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COURSE DESIGN COMMITTEE
Chief Academic Officer
Dr. Shalini Kalia
NMIMS Global Access – School for Continuing Education
TOC Reviewer
Mr. Mario Sequeira
Mr. Mario Sequeira
Visiting Faculty, NMIMS Global
Access - School for Continuing Education
Specialization: Intellectual Property Law,
E-Commerce, Corporate Law and
Dispute Resolution
Visiting Faculty, NMIMS Global
Access - School for Continuing Education
Specialization: Intellectual Property Law,
E-Commerce, Corporate Law and
Dispute Resolution
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Content Reviewer
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Author: Dr. Manish Arora
Advocate Supreme Court of India
President Universal Institute of Legal Studies
Member Board of Legal Studies, Amity University
President Harvard Club of India 2008 -2010
Reviewed By: Mario Sequeira
Copyright:
2021 Publisher
ISBN:
978-93-90457-95-3
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CHAPTER NAME
PAGE NO.
1
The Indian Contract Act, 1872
1
2
Sale of Goods Act, 1930
69
3
Laws Related to the Formation of Businesses
97
4
Laws that Commonly Affect Businesses
149
5
Laws Related to Enforcement and Redressal Mechanism
in Business
205
6
Consumer Protection Act, 2019
239
7
Right to Information Act, 2005
273
Competition Act, 2000
295
Employee Related Laws
335
10
Environment-Related Laws
369
11
Case Studies
399
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B usin e ss Law
c u rr i c u l u m
The Indian Contract Act, 1872: Agreements and Contracts, Classification of Contracts, When an
Agreement becomes a Contract: Essential Conditions, Offer/Proposal and Acceptance, Standard
Form of Contract/Boilerplate Contract/Adhesion Contract, Consideration and Privity of Contract,
Free Consent, Capacity to Contract, Void, Valid and Voidable Agreements, Quasi-Contracts,
Discharge of Contracts, Remedies for Breach of Contract, Contracts of Indemnity and Guarantee,
Contract of Bailment and Contract of Pledge, Contracts Dealing with Agency, Explaining
Agreements using a Template
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Sale of Goods Act, 1930: Concept of Goods, Sale of Goods Act, 1930, Difference between the Contract
of Sale of Goods and the Contract for Work and Labour, Doctrine of Caveat Emptor and Exceptions,
Performance of the Contract of Sale, Unpaid Seller, Hire Purchase and Hypothecation Agreements
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Laws Related to the Formation of Businesses: Unincorporated and Incorporated Forms of
Business, Sole Proprietorship—Meaning, Features, Advantages and Disadvantages, Limited
Liability Partnership (LLP) Act, 2008, Companies Act, 2013
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Laws that Commonly Affect Businesses: Negotiable Instruments Act, 1881, Types of Negotiable
Instruments, Recent Amendments in the Negotiable Instruments Act, 1881 and their Impact,
Payment and Settlement Systems Act, 2007 and its Features, Penalties and Punishment under
Negotiable Instruments Act, 1881 and Payment and Settlement Systems Act, 2007, Intellectual
Property Law, Prevention of Sexual Harassment, Impact of Sexual Harassment Cases on Indian
and Foreign Organisations
Laws related to Enforcement and Redressal Mechanism in Business: Alternative Dispute
Resolution, Meaning and History of Alternate Dispute Resolution, Features of Alternative Dispute
Resolution, Advantages of Alternative Dispute Resolution, Types of Alternate Dispute Resolution,
Negotiation, Mediation, Conciliation, Lok Adalats, Arbitration and Conciliation Act, 1996, AntiCorruption Laws, Anti-Corruption Laws in India, Difference between US Anti-Corruption Laws
and Indian Anti-Corruption Laws
Consumer Protection Act, 2019: Consumer Protection Act, 2019, Objective of the Act, Scope of
the Act, Important Provisions and Features of the Consumer Protection Act, 2019, Difference
between Consumer Protection Act, 1986 and Consumer Protection Act, 2019, Rights of a Consumer,
Consumer Protection Councils, Functions of Consumer Protection Councils, Central Consumer
Protection Council, State Consumer Protection Councils, District Consumer Protection Councils,
Consumer Disputes Redressal, Consumer Disputes Redressal Machinery, Procedure of Dispute
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Resolution, Procedure for Filing a Complaint before the Consumer Protection Body, Nature and Scope
of Remedies, Appeals and Limitations, Comparison of Consumer Law in Other Countries
Right to Information Act, 2005: The Right to Information (RTI) Act, 2005, Public Authorities (Chapter
II of the Act), Procedure for Obtaining Information (Sections 6 and 7), Information Exempted from
Disclosure (Section 8), Information Commissions (ICs), Impact of the RTI Act, 2005
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Competition Act, 2000: Competition—What and Why, Competition Act, 2002, Anti-competitive
Agreements, Competition Commission of India (CCI), Combination, Penalties Imposed Under the
Competition Act, 2002, Leading Cases under the Competition Law in India
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Employee related Laws: Factories Act, 1948, Objectives and Applicability, Key Provisions and Features
of the Law, Occupation of Occupier (Employer) and Responsibilities of Occupier, Industrial Disputes
Act, 1947, Minimum Wages Act, 1948, Employees Compensation Act, 1923, Employees Provident Fund
and Miscellaneous Provisions Act, 1952, Calculation of Provident Fund and Apportionment of the Fund
against Various Schemes, Payment of Bonus Act, 1965, Payment of Gratuity Act, 1972, Maternity Benefit
Act, 1961, Code on Labour Laws
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Environment related Laws: Laws Aimed at Protecting and Conserving the Environment, Environment
Protection Act (EPA), 1986, National Green Tribunal (NGT) Act, 2010, Air (Prevention and Control
of Pollution) Act, 1981, Water (Prevention and Control of Pollution) Act, 1974, Hazardous and Other
Wastes (Management and Transboundary Movement) Rules, 2016, Wildlife Protection Act, 1972, Forest
Conservation Act, 1980, Public Liability Insurance Act, 1991, Biological Diversity Act, 2002
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THE INDIAN CONTRACT ACT, 1872
1.2.1
1.2.2
1.3
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1.3.1
1.3.2
1.3.3
1.3.4
Introduction
Agreements and Contracts
Contracts – Historical Perspective
Promise and Contract – Two Sides of the Same Coin
Self Assessment Questions
Activity
Classification of Contracts
According to Initiation
According to Enforceability/Validity
According to the Method of Formation
According to Performance
Self Assessment Questions
Activity
When an Agreement becomes a Contract: Essential Conditions
Self Assessment Questions
Activity
Offer/Proposal and Acceptance
What Constitutes an Offer
Difference between Offer and Invitation to Offer
Acceptance
Communication of Offer and Acceptance
Self Assessment Questions
Activity
Standard Form of Contract/Boilerplate Contract/Adhesion Contract
Self Assessment Questions
Activity
Consideration and Privity of Contract
Essentials of a Valid Consideration
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1.1
1.2
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Contents
1.4
1.5
1.5.1
1.5.2
1.5.3
1.5.4
1.6
1.7
1.7.1
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Business Law
CONTENTS
Exceptions to the Rule of No Consideration, No Contract (Section 25)
Doctrine of Privity of Contract (Rule of a Stranger to a Contract)
Exceptions to the Rule of Privity of Contract
Self Assessment Questions
Activity
1.8
Free Consent
1.8.1
Consent vs. Free Consent
Coercion
1.8.2
1.8.3
Undue Influence
1.8.4
Fraud
Misrepresentation
1.8.5
Mistake
1.8.6
Self Assessment Questions
Activity
1.9
Capacity to Contract
1.9.1Disqualifications for Capacity to Contract – Minors, Persons of Unsound
Mind and Disqualified Persons
Self Assessment Questions
Activity
Void, Valid and Voidable Agreements
1.10
Void Agreements with Unlawful/Illegal Consideration or Object
1.10.1
Expressly Declared Void Agreements
1.10.2
Effect of Void, Valid and Voidable Agreements
1.10.3
Self Assessment Questions
Activity
1.11
Quasi-Contracts
Self Assessment Questions
Activity
Discharge of Contracts
1.12
Discharge by Performance
1.12.1
Discharge by Mutual Agreement
1.12.2
1.12.3
Discharge by Impossibility of Performance (Force Majeure Clause)
Discharge by Lapse of Time
1.12.4
Discharge by Operation of Law
1.12.5
1.12.6
Discharge by Breach of Contract
1.12.7
Appropriation of Payments (Clayton’s Rule of Appropriation)
Self Assessment Questions
Activity
Remedies for Breach of Contract
1.13
1.13.1
Damages
1.13.2
Specific Performance
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1.7.2
1.7.3
1.7.4
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THE INDIAN CONTRACT ACT, 1872 3
CONTENTS
Injunctions
Self Assessment Questions
Activity
1.14
Contracts of Indemnity and Guarantee
1.14.1Contract of Indemnity and Contract of Guarantee – Meaning
and Examples
1.14.2
Rights of the Indemnified and Indemnifier
1.14.3
Commencement of Indemnifier’s Liability
Contract of Guarantee
1.14.4
1.14.5
Kinds of Guarantee
1.14.6
Rights and Liabilities of Surety
Discharge of Surety
1.14.7
Difference between Contract of Indemnity and Contract of Guarantee
1.14.8
Self Assessment Questions
Activity
Contract of Bailment and Contract of Pledge
1.15
Kinds of Bailment
1.15.1
1.15.2
Termination of Bailment
Duties and Rights of a Bailor
1.15.3
Duties and Rights of a Bailee
1.15.4
Bailee’s Lien
1.15.5
1.15.6
Types of Lien
1.15.7
Pledge
Rights and Duties of a Pledgee (Pawnee) and a Pledger (Pawnor)
1.15.8
Self Assessment Questions
Activity
Contracts Dealing with Agency
1.16
1.16.1
Meaning of Principal and Agent
1.16.2
Types of Agents
Authority of an Agent
1.16.3
Liability of Principal and Agent
1.16.4
1.16.5
Termination of Agency
Self Assessment Questions
Activity
1.17
Explaining Agreements using a Template
Self Assessment Questions
Activity
1.18
Summary
Descriptive Questions
1.19
Answers and Hints
1.20
1.21
Suggested Readings & References
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1.13.3
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Business Law
Introductory Caselet
FORMATION OF CONTRACTS
Case Objective
This caselet discusses the
importance of an agreement
for the formation of a contract
and how it is different from
an invitation to enter into an
Agreement.
The presence of an agreement is the first requirement for the formation of a legally binding contract. Mr Ayush puts up a property
for sale at an auction. Mr Pushkar makes a bid of ` 75 lakhs, whichwas the highest bid. Mr Ayush did not accept the bid because he
was doubtful of the ability of Mr Pushkar to pay the amount of the
bid. This matter was brought to the court, where Mr Pushkar was
the plaintiff and Mr Ayush was the defendant.
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Mr Pushkar claimed that he and Mr Ayush had entered into a
legally binding contract because he had made the highest bid. The
court heard both the parties and pronounced the following judgement:
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Bidders at any auction are entitled to make an offer but that offer
may or may not be accepted by the seller. In other words, auctions
are an invitation to offer. Therefore, it was held that no agreement
was reached because the seller refused the offer made by Mr
Pushkar. The court held that no legally enforceable contract was
entered into because there was a lack of agreement. Mr Ayush
won the suit. Hence, an invitation to offer does not give rise to any
rights or obligations.
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THE INDIAN CONTRACT ACT, 1872 5
Learning objectives
After studying this chapter, you will be able to:
Explain the concept of agreements and contracts
Describe the classification of contracts and essential conditions of a contract
Explain the concept of an offer/proposal and its acceptance
Describe the meaning of communication of offer and acceptance
Describe the Standard Form of Contract/Boilerplate Contract/Adhesion Contract
Describe the meaning of consideration and privity of contract
Explain the concept of free consent and capacity to contract
Outline various disqualifications to contract including
minors, persons of unsound mind and disqualified persons
Discuss the meaning of void, valid and voidable agreements
Explain quasi-contracts
Explain various modes of discharge of contracts
Describe various remedies for a breach of contract
Explain the contracts of indemnity and guarantee
Describe the contract of bailment and contract of pledge
Explain the essential elements of agreements using a template
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1.1 Introduction
The Contract Act, 1872 is the most important law that governs various types of contracts to be applied for transactions affecting Indian
goods and properties. Section 2(h) of the Contract Act, 1872 defines a
contract as an agreement enforceable by law. An agreement cannot
become a contract unless it is enforceable by law. To be enforceable
by law, a contract must contain all the essential elements of a valid
contract.
The first step in the formation of a contract is ‘proposal’. An accepted
proposal is a ‘promise’ and an ‘agreement’ is a promise or a set of
promises. A ‘contract’ is an agreement enforceable by law. Essential
elements of enforceability of a contract are defined in Section 10 of the
Contract Act, 1872 and include competency of parties, free consent of
parties, lawful object, lawful consideration, not expressly declared to
be void and legal formalities like written registration, etc.
In this chapter, you will study about the elements of agreements and
contracts under the Contract Act, 1872 at length.
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Business Law
1.2 Agreements and Contracts
Under Section 2(e) of the Contract Act, 1872, an ‘agreement’ means
every promise or a set of promises that forms a consideration for each
other. In other words, an agreement is an exchange of promises
between two or more parties.
As per Section 7 of the Contract
Act, 1872, in order to convert
a proposal into a promise, the
acceptance must:
(1) be absolute and unqualified
(2) be expressed in some usual
and reasonable manner
Under Section 2(b) of the Indian Contract Act, 1872, when the person
to whom the proposal is made, signifies his assent thereto, the proposal
is said to be accepted. A proposal, when accepted, becomes a promise.
‘Offer’ and ‘proposal’ can be used interchangeably; while the English
law uses the term ‘offer’ and in the Indian law, ‘proposal’ is used. Thus,
Agreement = Offer (Proposal) + Acceptance of Offer (Proposal) +
Consideration
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Example: A offers to buy a television for ` 5,000 from B and B accepts
this offer. In this case, the offer after acceptance becomes a promise and
this promise is called an agreement between A and B.
Essential Elements of Agreement
An agreement consists of the following five essential elements:
2. One of the parties must make an offer to the other party.
3. The offer must be accepted by the other party.
4. Both the offer and the acceptance must coincide in relation to
the same subject matter and context which is called ‘making the
agreement in the same sense’ or consensus-ad-idem.
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Consensus-ad-idem is a phrase
in the contract law that is used
for a situation where there is a
common understanding of both
the parties in the formation of
the contract.
1. There must be two or more parties.
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Know More
5. There must be the intention to enter into a legal relationship.
Meaning of Contract
According to Section 2(h) of the Contract Act, 1872, a ‘contract’ is an
agreement enforceable by law.
From the above definitions, it can be revealed that a contract has two
elements, namely:
1. Agreement
2. Enforceability
Thus, it can be summarised as follows:
Contract = Agreement under Section 2(e) of Contract Act, 1872 +
Enforceability of the agreement under Section 10 of the Act
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THE INDIAN CONTRACT ACT, 1872 7
What is Enforceability of an Agreement?
It has already been defined that an agreement is an important part of a
contract. An agreement becomes a contract when it becomes enforceable by law. When a contract involves offer, acceptance and consideration, it is enforceable in the court of law. A detailed explanation of
offer and consideration is given later in the chapter. Enforceability is
the recourse available if all the essentials of the Contract Act, 1872 are
adhered to provide protection against the breach of contract by any of
the parties.
1.2.1 Contracts – Historical Perspective
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The law governing contracts in India is the Indian Contract Act, 1872
came into force on 1 September 1872. Since then, the Indian Contract
Act, 1872 has been amended from time to time by the Central Government and the state governments as per the state requirements.
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The Contract Act, 1872 defines the meaning of contracts, their execution and implementation in addition to describing the provisions for
the breach of contracts. The Contract Act, 1872 that we see today has
been developed into its current state by going through a lot of transformation. The different phases through which the Contract Act, 1872
has passed to reach its current shape are explained as follows:
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1. Early and medieval period (Vedic and medieval period and
Islamic law): There was no general rule governing contracts in
the ancient and medieval periods in India. However, the principles mentioned within various scriptures, such as Vedas, Dharmshastras, Smritis and Shrutis, mention laws similar to contracts.
Various studies have revealed that contracts originated in the
Vedic period. These scriptures mention various transactions
that are similar to contracts, such as debt deposit, pledges, sale
without ownership, mortgage, gifts, etc. These scriptures mention various rules of contracts that are similar to the Modern
Law of Contract. As an example, Manusmriti mentions that the
competence of parties is the first requirement for the formation
of a contract. In Manusmriti, dependents, minors and persons
devoid of limbs were considered incompetent to the contract.
Vedic scriptures also mention the concept of liability.
? DID YOU KNOW
The Arthashastra is an ancient
Indian Sanskrit treatise on
statecraft, economic policy and
military strategy. Kautilya, also
identified as Chanakya, wrote
this treatise 2400 years ago.
NOTE
In medieval times, the law of contract was governed by moral
and economic factors and activities. Contracts were made for
business and commercial transactions, such as transfer of property, performance of services, etc., on the basis of agreements
and promises. Another important medieval scripture to mention
contracts is the Kautilya’s Arthashastra.
yyContracts made in a forest
Contracts were also made during the Mauryan period and
involved free consent and consensus.
yyContracts made in any secret
place
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In the Mauryan period, the
following types of contracts
were considered to be void:
yyContracts formed during the
night
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Business Law
In the medieval period, contracts were void if made under undue
influence. The rule of ‘damdupat’, according to which the amount
of principal and interest recoverable at one time in a lump sum
couldn’t be more than double the money lent, was also followed.
During the Mughal rule in India, contracts were governed
according to the Mohammedan Law of Contract. In Arabic, Aqd
means a contract which literally means conjunction. Aqd means
a combination of proposal (Ijab) and acceptance (Qabul).
Know More
2. Early law of contract (Rome): Romans recognised various types
of promises. The Roman law recognised that promise itself might
give rise to an enforceable duty. Romans also recognised that a
promise was not legally enforceable until it was considered as a
stipulation, real contract or consensual contract.
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The Rule of Damdupat is a
branch of the Hindu Law of debts
according to which the amount
of interest that can be recovered
at any one time cannot exceed
the principal amount.
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A covenant is considered to be
an equivalent of the modern
day contract. Actions related to
covenant majorly included the
cases related to breaches of
agreements, such as building,
sales, lease of land, etc. The
cases were presented in royal
courts and were related to the
claims for the performance
of the contract and claiming
damages. Actions related to debt
included claims for the prices
of goods sold and delivered.
Claims were made for monetary
compensation for the benefit
received.
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NOTE
3. Early law of contract (England): There were two assumptions
given by common law courts (courts in England) in the medieval times. The first assumption was that promises were generally enforceable and then exceptions could not be created for
promises that were not desirable for being enforced. The second
assumption was that promises were generally unenforceable and
then exceptions were created for promises that were desirable to
enforce. The courts in those times believed that a mere promise
did not give rise to an action.
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In the 15th and 16th centuries, common law courts were able
to develop a general criterion for enforcing promises within a
framework. Two forms of action for enforcing (contractual)
rights, namely ‘debt’ and ‘covenant’ were developed.
In the 16th century, the concept of ‘assumpsit’ was developed.
Assumpsit was an implied promise on which an action for the
recovery of damages caused due to the breach of contract could
be taken. In the 17th and 18th centuries, concepts such as transferability of contract rights were recognised. Also, some legislations
were passed that required some contracts to be in the written
form.
4. English Law in India: In India, the formal contract law was
introduced with the rule of Englishmen. The English common
law and statute law came in India with the Chartered Courts of
the 18th century. Various Courts of Justice were established in the
presidency towns of Calcutta, Madras and Bombay.
The English law was applied across India, which led to various
inconveniences to the indigenous population of India including
Hindus and Mohammedans. To handle this situation, the law
gave powers to the Supreme Court located at Calcutta, Madras
and Bombay to determine the type, actions and suits related to
contractual nature in cases related to Hindus and Mohammed-
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THE INDIAN CONTRACT ACT, 1872 9
ans. For cases between Hindus, Hindu Law was applied and in
cases between Mohammedans, Mohammedan Law was applied.
In cases between Hindus and Mohammedans, the law of the
defendant was applied. These laws continued to be applicable
till the Contract Act, 1872 was enacted.
5. Enactment of Contract Act, 1872: In 1872, the Contract Act was
enacted. It became enforceable from 1 September 1872. It continues to exist till date with various amendments.
1.2.2 Promise and Contract – Two Sides of the
Same Coin
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‘Promise’ and ‘contract’ are said to be the two sides of the same coin.
Section 2(e) of the Contract Act, 1872 states agreement as every promise or a set of promises that forms a consideration for each other. It
means that the presence of a promise is quintessential for the formation of an agreement that, if legally enforceable, becomes a contract.
self assessment Questions
1. For making an agreement, there must be two or more parties
and one of the parties must make a/an __________ to another
party.
a. Dependents
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b. Minors
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2. In Manusmriti, who were considered incompetent to the contract.
c. Persons devoid of limbs
d. All of these
Activity
Using the Internet, study the Contract Act, 1872 thoroughly and
analyse the rationale of the law.
1.3 Classification of Contracts
Contracts are categorised on the basis of their initiation, enforceability, formation and performance. Let us discuss different categories of
contracts in detail.
1.3.1 According to Initiation
Based on initiation, contracts are classified as follows:
‰‰ Unilateral
contract: It is an offer made by a party without any
reciprocation from another. On the fulfilment of conditions
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Business Law
attached with the offer, the initiating party is irrevocably bound to
honour its promise, such as in ‘offer of reward for missing person’.
In India Unilateral contracts are not recognised.
‰‰ Bilateral
contract: It involves a mutual exchange of promises
between two or more parties, such as between buyers and sellers.
1.3.2 According to Enforceability/ Validity
According to enforceability, contracts are classified as follows:
‰‰ Valid
contract: A valid contract is one that fulfils essential conditions prescribed in Section 10 of the Contract Act, 1872 and is,
thereby, legally enforceable.
agreement [Section 2(g)]: An agreement that is not enforceable by law is said to be a void agreement. It may become void
due to the absence of the following essential elements of a valid
contract:
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‰‰ Void
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 Lack of contractual capacity of any of the contracting parties in
case of minority, unsoundness of mind or legal disqualification
 Agreement
formed without any consideration in terms of Sec-
tion 25
 Unlawful
consideration or unlawful object in terms of Sec-
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tion 23
 Agreement
being per se void in terms of Sections 26-30
‰‰ Voidable
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agreement [Section 2(i)]: An agreement that is enforceable by law at the option of one or both the parties but not at the
option of the defaulting party is a voidable contract. A voidable
contract arises if the consent of either of the parties has been
obtained by coercion, undue influence, fraud, mistake or misrepresentation of the contract.
In case of voidable contracts, the law gives the aggrieved (suffering)
party an option to either (i) adopt or (ii) rescind the transaction.
In case the transaction is adopted or the aggrieved party fails to
rescind the contract within a reasonable time, the contract shall
become a valid contract due to acquiescence or implied consent.
However, the aggrieved party may get the voidable contract
rescinded by filing a suit for declaration after producing evidence
of his consent not being free. In addition to the rescission of the
contract, the affected party may also receive compensation.
‰‰ Void
contract [Section 2(j)]: A contract becomes void as soon as it
ceases to be enforceable by law. Such contracts are initially valid,
but, subsequently, become unenforceable by law and hence, void
(Doctrine of Frustration) because of the following reasons:
i.
Supervening impossibility due to unforeseeable and uncontrollable events specified in Section 56, such as change of law,
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THE INDIAN CONTRACT ACT, 1872 11
government intervention, outbreak of war/disease, epidemics,
pandemics, death of a contracting party and natural events,
etc.
ii. A contingent contract dependent on the happening of an event
shall become void when happening of that event becomes impossible (Section 32).
Example: A contract signed by X to import goods from a foreign
country may subsequently become void when war breaks out between
the two countries.
‰‰ Unenforceable agreement due to procedural lacunae: It is a valid
 Non-registration
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contract, but it cannot be enforced through a court of law because
of some technical defect or noncompliance with the prescribed
formalities as follows:
of an agreement under the Registration Act,
1908
or inadequate stamping of a document as per
the requirements of the relevant Stamp Act, 1899
not being in writing where contracts are required to
be compulsorily in writing
 Contract
not being duly notarised or attested
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 Non-stamping
1.3.3 According to the Method of Formation
According to the method of formation, contracts may be of the following types:
Express Contract is made in words, whether spoken or written, such as a will, sale or purchase of property.
‰‰ An
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‰‰ An
Implied Contract is inferred from the (a) conduct of parties or
(b) circumstances of the case arisen during the formation of the
contract.
‰‰ A Quasi-contract is one that is neither made expressly nor impliedly
by conduct. It arises due to the legal prescription designed to prevent unjust enrichment at the expense of the other party, such as
restoring found goods to its owner by the finder thereof.
Example: A courier man delivers a birthday cake to a wrong
addressee X. Now, X is under an obligation either to pay for the cake
or return it to the courier man.
1.3.4 According to Performance
According to performance, contracts may be of the following types:
‰‰ Executed
contract: When the contracting parties have performed
their obligations under the contract, the contract is said to be
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NOTE
Express contract = Express offer
+ Express acceptance
Implied contract = Implied offer
+ Implied acceptance
Business Law
executed. Under the executed contract, the contract is fully discharged and the parties are free from their respective liabilities.
‰‰ Executory
contract: When both the parties to the contract or
either of the parties have/has to still perform their/its contractual
obligation, the contract is said to be an executory contract. In case
of an executory contract, it remains incomplete and the concerned
party is still to perform its obligations and shall not be discharged
of its obligations under the contract.
Self Assessment Questions
3. __________ is a contract made in words, whether spoken or
written, such as a will, sale or purchase of property.
IM
S
4. Outbreak of war is a type of supervening impossibility.
(a) True (b) False
Activity
Using various sources, study the rationale of a bilateral contract
and write down your findings.
When an Agreement Becomes a
Contract: Essential Conditions
M
1.4
An agreement that is enforced by the law is a contract. Section 10 of
the Contract Act, 1872 states that an agreement becomes a contract if
it is made by the out of free consent of the parties who are competent to
contract in exchange for a lawful consideration and a lawful object and
are not expressly declared void.
N
12
Various conditions essential for an agreement to become a contract
are as follows:
‰‰ Free
consent: It is essential that the agreement between parties
must not be made by the following means:
 Coercion
 Undue
influence
 Fraud
 Misrepresentation
 Mistake
– bilateral or unilateral
When the consent of a party to the agreement is not free, the
contract is voidable. The party whose consent is not free, has the
option to either accept the contract or reject the same.
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THE INDIAN CONTRACT ACT, 1872 13
‰‰ Contractual capacity of the parties: As per Section 11 of the Con-
tract Act, 1872, the parties into the contract must have a contractual capacity to fulfil the following requirements:
 The
party has attained the age of majority.
 The
party is not of unsound mind.
 The party is not disqualified to enter into a contract by any law
to which the party is subject.
Thus, if all the above factors are present, it is assumed that the
party is capable to enter into the contract.
consideration: Consideration means something in return
for something (Quid Pro Quo). Consideration can be in the form of
money or in the form of some benefit to the party. An agreement
has a lawful consideration only if both the parties get something
and give something.
S
‰‰ Lawful
IM
Example: A agrees to sell his car to B for ` 4 lakhs. In this case, ` 4
lakhs is the consideration for A and A’s promise to sell the car is the
consideration for B.
object: An agreement is valid and becomes a contract if it
has a lawful object. Lawful object means that the object or the purpose of entering into an agreement must not be fraudulent, illegal,
immoral or opposed to any public policy. It must also not cause
any injury or damage to any person or property of another. Agreements made for any unlawful object are considered to be illegal
and void.
M
‰‰ Lawful
N
Example: If A promises to pay ` 2 lakhs to B and B robs the house of
D, then this agreement has an unlawful object which makes it illegal
and void.
‰‰ Not
expressly declared void: An agreement must not be of such a
nature that has been expressly declared to be void as per Sections
24 to 30 of the Contract Act, 1872.
The following agreements shall be treated as expressly declared as
void:
‰‰ Agreements
for unlawful object or unlawful consideration
‰‰ Agreements
devoid of consideration
‰‰ Agreements
in restraint of marriage
‰‰ Agreements
in restraint of trade
‰‰ Agreements
restraining legal proceedings
‰‰ Uncertain
‰‰ Wagering
agreements
agreements
Example: A promises B to pay her ` 8 lakhs if B does not marry C. This
agreement is expressly declared to be void because it is restraint of marriage.
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NOTE
Consideration is also defined as
the price paid by one party for
the promise of the other.
14
Business Law
self assessment Questions
5. When the consent of a party to the agreement is not free, the
contract is __________.
a. void
b. voidable
c. valid
d. None of these
6. __________ means something in return for something.
Activity
S
Make a list of at least three types of contracts that have been
expressly declared as void under the Contract Act, 1872.
1.5 Offer/Proposal and Acceptance
N
M
IM
There must be a ‘lawful offer’ and ‘lawful acceptance’ for the formation of a valid contract. If an individual expresses his willingness to
enter into a legally binding contract based on certain terms with some
other party, it constitutes an offer to contract or a proposal. The person making the offer/proposal is called an offeror/promisor and the
one to which the offer/proposal is made is called an offeree/promisee.
Both the offer/proposal and acceptance must be made out of the free
will of the offeror and offeree who intends to enter into a legally binding agreement. If the offeree agrees to all the conditions of an offer
without placing any counter-condition(s), the communication of this
approval of offer is called acceptance.
1.5.1 What Constitutes an Offer
As per Section 2(a) of the Act, a person is said to make an offer when he
signifies to the other person his willingness to do or to abstain from doing
anything with a view to obtaining the assent of the other person.
According to the definition, there are three important elements of an
offer:
i. There must be an expression of willingness from one person to
another to do or not to do something.
ii. The expression is made by one person to another.
iii. The expression must be made in order to obtain the consent of
the other person.
NOTE
Essentials of a Valid Offer
When a person expresses his
intention, this will not amount to
offer.
A valid offer consists of the following essential elements:
‰‰ An
offeror must convey his willingness to do or not do something.
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THE INDIAN CONTRACT ACT, 1872 15
‰‰ An
offer must be made with an intention to obtain the acceptance
of the other party/offeree.
‰‰ An
offer must be made with an intention to create a binding legal
relationship. The formation of legal relationships also means that
the breach of such relationships will be followed by legal consequences.
‰‰ The
terms of the offer must be defined clearly and must not be
vague or ambiguous (unclear).
‰‰ An offer may be general or specific. A general offer means an offer
S
that is made to the world at large or to public in general. Any person from the general public can accept the general offer if he/she
fulfils the terms of the general offer. A specific offer, on the other
hand, is an offer that is made to a specific person or a group of persons. The specific offer must be accepted by the person or group
to whom it has been made.
NOTE
The deemed acceptance of a
contract refers to under what
conditions a contract will be
judged to be accepted by the
party it is being offered to.
‰‰ An
IM
Example: A offers a reward of ` 500 to anyone whosoever finds his
lost pet. This is a general offer. On the other hand, if A offers ` 500 to
B to find his pet, it is a specific offer because only B can accept this
offer and no one else.
offer may be expressed or implied.
offer may be positive or negative. An offer to do something is
known as a positive offer. On the contrary, an offer not to do something is known as a negative offer. Both these types of offers are
valid.
‰‰ An
M
‰‰ An
offer may be a definite offer or a standing offer.
N
Example: A definite offer means an offer that is made to supply
specific goods or services. On the contrary, when an offer is made to
supply goods periodically and in accordance with the requirements
of the offeree, it is called a standing offer or an open offer.
‰‰ Every
offer must be communicated.
‰‰ An
offer should not contain any terms, the non-compliance of
which may lead to acceptance (Deemed Acceptance).
‰‰ All
terms and conditions including special terms and conditions
should also be communicated.
‰‰ Two
identical cross offers do not create a contract.
‰‰ An
offer is not the same as an answer to a question.
‰‰ An
offer is not the same as invitation to an offer.
1.5.2 Difference between Offer and Invitation to
Offer
An invitation to offer refers to an action to invite other parties to make
an offer to form a contract and is made with an intention to invite
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? DID YOU KNOW
Many a time, a standing offer is
also called a continuous offer.
Business Law
others to enter into a contract. For instance, when you go to a shop,
the goods are displayed there to invite proposals from the customers.
When a customer selects goods that he wants to buy, the customer
makes a proposal to buy those goods to the shopkeeper. Table 1.1 lists
major differences between an offer and an invitation to offer:
Table 1.1: Distinction between Offer and an
Invitation to Offer
S. No.
Offer
Invitation to Offer
An offer implies the
An invitation to offer does not imply
willingness of a party to
a final willingness, but only an invitacreate legal relationships. tion to the public to make an offer.
2.
An offer is defined under
Section 2(a) of the Contract Act, 1872.
The Contract Act, 1872 does not define
an invitation to offer.
3.
An offer is essential for
forming a contract.
An invitation to offer is not essential
for forming a contract. It becomes relevant only when it becomes an offer.
4.
When an offer is accepted, it becomes an agreement.
When an individual or a group from
the public accepts the invitation to
offer, it becomes an offer.
5.
The main objective of
making an offer is to enter into a contract.
The main objective of making an invitation to offer is to receive offers from
the public and negotiating the terms
of contract before entering into it.
M
IM
S
1.
1.5.3 Acceptance
N
16
A contract comes into existence when a valid offer is validly accepted.
There are two modes of acceptance:
‰‰ Express
acceptance: It is an acceptance made orally or in writing,
such as by telephone, the e-mail or by sending a letter.
‰‰ Implied acceptance: When acceptance is interpreted from the con-
duct of parties or from circumstances of the case, it is considered
as implied. However, acceptance cannot be implied from silence.
Essentials of a Valid Acceptance
The essentials of a valid acceptance are as follows:
‰‰ Acceptance
may be express or implied.
Example: A makes an offer to B to sell his old LED television for
` 40,000 over telephone and gets his acceptance by telephone. Here,
an acceptance of B is express. On the other hand, eating food in
a restaurant, withdrawing cash from ATM, etc., are examples of
implied acceptance.
‰‰ Acceptance
may be specific or general.
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THE INDIAN CONTRACT ACT, 1872 17
‰‰ Acceptance
must be absolute and unqualified. It means that the
offeree must accept the offer with the same terms and conditions as
offered without even the slightest of change in them. If the offeree
suggests that he/she can accept the offer with certain changes, it is
a case of counter offer and not offer.
‰‰ Acceptance
must be conveyed only to the offeror or to any authorised persons.
‰‰ Acceptance
must be conveyed only from the offeree.
‰‰ Communication
of acceptance is extremely important because
uncommunicated acceptance or only the mental acceptance is not
sufficient to form a contract.
‰‰ Silence
of the offeree cannot be regarded as acceptance of con-
S
tract.
the offer contains any specific mode for acceptance of the offer,
the acceptance must be made in the prescribed mode only. If
acceptance is communicated using any other mode, the offeror
may refuse to be bound by such acceptance. However, in cases
where the mode of acceptance is not prescribed, the acceptance
can be communicated in any reasonable mode which depends on
a particular case.
IM
‰‰ If
the offer contains any specific timeline for acceptance of the
offer, the acceptance must be made within the prescribed timeline
only. If acceptance is communicated outside the timeline, it shall
not be binding on the offeror. However, in cases where timeline
for acceptance is not prescribed, the acceptance can be communicated within a reasonable time, which depends on a particular
case.
N
M
‰‰ If
‰‰ Acceptance
succeeds offer.
‰‰ Acceptance
must be given by the person to whom the offer has
been made.
‰‰ It
1.5.4
must be communicated to the offeror.
Communication Of Offer And Acceptance
According to Section 4 of the Contract Act, 1872, communication of
offer is complete when it comes to the knowledge of the person to whom
the offer is made. The person to whom the offer has been sent is
deemed to have come to the knowledge of offer on the date and time
when such an offer is received by him. The mode of communicating
the offer may vary, such as letter, e-mail or telephone.
Example: A wants to sell his building to B. A posts a letter containing
the offer on 25th July, that reaches B on 30th July. In such a case, the communication of the offer is completed on 30th July on receipt of the letter
by the intended party.
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18
Business Law
The communication of a proposal is complete when it comes to the
knowledge of the person to whom it is made.
Example: Continuing the above example, assume that B posts his letter
of acceptance from Mumbai on 1st August, that reaches A in Delhi on 4th
August. The communication of acceptance is complete on 1st August as
against the offeror irrespective of whether or not the letter of acceptance
has reached the offeror. However, the communication of acceptance is
complete as against B on 4th August, enabling him to revoke his acceptance if he wishes to before 4th August.
Section 5 of the Contract Act,
1972 talks about the revocation
of proposals and acceptance.
The communication of a revocation of an offer is complete as against
the offeror when the message containing the details of revocation
is sent to the intended person and when the message sent is put in
course of transmission and is out of the power of the offeror to recall.
IM
Study
Hint
S
Under the law of contract, the contract is considered to have been
made on 1st August in Mumbai in the above example. In the case of any
dispute between parties relating to the contract, the suit will be filed
in Mumbai where the contract has been legally concluded.
Self Assessment Questions
M
7. The person making an offer/proposal is called offeror/
promisor and the one to which the offer/proposal is made is
called __________.
N
8. A standing offer means an offer that is made to supply the
specific goods or services. (a) True (b) False
9. The person to whom the offer has been sent is deemed to have
come to the knowledge of offer on the date and time when
such offer is received by him. (a) True (b) False
10. The communication of acceptance is complete as against the
offeror when the acceptance is put in a __________.
Activity
Using the Internet, study more on Section 4 of the Contract Act,
1872.
Standard Form OF Contract/
1.6 BoilerPlate Contract/Adhesion
Contract
A standard form of contract, also known as an adhesion contract or
a boilerplate contract, refers to a contract drafted by one party (generally with stronger bargaining power) and signed by another party
(usually with weaker bargaining power, for example, a consumer in
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THE INDIAN CONTRACT ACT, 1872 19
need of goods or services). In such contracts, one party can exploit
the weakness of the other party by imposing terms and conditions
that ensure no liability falls on the first party. In such contracts, the
other party often falls prey to abuse and various instances have been
observed when the courts have come to the rescue of such parties, but
with difficulty.
‰‰ These
contracts are made without any negotiation.
is no pre-knowledge of full terms of contract for lack of
access to the relevant document.
‰‰ Due
IM
‰‰ There
S
Customers in such contracts are not allowed to have the terms of
the contract customised or modified. They are given a standard preprinted document containing various terms and conditions which
they simply have to sign. Such contract documents are given on the
basis of ‘take it or leave it’. Such contracts usually contain unacceptable clauses that contain written express terms developed in advance.
The terms are fixed by conducting negotiations and brainstorming by
experts other than the contracting parties. Some of the important features of standard form contracts are as follows:
to an unequal bargaining position, there may arise an unfair
contract.
signing of the contract, parties are bound by its terms.
‰‰ There
M
‰‰ On
is a possibility of exploitation of the weaker party because
traditional law of contracts regards contracts as private legislation
(a separate law unto itself) and hence, binding.
N
There are various instances where organisations and individuals have
to accept the standard form contracts because the terms and conditions are fixed by the party that is in the stronger position and enjoys
better bargaining power. The following are the examples of standard
form contracts:
‰‰ Insurance
policies: Insurance companies offer multiple types of
policies and each policy comes by a unique name and its own set of
standardised terms and conditions. The terms and conditions are
decided by the insurance company (insurer). In such contracts,
there is a high possibility of customers being exploited. Such contracts usually contain unacceptable clauses.
‰‰ Loans:
Banks and other financial institutions offer various types
of loans. The terms and conditions of each type of loan are determined and fixed by the bank or the financial institution. The loan
terms remain unchanged for each person who is taking the loan.
‰‰ Others:
Parking tickets, theatre tickets, package receipts, debit
card purchase slips, bills of lading, sale contracts, etc., are also
standard form contracts.
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Study
Hint
Bargaining power refers to the
ability of a firm’s customers
to influence the prices of the
products and services it sells
and suppliers to set the prices
the firm pays for materials and
services that it buys.
NOTE
Standard form of contracts are
non-negotiated contracts.
20
Business Law
self assessment Questions
11. In __________ contracts, the customers are not allowed to have
the terms of the contract customised or modified.
12. Adhesion contracts are given on the basis of ‘take it or leave
it’. (a) True (b) False
Activity
Find some examples of standard form contracts.
Privity of contract refers to a type of relationship between the parties
to a contract according to which the parties can sue each other. However, no third party can sue any of the parties to contract. Such third
parties are also restrained from seeking enforcement of a contract. In
simple words, contracts cannot confer rights nor can they impose any
obligations arising out of contracts on any party other than the parties
to a contract.
N
When at the desire of the
promisor, the promisee or
any other person has done or
abstained from doing or does or
abstains from doing or promises
to do or to abstain from doing
something, then such an act of
abstinence or promise is called
a consideration for the promise.
IM
According to Section 2(d),
consideration means the
following:
Consideration is one of the essential requisites of a valid contract. An
agreement made without consideration is void. Consideration denotes
the price paid to purchase the promise of the other party. The term is
always used in the sense of ‘quid pro quo’, i.e., something in return.
In a contract, both the parties will get as well as give something to
another, which is called consideration in legal sense. It may also consist of a ‘loss to one or benefit to another’ or benefit to both.
M
Know More
Consideration and Privity of
Contract
S
1.7
1.7.1 Essentials of a Valid Consideration
The essentials of a valid consideration are as follows:
‰‰ It
must express the desire of the promisor that must not be done
gratuitously.
‰‰ It
may move from the promisee or any other person.
‰‰ It
may be past, present or future.
‰‰ It
may comprise doing or abstaining from doing something.
‰‰ It need not be adequate although inadequacy is a factor in proving
the absence of free consent.
‰‰ It
must be of real value and not illusory.
‰‰ It
cannot consist of something which the promisor is already
bound to do.
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THE INDIAN CONTRACT ACT, 1872 21
1.7.2 Exceptions to the Rule of No Consideration,
No Contract (Section 25)
According to Section 25, an agreement without consideration is void.
Without any consideration, an agreement is no more than a bare
agreement (nudum pactum), no more than a gift.
Some of the important exceptions to the Rule of ‘No Consideration,
No Contract’ are as follows:
‰‰ Written
and registered agreement made out of natural love and
affection between parties standing in near relationship to one
another [Section 25 (1)]
to compensate a person for services rendered voluntarily
[Section 25(2)]
S
‰‰ Promise
‰‰ Written and registered promise by the debtor to pay a time-barred
debt [Section 25 (3)]
gifts are binding, though there is no consideration
(explanation to Section 25)
‰‰ No
IM
‰‰ Completed
consideration is required to create an agency (Section 185)
M
1.7.3 Doctrine of Privity of Contract (Rule of a
Stranger to a Contract)
N
A contract establishes the privity of contract between the contracting
parties. In other words, a contract does not create any legal obligations or right in the favour of third party. The third party is a ‘stranger
to contract’. A third party is neither liable nor vested with any legal
rights under a contract. It is known as the rule of ‘privity of contract’.
Example: If a petitioner D supplied tyres to X on the condition that X
should not sell any tyre below the price list issued by D. X supplied the
tyre to S who sold it at a price below the price list. D filed a suit against
S to forbid him from selling the tyres below the specified rate. D cannot
take an action against S as he is a stranger to contract between X and S.
1.7.4 Exceptions to the Rule of Privity of
Contract
The rule of privity of contract does not apply in the following cases:
‰‰ Beneficiary of a trust can claim benefits or rights conferred on him
in terms of the trust deed.
‰‰ Beneficiary of a charge which has been created on specific immov-
able property for his benefit can file suit to enforce the charge.
‰‰ When
a contract is made under a family settlement or partition
of the joint property or any other family arrangement in order to
benefit a stranger.
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Business Law
‰‰ In case contracts are made by the agent, the principal has the right
to enforce those contracts.
‰‰ In
case an acknowledgement of receipt of money has been made
on behalf of another (Estoppel), the rightful claim from the party
which had made the acknowledgement.
self assessment Questions
13. __________ refers to a type of relationship between the
parties to a contract according to which the parties can sue
each other.
S
14. Which of the following is not an exception to the rule of ‘No
Consideration, No Contract’?
IM
a. Written and registered agreement made out of natural love
and affection between parties standing in near relationship to one another
b. Written and registered promise by the debtor to pay a
time-barred debt
c. Promise to compensate a person for services rendered voluntarily
M
d. Written and registered promise by the debtor to pay a statute-barred debt
Activity
N
22
Using the Internet, read the rule of ‘No Consideration, No Contract’
thoroughly and find out the exceptions to the ‘No Consideration No
Contract’ Rule.
1.8 Free Consent
As studied earlier, consent is said to be free when an agreement is
made with the approval of both the parties and is free from any kind
of force or pressure.
Consent is said to be free when it is not caused by:
‰‰ Coercion
‰‰ Undue
‰‰ Fraud
(Section 15)
Influence (Section 16)
(Section 17)
‰‰ Misrepresentation
‰‰ Mistake
(Section (18)
(Sections 20, 21 and 22)
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THE INDIAN CONTRACT ACT, 1872 23
1.8.1 Consent vs. Free Consent
The usual meaning of the word ‘consent’ is giving an assent or approval
to an offer. According to the Section 13 of the Contract Act, 1872 two
or more persons are said to consent when they agree upon the same thing
in the same sense.
Example: A wants to sell his car to B at a certain price, but does not
specify which car as A has numerous cars. On the other hand, B also
wants to purchase A’s car which A may not be intending to sell. In this
case, there is no consent as both the parties are not agreeing upon the
same thing in the same sense.
S
Free consent of contracting parties is essential for a valid contract.
The consent of the parties is said to be free if it has not been caused by
any of the vitiating factors which include coercion, undue influence,
fraud, or misrepresentation or mistake.
IM
There is a minute difference between consent and free consent. The
consent of an individual can be obtained by illegal means, such as use
of force or threat. However, free consent is the consent given by an
individual without using any force or pressure.
1.8.2 Coercion
Know More
Section 15 of the Contract
Act, 1872 states coercion as
committing or threatening to
commit, any act forbidden by
the Indian Penal Code (45 of
1860) or the unlawful detaining,
or threatening to detain, any
property, to the prejudice of
any person whatever, with the
intention of causing any person
to enter into an agreement.
M
Coercion means making someone do something or prohibiting someone by using force or threat. In other words, coercion refers to the
practice of compelling another party to act in an involuntary manner
by use of threat or force.
N
Example: B executing a promissory note in A’s favour on the basis of a
threat by the latter that if B does not comply with his order, he would kill
his daughter, is a case of the use of coercion.
1.8.3 Undue Influence
To put simply, a contract is said to be induced by undue influence
when a party is in a position to dominate the other party and uses its
position to take an undue advantage over the other party.
Circumstances in which a party is considered to be in a dominant
position are:
‰‰ A
party holding real or apparent authority over the other party,
such as master and servant or principal and agent
‰‰ When
a party stands in a fiduciary position, such as a doctor and
patient or guru and disciple
‰‰ When
a party contracts with a person whose mental condition has
been temporarily or permanently debilitated because of old age,
prolonged sickness, or physical or mental distress
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Know More
Section 16 of the Contract Act,
1872 states that a contract is
said to be induced by ‘undue
influence’ where the relations
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.
24
Business Law
Study
Hint
Section 17 of the Contract Act,
1872 states fraud as an act by
a party with an intention to
deceive the other party in any
of the following conditions:
yyFalse representation of
facts done purposely or
recklessly
yyConcealment of facts by
anyone who has knowledge
or belief of the facts
yyAny other act to deceive
1.8.4
Fraud
Fraud refers to an intentional misrepresentation of material existing
facts made by one person to another with knowledge of its falsity and
for the purpose of inducing the other person to enter into a contract.
CASE LAW
Rajagopala Iyer vs. South India Rubber Works (1942), MLJ 228
Facts: The prospectus of a company showed certain persons as its
directors. The statement was true; however, before allotment, some
of the named directors retired. This fact was not communicated to
the applicants for shares. It was held to be a fraud consisting of concealment; therefore, the applicants could seek refund of their money.
IM
yyAny act or omission which
the law has specifically
declared as fraudulent
Example: A poor Hindu widow agreed to pay the lender 100 percent
rate of interest on the money which she had borrowed to establish her
right to maintenance. It was held that the agreement has been induced by
undue influence as the lender has abused his dominant position.
S
yyAny promise made without
an intention to perform it
There is a presumption of law against the dominant party that he/she
must have abused his/her dominant position in making the contract in
the aforementioned cases.
Misrepresentation
M
1.8.5
Section 18 of the Contract Act, 1872 describes misrepresentation to
involve the following:
N
‰‰ Making
unwarranted statements which are not factually true,
though one believes them to be true, e.g., quoting production figures of a factory from guess work
‰‰ Committing
a breach of duty without the intent to deceive, but
obtaining an advantage by conveying wrong information unintentionally
‰‰ Causing
another party to make a mistake which causes him loss
which means inducing a mistake about the subject matter. Any contract that is made by misrepresentation may either be rescinded
or the affected party may accept the contract along with the restitution of his loss.
1.8.6
Mistake
Mistake is an innocent or erroneous belief in a certain state of things.
A mistake may either be of law or of facts. A mistake of law may relate
to mistake of either the Indian law or a foreign law during the formation of the contract. In the case of mistake of the Indian law, the rule
is that the ignorance of law is not an excuse. However, in the case of
mistake of foreign law, it may be taken as a mistake of fact. In other
words, parties may have to face consequences of the fallout due to
ignoring Indian law.
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THE INDIAN CONTRACT ACT, 1872 25
Example: If a party commits an error of applying service tax for the
contract instead of Goods and Service Tax (GST), the party shall still be
liable for non-compliance under GST.
As regard to the mistake of fact, it may be either a bilateral mistake or
a unilateral mistake. According to Section 20 of the Contract Act, 1872,
a bilateral mistake about a matter essential to the agreement will lead to
making the agreement void if both the parties are under a mistake and
the mistake relates to an important and material fact.
CASE LAW
Galloway vs. Galloway (1914)
S
A bilateral mistake may relate to the existence of the subject matter
of a contract; identity of the subject matter; quality, quantity, or price
of the subject matter; title to the subject matter or possibility of performance.
IM
Facts: A man and a woman executed a separation deed believing
themselves to be lawfully married to each other. Later, it was discovered that they were under a bilateral mistake as to the legality
of their marriage as the marriage was not duly registered leading to
the annulment of the separation deed.
M
A unilateral mistake is one in which only one of the parties is under
mistake.
CASE LAW
Ayekam Angahal Singh vs. Union of India (1970)
N
Facts: There was an auction for sales of fisheries rights on an annual
contract basis and the lease for a period of three years. Mr. Singh
was the highest bidder but he mistook the bid to be for all the three
years of lease, whereas the bid price was on an annual basis. However, Mr. Singh could not get any relief from the court since it was a
case of unilateral mistake.
self assessment Questions
15. Free consent of contracting parties is essential for a valid contract. (a) True (b) False
16. A party holding real or apparent authority over the other
party is considered to be in a __________ position.
Activity
Mrs. X has been coerced by her husband to enter into a property
contract. Now, she wants to cancel the contract. Can she do so?
What are the remedial provisions available with Mrs. X against her
husband?
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NOTE
According to Section 22 of the
Contract Act, 1872, a contract
does not become void because
of any unilateral mistake. Unless
the unilateral mistake is related
to a fundamental fact, the
contract validity is not affected.
26
Business Law
1.9 Capacity to Contract
According to Section 11 of the Contract Act, 1872, every person is competent to enter into a contract if:
‰‰ He/she
is of the age of majority according to the law to which he/
she is subject;
‰‰ He/she
is of a sound mind; and
‰‰ He/she
is not legally disqualified from contracting by any law to
which he is subject.
It means that the contractual capacity of individuals is determined in
accordance with their age, soundness of mind and legal qualifications.
As per the Indian Majority Act,
1875, in computing the age of
any person, the day on which
he was born is to be included
as a whole day and he shall
be deemed to have attained
majority at the beginning of the
eighteenth anniversary of that
day.
The analysis of Section 11 reveals that the following persons are
incompetent to contract:
‰‰ Minors
(till they are being classified as minors under the law they
are subject)
‰‰ Persons
of unsound mind
M
NOTE
IM
S
1.9.1 Disqualifications for Capacity to Contract
– Minors, Persons of Unsound Mind and
Disqualified Persons
‰‰ Persons
disqualified by law to which they are subject
Let us study about the persons who are incompetent to contract:
N
‰‰ Minors: According to the Indian Majority Act, 1875, a person below
the age of 18 years is considered as a minor. However, the age of
majority is extended to 21 years where the guardian of a person or
his property has been appointed by a court or the minor has been
put under the guardianship of the court of wards.
Legal Position of Agreements by a Minor
The following points explain the legal position of agreements by a
minor:
 An
agreement with a minor is void ab initio (Mohiri Bibee vs.
Dharmodas Ghose) so that a minor is not under any legal obligation.
 A
minor can be a promisee or a beneficiary so that he can enforce the agreement.
 There
can be no ratification of the agreement made with a minor during or after he attains majority.
 There
can be no specific performance of a minor’s agreement.
 There
can be no estoppel against a minor as per Section 115
of the Evidence Act, 1872. It means that a minor cannot be es-
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THE INDIAN CONTRACT ACT, 1872 27
topped from setting up the plea or a minors statements cannot
be used as final and binding covenants.
 The
Contract Act, 1872 allows that a principal may appoint a
minor as an agent and he/she can bind the principal by his acts
but the agent cannot be held personally liable for the breach of
contract.
 A minor can be admitted to the benefits of partnership, though
he cannot become a partner in the partnership firm.
of unsound mind: The soundness of mind of a person for
the purpose of making a contract is to be adjudged at the time
when the contract is being made. Unsoundness of mind may be
consistent or occasional. A person cannot make a contract when
he is not of a sound mind even if he is generally of sound mind.
On the other hand, a person who is under usual circumstances of
sound mind, but on certain occasions, the person is of unsound
mind, then he cannot make the contract when he is of unsound
mind.
IM
S
‰‰ Persons
Example: An individual is of unsound mind when he is under the
influence of liquor or heavy medication. Therefore, he can make a
contract only after the influence of liquor or medication has veered
off. Contracting during the unsoundness of the mind of a party makes
the contract void.
disqualified from contracting: The following persons
have been declared incompetent from making a contract:
enemies: All the persons who are not Indian citizens are
called aliens. The aliens may be enemies or friends depending
upon their country’s relations with India. Citizens of a foreign
state whose country is at war with India or does not have diplomatic relations with India are called alien enemies.
 Foreign
N
 Alien
M
‰‰ Persons
sovereigns and ambassadors: These persons can enter into contracts and enforce those contracts in courts, but
they cannot be sued in any court without the sanction of the
Central Government unless they choose to submit themselves
to the jurisdiction of the court. This immunity is enjoyed by
them under the International law.
 Convicts
undergoing imprisonment: A convict is one who is
found guilty by a court and is undergoing sentence of imprisonment. During the period of his imprisonment, he is incompetent to enter into contract. However, after the expiration of the
period of sentence or when the convict is on parole, he/she can
enter into a contract and may also sue on a contract.
‰‰ Company
under Companies Act, 2013 or statutory corporation
under the Special Act of Parliament (entering into contract outside its objects or purpose): A company/corporation is an artificial
person created by the law. The contractual capacity of a company
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NOTE
According to Section 12, a
person is said to be of sound
mind if, at the time of making
the agreement, he or she is (a)
capable of understanding the
terms and conditions of the
contract; and (b) capable of
forming a rational judgement of
the effect of the contract on his
interests.
Business Law
is determined by the objects clause of the Memorandum of Association (MOA) and Articles of Association (AOA). It cannot enter into
the contract outside the powers conferred upon it by the objects
clause since it will be ultra vires. In case of statutory companies,
its capacity to contract depends on the statute through which it
was created.
‰‰ Insolvents: When a person’s debts exceed his assets, he is adjudged
insolvent. Such a person cannot enter into contracts relating to his
property. Such persons also cannot sue or be sued.
Self Assessment Questions
a. Age
S
17. Which of the following conditions do not affect the capacity of
a person to contract?
b. Soundness of mind
c. Presence of all limbs
d. Qualification as per law
IM
18. A person cannot make a contract when he is not of a sound
mind if he is generally of __________.
Activity
M
Research on the Internet and find out the essentials of a valid contract under the Contract Act, 1872.
1.10
N
28
Void, Valid and Voidable
Agreements
On the basis of enforceability or validity, agreements can be classified
as being valid, void or voidable. When a contract is in dispute, the
terms ‘voidable’ and ‘void’ may seem similar but these have different meaning. These terms as defined in the Contract Act, 1872 are
explained as follows:
‰‰ Valid agreement: When an agreement has all the five essential ele-
ments (mentioned under Section 1.2 of this chapter), it is termed
as a valid agreement.
‰‰ Void
agreement: According to Section 2(g) of the Contract Act,
1872, an agreement that is not enforceable by law is called void.
The Contract Act, defines certain types of agreements as void.
These are as follows:
 Agreements
made by incompetent parties (Section 11)
 Agreements
where the consideration and/or the objectives are
unlawful either in whole or in part. (Section 24)
 Agreements
without consideration (Section 25)
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THE INDIAN CONTRACT ACT, 1872 29
 Agreements
that have expressly been declared void (Sections
26-30, 36 and 56):
99 Agreements
in restraint of marriage (Section 26)
99 Agreements
in restraint of trade (Section 27)
99 Agreements
in restraint of legal proceedings (Section 28)
99 Uncertain
99 Wagering
Agreements (Section 29)
Agreements (Section 30)
99 Agreements
that are contingent on happening of specified
event within fixed time (Contingent Contracts) (Section 36)
99 Agreement
to do impossible acts (Doctrine of Frustration)
S
(Section 56)
‰‰ Voidable agreement: According to Section 2(i) of the Contract Act,
IM
1872, an agreement which is enforceable by law at the option of one
or more of the parties thereto, but not at the option of the other or
others, is a voidable contract.
1.10.1 Void Agreements with Unlawful/Illegal
Consideration or Object
M
Unlawful agreements are those in which the consideration and/or
object is/are unlawful. Object or consideration is considered unlawful
under Section 23 if it is:
‰‰ Illegal
by law (bigamy among Hindus)
N
‰‰ Forbidden
‰‰ Defeating the provisions of any law like furnishing bail after taking
deposit from the defendant
‰‰ Fraudulent
‰‰ Involving/implying
injury to the person or property of another
‰‰ Immoral
‰‰ Opposed
to public policy
It is relevant to discuss the meaning of public policy and the agreements that are opposed to the public policy. There is no precise definition of ‘public policy’ as its meaning keeps on changing with the exigencies of time. However, over a period of time, various matters have
been held to fall within the ambit of public policy, such as:
‰‰ Trading
with enemy
‰‰ Stifling of prosecution, i.e., absolving offenders of criminal liability
or withdrawing a criminal case after receiving compensation
‰‰ Maintenance
(filing frivolous litigation) and Champerty (rendering assistance in pursuing legal remedy and sharing its benefits)
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‰‰ Interference
‰‰ Trafficking
‰‰ Marriage
with the course of justice
in public offices
brokerage agreements
‰‰ Agreements
restricting personal liberty
‰‰ Agreements
in restraint of parental rights
‰‰ Agreements
interfering with marital rights
‰‰ Agreements
creating interest opposed to duty
‰‰ Agreements
for varying the period of limitation
1.10.2 Expressly Declared Void Agreements
in Restraint of Marriage (Section 26): Any agreement that is made in restraint of marriage of any individual or
forcing/inducing an individual to enter into marriage.
IM
‰‰ Agreements
S
Sections 26-30, 36 and 56 of the Contract Act, 1872 describe various
types of agreements that have been expressly declared as void. These
are as follows:
in Restraint of Trade (Section 27): As per Article
19 (1)(g), every person in India has a right to engage in any lawful trade, business, occupation, profession or employment of any
kind. However, there are certain exceptions to such agreements
restraining trade which means that apart from these exceptions,
all other agreements in restraint of trade are void. The exceptions
are as follows:
M
‰‰ Agreements
N
30
 Sale
of goodwill
 Non-compete
99 with
newly admitted or retiring partner(s)
99 between
lution
99 with
agreements under the Partnership Act, 1930:
existing partners upon or in anticipation of disso-
the buyer of a firm’s goodwill
 Other
exceptions to Section 27 subject to reasonable restrictions include:
99 Service
contracts prohibiting double employment
99 Employee
bonds where an employee has to deposit security upfront or submit a bond to serve the company for a
specified period in consideration of training; or bond with
guarantee from a third party
99 Agreements
relating to non-disclosure, no poaching,
non-solicitation, confidentiality, etc.
‰‰ Agreements
in Restraint of Legal Proceedings (Section 28):
Agreements in which parties agree not to resort to courts for a
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THE INDIAN CONTRACT ACT, 1872 31
legal remedy in the case of a dispute are called agreements in
restraint of legal proceedings. All such agreements are void. There
is an exception to this section. When two parties to an agreement
mutually agree that in the case of any disputes that arise between
them with respect to the agreement, such dispute will be referred
to arbitration rather than courts. Such an agreement is valid.
‰‰ Uncertain
Agreements (Section 29): Agreements with an uncertain meaning or agreements, the meaning of which cannot be
made certain, are void.
CASE LAW
Guthina vs. Lynn (1831)
S
Facts: A horse was bought for a certain price with a promise to
pay some additional money if the horse proved lucky. The agreement was held to be void for the want of certainty.
Agreements (Section 30): In general, a wager is ‘an
agreement by a party to pay money or money’s worth to another
on the happening of some uncertain event in consideration of
other person’s promise to pay on the non-happening of the event’.
The Contract Act, 1872 does not define a wagering agreement, but
states that agreements by the way of wager are void.
IM
‰‰ Wagering
 There
 It
M
The following are the essential ingredients of a wager:
must be two persons.
must consist of a promise to pay money or money’s worth.
 The payment must be conditional on the happening or non-hap Event
N
pening of an event.
must be uncertain.
 Parties
must have equal chance of winning or losing.
 Neither party has any control on the event, nor any other inter-
est except winning.
1.10.3 Effect of Void, Valid and Voidable
Agreements
A valid agreement has potential legal effects, whereas a void agreement has no legal effects. A voidable agreement can have two types of
effects, either it can be rescinded or be adopted. If a voidable agreement is avoided by the party at whose option the agreement becomes
void, then the other party need not perform the agreement. Also, if
the party that rescinds the contract has received any benefit from the
other party, it must restore the same. A valid contract is recognised
under the law while a void agreement has no recognition under law.
The recognition of a voidable agreement is dependent on whether the
affected party adopts or rescinds the agreement.
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NOTE
Adoption of the agreement
would make the agreement a
valid contract, while rescission
would make it void.
32
Business Law
Self Assessment Questions
19. Which of the following agreements have not been expressly
declared as void?
a. Agreements in restraint of marriage
b. Agreements in restraint of trade
c. Agreements whose meaning is certain
d. Agreements in restraint of legal proceedings
Activity
S
20. Object or consideration is considered unlawful if it is illegal.
(a) True (b) False
IM
Differentiate between void and voidable agreements.
1.11 Quasi-Contracts
N
M
? DID YOU KNOW
Quasi-contracts are also called
contracts implied in law.
Usually, contracts are made between two or more parties wherein
a promisor voluntarily undertakes to do or not to do something for
the promisee. However, at times, the law imposes certain restrictions
upon one party for the benefit of the other party even in the absence
of a contract. In such cases, the law assumes the presence of a contract when, in reality, no agreement (either express or implied) exists
between the parties. Such a contract is called a quasi-contract. Obligations are imposed by law upon a person to prevent unjust enrichment
at the expense of another person.
Quasi-contracts are not contracts in a pure sense. There are various types of quasi-contracts as specified in Sections 68-72, which are
explained as follows:
‰‰ Supply
of necessaries to incompetent persons (Section 68):
When a person supplies any necessaries to a person who is incapable of entering into a contract or to any incompetent person who
requires support, then such a person is entitled to be reimbursed
from the property of the incapable person.
Example: A’s minor children are looked after by B due to A’s illness,
B is entitled to be reimbursed for the expenses made by him towards
the minor children, though there is no agreement.
‰‰ Payment
by an interested person (Section 69): When a person is
interested in making the payment on behalf of a person who was
bound by the law to pay, the person who has made the payment
is entitled to be reimbursed from the person who has the original
responsibility to make the payment. For example, a man paying
the entire sum of property tax including the tax amount that was
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THE INDIAN CONTRACT ACT, 1872 33
payable by his brother in order to save his property from being
attached for the non-payment of government dues.
‰‰ Obligation of a person enjoying a benefit of a non-gratuitous act
(Section 70): When a person does anything or delivers anything
non-gratuitously for another person who enjoys the benefits of
such an act, the person who benefitted is bound to compensate the
person who has done that act.
‰‰ Responsibility
of the finder of goods (Section 71): When any person finds things belonging to another and takes goods under his
custody, then he must fulfil the responsibility of a bailee. In other
words, the finder of goods is put in the position of a bailee and has
to discharge the following obligations:
take reasonable care of the goods found
 Not
 To
to make personal use of those goods
make efforts to trace the owner
restore the goods to its original owner if the original owner
is found
IM
 To
S
 To
paid or goods delivered by mistake or under coercion
(Section 72): It is the legal liability of a person to return the goods
or refund (repay or return) the money that has been delivered to
him by mistake or under coercion.
M
‰‰ Money
N
Example: A and B have taken a loan of ` 2,000 from C. A returns
the whole amount to C on his and B’s behalf. B was not aware of the
payment made by A and also returned ` 1,000 to C. In this case, C is
bound to pay back ` 1,000 to B.
Table 1.2 differentiates between a contract and a quasi-contract:
Table 1.2: Differences Between Contract
and Quasi-Contract
S. No.
Point of
Distinction
Contract
Quasi-contract
1.
Purpose
A contract results
from the will of
both the parties
expressed with a
view to create an
obligation.
A quasi-contract is a contract
that resembles the creation
of a contract but in reality no
contract is created in express
or implied terms. Such contracts have obligations similar
to those created by a contract.
2.
Agreement
A contract is
Quasi-contracts are not formed
formed on the basis on the basis of any agreement.
of an express or implied agreement.
3.
Essential
elements
A contract has
certain essential
elements.
Essentials for the formation of
a contract are not applicable.
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S. No.
4.
Point of
Distinction
Nature
Contract
It is a full-fledged
contract and is
binding.
Quasi-contract
A quasi-contract resembles a
contract. It is not a full-fledged
contract but still is a binding contract and resembles a
contract and all obligations of
contract shall apply.
Self Assessment Questions
21. A contract results from the will of both the parties expressed
with a view to creating an obligation, whereas a _____________
is an obligation resembling to that created by a contract.
IM
S
22. When a supplier supplies any necessaries to a person who is
incapable of entering into a contract or to any incompetent
person who requires support, then such a person is entitled
to be reimbursed from the property of the incapable person.
(a) True (b) False
Activity
M
From the Internet, find some examples of quasi-contracts.
1.12 Discharge of Contracts
Discharge of a contract in general means the fulfilment, termination
or discontinuation of the contractual relationship between the parties.
A contract is discharged when the rights and obligations of both the
parties to a contract come to an end. In other words, when the parties
to a contract are released or have completed their respective obligations under the contract, the contract is discharged. It puts an end to
the contract.
N
34
1.12.1
Discharge by Performance
Performance is the usual and preferred mode of discharge of a contract. A contract is discharged by performance when both the parties
to a contract have fulfilled their respective responsibilities under the
contract within the prescribed time. The discharge must be in a manner as prescribed in terms of the contract.
1.12.2
Discharge by Mutual Agreement
Just like contracts can be made by a mutual agreement between two
parties, they can also be discharged through mutual agreements.
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THE INDIAN CONTRACT ACT, 1872 35
The nature of mutual agreement may be of the following types:
‰‰ Novation:
It means that a new contract is substituted in place of
an existing contract between the same or different parties.
‰‰ Rescission:
It means the cancellation of contract by one or both
parties to the contract.
‰‰ Alteration:
It means changing one or more terms of the contract
by mutual consent of the parties. Due to alteration, the previous
contract stands discharged and new terms become effective.
‰‰ Remission:
It means that the promisee accepts a lesser performance than what was actually promised. Remission does not
require any consideration.
It means that the promisee intentionally relinquishes its
contractual rights by exempting the promisor from carrying out its
duties as per the contract.
S
‰‰ Waiver:
IM
1.12.3 Discharge by Impossibility of Performance
(Force Majeure Clause)
A contract is said to be impossible to discharge when it cannot be performed due to circumstances beyond the control of the parties to the
contract. Impossibility may be of two types:
M
‰‰ Initial impossibility: An impossibility that exists at the time of the
N
formation of the contract is known as initial impossibility. Such
impossibility may or may not be known to both the parties. Such
contracts are void. However, if the impossibility is known only to
one of the parties, the contract is voidable at the option of the other
party.
‰‰ Supervening
impossibility: A supervening impossibility refers to
an impossibility which did not exist at the time of creating the contract but it arose subsequently after the contract was made. Subsequent impossibility renders a contract impossible or illegal to
perform. Such contracts are void. There are certain cases when a
contract is discharged on the grounds of supervening impossibility
as follows:
 Destruction
of the subject matter of contract
 Declaration
of war
 Death
or personal incapacity
 Non-occurrence
or non-existence of particular state of things
necessary for performance
 Change
of law
 Epidemic
or Pandemic
 Riots
 Lockouts
or strikes
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However, there are certain other cases where the contract suffers from
supervening impossibility. Such contracts cannot be said to be discharged and even with such impossibility parties are expected to perform the contract and avoidance of obligations would lead to breach of
contract. The rationale behind this is that the purpose of frustration is
to put an end to the contract. This doctrine is not to be lightly invoked.
‰‰ Difficulty
of performance: Difficulty of performance arises when
the performance of the contract becomes more difficult due to
increased expenses or decreased profits than what was estimated
at the time of the formation of contracts.
‰‰ Commercial
impossibility: It has become commercially non-profitable or expected profits cannot be realised under the contract.
‰‰ Impossibility due to default of a third party: If the contract could
impossibility: A contract cannot be simply considered as
discharged because of impossibility of one of the several objects
of a contract. Then the obligations that cannot be performed are
severed to the extent they can be severed from the contract and
the rest of the contract is expected to be performed.
IM
‰‰ Partial
S
not be discharged due to the default of a third party on whose
promise the performance of contract was based, it cannot be considered as discharged.
Discharge by Lapse of Time
M
1.12.4
If a contract is expected to perform within a specified time and where
time is the essence of the contract, then such a contract would stand
discharged and the parties failing to perform would be held liable for
breaching (breaking) the contract. If no time is mentioned in the contract, an unreasonable or inordinate delay would be treated as discharge of the contract.
N
36
1.12.5
Discharge by Operation of Law
A contract is discharged due to operation of law in the following cases:
‰‰ Death
of either of the parties
‰‰ Insolvency
of either of the parties
‰‰ If
the contract is a personal contract where the individual has to
perform and such individual turns to be of unsound mind
1.12.6
Discharge by Breach of Contract
The usual meaning of breach of contract is the refusal to perform a
contract. When any party to a contract refuses or fails to perform the
contract as per the specified time and place, it is a case of breach of
contract. In this case, it is said that the contract is discharged by the
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THE INDIAN CONTRACT ACT, 1872 37
breach of contract. If one party refuses to perform, it is considered
that the other party has discharged its obligations as per the contract.
In case of breach of contract, the aggrieved party can proceed legally
against the defaulting party. The breach of contract may be of two
types: anticipatory breach or actual breach.
ANTICIPATORY BREACH
If a party declares its intention of not performing the contract before
its performance is due, it is called anticipatory breach.
S
Example: If A appoints a teacher to give 15 lectures on a subject and the
teacher, without a sufficient reason, does not turn up after taking 9 lectures and A has not come to know that he cannot take the next 5 lectures
due to conflicting appointment. Then A if informs the class in advance
of such breach and this is anticipatory breach the remaining 6 lectures.
IM
ACTUAL BREACH
If any party to a contract refuses to perform or fails to perform his/
her obligations on the due date of performance or during the course
of performance, it is considered to be an actual breach of contract. A
contract can be breached by any of the parties to a contract.
N
M
Example: In case of a contract for sale, a buyer is said to have breached
the contract if he refuses to accept the delivery which has been made as
per the terms of contract or if he fails to make the payment or delays
the payment after the delivery has been made. On the other hand, the
contract can be considered as breached by the seller if he fails to deliver
according to the terms of the contract.
What Constitutes Breach?
Whenever one or more parties to a contract reach out to the legal system and claims/claim that the contract has been breached, the courts
need to decide whether or not the case concerned is indeed a case of
breach of contract. Breach of contract means the failure to perform
the promise related to the entire contract or of some clauses of the
contract. To decide if a claim of breach is indeed true, the courts need
to answer certain questions as follows:
‰‰ Did
a contract exist in the first place? Is such a contract a valid
contract?
‰‰ Did
a valid contract exist? What were the duties of each party?
‰‰ Was
the contract modified at any point of time?
‰‰ Did
the breach take place as claimed?
‰‰ What
was the nature of breach – material breach or non-material
breach?
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‰‰ Does
the defaulting party have any legal defence against the
enforcement of the contract?
‰‰ What
damages were caused by the breach?
Difference between Breach and Material Breach
S
There are two major types of breach based on materiality, namely
material breach and non-material breach. A material breach of
contract means a major or complete failure to perform the obligations
of a contract, that also severely affects the rights of the parties. On
the contrary, a failure to complete some minor obligation as per the
contract is called non-material breach. Such breaches could not lead
to discharge of the contract but the contract shall continue upon payment of damages.
IM
1.12.7 Appropriation of Payments (Clayton’s Rule
of Appropriation)
Appropriation of a payment means the application of payment to some
debt. If the performance consists of payment of money and there are
several debts to be paid to a creditor in part payments, such payment
shall be appropriated as per Sections 59-61 of the Contract Act, 1872
as follows:
M
‰‰ Application of payment where debt to be discharged is indicated
N
38
by the debtor (Section 59): If a debtor who owes various debts to
a creditor makes a payment and intimates the creditor expressly
that the payment must be applied to discharge a particular debt,
the payment must be applied accordingly (if accepted). This is
called appropriation as per the will of a debtor.
‰‰ Application
of payment where debt to be discharged is not indicated by the debtor (Section 60): If a debtor who owes various
debts to a creditor makes a payment but fails to intimate against
which debt the payment has been made by the debtor, the creditor
can apply the payment according to his will to any of the lawful
debts. This is called appropriation as per the will of creditor.
‰‰ Application of payment where neither party indicates appropri-
ation (Section 61): If neither the debtor nor the creditor makes
any appropriation, the payment should be applied in a chronological order, which means that the discharge of debts will be done
according to time (First In First Out). The amount to the earlier
debt will be first appropriated in order of time.
self assessment Questions
23. __________ performance of a contract occurs when both the
parties fulfil their obligations arising out of the contract as per
the terms of the contract.
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THE INDIAN CONTRACT ACT, 1872 39
24. In which of the following cases will the contract not be discharged?
a. Declaration of war
b. Death
c. Difficulty of performance
d. Change of law
Activity
S
Identify a contract that includes a specified date of performance
on part of one of the parties to the contract. Describe in brief the
anticipatory breach of contract and the actual breach of contract in
the context of this contract.
IM
1.13 Remedies for Breach of Contract
Whenever there is a breach of contract, the aggrieved party is relieved
from performing his/her obligations under the contract and can pursue any of the following courses of action or remedies:
‰‰ Rescission
of the contract
for damages
‰‰ Suit
for specific performance
‰‰ Suit
for injunction
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‰‰ Suit
N
You have already studied that if one party refuses to perform his/her
duties as per the contract, the other party can rescind the contract and
refuse to perform his/her obligations.
1.13.1 Damages
Section 73 of the Contract Act, 1872 deals with the compensation of
loss or damages caused by the breach of contract. In case of the breach
of contract, the aggrieved party, in addition to rescinding the contract,
has the right to claim for damages. Damages mean that the defaulting
party will pay compensation to the aggrieved party because he/she
has suffered due to the breach of contract.
There are four major types of damages, namely ordinary damages,
special damages, exemplary damages and nominal damages. In case
of an ordinary damage, the compensation is given in a manner that
can reasonably be explained for the amount of loss suffered. The compensation is calculated on the basis of the real loss suffered by the
aggrieved party.
When the parties are affected by some unusual circumstances which
result in the breach of a contract, it is a case of special damages. ExemNMIMS Global Access - School for Continuing Education
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plary damages are awarded to the aggrieved party in order to set an
example and punish the defaulting party and not just to compensate
the loss suffered by the aggrieved party.
Lastly, nominal damages are awarded keeping in mind that the
aggrieved party has not suffered substantial loss and the compensation is more directed towards acknowledging the fact of occurrence of
breach by the defaulting party.
1.13.2 Specific Performance
Specific performance is ordered at the discretion of a competent court
as per Section 10 of the Specific Relief Act (1963).
S
It is granted in the following cases:
‰‰ Where
money is not an adequate remedy
‰‰ Where
there are no standards for ascertaining actual damage
IM
However, no specific performance is ordered if:
‰‰ The
‰‰ A
contract is of personal nature
court cannot supervise execution
‰‰ Money
is an adequate remedy
M
There are certain cases involving the breach of contract wherein
awarding damages or monetary compensation may not be an adequate remedy. It is also possible that the aggrieved party may not be
interested in monetary compensation. In such cases, the court may
give instructions to the defaulting party to perform his obligations or
fulfil his/her promise as per the terms of the contract. In other words,
the court may order the defaulting party to perform the contract. This
is called specific performance of a contract. It is regulated by the Specific Relief Act, 1963. Specific performance is ordered by a competent
court as per Section 10 of the Specific Relief Act (1963).
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Example: An event management company had a contract with a celebrity for a dance show. The tickets for the show were sold out. The celebrity
now wanted to terminate the agreement as she had some other lucrative
offers. The celebrity offered to compensate but the event management
company chose to get the contract specifically performed by the celebrity
through the court.
AMENDMENT TO SPECIFIC RELIEF ACT, 2018
Specific Relief (Amendment) Act 2018 has been effective since 1 October, 2018 which has inter-alia amended provisions of the Specific
Relief Act, 1963 more specifically provided in Sections 10 and 14 of
the Specific Relief Act, 1963. The amendments were initiated with an
aim of realigning the provisions to foster ease of doing business in
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THE INDIAN CONTRACT ACT, 1872 41
India by strengthening investor protection and stronger contractual
enforcement. These amendments provide greater protection to the
non-defaulting party by ensuring the performance of the contract he
bargained for.
Specific performance will be a general rule rather than a limited right.
The provision provided under Section 10 of the Specific Relief Act,
1963 has been changed. One of the major changes is that now enforcement of the specific performance of contracts has become mandatory
by courts, except for the contracts in which performance is not specifically enforceable. Prior to amendments, the courts often offer the
provision of awarding damages against breach of contract rather than
granting specific performance because of wide discretionary powers.
S
Engagement of Experts
M
IM
In Section 14A of the Specific Relief Act, 1963, the court may engage
experts for their opinion on any subject matter, within the purview
of the Specific Relief Act, 1963, in order to get assistance on any specific issues involved in the cases for contractual disputes. A suit may
require more experts to accumulate or provide evidence or include
the production of documents on the issue that shall be based upon
the relevant information and part of a record. Therefore, according to
Section 14A, the court has the power to engage experts in a suit.
Substituted Performance
N
Section 20 of the Specific Relief Act, 1963 has been changed under the
Specific Relief (Amendment) Act, 2018 to substitute the performance
of a contract. As per the new provisions, the aggrieved party has a
choice to get the contract performed by the third party at the same
cost as the party that has not performed or breached the contract.
The condition is that the victimised party needs to give in writing, a
notice to the breaching party of not less than 30 days, to perform the
contract. So, the breaching party needs to perform the contract signed
within the specified time frame mentioned in the notice; otherwise,
the aggrieved party can get the same contract performed by a third
party or his own agency, and the costs and expenses incurred from
performing the contract shall be borne by the breaching party.
Contracts Not Specifically Enforceable
As per Section 14 of the Specific Relief Act, 1963, the following contracts now cannot be specifically enforced:
(a) where a party to the contract has obtained substituted performance of the contract as per Section 20 of the Act;
(b) a contract the performance of which involves the performance of
a continuous duty that the court cannot supervise;
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(c) a contract that is so dependent on the personal qualifications
of the parties that the court cannot enforce the specific performance of its material terms; and
(d) a contract which is, in its nature, determinable
1.13.3 Injunctions
IM
S
At times, a party may not perform the contract, which has been promised, causing the breach of contract. In such a case, a competent court
may issue an order to prohibit the party from either performing the
act or preventing him from doing any act that leads to the loss of the
aggrieved party. Such orders of the court are called injunctions. More
specifically, an injunction can be defined as a mode of securing the
specific performance of the negative terms of the contract. In other
words, injunction is a court order requiring a party in, to refrain from
doing something which may lead to a breach. Injunction may be a
temporary injunction or a perpetual injunction [Section 36 of Specific
Relief Act (1963)]. While the scope of temporary injunction is temporary, i.e., till the disposal of the suit; permanent injunction gives a permanent relief.
M
Example: If a person agrees to sell a property and thereafter refuses to
sell it, the court may pass an order of injunction against the seller from
selling the property to any third party, thereby securing the interests of
the buyer.
self assessment Questions
25. List the four types of damages.
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26. No specific performance is ordered if the compensation in
terms of money is an adequate remedy. (a) True (b) False
Activity
ABC Company entered into a contract with the Government of
India in order to build a highway in two years. After one year of
the contract, it refuses to make the highway and goes back on the
statements made by it during the formation of the contract. Discuss
in detail the doctrine of the law applicable to the contract and the
remedy available to the Government of India.
1.14
Contracts of Indemnity and
Guarantee
The Contract Act, 1872 has provided for certain special contracts,
such as contracts of indemnity, contracts of guarantee, bailment and
pledge. Let us study about contracts of indemnity and guarantee.
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THE INDIAN CONTRACT ACT, 1872 43
1.14.1 Contract of Indemnity and Contract of
Guarantee – Meaning and Examples
Indemnity means protection against damage or loss in order to compensate the party who has suffered any loss. In such contracts, two
parties, namely indemnifier and indemnified are involved. Indemnifier is the person who promises to compensate for the loss, whereas
the person to whom the promise is made is called indemnified. In
other words, the indemnifier makes good the loss of the indemnified.
Insurance contracts are a typical example of a contract of indemnity
where the insurance company undertakes to compensate the insured
for any loss which his property may sustain from catching fire.
Know More
According to Section 124 of the
Contract Act, 1872, a contract
of indemnity means a contract
by which one party promises
to save the other from loss
caused to him by the conduct of
the promisor himself, or by the
conduct of any other person.
1.14.2
IM
S
Example: X and Y enter into a contract for software licensing where
X represents that he is the owner of the software. The deal was for ` 10
lakhs. X has indemnified Y under a contract for any claims of ownership
of software from any third party. Now Z, who claims to be the real owner
of software, has filed a case against Y. Z has claimed software infringement and sought ` 1 crore against damages. Z has obtained an order from
the court. Now Y can claim damages from X as X has indemnified Y.
Rights of the Indemnified and INDEMNIFIER
M
RIGHTS OF INDEMNIFIED
The indemnified is entitled to the following rights when sued:
to recover damages: Right to recover all damages that the
indemnified has to pay any amount to the third party in the legal
suit related to the contract of indemnity.
‰‰ Right
N
‰‰ Right
to recover costs: Right to recover all the legal costs that are
payable to the third party.
‰‰ Right
to recover sums paid under settlement or compromise:
Right to recover all sums paid or payable under the terms of any
compromise or settlement of any suit.
‰‰ Right
to sue for specific performance: The indemnified has the
right to sue the indemnifier for specific performance if he has
incurred absolute liability and the contract covers such liability.
RIGHTS OF INDEMNIFIER
The Contract Act, 1872 does not mention the rights of the indemnifier expressly. In Maharana Shri Jasvaisingji Fatesingji v. Secretary of
State for India 14 BOM 299, it was decided that the rights of the indemnifier are similar to the rights of a surety mentioned under Section 141
of the Act. As per Section 141, the indemnifier becomes entitled to
the benefit of all securities that the creditor has against the principal
debtor whether he was aware of them or not. Where a person agrees to
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? DID YOU KNOW
Section 125 of the Contract Act,
1872 mentions the rights of the
indemnified who is also known
as indemnity holder.
Business Law
indemnify, he will, upon such indemnification, be entitled to succeed
to all the ways and means by which the person originally indemnified
might have protected himself against loss or set up his compensation
for the loss. A detailed explanation of rights of surety is given in later
sections of this chapter.
1.14.3
Commencement of Indemnifier’s Liability
An indemnified cannot hold the indemnifier liable till the time such
indemnified has suffered an actual loss. In relation to the contracts of
indemnity, it is relevant to determine when an indemnifier becomes
liable to pay. In other words, it must be determined when an indemnified becomes entitled to recover his indemnity.
Contract of Guarantee
S
1.14.4
IM
According to Section 126 of the Contract Act, 1872, a contract of guarantee is a contract to perform the promise or discharge the liability of a
third person in case of his default. In a contract of guarantee, there are
three persons involved. The person who gives the guarantee is called
surety. The person for whom the guarantee is given is called the principal debtor. Lastly, the person to whom the guarantee is given called
the creditor.
M
Example: X and Y go to a shop to buy some grocery. X buys some items
and pays for them. Y also buys some items but did not have the money
to pay to the shopkeeper. The shopkeeper, Z, tells Y that he can give him
the goods on credit provided X provides a guarantee for payment that
in case Y fails to pay Z, then X will have to pay Z. Y and X agrees to the
proposition of the shopkeeper Z. In this case, Y is the principal debtor, X
is the guarantor or surety and Z is the creditor.
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1.14.5 Kinds of Guarantee
Contracts of guarantee are of two types, viz., specific guarantee and
continuing guarantee. When a surety gives the guarantee for a single
debt or a specific transaction, it is called specific or simple guarantee.
Specific guarantee ends when the guaranteed debt is paid or when
the promise has been performed. When a surety agrees to give guarantee for a series of transactions, it is called continuing guarantee.
A continuing guarantee continues till all the transactions have been
completed or performed. In the case of continuing guarantee, the liability of transactions is not discharged until it is revoked.
1.14.6
Rights and LiabilitIES of Surety
Under a contract of guarantee, the surety enjoys all the rights that
are usually available to any party under a usual contract. Apart from
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THE INDIAN CONTRACT ACT, 1872 45
these, there are certain specific rights that are enjoyed by the surety
under a contract of guarantee, which are as follows:
‰‰ Rights
against principal debtor: The following are the rights of
surety against principal debtor:
 Right
of indemnity: The surety has the right to recover any
amount from the principal debtor that he has legitimately paid
to the creditor towards the debt under the contract of guarantee.
 Right
of subrogation: After the surety has paid the liability
of the principal debtor towards the creditor, the surety gains
the rights of the creditor and assumes the same rights that the
creditor had against the principal debtor.
against creditor: In the case of fidelity guarantee (guarantee on behalf of employee), the surety can direct the creditor
to dismiss the employee whose honesty he has guaranteed, in the
event of proved dishonesty of the employee. The creditor’s failure
to do so will exonerate the surety from his liability. The following
are the rights of surety against principal creditor:
IM
to securities: The surety has the right to receive the
securities of the principal debtor that he may have deposited
with the creditor at the time of making the contract of guarantee. Upon the payment of debt, the creditor shall provide the
surety deposited by the principal debtor. If the creditor loses
or, without the consent of the surety, parts with any securities
(whether known to the surety or not), the surety shall stand
discharged to the extent of the value of such securities and the
surety will be exempted from payment of debt to that extent.
 Right
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M
 Right
S
‰‰ Rights
to set-off: The surety has the right to set-off the principal debtor’s claims against the creditor.
 Right
of subrogation: After the payment of the guaranteed
debt, the surety is invested with the position of the creditor
against the principal debtor.
‰‰ Rights
against co-sureties: Where a debt has been guaranteed by
more than one person, they are called ‘co-sureties’ among themselves. The following are the rights of surety against co-sureties:
 Right
to contribution: If there are two or more co-sureties for
a debt jointly or individually and the co-sureties know or do
not know about the same and are under same or different contracts, then the co-sureties have to pay an equal share of debt
or of the unpaid debt.
Example: A, B and C are sureties to D for the sum of ` 3,000 lent
to E. E defaults in making payment. A, B and C are liable among
themselves to pay ` 1,000 each. If any one of them has paid more
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than their share of ` 1,000, they can claim contribution from others in excess of ` 1,000.
 Effect
of releasing a surety: The release of one surety of
co-sureties by the creditor does not discharge other sureties,
nor is the surety, so discharged, released from his obligation
vis-a-vis other co-sureties.
1.14.7
S
You studied about the rights of surety. However, there are liabilities
of the surety and co-sureties as well. The nature and extent of the
liability of a surety depends on whether there is a single surety or two
or more co-sureties. According to the Contract Act, 1872, the liability
of a surety is co-extensive with the liability of the principal debtor
except in case the contract provides for the contrary. As a general rule,
co-sureties are jointly and severally liable for the debt. It means that
all sureties have to contribute equally for the repayment of debt.
Discharge of Surety
M
IM
Under a contract of guarantee, a surety is discharged from his/her liability under the circumstances shown in Figure 1.1:
Notice by Surety
By Revocation
Death of Surety
Novation
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Variance in Terms of Contract
Release or Discharge of the
Principal Debtor
Discharge
of Surety
By Conduct of
Creditor
Arrangement between Principal
Debtor and Creditor
Creditor’s Act or Omission Impairing
Surety’s Eventual Remedy
Loss of Security
Guarantee Obtained by
Misrepresentation
By Invalidation of the
Contract of Guarantee
Guarantee Obtained by
Concealment or Fraud
Failure of Co-surety to
Join Surety
Figure 1.1: Discharge of Surety
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THE INDIAN CONTRACT ACT, 1872 47
A surety can be discharged by revoking the contract of guarantee in
the following ways:
‰‰ Notice
by surety: In the case of a specific guarantee, the guarantee cannot be revoked by giving a notice if the liability has already
accrued. In other words, if the principal debtor receives the credit
from the creditor, the surety cannot be revoked. However, in the
case of continuing guarantee, the guarantee can be revoked by
surety by giving a notice to the creditor with respect to the future
transactions that have not been accrued.
‰‰ Death
of surety: In the case of continuing guarantee, the death of
a surety leads to revocation of the guarantee with respect to future
transactions.
A surety is discharged by revoking a contract if a fresh
contract is made and entered into by the same parties or other
parties and the consideration for contract is the mutual discharge
of old contract.
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‰‰ Novation:
IM
A surety can be discharged by the conduct of creditor in the following
cases:
‰‰ Variance
in terms of contract: If the creditor conducts himself in
a way that results in material alteration of the terms of the contract, the surety is discharged from his liability.
‰‰ Release or discharge of the principal debtor: If the creditor enters
between principal debtor and creditor: If a creditor makes an arrangement with the principal debtor for composition or promises to give him time for fulfilling the promise without
the knowledge of the surety, then the surety is discharged.
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‰‰ Arrangement
M
into a contract with the principal debtor that results in the discharge of the principal debtor or if any act or omission of the creditor results in the discharge of the principal debtor, it also results
in the discharge of the surety.
‰‰ Creditor’s
act or omission impairing surety’s eventual remedy:
When a creditor engages in any activity that is against the rights of
the surety or if he does not perform an act that is his duty towards
the surety, then the surety is discharged from his liability.
‰‰ Loss
of security: If the principal debtor gives any security to the
creditor at the time of forming contract and the creditor parts with
or loses the security given to him without the consent of the surety,
the surety is discharged from his liability to the extent of the value
of security.
A surety can be discharged by invalidation of the contract, i.e., when
the contract becomes void or voidable at the option of surety, in the
following cases:
‰‰ Guarantee obtained by misrepresentation: If a creditor or princi-
pal debtor misrepresents any material fact related to the contract
of guarantee, the contract becomes invalid.
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‰‰ Guarantee
obtained by concealment: If a creditor conceals any
material fact related to circumstances relating to the contract, the
contract becomes invalid.
‰‰ Failure of co-surety to join surety: The guarantee becomes invalid
if there is a condition that the creditor will not act till all co-sureties have joined the contract and the condition is not fulfilled.
1.14.8 Difference between Contract of Indemnity
and Contract of Guarantee
The differences between the contract of indemnity and the contract of
guarantee are listed in Table 1.3:
S
Table 1.3: DISTINCTION between the Contract of
Indemnity and the Contract of Guarantee
Contract of Indemnity
Contract of Guarantee
IM
There are two parties, namely There are three parties, namely surety,
indemnifier and indemnified. creditor and principal debtor.
Liability of the principal debtor is primary,
but surety becomes liable in the case of
default by the principal debtor.
There is only one contract
between indemnifier and
indemnified.
There are two contracts, one between the
principal debtor and creditor and the other between guarantor and creditor.
M
Liability is solely of the indemnifier.
Liability of indemnifier arises Liability of surety arises after the default
after the happening of a con- of principal debtor.
tingency.
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There is no existing debt in
the contract of indemnity.
There is always some existing debt or duty
in the contract of guarantee.
The indemnifier cannot sue
any third party for any loss.
The surety has the right to sue the principal debtor if he has discharged his guarantee by invalidation of the contract.
self assessment Questions
27. __________ contracts are typical examples of the contract of
indemnity.
28. The indemnified has the right to sue the indemnifier for specific performance of indemnity if he has incurred absolute liability and the contract covers such liability. (a) True (b) False
Activity
Find some real life examples where contracts of guarantee and contracts of indemnity are applied.
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THE INDIAN CONTRACT ACT, 1872 49
1.15
Contract of Bailment and
Contract of Pledge
The term ‘bailment’ has been derived from a French word ‘bailer’
which means to deliver or hand over goods under the contract. Section 148 of the Contract Act, 1872 talks about bailment. According to
the Act, 1872, “Bailment is the delivery of goods by one person to another
for some purpose, upon a contract that they shall be returned when the
purpose is accomplished or otherwise disposed of ,according to the directions of the person delivering them. The person delivering the goods is
called the ‘bailor’. The person to whom they are delivered is called the
‘bailee’.
IM
S
Example: If A visits B, who is a tailor, and gives 50 metres of cloth to
make sofa covers, A is the bailor and B is the bailee. This transaction
creates a relationship of bailment between A and B. Other examples
include safe deposit of goods except where keys are retained by the
depositor, lending of books by library, delivery of goods to carrier, dry
cleaner, garage, keeping of goods in a warehouse or deposit of luggage in
the cloakroom.
The essential features of a bailment relationship are as follows:
‰‰ Agreement
transfer and delivery of movable goods (it is of essence
for a contract of bailment)
‰‰ Return
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‰‰ Voluntary
(express or implied)
of the specific goods
of possession of goods can be actual or constructive
‰‰ Delivery
is made as per a contract except in the case of finder of
goods
‰‰ Delivery
N
‰‰ Delivery
is made for some purpose
‰‰ A
bailee must return the goods to the bailor after accomplishment
of purpose of bailment or on the expiry of period of bailment
1.15.1 Kinds of Bailment
Bailment is classified on two basis, namely reward and benefit. On the
basis of reward, the bailment is classified as gratuitous bailment and
non-gratuitous bailment. The bailment that involves no consideration
is gratuitous bailment.
Example: Arun gives his novel to Bala for reading and says that Bala
can return the novel after reading. It is a case of gratuitous bailment.
The bailment that involves consideration is termed as non-gratuitous
bailment.
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Example: Arun gives his novel to Bala for reading and says that Bala
can return the novel after reading if he pays Arun ` 15. It is a case of
non-gratuitous bailment.
On the basis of the benefit accruing to the parties, the contract of bailment is classified into the following categories:
‰‰ Bailment
for exclusive benefit of the bailor: In such a bailment,
the bailment is executed solely for the benefit of bailor and the
bailee derives no benefit.
Example: Arun gives his novel to Bala for safe-keeping because his
house is being renovated.
for the exclusive benefit of the bailee: In such a bailment, the bailment is executed solely for the benefit of bailee and
the bailor derives no benefit.
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‰‰ Bailment
Example: Arun has five cows and gives one cow to his poor friend
Bala so that he may sell its milk to manage his household for one year.
IM
‰‰ Bailment for mutual benefit of both the bailee and the bailor: In
such bailment, the bailment is executed for the mutual benefit of
both the bailor and the bailee.
M
Example: Arun gives a gold bar to Bala, who is a jeweller, to make
a ring from it and Bala charges money for the services undertaken
by him.
1.15.2
Termination of Bailment
A contract of bailment may be terminated in the following four cases:
‰‰ Accomplishment
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of purpose: When the purpose, for which the
contract of bailment was created, has been accomplished and the
goods are returned to the bailor, the contract is terminated.
‰‰ Expiry
of time: If a contract of bailment is created only for a fixed
period of time, then the contract is terminated at the expiry of the
term of the bailment contract.
‰‰ Death of the party: A contract of bailment is terminated in case of
death of the bailor or bailee.
‰‰ Bailee’s inconsistent act: A contract of bailment is voidable at the
option of the bailor if the bailee does any act with regard to the
goods bailed that is inconsistent with the conditions of the bailment.
1.15.3
Duties and Rights of a Bailor
The duties of a bailor are as follows:
‰‰ Duty
to disclose known facts: The bailor must disclose all the
known faults in the goods bailed to the bailee. If the bailee experiences any damages due to faulty goods, the bailor is held liable for
the same. In the case of gratuitous bailment, the bailor can be held
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THE INDIAN CONTRACT ACT, 1872 51
liable for known faults only. However, in the case of non-gratuitous
bailment or bailment for reward, the bailor is held liable even for
the unknown defects.
‰‰ Duty to repay bailee’s expenses (bear expenses of bailment): The
bailor has to repay all the expenses incurred by the bailee under
the contract of bailment.
‰‰ Duty to indemnify the bailee: A bailor has to indemnify the bailee
for any loss that arises due to his/her imperfect or defective title of
the goods or due to premature termination of the contract.
to compensate the bailee for the breach of warranty: In
every contract of bailment, the bailee assumes that the bailor’s
title to the goods is defect free. However, if the bailee suffers any
loss due to the bailor’s title being defective, the bailor must compensate the bailee for the breach of warranty.
S
‰‰ Duty
to claim back the goods: After the expiration of the term of
bailment or after the fulfilment of the promise under the contract,
the bailor must take back the goods.
The rights of a bailor are as follows:
‰‰ Right
IM
‰‰ Duty
to enforce a bailee’s performance/duties: A bailor has the
right to sue the bailee for enforcing his liabilities and duties.
to claim damages: The bailor has the right to claim damages in case the goods bailed by him are damaged or lost due to the
negligence or conduct of the bailee.
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‰‰ Right
‰‰ Right to claim compensation against unauthorised use of goods:
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If any damage has been caused to the goods bailed due to unauthorised use or used as opposed to the directions and conditions of
bailment, the bailor can claim compensation from the bailee.
‰‰ Right to demand return of goods: When the bailor bails the goods
for some consideration, the bailor has a right to demand their
return, when he wants, whether or not the specific time has been
elapsed or the specific purpose has been met or not.
1.15.4 Duties and Rights of a Bailee
The duties of a bailee are as follows:
‰‰ Duty
to take reasonable care of the goods bailed: A bailee must
take reasonable care of the bailed goods as he would take care of
his/her own goods. It is the duty of the bailee to prove that he had
indeed exercised reasonable care. The bailee is held liable if the
goods get damaged due to his negligence. However, if the bailee
had managed the goods with reasonable care but the goods still
get damaged, then the bailee cannot be held liable.
‰‰ Duty
not to make unauthorised use of the bailed goods: A bailee
must use the goods only as per the terms of the contract. If the
goods are put to use which is inconsistent with the terms of the
contract, then the bailee can be held liable.
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‰‰ Not
to mix the bailed goods with other goods: It is the duty of
the bailee not to mix the bailed goods with any other goods held
by him. There can be three cases when the bailee mixes the goods
which are:
1. When the goods are mixed with the approval of the bailor, the
bailor and the bailee have an equal proportion of interest in the
mixed goods.
2. When the goods are mixed without the approval of the bailor
and the goods can be separated, the bailee has to bear the costs
related to division, separation and damages.
3. When goods are mixed without the approval of the bailor and
the goods cannot be separated, the bailee has to bear the costs
of loss to the bailor.
S
‰‰ Duty to return the goods to the bailor in time: It is the duty of the
bailee to return the goods to the bailor after the expiry of the time
of contract or when the purpose of bailment has been achieved.
IM
‰‰ Duty to return accretion to the goods: The bailee must return the
goods to the bailor along with any profit or increments.
The rights of a bailee are as follows:
‰‰ Right to receive compensation for loss due to faulty goods bailed:
M
The bailee has the right to recover the loss that he has incurred
from the bailor due to a fault in the goods which were not disclosed
to him during the creation of the bailment contract.
‰‰ Right
N
52
to receive the necessary expenses: The bailee has the right
to receive expenses that he has incurred in maintaining the bailed
goods for keeping it in his custody, transporting it or repairing it
from the bailor.
‰‰ Right
against premature termination of bailment: In case of
non-gratuitous bailment, wherein a bailor demands return of
goods before the expiry of the term of contract due to which the
bailee suffers loss beyond the benefit that is actually derived by
him from bailed goods, then the bailee can claim such expenses
from the bailor.
‰‰ Right
to compensation in case of defective title: When a bailor
holds a defective title to goods and the bailee had to undergo a loss,
the bailee can claim damages from the bailor.
‰‰ Delivery
of goods to one of the joint owners: If the goods have
been bailed by several joint owners, then the bailee can deliver the
goods back to the person(s) as indicated in contract or to any one
of the joint owners, without the consent of all the joint owners, if
there is no agreement to the contrary.
‰‰ Right
of a particular lien: If the bailor does not pay the charges
to the bailee for the goods bailed, the bailee may retain the goods.
The case in which the bailee can only retain the goods is called
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THE INDIAN CONTRACT ACT, 1872 53
particular lien. It must be remembered that the bailee cannot sell
the bailed goods under lien.
1.15.5
Bailee’s Lien
Lien is the right of a person to retain possession of goods until some
debt or claim outstanding in respect of them is paid. Since lien is
dependent on possession, it is called ‘possessory lien’. Lien may arise
by statute, contract or general course of dealings in the particular
trade.
1.15.6 Types of Lien
S
There are two types of lien, namely particular lien and general lien,
which are explained as follows:
Lien: According to Section 170 of the Contract Act,
1872, a bailee’s particular lien is defined as where the bailee has, in
accordance with the purpose of the bailment, rendered any service
involving the exercise of labour or skill in respect of the goods bailed,
he has, in the absence of a contract to the contrary, a right to retain
such goods until he receives due remuneration for the services he has
rendered in respect of them.
IM
‰‰ Particular
M
It means that a bailee may retain the goods only in case he has
not received his legal and rightful remuneration for the services
provided by him.
Lien: According to Section 171 of the Contract Act, 1872,
general lien is a lien that bankers, factors, wharfingers, attorneys of
a High Court and policy brokers may, in the absence of a contract to
the contrary, retain, as a security for a general balance of account,
any goods bailed to them, but no other persons have a right to retain,
as a security for such balance, goods bailed to them, unless there is
an express contract to that effect.
N
‰‰ General
It means that certain categories of persons, such as attorneys, insurers, bankers and wharfingers have the right to retain goods not only
for payments outstanding in respect of the goods retained, but for a
general balance of account.
Example: A borrows ` 1,000 from his bank XYZ without any security.
After three months, A again borrows ` 1,000 from XYZ, but this time he
keeps a security of some gold ornaments. Now, if A has returned the second loan of ` 1,000, then XYZ can retain the gold ornaments till A pays
off the rest amount of loan.
1.15.7 Pledge
Section 172 of the Contract Act, 1872 describes three terms, namely
pledge, pawnor and pawnee.
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When goods are bailed as a security for the payment of a debt or for the
performance of a promise, it is called pledge. The bailor here becomes
the pawnor/pledger, whereas the bailee becomes the pawnee/pledgee.
Pledge is a specific case of bailment. In case of pledge, the ownership
of the goods is not changed.
The essential features of a contract of pledge are:
‰‰ Bailment
for security for payment of debt or performance of a
promise.
‰‰ Goods
are the subject matter of contract.
‰‰ Goods
pledged must exist.
of goods from pawnor to pawnee.
S
‰‰ Delivery
IM
In both bailment and pledge, only movable goods are delivered. The
bailment and pledge contracts are both created by mutual agreement
between the parties. In the case of bailment, the bailee may use goods
as per the terms of contract, whereas the pawnee cannot use the goods
pledged.
M
In the case of pledge, the pawnee has a right to sell the goods pledged
if the pawnor defaults on debt repayment after giving a due notice to
him. On the contrary, in case of default by the bailor, the bailee can
only retain and have lien on the goods or sue the bailor.
1.15.8 Rights and Duties of a Pledgee (Pawnee) and
a PledgEr (Pawnor)
N
54
The rights of a pledgee are as follows:
‰‰ Right
of retention: A pledgee has the right to retain the goods
pledged for the payment of debt or of interest, or for the performance of the promise, or for the necessary expenses incurred by
him.
‰‰ Right
to retention of subsequent debts: The pledgee has the
right to retain the pledged goods for any money lent by him to the
pledger after the date of pledge except in case there is a contract
to the contrary.
‰‰ Right
to recover extraordinary expenses: If the pledgee has
incurred any extraordinary expenses for the maintenance of the
pledged goods, then he has the right to sue the pledger for these
expenses. However, the pledgee cannot retain goods in such a case.
‰‰ Right to sue pledger in case of default: If the pledger fails to repay
the debt or perform his promise at the stipulated time, the pledgee
can file a suit against the pledger and may retain the pledged goods
as a security. The pledgee may also sell the goods after giving a
notice to the pledger.
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THE INDIAN CONTRACT ACT, 1872 55
The rights of a pledger are as follows:
‰‰ Right
to redeem: The pledger has the right to receive back his
goods, provided he has paid the pledgee the expenses incurred by
him and before the goods have been sold.
‰‰ Pledge
where pledger has limited interest: In case the pledger
has only limited interest in the pledged goods, the pledge is valid
only up to the extent of the interest.
DUTIES OF A PLEDGEE (PAWNEE) AND A PLEDGER (PAWNOR)
The duties of a pledgee are as follows:
‰‰ A
pledgee must take reasonable care of the pledged goods.
pledgee must not engage in the unauthorised use of the pledged
goods.
S
‰‰ A
‰‰ A
pledgee must return goods after the pledger has fulfilled his
promise or has paid his debt.
pledgee must not mix the pledged goods with any other goods.
IM
‰‰ A
‰‰ A pledgee must not engage in any activity that is inconsistent with
the terms of contract.
pledgee must return any profits or gains accrued by pledged
goods.
M
‰‰ A
The duties of a pledger are as follows:
‰‰ A
pledger must fulfil his promise or pay his debt, as the case may
be.
pledger must compensate the pledgee for the extraordinary
expenses incurred by him.
‰‰ A
N
‰‰ A
pledger must disclose all the known faults about the pledged
goods which might put the pledgee at risk.
‰‰ A
pledger must indemnify the pledgee if he incurs any loss due to
defect in the pledger’s title to goods.
‰‰ A
pledger must pay the deficit amount if the pledgee sells the
pledged goods, but not able to recover the entire amount.
Table 1.4 shows the difference between pledge and bailment:
Table 1.4: Difference between pledge
and bailment
Pledge
Bailment
A pledge involves the delivery of
goods as a security against the
debt or performance of a contract.
A bailment arises when goods are
handed over temporarily to another
person for a specific purpose.
Section 172 of the Act deals with
pledges.
Section 148 of the Act deals with
bailments.
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Table 1.4: Difference between pledge
and bailment
For instance, Mr A pledges gold to
a bank for gold loan.
For instance, Mr A sent his bike to
Mr. B for repairing.
Consideration is always present in
a pledge.
Consideration may or may not be
present in a bailment.
1.16 CONTRACTS DEALING WITH AGENCY
1.16.1
S
In business law, contracts enforcing a relationship of the agency are
general. The law of agency is an important part of the Contract Act,
1872. The authority provided can be implied or expressed. This law is
based on Latin words ‘Qui facit per alium, facit per se’, which means
‘he who acts through another is deemed in law to do it himself’.
MEANING OF PRINCIPAL AND AGENT
M
IM
It is not easy for organisations to perform every business transaction itself due to business complexity, expertise and time constraint.
Therefore, another person is involved in the business to perform various activities. This person is called an agent. In other words, when a
person performs some activities on behalf of a person or an organisation, he/she is known as an agent. The principal is defined as a person
who is represented and for whom the services or acts are performed
by an agent.
As mentioned in Section 182 of the Contract Act, 1872, an agent is a
person employed to do any act for another (called ‘principal’) or to represent another in his dealings with third parties. The person for whom
such an act is done or whom the agent represents is called the ‘principal’. According to Section 183 of the Act, any person competent to contract can appoint an agent. The agreement signed between the principal and its agent is known as the contract of agency. Under Section
184, even a minor can be appointed as an agent. However, a minor will
not be responsible to his principal or to third parties.
N
56
Example: X appoints Y to buy some property on his behalf. Here, X is the
principal and Y is the agent. The relationship established between X and
Y is known as ‘agency’.
1.16.2
TYPES OF AGENTS
An agent is described on the basis of the authority provided to him
on behalf of the principal. There are various types of agents available,
some of which are as follows:
‰‰ Special agent: It refers to an agent who is appointed for a singular
specific act, for example, an agent is involved in the sales of goods.
As soon as the specific act is over, the authority of the agent comes
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THE INDIAN CONTRACT ACT, 1872 57
to an end. When an agent has the authority to perform a particular
transaction, he is termed as a special agent.
‰‰ General
agent: It refers to an agent who is appointed for all acts
relating to a specific job. He has the authority or right to perform
all the acts related to a particular trade and business. The general
agent’s authority goes on till the termination of agency.
‰‰ Sub-agent: It refers to an agent who is appointed by another agent.
‰‰ Co-agent:
It refers to an agent who is appointed together to perform an act jointly.
It refers to an agent who receives and sells goods on commission (called factorage). He has the right to sell goods on credit
and, in return, gets the price from the buyer and provides the
amount to the principal seller. The possession of goods provided
to this agent is merely for the selling purpose as he sells goods in
his own name.
S
‰‰ Factor:
It refers to an agent who has to create a contractual
relationship between two parties. He has the power to negotiate
on behalf of the principal. He does not possess the ownership of
goods. He negotiates and establishes a contract between the principal and the third party.
It refers to an agent who acts as a seller in an auction
for the principal. He gets rewarded in the form of commission on
the sale. He is entrusted with the good’s possession for sale at a
public auction.
M
‰‰ Auctioneer:
IM
‰‰ Broker:
‰‰ Commission agent: It refers to an agent who is appointed to make
‰‰ Del
N
a purchase (buy/sell goods) for his principal. It is a general term
that can also be used for a broker or a factor.
Credere: It refers to an agent who acts as a salesperson, guarantor and broker for the principal. He is known as the agent who
guarantees the act’s performance by the third party. He offers
guarantee to his principal that the third party who has entered
into the contractual agreement will perform its obligations.
1.16.3 AUTHORITY OF AN AGENT
The authority of an agent is described as the agent’s capacity to bind
his principal. The actual authority of an agent is stated in Section 189
of the Contract Act, 1872. An agent can bind the principal by all his
acts as if those have been done by the principal himself. An agent’s
authority can be of the following types:
‰‰ Actual
authority, expressed or implied, conferred on him under
the contract (Section 186) and every lawful thing necessary for a
particular business (Section 188). This authority has been really
delegated to the agent and it can be expressed or implied.
‰‰ Ostensible
authority, which appears to third parties to be necessary in the context of the relevant business even if the agent may
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As per the Contract Act, 1872,
a ‘sub-agent’ is a person
employed by, and acting under
the control of, the original agent
in the business of the agency.
Business Law
have acted without authority (Section 237). In this case, an agent
is employed for a particular task and all people employed with him
can presume that the agent has the authority to perform all the
acts necessary for business.
‰‰ Authority,
in an emergency, is necessary when an agent exceeding
his authority in an emergency may bind the principal, provided
he could not communicate with the principal, had acted bonafide and had taken all steps to protect the principal from loss as
would be done by a person of ordinary prudence in his own case
(Section 189).
1.16.4
LIABILITY OF PRINCIPAL AND AGENT
IM
S
The Law of Agency states that an agent is not personally liable except
in a few conditions which are stated as: ‘In the absence of any contract
to that effect, an agent cannot personally enforce contracts entered into
by him on behalf of his principal, nor is he personally bound by them’.
However, there are certain circumstances that make the agent personally liable. Figure 1.2 shows the circumstances under which an agent
is personally liable:
Circumstances under which an Agent becomes Personally Liable
M
In case of
foreign principal
[Section 230]
N
58
In case of
undisclosed
principal
[Section 230]
In case of acts
not ratified
[Section 235]
In case of
incompetent
principal
[Section 230]
In case
of acts in
his own name
In case of
principal not
in existence
In case of
express
agreement
In case of
custom or
usage of
trade
Figure 1.2: Circumstances under which an Agent Becomes
Personally Liable
An agent is personally liable if he acts for:
‰‰ A
foreign principal: The Law of Agency states that if a contract is
created for the sale and purchase of goods by the agent for a merchant residing abroad, the agent is held or presumed to be personally liable.
‰‰ An unnamed or undisclosed principal: As per the Law of Agency,
an agent is held personally liable in the circumstances where the
contract is established by an agent for the undisclosed principle.
‰‰ A
disclosed principal who cannot be sued, i.e., an incompetent
person: A minor, lunatic or foreign ambassador cannot be sued if
the contract is made with such entities. The agent is held personally liable for the contract.
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THE INDIAN CONTRACT ACT, 1872 59
‰‰ A
non-existent principal: When an agent makes a contract with
the unincorporated company which is yet to be formed, only the
agent is held personally liable for such a contract.
‰‰ A
pretended agent (in case of acts not ratified): When an agent
acts as a pretended agent, i.e., falsely represents himself as agent
of another and the alleged principal declines to adopt. However, if
the principal ratifies such acts, the principal will be liable for the
same.
‰‰ When
an agent acts on his own name: When an agent signs a
contract/negotiable instrument in his own name, he is personally
liable for such contract because he acts without disclosing that he
is contracting as an agent.
‰‰ When an agent expressly agrees to be personally liable: The Law
IM
S
of Agency states “When an agent has, without authority, done acts
or incurred obligations to third persons on behalf of his principal,
the agent is personally bound by such acts or obligations, if he has by
his words or conduct induced such third persons to believe that such
acts and obligations were within the scope of the agent’s authority.”
‰‰ In
case of custom or usage of trade: In such cases, if there is
absence of contract, the agent is held personally liable for the contract.
TERMINATION OF AGENCY
M
1.16.5
N
The termination of an agency is defined as the end of relationship
between the principal and his agent. It can be done either by the act of
parties or by the operation of laws. Figure 1.3 shows the modes of the
termination of agency:
Modes of Termination of Agency
I. By act of parties
II. By operation of law
By mutual
agreement
By revocation
of authority by
the principal
On completion
of the business
of agency
On death/or becoming
of unsound mind of
principal or agent
On destruction of
the subject matter
By renunciation
of agency by the
agent
On insolvency
of principal
On dissolution
of company
On expiry of
fixed period
On principal
becoming an
alien enemy
Figure 1.3: Modes of Termination of Agency
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Both the agent and the principal can terminate the agency by the following ways:
‰‰ By
mutual agreement: An agency between the principal and his
agent can be terminated by mutual agreement in the similar way
an agency is formulated.
‰‰ By revocation of an authority by the principal: An agency gets ter-
minated if the principal revokes the authority of his agent. The principal has the right to revoke the authority of its agent at any time.
‰‰ By
renunciation of agency by the agent: An agency is terminated
when an agent himself renounces the business’s agency.
‰‰ On
S
Apart from the above-mentioned circumstances, an agency itself
gets termination under various other cases, such as when it becomes
impossible for the agency to function due to force majeure. Some of
the other cases where the termination of agency is done are as follows:
completion of agency business
death or insanity of the principal or agent, but acts done prior
thereto, shall remain valid
IM
‰‰ On
‰‰ On
expiry of time if agency has been created for a fixed period of
time
destruction of subject matter of agency
‰‰ On
dissolution of the company
‰‰ On
the principal becoming a foreign alien
M
‰‰ On
N
60
self assessment Questions
31. A/An __________ is a person employed to perform any act for
another (called principal) or to represent another in his dealings with the third parties.
32. The third party has to perform the business activities of the
principal as per the principal’s direction. (a) True (b) False
Activity
Explore the roles and responsibilities of a subagent.
1.17
Explaining Agreements Using a
Template
You have already studied about the types of agreements in the initial sections of this chapter. Different types of agreements are used
for different purposes. The essential elements for the formation of an
agreement are as follows:
‰‰ Two
or more parties
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THE INDIAN CONTRACT ACT, 1872 61
‰‰ One
of the parties must make an offer to another party
‰‰ Offer
must be accepted by the other party
‰‰ Consensus-ad-idem
(The offer should be accepted in the same
context without any ambiguity)
‰‰ Intention
to enter into a legal relationship
Some important agreements and their templates used in businesses
are discussed herein. Figure 1.4 presents the template agreement for
underwriting shares of a company as follows:
Place of the Agreement
AGREEMENT FOR UNDERWRITING SHARES OF A COMPANY
The name of the Parties should
mention the full name. Special care
should be taken when you mention
the type of organisation (For example
an individual, a sole proprietorship,
partnership company, private limited
company and public limited company
Two Parties
IM
This Agreement made at ................. on this .................. of ................... 2000, between ABC Ltd., a company
incorporated under the Companies Act, 1956 and having its registered office at .................... hereinafter
called “the company” (which expression shall, unless it be repugnant to the context or meaning
thereof be deemed to mean and include its successors and assigns) of the ONE PART and M/s. XYZ
a partnership firm registered under the Partnership Act, 1932 and having its place of business at
.................. hereinafter called “the underwriters”, (which expression shall unless it be repugnant to the
context or meaning thereof, be deemed to mean and include every partner for the time being of the
said firm, the survivor or survivors or the legal representatives, executors or administrators of the last
partner) of the Other Part.
S
Date when the
Agreement is executed
Whereas the company proposes to issue ............... equity shares of to Rs ..................... each and offer the
same for public subscription at Rs ....................... per share in accordance with the terms of the draft
prospectus, a copy of which is annexed hereto, or with such modifications therein as may be mutually
agreed upon between the company and the underwriters.
Proposal to
make an offer and
acceptance
Whereas the underwriters have agreed to underwrite the subscription of the said shares on the terms
and conditions hereinafter appearing.
Now it is hereby Agreed between The Parties as Follows:
2.
N
3.
The company shall issue ...................... equity shares of Rs ............. each for public subscription
in terms of the draft prospectus, a copy of which is annexed hereto or with such modification
therein, as may be mutually agreed upon between the parties, on or before the ................... day of
…………. 2000, or such later date as shall be mutually agreed upon by the parties hereto not after
the .......... day of ....................... 2000.
The underwriters shall on or before the closing of the subscription list apply for the ....................
shares or cause the same to be applied for by the responsible persons, who shall pay on
application, the application moneys payable on the shares applied for by them respectively and
who shall not withdraw their applications before notification of allotment of shares to them.
If on the closing of the list under the said prospectus the said ...................... shares shall be allotted
on the applications received from the public, the responsibility of the underwriters will cease
and no allotment is to be made to the underwriters under this agreement, but if the said ............
shares shall not be allotted to the public, but any smaller number of such shares is so allotted,
the underwriters undertake to stand for the difference between the said .......................... shares
and the number of the shares allotted to the public and company may allot to the underwriters
all the shares which shall not have been applied for by such members of the public or such
responsible persons as aforesaid and the underwriters shall accept the shares so allotted and
pay all application and allotment money in respect of those shares in accordance with the said
prospectus.
The underwriters irrevocably authorise the company to apply for the said ............... shares or any
part thereof in the name and on behalf of the underwriters in accordance with the terms of the
said prospectus and authorise the directors of the company to allot the said ..................... shares
of the company or part thereof to the underwriters and in the event of the company making an
application for such shares in the names of the underwriters, the underwriters shall hold the
company harmless and indemnified in respect of such application.
The company shall pay to the underwriters in cash a commission of .............................. per cent on
the nominal value of the shares within ............. days from the allotment of the said ......................
shares. But should any allotment of the shares be made to the underwriters in accordance with
the terms of this agreement, the commission shall not be payable until the underwriters pay
the application and allotment moneys payable in respect of all the shares so allotted to the
underwriters.
It is hereby agreed that time is the essence of this agreement.
This agreement shall be executed in duplicate. The original shall be retained by the company
and the duplicate by the underwriters.
M
1.
4.
5.
6.
7.
In Witness Whereof the parties have signed these presents and a duplicate hereof the day and year
first hereinabove written.
Signed and delivered by A 8 Ltd., the within named
Legal
relationship
Consensus
ad idem
Recitals: Recitals introduce
the parties and the
transaction to be entered
between them.
The Object of the Parties to
enter into a contract
Consideration
Timely Performance
of the obligations. If
the obligations are not
performed as per the
timelines in the contract.
If not then the Agreement
shall be breached
Execution of the
Agreement is important for
a contract to be concluded
company by its Managing Director Shri ..................
Signed and delivered by M/s. XYZ the within named under writers by their partners
WITNESSES;
1.
Witness
2.
Source: https://www.advocatekhoj.com/library/agreements/companylaw/22.php
Figure 1.4: Agreement for Underwriting Shares of a Company
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Figure 1.5 presents the template of agreement for license between a
trademark owner and a manufacturer:
Place of Agreement
Date of the
Agreement
AGREEMENT FOR LICENSE BETWEEN TRADEMARK OWNER AND A MANUFACTURER
Title of Agreement
AGREEMENT is made this _____________day of ________ between __________M/s ______________, a Company registered
under the Companies Act,____, and having its registered office at ___________ hereinafter referred to as ‘the Licensor’ of
the One Part and Mr. ._________________carrying on business of ________________ Hereinafter referred has ‘the Licensee’
of the Other Part
Parties have to be
identified
WHEREAS
1.
2.
3.
The Licensor is the proprietor of a trade mark more particularly described in the schedule hereunder written and
which is duly registered under the Trade and Merchandise Marks Act 1958.
The Licensor is manufacturing and selling the goods viz ____________________ under the said trade mark.
The Licensee who is running a small scale industry has requested the Licensor to grant him a license to manufacture
the said goods with the trade mark embossed or printed thereon as is being done by the Licensor and which the
Licensor has agreed to do on the following terms and conditions agreed to between the parties hereto.
Recitals of
Agreement
NOW IT IS AGREED BY AND BETWEEN THE PARTIES AS FOLLOWS:
2.
3.
4.
IM
5.
The Licensor hereby grants to the Licensee a license to manufacture the said goods as a job work by applying the said
trade mark, particulars of which are described in the Schedule hereunder written.
The Licensee agrees and undertakes that all of the said goods manufactured by the Licensee in his factory at
______________or elsewhere shall be sold to the Licensor and not to anybody else at the price of Rs __________ per
item or article. The Licensee undertakes to manufacture and supply to the Licensor a quantity of not less than
_________________every month.
The goods so manufactured with the said trade mark applied to them will be supplied and delivered by the Licensee to
the Licensor at the latter s business premises at _______ at his own costs of transport.
The price of the said goods so supplied will be paid by the Licensor against delivery after deducting there from the
royalty payable by the Licensee to the Licensor as hereinafter provided.
The Licensor shall have the right to reject any goods supplied if they are not as per specifications or quality which are
made known to the Licensee and in the event of such rejection the Licensee shall take back the rejected goods from
the Licensor’s premises at his own costs and until such removal they will be at the risk of the Licensee. The Licensor
agrees that during the subsistence of this agreement, the Licensor will not get the said goods manufactured from
anybody else.
The ownership of the said trademark will always remain with the Licensor and the Licensee will not pass off the said
goods as if he is the owner of the said trademark.
The Licensee will be at liberty to put a label or advertise that the said goods are manufactured by him but it will also
be mentioned that the trade mark belongs to the Licensor and that the goods are manufactured for the benefit of the
Licensor.
In consideration of the Licensor allowing the Licensee to manufacture the said goods with the said trade mark the
Licensee agrees to pay to the Licensor by way of royalty a sum equal to ______________per cent of the price of the goods
at which they will be sold to the Licensor by the Licensee as aforesaid.
The Licensee shall keep an account of the goods manufactured and sold to the Licensor and the price received by him
and royalty paid in respect thereof and such account shall be open to inspection by the Licensor from time to time
as may be required by the Licensor. The Licensor will also have the right to enter upon the premises of the Licensee
where the goods are manufactured and to take inspection of the goods manufactured.
This agreement will remain in force for a period of ______ years from the date hereof and on the expiration of the said
period or earlier termination thereof as herein provided, the Licensee shall stop manufacturing the said goods under
the said trade mark and all the goods till then manufactured and lying undelivered to the Licensor will be delivered to
the Licensor in terms of this agreement as aforesaid.
If the Licensee commits breach of any term of this agreement, the Licensor will be entitled to terminate this agreement
by fifteen days prior notice in writing to the Licensee and on the expiration of the notice period, this agreement shall
stand terminated unless in the mean while the breach complained of is remedied to the satisfaction of the Licensor.
The Licensee may get himself registered as a registered user under the provisions of the Trade & Merchandise Marks
Act 1958 subject to the terms of this agreement.
If the Registrar of Trade Marks while registering the Licensee as a registered user puts any condition which is not
acceptable to the Licensor, the Licensee will withdraw the application for registration or the Licensor will have the
option to terminate this agreement.
If any person is found by the Licensee to infringe the said trade mark either by passing off or otherwise, the Licensee
will bring that fact to the notice of the Licensor to enable him to take necessary legal action against such person and
in that event the Licensee will give all cooperation to the Licensor in prosecuting such action and all the costs thereof
will be borne and paid by the parties hereto in equal shares.
If the Licensee himself infringes the said trade mark by passing off or otherwise, then notwithstanding anything
provided in clause 16 hereof it will be open to the Licensor to take legal action against him and in such case the
Licensee will not be entitled to challenge the ownership of the Licensor in respect of the said trade mark.
In the event of any dispute arising out of this agreement, the same will be referred to arbitration of a common
Arbitrator if agreed upon or in the absence of such agreement, to two Arbitrators one to be appointed by each party
hereto and the Arbitration will be governed by the Arbitration Act for the time being in force.
S
1.
6.
7.
8.
9.
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10.
11.
12.
13.
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14.
15.
16.
IN WITNESS WHEREOF the parties have put their respective hands the day and year first hereinabove written.
THE SCHEDULE ABOVE REFERRED TO
Signed and delivered for and on behalf of
Within named Licensor ____________Company
By its Managing Director
In the presence of _____________
Signed and delivered by the
Within named Licensee Mr.______________
In the presence of ____________
Offer
Acceptance
Ownership of
Property
Consideration
Duration
Termination
Negative
CovenantsCovenants that
restrict parties
from affecting or
causing losses
Dispute
Resolution and
Jurisdiction are
the clauses which
govern the law
and court which
will apply in case
of disputes
Execution of
the Agreement
is important for
a contract to
be concludedConsensus-adidem
Witness
Source: https://lawrato.com/legal-documents/trademark-copyright-ipr-legal-forms/agreement-of-license-between-trademark-owner-and-a-manufacturer-35
Figure 1.5: Agreement for Underwriting Shares of a Company
self assessment Questions
33. The common intention to create legal relationship is also
known as __________.
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THE INDIAN CONTRACT ACT, 1872 63
Activity
Prepare a template of the agreement for providing consultancy services.
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1.18 Summary
‰‰ A
contract is a legally binding agreement made between two or
more persons by which rights are acquired by one or more acts
or forbearances (abstaining from doing something) on the part of
others.
‘agreement’ means a promise or a set of promises that forms a
consideration for each other. In other words, an agreement is an
exchange of promises between two or more parties.
S
‰‰ An
‰‰ Contracts
are mainly categorised based on their initiation, formation, enforceability and performance.
agreement that is not enforceable by law is said to be a void
agreement.
IM
‰‰ An
‰‰ A voidable contract arises if the consent of either of the parties has
been obtained by coercion, undue influence, fraud, misrepresentation or mistake of the contract.
offer is said to have been accepted when the person to whom
the proposal is made gives his assent to that proposal or offer.
‰‰ An
M
‰‰ An
offer is different from an invitation to offer.
standard form contract is a non-negotiated contract, which is
also referred to as a contract of adhesion or boilerplate contract.
N
‰‰ A
‰‰ Consideration
is one of the essential requisites of a valid contract.
‰‰ Privity of contract refers to a type of relationship between the par-
ties to a contract according to which the parties can sue each other.
However, no third party can sue any of the parties to contract.
‰‰ An
agreement made without consideration is void.
‰‰ Consent
is said to be free when it is not caused by—
 Coercion
 Undue
 Fraud
(Section 15);
Influence (Section 16);
(Section 17);
 Misrepresentation
 Mistake
(Section (18); or
(Sections 20, 21 and 22)
‰‰ Discharge
of a contract means discontinuation or completion of
contractual relations between parties.
‰‰ The
contractual capacity of individuals is determined in accordance with their age, soundness of mind and legal qualifications.
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‰‰ A
quasi-contract is said to have formed when the law assumes the
presence of a contract when, in realty, no such agreement exists
between the parties.
‰‰ The
person who promises to make good the loss is called the
‘indemnifier’ (promisor), and the person whose loss is to be made
good is called the ‘indemnified’ or ‘indemnitee’.
‰‰ Bailment
is the delivery of goods by one person to another for
some purpose upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to
the directions of the person delivering them.
is a right of a person to retain the possession of goods until
some debt or claim outstanding, in respect of them, is paid. If lien
is dependent on possession, it is called ‘possessory lien’. Lien may
arise by statute, contract or general course of dealings in the particular trade.
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‰‰ Lien
is the bailment of goods as security for the payment of a
debt or performance of a promise. The person who delivers goods
as security is called the pledger or pawner and the person to whom
the goods are delivered is called the pledgee or pawnee.
IM
‰‰ Pledge
‰‰ Contracts are extremely important for the success of any business.
M
key words
‰‰ Agreement:
Every promise or a set of promises that forms a
consideration for each other
‰‰ Coercion:
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64
An act of committing or threatening to commit an
act that is forbidden under the Indian Penal Code, 1860 or any
other law
‰‰ General
lien: The right to retain goods not only for demands
arising out of the goods retained, but for other unpaid debts
account in the favour of such debtor
‰‰ Illegal
agreements: Agreements that are forbidden by the law
‰‰ Particular
lien: The right to retain particular goods in respect
of which the claim/debt is due
‰‰ Unlawful
agreements: Agreements that have unlawful object
or unlawful consideration are void
?
1.19 Descriptive Questions
1. Explain the following phrase:
‘All contracts are agreement but all agreements are not contracts.’
2. Describe the classification of contracts on the basis of initiation,
formation, enforceability and performance.
3. Explain the essential conditions for the formation of contracts.
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THE INDIAN CONTRACT ACT, 1872 65
4. Explain the meaning of offer and acceptance.
5. How are offer and acceptance communicated?
6. Explain the meaning of a boilerplate contract?
7. What do you understand by the term ‘privity of contract’?
8. What is free consent?
9. Describe various disqualifications that affect the capacity to contract.
10. What are void, valid and voidable agreements?
11. Describe the meaning of ‘quasi-contracts’.
12. What are various modes for discharge of contracts?
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13. Explain various remedies for the breach of contract.
14. Describe the difference between contracts of indemnity and
guarantee.
IM
15. Explain the contract of bailment and contract of pledge.
1.20 Answers and Hints
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Agreements and Contracts
When an Agreement becomes a
Contract: Essential Conditions
Offer/Proposal and Acceptance
Standard Form of Contract/
Boilerplate Contract/ Adhesion
Contract
Consideration and Privity of
Contract
Answer
1.
offer
2.
All of these
3.
Express Contract
4.
True
5.
b.
6.
Consideration
7.
offeree/promisee
8.
False
9.
True
10.
course of transmission
11.
standard form contracts
12.
True
13.
Privity of contract
N
Classification of Contracts
Q. No.
M
Topic
voidable
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Topic
Free Consent
Capacity to Contract
Void, Valid and Voidable Agreements
Q. No.
Answer
14.
d. Written and registered
promise by the debtor to
pay a statute-barred debt
15.
True
16.
Dominant
17.
c.
18.
sound mind
19.
c. Agreements whose meaning is certain
20.
True
21.
quasi-contract
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Quasi-Contracts
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Discharge of Contracts
Remedies for Breach of Contract
M
Contracts of Indemnity and
Guarantee
Contract of Bailment and Contract of Pledge
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Contracts dealing with Agency
Explaining Agreements using a
Template
Presence of all limbs
22.
True
23.
Actual
24.
c.
25.
Ordinary damages, special
damages, exemplary damages and nominal damages
26.
True
27.
Insurance
28.
True
29.
bailment
30.
Lien
31.
agent
32.
False
33.
consensus-ad-idem
Difficulty of performance
HINTS FOR DESCRIPTIVE QUESTIONS
1. According to Section 2(h) of the Contract Act, 1872, a ‘contract’
is ‘an agreement enforceable by law’. Refer to Section 1.2 Agreements and Contracts
2. Contracts are categorised on the basis of their enforceability, creation, performance and initiation. Refer to Section 1.3 Classification of Contracts
3. Section 10 of the Contract Act, 1872 states that an agreement
becomes a contract if it is made by the free consent of the parties
who are competent to contract, in exchange for a lawful consideration and a lawful object and is not expressly declared void.
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THE INDIAN CONTRACT ACT, 1872 67
Refer to Section 1.4 When an Agreement becomes a Contract:
Essential Conditions
4. If an individual expresses his willingness to enter into a legally
binding contract based on certain terms with some other party,
it constitutes an offer to contract or a proposal. Refer to Section
1.5 Offer/Proposal and Acceptance
5. According to Section 4 of the Contract Act, 1872, communication
of offer is complete when it comes to the knowledge of the person
to whom the offer is made. The communication of acceptance is
complete as against the offer or when the acceptance is put in a
course of transmission so that it is out of power of the acceptor/
offeree. Refer to Section 1.5 Offer/Proposal and Acceptance
IM
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6. The boilerplate contract is a type of highly standardised contract,
which contains various terms and conditions that can restrict or
even exclude the liability of one party. Refer to Section 1.6 Standard Form of Contract/Boilerplate Contract/Adhesion Contract
7. Privity of contract refers to a type of relationship between the
parties to a contract according to which the parties can sue each
other. Refer to Section 1.7 Consideration and Privity of Contract
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8. Consent is said to be free when it is not caused by coercion,
undue influence, fraud, misrepresentation or mistake. Refer to
Section 1.8 Free Consent
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9. Minors, persons of unsound mind and persons disqualified by
law, to which they are subject, are incompetent to make a contract. Refer to Section 1.9 Capacity to Contract
10. On the basis of enforceability or validity, agreements can be classified as being valid, void or voidable. Refer to Section 1.10 Void,
Valid and Voidable Agreements
11. When the law assumes the presence of a contract when, in realty,
no agreement exists between the parties, such a contract is called
a quasi-contract. Refer to Section 1.11 Quasi-Contracts
12. A contract can be discharged in various ways, such as by performance, mutual agreement, lapse of time, etc. Refer to Section
1.12 Discharge of Contracts
13. Remedies for breach of contract include rescission of the contract, suit for damages, suit for specific performance and suit for
injunction. Refer to Section 1.13 Remedies for Breach of Contract
14. Indemnity means making the loss good, in order to compensate
the party who has suffered any loss. In such contracts, two parties, namely indemnifier and indemnified, are involved. A contract of guarantee is a contract to perform the promise or discharge
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the liability of a third person in case of his default. Refer to Section 1.14 Contracts of Indemnity and Guarantee
15. Section 148 of the Contract Act, 1872 defines bailment. When the
goods are bailed as a security for the payment of a debt or for the
performance of a promise, it is called pledge. Refer to Section
1.15 Contract of Bailment and Contract of Pledge
1.21 Suggested Readings & References
Suggested Readings
‰‰ Chandiramani,
N. (1997). The law of contract. Mumbai: Saptarang
Publ.
P. (2019). Business Law (3rd ed.). New Delhi: McGraw Hill
Education (India) Private Limited.
T. (2017). Business Law (3rd ed.). Pearson Education.
IM
‰‰ Sheth,
S
‰‰ Tulsian,
E-REFERENCES
‰‰ (2020).
Retrieved 18 September 2020, from https://cablogindia.
com/the-indian-contract-act-1872-notes/
B., Law, C., & guarantee, I. (2020). Indemnity and Guarantee. Retrieved 31 March 2020, from https://www.lawctopus.com/
academike/indemnity-and-guarantee/
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‰‰ Laws,
‰‰ History
N
68
of the Indian Contract Act 1872. (2020). Retrieved 31
March 2020, from https://www.lawteacher.net/free-law-essays/contract-law/history-of-the-indian-contract-act-1872-contract-law-essay.php
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2
a
pt
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Sale of Goods Act, 1930
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2.3
Introduction
Concept of Goods
Self Assessment Questions
Activity
Sale of Goods Act, 1930
Sale and Agreement to Sell
2.3.1
2.3.2 Difference between the Contract of Sale of Goods and the Contract
for Work and Labour
Conditions and Warranties
2.3.3
2.3.4
Title (Ownership)
2.3.5
Doctrine of Caveat Emptor and Exceptions
Performance of the Contract of Sale
2.3.6
2.3.7
Unpaid Seller
2.3.8
Hire Purchase and Hypothecation Agreements
Self Assessment Questions
Activity
Summary
Descriptive Questions
Answers and Hints
Suggested Readings & References
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2.1
2.2
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Contents
2.4
2.5
2.6
2.7
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Introductory Caselet
Breach of Contract of Sale
Case Objective
This caselet discusses the
repercussions of the breach
of contract of sale.
‘A’ goes to a chemist’s shop to buy a hot water bottle. The chemist
shows him a bottle and says that the bottle will not stand boiling
water, but is fit to store hot water. On this representation by the
chemist, ‘A’ buys the bottle. After a few days, while ‘A’ was using
the bottle, it burst and caused injuries to ‘A’.
Thereupon, it is found on examination that the bottle is not fit to
be used as a hot water bottle. It is to be examined what the specific
requirement of ‘A’ was while buying the bottle.
S
In this case, ‘A’ specifically mentioned his purpose while buying
the bottle, i.e., a bottle that can store hot water. Therefore, there
was an implied condition by ‘A’ that the bottle must be capable of
storing hot water and the same has been breached by the seller.
IM
The seller is liable to pay damages to ‘A’ for the breach of this condition.
M
*Source: Priest v. Last (1903) 2 KB 148.
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Sale of Goods Act, 1930 71
Learning objectives
After studying this chapter, you will be able to:
Explain the concept and types of goods
Describe the Sale of Goods Act, 1930
Explain the differences between sale and agreement to sell
Differentiate between the contract of sale of goods and the
contract for work and labour
Explain the meaning and types of conditions and warranties
Discuss the concept when a condition becomes a warranty,
but a warranty cannot become a condition
Explain the meaning of ‘title’ or ‘ownership’
Describe the rules related to the transfer of title
Outline the meaning of the doctrine of Caveat Emptor and
the exceptions
Describe how a contract of sale is performed
Discuss the meaning, rights and responsibilities of an unpaid
seller
Explain the meaning of hire purchase and hypothecation
agreements
>>
>>
>>
>>
>>
>>
>>
>>
>>
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2.1 Introduction
IM
S
>>
>>
>>
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In the previous chapter, you studied about the Contract Act, 1872. The
chapter discussed the agreements, contracts, types of contracts and
various related provisions.
Till now, you have studied about the contracts in general. However,
the contracts for sale of goods are governed by the Sale of Goods Act,
1930. Before 1930, the law relating to sale of goods was contained in the
Indian Contract Act, 1872. In the year 1930, the Sale of Goods Act was
enacted which came into force from 1st July 1930. This chapter starts
with an explanation of the meaning of goods and its types, namely the
existing goods, future goods and contingent goods.
Agreements for sale and agreement to sell are quite different. Similarly, contracts for sale of goods and contract for work and labour are
different. In case of any contract, there are certain stipulations that
are divided into conditions and warranties. Condition is a stipulation
that is an essential part of a contract, whereas warranty is a stipulation that is only collateral to a contract.
Conditions and warranties are of two types, namely express and
implied. A condition can be treated as a warranty, but the reverse is
not true. The ownership of the goods is called the title of goods.
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Quick Revision
72
Business Law
The contracts for sale are guided by the doctrine of Caveat Emptor
which means that examining the goods before buying is the primary
responsibility of the buyer. There are certain exceptions to this rule.
A seller who has not received the full amount of price is known as an
unpaid seller and he has certain rights and duties. There are certain
agreements, such as hire purchase agreement and the hypothecation
agreement where the buyer takes the possession of the assets first and
then makes payments in certain periodic amounts. In this chapter, you
will study about Sale of Goods Act, 1930 at length.
2.2 Concept of Goods
S
According to Section 2(7) of
the Sale of Goods Act, 1930,
a good means every kind of
movable property other than
actionable claims and money;
and includes stock and shares,
growing crops, grass, and things
attached to or forming part of
the land which are agreed to be
severed before sale or under the
contract of sale.
As per the definition of goods given in Section 2(7) of the Sale of Goods
Act, 1930, ‘goods’ include and excludes certain items. The items that
are included under the definition of goods are as follows:
IM
Know More
Goods in general refer to merchandise or possessions or articles that
can be bought and sold. According to economics, goods are used by
human beings to satisfy their wants and provide utility. Goods can be
made or grown.
‰‰ All types of movable property, such as computer, jewellery, vehicles,
etc.
‰‰ Stocks
and shares
M
‰‰ Growing
crops
N
‰‰ Things
attached to earth or forming part of the land which can
be severed before sale or under a contract of sale. For example,
apples hanging with branches of the tree will become goods only
when they are separated from branches.
The goods that are excluded under the definition of goods are as follows:
‰‰ Actionable
‰‰ Money
claims such as book debts
which is a legal tender
Generally, there are three types of goods as shown in Figure 2.1:
Existing Goods
Future Goods
Contingent Goods
Figure 2.1: Three Types of Goods
The three types of goods are explained as follows:
‰‰ Existing
goods: These are goods that are owned and possessed by
a seller at the time of making the contract of sale.
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Sale of Goods Act, 1930 73
Example: If A, who is a shopkeeper, sells a television set to B, and
the television is lying in A’s warehouse, it is a case of the sale of
existing goods.
Existing goods are further divided into two types, namely specific
goods and uncertain goods. Specific goods are the goods that are
identified and agreed upon at the time of making the contract of
sale. On the contrary, uncertain goods are the goods that are not
identified at the time of making the contract of sale.
‰‰ Future goods: These are the goods that are to be manufactured or
produced or acquired by a seller after the contract of sale is made.
Example: A is a farmer and he agrees to sell all the mangoes that
would grow from April to July in the current year to B who is a
wholesaler.
S
‰‰ Contingent goods: These are the goods which may be acquired by
the seller depending upon some contingency, i.e., the happening
or non-happening of an event.
IM
Example: Nisha, a seller, agrees to sell some cosmetics to Madhu. If
those specific goods arrive by a particular date by a particular ship,
such goods are called contingent goods.
self assessment Questions
a. Stocks
M
1. Which of the following is not considered to be a good as per
the definition of goods as per the Sale of Goods Act, 1930?
b. Money
c. Growing crops
d. Moveable property
N
2. __________ are the goods that are owned and possessed by a
seller at the time of making the contract of sale.
3. Contingent goods depend upon the happening or non-happening of an event. (a) True (b) False
Activity
Find out a few examples of contingent goods.
2.3 Sale of Goods Act, 1930
The Sale of Goods Act, 1930 is the governing law for the contracts
of sale of goods. A contract of sale of goods is a contract according
to which a seller transfers or agrees to transfer certain good(s) to a
buyer for a given sum of money known as the price of the good. The
contract of sale is a common term and is used to refer to the following
two things:
‰‰ Sale
‰‰ An
agreement to sell
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Know More
Section 5 of the Sale of Goods
Act, 1930 explains how the
contract of sale is made:
(1) A contract of sale is made
by an offer to buy or sell
goods for a price and the
acceptance of such offer.
The contract may provide for
the immediate delivery of the
goods or immediate payment
of the price or both, or for the
delivery or payment by instalments, or that the delivery
or payment or both shall be
postponed.
(2) Subject to the provisions of
any law for the time being
in force, a contract of sale
may be made in writing or by
word of mouth, or partly in
writing and partly by word of
mouth or may be implied from
the conduct of the parties.
Business Law
There are differences between sale (agreement for sale) and agreement to sell. These differences are discussed in the upcoming section.
2.3.1 Sale and Agreement to Sell
The differences between an agreement for sale and an agreement
to sell are shown in Table 2.1:
Table 2.1: Sale and an Agreement to Sell
S. No.
Agreement for Sale
Agreement to Sell
Sale is when the goods are imme- Agreement to sell is when the
diately transferred from the seller seller is to transfer the goods to
to the buyer.
the buyer at a future date.
2.
Property in goods is transferred
from the seller to the buyer immediately.
Property in goods is not transferred from the seller to the
buyer immediately but at a
future date.
3.
It is an executed contract.
It is an executory contract.
4.
It is absolute in nature.
It is a conditional agreement.
5.
The consequences of subsequent
loss or damage have to be borne
by the buyer.
The consequences of subsequent loss or damage have to
be borne by the seller.
6.
An unpaid seller has a right to
sue for the price.
An unpaid seller has a right to
sue for damages.
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IM
S
1.
7.
The seller has a right to sue the
The seller has a right to sue the
buyer for the breach of a contract. buyer only for damages.
8.
The seller cannot resale the
goods.
The seller can resell the goods.
9.
If after the sale, the goods are lying in the possession of the seller
and the goods are destroyed, the
loss is the responsibility of the
buyer.
If the goods are in the possession of the buyer and the loss
occurs due to any damage, the
loss is the responsibility of the
seller.
10.
Example: Anjali buys 10 kg of
wheat from Shyam by paying a
price of ` 1,000.
Example: Anjali agrees to sell
10 kg of wheat to Shyam if she
gets the stock of the same for a
price of ` 1,000.
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2.3.2 Difference between the Contract of Sale
of Goods and the Contract for Work and
Labour
Till now, you studied the importance of contract of sale. However,
apart from the contract of sale of goods, there are contracts for work
and labour. The difference lies in the nature of these contracts because
the contract of sale of goods deals in tangible goods that are sold and
purchased by two parties, whereas contracts for work and labour deal
in intangible services in the form of work and labour.
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Sale of Goods Act, 1930 75
A contract of sale involves the selling of a good and the transfer of
ownership of the good from a seller to the buyer for a given amount
or price. In such a contract, the delivery of goods is of primary importance.
Example: If A purchases a beautiful painting of an artist for a given
price, then it is a contract of sale of goods.
In a contract for work or labour, rendering of service and the exercise
of skill is of primary importance. Work and labour means that there
must be a provision of work or service which might require using
some materials.
Examples:
S
1. If A is a sand artist and enters into a contract with B to perform a
sand art for creating awareness regarding air pollution, then this
contract is basically a contract where the skill of the artist is of
essence.
IM
2. If X enters into an agreement with Y, who is a graffiti artist to paint
the walls of her backyard and provides all the required paints,
brushes, etc., it is a contract for work and labour.
If both the material and services are provided by one party, it may be a
‘sale’, though theoretically called ‘contract for work and labour’.
Conditions and Warranties
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2.3.3
According to Section 12(1) of
the Sale of Goods Act, 1930, a
stipulation in a contract of sale
with reference to goods which
are the subject thereof, maybe a
condition or a warranty.
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When you buy some goods like electronic gadgets, you are concerned
about their warranty period. You always ask the seller about the
warranty in order to ensure that the product gets easily replaced or
repaired even if it is found to be faulty after purchase. Thus, the sale
or purchase of goods forms contractual relations between a buyer and
the seller. These contractual relations lead to certain rights and liabilities. Whenever there is a breach of these rights and liabilities, the
breach of contract arises. To avoid or curb the instances of the breach
of contract, the terms ‘Condition’ and ‘Warranty’ are mentioned in the
contract of sale in order to determine remedies the parties can claim
in case of the breach by either of the parties.
Know More
What is a Condition?
A condition is a stipulation which is essential for the very purpose of
the contract and gives the aggrieved party an option to terminate the
contract.
Example: A asks B, a two-wheeler dealer, that he wants to purchase a
bike that can run at a speed of 200 miles/hour. B suggests a bike to A,
and A purchases the suggested bike. However, A finds that the bike purchased by him is not running at the required speed which was one of the
conditions of the contract. On the breach of this condition, A is entitled
to reject the bike and seek a refund of the price paid.
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Know More
According to Section 12(2) of
the Sale of Goods Act 1930,
a condition is a stipulation
essential to the main purpose of
the contract the breach of which
gives rise to a right to treat the
contract as repudiated.
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Business Law
It must be noted that the non-fulfilment of a condition is considered to
be a breach of contract. In other words, non-fulfilment of a condition
is considered akin to failure to perform the contract. When a condition
is not fulfilled, the buyer has the right to terminate the contract and
recover damages.
CASE LAW
Baldry vs. Marshall (1925)
Facts: X consulted a car dealer Y and told him that he wanted to
purchase a car for touring purposes. Y suggested that a Buggati car
would be fit for the purpose. Relying upon the statement, he bought
the Buggati car. Later on, the car turned to be unfit for the purpose
of touring.
IM
S
The Court observed that the suitability of the car for touring purpose
was a condition because it was so important that the non-fulfilment
defeated the very purpose of purchasing the car. It was held that A
was entitled to return the car and get back the price paid.
What is a Warranty?
NOTE
According to Section 12(3) of the Sales of Goods Act, 1930, a warranty
is a stipulation collateral to the main purpose of the contract the breach
of which gives rise to a claim for damages, but not to a right to reject the
goods and treat the contract as repudiated.
N
Both conditions and warranties
are stipulations and there is
no fixed and certain rule to
decide which stipulation is a
condition and which one is a
warranty. According to Section
12(4), whether a stipulation in a
contract of sale is a condition
or a warranty, depends in each
case on the construction of the
contract. A stipulation may be
a condition, though called a
warranty in the contract.
M
A warranty is a stipulation that is only collateral to the main purpose
of the contract and the aggrieved party has the right to claim damages, but it cannot terminate the contract.
Example: X asks a dealer Y to suggest a manual food processor that
operates noiselessly and requires minimum effort to chop vegetables
and knead dough. Y suggests a certain product to X. X buys the product.
However, after a few days of use, he discovers that the food processor
makes a lot of noise and it is not at all convenient to use. In this case,
the statement about the noiseless use and minimum effort is only a warranty. The breach of such a warranty entitles X to claim damages, but
he can neither reject the food processor nor terminate the sale contract.
Types of Conditions
There are two types of conditions, which are explained as follows:
‰‰ Express condition: It is a condition inserted in a contract with the
mutual consent of both the parties.
Example: If Sarita wants to buy an air conditioner that has a fivestar rating, then the five-star rating is an express condition.
‰‰ Implied
condition: It is a condition that the law automatically
presumes the existence of some terms in a contract, even though
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Sale of Goods Act, 1930 77
parties to a contract may not have made any express contract
related to those. The law incorporates different implied conditions
in a contract of sale as shown in Figure 2.2:
Condition in a
Sale by Description
Condition as to
Fitness or Quality
Condition in a
Sale by Sample
Condition as to
Merchantability
S
Conditions as to
Title
Figure 2.2: Implied Conditions in a Contract
Let us now discuss these implied conditions.
as to title: In every contract, there is an implied
condition on the part of the seller that he is the owner of the goods.
In the case of a sale, the seller has a right to sell goods and in case
of an agreement to sell, the seller will have the right to sell at the
time when the title of the property is to pass.
IM
‰‰ Conditions
in a sale by description: In a contract for the sale of
goods by description, there is an implied condition that the goods
shall correspond with the description given. The description
may be in terms of grade, brand, symbol, packaging, quality or
characteristics of the goods, such as basmati rice, champagne, MP
wheat, etc.
N
‰‰ Condition
M
Example: Ram purchases a second-hand car from Suresh, a car
dealer. After a few months, the car was taken by the police for its
being a stolen one. Held, Ram can recover the full price from Suresh
since he has committed a breach of the condition of title.
Example: X bought a machine from Y who claimed it to be only six
months old. However, after using it, X found that the machine was
extremely old. X has the right to reject the machine as the description
of the machine does not match the one provided by the seller.
‰‰ Condition
in a sale by sample: When, under a contract of sale,
goods are supplied according to a sample, the implied conditions
are that:
 The
bulk shall correspond with the sample shown.
 The
buyer shall have a reasonable opportunity of comparing
the bulk with the sample.
 The
goods must be free from any defect that renders goods
un-merchantable and which is not apparent on reasonable examination (latent).
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Business Law
Example: In E&S Ruben Ltd. vs. Fair Bros. (1949), some rubber rolls
were sold corresponding to the specific length and width. However,
the actually supplied rolls did not match the sample, giving a right to
the buyer to repudiate the contract.
‰‰ Condition as to fitness or quality: Under a contract of sale, there is
no implied condition as to the quality or fitness of goods supplied.
In fact, in most agreements, this assurance or condition of fitness
or quality is specifically disclaimed by the seller. This is expressed
by the principle of Caveat Emptor (i.e., let the buyer beware).
However, the buyer has the right to satisfy himself/herself about
the quality of goods. In the following cases, an implied condition is
deemed to exist on part of the seller that the goods supplied shall
be reasonably fit for the purpose for which the buyer wants them:
buyer discloses the purpose for which the goods are needed except where the purpose is self-evident from the nature of
goods;
 The
buyer relies on the seller’s skill or judgement;
 The
business of the seller must be to sell goods of that kind.
Example: A customer purchased a packet of milk from H’s dairy.
However, the milk was infected with typhoid bacteria, resulting in
the customer’s wife falling ill on consumption of milk. He will be
liable to pay damages as it is a case of breach of condition of fitness.
M
The principle of Caveat Emptor
is contained in Section 16 of the
Sale of Goods Act, 1930.
IM
NOTE
S
 The
N
‰‰ Condition
as to merchantability: There is an implied condition
that the goods shall be of merchantable quality, unless specifically
disclaimed by the seller, or the goods are specifically stated to
be sold on an ‘as is’ condition (i.e., with all their defects). The
expression ‘merchantable quality’ means that goods are free from
any latent defects. The quality and condition of the goods must
be such that an individual would accept them as the goods of that
description.
Example: A customer bought some worst-quality coatings after
seeing the sample. Later, it was discovered that the clothing was unfit
for stitching into coats. The same defect was also there in the sample
but it was discoverable by ordinary examination. The goods were
held to be un-merchantable.
Types of Warranty
Similar to conditions, there are two types of warranties, which are:
1. Express warranty: It is a warranty which is added in a contract
by expressed words (oral or written) between the two contracting parties.
2. Implied warranty: It is a warranty that can be inferred from
the conduct of parties regarding the existence of some terms in
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Sale of Goods Act, 1930 79
a contract even though the parties to a contract may not have
made any express contract related to those.
Example: If Sarita purchases an air conditioner, there is an
implied warranty that it must not be dented or otherwise damaged.
Exhibit
Types of Implied Warranty
The law provides for the following types of implied warranties
(unless otherwise agreed upon) in a contract of sale:
‰‰ Warranty of quiet possession: As per this implied warranty, the
S
buyers shall have and enjoy quiet possession of the goods. The
buyer will not face any disturbance of any kind including the
seller himself. This is an extension of the implied condition as
to the title. If the buyer’s quiet possession is disturbed due to a
defective title, the buyer can claim damages from the seller.
as to freedom from encumbrances: As per this
implied warranty, the goods that are sold must be free from any
charge of a third party. In other words, the goods must be free
from any encumbrance in favour of any third person.
M
‰‰ Warranty
IM
Example: Anita purchases a laptop from Sarita and had spent
some money on its repair. However, the laptop sold by Sarita was
a stolen one. Therefore, in this case, Anita can file a suit for claim
against Sarita for the recovery of damages, including the cost of
repair.
N
Example: Mitali borrows ` 3, 00,000 from Rahul and hypothecates
her car with Rahul as security. After a month, Mitali sells the car
to Jagdish who buys the car in good faith. In this case, Jagdish can
claim damages from Mitali because his possession is disturbed by
Rahul having a charge. However, if the buyer is aware of such a
charge or encumbrance, this warranty shall not hold.
‰‰ Warranty
of disclosing the dangerous nature of goods to the
ignorant buyer: As per this implied warranty, the seller has the
duty to disclose the dangerous nature or dangers associated
with the use of the goods that he is selling. In such a case, the
buyer can claim compensation for damages.
Example: Ashok purchases a strong chemical disinfectant from
Zoya. Zoya knows that the packaging of the product is defective
and must be handled with care, else it may prove to be dangerous.
However, Zoya does not disclose this to Ashok who opens the
packet and the disinfectant rushes out suddenly causing a severe
damage to his eyes. In this case, Zoya is liable to pay for damages
caused to Ashok.
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Business Law
Difference between a Condition and a Warranty
As mentioned earlier, both conditions and warranties are types of stipulations. The decision to categorise a certain stipulation as being a
condition or a warranty depends on the very nature of the stipulation.
If the stipulation forms the basis of a contract, it is considered as a
condition and if the stipulation is only a collateral promise, then it is
considered as a warranty.
S
When a buyer would not have purchased the goods in the absence
of a stipulation, it is called a condition. However, if a buyer would
still have purchased the goods in the absence of the stipulation, it is
called a warranty. When the stipulations are only designed to provide
an assurance with respect to quality and suitability of the goods, it is
called a warranty.
IM
The difference between the two stipulations (condition and warranty)
can be judged from the fact whether the breach of the stipulation
would make the rights of the aggrieved party nugatory or not. If it
does, the stipulation is a condition. If the stipulation is only auxiliary,
it is a warranty.
M
In each case, the decision regarding whether a stipulation is a condition or warranty depends on the construction of the contract. In case
of court disputes, the court takes guidance from the terms of the contract and circumstances. This view is also supported by Section 12(4)
according to which a stipulation may be a condition, though called a
warranty in the contract.
Some of the important differences between a condition and a warranty are shown in Table 2.2:
N
80
Table 2.2: Difference between Condition and
Warranty
S. No.
Condition
1.
A condition is a stipulation that is
essential for the very purpose of
the contract.
A warranty is a stipulation
that is collateral to the main
purpose of the contract.
2.
In case of a breach of condition,
the aggrieved party can claim
damages as well as terminate the
contract.
In case of breach of warranty,
the aggrieved party has the
right to only claim damages,
but they cannot terminate the
contract.
3.
In case of a breach of condition,
A breach of warranty cannot
the aggrieved party has the option be treated as the breach of
to treat the breach of condition as condition.
a breach of warranty. In that particular case, the aggrieved party
claims only damages.
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Warranty
Sale of Goods Act, 1930 81
A Condition can become a Warranty but a Warranty
Cannot Become a Condition – Concept and Examples
According to Section 13 of the Act, a condition is to be treated as a
warranty under three cases as mentioned in Sections 13(1), 13(2) and
13(3). In all these three cases, the aggrieved party has the right to
claim damages, but it cannot rescind the contract.
Section 13(1) states that where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or
elect to treat the breach of the condition as a breach of warranty and not
as a ground for treating the contract as repudiated.
S
This means that the buyer may voluntarily waive off the condition.
Here, the buyer’s waiving off of the condition and treating the breach
of condition as a breach of warranty is completely voluntary and it
depends upon the will of the buyer.
IM
When a buyer finds out that the seller has committed a breach of condition, the buyer has the right to repudiate the contract. However, if
the buyer does not repudiate the contract, it is assumed that he has
waived off the condition. And after a condition has been voluntarily
waived off by the buyer, he cannot ask the seller to fulfil it.
M
Example: Lipikant, a wholesaler, agrees to supply 100 kg of A1 quality wax powder to Hemant, a retailer, at the rate of ` 130/kg. However,
Lipikant supplies 100 kg of A3 quality wax powder at the rate of ` 90/
kg. Here, if Hemant does not repudiate the contract and considers voluntarily waiving off the condition, he can claim a compensation of ` 40/
kg from Lipikant.
N
Section 13(2) states that where a contract of sale is not severable and the
buyer has accepted the goods or part thereof, the breach of any condition
to be fulfilled by the seller can only be treated as a breach of warranty
and not as a ground for rejecting the goods and treating the contract as
repudiated, unless there is a term of the contract, express or implied, to
that effect.
This means that when a buyer has accepted goods and comes to know
about the breach of condition later, he cannot reject the goods, but can
claim for damages. There can be certain cases where the buyer has
accepted a part of the entire consignment and the contract is indivisible. In this case, the buyer has to accept the entire consignment but
has the right to claim damages. For example upon the purchase of a
television, the buyer finds that the remote of the TV is defective and in
that case the buyer cannot repudiate the contract but claim damages
as both are not severable.
In case of a divisible contract, the buyer has to retain goods that have
been accepted and claim damages for the part of goods received. However, for the remaining unaccepted part of the goods, the buyer can
repudiate the contract.
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In this regard, Section 42 of the Sales of Contract Act, 1930 describes
acceptance as: the buyer is deemed to have accepted the goods when he
intimates the seller that he has accepted them or when the goods have
been delivered to him and he does any act in relation to them which is
inconsistent with the ownership of the seller, or when, after the lapse of
a reasonable time, he retains the goods without intimating the seller that
he has rejected them.
Section 13(2) states that nothing in this Section shall affect the case of
any condition or warranty, fulfilment of which is excused by law by reason of impossibility or otherwise.
2.3.4
S
It means that when the fulfilment of a condition or warranty is excused
by the law, the condition may be treated as warranty.
Title (Ownership)
Know More
A document of title is a document showing that the person named
in the document or the person holding the document is the owner of
the goods. This document of title can be transferred to any other person after that such person becomes entitled to receive goods either by
endorsement or delivery. The documents that serve as document of
title include bill of lading, railway receipt, multimodal transport document, dock-warrant, wharfinger’s certificate, etc.
N
M
According to Section 2(4) of
the Sale of Goods Act, 1930,
‘document of title to goods’
includes a bill of lading, dockwarrant, warehouse-keeper’s
certificate, wharfingers’
certificate, railway receipt,
[multimodal transport
document], warrant or order
for the delivery of goods and
any other document used in
the ordinary course of business
as proof of the possession or
control of goods, or authorising
or purporting to authorise, either
by endorsement or by delivery,
the possessor of the document
to transfer or receive goods
thereby represented.
IM
In simple words, ‘title’ means ‘ownership’. A person that holds the title
to the goods is the owner of the goods. The title or ownership of goods
can be proved by using documents.
There are also documents called document showing title. A document
showing title is a document that shows the person, who is named in
the document, as the owner of the shares. It must be remembered that
such shares cannot be transferred by endorsement or delivery.
The difference between document of title and document showing title
is that a person named in the document or the one holding the document is the owner of goods. Whereas, in a document showing title,
only the named person is the owner. The owner can transfer the document by endorsement or delivery, whereas the document showing
title cannot be transferred.
Transfer of Title and Related Rules
The transfer of ownership in goods means passing of property in
goods from one person to another. In a contract of sale of goods or
property, the ownership is also passed on from the seller to the buyer.
In the process of sale, it is relevant to determine the exact point of
time when the property or goods are passed on from the seller to
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Sale of Goods Act, 1930 83
the buyer because the risk involving the property depends on the
time of transfer. In a sale of goods contract, following have to be
determined:
‰‰ Exact point in time when the property in goods is transferred from
the buyer to the seller
‰‰ Point
of time when the risk is transferred from the seller to the
buyer
‰‰ Point
of time when ownership and possession are passed on from
the seller to the buyer
The performance of a contract of sale of goods is done in three stages
which are:
S
1. Transfer of property in goods
2. Transfer of possession of goods
IM
3. Transfer of title
As a general rule, the property in goods is transferred to the buyer at
the time as the parties intend it to be transferred. It means that the
general rule of transfer of ownership depends on the intention of the
parties to a contract.
M
The time for the transfer of ownership from the seller to the buyer can
be decided by the parties freely. However, in cases where the intention
of the parties is not clarified from the contract, some rules have to be
followed.
N
For deciding the time of passing of property in goods from the seller
to the buyer, goods are divided into three types, namely specific or
ascertained goods, generic or unascertained goods and goods sent on
approval. Let us now discuss the three cases as follows:
1. Specific/Ascertained goods: For specific goods, there can be
three cases, which are as follows:
a. Where there is an unconditional contract for the sale of specific goods in a deliverable condition, the ownership passes at
the time when the contract is made.
b. Where there is a contract for the sale of specific goods not in
a deliverable condition, the ownership passes when the goods
are made into a deliverable state and the buyer has information regarding it.
c. Where there is a contract for the sale of specific goods in a deliverable state, but the seller has to weigh or measure goods
to ascertain the price, the ownership passes when the seller
has ascertained the price and the buyer has information regarding the same.
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NOTE
The transfer of title (ownership)
plays a crucial role in the
contract of sale of goods. The
legal rights and duties of the
buyer and the seller are decided
by the ownership of goods.
Business Law
2. Generic/Unascertained goods: At the outset, it is a general rule
that property in such goods does not pass until the goods are unascertained. In the case of generic goods, the ownership passes
when goods are ascertained and are appropriated by the seller
or the buyer, with due assent of the other party. It must be noted
that the consent may be gained before or after the appropriation.
The appropriation may be done by the seller and assented to by
the buyer or vice versa.
Example: Ramesh, a wholesaler of sugar, contracts to sell 100 kg
of sugar to Mohan. He selects 100 bags of 1 kg each of sugar and
Mohan approves these 100 bags. This is appropriation.
S
3. Goods sent on approval: For goods sent on approval, there can
be three cases as follows:
IM
a. When the buyer signifies his approval or acceptance (express
or implied), the ownership passes after the buyer’s approval
or acceptance is communicated to the seller.
b. When the buyer adopts a transaction by doing some act that
shows the acceptance of the goods, such as pledging of goods,
then ownership passes after the act of adoption is done.
M
c. When the buyer fails to return the goods and some time has
been fixed for return of goods, ownership passes on the expiry of fixed time.
d. When the buyer fails to return the goods and no time has been
fixed for return of goods, ownership passes on the expiry of a
reasonable time.
N
84
Apart from these, in case of standing trees, the ownership passes when
the trees are felled and ascertained.
The title is usually transferred by the owner himself. The general rule
to be followed is “nemo dat quod non-habet” that means that no one
can give a better title than himself. In any case, if a person purchases
and acquires the possession of a stolen good, then he must return that
to the actual owner. In case a seller sells the goods when he does not
have a title, the buyer acquires no title in the goods.
Title and Risk of Loss
Risk of loss is passed with ownership or passing of property in goods.
The person, who is the owner of the goods (which have suffered a loss)
at the time when loss occurred, has to bear the loss irrespective of
whether or not the delivery of the goods was made.
Example: Sita selects 10 kg rice, pays for the same and let the rice remain
in the shop with an arrangement of picking it up later. Meanwhile, there
is a flood and the rice gets destroyed. Sita will be liable to bear the loss.
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Sale of Goods Act, 1930 85
2.3.5 Doctrine of Caveat Emptor and Exceptions
The term ‘Caveat Emptor’ means ‘let the buyer beware’. It is a fundamental principle followed in contracts of sale of goods. It means that
it is the responsibility of the buyer to check the suitability and defects
in a good, he is purchasing. Stated another way, it is not the duty of
the seller to point out any defect. The buyer must make use of his
skill and judgement while making the purchase. In this regard,
Section 16 of the states that there is no implied warranty or condition
for the quality of the goods or for the fitness, as to the purpose of the
buyer under the contract of sale.
However, there are certain exceptions to the doctrine of Caveat Emptor as follows:
a seller misrepresents any detail related to good and the buyer
purchases the good on the basis of the representation, the doctrine
of Caveat Emptor does not hold and such a contract is voidable at
the will of the buyer.
IM
S
‰‰ If
‰‰ If a seller conceals any defect in the goods he is selling, in such a way
the buyer has apprised the seller of his requirement and
depends on the skill and judgement of the seller, the doctrine of
Caveat Emptor does not hold.
‰‰ When
N
‰‰ When
M
that such defects do not reveal upon reasonable examination or if
the seller engages in false representation and the buyer purchases
the goods based on such false representation and enters into a
contract of sale, then such a contract becomes voidable. Then the
buyer has the right to terminate the contract and claim damages.
a seller makes a sale based on the description, it is implied
that the goods must correspond with the description.
‰‰ When
a buyer buys certain goods in bulk and he has based his
decision after examining a sample and the goods received do not
match with the quality as shown in the sample, the doctrine does
not hold.
2.3.6
Performance of the Contract of Sale
Performance of a contract is discussed in Sections 31 to 44 of the Sale
of Goods Act, 1930. For a seller, performance of a contract means
delivery of the goods to the buyer. For a buyer, the performance of a
contract means accepting the delivery of goods and making the payment as per the contract terms.
Delivery means the voluntary transfer of goods from the seller to the
buyer. The seller must be willing to give the possession of the goods to
the buyer for a price and the buyer must be willing to accept and pay
the price.
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Business Law
The first part of the performance of a contract is delivery. Delivery can
be of three types which are as follows:
1. Actual delivery: In the case of actual delivery, goods are transferred by the seller to the buyer or to his agent.
2. Symbolic delivery: At times, it is not possible to make the actual
delivery of goods such as in case of bulk goods or bulky goods. In
this case, delivery is given symbolically such as by handing over
the keys.
3. Constructive delivery: In case of constructive delivery, it is not
made by physical or symbolic modes. In such cases, an individual possesses the products for the benefit of the purchaser. Constructive delivery can be made in three ways:
S
 When a seller, after selling goods, agrees to hold the goods for
the buyer.
a third party holds the goods for the seller and agrees
and acknowledges to hold them for the buyer.
IM
 When
The second part of the performance of contract is a buyer’s acceptance
of goods. When the buyer gives his assent, the goods are accepted.
But, before a buyer gives his assent, he can follow the steps mentioned
below:
M
1. Examine the products upon delivery. It means that on receiving
the delivery of the goods, the buyer has the right to examine the
goods to confirm whether or not they conform to the order and
are in a good condition.
2. A buyer is deemed to have accepted goods in the following cases:
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86
 He
informs the seller that he has received goods and they are
appropriate.
 He
does an act to the goods which is inconsistent with the
rights of the seller, such as resale or pledge of the goods received by him.
 He
retains the goods after the expiry of reasonable time without informing the seller.
The third and last part of the performance of a contract relates to
making the payment for goods received. The buyer, after receiving
the goods, must make the absolute payment in line with the terms of
the contract. In case the price is to be paid in instalments, it must be
paid as per the payment schedule.
2.3.7 Unpaid Seller
An unpaid seller refers to a seller who has not received the full price
for the goods sold by him.
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Sale of Goods Act, 1930 87
The term ‘unpaid seller’ has been defined in Section 45 of the Sale of
Goods Act, 1930 as follows:
(1) The seller of goods is deemed to be an ‘unpaid seller’ within the
meaning of this Act—
(a) When the whole of the price has not been paid or tendered.
(b) When a bill of exchange or other negotiable instrument has been
received as conditional payment and the condition on which it
was received has not been fulfilled by reason of the dishonour
of the instrument or otherwise.
S
As per the given definition, the seller of goods is considered as an
unpaid seller in two cases – first, when the full price has not been
paid; and, second when a cheque, bill of exchange or any other negotiable instrument has been received as a conditional payment, but is
dishonoured.
‰‰ Goods
‰‰ Full
are sold by the seller, but the price is due.
price is not received.
the price is not paid immediately, a negotiable instrument, such
as bill of exchange, cheque, etc., are received as payment.
‰‰ The
M
‰‰ If
IM
The conditions that must be satisfied for an unpaid seller are as follows:
negotiable instrument received had been dishonoured.
N
Example: If Sameeksha sold a T-shirt for ` 1,500 to Aditya, but Aditya
paid her ` 1,300 only, then Sameeksha is an unpaid seller.
If Sameeksha sold a T-shirt for ` 1,500 to Aditya, but Aditya paid the
whole amount through a cheque that was dishonoured, then Sameeksha
is an unpaid seller.
If Sameeksha sold a T-shirt for ` 1,500 to Aditya, but allows a time of one
month to make the payment, but does not receive the payment after one
month, then Sameeksha is an unpaid seller.
There are certain cases where the seller cannot be called an unpaid
seller, which are as follows:
‰‰ If
the payment has been received in full, but some other expenses
have not been paid, the seller will not be called an unpaid seller.
‰‰ If
the seller has sold the products on credit, the seller cannot be
called an unpaid seller till the expiry of the credit period.
‰‰ If
a buyer has paid the full price of goods, but the seller refuses to
accept the payment, he cannot be called an unpaid seller.
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Business Law
Rights of an Unpaid Seller
Against Goods
Where the Property
in Goods has Passed
to the Buyer but not
the possession of
Goods
Lien
Stoppage in Transit
Resale
S
Where the Property and possession in Goods
has Passed to the Buyer
Against the Buyer
IM
Rights of an Unpaid Seller
The rights of an unpaid seller are shown in Figure 2.3:
Suit for Price
Suit for Damages
Suit for Interest
Figure 2.3: Rights of an Unpaid Seller
Let us now discuss these rights in detail as follows:
M
‰‰ RIGHTS
AGAINST GOODS
the property in goods has passed to the buyer: The
rights of an unpaid seller when the property in goods has
passed to the buyer are as follows:
N
 Where
99 Right
of lien: Right to lien means that the seller can retain
the possession of the goods until he receives the full price
of the goods. The right to lien can be exercised under the
following three circumstances:
zz When
the goods have been sold without any stipulation
as to credit.
zz When
NOTE
Lien is of two types- namely
particular lien and general lien.
Particular lien is exercisable
only against goods for which
payment is outstanding. General
lien can be exercised for all
previous outstanding amounts.
the goods were sold on credit, but the credit
period has expired.
zz When
the buyer becomes insolvent.
According to Section 47(2), the seller may exercise his right
of lien even if he possesses goods as an agent or a bailee for
the buyer.
After a lien has been exercised, it is relevant to determine
when a lien will be terminated. A lien is terminated when
the seller loses possession of goods. This happens when delivery of goods is made by the seller to the carrier or when
the buyer lawfully obtains the possession from the seller
by paying the due amount. A lien may also be terminated
when the seller voluntarily waives off the lien.
NMIMS Global Access - School for Continuing Education
Sale of Goods Act, 1930 89
99 Right
of stoppage in transit: Right of stoppage of goods in
transit means that the goods that have been dispatched by
the seller and are in the possession of middlemen in transit,
the delivery of goods can be stopped and retained by the
seller till the full amount of goods is received.
The right of stoppage in transit can be exercised only if the
following conditions are met:
zz The
buyer has become insolvent.
zz Goods are in transit, i.e., goods are not in the possession
of the seller and have not reached the buyer.
zz Unpaid
seller can stop goods in transit only in order to
receive the full amount of payment.
IM
S
The duration of transit is the time when goods are handed
over from the seller to the middlemen till the time the buyer receives the goods. If the buyer refuses to take delivery,
the transit continues.
The transit of goods is terminated in the following cases:
zz Delivery
buyer
of goods at the intended destination of the
zz Interception
by the buyer
by the carrier to the buyer that he
holds goods on his behalf
M
zz Acknowledgement
zz Part delivery has been made with the intention to deliv-
ering the whole
N
There are two modes of stoppage in transit i.e. by taking
actual possession of goods and by giving notice to the carrier not to deliver the goods. When the seller stops goods
in transit, the goods are returned to the seller and all the
related expenses are borne by the seller.
99 Right
of resale: An unpaid seller has the right to resell the
goods in the following cases:
zz Goods
are of perishable nature.
zz When
the unpaid seller expressly reserves a right of
resale in the case a buyer makes a default in payment.
zz When the unpaid seller has exercised his right of lien or
stoppage in transit and gives a notice to the buyer about
his intention to resell if the buyer does not repay the
amount in a reasonable amount of time.
 Where
the property in goods has not passed to the buyer: In
addition to the above-mentioned three rights, in case when the
property in goods has not passed to the buyer, the unpaid seller
also has an additional right to withhold delivery if the goods
have not been passed to the buyer.
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Business Law
B. RIGHTS AGAINST THE BUYER
The rights of an unpaid seller against the buyer are as follows:
 Suit
for price: If, in a contract of sale, the property in goods
has passed from the seller to the buyer, but the buyer refuses to
pay the price, the seller has the right to sue the buyer for price.
In certain cases, the property in goods may not have passed
from the seller to the buyer, but the contract makes it necessary to pay the price at a certain date, then the seller may sue
the buyer for price.
 Suit
for damages: An unpaid seller may sue the buyer for
claiming damages in the following cases:
99 When
price
the buyer refuses to accept the goods and pay the
the buyer repudiates the contract before the date of
delivery
for interest: A seller may recover such interest from the
buyer if there is an agreement between the seller and the buyer which specifically states about the interest that would be
charged on the price of the goods after the payment becomes
due. However, if there is no specific agreement regarding the
interest payment, the seller may charge interest after notifying
the buyer of the interest that has become due.
M
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 Suit
S
99 When
Responsibilities of an Unpaid Seller
Some important responsibilities of an unpaid seller are as follows:
‰‰ Delivering
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90
the goods back to the buyer after he has made the
payment while exercising his right to stoppage in transit.
‰‰ Giving
notice to the middleman (carrier or bailee) who possesses
the goods for stopping goods in transit.
‰‰ Maintaining
‰‰ Giving
notice to the buyer that he intends to resell the goods.
‰‰ Bearing
transit.
the goods in a deliverable state.
the expenses of redelivery if he has stopped goods in
2.3.8 Hire Purchase and Hypothecation
Agreements
Hire purchase agreements and hypothecation agreements are specific
types of agreements that are used by buyers to purchase assets by
making payments in periodical instalments.
Hire Purchase Agreement
Hire purchase is an agreement in which the possession of an asset is
transferred from one person to another but the ownership remains
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Sale of Goods Act, 1930 91
with the vendor. The payment may be made in instalments and the
ownership will be transferred in favour of the buyer only on the completion of payment of all agreed number of instalments. However, the
buyer can use assets. The main features of a hire purchase agreement
are as follows:
‰‰ There
are two parties, namely the hirer and the hiree (the vendor
or the owner).
‰‰ The
hirer is the person who makes use of the assets while making
payment of the asset on an instalment basis.
‰‰ In
a hire purchase transaction, there is no transfer of ownership
till the whole amount or until the payment of final instalment.
transaction is a bailment coupled with the hirer’s option to
purchase by paying all the agreed number of instalments.
S
‰‰ The
hire purchase agreement includes two elements, namely an
element of bailment and an element of sale.
IM
‰‰ A
‰‰ There
is no obligation on part of the buyer to purchase the asset.
Options are available with him to either buy or decline the hire
purchase agreement.
‰‰ Sale
M
The main differences between a hire purchase agreement and sale are
as follows:
is governed by the Sale of Goods Act, 1930, while the hire
purchase agreement is merely a combination of bailment and sale.
the case of sale, the ownership is transferred immediately upon
payment while in the case of the hire purchase agreement; only
the possession with the right to use the asset is given to the hirer.
‰‰ Payment
N
‰‰ In
for a sale may be in cash, credit or instalment, while, in
a hire purchase agreement, the payment is made in instalments.
‰‰ On the failure of the buyer to make payment, the seller cannot take
back assets but sue the buyer for the unpaid portion of the price.
However, in a hire purchase agreement, the owner can take back
the asset on default by the hirer to pay even a single instalment.
‰‰ Sale
involves price, whereas hire purchase includes some amount
of interest in the total amount of payment.
‰‰ The
buyer, in the case of sale, has the right of resale and the
subsequent buyer shall get a good title. In the hire purchase,
the hirer has no right to sell the asset without the completion of
payment.
Hypothecation Agreement
Hypothecation is a legal transaction that involves movable assets and
creates an equitable charge on the assets. In such a transaction, secuNMIMS Global Access - School for Continuing Education
Business Law
rity interest is created without having to transfer the possession of
assets as the security remains in the possession of the borrower. The
security is charged in favour of the lender through documents that are
executed by the borrower. In hypothecation, there are three parties,
the seller, the financier and the borrower.
Difference between Hire Purchase Agreement and
Hypothecation
Some of the important differences between hire purchase agreement
and hypothecation are shown in Table 2.3:
Table 2.3: Differences between Hire Purchase
Agreement and Hypothecation
Hire Purchase Agreement
Hypothecation
1.
In a hire purchase transaction,
the possession of the assets is
transferred to the hirer, but the
ownership remains with the
hiree.
Hypothecation transaction
involves the transfer of possession along with the transfer of
documents of the ownership to
the seller.
2.
There are two parties, namely
the hirer and the hiree.
There are three parties in hypothecation namely the seller,
the financier and the borrower.
3.
In a hire purchase agreement,
there are two elements, namely
bailment and sale.
Hypothecation includes an
element of pledge.
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S. No.
self assessment Questions
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92
4. Which of the following is not true in the context of a condition?
a. A type of stipulation
b. Essential for the very purpose of the contract
c. Aggrieved party can terminate the contract
d. Collateral to the main purpose of the contract
5. Contract of sale is a common term and involves sale and agreement to sell. (a) True (b) False
6. Rule as to no liability of seller for the quality or fitness of goods
supplied is usually expressed by the principle of __________.
7. Which of the following rights is available exclusively in case
the property in goods has not passed to the buyer?
a. Right of resale
b. Right of stoppage in transit
c. Right to withhold delivery
d. Right of lien
NMIMS Global Access - School for Continuing Education
Sale of Goods Act, 1930 93
8. The __________ in goods means passing of property in goods
from one person to another.
Activity
Study any case law related to the suit for interest filed by an unpaid
seller. Prepare a synopsis for the case law.
2.4 Summary
S
‰‰ Goods
in general refer to merchandise or possessions or articles
that can be bought and sold.
are of three types, namely existing goods, future goods and
contingent goods.
S
‰‰ Goods
Sale of Goods Act, 1930 is the governing law for the contracts
of sale of goods.
IM
‰‰ The
‰‰ Sale is when the goods are immediately transferred from the seller
to the buyer, whereas agreement to sell is when the seller is to
transfer the goods to the buyer at a future date.
condition is a stipulation which is essential for the very purpose
of the contract and it gives the aggrieved party an option to
terminate the contract.
M
‰‰ A
‰‰ A
warranty is a stipulation that is only collateral to the main
purpose of the contract and the aggrieved party has the right to
claim damages but it cannot terminate the contract.
of implied conditions include:
N
‰‰ Types
 Conditions
as to title
 Condition
in a sale by description
 Condition
in a sale by sample
 Condition
as to fitness or quality
 Condition
as to merchantability
‰‰ Types
of implied warranties include:
 Warranty
of quiet possession
 Warranty
as to no encumbrances
 Warranty
of disclosing the dangerous nature of goods to the
ignorant buyer
‰‰ Title
means ownership. A person who holds the title to the goods
is the owner of the goods.
‰‰ The
transfer of ownership in goods means passing of property in
goods from one person to another.
NMIMS Global Access - School for Continuing Education
Business Law
‰‰ The time for the transfer of ownership from the seller to the buyer
can be decided by the parties freely.
‰‰ For
deciding the time of passing of property in goods from the
seller to the buyer, the goods are divided into three types, namely
specific or ascertained goods, generic or unascertained goods and
goods sent on approval.
‰‰ It is not the duty of the seller to point out any defect. The buyer must
make use of his skill and judgement while making the purchase.
‰‰ The
first part of the performance of a contract is delivery.
‰‰ The
second part of the performance of a contract is the buyer’s
acceptance of goods.
‰‰ The third and last part of performance of contract relates to making
S
the payment for goods received.
‰‰ An
unpaid seller refers to a seller who has not received the full
price for the goods sold by him.
rights of an unpaid seller include:
IM
‰‰ Various
 Right
of lien
 Right
of stoppage in transit
 Right
of resale
 Right
to withhold goods
M
N
94
 Suit
for price
 Suit
for damages
 Suit
for interest
‰‰ Hire
purchase agreements and hypothecation agreements are
specific types of agreements which are used by buyers to purchase
assets by making payments in periodical instalments.
key words
‰‰ Condition:
A stipulation that is central for the very purpose of
the contract.
‰‰ Implied
condition: A condition that the law automatically
presumes the existence of some terms in a contract even though
the parties to a contract may not have made any express contract
related to those.
‰‰ Merchantability: The state of being fit for market, i.e., the goods
can be bought and sold.
‰‰ Security
interest: An enforceable legal claim or lien on
collateral.
‰‰ Specific
goods: Goods that are identified and agreed upon at
the time of making the contract of sale.
NMIMS Global Access - School for Continuing Education
Sale of Goods Act, 1930 95
2.5 Descriptive Questions
1. Explain the concept of goods as per the Sale of Goods Act, 1930.
2. Explain the Sale of Goods Act, 1930.
3. Describe the meaning of conditions and warranties and their
types.
4. With reference to conditions and warranties, it is said that a condition can become a warranty, but a warranty cannot become a
condition. Explain this concept with the help of examples.
5. What is the meaning of Caveat Emptor? Discuss its exceptions.
6. Who is an unpaid seller and what are his rights?
S
7. Explain the meaning of a hire purchase agreement.
2.6 Answers and Hints
Q. No.
Concept of Goods
1.
b.
2.
Existing goods
3.
a.
4.
d. Collateral to the main purpose
of the contract
5.
a.
6.
Caveat Emptor
7.
c.
8.
transfer of ownership
N
Sale of Goods Act, 1930
Answer
Money
True
M
Topic
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ANSWERS FOR SELF ASSESSMENT QUESTIONS
True
Right to withhold delivery
HINTS FOR DESCRIPTIVE QUESTIONS
1. According to Section 2(7) of the Sale of Goods Act, 1930, a good
means every kind of movable property other than actionable claims
and money; and includes stock and shares, growing crops, grass,
and things attached to or forming part of the land which are agreed
to be severed before sale or under the contract of sale. Refer to Section 2.2 Concept of Goods
2. The Sale of Goods Act, 1930 is the governing law for the contracts of sale of goods. A contract of sale of goods is a contract
which a seller transfers or agrees to transfer certain good(s) to
a buyer for a given sum of money known as price of the good.
Refer to Section 2.3 Sale of Goods Act, 1930
3. There are two types of stipulations in a contract of sale, namely
conditions and warranties. A condition is a stipulation which is
NMIMS Global Access - School for Continuing Education
?
Business Law
essential for the very purpose of the contract and it gives the
aggrieved party an option to terminate the contract. Refer to
Section 2.3 Sale of Goods Act, 1930
4. Section 13 of the Sale of Goods Act, 1930 states that a condition
is to be treated as a warranty under three cases as mentioned in
Sections 13(1), 13(2) and 13(3). Refer to Section 2.3 Sale of Goods
Act, 1930
5. The doctrine of Caveat Emptor is a fundamental principle which
means that it is the responsibility of the buyer to check the suitability and defects in a good he is purchasing. Refer to Section
2.3 Sale of Goods Act, 1930
S
6. An unpaid seller refers to a seller who has not received the full
price for the goods sold by him. The term ‘unpaid seller’ has been
defined in Section 45 of the Sale of Goods Act, 1930. An unpaid
seller has rights against the goods as well as against the buyer.
Refer to Section 2.3 Sale of Goods Act, 1930
IM
7. Hire purchase is an agreement in which the possession of an
asset is transferred from one person to another person, but the
ownership remains with the vendor. The payment may be made
in instalments. Refer to Section 2.3 Sale of Goods Act, 1930
M
2.7 Suggested Readings & References
Suggested Readings
‰‰ Kumar,
A. (2001). Mercantile Law. Atlantic Publishers & Dist.
‰‰ Pillai,
N
96
R. Legal Aspect of Business (Mercantile Law). New Delhi: S.
Chand.
e-References
‰‰ Implied
Conditions in the Sale of Goods. (2020). Retrieved 7 April
2020, from https://www.lawyersclubindia.com/articles/IMPLIEDCONDITIONS-IN-THE-SALE-OF-GOODS–379.asp
‰‰ Duties
of an Unpaid Seller under Sale of Goods Act - iPleaders.
(2020). Retrieved 7 April 2020, from https://blog.ipleaders.in/dutiesof-an-unpaid-seller/
NMIMS Global Access - School for Continuing Education
C
h
3
a
pt
e
r
Laws Related to the Formation of
Businesses
IM
Introduction
Unincorporated and Incorporated Forms of Business
3.2.1
Sole Proprietorship—Meaning, Features, Advantages, and Disadvantages
3.2.2
Partnership and the Partnership Act, 1932
Limited Liability Partnership (LLP) Act, 2008
3.2.3
3.2.4Distinction between Partnership Firm Incorporated under the Partnership Act and Partnership Firm Incorporated under the LLP Act
3.2.5
Hindu Undivided Family (HUF) and its Characteristics
3.2.6Distinction between a Partnership Firm Incorporated under Partnership
Act, 1932 and an HUF
Self Assessment Questions
Activity
3.3
Companies Act, 2013
3.3.1
Concept and Evolution of a Company
3.3.2
Characteristics of a Company
3.3.3
Kinds of Companies
3.3.4
Difference between a Private Company and a Public Company
3.3.5
Lifting the Corporate Veil
3.3.6Formation and Incorporation of a Company—Conditions and the Process
of Incorporation
3.3.7
Constitutional Documents of a Joint Stock Company
3.3.8
Memorandum of Association (MoA)
Articles of Association (AoA)
3.3.9
3.3.10
Binding Force of MoA and AoA
Difference between MoA and AoA
3.3.11
3.3.12
Public Limited Company—Prospectus
3.3.13
Raising Capital using Shares and Debentures
Membership (Ownership) and Management
3.3.14
N
M
3.1
3.2
S
Contents
NMIMS Global Access - School for Continuing Education
Business Law
CONTENTS
3.3.15
M
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S
3.4
3.5
3.6
3.7
Corporate Governance and Corporate Social Responsibility (CSR)
Self Assessment Questions
Activity
Summary
Descriptive Questions
Answers and Hints
Suggested Readings and References
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98
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Laws Related to the Formation of Businesses 99
Introductory Caselet
Formation of Partnership
N
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Mr X, Mr Y, and Mr Z are three persons interested in starting
a business. They all meet and decide to form a partnership and
conduct business operations together. They prepare a partnership deed which includes the name of the firm and the objective
of the business. They also decide a profit-sharing ratio among
themselves in order to distribute the profit earned in the business.
The rights and duties of the partners are also decided. These are
expressly defined in the partnership deed. The partnership deed
also contains provisions about the new partners and also for the
minor partners. In this way, a partnership firm has been formed
by three persons to conduct the operations of a business.
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Case Objective
This caselet mentions the
formation of a partnership
business.
Business Law
Learning objectives
After studying this chapter, you will be able to:
Explain the meaning of sole proprietorship and partnership
Understand the nature of a partnership deed and its duration
Discuss the legal position of a minor admitted to a partnership
firm and his/her rights and liabilities
Explain express and implied authority and the scope of
implied authority of partners
Discuss the rights, relations, and liabilities of a partner
against a third party and other partners
Describe the rights and liabilities of the newly admitted
partners
Explain the changes in a firm, such as retirement, expulsion,
insolvency, and death of a partner
Explain the Limited Liability Partnership (LLP) Act, 2008
Discuss Hindu Undivided Family (HUF) and its
characteristics
Explain the roles and responsibilities of Karta
Explain the concept of a company and its legal characteristics
Describe the legal provisions regarding the formation and
incorporation of a company
Elaborate on the purpose and regulations concerning
Memorandum of Association (MoA) and Articles of
Association (AoA)
Describe the concept of a prospectus and its purpose
Explain various aspects of a membership
Explain the concept of shares and debentures
Discuss corporate governance and Corporate Social
Responsibility (CSR)
>>
>>
>>
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>>
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3.1 Introduction
Quick Revision
In the previous chapter, you had studied about the Sale of Goods Act,
1930 which is one of the most important laws of contract for conducting business in India. This chapter discusses the principal forms of
business organisations. The oldest of these forms is the sole proprietorship. Most small shops in villages, towns, and cities selling all
kinds of daily-use items are of this kind. In comparison, if two or more
persons decide to set up a business for sharing the profits earned, it
is called a partnership. A partnership between persons can be established through an agreement, which can be either written or oral. An
oral agreement is, however, not recognised under the statutory laws
governing partnerships in India. Further, oral agreements may lead
to ambiguity and disputes in future. Hence, it is better to have a writNMIMS Global Access - School for Continuing Education
Laws Related to the Formation of Businesses 101
ten agreement between partners. Rights and duties created under the
Partnership Act, 1932, however, can be enforced in a court of law only
if the partnership is registered and a written partnership agreement
is filed with the Registrar. That said, an unregistered partnership firm
can be sued by a third party. The law relating to partnerships in India
is governed by the Partnership Act, 1932 and the Limited Liability
Partnership (LLP) Act, 2008.
In this chapter, we will study the various forms of partnership and the
types of partners. The relationship between partners and their rights
and duties are also discussed. The chapter also discusses different
Acts for various other forms of business establishments such as Hindu
Undivided Family (HUF) and joint stock companies.
Unincorporated and
Incorporated Forms of Business
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3.2
‰‰ Sole
N
M
IM
A business can be established in the form of sole proprietorship, HUF,
partnership, or a joint stock company. It depends upon the choice of
owners to decide the structure of their business. They can choose
either an unincorporated or an incorporated form of business. Incorporation of business is a process of creating a separate legal entity for
a business as per the statutory laws. It can reduce the magnitude of
risk and provide tax benefits and legal protection as well. In an unincorporated form of business, the owner is responsible for all the liability and responsibility except in the case of a limited liability partnership. The business does not become a separate legal entity. There are
different ways of establishing a business. Let us study the major forms
of incorporated business, which are as follows:
proprietorship
‰‰ Partnership
‰‰ HUF
‰‰ Joint
firm (unlimited or limited liability)
stock company
3.2.1 Sole Proprietorship—Meaning, Features,
Advantages, and Disadvantages
Sole proprietorship refers to the type of business that is operated by a
single person, though he/she may take the help of his/her family members for the purpose of running the business. The profits and risks are
solely of the owner. The owner of the business is responsible for all the
important decisions and day-to-day activities.
Essential Features of Sole Proprietorship
Some of the essential features of sole proprietorship are as follows:
‰‰ The
business is owned and controlled by a single individual.
NMIMS Global Access - School for Continuing Education
NOTE
The sole proprietorship is the
simplest business form under
which one can operate a
business. It is not a legal entity.
Business Law
‰‰ The
concerned individual assumes all risks to which the business
is exposed.
‰‰ The
individual’s liability is unlimited, i.e., his/her personal assets
can also be used for the payment of business liabilities.
‰‰ The
business has no separate existence apart from the sole
proprietor.
‰‰ No
complex legal formalities are necessary to set up the sole
proprietary business except for some statutory restrictions under
local regulations.
‰‰ The
sole proprietor enjoys unlimited freedom of action as regards
the nature of business, decision-making, the place of business,
whether to make cash or credit transactions, etc.
proprietor’s family generally joins him/her in performing
various tasks.
of the proprietor is unlimited, thereby exposing his/her
personal financial fortunes to great uncertainty.
IM
‰‰ Liability
S
‰‰ The
M
Sole proprietorship is the best option for a business in which the
investment and associated risks are few; the nature of business and
decision-making is simple; and customers are in direct contact with
the business. Retail shops, eateries, and businesses based on personal
skills such as beauty salons, consultancy and advisory business, travel
services, transportation, etc., are feasible to be carried out under sole
proprietorship form of business.
Advantages of Sole Proprietorship
N
102
Operating a sole proprietorship is relatively easy and provides relaxation to the owner. There are several advantages of conducting businesses in the form of sole proprietorship, some of which are as follows:
‰‰ No registration required: A sole proprietorship does not need any
registration except for some local licensing requirements in case
of medicine stores, restaurants, or those requiring professional
training under local regulations.
‰‰ No
maintenance of formal accounts required: All incorporated
firms and companies have to maintain their accounts in prescribed
formats, which must also be audited by a qualified auditor. There
is no such compulsion in case of sole proprietorship firms.
‰‰ Control
and ownership: Sole proprietors have complete control
and ownership rights on their businesses. A sole proprietor is the
single owner of his/her business entity and has every right to take
all the decisions by himself/herself.
‰‰ Tax:
The business will be taxed at the rates applicable to personal
income and not as per the corporate tax rates.
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Laws Related to the Formation of Businesses 103
Disadvantages of Sole Proprietorship
Sole proprietorship also has a few disadvantages, which are as follows:
‰‰ No
perpetuity: As the business is handled only by one person, the
business may have to close down in the event of his/her death and
there is no other person to run the business.
‰‰ Unlimited
liability: As the business is not a separate legal entity,
the loss in business may be recovered from the personal property
of the owner/proprietor.
‰‰ Difficulties
in raising funds: It is quite challenging to generate
capital because the preliminary funds are provided by the owner
or proprietor himself/herself. There are no provisions to issue
shares or other forms of fund-raising actions.
size: Sole proprietorship carries a limit for expansion,
beyond which it becomes difficult for the owner to expand. The
growth becomes stagnant as it continues to remain with the sole
owner.
IM
3.2.2
S
‰‰ Limited
Partnership and the Partnership Act, 1932
N
M
A partnership is a legal relationship between persons who have agreed
to work together to perform certain business activities. As per Section
4 of the Indian Partnership Act, 1932 (hereinafter referred to as the
‘Partnership Act’), partnership is defined as ‘the relation between persons who have agreed to share the profits of a business carried on by
all or any one of them acting for all’. It is a contractual relationship
between two or more people who have agreed to share profits in an
agreed ratio in order to conduct a business.
Features of A Partnership
The following are the salient features of a partnership:
‰‰ The
partnership is an association of two or more persons: A
minimum of two people are required to constitute a partnership
firm. The maximum number of partners in a partnership firm
cannot exceed 100; otherwise, it will become an illegal association.
It is important to note that a partnership firm cannot be a partner
in another partnership firm.
‰‰ The
association between partners must be based on an
agreement between two or more persons: A partnership is based
on a mutual agreement (whether oral or written) between two
parties or partners involved. It cannot arise from status or birth as
in the case of the persons constituting an HUF business. Moreover,
a partnership also cannot arise by operation of law such as in the
case of co-ownership.
‰‰ The
partnership agreement must be to carry on some business:
The term ‘business’ encompasses every trade, occupation, or
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NOTE
The partnership firm is
registered when the registrar
of firms is satisfied with the
compliance of Section 58 of the
Partnership Act.
Business Law
profession. Though the term ‘business’ connotes the doing of
numerous transactions, a partnership may arise even for doing a
single transaction. Without business, no partnership can arise.
agreement must be to share the profits of the business:
The agreement must be to carry on a business to share profits
arising from the business. Though there is no mention of ‘sharing
of losses’, it is implied from the agreement; however, it is not
necessary that all partners agree to share the losses. Where the
partnership agreement is silent on sharing of losses, it is assumed
that all partners will share losses as they have agreed to share
profits. Though the sharing of profits is an essential element of a
partnership, exception exists in the form of ‘partner by estoppel’
and ‘partner by holding out’. Also, there may exist a profitsharing relationship between two persons but that alone does not
necessarily make them partners, e.g., receipt of share or payment
by a widow of a deceased partner.
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‰‰ The
‰‰ The business must be carried on by all or any one of them acting
M
IM
for all: A partnership is based upon the idea of mutual agency.
Every partner of a firm has a dual role—the one of a principal and
the other of an agent. In other words, the law of partnership is
an extension of the law of agency. Thus, a partner can bind other
partners by his/her acts done in the ordinary course of business like
an agent. Similarly, he/she is bound by the acts of other partners as
he/she is in the position of a principal herein.
‰‰ Unlimited
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104
liability: The liability of each partner of a firm is
unlimited besides being joint and several. It implies that any single
partner may be called upon to pay the entire liability of the firm.
This is called ‘several liability’. Except for such a situation, the
liability of the partners is joint so that all of them are jointly liable
to pay the debts of the firm.
‰‰ No
separate legal entity: The partnership firm is merely an
‘association of individuals’, where the firm name is only a collective
name of those individuals; the firm does not have the status of legal
entity. Consequently, a firm has no independent legal existence of
its own apart from the persons who constitute it.
‰‰ Utmost
good faith: A partnership agreement is based on mutual
confidence and trust between partners. The partners must,
therefore, be just and honest towards other partners. They must
disclose all the facts and render true accounts relating to the
business of the firm and not make any secret profits. The failure to
observe good faith may lead to the dissolution of partnership.
‰‰ Restriction
on a partner’s transfer of interest to outsider(s)
without the consent of other partners: No partner can transfer
his/her share to an outsider without the consent of all the other
partners.
‰‰ Unanimity
of consent: No change can be made in the nature
of the business without the unanimous consent of all the partners.
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Laws Related to the Formation of Businesses 105
Types of PartnershipS
The various types of partnerships are discussed as follows:
‰‰ According
to business objective: On the basis of business
objectives, the types of partnerships are as follows:
 Partnership
at will: It is a form of business partnership that
exists on the will of the partners and there is no fixed period for
the existence of partnership.
 Particular
partnership: It is a form of business establishment
that exists for the object of conducting a particular business
venture. The partnership gets terminated automatically with
the completion of venture.
to tenure: On the basis of tenure of business, the types
of partnerships are as follows:
S
‰‰ According
for fixed term: It is a form of business partnership that is established for a fixed period of time say 2 years,
5 years, or more years. At the expiry of that period, the partnership comes to an end automatically.
IM
 Partnership
 Flexible
partnership: It is a form of business partnership that
is formed not for a particular venture or period.
‰‰ According to nature of liability: On the basis of nature of liability,
M
the types of partnerships are as follows:
 General partnership: It is a form of basic business partnership
that is formed under common law wherein every partner has
unlimited liability and equal management authority.
partnership: When one or all partners have a limited
liability to the extent of capital contribution in a business partnership, it is known as a limited partnership. In this type of
partnership, not all partners have unlimited liability.
N
 Limited
‰‰ According
to legality: On the basis of the nature of business, the
types of partnerships are as follows:
 Legal
partnership: A business partnership that is formed in
accordance with the Partnership Act of 1932 and the Indian
Contract Act is known as a legal partnership.
 Illegal
partnership: When in a business partnership, the provisions of any law get violated or when the requisite number
of partners goes below or above the minimum and maximum
limits, it is referred to as an illegal partnership.
‰‰ According
to registration: On the basis of registration, the types
of partnerships are as follows:
 Partnership
at will: When there is no duration specified for a
particular partnership, the partnership is made at will. Such a
type of partnership can be dissolved at any time by any partner
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after submitting a prior notice to the firm. Any partner on his/
her will can give notice and retire from the partnership. The
partnership is not bound or limited by the period of time.
 Partnership
for a particular period: A partnership made for
a particular period is known as a partnership for a period. The
period may be decided by the partners by mutual understanding. The term of this kind of partnership may be one year, two
years, or any other fixed period. The period of the partnership
is mentioned in the partnership deed.
 Partnership for a certain venture or purpose: This refers to a
S
partnership made for a particular purpose and gets dissolved
on the completion of that purpose. For example, if one person gets into a partnership with another person for the manufacturing and sale of paper cups, it is said to be a particular
partnership. In this case, the partnership gets dissolved on the
completion of the purpose.
IM
Partnership Deed and its Contents
M
A partnership deed is a written agreement made between partners.
This deed delineates the rights and duties of partners, the name and
objective of the partnership business, the address of the firm, and
other details. This partnership deed is the basis of the functioning of
the partnership business.
Main Contents of a Partnership Deed
The following are the main contents of a partnership deed:
‰‰ Name
and address of the firm
‰‰ Name
and address of the partners
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106
‰‰ Nature
of partnership business
‰‰ Commencement
‰‰ Partner’s
‰‰ Interest
from the firm’s capital
and loss-sharing ratio
‰‰ Salaries,
‰‰ Rules
capital
on partner’s capital
‰‰ Drawings
‰‰ Profit-
and duration of a partnership
commissions, etc., if any, payable to partners
for admission and retirement of partners
‰‰ Accounts
and audit
‰‰ Dissolution
‰‰ Conduct
of partnership firm
and management of business
‰‰ Arrangement
in case a partner becomes insolvent
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Laws Related to the Formation of Businesses 107
‰‰ Dispute
resolution in matters of dispute in the partnership affairs
‰‰ Methods
of valuation and revaluation of assets and liabilities on
admission and retirement or death of partners
Changes in the Constitution of the Firm
There are certain changes that may occur in the constitution of the
firm due to the following events:
‰‰ Retirement
of a partner: Every partner of the firm has the full
right to retire at any time during the course of the partnership.
However, in the case of a partnership at will, a prior notice has to
be given to all the remaining partners, of such retirement.
of a partner: In case any partner is found guilty of any
misconduct, the other partners may, by mutual consent, expel the
guilty partner from the partnership. The most common reason of
the expulsion of a partner is his/her involvement in unlawful acts
against the firm or the partners.
IM
S
‰‰ Expulsion
‰‰ Insolvency of a partner: When a partner is unable to pay off his/her
liabilities, he/she is said to be insolvent. Upon insolvency, he/she
ceases to be a partner from the date of his/her being adjudicated
as an insolvent.
of a partner: If one of the two partners dies, then the
partnership is said to be dissolved. However, if there are more than
two partners, the death of one of them will not lead to dissolution
of the firm, but will lead to re-constitution of the partnership firm.
N
Types of PartnerS
M
‰‰ Death
The various types of partners in a partnership are described as follows:
‰‰ Active
partner/managing partner: An active partner participates
in the functioning of the firm. He/she can act as an agent for the
other partners and bind them by such actions.
‰‰ Sleeping partner: A sleeping partner does not actively participate
in the functioning of the firm. He/she is, however, liable for the acts
of others to outside parties which are aware of his/her existence in
the firm.
‰‰ Nominal partner: A person who provides his/her name to the firm
but does not have any interest in the firm is known as the nominal
partner of the firm. The nominal partner is not entitled to the
profit-sharing of the business. In addition, he/she does not invest
his/her capital in the functioning of the business.
‰‰ Partner
for profit only: A partner who is not liable for the losses
and is entitled to a share in the profit only is known as a partner
for profit only.
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‰‰ Partner
by estoppel and partner by holding out (Section 28):
When a partner knowingly permits any other person to act as a
partner in the firm, the other person is known as a partner by
holding out. If a person himself/herself or by his/her conduct
makes others believe that he/she is a partner, then such a partner
is known as a partner by holding out or a partner by estoppel.
‰‰ Minor
partner: A minor cannot be a partner in a partnership
firm as he/she is incompetent to the contract. But he/she can be
admitted as a partner for the benefits of partnership (only for
sharing of profits and not losses).
partner: The status of a secret partner lies somewhere
between active and sleeping partner. His/her role in the partnership
is not disclosed to the outsiders. He/she has unlimited liability as
they also bear losses in the business. He/she might take part in the
working of the business.
partner: A partner who leaves the partnership firm
because of retirement, expulsion, insolvency, or death is known as
an outgoing partner.
IM
‰‰ Outgoing
S
‰‰ Secret
‰‰ Limited
partner: A partner with no personal liability attached
to the business beyond his/her original investment is a limited
partner. The limited partner gets protected from third-party
creditors because of their limited share in the partnership.
A partner may assign or associate someone for his/
her share in the partnership. A part of share can be assigned to a
stranger and that person would be treated as a sub-partner. The
firm would not have any relationship with the sub-partner. It is
between the assigning partner who is allocating his/her share and
the sub-partner.
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‰‰ Sub-partner:
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108
Rights and Duties of Partners vis-à-vis Partners
As per the Partnership Act, 1932, there are certain rules that need to
be followed by all the partners. These rules are as follows:
1. Every partner has a right to take part in the conduct of the business.
2. Every partner is bound to attend diligently to his/her duties in
the conduct of the business.
3. Any difference arising as to ordinary matters connected with the
business may be decided by a majority of partners, and every
partner shall have the right to express his/her opinion, before the
matter is decided, but no change may be made in the nature of
the business without the consent of all the partners.
4. Every partner has a right to have access to and to inspect and
copy any of the books of the firm.
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Laws Related to the Formation of Businesses 109
The following are some mutual rights of partners:
‰‰ The
partners are entitled to share the profits earned equally, and
shall contribute equally to the losses sustained by the firm.
‰‰ Where a partner is entitled to interest on the capital subscribed by
him/her, such interest shall be payable only out of profits.
‰‰ A
partner making, for the purposes of the business, any payment
or advance beyond the amount of capital he/she has agreed to
subscribe, is entitled to interest.
‰‰ The
firm shall indemnify [Section 13(e)] a partner in respect:
 of
payments made and liabilities incurred by him/her
 in
the ordinary and proper conduct of the business
doing such an act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his/her own case, under similar circumstances
IM
S
 in
The following are some individual rights of partners:
to take part in the conduct of the business [Section 12(a)]:
Every partner has a right to enter into the firm to inspect and see
the day-to-day functioning of the firm in the ordinary course of the
business. He/she can take part in the administration of the firm
and also in the decision-making of the firm.
to be informed: Every partner of the partnership firm is
authorised to be informed by the other partners about the working
of the firm. When there is a conflict in the decision-making of the
firm, all the partners have a right to be informed.
‰‰ Right
N
‰‰ Right
M
‰‰ Right
to remuneration: No partner has a right to get the
remuneration except for his/her share of profit in the firm besides
interest on capital. However, such remuneration can be provided if
there is an express contract between the partners. It is a common
practice for the partners to agree that a managing partner will
receive over and above his/her share, salary or commission for the
efforts he/she may make while conducting the business of the firm.
‰‰ Right
to share profit [Section 13(b)]: The partner has a right to
take a share of profit from the firm as decided in the partnership
deed.
‰‰ Right
to retire: Every partner of the firm has a right to retire at
any time during the course of a partnership. A prior period notice
has to be given to all the partners expressing the intention to retire
from the partnership firm.
Express and Implied Authorities of the Partners and
the Scope of Implied Authority of a Partner
A partner in the partnership firm is an agent of the firm as well as of
other partners. The general rule is that a partnership firm is bound
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110
Business Law
by the acts of partners which are done in the ordinary course of business. The authority and responsibility of a partner can be classified as
follows:
‰‰ Express
authority: Express authority of a partner is defined in
the partnership deed itself. Every partner’s liabilities and rights,
which are expressed, are mentioned in the partnership deed. The
firm is bound by all acts of a partner done within the scope of his/
her express authority.
‰‰ Implied
authority: This authority allows a partner to perform the
necessary or reasonable duties on behalf of another partner or the
partnership firm entity even though the same may not be expressly
mentioned in the partnership deed; such implied authority can be
inferred from the circumstances of the case.
S
Scope of Implied Authority of a Partner
IM
The implied authority of the partners in a partnership firm may
include within its scope:
‰‰ Making sale and purchase of moveable assets on behalf of the firm
‰‰ Raising
loans on the assets of the firm
‰‰ Receiving
and making payments to third parties
cheques, bills of exchange, and other promissory notes
on behalf of the firm
M
‰‰ Accepting
‰‰ Taking
on rent or lease the land or building for the firm
‰‰ Appointing
servants and other people for the firm
NOTE
N
Exceptions to Implied Authority of a Partner
To facilitate the concept of
limited liability in partnerships as
well, a new form of partnership
entity has been introduced
under which the liability of the
partners in a partnership firm
is also limited and such form of
organisation is called Limited
Liability Partnership.
However, a partner has no implied authority to do the following:
‰‰ Opening
a bank account on behalf of the firm in his/her personal
name or in the name of the firm
‰‰ Selling
or transferring the immovable properties of the firm
‰‰ Entering
into a partnership with other firms on behalf of the
partnership firm
‰‰ Acquiring
‰‰ Entering
3.2.3
property on behalf of the firm
into partnership in competition to partnership firm
Limited Liability Partnership (LLP) Act, 2008
A Limited Liability Partnership (LLP) is a hybrid type of corporate
structure that has the advantage and flexibility of a traditional partnership firm and features of a joint stock company. LLPs are governed
by the LLP Act, 2008 (hereinafter referred to as the LLP Act).
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Laws Related to the Formation of Businesses 111
Features Of LLP Act, 2008
The salient features of an LLP can be summarised in the following
manner:
‰‰ An LLP is a corporate body formed by any two or more persons by
subscribing their names to an incorporation document.
‰‰ On
incorporation, an LLP becomes an entity with a separate
personality and existence with perpetual succession.
‰‰ The
mutual rights and liabilities of the partners in an LLP are
governed by the LLP agreement entered between the partners,
which are subject to the provisions of the LLP Act, 2008.
LLP is a separate legal entity enjoying limited liability so that
its members are liable to the extent of the amount of contribution
made by them.
S
‰‰ An
LLP must have at least two designated partners, out of which
one must be a resident of India.
IM
‰‰ An
LLP is required to maintain the annual accounts reflecting
the true and fair position of the statements of accounts, and to
file annual statement of solvency of the LLP with the Registrar.
Its annual accounts must be annually audited and filed with the
Registrar.
‰‰ The
M
‰‰ An
winding up of an LLP will be either voluntary or by the
National Company Tribunal.
N
LLP Agreement
LLP has more formalities than a partnership firm registered under
the Partnership Act. An LLP agreement is one such formality, which
is defined as a written formal document that states the agreement
among the partners of an LLP. It delineates the duties and rights of
all partners towards the firm and towards each other. Submission of
the LLP agreement to the Registrar of Companies is mandatory
within 30 days of incorporation of LLP. In the absence of an LLP
agreement, the rights and liabilities will not apply to the firm and partners. A well-formulated LLP agreement fosters a strong foundation of
the business. It helps in clarifying the roles and responsibilities of the
partners which reduces the chances of conflicts. As per the LLP Act,
the name of the LLP firm should always end with the term LLP.
An LLP agreement states the ratio of capital invested by all the partners and their respective profit-sharing ratios. All the provisions
related to capital contribution, such as maintenance of books of
accounts or admission of a new partner into the LLP, are defined in
the LLP agreement.
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NOTE
LLP is a good hybrid of
partnership and company which
enables professional expertise
and entrepreneurial initiative to
operate in a flexible and efficient
manner.
Business Law
3.2.4
DISTINCTION BETWEEN PARTNERSHIP FIRM
INCORPORATED UNDER the PARTNERSHIP ACT
AND PARTNERSHIP FIRM INCORPORATED UNDER
THE LLP ACT
Table 3.1 distinguishes between partnership firm incorporated under
the partnership act and partnership firm incorporated under the LLP
Act:
Table 3.1: DIFFERENCE BETWEEN PARTNERSHIP FIRM
INCORPORATED UNDER THE PARTNERSHIP ACT AND
PARTNERSHIP FIRM INCORPORATED UNDER THE LLP
ACT
Partnership Firm Incorporated under the LLP Act
(LLP)
Partnership is governed under the Partnership Act, 1932.
LLP is governed under the
LLP Act, 2008.
IM
S
Partnership Firm Incorporated under
the Partnership Act
The liability of partners is
limited.
A partnership firm has no individual
existence apart from its members.
LLP is a legal entity separate
from its partners.
The registration of a partnership firm is
optional. It depends on the mutual consent of the partners to register the firm.
The registration of an LLP firm
is mandatory.
The maximum number of partners in a
partnership firm is 100.
There is no limit on the maximum number of partners.
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The liability of partners is unlimited.
Therefore, each partner is personally
liable.
N
112
There is no perpetual succession for
these partnership firms and they can
cease to exist on the death or retirement
of partners.
In an LLP, perpetual succession
continues irrespective of the
death or retirement of partners.
A partnership deed is the governing
document of a partnership firm.
An LLP agreement is the governing document in an LLP.
In a partnership, two or more individuals agree to share profit and loss mutually to carry business.
It offers the benefit of, both,
partnership and limited liability company.
Each partner can bind the firm as well
as all its partners by his/her own acts.
Each partner can bind the LLP
ONLY by his/her acts and NOT
the other partners.
3.2.5 Hindu Undivided Family (HUF) and its
Characteristics
A Hindu Undivided Family (HUF) is a unique form of business. All the
members of a joint Hindu family may get into business and such forms
of business are recognised under the law. The membership of an HUF
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Laws Related to the Formation of Businesses 113
occurs on birth in the family by default. It is governed and dictated by
the Hindu Law. The members of an HUF are headed by a ‘Karta’, and
the rest of the family members are called ‘coparceners’.
Characteristics of an HUF
The following are the characteristics of an HUF:
‰‰ Formation:
There is no complexity in the formation of an HUF as
the minimum number of people required to open an HUF is only
two and there is no maximum limit. Every member who is born
in the family becomes a part of the HUF, irrespective of his/her
willingness.
The liability of the coparceners is limited to the amount
of their share in the family property. However, the liability of Karta
is unlimited.
S
‰‰ Liability:
The entire business of an HUF is controlled by the Karta
and he/she is the sole person to take all its decisions. He/she may
choose to consult with coparceners, but he/she can also take
decisions independently.
IM
‰‰ Control:
Concept of HUF under the Hindu Marriage Act
N
M
Joint Hindu Family (JHF) is a concept under the Hindu law where
husband and wife form a JHF. They are further joined by their progeny. A JHF can enter into a business together, comprising members
of the family. Such business is taxed under the Income Tax Act as an
HUF. Before 2005, only male members of the family could be coparceners. But after 2005 Amendment to the Hindu Succession Act, 1956,
even women can be coparceners in their father’s family. Recently in
2020, the Supreme Court further clarified that any woman, whether
married or unmarried, will be a coparcener in her father’s family.
Questions have also been raised whether a woman can be a Karta.
It has been held numerous times that a woman can be a Karta in her
father’s family’s coparcenary. There have also been several instances
where a woman—the mother or eldest son’s wife or an older daughter—has played the role of Karta. Just like a male coparcener, now a
female coparcener can also seek a partition in her father’s coparcenary. A male coparcener’s wife enjoys a different position. She gets a
share in the HUF property only upon her husband’s death or when a
partition takes place; she can ask for a partition of the HUF property
in her husband’s family. As a coparcener, sons and daughters of a family automatically become members of the HUF business.
Roles, Responsibilities, and Liabilities of a Karta
Karta is the head as well as the representative of the family. He/she
acts for or on behalf of the other family members. Karta in an HUF is
the manager of the HUF business.
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Eligibility to Become a Karta
The senior most member of the family is generally appointed as the
Karta, but no one can take his/her position until he/she decides to
retire from the HUF and relinquishes all his/her rights in favour of
some other person. A Karta should be of sound mind.
Minor as a Karta
S
Normally, any member of whatever age can become a coparcener; but
when it comes to becoming a Karta, it is always the eldest member
of the family who can get to this position. However, in case HUF is
left with no other option, then the youngest or the only member left
can also be declared as the Karta. A minor can always be the Karta,
but it is compulsory that he/she should have some guardian with him/
her who is an adult and who can represent and guide him/her to take
specific decisions. With the recent amendment of including female as
Karta, scenarios of minors being Karta would not arise.
IM
The following are the liabilities of a Karta:
‰‰ Maintenance: The biggest responsibility of the maintenance falls on
M
the Karta. Though everyone works together in the family business,
but the Karta is individually responsible for the maintenance. He/
she needs to look into every matter and make sure that all the
members receive maintenance through the income received from
the property. If a member feels that his/her maintenance rights are
being hampered, then the Karta can be sued in the court of law.
‰‰ Accounts:
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114
A Karta should maintain the accounts and file tax
returns at the end of every financial year. If the Karta disobeys the
rules of maintaining the accounts, then he/she can be sued in the
court of law.
‰‰ Representative:
A Karta represents the HUF on all social, legal,
religious, and revenue-associated litigations and situations that
involve HUF’s immovable property.
‰‰ Suit:
Any suit against a Karta also binds all the members of the
HUF.
The following are considered to be the powers of a Karta:
‰‰ Power to manage the family affairs: A Karta is the head of an HUF.
Though his/her powers with the affairs related to the alienation
of property are limited, his/her powers with respect to decisionmaking are somewhat infinite when it comes to managing the
family and its related affairs. His/her rights in this regard allow
him/her to take any decision he/she wants to.
‰‰ Power
to receive and spend the family income: A power that
comes along with the authorship of the Karta is the right to manage
the income which comes in an HUF. A Karta can divide the money
amongst the members and save the rest for future use of the HUF.
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‰‰ Power
to alienate property: A Karta’s power to sell the property
of HUF is rather limited. He/she should take the permission of all
the members. He/she can be sued in case such consent has not
been taken or a person was incapable of giving his/her consent in
some case, for instance, minors. Thus, in case alienation is done
without proper authorisation, such alienation can be challenged
and the property can be recovered.
‰‰ Power to acknowledge and contract debts: A Karta is responsible
to repay all the debts of the HUF. The liability of a Karta is unlimited,
whereas the coparceners are liable to the extent of their share in
the family property.
‰‰ Power to settle family disputes: As the Karta is the eldest member
S
of the family, so if any dispute arises in the family, the same can be
resolved by the Karta.
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Coparceners
M
A coparcener is defined as a person who acquires the rights in the
HUF by birth. The coparcener has the right to enforce partition.
According to the Hindu Succession Act, 1956, every male member
born in a family is treated as a coparcener. A coparcener has a legal
right in the ancestral property as a successor. A coparcener has the
right to demand partition in the HUF. Thereafter, as per the Hindu
Succession (Amendment) Act, 2005, daughters too were considered as
the coparceners of an HUF.
N
Succession of an HUF in Case of the Death of a Karta
When a Karta dies leaving behind his/her property and wealth, the
next senior member of the family has the right to become the Karta
of the HUF. As per Section 6 of the Hindu Succession Act, 1955, Karta’s death does not result in partition. A coparcener has the right to
become the Karta of the HUF. Now, even daughters can become the
Karta of the family. Since daughters have an interest in the coparcenary property similar to that of sons, they can also continue their
father’s HUF. But a wife does not have the right to become the Karta.
Hence, the oldest member of the family becomes the Karta after the
death of the Karta.
Women Rights in aN HUF
Before 2005, only male members of an HUF used to become the Karta
and the females were not given equal status in the HUF. After 2005,
through an amendment to the Hindu Succession Act, 1956, even
females are entitled to be Karta by virtue of they having share in the
property. Earlier, only male members could be Karta, but now female
members can also act as Karta and can demand HUF partition.
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When the Karta of an HUF
enters into a partnership with
a stranger, the members of the
family do not ipso facto become
partners in that firm and they
have no right to take part in its
management or to sue for its
dissolution.
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3.2.6 DISTINCTION BETWEEN A PARTNERSHIP FIRM
INCORPORATED UNDER PARTNERSHIP ACT, 1932
AND AN HUF
Table 3.2 shows the difference between a partnership firm (under
Partnership Act) and an HUF:
Table 3.2: Difference between a Partnership
Firm (under Partnership Act) and AN HUF
Partnership firm (under Partner- HUF
ship Act)
The members of an HUF acquire
rights in the HUF by virtue of being
born in the family. Hence, an HUF
arises by operation of law.
S
A partnership is created by an
agreement.
IM
The death of a partner may lead to The death of any member does not
the dissolution of the partnership
lead to the dissolution of the HUF.
But the death of all the members
deed.
may lead to the dissolution.
All the partners equally participate The Kartas take charge and control
in the functioning of the partnerof the HUF.
ship firm.
In the case of an HUF, the Karta can
act for the other members of the
family.
In the case of a partnership firm,
the liabilities of the partners are
unlimited.
In the case of an HUF, the liabilities
of the Karta are unlimited, but the
liabilities of coparceners are limited.
M
In the case of a partnership firm,
every partner can act on his/her
own in the firm but will have to
consult with other partners from
time to time.
N
116
self assessment Questions
1. __________ refers to the type of business entity wherein an
individual starts a business with his/her own capital and manages all the operations on his/her own.
2. A partnership is a __________ between persons who have
agreed to share profits of a business.
3. A partnership between persons can be established through an
agreement which can be either written or oral.
a. True
b. False
4. Which of the following is not a type of partnership?
a. Partnership at will
b. Partnership for fixed term
c. Particular partnership
d. Partnership between minors
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5. A minor has the right to take his/her share of profit from the
business as agreed upon in the __________.
6. A partnership arises from an agreement, whether implied or
expressed.
a. True
b. False
7. Limited Liability Partnerships (LLPs) are governed by
the __________.
8. LLPs will have at least two designated partners, out of which
one should be a resident in India.
a. True
b. False
a. Karta
b. Coparcener
c. Adult
d. None of these
S
9. Who is the head of the family?
IM
10. What is the minimum number of people required to start an
HUF?
b. Two
c. Three
d. Seven
Activity
M
a. One
N
Using the Internet, identify the legal journey that led to the amendment of Hindu Succession Act, 1956 that led to allowing women a
share in the HUF property.
3.3 Companies Act, 2013
The Companies Act, 2013 has consolidated and amended the law relating to joint stock companies. It has replaced the Companies Act, 1956
with a rule-based legislation containing 470 sections across 29 chapters and 7 schedules as against 658 sections in the Companies Act,
1956. It delineates the concept of company formation and the legal
procedures that are required to start a joint stock company. In this
chapter, the ‘company’ would mean joint stock company. Since every
company is a legal entity with its own rights, it is important to know
the founding and governing principles of companies. The Companies
Act, 2013 provides for the registration of various kinds of companies
in India. It is designed to ensure enhanced disclosure norms as well
as accountability of management, stricter enforcement, protection
of minority shareholders and other investors, better framework for
investigation, and punishment for indulgence in corporate crimes.
Transparency and good governance, check on insider trading, class
action suits, periodic rotation of auditors, and induction of independent directors are some of the other significant provisions. The overall
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In a company, a shareholder has
limited liability (limited to the
extent of the share capital).
Business Law
object of the Companies Act, 2013 is to build a smooth and easy corporate environment marked by simplification and ease of doing business, which is critical for India to become more competitive.
3.3.1
Concept and Evolution of a Company
M
IM
S
As per Section 2(20) of the Companies Act, 2013, a company means a
company incorporated under this Act or under any previous company
law. A company is considered as a separate entity or an association
with a common seal, perpetual succession, and limited liability. A
company can be described as a contractual entity distinct from its
members. It has legal rights and obligations. A company is run and
governed under the Companies Act, 2013. Before independence, the
company law in India was governed by the Companies Act, 1913.
After independence, the Act underwent several amendments; and in
1956, the Act was fully revised and re-enacted as Companies Act, 1956
with several major amendments based on changing business requirements, and was recently replaced with the new Companies Act, 2013
which received the President’s assent on 29th August, 2013 and a few
provisions of the Act were brought into force on 12th September, 2013;
thereafter, from time to time, provisions of the law were brought into
force, and became applicable from the financial year 2014-15. The
Companies Act, 2013 has several major changes including higher
power for shareholders, provisions for corporate social responsibility and the establishment of National Company Law Tribunal among
others.
3.3.2 Characteristics of a Company
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118
The following are the characteristics of a company:
‰‰ Incorporated
association: A company is required to be registered
under the Companies Act, 2013 in order to function as a legal
entity. The minimum number of people required to formulate
a public company is seven and a private company is two. Every
promoter member of a company should subscribe their names in
the Memorandum of Association and also fulfil various other legal
compliances.
‰‰ Artificial
legal person: A company is artificial in nature as it is
invisible, intangible, immortal, and exists only in the realm of law.
Due to its artificial nature, it needs to be operated and managed by
the board of directors consisting of individuals.
‰‰ Separate
legal entity: A company is a legal entity separate from
its promoters or shareholders. It is an autonomous body, selfcontrolling and self-governing. The ownership of assets of the
company belongs to the company as a legal entity and not to the
shareholders. In the eyes of law, a company is a different entity
from its shareholders.
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‰‰ Perpetual
succession: A company is a stable form of organisation
unaffected by the insolvency, death, mental or physical incapacity
of its promoters or members. It can only be dissolved by the law. A
company once incorporated by registration is said to exist forever
until it is explicitly dissolved for certain reasons. The lifespan
of a company goes beyond the lifespan of any of its promoters,
managers, or shareholders. These entities keep changing, but the
company retains its identity and is said to have perpetual existence.
‰‰ Limited
liability: The liability of the members of a company
is limited to the extent of amount of their shareholdings. A
shareholder may be required to pay more than the nominal value
of shares held by him/her or the amount of guarantee, in case a
person is a member of a guarantee company.
S
‰‰ Transferability of shares: The shares or debentures of a company
IM
are considered as movable properties which can be transferred
without the permission of the company, but in a manner provided
in the Articles of Association. The right to transfer shares is a
statutory right and cannot be taken away by making any provision
to the contrary in the Articles of Association. However, a private
company imposes restrictions on transfer as per Section 2(68).
property: All the property of the company vests
exclusively in itself. The company can control, manage, and hold
the same in its own name. The members neither have ownership
rights in the company’s property (either individually or collectively)
nor do they have any insurable right in the company’s property.
The creditors of the company have a claim only against the assets
of the company, but not those of the members of the company.
to sue: Being a legal person, a company is authorised to
enforce its rights by filing cases in its own name and without the
requirement of any shareholder joining hands with it. It can also
sue any other company in court against the breach of contract.
Similarly, outside parties can sue the company in its own name for
breach of contractual or statutory duties.
N
‰‰ Capacity
M
‰‰ Separate
3.3.3 Kinds of Companies
Companies are divided into various categories based on different factors, many of which are discussed hereunder.
COMPANIES WITH LIMITED LIABILITY
There are primarily two types of companies with limited liability,
which are as follows:
1. Statutory company: A company incorporated by a particular
Act of Parliament or legislature is known as a statutory company.
All the powers, rights, responsibilities, and objects are defined
by the Act. The statutory companies are government companies
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formed by special acts of the Parliament, such as the RBI, SBI,
municipal corporations, etc.
2. Registered companies: Most other types of companies are called
‘registered companies’ since they are incorporated and registered under the Companies Act, 2013. Such companies may fall
into the following broad categories:
 Companies
limited by shares in which a shareholder’s liability is limited to the extent of the amount of his/her shareholding.
limited by guarantee in which the liability of the
members is limited to the amount of guarantee which they
have undertaken to contribute in the event of the winding up
of the company.
S
 Companies
COMPANIES WITH UNLIMITED LIABILITY
IM
Under Section 29(2) of the Companies Act, 2013 talks about companies with unlimited liability in which the company does not have any
limit on the liability of its members; every member is liable for the
debts of the company to an unlimited extent.
Classification based on number of members:
private company, which is set up with private ownership. Its
shares do not trade on public exchanges or through Initial Public
Offer (IPO). They are also known as privately-held companies.
M
‰‰ A
‰‰ A
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120
public company, which issues shares through an IPO and is
publicly traded on at least one stock exchange. Its ownership is
dispersed among the general public.
‰‰ A
one-person company, which is set up by a single individual who
is an Indian citizen or a citizen who is a resident of India for a
minimum period of 182 days in the preceding year. He/she must
submit the name of a person who will act as his/her nominee in the
event of his/her death or contractual incapacity.
‰‰ A
not for profit company set up under Section 8 for carrying on
socially beneficial activities and which cannot use its profits
for other than its objects and nor can it distribute its profits as
dividend.
The company:
 has
in its objects the promotion of commerce, art, science,
sports, education, research, social welfare, religion, charity,
protection of environment, or any such other object
 intends to apply its profits, if any, or other income in promoting
its objects
 intends to prohibit the payment of any dividend to its members
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3.3.4 Difference between a Private Company and a
Public Company
The major differences between a private company and a public company are given in Table 3.3:
Table 3.3: Difference between a Private Company
and a Public Company
S. No.
Feature
Private Company
Members
There is no limit on
the number of its
shareholders with a
minimum of seven
members.
2.
Raising capital It cannot invite public to
subscribe to its securities.
It can invite public
to subscribe to its
share capital.
3.
Transferability The right to transfer
of shares
shares by the members is
restricted by the Articles.
Its shares are freely
transferable.
4.
Privileges
All the relevant
provisions of the
Companies Act need
to be complied for
a greater level of
transparency and
compliance.
S
1.
IM
The maximum number of
its shareholders is limited
to 200 and the minimum
to 2.
Public Company
M
As there is no involvement
of public funds, private
companies are exempted
from several provisions
of the Companies Act and
several others less stringent compliances.
‰‰ Two
N
Some important exemptions and privileges of a private limited company are:
persons are sufficient to start a private company.
‰‰ Exempted from complying with the provisions of the Act regarding
the issuing of a prospectus.
‰‰ Exempted
from restrictions placed on public limited companies
with regard to kinds of share capital, voting rights, and issuing of
shares with disproportionate voting rights.
‰‰ Several
exemptions are given with respect to the appointment of
directors. For example, there is no need for the appointment of
mandatory independent directors.
‰‰ Exemptions
regarding provisions pertaining to managerial
remuneration.
‰‰ No
need to constitute an audit committee of the board.
3.3.5
Lifting the Corporate Veil
Since a company is a legal entity separate from the persons owning its
share capital or running its management, a veil is said to be created
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IM
S
between promoters, managers and shareholders, and the external
world once incorporation is done as a company under the Companies
Act. A corporate veil provides a protection shield to the members of
the company from liability connected to the company’s actions. This
corporate veil hides the persons behind the company; and as far as
the external world is concerned, it is with the company they are transacting rather than the person behind it. The liabilities of the company
are different from the liabilities of its shareholders. Hence, in every
business dispute, the courts would treat the company as an artificial
legal person that transacts with the external world and would not look
into the actual persons behind the corporate veil. Generally, the law
respects the corporate veil. But, in certain situations, the law as well
as the courts may ‘lift the corporate veil and probe the persons behind
the company and their activities’. The disregard of corporate personality is known as ‘the phenomenon of lifting of corporate veil’. The
expression ‘piercing the corporate veil’ is applied to a range of situations in which the law attributes the acts or property of a corporation
to those who control it.
The corporate veil can be lifted:
1. By means of judicial interpretation
2. Under statutory provisions
M
Table 3.4 lists the conditions under which a corporate veil can be lifted:
Table 3.4: Lifting the Corporate Veil
Conditions Under
Judicial Interpretation
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Courts can lift the corporate veil
under the following instances:
1. When the character of the company is to be investigated
2. When the company acts as an
agent of shareholders
3. When the company is formed:
Conditions Under
Statutory Provisions
Statutory provisions of the Companies Act, 2013 pertaining to the
following instances allow lifting of
the corporate veil and investigating
the persons behind the company:
1. When wind-up proceedings
throw up fraudulent activities
2. When there is a misrepresentaTo evade taxes or against revtion in the prospectus
enue interests of the govern3. Ultra vires act (beyond one’s
ment
legal power or authority)
zz To evade personal and statuto4. A holding company is required to
ry obligations
disclose the accounts of subsidizz To avoid welfare legislation
ary to its members. This amounts
to lifting of the corporate veil as
zz To divert business opportunity
holding and subsidiary compato another company
nies are separate legal entities.
4. When the company is used as a
facade to cover fraudulent and
illegal activities
zz
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3.3.6 Formation and Incorporation of a
Company—Conditions and the Process of
Incorporation
The process of formation and incorporation of a company involves
three stages, which are as follows:
1. Promotion
2. Incorporation
3. Commencement of business
Let us understand the stages in detail.
S
Promotion
Who is a ‘Promoter’?
M
IM
It is the stage prior to the incorporation and commencement of the
business by a company. Before setting up a company, an individual
called ‘promoter’ has to conceive the idea of the business and work on
its implementation. The promoter may also take the help from external entities such as functional experts in the field, managerial experts,
legal experts, technical experts, etc., towards starting the business.
The relationship between the promoter and the company is a fiduciary
relationship from the day on which he/she starts floating the company
and it continues till he/she hands over the same to the directors.
N
Before a company can be formed, somebody conceives the idea of the
business and works on that idea. The person who initiates the formation of the company with the intention of starting the business based
on his/her idea is termed as the ‘Promoter’. A promoter is a person
who forms a company and takes all the essential steps for the registration of the company.
According to Section 2(69) of the Companies Act, 2013, the term ‘Promoter’ can be defined as the following:
‰‰ A
person who has been named as such in a prospectus or is
identified by the company in the annual return in Section 92; or
‰‰ A
person who has control over the affairs of the company, directly
or indirectly whether as a shareholder, director or otherwise; or
‰‰ A
person who is in agreement with whose advice, directions, or
instructions the Board of Directors of the company is accustomed
to act.
The functions of a promoter include conceiving the business idea;
undertaking the detailed technical, economic, and commercial feasibility of the project idea; conducting negotiation with suppliers for
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business contracts; deciding on the name, location, scope of business,
etc., of the company; acquiring the business or property which the
company is to manage; getting the Memorandum and Articles of association drafted and printed; arranging for the preparation of the prospectus; raising funds for the company; and paying the preliminary
expenses.
Legal Position of a Promoter
In terms of the provisions of the Companies Act, 2013, the promoter
holds a fiduciary relationship with the company. As a person having
a fiduciary relationship, he/she has the following obligations or duties
to the company:
‰‰ Not to make secret personal profit or to engage in aggrandisement
‰‰ To
S
(increase one’s personal wealth) during promotion of the company
disclose material facts regarding the property which he/she
wants to sell to the company
to make unfair use of his/her position and to avoid doing
anything which has the appearance of fraud or undue influence
IM
‰‰ Not
‰‰ To
give the benefit of negotiations to the company
M
A promoter is liable for preliminary contracts made by him/her before
the company is incorporated and the same are adopted by the company. He/she is also liable for any frauds in the promotion of the company, omission or misrepresentation in the prospectus, and non-disclosure of secret profit made.
Incorporation
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Incorporation refers to the process of bringing the company into existence as a separate corporate legal entity. Various steps involved in
incorporating a company are as follows:
‰‰ The
promoter should apply to the Registrar of Companies (ROC)
to ascertain the availability of the company name.
‰‰ Engagement
of experts, such as chartered accountants, lawyers,
company secretaries, etc., to prepare and complete various legal
formalities.
‰‰ Drafting
of the Memorandum of Association (‘MoA’) and Articles
of Association (‘AoA’) and getting the same subscribed by the
minimum stipulated number of subscribers.
‰‰ Within
60 days of the approval of name, the promoter can apply
for registration of the company by submitting all the relevant
documents along with the prescribed fees.
‰‰ After
submission of all the relevant documents and information
required under the Act, the ROC shall scrutinise the documents
and if these are found to be in order, he/she shall register the
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details in the register and issue a ‘Certificate of Incorporation’
(with an allotment of corporate identity number) to the effect that
the proposed company has been incorporated under the Act.
Online registration of companies is also possible through similar
steps. The registration of the company should be done with the ROC
situated in the state in which the registered office is located with the
following documents and information:
‰‰ MoA
and AoA duly signed by all the subscribers (promoters).
‰‰ A declaration by a qualified person (such as an advocate, chartered
S
accountant, etc., involved in the formation of the company) and a
person named in the Articles as director, manager, or secretary
that all the requirements as per the law for incorporation of the
company have been complied with.
declaration by members subscribing to the MoA and AoA and
first directors named in the Articles that they are not convicted
in any offense or any fraud or any breach of duty under the Act
and that all the information given in the documents is true to their
knowledge.
‰‰ Address
IM
‰‰ A
for correspondence till registered office is established.
of personal details of subscribing members who have
signed the MoA and AoA and the personal details and interests of
first directors named in the Articles.
M
‰‰ Particulars
Certificate of Incorporation
N
The ‘Certificate of Incorporation’ is a legal document that brings the
company into existence from the date mentioned therein. From the
date of issuance of certificate of incorporation, the company becomes
a legal entity with separate legal personality, perpetual existence, and
limited liability. The MoA and AoA become binding upon the members and the company as if they have been signed by the company
and the members. The company can now raise the share capital to
commence its business.
Commencement of Business
The concept of Certificate of ‘Commencement of Business’ was there
in the erstwhile Companies Act, 1956 and it was also retained by the
Companies Act, 2013 under the Section 11 of the 2013 Act. However,
Section 11 was omitted (deleted) by the companies (Amendment) Act,
2015 w.e.f. 29th May, 2015.
Recently, the Companies Act, 2013 has further amended by way of
passing of ordinance by the President of India, on 2nd day of November, 2018. Declaration for commencement of business is re-introduced
by way of inserting a new Section 10A after Section 10 of the Companies Act, 2013.
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Under Section 10A of the Companies Act, 2013, a declaration is to be
issued by the directors within 180 days of incorporation of company
stating that the subscribers to the MoA and AoA of the company have
paid the value of shares so agreed by them, along with a verification of
the registered office address of the company.
Floating/Raising of Capital
Newly formed companies raise capital from the capital brought by the
promoters and their friends and families, the venture capital firms,
private equity funds, and other such special avenues available for
entrepreneurs.
S
A public limited company, which meets the eligibility conditions of
SEBI, can raise capital through any of the following methods: (1) Public offer; (2) Offer for sale; (3) Rights issue; and (4) Private placement.
A private limited company can raise equity capital through rights
issue or private placement.
IM
A public offer may be an IPO made when the company raises capital
for the first time from the capital markets or by offering the general
public to subscribe to the shares of the company in the primary market through the issue of a ‘Prospectus’.
M
Companies that have already raised equity capital from the public
before and intend to raise further equity capital with Follow on Public Offer should first mandatorily offer their existing shareholders an
opportunity to subscribe to the newly issued shares. This is the right
granted by the Companies Act, 2013 to the existing shareholders in
order to ensure that their existing proportion of the share capital with
the company is not diluted. Such issue of new shares made to the
existing shareholders is called the ‘rights issue’. It is mandatory for
the companies to make ‘rights issue offer’ to the existing shareholders
before they can raise further capital from the general public.
N
126
The method of private placement involves raising equity capital from
friends and relatives of promoters or from qualified institutional
investors in compliance with the regulations of SEBI. No public offer
is made in the case of private placement of equity shares.
3.3.7 Constitutional Documents of a Joint Stock
Company
Every company needs to maintain certain documents for its existence
and business operations. The following are the essential documents
required by a company for its existence:
‰‰ MoA
(Memorandum of Association)
‰‰ AoA
(Articles of Association)
‰‰ Prospectus
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3.3.8 Memorandum of Association (MoA)
MoA is the Charter or Constitution of a company that defines and confines the scope of business objects of the company. It is also called the
life-giving document. Since it contains the fundamental conditions on
which a company has been registered, it is also described as the constitution or charter of the company. By laying down the objects and
powers of the company, it regulates the external relationships of the
company. After registration, the memorandum becomes a public document so that any outsider dealing with the company is bound by the
terms contained in it. It, both, describes and circumscribes the scope
of a company’s business activities.
Clauses of MoA
S
The important clauses of a memorandum are briefly explained as follows:
Clause: The name of a public company registered with the
ROC should mandatorily end with the term ‘Limited’, and that of a
private company must end with ‘Private Limited’.
IM
‰‰ Name
‰‰ Domicile
Clause: This clause states the location of the registered
office of the company. It specifies the union territory or state of the
registered office. It is the second clause of the MoA.
M
‰‰ Object Clause: The Object clause states the objects of the company
‰‰ Liability
N
beyond which the company cannot do any activity. Any business
done outside the objects of the MoA will be considered illegal and
void. Objects also include anything incidental to the attainment of
the object of the company.
Clause: The Liability clause states the liability of every
member of the company. For a company limited by shares, the
liability of every member will not be more than each share’s face
value. For a company limited by guarantee, the clause defines the
liability of every individual stakeholder. For an unlimited company,
the clause wouldn’t be included as stakeholders are entirely liable
of the business.
‰‰ Subscription
or Association Clause: The Subscription clause
is the final and last clause of the MoA. It describes the reason of
subscribers to incorporate the company. It contains the address
and name of the first subscribers. Every subscriber of the company
has to purchase at least one share. There should be a minimum of
two members in case of a private company and seven in case of a
public company.
Alteration of MoA
Since MoA is one of the most important documents that functions as
the charter or constitution for the company, the alterations to the doc-
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ument are strictly regulated by the provisions of the Act. Though any
of the clauses of the memorandum can be altered, several restrictions
have been put in place. Some of the alterations require a general resolution (more than 50% majority); some alterations require a special
resolution (more than 75% majority); and others require Central Government approval in addition to a resolution.
3.3.9 ARTICLES OF ASSOCIATION (AoA)
S
AoA specifies the rules, regulations, and bye-laws for the internal
administration and management of the company. It governs the relationship between the company and its constituent members by prescribing their rights and obligations. An act of a company in contravention with the AoA is not null and void. It is merely irregular and
can be ratified by means of a special resolution.
Contents of the AoA pertain to the following subject matters:
capital and rights attached to different classes
IM
‰‰ Share
‰‰ Procedures
regarding making calls and forfeiture of shares
‰‰ Appointment
of managerial personnel, their power, rotation,
duties, etc.
‰‰ Rules regarding matters such as transfer of shares, issuing of shares,
M
general meetings, common seal, dividends and reserves, accounts
and audits, remuneration of managers, issuing of redeemable
preference shares, a lien on shares, paying commissions and fixing
rate thereof, and winding up of the company.
Importance of AoA
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MoA and AoA, once registered, binds the company and its members to
its clauses and puts them under observation. The AoA helps in overcoming the day-to-day problems and issues in the functioning of the
company. Simply put, Articles are the rules, regulations, and bye-laws
for the internal management of the affairs of the company. AoA establishes a formal and ethical relationship between a company and its
shareholders in order to bind the members to the company and the
company to its members. It constitutes a contract between a company
and its members in respect of rights and liabilities as members. Articles usually contain provisions relating to share capital and variation
of rights, transfer of shares alteration of capital, general meetings, voting rights, proceedings of the Board, dividends and reserves, winding
up, and the like.
Alteration of Articles—Manner and Effect
As per the Companies Act, 2013, a company can alter its Articles even
with a retrospective effect. AoA can be changed by passing a special
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resolution. The following are the provisions with regard to the alteration of Articles:
‰‰ AoA
can be altered only through a special resolution.
‰‰ AoA
cannot go beyond any provisions of the MoA or of the
Companies Act, 2013.
‰‰ AoA
cannot be illegal, contrary to any statute or public policy.
‰‰ Alteration in the AoA must be done in good faith and for the benefit
of the company as a whole.
‰‰ Alteration
cannot increase the liability of the existing members to
contribute to the share capital, nor can the board of directors expel
a member by altering the Articles.
listed company can alter its AoA only with the approval of
concerned stock exchange.
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‰‰ A
of AoA with the effect of converting a public company
into a private company can happen only after an approval from the
central government.
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‰‰ Alteration
Binding Force of MoA and aoa
3.3.10
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According to Section 10 of the Act, the MoA and AoA shall, when registered, bind the company and the members thereof to the same extent
as if they, respectively, had been signed by the company and each of
the members. Accordingly, both the parties are bound to observe all
the provisions of the memorandum and the Articles. The Articles bind
the company to its members, the members to the company, and the
members inter se to each other.
3.3.11
Difference between MoA AND AoA
The difference between MoA and AoA is given in Table 3.5:
Table 3.5: Difference between MoA AND AoA
S. No.
Feature
MoA
AoA
1.
Purpose
It contains the main conditions based on which
the company is allowed
to be incorporated.
These are the rules and
regulations to manage
internal affairs of the
company.
2.
Status
It is subordinate to the
Act and specifies the
limits within which the
company can operate.
Articles are subordinate, both, to the Act
and also to the MoA and
lays down rules, etc.,
for working within the
boundaries of memorandum.
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S. No.
Feature
MoA
AoA
3.
Nature
It specifies the conditions for making of contracts by outsiders with
the company.
They constitute contracts
between the company
and its members.
4.
Changes
Alterations involve
stricter conditions.
They can be frequently
altered by passing a special resolution.
5.
Ratification Acts beyond the scope of
the MoA are ultra vires
void and cannot be ratified by any means.
Acts beyond the Articles
are considered as irregular and can be ratified
later by shareholders.
Public Limited Company—Prospectus
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3.3.12
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It is a public document that invites the general public for subscription
of the share capital in a public company. The prospectus is a disclosure document inviting public to subscribe for the securities of the
company to enable the investors to take rational investment decisions,
and to protect their rights by giving various material facts and prospects about the company.
Contents of A Prospectus
M
The prospectus generally consists of the information like:
‰‰ Names
‰‰ Date
and addresses of the registered offices of the company
of opening and closing of the issue
‰‰ Details
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about underwriting of the issue
‰‰ Authority
‰‰ Capital
‰‰ Main
structure of the company
objects of the public offer
‰‰ Terms
‰‰ Main
for the issue and the details of the resolution passed
of the present issue and such other particulars
objects and present business of the company
‰‰ Schedule
of the implementation of the project
‰‰ Particulars relating to the management’s perception of risk factors
specific to the project
‰‰ Gestation
‰‰ Extent
period of the project
of progress made in the project
‰‰ Deadlines
for the completion of the project and any litigation or
legal action pending
‰‰ Disclosures
about the source of a promoter’s contribution
‰‰ Reports
by the auditor of the company with respect to its profits
and losses, assets and liabilities, etc.
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‰‰ Declaration
‰‰ Consent
about compliance with provisions of this Act
of directors, auditors, experts’ opinion, if any
Mis-statements in Prospectus and Liability
If the prospectus contains misleading information, false statements,
or omits material facts, then the directors, promoters, and others
responsible for such misleading information are liable for their mistakes under civil laws, criminal laws, and general contract law. The
shareholders also have the right of rescission of the contract and the
right of action for damages for fraud against the company. Directors,
promoters, experts, and others who authorised the issue of prospectus
are also liable to compensate shareholders for damages.
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Private Placement
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A company making private placement shall issue private placement
offer and application in the form and manner prescribed to identified
persons, a select group of people only. The offer or invitation to subscribe shall be made through private placement offer-cum-application
that satisfies all the conditions of Section 42 of the Companies Act,
2013. A company issuing securities under this section shall not release
any public advertisements or use media.
3.3.13 Raising Capital Using Shares and
Debentures
N
A company can raise capital by issuing shares and through borrowings. A huge amount of capital is required to run a business. Debt
and equity are the two ways through which a company can fund its
operation. The mix of debt and equity is a cost-effective way of corporate financing. Shares are used to raise the capital that is owned
by the company’s shareholders. On the other hand, debentures as a
debt instrument are a secured way of raising capital with a fixed rate
of interest.
Share Capital—Authorised Share Capital, Issued
Capital, and Subscribed Capital
Share is the interest of a shareholder in a company. Though measured
in monetary terms, it consists of a bundle of rights and liabilities which
entitle a holder not only to participate in profits and assets, but also
to enjoy various rights conferred by the Companies Act, 2013. A share
is a fractional part of the share capital of the company. The share of a
member is a movable property transferable in a manner mentioned in
the Articles. It is incorporeal in nature, which is enforceable only by a
legal action. Let us understand the types of share capital:
‰‰ Authorised
capital: It is the maximum amount of share capital
that a company can issue. It is known as the registered or nominal
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capital that is mentioned in the MoA as it is the amount of capital
that a company is authorised to raise from the public by issuing
shares.
‰‰ Issued capital: It is the part of the authorised capital that is issued
to the public for subscription.
‰‰ Subscribed
capital: It is the portion of the issued capital that is
subscribed or paid by the public.
Types of Shares
There are two major types of shares: equity shares and preference
shares. The description of these types is as follows:
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1. Equity shares (or ordinary shares), apart from the rights mentioned above, give its owner the right to vote during resolutions
passed in company’s general meetings, thereby giving him/her
the right to participate in the decision-making of the management. Other characteristics of ordinary equity shares are as follows:
 Owners
of equity shares are entitled to dividends out of profits as declared in an annual general meeting.
the purposes of dividend and repayment of capital, they
rank after preference shares. Dividends can be declared only
after dividends are paid for preference shareholders.
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 For
 Companies
Act, 2013 also allows for the issuing of equity
shares with differential rights with regard to dividend and
voting rights.
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 Upon
winding-up, equity shareholders have a claim over
capital, next in line to preference shareholders.
2. Preference shares are those shares which carry a preferential
right as regards the payment of dividend and repayment of capital (if and when the company is wound up). In general, preference shares are entitled to a fixed amount of dividend (unlike
ordinary equity shares where the dividend may be higher, lower,
or nil depending on profits made).
Exhibit
Types of Preference Shares
The following are the different types of preference shares depending on how the dividend is paid over the years:
‰‰ Cumulative
and non-cumulative preference shares: Cumulative shares are the kind of shares that provide the shareholder
fixed dividend amount each year from the company’s net profit; and if the dividend is not paid in any year, it will be paid in
subsequent years as the unpaid dividends are cumulated over
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years. However, in case of non-cumulative preference shares,
if it fails to pay the dividend on such preference share in any
year, then such dividend cannot be claimed by the shareholder
in future.
‰‰ Participating
and non-participating preference shares:
These shares have a right to participate in the surplus profit
after dividend has been paid to the equity shareholders. This
means these shareholders get their fixed rate of dividend and
shall also have the right to share in surplus, along with equity
shareholders. Non-participating preference shareholders do
not get a share of the surplus profits.
and irredeemable preference shares: As per
Section 55 of the Companies Act, 2013, a company can issue
redeemable preference shares if its AoA authorises it. A
company cannot issue any irredeemable preference shares.
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‰‰ Redeemable
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Debentures
N
Features of Debentures
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Debentures are the instruments of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.
‘Debenture includes debenture stock, bond, or any other instrument
of a company evidencing a debt, whether constituting a charge on
the assets of the company or not. Debentures can be secured or unsecured. Also, it can be convertible or non-convertible. Debentures do
not offer voting rights.
The following are some features of debentures:
‰‰ Fixed
rate of interest: Debenture holders are prioritised over
shareholders for the payment of interest. They receive a fixed rate
of interest. Debentures enforce a legal obligation on the company
to pay first the interest on the due dates irrespective of the level of
earning.
‰‰ Maturity:
Debentures offer long-term funds to the company. The
maturity of debentures comes after a specific period. This form of
borrowings has to be paid at a definite stipulated time. On the date
of maturity, the company has to pay back the principal amount;
otherwise, the debenture-holders have the right to ask to enforce
winding up of the company.
‰‰ Claims
on assets: Debenture-holders have a right to claim on the
assets of the company. They are given preference to be paid first
before paying back to preference or equity shareholders at the
time of liquidation of the company.
‰‰ Call
feature: A call feature offers at the time of the issuance of
debentures that entitles the company to redeem its debentures
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before the maturity date at a certain price. The call price is usually
more than the issue price.
‰‰ Control: Debenture-holders are considered as company’s creditors.
They do not have any control over the managerial operations and
voting rights. At the time of liquidation, the company has prior
claims over shareholders.
Difference between Shares and Debentures
Table 3.6 shows the difference between shares and debentures:
Table 3.6: Difference between Shares
and Debentures
Shares
Debentures
Debenture-holders are considered
as the creditors of the company.
Dividend is paid only if the company earns sufficient profit.
It is mandatory to pay interest to
debenture-holders irrespective of
profit or loss.
Shareholders bear high risk as
shares are unsecured in nature.
Debenture-holders bear less risk as
debentures are secured in nature.
They have voting rights and attend
the general meetings of the companies.
They do not have voting rights and
are not authorised to attend the
general meetings of the companies.
Any interest that has to be paid to
the shareholders will be paid only
after all the other claims have been
settled.
Interest has been paid first and
foremost to debenture-holders.
Shareholders can convert their
shares into debentures.
Debenture-holders can never convert their debentures into shares.
Repayment of shares is done after
the payment of all the liabilities.
Repayment of debentures is given
priority over shares.
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Shareholders are considered as the
owners of the company.
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3.3.14
MEMBERSHIP (OWNERSHIP) AND MANAGEMENT
A person can become a member of a company by entering his/her
name in the register of members, or by subscribing to the MoA, or
by transfer of shares, or by application and allotment of shares, or by
succession and by estoppel; or acquiescence. Every registered shareholder is a member. However, every member may not be a shareholder.
An individual can be considered as a member without holding shares.
The following are the rights of a member in a company:
‰‰ Right to obtain the share certificate from the company and his/her
name registered in the register of members
‰‰ Right
to receive the notice of general meetings and voting rights
‰‰ Right
to receive the dividend that is declared by the company
‰‰ Right
to obtain the copy of MoA or AoA
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‰‰ Right
to obtain a copy of minutes of general meeting
‰‰ Right
to vote at meetings
‰‰ Right
to appoint directors
‰‰ Right
to inspect the statutory books of company
Membership and Rights of Members
The following are the members and their rights:
‰‰ Shareholders:
The most important entities of a company are
shareholders. Shareholders are considered as the owners of the
company. They have voting rights and play a pivotal role in the
working of the company.
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‰‰ Separation of ownership and management: Though a company is
M
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owned by shareholders, they are not involved in the management
of its business. Shareholders, as principals, set the objectives
and goals for the company through their agents in terms of their
representatives. The representatives are the directors of the
company who, in turn, appoint managers to run the company.
In every company, there is the separation of ownership and
management. The management of the company is handled by
the board of directors, whereas ownership lies in the hands of
shareholders. The shareholders do not have the right to take
part in the management activities as the decisions related to the
management of the company are taken by the board of directors.
of directors: The board of directors mainly handles the
managerial role of the company. It has powers, on behalf of the
company, to borrow, lend, or invest money in accordance with
the provisions of the Act in this regard, which they can delegate
to other managerial personnel. In accordance with this power,
the company can make an arrangement with bankers to borrow
money by way of overdraft, cash credit, and other types of loans.
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‰‰ Board
The Companies Act, 2013 attempts to codify the duties of directors,
including (but not limited to) the following: They are required to
(a) act in good faith and in the best interest of the company, (b) not
to have direct or indirect conflict with the interests of the company,
and (c) exercise duties with diligence and reasonable care. The
Companies Act, 2013 declares that it would be a punishable offence
to commit a breach of those duties. The liability of the director in
default for contravention shall not be less than ` 1,00,000, which
may extend to ` 5,00,000.
‰‰ Key managerial persons: Key managerial personnel, in relation to
a company, means:
 the
Chief Executive Officer (CEO) or the managing director or
the manager
 the
company secretary
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 the
whole-time director
 the
Chief Financial Officer
 such
other officers as may be prescribed by the Companies
Act, 2013 from time to time
3.3.15 Corporate Governance and Corporate
Social Responsibility (CSR)
M
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Corporate Governance refers to the processes, mechanism, principles, and structure by which the business and affairs of the company are directed and managed and governed effectively. Its goal is
to enhance long-term shareholder value through improving corporate
performance and accountability while taking into account the interest
of other shareholders. The structure of corporate governance defines
the relations and the respective rights and responsibilities of the board
of directors, managers, and shareholders. This structure further aids
in formulating the rules and procedures to make decisions on corporate affairs as it offers the structure through which the company
objectives are set, as well as the means of attaining and monitoring the
performance of those objectives. The fundamental concern of corporate governance is to ensure the conditions whereby an organisation’s
directors and managers act in the larger interests of the organisation
and its shareholders in particular and stakeholders in general, and to
ensure the means by which managers are held accountable to capital
providers for the use of assets. In the framework of corporate governance, the issues of fiduciary duty and accountability are often discussed. It allows a more constructive and flexible response to raise
standards in running and managing a company as opposed to strict
statutory requirements. The Companies Act, 2013 is the foundation
upon which corporate governance is built. It provides the rules for the
boards of directors and their shareholders, the meaning of accountability for the exercise of corporate economic power, and the remedies
and punishments for negligent, irresponsible, and fraudulent abuses
of that power.
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Corporate Social Responsibility (CSR) is the commitment of businesses to behave ethically and to contribute to sustainable economic
development by working with all relevant stakeholders to improve
their lives in ways that are good for business, the sustainable development agenda, and society at large. In the emerging markets, businesses have started realising the benefits attained out of CSR initiatives as it indirectly improves the quantified revenue and market
access, productivity, and risk management.
Kotak Committee Report and its Implications on
Corporate Governance
The SEBI Committee was formed on corporate governance on
2nd June, 2017 under the chairmanship of Mr. Uday Kotak who was
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the executive vice chairman and managing director of Kotak Mahindra Bank. The aim of formulating such a committee with different stakeholders from industry, government, stock exchange, etc.,
was to improve the standards of corporate governance in India.
The following issues were recommended to this committee for
reference:
‰‰ Ensuring
independence in spirit of Independent Directors
and their active participation in functioning of the company;
Improving safeguards and disclosures pertaining to Related Party
Transactions;
‰‰ Issues
in accounting and auditing practices by listed companies;
‰‰ Improving
effectiveness of Board Evaluation practices;
issues faced by investors on voting and participation
in general meetings;
‰‰ Any
and transparency-related issues, if any;
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‰‰ Disclosure
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‰‰ Addressing
other matter, as the Committee deems fit, pertaining to
corporate governance in India.
‰‰ Role
N
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This committee received the comments from Ministry of Finance and
Ministry of Corporate Affairs. The report of Kotak Committee on corporate governance enforced some salient amendments in SEBI Regulations. SEBI followed this by amendments to the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR
Regulations’) on May 09, 2018 and through issuance of a circular SEBI/
HO/CFD/CMD/CIR/P/2018/79 on May 10, 2018 (‘May 10 Circular’). The
amendments to the SEBI LODR Regulations, unless specified otherwise, were to come into force with effect from April 1, 2019. Some of
the amendments were as follows:
and composition of the board of directors: There has to be
a proper representation of the board by appointing six directors
and maximum number of directorships an individual can take is
reduced to seven.
‰‰ Compulsory woman director: In order to ensure gender diversity,
one woman director needs to be present as director. In April,
2019, this amendment was applicable on top 500 listed companies.
From April, 2020 onwards, it became applicable on top 1000 listed
companies.
‰‰ Disclosure
and transparency: The information related to the
holder of depository receipts, institutional/investors meet, all
credit ratings obtained by the entity, key changes in financial
parameters, long-term and medium-term strategies, utilisation of
proceeds Private Investment or Qualified Institutional Placement
(QIP) and disqualification of directors need to be disclosed.
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IMPLICATIONS OF NOT FOLLOWING CORPORATE
GOVERNANCE—EXAMPLES
One of the scams that strengthened the need for corporate governance
is listed as follows:
‰‰ UCO
Bank Security Scam carried out by Harshad Mehta in the
(Year 1992)
UCO Bank Security Scam Carried out by Harshad Mehta in the
Year 1992
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Mumbai, December 4: Five top bank officials, including former
UCO Bank chairman and managing director K Margabandhu and an
employee of the stock broker late Harshad Mehta were convicted in a
1992 securities scam case. A special court sentenced them to rigorous
imprisonment ranging from six months to three years against the systematic fraud committed by Harshad Mehta in the Indian stock market. The entire security system of the Indian stock market collapsed
as a result of a fraud of over ` 1000 crore from the banking system of
India to buy stocks on the Bombay Stock Exchange. The officials of
UCO Bank in this case illegally borrowed ` 40 crore in money market
and placed the funds in the hands of late Mr. Mehta for his own use.
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Justice DK Deshmukh sentenced Mr. Margabandhu and R Venkatkrishnan, former general manager of UCO Bank, to six months’ rigorous imprisonment and fined them ` 1 lakh each for conniving with
other officials to place public funds amounting to ` 40 crore in the
hands of late Mr. Mehta.
C Ravi Kumar, assistant general manager, National Housing Bank,
was sentenced to three years RI while Suresh Babu, assistant manager of the same bank, was given one year RI.
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SV Ramanathan, AGM, UCO Bank, was sentenced to one-month jail
term while Atul Parekh, employee of late Mr. Mehta, was sent to prison
for 15 days. Mr. Mehta died during the trial and hence the case against
him was abated.
All the public servants accused were asked to pay a fine of ` 1 lakh
each. They were convicted of offences under 120-B IPC (conspiracy),
409 IPC (criminal breach of trust), and Section 13(2) read with Section
13(1) (D) of PCA. CBI registered the case in June 1992 against the
accused.
The failure of corporate governance is evident in this case as diversion
of funds was acknowledged to unrelated purposes—lack of security
and management, bribing officials, and bringing forth unaccounted
money to gain special business advantages and manipulating the balance sheet to show a false financial picture of the organisation.
Source: http://www.financialexpress.com/news/5-bankers-harshad-staff-convicted-in-92-scamcase/76281 [Retrieved on DD-MM-YYYY]
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CSR Provisions in the Companies Act, 2013
CSR refers to the self-regulatory measures taken by companies to perform philanthropic practices for societal and environmental welfare.
The term CSR has been defined under the CSR Rules vide notification dated 27th February, 2014 which includes but is not limited to:
The projects or programs relating to activities specified in the Schedule; or projects or programs relating to activities undertaken by the
Board in pursuance of recommendations of the CSR Committee as
per the declared CSR policy subject to the condition that such policy
covers subjects enumerated in the Schedule.
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The Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules)
which has come into effect from 1st April, 2014.
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Section 135 of the Companies Act provides the threshold limit for
applicability of the CSR to a Company, i.e.,
(a) net worth of the company to be ` 500 crore or more
(b) turnover of the company to be ` 1000 crore or more
(c) net profit of the company to be ` 5 crore or more
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Further, as per the CSR Rules, the provisions of CSR are not only
applicable to Indian companies, but also applicable to branch and
project offices of a foreign company in India.
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Every qualifying company requires spending of at least 2% of its average net profit for the immediately preceding 3 financial years on CSR
activities. Further, the qualifying company will be required to constitute a committee (CSR Committee) of the Board of Directors (Board)
consisting of 3 or more directors. The CSR Committee shall formulate and recommend to the Board a policy which shall indicate the
activities to be undertaken (CSR Policy), recommend the amount of
expenditure to be incurred on the activities referred, and monitor the
CSR Policy of the company. The Board shall take into account the
recommendations made by the CSR Committee and approve the CSR
Policy of the company.
Assessing Impact of CSR on Society—Examples
Firms like Johnson & Johnson, a global giant focuses on reducing
the impact on the planet for last three decades. They have taken various initiatives to provide safe water to communities and offer economical alternate to electricity. Also, companies such as Google, Ford,
and Microsoft take environment-friendly initiatives. Governments
are also realising the importance of CSR as it is a cost-effective and
sustainable development strategy. Government as a component of its
national competitiveness strategies attracts foreign direct investment
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and positions its exports in global markets, also motivating the firms
to perform CSR. There is a significant opportunity for the public sector to harness business enthusiasm for CSR to help achieve its goal of
reducing poverty.
For example, Oil and Natural Gas Corporation (ONGC) Ltd. as a
responsible corporate citizen is focused on the promotion of vocational education, health care, and entrepreneurship in the community
coupled with initiatives in water management and disaster relief in
the country.
self assessment Questions
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11. A technology company that raised huge capital with the
promise of changing people’s lives with innovative technical solutions went bankrupt due to faulty technology, which
was unearthed much later. Customers suffered huge personal
losses and damages due to faulty products produced by the
company. Customers sued the company for getting compensation for damages suffered. In this case,
a. the shareholders who were instrumental in setting up the
company were also liable to pay for damages, if any, awarded by courts
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b. promoter shareholders are liable to compensate monetarily the affected consumers
c. compensation cannot go beyond the proceeds of the sale
of assets of the company after paying creditors, and shareholders are not liable in any way
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d. All of these
12. The term ‘corporate veil’ means
a. separation of the company as a separate legal entity from
that of persons behind it
b. the protection offered to consumers dealing with the company
c. perpetual existence of the company
d. None of these
13. The partnership form of business can lead to unlimited liability for partners.
a. True
b. False
14. The legal provisions regarding private limited companies are
less strict than public limited companies. Choose the best reason from the given choices:
a. Private limited companies have a limited number of shareholders.
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b. Private limited companies cannot raise capital from the
general public.
c. Private limited companies tend to be family businesses.
d. None of these
15. Courts can look into the persons behind a company, such as
promoters, directors, or managers in the following cases:
a. Courts can always probe into persons behind a company
as a company is an invisible artificial person in the eyes
of law.
b. Courts can probe into the persons behind the company under some specific statutory provisions.
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c. Courts have to treat a company as an artificial legal person
and can probe into the persons behind the company only
in case of fraudulent or illegal activities, and misdeeds.
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d. Both b. and c.
16. Choose the wrong statement with regard to the term ‘promoter’ of a company.
a. A promoter is a person who is identified so in the prospectus.
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b. A promoter is a person who has a control over the affairs of
the company.
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c. A promoter is a person who instructs and advises the
Board of Directors.
d. A promoter of the company cannot reimburse or remunerate himself/herself once the company is incorporated.
17. Which of the following documents should be registered with
the Registrar of Companies during the incorporation of a company?
a. Prospectus
b. Memorandum of Association
c. Articles of Association
d. Both b. and c.
18. Which of the following statements is true with regard to the
Memorandum of Association?
a. A company is not restricted to the scope of activities mentioned in the memorandum.
b. The law does not require anyone dealing with the company to know the contents of the memorandum beforehand.
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c. Liability clause of the memorandum states the nature of
liability of members.
d. The doctrine of indoor management requires external
people to be aware of internal management of the company before entering into any contract.
19. Which of the following clauses of a memorandum can be
altered with an ordinary resolution?
a. Name clause
b. Objects clause
c. Increase in the authorised share capital
d. Change in the scope of business activities
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20. The main purpose of the Articles of Association is:
a. To define the scope of business activities of the company
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b. To define the organisational structure of the company
c. To stipulate the rules, regulations, and bye-laws regarding
internal management
d. None of these
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21. It is more difficult to alter the clauses of the Articles of
association than the clauses of the Memorandum of Association.
a. True
b. False
22. The Memorandum of Association and Articles of Association
bind a company and its members as if the company and the
members have signed a contract to observe the clauses of
these documents.
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a. True
b. False
23. The doctrine of constructive notice is not strictly followed by
the courts in India.
a. True
b. False
24. Which of the following statements is true with regard to a prospectus?
a. It is a document meant to invite the general public to subscribe to the new issue of shares.
b. It should be filed with the Registrar through a lead merchant banker.
c. The contents of a prospectus should follow the relevant
provisions of the Companies Act and SEBI regulations.
d. All of these
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25. What does the golden rule of a prospectus state?
a.The pricing of shares should always be at a discount to fair
value.
b. It should contain only minimal information as required by
law.
c. It should make statements with scrupulous accuracy and
avoid statements which are not strictly correct and, thereby, reflect the true nature of the company’s venture.
d. None of these
26. Choose the right statement(s) with regard to the members of a
public limited company.
S
a. All the shareholders of a public limited company are its
members.
IM
b. Those who are listed as members in the memorandum can
only be termed as its members and not all shareholders.
d. Both a. and c.
Activity
M
c. Those who are registered as members (or beneficial owners in depositories) with the registrar of companies are its
members.
N
Using secondary sources of information, find the amendments done
in the Companies Act, 2013.
3.4 Summary
‰‰ Sole
proprietorship refers to the type of business that is operated
by a single person, though he/she may take the help of his/her
family members for the purpose of running it.
‰‰ A
sole proprietorship is the best option for a business in which
investment and risks associated with it are few, the nature of
business is simple, decision-making is simple, and customers are
in direct contact with the business. Partnership is ‘the relationship
between persons who have agreed to share the profits of a business
carried on by all or any one of them acting for all’.
‰‰ A
partnership is based upon the idea of mutual agency. Every
partner of a firm has a dual role—the one of a principal and the
other of an agent. In other words, the law of partnership is an
extension of the law of agency.
‰‰ A
partnership deed is a written agreement made between the
partners, which delineates the rights and duties of the partners,
NMIMS Global Access - School for Continuing Education
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Business Law
the name and objective of the partnership business, the address of
the firm, and other details.
‰‰ A Limited Liability Partnership (LLP) is a hybrid type of corporate
structure which has the advantage and flexibility of a traditional
partnership firm and features of a company.
‰‰ Karta is the head as well as the representative of a Hindu Undivided
Family (HUF). He/she is the manager of the HUF business and can
act for or on behalf of the other family members.
‰‰ A
company is considered as a separate entity or an association
with a common seal, perpetual succession, and limited liability.
company is required to be registered under the Companies Act,
2013 in order to function as a legal entity. The minimum number
of people required to formulate a public company and a private
company are seven and two, respectively.
company is artificial in nature as it is invisible, intangible,
immortal, and exists only in the contemplation of law. Due to its
artificial nature, it needs to be operated by the Board of Directors
consisting of individuals.
IM
‰‰ A
S
‰‰ A
‰‰ The
two major kinds of companies are statutory companies and
registered companies.
‰‰ Before setting up a company, an individual called ‘promoter’ has to
M
conceive the idea of the business and work on its implementation.
‰‰ The
N
144
‘Certificate of Incorporation’ is a legal document that brings
the company into existence from the date mentioned therein. From
the issue date of the certificate of incorporation, the company
becomes a legal entity with separate legal personality, perpetual
existence, and limited liability.
‰‰ A
new public company or a company with no track record of
profits and not meeting the other similar eligibility conditions as
prescribed by regulations of the Securities and Exchange Board
of India (SEBI) cannot raise equity capital from the public by
floatation of equity shares in the capital market.
‰‰ The
Memorandum of Association (MoA) is the charter of the
company that defines and confines the scope of business objects of
the company. It is also called the life-giving document.
‰‰ The doctrine of indoor management provides that ‘though a person
is presumed to have the knowledge of memorandum and Articles,
it is not required of him/her to enquire into the regularity of the
indoor proceedings’.
‰‰ Share
is the interest of a shareholder in a company. Though
measured in monetary terms, it consists of a bundle of rights and
liabilities which entitle a holder not only to participate in profits
and assets, but also to enjoy various contractual rights conferred
by the Act.
NMIMS Global Access - School for Continuing Education
Laws Related to the Formation of Businesses 145
‰‰ Debentures
are the instruments of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.
The provision of debentures is specified in Section 2(30) of the
Company Law.
‰‰ Corporate
Governance refers to the processes, mechanisms,
principles, and structures by which the business and affairs of the
company are directed and managed and governed effectively. Its
goal is to enhance long-term shareholder value through improving
corporate performance and accountability while taking into
account the interest of other shareholders.
Social Responsibility (CSR) is the commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all the relevant stakeholders
to improve their lives in ways that are good for business, the sustainable development agenda, and society at large.
S
‰‰ Corporate
‰‰ Board
IM
key words
of Directors (BOD): A collective body of directors of a
company
‰‰ Insolvent:
on him
A person who is unable to pay off the liabilities due
M
‰‰ Joint stock company: A separate legal entity in which a member
has a separate status as that of the company
‰‰ Paid-up share capital: The aggregate amount of money credited
‰‰ Voting
N
as paid-up is equivalent to the amount received as paid-up in
respect of shares issued and also includes any amount credited
as paid-up in respect of shares of the company, but does not
include any other amount received in respect of such shares by
whatever name called
right: The right of a member of a company to vote in
any meeting of the company or by means of postal ballot with
respect to the affairs of the company
3.5 Descriptive Questions
1. Describe the legal position of a minor in a partnership firm. What
are his/her rights and liabilities?
2. Define the concept of LLP under the Limited Liability Partnership Act, 2008. What is the legal nature of an LLP?
3. Define the concept of an HUF. Explain the characteristics of an
HUF in detail.
4. What are the important legal characteristics of companies as per
the Companies Act? Explain the concept of limited liability and
perpetual existence of companies.
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Business Law
5. What are the different kinds of companies that can be incorporated under the Companies Act, 2013?
6. What are the steps involved in incorporating a company?
7. Explain the purpose and contents of the Memorandum of Association and Articles of Association of a company.
8. Explain the concept of shares, different types of shares, and
rights of shareholders.
9. Write a short note on corporate governance and corporate social
responsibility.
3.6 Answers and Hints
Topic
Q. No.
M
Companies Act,
2013
Answer
1.
Sole proprietorship
2.
legal relation
3.
a.
True
4.
d.
Partnership between minors
5.
partnership deed
6.
a.
7.
Limited Liability Partnership Act, 2008
8.
a.
True
9.
a.
Karta
10.
b.
Two
11.
c. Compensation cannot go beyond the
proceeds of the sale of assets of the
company after paying creditors and
shareholders are not liable in any way.
12.
a. Separation of the company as a separate legal entity from that of persons
behind it
13.
a. True
14.
b. Private limited companies cannot
raise capital from the general public.
15.
d.
IM
Unincorporated
and Incorporated
Forms of Business
S
ANSWERS FOR SELF ASSESSMENT QUESTIONS
N
146
True
Both b and c
NMIMS Global Access - School for Continuing Education
Laws Related to the Formation of Businesses 147
Q. No.
Answer
16.
d. A promoter of the company cannot
reimburse or remunerate himself/
herself once the company is incorporated.
17.
d.
18.
c. Liability clause of the memorandum
states the nature of liability of members
19.
c.
20.
c. To stipulate the rules, regulations, and
bye-laws regarding internal management
21.
b.
False
22.
a.
True
23.
b.
False
24.
d.
All of these
25.
c. It should make statements with scrupulous accuracy and avoid statements
which are not strictly correct and,
thereby, reflect the true nature of the
company’s venture.
26.
d. Both a and c
Both b and c
IM
S
Increase in authorised share capital
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Topic
HINTS FOR DESCRIPTIVE QUESTIONS
N
1. The roles, duties, and rights of a minor are not similar to those of
other partners. These are also different before and after the date
of maturity of the contract. Refer to Section 3.2 Unincorporated
and Incorporated Forms of Business
2. The Limited Liability Partnership (LLP) is an innovative type of
corporate structure which has the advantage and flexibility of a
partnership. The cost of developing an LLP and the compliance
costs of the LLP are relatively lower. Refer to Section 3.2 Unincorporated and Incorporated Forms of Business
3. A Hindu Undivided Family (HUF) is a unique form of business
entity restricted to India. It is formed between all the members
of an HUF including females. Refer to Section 3.2 Unincorporated and Incorporated Forms of Business
4. Limited liability, definition, incorporation, etc., are some major
characteristics of a company. Refer to Section 3.3 Companies
Act, 2013
5. The two major kinds of companies are statutory companies and
registered companies. The statutory companies are government
companies formed by special acts of the Parliament. Refer to
Section 3.3 Companies Act, 2013
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Business Law
6. Incorporation refers to the process of bringing the company into
existence as a separate corporate legal entity. Refer to Section
3.3 Companies Act, 2013
7. The Memorandum of Association is the charter of a company
that defines and confines the scope of business objects of the
company. Refer to Section 3.3 Companies Act, 2013
8. A share refers to the share of equity capital contributed by a
member to the share capital of a company represented by the
certificate of shares. Refer to Section 3.3 Companies Act, 2013
S
9. The Corporate Governance structure specifies the relations, and
the distribution of rights and responsibilities, among primarily
three groups of participants, viz., the Board of directors, managers, and shareholders. Refer to Section 3.3 Companies Act, 2013
3.7 Suggested Readings & References
IM
Suggested Readings
‰‰ Pathak,
A. (2021). Legal Aspects of Business. Tata McGraw-Hill.
‰‰ Ramaiya
(Revised by Arvind P Datar, Balasubramanian S). (2014).
A Ramaiya Guide to the Companies Act, 18th Edition. Lexis Nexis.
M
E-References
‰‰ Indian
N
148
Partnership Act, 1932 | Bare Acts | Law Library |
Advocate Khoj (2018). Retrieved on DD-MM-YYYY from http://
www.advocatekhoj.com/library/bareacts/partnership/index.
php?Title=Indian%20Partnership% 20Act,%201932
‰‰ Satapathy,
S. (2018). Meaning of HUF—Hindu Undivided Family.
Retrieved on DD-MM-YYYY from http://incometaxmanagement.
com/Pages/HUF/1-Meaning_of_HUFHindu_Undivided_Family.
html
‰‰ (2020).
Retrieved 26 October 2020, from http://www.caaa.in/
resource/Image/11_cos_act_2013.pdf
‰‰ Companies Act 2013—Salient Features of the Indian Companies Act,
2013 [UPSC GS-II]. (2020). Retrieved on 26th October, 2020 from
https://byjus.com/free-ias-prep/indian-companies-act/
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C
h
4
a
pt
e
r
LAWS THAT COMMONLY AFFECT BUSINESSES
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Introduction
Negotiable Instruments Act, 1881
4.2.1
Scope, Features and Importance of Negotiable Instruments Act, 1881
4.2.2
Types of Negotiable Instruments
4.2.3Recent Amendments in the Negotiable Instruments Act, 1881 and their
Impact
4.2.4
Payment and Settlement Systems Act, 2007 and its Features
4.2.5Penalties and Punishment under Negotiable Instruments Act, 1881 and
Payment and Settlement Systems Act, 2007
Leading Case Studies
4.2.6
Self Assessment Questions
Activity
4.3
Intellectual Property Law
4.3.1
What are Intellectual Property Rights (IPRs)?
4.3.2
Impact of IPR
4.3.3
Leading Case Laws in IPR
Self Assessment Questions
Activity
Prevention of Sexual Harassment
4.4
4.4.1
What is Sexual Harassment?
4.4.2Judgment – Vishakha vs. State of Rajasthan
4.4.3The Sexual Harassment of Women at Workplace (Prevention, Prohibition
and Redressal) Act, 2013
4.4.4Committee on Prevention of Sexual Harassment – Appointment, Members, Procedures and Actions to be Taken
4.4.5
Impact of Sexual Harassment Cases on Indian and Foreign Organisations
Self Assessment Questions
Activity
N
M
4.1
4.2
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Contents
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Business Law
CONTENTS
S
M
4.6
4.7
4.8
4.9
Information Technology Law
Information Technology Act, 2000 and its Objectives
4.5.1
4.5.2
Features of the Information and Technology Act, 2000
4.5.3Scope and Major Provisions under the Information and Technology Act,
2000
E-Commerce
4.5.4
4.5.5
E-Governance – Meaning and Status in India
4.5.6
The Information Technology Amendment Act, 2008
Cybercrime
4.5.7
Self Assessment Questions
Activity
Summary
Descriptive Questions
Answers and Hints
Suggested Readings & References
IM
4.5
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150
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LAWS THAT COMMONLY AFFECT BUSINESSES
Introductory Caselet
TOYOTA AND ITS PRIUS TRADEMARK, NO PASSING OFF
ACTION WITHOUT PRIOR GOODWILL, REPUTATION
AND MARKET POPULARITY
IM
S
Toyota launched the world’s first commercial hybrid car called
‘Prius’ in Japan in 1997, which was subsequently introduced in
other countries like UK, USA, Australia, etc., in 2001. The trade
name ‘Prius’ was initially registered in Japan in 1990 followed
by registration in 28 other countries. The car was, however, not
introduced in India till 2009. Considering the trade name to have
become well established, it thought itself as the natural owner of
the trade name all across the globe. To its dismay, the company
discovered that the same trade name has been registered in 2001
in India by a small auto-parts manufacturer. The auto-supplier
was making supplies to several major automobile manufacturers,
like Hyundai, GM and even Toyota. The Indian company claimed
to have got the Latin word ‘Prius’ from English Dictionary as a
substitute for the Sanskrit phrase ‘pehla prayas’ meaning ‘to
come first’. It further claimed its intention to use this trade name
for their new product ‘Add-On Chrome-Plated Accessories’ and
that it has nothing to do with Toyota’s Prius.
M
Toyota approached the Indian trademark authorities for cancellation of the registered trademark given to the Indian auto-supplier
on the basis of prior use of trademark since 1990 and legitimate
ownership of the trademark in 28 countries.
N
ISSUE: Does the Indian auto-supplier have a valid claim on his
registered trade name?
PASSING-OFF
Another concept with regard to unregistered trademarks is ‘Passing-Off’. Suppose one manufacturer has successfully built a reputation over a period of time with a well-known trademark, but
has not got it registered. If another manufacturer tries to sell his
own goods using the reputation of the first manufacturer built on
that unregistered trademark, the second manufacturer is said to
be passing off his goods using a trademark which does not belong
to him. The concept of ‘infringement’ is applicable only in the case
of registered trademarks, and the statutory right for an action
against infringement is not applicable in the case of ‘Passing-Off’.
In a passing-off action, the registration of the trade name has no
meaning (as neither manufacturer has registered it) and the priority in adoption and usage of the trademark is superior to the priority in registration. A prior user of the trademark has rights even
over a later registered user, provided he adduces proof of goodwill,
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Case Objective
This caselet discusses
whether Toyota has a valid
claim on its registered trade
name?
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Business Law
Introductory Caselet
reputation, and popularity in the market where the suit for passing off is brought. However, the passing-off action will fail if such
proof does not relate to the relevant jurisdiction in which it has
been filed.
TERRITORIAL RIGHTS: GLOBAL TRADEMARKS TOYOTA JIDOSHA KABUSHIKI KAISHA VS. M/S PRIUS AUTO
INDUSTRIES LIMITED (2017)
IM
S
It needs to be noted that trademarks are territorial in nature and
there is no concept of ‘global trademark’. Companies need to register their trademarks in every country in which they propose to
sell their goods. It is unlike the facility of international registration of patents provided by WIPO, whereby a single application is
sufficient for protection of patent all over the world. However, the
protection afforded to unregistered trademarks is also available
for foreign trademarks which have built a reputation in a particular country through extensive advertisements and publicity. The
trans-border reputation can enable a global manufacturer to seek
injunction in the courts of the country in which he is not trading.
Indian courts have ‘recognised the existence of trans-border reputation and have granted an injunction in several cases in the past.
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THE VERDICT
Based on the logic of territorial rights, the Delhi High Court issued
an injunction order against the Indian auto spare parts maker
(defendant) using the registered trademarks of Toyota. Toyota (the
Plaintiff) filed an appeal before the Division Bench of the High
Court against the relief to defendant which permitted the defendant to use the registered as well as unregistered trademarks of
Toyota subject to the condition that they use the trademarks only
for the purpose of identifying that the defendants’ product can
be used in Toyota’s cars. Consequently, the issue went in appeal
before the Supreme Court. The Supreme Court took a position
that the case depends mainly on whether there had been a spillover of the reputation and goodwill of the trademark of Toyota in
India. It was held that the Prius car was launched in India in 2009
and, at that time, the brand name had not acquired the degree of
goodwill, reputation and market popularity in the Indian market.
It meant that the degree of goodwill was not enough so as to vest
in the plaintiff the necessary attributes of the right of a prior use
so as to successfully maintain an action of passing off even against
the registered owner.
N
152
All this upheld the Delhi High Court order and granted the rights
for the usage of the trademark ‘Prius’ to the defendant as there
were not sufficient enough proofs of reputation of ‘Prius’ in the
Indian market.
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LAWS THAT COMMONLY AFFECT BUSINESSES
Learning objectives
After studying this chapter, you will be able to:
Explain various aspects of the Negotiable Instruments Act,
1881, Payment and Settlement Systems Act, 2007
Describe the miscellaneous intellectual property rights and
their governing legislations
Outline the meaning of sexual harassment and the legislation
related to the prevention of sexual harassment at workplace
Explain the laws that govern the Information Technology,
Internet and e-commerce
>>
>>
>>
>>
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4.1 INTRODUCTION
IM
In the previous chapter, you studied the incorporated and unincorporated forms of business and the Companies Act, 2013. In this chapter,
you will study various laws that commonly affect businesses.
M
A negotiable instrument is essentially a document that promises a
sum of payment to a specific person or the bearer of the instrument
at a specified date. The Negotiable Instruments Act, 1881 is the governing act for negotiable instruments which include cheques, bills of
exchange and promissory notes.
N
In the modern era, the grant of protection to intellectual property
is essential for the development and prosperity of any society. Without such protection, creative people will not invest time, effort and
money in doing innovative tasks because of the possibility of theft by
others. Considering the significance of Intellectual Property Rights
(IPRs), a multilateral agreement pertaining to Trade Related Aspects
of Intellectual Property Rights (TRIPS) has been entered into under
the auspices of World Trade Organization (WTO). Moreover, a specialised agency of the United Nations, known as the World Intellectual
Property Organization (WIPO), has been set up in 1967 for the protection of IPRs and to incentivise innovation and creativity. Owing to the
globalisation and emergence of multinational corporations in recent
decades, the concept of IPRs has acquired greater significance and
importance from the perspective of both domestic and international
businesses.
To deal with the multiple issues, such as cyber-crime, e-commerce,
etc., the Indian government has enacted the Information Technology
Act, 2000 and Information Technology (Amendment) Act, 2008.
Due to increasing levels of education and elimination of gender biasness, women now work in various industries. There has been instances
when women are subject to sexual harrasment. To ensure that sexual harassment cases at workplaces can be dealt with effectively, the
Indian Government has enacted a legislation to that effect.
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Quick Revision
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4.2 NEGOTIABLE INSTRUMENTS ACT, 1881
A negotiable instrument is a document that promises the payment of a
certain sum of money to the assignee or to some specific person on the
instruction of assignee. Negotiable instruments are the means used
for transferring money from one person to another. The Negotiable
Instruments Act, 1881 is the law that governs negotiable instruments
in India. Negotiable instruments must be in a written form. As per
the Negotiable Instruments Act, 1881, negotiable instruments include
promissory notes, bills of exchange and cheques. These instruments
are used to transfer money to the bearer of the document. Apart from
these instruments, other negotiable instruments such as ‘hundis’ and
‘railway receipts’ are governed by local usage.
IM
Some important features of negotiable instruments are as follows:
‰‰ Written
instrument: A negotiable instrument is a written
document with a signature of the drawer on it, which indicates that
the drawer of the instrument intends to pay a specified amount to
the ‘drawee’.
‰‰ Easy transaction and negotiability: A negotiable instrument must
N
The insertion of new provisions
in Negotiable Instruments Act,
1881 is a welcome step aimed at
addressing the issue of undue
delay, efficacy and efficiency in
cases related to the dishonor of
cheques.
The scope of the Negotiable Instruments Act, 1881 is limited to the
three negotiable instruments that are defined in the Act, namely promissory notes, bills of exchange and cheques. It must also be understood
that no provision of Negotiable Instruments Act, 1881 can be applied
to the usage of any other type of instrument.
M
Know More
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4.2.1 SCOPE, FEATURES AND IMPORTANCE OF
NEGOTIABLE INSTRUMENTS ACT, 1881
be easily and freely transferable. The property being a negotiable
instrument can be transferred with minimal formality. Where the
instrument is payable by delivery, the property passes by mere
delivery of instrument to the bearer, and where the instrument is
payable to order, then the transfer of property is by endorsement
and delivery. Also, there is no restriction on the number of times
a negotiable instrument can be reassigned till it attains maturity.
‰‰ Good title of transferee: The transferee of a negotiable instrument
is known as holder in due course. A bona fide transferee for value
is not affected by any defect of title on the part of the transferor or
of any of the previous holders of the instrument. This is the main
distinction between a negotiable instrument and other subjects of
the ordinary transfer.
‰‰ Unconditional
order/promise: The promise or order must be
unconditional. In the case of a conditional promissory note or bill
of exchange, it will cease to be negotiable.
‰‰ Payment:
The instrument involves the payment of a certain
amount of money. It cannot be based on assets, securities or other
things.
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LAWS THAT COMMONLY AFFECT BUSINESSES
155
‰‰ Time
of payment: The instrument must be payable at a certain
time. Suppose the instrument mentions ‘payment can be made
when convenient’, it is not a negotiable instrument.
‰‰ Certain payee: The name of the person on whom the instrument is
drawn must be mentioned clearly. Here, the term ‘person’ may be
used for individual, body corporate, trade unions, etc.
‰‰ Signature:
A negotiable instrument is valid only if it bears the
signature of its maker or drawer.
‰‰ Delivery:
A negotiable instrument must be delivered to the
intended payee.
As per the Indian Stamp Act, 1899, bills of exchange
and promissory notes are mandatory. The value of the stamp
applicable depends on the value and time of the negotiable
instrument.
S
‰‰ Stamping:
to file a suit: In case the instrument is dishonoured, the
transferee or the payee has the right to file a legal suit.
There are certain presumptions that apply to
a negotiable instrument like (i) the instrument was for a valid
consideration; (ii) every transfer of the instrument is presumed to
have been made before it attained maturity; (iii) every holder of
instrument is a holder in due course; (iv) in a suit for the dishonour
of instrument, it is presumed that it was dishonoured till such time
that the other party can prove it was not
4.2.2
M
‰‰ Presumptions:
IM
‰‰ Right
TYPES OF NEGOTIABLE INSTRUMENTS
N
According to Section 13 of the Negotiable Instruments Act, 1881, a
‘Negotiable Instrument’ means a promissory note, bill of exchange or
cheque payable either to order or to bearer. Let us study these three
negotiable instruments in the next sections. A bearer is a person who
possess the promissory note.
PROMISSORY NOTE – ELEMENTS AND PARTIES
A promissory note is a written note ordering/promising to pay a certain amount of money in future only to, or to the order of, a certain
person, or to the bearer. A bearer is a person who possess the promissory note.
Promissory notes are instruments wherein a debtor makes a promise to his creditor to pay the whole amount at a promised date. After
stamping is done on a promissory note, it becomes legal and valid. The
revenue stamps that are to be affixed on the promissory note depend
on the value of the promissory note.
With respect to promissory notes, there are two parties, namely the
maker/payer/drawer and the drawee/payee. Maker is the one who
makes the promissory note and payee is the one to whom the promisNMIMS Global Access - School for Continuing Education
MARK IT!
Section 4 of the Act defines
a promissory note as 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.
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Business Law
sory note is given or in whose favour the promissory note is written.
The essential elements of a promissory note include:
‰‰ A
promissory note exists in a written form.
‰‰ It
contains an express promise to pay money.
‰‰ It
contains an unconditional promise to pay.
‰‰ It
is signed by the drawer.
‰‰ It
mentions that ‘drawer’ and ‘drawee’ are certain persons.
‰‰ It is made for a certain amount that is paid in monetary terms only.
BILL OF EXCHANGE – ELEMENTS AND PARTIES
S
Some important elements of a bill of exchange is as follows:
‰‰ Written
form
‰‰ Express
order to make payment
‰‰ Definite
and unconditional and free from any condition
M
Section 5 of the Act defines
the bill of exchange as 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.
IM
MARK IT!
A bill of exchange is a written unconditional order that is signed by
the maker which directs a person to pay a certain amount of money
only to a certain person or to the bearer. In a bill of exchange, there
are three parties, namely drawer, drawee and payee. The drawer is
the person who draws the bill of exchange. The third party to whom
the order to pay money is given is called the drawee and the person to
whom the payment is to be made is called the payee.
‰‰ Presence
NOTE
N
‰‰ Order
Section 6, Explanation I, Clause
(a) as amended by Act 26 of
2015 defines `a cheque in
electronic form’ as a cheque
drawn in electronic form by using
any computer resource and signed
in a secured system with a digital
signature (with or without biometric
signature) and asymmetric crypto
system or with an electronic
signature, as the case may be.
of three parties
to pay money only
‰‰ Names
of parties
‰‰ Signed
by the drawer
‰‰ Amount
of money must be fixed
‰‰ Stamping
of bill is essential under the provisions of the Indian
Stamp Act, 1899.
CHEQUE – TYPES AND LEGAL VALIDITY
A cheque is a special kind of bill of exchange that is drawn on a specified banker and is payable only on demand. A cheque also includes
the electronic image of a truncated cheque and a cheque in the electronic form.
A cheque must be signed and must contain an unconditional order on
a specified banker to pay a sum of money. A cheque does not require
acceptance. There are three parties to a cheque, namely drawer,
drawee and payee. The drawer is the maker of a cheque. The banker
on whom the cheque is drawn is called the drawee and the person in
whose favour the cheque is made is called the payee.
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Some important elements of a cheque is as follows:
‰‰ Written
‰‰ Drawn
form
‰‰ Unconditional
‰‰ Bears
MARK IT!
on a specified bank
order
the signature of the maker
‰‰ Under
Section 35A of the Banking Regulation Act, 1949, the
validity of a cheque in India is 3 months
‰‰ Payable
‰‰ Does
on demand
not require stamping
Types of Cheques
S
Exhibit
cheque: It is a cheque that can be used to pay cash to
the bearer of the cheque or to any person who presents the
cheque to the bank. The bearer cheque does not mention the
word ‘bearer’ on the cheque. Such a cheque can be presented
by a bearer at the counter of the drawee bank and it is paid
in cash. An important characteristic of the bearer cheques is
that it can be transferred to another person. A person who
is in lawful possession of a cheque payable to a bearer as a
holder of the cheque is entitled to lawfully enforce the payment
due. However, in certain specific cases, the bank may ask for
identification proof if the amount of cheque is substantial.
‰‰ Order
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‰‰ Bearer
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There are different types of cheques. Some of them are explained
as follows:
cheque: When the cheque is paid to a particular person
with the word ‘order’ written on it, it is called ‘order cheque’. In
such cases, the payment is done to the named person only. The
payee can transfer the cheque, but he has to write his name at
the back of the cheque. The cheque would bear words like, ‘Pay
to X or order’.
‰‰ Crossed
cheque: Crossed cheques are exactly opposite to the
open cheques. The payment of crossed cheques can only be
credited in the account of the payee. Such cheques cannot be
encashed. A cheque becomes a crossed cheque by drawing two
parallel lines across the cheque. A crossed cheque is also called
an account payee cheque. Crossed cheques are the safest form
of a cheque. The cheque bears two parallel lines in the top left
corner, with or without the words ‘not negotiable’.
‰‰ Open cheque: A cheque that is not crossed or a bearer cheque is
called an open cheque. An open cheque is risky because it may
be encashed by any person holding it (bearer cheque). If the
cheque is stolen, the rightful drawer will be put to loss.
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Section 6 Explanation I, Clause
(b) defines ‘a truncated cheque’
as a cheque which is truncated
during the course of a clearing
cycle, either by the clearing
house or by the bank whether
paying or receiving payment,
immediately on generation
of an electronic image for
transmission, substituting the
further physical movement of the
cheque in writing.
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‰‰ Ante-dated
(pre-dated) cheque: If the drawer mentions a past
date on the cheque, this type of cheque is called an ante-dated
cheque.
Example: A cheque issued on 1st May, 2020 bearing a date 25th,
April, 2020 is an ante-dated cheque.
‰‰ Stale
cheque: Any cheque has validity for three months from
the date mentioned on it. The cheque becomes a stale cheque
after a period of three months from the date mentioned on it. It
is pertinent to know that a stale cheque cannot be accepted by
the bank.
‰‰ Post-dated cheque: If the drawer mentions a future date on the
cheque, this type of cheque is called a post-dated cheque.
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S
Example: A cheque issued on 1 May 2020 bearing a date of 25
June 2020 is a post-dated cheque and will be valid for three months
from the date mentioned on the cheque.
There are certain types of cheques that are mentioned in the Negotiable Instruments Act, 1881 as follows:
crossed generally: Section 123 of the Negotiable
Instruments Act, 1881 states that when a cheque bears two
parallel transverse lines or some words or company name or any
abbreviation with or without the words ‘not negotiable’ between
two parallel transverse lines, such a cheque is considered to be
crossed generally.
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‰‰ Cheques
‰‰ Cheque
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crossed specially: Section 124 of the Negotiable
Instruments Act, 1881 states that when a crossed cheque bears
the name of a banker with or without the words ‘not negotiable’,
such a cheque is called a specially crossed cheque. Such a cheque
can be presented to and cleared by a paying bank whose name
appears on the cheque.
‰‰ Cheque
bearing ‘not negotiable’ crossing: Section 130 of the
Negotiable Instruments Act, 1881 states that a person taking a
cheque crossed generally or specially, bearing in either case the
words ‘not negotiable’, shall not have, and shall not be capable of
giving, a better title to the cheque than that which the person from
whom he took it had.
4.2.3 RECENT AMENDMENTS IN THE NEGOTIABLE
INSTRUMENTS ACT, 1881 AND THEIR IMPACT
Some of the important amendments made in the Negotiable Instruments Act, 1881 as per the Negotiable Instruments (Amendment) Act,
1881 are as follows:
‰‰ Insertion
of a new Section 143A (Power to direct interim
compensation): Section 143A of the Negotiable Instruments Act,
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1881 gives power to the court to order the drawer of a cheque to
pay interim compensation to the complainant in a summary trial/
summons case where he pleads not guilty to the accusations in the
complaint. This Section also states that the interim compensation
shall not exceed 20% of the amount of the cheque which is to be
paid within 60 days from the date of the order. In case the drawer
of the cheque is acquitted, the court may direct the complainant to
repay the amount of interim payment to the drawer at interest rates
as prescribed by RBI. This amendment empowers to deposit 20%
of the disputed amount in the initial period for a security purpose.
Though the percentage mentioned is only 20%, it depends from
one judge to the other as he can ask for more or less depending
upon the case.
of a new Section 148 (Power of the appellate court to
order payment pending appeal against conviction): If a person
is found guilty by the trial court, that person has a right to file
an appeal in the Appellate Court. However, such an appeal can
only be submitted in the appellate court if the petitioner/appellant
deposits a minimum of 20% of the fine/compensation awarded as
interim compensation paid under Section 143A. If the appellant
is acquitted of the charges, the amount is refunded back along
with applicable interest to him. Such amount has to be paid within
60 days from the date of order.
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S
‰‰ Insertion
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4.2.4 PAYMENT AND SETTLEMENT SYSTEMS ACT, 2007 AND
ITS FEATURES
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It is a known fact that all countries need money for carrying out their
economic activities, such as trade and commerce, which is essential
for taking care of the demand and supply of goods and services. Trade
and commerce transactions require payments of money and settlement of dues. The efficiency of an economy depends on the reliability
of the payment and settlement system of the country.
In any economy or financial market of a country, the payment and settlement system is a network of miscellaneous arrangements that help
in systematically and efficiently transferring money, cheques, demand
drafts, etc., through various electronic channels in a secured manner.
The Central Bank of a country is the regulatory authority that is
responsible for the development and maintenance of the payment
and settlement systems. In India, the Reserve Bank of India is the
regulatory authority for the financial system. It is also the in-charge of
the development of the National Payment and Settlement System. All
the payments and settlements are regulated and governed by the Payment and Settlement Systems (PSS) Act 2007 (hereinafter referred to
as ‘PSS Act’).
There are two regulations that have been made by the RBI in the PSS
Act, 2007. The first regulation is related to the Board for Regulation
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Business Law
and Supervision of Payment and Settlement Systems (BPSS), 2008.
It is a sub-committee of the RBI and it is the highest policy-making
body related to payment systems. This committee comprises the central board of directors of the RBI.
The second regulations are the Payment and Settlement Systems
Regulations, 2008. These regulations lay down the basic procedures
that are required for carrying out or starting a payment system. It
includes matters related to the following:
‰‰ Application form to apply for the authorisation for commencing or
carrying a payment system
‰‰ Granting
authorisation
‰‰ Payment
instructions
returns
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‰‰ Furnishing
‰‰ Documentation
accounts and balance sheets
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‰‰ Furnishing
‰‰ Determination
of standards of payment systems
Some of the payment and settlement systems in India are as follows:
‰‰ Paper-based
payment systems, such as cheques and drafts
Time Gross Settlement (RTGS)
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‰‰ Real
‰‰ National
Electronic Fund Transfer (NEFT)
‰‰ National
Electronic Clearing Service (Credit and Debit)
‰‰ Card
payments
‰‰ Immediate
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Payment Service (IMPS)
‰‰ Mobile
banking systems
‰‰ Online
transactions
4.2.5 P
ENALTIES AND PUNISHMENT UNDER NEGOTIABLE
INSTRUMENTS ACT, 1881 AND PAYMENT AND
SETTLEMENT SYSTEMS ACT, 2007
Section 138 of the Negotiable Instruments Act, 1881 deals with penalties that can be imposed if a cheque is dishonoured due to insufficient
funds. According to this Section, if a cheque is drawn by a person on
an account that is operated under his name with a particular banker
for the payment of a sum of money to another person for the discharge
of any debt or liability, and it is returned by the bank due to insufficient funds, the bank will not release the required sum of money and
such a cheque will be dishonoured. If a cheque issued by a drawer is
dishonoured, the drawer is said to have committed an offence. If this
offence is proved, the drawer may be punished with imprisonment for
a term that may extend up to 2 years or a fine twice the amount of the
cheque.
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An offence under Section 138 of the Negotiable Instruments Act,
1881 is registered if the drawee serves a notice to the drawer within 1
month of the dishonour and the drawer has to make payment within
15 days of the service of the notice. If the drawer makes the payment
within 15 days, no offence is committed. However, if the drawer fails
to make the payment, an offence is perpetrated. The case can be filed
by the drawee within 1 month from the expiry of the 15th day of notice
to the drawer.
4.2.6 LEADING CASE STUDIES
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In Dayawati vs. Yogesh Kumar Gosain case, the Court held that it is
legal to refer a criminal compoundable case as one under Section 138
of the Negotiable Instruments Act, 1888 to mediation. In this case, the
fundamental issue is related to the settlement of disputes in criminal
law through alternative dispute mechanisms. The Court, in order to
arrive at its decision, studied the distinction between different kinds
of criminal offences, i.e., compoundable and non-compoundable
offences. The Court stated that there is no express statutory provision
in the legislation that enables the criminal courts to refer the complainant and accused persons to Alternate Dispute Redressal (ADR)
mechanism; but the Code of Criminal Procedure does permit and
recognise settlement without stipulating or restricting the process by
which it may be reached. There is, thus, no bar in utilising the alternate dispute mechanism including arbitration, mediation, conciliation
(recognised under Section 89 of Code of Civil Procedure) to settle disputes that are the subject matter of offences covered under Section
320 of the Code of Criminal Procedure.
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Self Assessment Questions
1. Which of the following is a synonym of a pre-dated cheque?
a. Crossed cheque
b. Ante-dated cheque
c. Open cheque
d. Stale cheque
2. If a cheque dishonour offence is proved, the drawer may be
punished with an imprisonment for a term that may extend
up to ______ years or a fine twice the amount of the cheque.
3. Payment and Settlement Systems Regulations, 2008 lay down
the basic procedures that are required for carrying out or
starting a payment system.
a. True
b. False
Activity
Find out the areas or activities or business transactions that are
done with the help of promissory notes.
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Business Law
4.3 INTELLECTUAL PROPERTY LAW
The current era is characterised by knowledge and information technology. With these trends, the term ‘intellectual capital’ has been popularised. Intellectual capital means the sum total of all intangible assets
of a business, such as human capital, structural capital and relational
capital. In recent decades, there has been a remarkable increase in
cross-border and global transactions which have led to an increase in
intellectual property and related rights.
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Now, organisations are going global and are selling their goods and
services in various countries across the globe. It must be remembered
that Intellectual Property Rights (IPRs) are country-specific. Therefore, specific IPRs and laws of the country where an organisation
wants to do business must be ascertained.
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In India, there is a well-established, statutory, administrative and judicial framework for safeguarding IPRs. India is a member of the WTO
and is a signatory to the TRIPS agreement. The TRIPS agreement
is an international and legal agreement signed between all member
countries of the WTO. It means that India complies with the obligations under the TRIPS agreement by introducing and amending different laws relating to IPRs.
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Various intellectual properties, such as patents, trademarks and copyrights, have been protected in India. For example, various international trademarks have been protected in India by the Indian courts in
the past although these trademarks were not registered in India. Also,
various computer databases and software programs have been protected under the copyright law of India. Copyright law has also helped
in restricting the piracy of creative work through judicial intervention.
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In India, trade secrets and know-how are not protected under any
particular IPR law. However, these are protected by the common law
of India. Trade secrets are protected using the law for breach of confidentiality.
4.3.1 WHAT ARE INTELLECTUAL PROPERTY RIGHTS (IPR)?
According to the World Trade Organisation, intellectual property
rights are the rights given to persons over the creations of their minds.
They usually give the creator an exclusive right over the use of his/her
creation for a certain period of time.
IPRs are similar to any other rights that enable their creators or owners to benefit from their own work or investments. These recognition
of a persons right to ownership and protection of IPRs are mentioned
in Article 27 of the Universal Declaration of Human Rights. There
were two major treaties, namely Paris Convention for the Protection
of Industrial Property (1883) for Patents and the Berne Convention
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for Protection of Literary and Artistic Works (1886) and copyrights
that are administered by the WIPO (World Intellectual Property
Rights) for IPRs.
IPRs help in rewarding creativity and human effort which help in
increasing the progress of humankind.
Example: Recordings, publishing and research works, software
products, inventions, etc., are protected by IPRs, such as copyrights and
patents based on the nature of work.
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Researchers and inventors produce better and more efficient products if they receive rewards as patents. IPRs such as patents and copyrights give confidence to consumers and they can buy international
products or services. Effective IPR rights help in curbing ill practices,
such as counterfeiting and piracy. Intellectual properties for understanding are divided into two categories as shown in Figure 4.1:
Copyrights (Literary
and Artistic Works)
Intellectual
Property
Patents (Inventions)
Industrial Property
Trademarks
Designs
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M
Soft Intellectual
Property (Trade
Secrets, Know how
and Confidentiality)
Geographic
Indications
Figure 4.1: Categories of Intellectual Properties
COMMERCIAL SIGNIFICANCE OF IPRs
In today’s business environment, IPRs come in various forms, such
as trademarks, copyrights and patents etc. It is important for businesses to understand the relevance and implication of various IPRs to
develop an effective business strategy that helps in achieving success
in the market. In other words, organisations need to understand IPRs
and related laws and regulations so that they can effectively protect
their IPRs, manufacturing secrets or any other trade secrets to remain
ahead of competitors. An organisation that fully understands intellectual property can use its intellectual property assets in a constructive way for maintaining quality and marketing products and services
which helps in developing long-term loyalty.
An organisation can also remain ahead of its competitors by introducing new and effective products and services and modifying current
products and services to incorporate customer needs. This is because
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organisations keep changing products and services in terms of design,
quality, looks and functions.
Knowledge is essential for the successful running of a business. An
intellectual property system is used to manage knowledge assets.
The major types of intellectual property rights include the following:
‰‰ Patent
‰‰ Trademarks
‰‰ Copyrights
‰‰ Designs
‰‰ Biodiversity-Geographical
Indications
‰‰ Trade
Secrets
S
‰‰ Registration of designs of Semiconductors and Integrated Circuits
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Some of the benefits of IPRs for businesses are as follows:
‰‰ The
presence of intellectual property assets helps in enhancing
the profitability of an organisation by licensing, franchising, sale of
protected products or services.
‰‰ IPRs
reward entrepreneurs and encourage innovation.
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‰‰ Trademarks
‰‰ Patents
‰‰ Trade
can be used to protect brands.
can be used to protect new inventions.
secrets can be used to protect confidential information.
‰‰ IP protection (patent) is specifically important for pharmaceutical,
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biotechnological companies because it helps them in developing
new medicines and treatments for diseases.
‰‰ IP
assets that have been protected can be exported for higher
revenues.
‰‰ IPRs
give creators exclusive rights over their creation.
‰‰ IPRs
helps in valuation and raising finance.
TRADE RELATED ASPECTS OF INTELLECTUAL PROPERTY
RIGHTS (TRIPS)
TRIPS is an international agreement on IPRs that has been signed by
the member countries of the WTO. This agreement came into force on
1st January, 1995.
The TRIPS agreement provides the minimum set of standards or
rules for protecting intellectual property all over the world. All the
member countries are required to prepare national laws to implement
the provisions of TRIPS. The TRIPS agreement lays down norms and
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standards for patents, trademarks, copyrights, geographical indications and industrial designs.
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India has implemented its obligations and made laws relating to IPRs
as per the TRIPS Agreement. A few of the major legislations coming out of TRIPS are: the Patents Act, 1970, amended by the Patents
(Amendment) Acts of 1999, 2002 and 2005. Rules implemented under
the Patents Act are: the Patents Rules, 2003; the Patents (Amendment)
Rules, 2005; and the Patents (Amendment) Rules, 2006. In India trademarks are regulated under the Trade Marks Act, 1999 and copyrights
are registered and regulated under the Copyrights Act, 1957. Similarly,
we have the Geographical Indications of Goods (Registration and Protection) Act, 1999 that defines and prescribes rules for geographical
indications in India.
There are three main features of the TRIPS agreement which are:
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1. Standards: These are the minimum standards of protection that
must be provided by each member country in respect of each
type of IPR.
2. Enforcement: The TRIPS agreement contains provisions that
describe the domestic procedures and remedies for enforcing
IPRs.
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3. Dispute prevention and settlement: Disputes among the member countries related to IPRs are subject to the dispute settlement procedures as laid down in the agreement.
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PATENTS – ELEMENTS, NATURE OF PROTECTION, PERIOD OF
PROTECTION AND AUTHORITY
In India, patents are regulated by the Patents Act, 1970 whose major
provisions came into force on 20th April, 1972. This Act was amended
from time to time and was given the name the Patents (Amendment)
Acts of 1999, 2002 and 2005 along with Patents Rules. The Patents
Rules were last amended in 2017. Patents now extend to all fields of
technology, such as food, drugs, chemicals and microorganisms.
A patent is a document that represents certain rights that give the creator or developer the sole right over their creations. Patents are issued
by an issuing authority of a country after receiving the application by
the owner of an invention. The rights given by patents ensure that the
patent holder has the rights to make, use, manufacture and market
the invention if the invention satisfies certain stipulated conditions.
The purpose of patenting inventions is to ensure that the researchers are able to take full economic advantage of their inventions which
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motivates them to undertake more and more innovations that help the
society.
A patent gives an inventor the right to own, use or sell the invention,
method or process for a specified period. Patented products help in
increasing the level of industrial innovations which leads to the growth
of the nation.
ELEMENTS OF THE PATENTS ACT, 1970
Some important elements of patent regulation are as follows:
‰‰ Section
2(m) defines a patent as a patent granted under the Act.
2(o) defines a patent as either in relation to an article or a
process called ‘patented article’ and ‘patented process’.
‰‰ A
S
‰‰ Section
patented article includes an article made by a patented process.
person to whom the patent is granted and whose name is
entered in the Register of Patents is called a patentee.
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‰‰ The
‰‰ Patenting
is mandatory for recognition and protection.
‰‰ Patenting
helps in preventing its breach, warding off pre-emptive
patenting and successful prosecution of infringers.
are 3 criteria for fulfilling a patent: (i) Novelty, (ii) NonObviousness and (iii) Industrial Application
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‰‰ There
‰‰ Patents
are granted only for inventions and not for discovery.
‰‰ The
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invention may consist a new product, process, method,
apparatus or a new combination of the pre-existing knowledge
which satisfies some human need.
‰‰ There
must be some industrial use or application of the invention.
‰‰ Product
patents are granted for end products.
‰‰ Process
patents are granted for the process only.
NATURE OF PROTECTION
Under the Patents Act, 1970, the country gives a patent-holder (or patentee/inventor/signee) the exclusive rights for a fixed period of time
(period of protection) for his/her invention.
PERIOD OF PROTECTION
According to Section 53 of the Patents Act, 1970, after the Patents
(Amendment) Act, 2002, the term of every patent is 20 years from the
date of filing the patent application.
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AUTHORITY
The offices and authorities that regulate the patent, trademarks and
geographical indications in India are shown in Figure 4.2:
Organisation chart
Ministry of Commerce & Industry
Department of Industrial Policy & Promotion
Office of the Controller General of Patents, Designs and Trade Marks
Mumbai Head Registry
Br. Registry at
New Delhi
Kokata
Chennai
Ahmedabad
The Designs
Act, 2000
Patent
Information
System and
NIIPM (IPTI)
Chennai
Kolkata
Nagpur
M
Kolkata Head Office
New Delhi Branch Office
Chennai Branch Office
Mumbai Branch Office
Geographical Indications
Registry The Graphical
Indication of Goods
(Registration & Protection
Act, 1999)
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Trade Marks
Registry
Trade Mark
Act, 1999
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The Patent Office
The Patents Act,
1970 (Amended in
1999, 2002 & 2005)
Figure 4.2: Offices and Authorities that Regulate Intellectual
Properties in India
Source: https://shodhganga.inflibnet.ac.in/bitstream/10603/54118/10/10_chapter%203.pdf
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From Figure 4.2, it is clear that there are four patent offices located
at Kolkata, New Delhi, Chennai and Mumbai. The application for the
patents can be filed in any of these patent offices.
COPYRIGHTS – ELEMENTS, NATURE OF PROTECTION, PERIOD
OF PROTECTION AND AUTHORITY
In India, copyrights, related rights and neighbouring rights are governed as per the Copyright Act, 1957 (as amended in 2017), the related
rules and the International Copyright Order, 1999.
Section 78 of the Copyright Act, 1957 empowers the central government to make rules governing the Copyright Act, 1957. In simple terms,
copyright is a form of intellectual property that protects the interests
of authors who have produced original works that are expressed in
some medium of expression. Copyrights are granted for published as
well as unpublished works.
The purpose of Copyright Act, 1957 is to protect the author or creator
of original work by preventing any other persons from reproducing
the work in any other form. Copyright laws protect literary works,
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The Copyright Act defines a
copyright as a collection of
rights that automatically vest to
someone who creates original
works of authorship, like a
literary work, song, movie or
software. These rights include
the right to reproduce the work,
to prepare derivative works, to
distribute copies, and to perform
and display the work publicly.
Business Law
dramatic works, musical works, artistic works, cinematographic films
and sound recordings.
Elements of Copyright Act, 1957 and Nature of Protection
Copyright Act, 1957 provides protection to original work from an
unauthorised use. The following explain the elements of the Copyright Act, 1957 and nature of protection:
‰‰ Copyrights
protect expressions and not the ideas, which means
that ideas cannot be protected.
‰‰ Copyrights
are associated with the right of reproduction,
communication to the public, adaptation and translation of work.
protection offered by the Copyright Act, 1957 is valid
within the Indian Territory only.
works are also secured in foreign countries because India
is a member of international conventions on copyrights and
neighbouring rights, such as the Berne Convention of 1866 and the
Universal Copyright Convention, 1971. India is also a signatory to
the WIPO Copyright Treaty, 1986 and the WIPO Performance and
Phonogram Treaty (WPPT), 1996.
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‰‰ Indian
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‰‰ Copyright
Period of Protection
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As per Section 22 of the Copyright Act, 1957, copyright is protected
for lifetime of the author and 60 years from the year following the
death of the author. In the case of original literary, dramatic, musical
and artistic works, the period of copyright protection lasts 60 years
from the year following the death of an author. If there is more than
one author, the copyright protection lasts for 60 years following the
death of the author who dies last.
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Broadcasting reproduction rights are available for 25 years from the
beginning of the calendar year next following the year in which the
broadcast is made. A performer’s right is valid for a period of 50 years.
In case of cinematograph films, sound recordings, photographs, works
of government, public undertakings and international organisations,
posthumous publications, anonymous and pseudonymous publications, the copyright protection is for 60 years and is counted from the
date of publication.
Authority
The Intellectual Property Appellate Board was established under Section 83 of the Trade Marks Act, 1999. The Board exercises the jurisdiction, powers and authority conferred on it by or under the Copyright Act, 1957. In view of the same, all the cases pending before the
Copyright Board were transferred to Intellectual Property Appellate
Board. This board is chaired by a Chairman who is a sitting or retired
judge of the High Court or a person qualified to be appointed as judge
of the High Court.
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This board oversees the adjudication of disputes pertaining to copyright registration, assignment of copyright, grant of licenses in respect
of works withheld from the public, unpublished Indian works, production and publication of translations.
TRADEMARKS – ELEMENTS, NATURE OF PROTECTION, PERIOD
OF PROTECTION AND AUTHORITY
A trademark is any symbol or word which helps in uniquely identifying a product or service and helps distinguish the product or service
from other products or services that are available in the market. It
makes your customers recognise your product or service.
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In India, trademarks are governed by the Trademarks Act, 1999.
According to Section 2 (1)(zb) of this Act, a trademark may refer to:
mark capable of being represented graphically and which is
capable of distinguishing the goods or services of one person from
those of others and may include shape of goods, their packaging and
combination of colours.
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‰‰ A
‰‰ A
registered trade mark or a mark used in relation to any goods in
the course of trade which shows that the user of the mark has the
right as proprietor to use the mark.
‰‰ A mark used or proposed to be used in relation to goods or services for
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the purpose of indicating or so to indicate a connection in the course
of trade between the goods or services as the case may be, and some
person having the right, either as proprietor or by way of permitted
user, to use the mark whether with or without any indication of the
identity of that person, and includes a certification trade mark or
collective mark.
Some images of the trademarks, service marks and registered marks
are shown in Figure 4.3:
R
C
TM
P
SM
Know More
Figure 4.3: Trade Marks, Service Marks and Registered Marks
Source: https://www.dreamstime.com/registered-trademark-copyright-patent-service-markicon-set-image146450985
Elements
Trademarks can be divided into
the following categories:
yyWord mark (word or letters,
slogans or taglines)
yyDevice mark (logo, combination of words, pictures or
drawings)
Some of the important elements of the Trade Marks Act, 1999 are as
follows:
yyShapes of goods
‰‰ It
yySound mark
gives exclusive rights of using trade marks to a registered
proprietor.
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yyColour mark
yyThree dimension mark
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‰‰ It provides for the registration of trade marks for goods and services.
‰‰ Provision
for penalties in case of infringement of trade marks.
‰‰ Provision
for criminal remedies in case of falsification of trade
marks.
‰‰ Expedited examination of a trade mark application if the applicant
makes a payment five times more than the actual application fee.
Period of Protection
Authority
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The trade mark registration is valid for 10 years from the date of application. A trade mark can be renewed from time to time after the applicant has made the application for renewal. It is renewed for 10 years
from the date of expiry of the original registration or the last renewal
of registration.
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Section 83 of the Trade Marks Act, 1999 empowers the central government to constitute an appellate board known as Intellectual Property Appellate Board (IPAB). The IPAB hears appeals against the
decisions made by the Registrar under this Act.
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TRADE SECRETS – ELEMENTS, NATURE OF PROTECTION,
PERIOD OF PROTECTION AND AUTHORITY
According to the WIPO, any confidential business information which
provides an enterprise a competitive edge may be considered a trade
secret.
In simple words, a trade secret refers to any piece of valuable business-related information that is usually known only by one or a few
members of an organisation or industry. Trade secrets give the owners
a competitive advantage over their rival competitors. Trade secrets
provide an advantage because they are related to information that is
used by its owner to make profits.
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Example: Formulas, patterns, methods, programmes, techniques, processes, etc. are some examples of trade secrets.
Elements
The essential features of a trade secret are as follows:
‰‰ A
trade secret is any information that is generally not known to a
majority of the public.
‰‰ The
trade secret has an economic benefit for the owners of the
secret.
‰‰ The owners of trade secret make reasonable efforts to maintain its
secrecy.
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Nature of Protection
In India, trade secrets are not covered by any law. Article 39 of the
TRIPS agreement protects trade secrets as undisclosed information.
Each member country of the TRIPS agreement protects trade secrets
and provides a uniform mechanism for protecting trade secrets.
Period of Protection
There is no specified period for the protection of a trade secret if it is
well protected. The protection to trade secrets can be extended indefinitely. This is an advantage over patents which only have a fixed term
of protection. Some secrets may not be patented at all.
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Example: The formula for preparing Coca-Cola cold drink, KFC’s
secret blend of 11 herbs and spices, Google’s search algorithm, WD-40
are examples of trade secret.
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Authority
There is no specified authority that looks after disputes relating to
trade secrets. Only the judicial system of each member of TRIPS
determines the requirements for obtaining the protection of a trade
secret.
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GEOGRAPHICAL INDICATIONS – ELEMENTS, NATURE OF
PROTECTION, PERIOD OF PROTECTION AND AUTHORITY
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According to the WIPO, a Geographical Indication (GI) is a sign used
on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin. In order to function as
a GI, a sign must identify a product as originating in a given place.
In addition, the qualities, characteristics or reputation of the product
should be essentially due to the place of origin. Since the qualities depend
on the geographical place of production, there is a clear link between the
product and its original place of production.
Example: Kolhapuri Chappal, Darjeeling tea, Banglar Rosogolla, etc.
are examples of GIs.
In other words, geographical indications are indications related to
goods that identify the goods as originating or manufactured in a particular territory of a country or region or a locality where a given quality, reputation or characteristic of such goods can be attributed to the
geographical origin of the good. The goods may be agricultural goods
or manufactured goods. In case of manufactured goods, one of the
activities of production or processing are related to a particular territory, region or locality.
In India, GIs are protected by Geographical Indications of Goods
(Registration & Protection) Act, 1999. According to Section 2(1)(e),
in relation to goods, means an indication which identifies such goods as
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agricultural goods, natural goods or manufactured goods as originating,
or manufactured in the territory of a country, or a region or locality in
that territory, where a given quality, reputation or other characteristic
of such goods is essentially attributable to its geographical origin and in
case where such goods are manufactured goods one of the activities of
either the production or of processing or preparation of the goods concerned takes place in such territory, region or locality, as the case may
be.
Explanation: For the purposes of this clause, any name which is not
the name of a country, region or locality of that country shall also be
considered as the geographical indication if it relates to a specific geographical area and is used upon or in relation to particular goods originating from that country, region or locality, as the case may be.
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Elements
Some important elements of GIs are as follows:
GI’s register is maintained in two parts, Part A and Part B.
Part A contains all registered GIs and Part B contains the details
of registered authorised users.
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‰‰ The
‰‰ GIs
are registered in different classes.
‰‰ Certain
GIs are prohibited from being registered.
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‰‰ The law empowers the central government to make laws and rules
related to the filing of application, its contents and the examination
of GI applications.
‰‰ All
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the registered GIs must be advertised compulsorily to invite
any possible objections.
‰‰ This
law also provides provisions that can be used in case a GI is
infringed by an unauthorised user.
‰‰ This
law prohibits the registration of a GI as a trademark.
Nature of Protection and Authority
This Geographical Indications of Goods (Registration & Protection)
Act, 1999 is administered through the Geographical Indications Registry established in Chennai. The Registrar of GIs is the Controller-General of Patents, Designs and Trademarks. The parties have the right
to appeal against the decision of the Registrar with the Intellectual
Property Appellate Board (IPAB) that has been established under the
Trade Marks Act, 1999.
Period of Protection
GIs are registered for 10 years and can be renewed from time to time.
Similarly, authorised users are registered for a period of 10 years or
till the date on which the registration of the GI in respect of which the
authorised user is registered expires.
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DESIGNS – ELEMENTS, NATURE OF PROTECTION, PERIOD OF
PROTECTION AND AUTHORITY
According to WIPO’s Patents and Industrial Designs Act, 2000, an
industrial design means any composition of lines or colours or any
three-dimensional form, or any material, whether or not associated with
lines or colours, provided that such composition, form or material gives
a special appearance to a product of industry or handicraft and can
serve as a pattern for a product of industry or handicraft and appeals to
and is judged by the eye.
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In simple terms, industrial designs are related to the aesthetics of a
good. The designs serve as a pattern for the manufacture of products
or handicrafts. An industrial design is only an ornamental or aesthetic
part of a good. The design of a good must be made in such a way that it
appeals to the eyes of the buyers. The aesthetics of a good include the
shape, pattern, colour of good, etc. Industrial designs are protectable
if they are new and original.
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Elements
In India, industrial designs are governed by the Designs Act, 2000; the
Designs Rules, 2001; the Designs (Amendment) Rules 2008; and the
Designs (Amendment) Rules 2014.
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Some of the important elements of the Designs Act, 2000 are as follows:
per the Designs Act, 2000, India has adopted the Locarno
classification for the registration of industrial designs and this
classification is based only on the subject matter of design.
‰‰ Introduced
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‰‰ As
the criteria of absolute novelty and originality.
‰‰ A design must be unique and there must not be any prior publication.
‰‰ The
design must be such that it does not hurt the sentiments of
the people.
Period of Protection
Industrial designs are protected for a period of 15 years. The protection is available against unauthorised copying or imitation.
Initially, a design is registered for a period of 10 years from the date
of registration, but the initial period of 10 years can be extended by
5 years if the registered proprietor applies for the same.
BIODIVERSITY LAW – ELEMENTS, NATURE OF PROTECTION,
PERIOD OF PROTECTION AND AUTHORITY
The diversity that exists in various life forms on the earth is known
as biodiversity. Biodiversity is an essential feature of the earth and is
important for the functioning of the ecosystem.
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If the biodiversity changes rapidly, it affects the well-being of humans
and all living beings. There are three major categories of biodiversity
as follows:
‰‰ Ecosystem
diversity: This is represented by principal biogeographic regions and habitats.
‰‰ Species
diversity: This is represented by variability found in
families, genera and species.
‰‰ Genetic
diversity: This is represented by variability that occurs
within a species.
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The objective of the Biological
Diversity Act, 2002 is to conserve
biological resources and
associated knowledge along
with facilitating the access to
these resources in a sustainable
manner.
The Convention on Biological Diversity (CBD) 1992 is an international
treaty for the conservation of biodiversity, sustainable use of biodiversity elements and equitable sharing of the benefits derived from
the use of genetic resources. There is a relation between biodiversity
and intellectual property which is depicted at international level using
several treaties. India also has ratified the CBD treaty and has enacted
the Biological Diversity Act, 2002.
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NOTE
Elements
Some important elements of the Biological Diversity Act, 2002 are as
follows:
the access to biological resources of the country to
ensure equitable share in benefits
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‰‰ Regulating
‰‰ Conserving
and sustainably using resources related to biological
diversity
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‰‰ Setting
up of National Biodiversity Authority (NBA), State
Biodiversity Board (SBB) and Biodiversity Management
Committees (BMCs)
‰‰ Creating
biodiversity funds at national, state and local levels and
using them for conserving biodiversity
‰‰ Respecting
‰‰ Protecting
and protecting the knowledge of local communities
biodiversity-related traditional knowledge
‰‰ Conserving
biological diversity sites
4.3.2 IMPACT OF IPR
Prior to the development of the IPR laws in India, the risk of infringement of IPRs was extremely high. In the absence of strong IPR laws,
individuals and organisations did not show much interest in R&D
works in India which resulted in a low rate of innovations and inventions, high risk of infringement and monetary loss. To mitigate and
handle this situation, India strengthened its IPR regime by enacting
various laws related to IPRs that you have read about in the preceding
sections.
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Today’s era is also known as the era of technology, knowledge and
intellect. India has also shown remarkable growth in the field of R&D.
India has a number of well-established labs that have been developed
indigenously and some of them belong to MNCs. The increasing levels
of the Indian economy in the past decade are clearly an indicator of
the impact which the Indian IP has on the world.
ENFORCEMENT AGAINST VIOLATORS OF IPR
S
Organisations, creators and owners of the IP are able to make profits
from their knowledge and innovations. In order to encourage innovation and growth, it is necessary that countries provide remedies that
can be accessed by IPR holders. Countries that do not have adequate
provisions and remedies provide minimum incentives to the rights
holder. The absence of or inadequacy in the IP enforcement and protection provisions can affect businesses which would further impact
job creation and consumerism.
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Most of the developing nations including India have made various
reforms in respect of IP enforcement methods because the methods
underlined in the TRIPS agreement are quite stringent. The enforcement in these countries is often restricted.
Example: A lack of enforcement may include the following:
issue sanctions that are insufficient
‰‰ Various
M
‰‰ Courts
officials that deal in IPRs often lack IPR-related knowledge
and training
of political will
‰‰ Insufficient
means to enforce IPRs
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‰‰ Absence
Reactive Enforcement (Infringement Action)
In case the IPRs of an owner are contravened, the owner has the right
to seek either reactive or proactive enforcement. Some of the infringement remedies that are available to the owner of IP are:
‰‰ Stop
unauthorised use of IP
‰‰ Prevent
‰‰ Obtain
‰‰ Seek
any further infringements
recovery
compensation for the damages
Pro-Active Enforcement (IP Registration, Protection and Raids)
In India, parties to a dispute first try to resolve the dispute amicably before taking any legal action. In case of IPR violations, the owners of the IPs usually send a cease-and-desist letter to the person or
the organisation that is presumably contravening the IP rights of the
owner. If such dispute settlement approach does not work, the IP
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India has set up new
technology and incubation
centres in various parts of
the country and provides
financial aid to technologists
and researchers. All this has
strengthened the status of
R&D in the country.
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owner has the option to seek a legal remedy which may be a civil or
criminal remedy.
Various IP laws that protect IP rights in India are as follows:
‰‰ Trade
Marks Act, 1999
‰‰ Copyright
‰‰ Patent
Act, 1957
Act, 1970
‰‰ Designs
Act, 2000
‰‰ Geographical
Indications (Registration and Protection) Act, 1999
Civil and criminal remedies are mentioned under these laws for IPR’s
enforcement.
In case of IP infringement, civil remedies may be enforced by filing
infringement suit in a designated and competent court. The court may
grant reliefs of civil nature as follows:
‰‰ Injunction:
S
Some of the proactive
enforcement remedies available
in case of IP violations include
civil remedies and criminal
remedies. Civil remedies include
infringement and passing off,
whereas criminal remedies
include administrative actions.
An injunction suit prohibits an action by a party to a
IM
NOTE
lawsuit.
pillar order/ex-parte orders: Such an order permits the
lawyer of the party who files the suit (plaintiff) to enter into the
premises of the infringers so that he/she may seize the evidence of
infringement.
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‰‰ Anton
to deliver up/surrender or seize and destroy: Such an
order is passed so that the infringing goods are delivered to the
plaintiff or the infringing goods may be destroyed as the case may
be.
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‰‰ Orders
‰‰ An
award of costs and damages: Damages are awarded to the
plaintiff to compensate for the losses incurred by the plaintiff. In
other cases, the court may grant costs or actual profits of the IP to
the plaintiff.
‰‰ Tracing
orders: When such an order is granted, the infringer is
asked to provide details regarding the infringing goods such as
from where he got the supplies of infringing goods.
The criminal remedies available are as follows:
‰‰ Falsification
of trademarks and infringement of copyright are
cognisable offences
‰‰ Filing
‰‰ FIR
a complaint with a magistrate
can be registered with the police
‰‰ An
imprisonment of 6 months to 3 years and a fine of ` 50,000
to ` 2 lakhs
‰‰ Penalty
can be increased in case of repeat offences
‰‰ Infringing
goods can be seized, forfeited or destroyed
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In case of criminal action, following sections can be invoked:
‰‰ Section
103/104 of Trade Marks Act, 1999
‰‰ Sections
63 and 64 of Copyright Act, 1957
‰‰ Section
39 of Geographical Indication of Goods Act, 1999
‰‰ Section
420 of India Penal Code (IPC)
‰‰ Section
91/93 of Criminal Procedure Code (CrPC)
4.3.3
LEADING CASE LAWS IN IPR DOMAIN
Bayer Corporation and Ors. Vs. Union of India and Ors. 162(2009)
DLT 371 (Decided on 18th August, 2009)
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The Court held that there is no Drug Patent Linkage mechanism in
India and only the Controller of Patents has the authority to determine patent standards. It was also held that mere market approval
of a drug does not lead to patent infringement and the jurisdiction of
which does not lie with the drug authorities.
Indian Performing Rights Society Vs. Eastern Indian Motion Pictures Ltd. AIR1977 SC1443
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The Hon’ble Supreme Court observed that the cinematograph film
producer becomes the first owner of the copyright in case he commissions a composer of music, a lyricist, for reward or for a consideration
to compose music to be incorporated in the cinematography film as
the composer is employed under contract of service. Section 17(c) of
Copyright Act, 1957 lays down that the proprietor becomes the absolute owner in cases of contract of service for a valuable consideration
unless there is an agreement contrary to it. Copyright Societies like
IPRS cannot claim royalty as the production house has the right over
the composition the moment it comes into existence. In this case, the
producer of the cinematograph film becomes the absolute owner and
the authority cannot be questioned.
Toyota Jidosha Kabushiki Kaisha Vs. Prius Auto Industries Ltd.
and Ors., 2017 SC (Decided on 14th December, 2017)
The test of possibility/likelihood of confusion would be valid at the
stage of quiatimet (injunction to restrain wrongful acts) actions and
not at the stage of final adjudication of the suit, particularly when the
defendants had used the impugned mark for a long period.
Source: https://www.icsi.edu/student/study-material-os/
self assessment Questions
4. Creations and inventions that are created by the human mind,
such as literary works, artistic works, symbols, names, images,
designs, etc., are called __________.
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5. Which of the following intellectual properties is not categorised under industrial property?
a. Patents
b. Trademarks
c. Copyrights
d. Industrial designs
Activity
Describe the strengths and weaknesses of IPR laws in India.
4.4 PREVENTION OF SEXUAL HARASSMENT
IM
S
These days all of us keep listening to the cases highlighting that one or
another person has faced sexual harassment at workplace. Of late, it
has become a menace. Anyone could be a victim of sexual harassment
at workplace irrespective of their gender, race, caste, nationality, etc.
Till recently, there were no laws under which cases of sexual harassment at the workplace could be tried. However, India has enacted the
Sexual Harassment of Women at Workplace (Prevention, Prohibition
and Redressal) Act, 2013, specifically for cases of sexual harassment
at the workplace.
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4.4.1 WHAT IS SEXUAL HARASSMENT?
According to Section 2(n) of the Sexual Harassment of Women
at Workplace (Prevention, Prohibition and Redressal) Act, 2013,
sexual harassment includes any one or more of the following unwelcome
acts or behaviour (whether directly or by implication), namely:
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(i) physical contact and advances; or
(ii) a demand or request for sexual favours; or
(iii) making sexually coloured remarks; or
(iv) showing pornography; or
(v) any other unwelcome physical, verbal or non-verbal conduct of
sexual nature
In simple words, sexual harassment involves unwelcome act(s) or
behaviour(s), such as sexual advances, requests for sexual favours and
any other verbal or physical conduct of sexual nature. These types of
acts or behaviours may also hint towards a preferential or detrimental
treatment in one’s employment. At times, an individual may also feel
a threat to present or future employment. Such acts and behaviours
usually involve creating an offensive or hostile or humiliating work
environment. The person who is the victim of sexual harassment is
made to feel humiliated, offended and insulted. The acts of sexual
harassment are extremely disturbing for the victim physically as well
as at mentally.
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Example: Acts that amount to sexual harassment include:
‰‰ Passing
indicative or offensive comments or jokes
‰‰ Uninvited
‰‰ Asking
touching
for sexual favours
‰‰ Showing or sending sexually explicit pictures, text messages, emails,
etc.
‰‰ Discrediting
a woman’s work only because of her gender
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Sexual harassment is a crime and it violates the fundamental rights of
women. Article 14 of the Indian Constitution grants a right to equality
to every citizen of India. In addition, it also violates Article 21 of the
Constitution of India, which guarantees the protection of life and personal liberty.
IM
Sexual harassment is considered one of the forms of violence and
crimes against women. It is a direct outcome of male chauvinism
which is a belief that men are better and superior to women. It is a
mind-set owing to which women are seen as objects rather than equal
human beings. Sexual harassment is a phenomenon that is found in
all countries of the world.
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In the last few decades, the education levels among women has
increased and they have started to go out and earn their livelihoods.
They are now employed in almost all fields of work. The cases of
sexual harassment have assumed alarming proportions after women
started being employed in all types of jobs and started to stand shoulder to shoulder with their male counterparts. Recently, the #MeToo
movement was started and the world witnessed various cases where
women were sexually harassed or attempted to be harassed at work
by male counterparts. It is also a fact that most of the victims who face
sexual harassment at workplace feel helpless and do not report such
incidents. At times, they are silenced and forced not to disclose these
incidents or they will face dire consequences. Certain organisations
may also try to suppress such cases for fear of their reputation.
4.4.2 JUDGEMENT – VISHAKHA VS. STATE OF RAJASTHAN
Vishakha vs. State of Rajasthan (1992) is a landmark case in which the
Supreme Court dealt with the issue of women safety from any kind
of sexual harassment at the workplace. Following this judgement,
detailed guidelines with respect to sexual harassment at workplace
were formed.
Bhanwari Devi worked as a Saathin or a social activist worker under
Rajasthan Government’s women development project. In 1992, she
was working for stopping child marriages in villages. As a part of her
work, she made her efforts to stop the marriage of the infant daugh-
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NOTE
After this crime, Bhanwari Devi had to face a lot of hardships during
her legal battle to get justice. Initially, the trial court acquitted the
accused. Despite this, she did not lose hope. She along with all female
social workers who were supporting her filed a writ petition in the
Supreme Court of India under the name ‘Vishakha’. Following this
case, the Supreme Court framed the guidelines for preventing sexual
harassment at workplace. These guidelines are called the Vishakha
Guidelines.
S
Vishakha guidelines formed the
basis of The Sexual Harassment
of Women at Workplace
(Prevention, Prohibition and
Redressal) Act, 2013.
ter of Ramkaran Gujjar who was less than a year old. Despite all her
efforts, she could not stop the marriage. However, Ramkaran Gujjar
became an enemy of Bhanwari Devi. She was exposed to social punishment and boycott. To seek vengeance, Ramkaran Gujjar and his
five friends gang raped Bhanwari Devi in front of her husband.
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In this case, the judgement was pronounced on 13th August, 1997 by
a bench comprising the then CJI, J.S. Verma, Justice Sujata Manohar
and Justice B.N. Kripal against the writ petition filed by ‘Vishakha’.
The court had observed that the fundamental rights under Articles
14, 19(1)(g) and 21 of the Constitution of India must be maintained
and every profession, trade and occupation should provide safe working environment to employees. The judgement also put forward various guidelines for employees to avoid sexual harassment. The main
objective of the Supreme Court was to ensure that women do not face
discrimination at the workplace. This judgement compelled the government to bring a law related to the issue of sexual harassment at
workplace.
Exhibit
Provisions of Vishakha Guidelines
The Vishakha guidelines lay down certain preventive steps that an
employer or responsible persons within the organisation should
keep in mind in order to prevent women from sexual harassment at
workplace. They can be summarised as follows:
‰‰ Express
prohibition of sexual harassment as defined (in this
decision) at the workplace should be notified, published and
circulated in appropriate ways.
‰‰ The
rules/regulations of the Government and public sector
bodies relating to conduct and discipline should include rules/
regulations prohibiting sexual harassment and provide for
appropriate penalties in such rules against the offender.
‰‰ Appropriate
work conditions should be provided in respect of
work, leisure, health and hygiene to further ensure that there
is no hostile environment towards women at workplaces and
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no woman employee should have reasonable grounds to believe
that she is disadvantaged in connection with her employment.
‰‰ An
appropriate complaints mechanism should be created in
the employer’s organisation for redress of the complaint made
by the victim. Such complaint mechanism should ensure timebound treatment of complaints.
‰‰ Complaints
Committee: The complaints mechanism, referred
to above, should be adequate to provide, where necessary, a
complaints committee, a special counsellor or other support
service, including the maintenance of confidentiality.
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Source: https://ccs.in/internship_papers/2008/Vishakha-Guidelines-kerala-study-200.pdf
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4.4.3 THE SEXUAL HARASSMENT OF WOMEN AT
WORKPLACE (PREVENTION, PROHIBITION AND
REDRESSAL) ACT, 2013
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In 2013, the Indian Government enacted the Sexual Harassment of
Women at Workplace (Prevention, Prohibition and Redressal) Act,
2013 (“POSH Act”). This law was enacted to provide protection to
women against sexual harassment at workplace and to prevent and
redress the complaints of sexual harassment at workplace and related
matters. Vishakha Guidelines were superseded by this POSH Act.
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This POSH Act recognises that women have a right to be in a safe
and secure work environment. This law is equally valid for all types
of women employees whether they are regular full-time employees,
temporary employees or daily wage workers or whether they are
employed directly or indirectly through a contractor. Women may
be working for remuneration or on a voluntary basis. The terms of
employment may be express or implied. Contractual employees, probationers, trainees and apprentices are also covered under this POSH
Act. Workers working in dwelling places and houses are also covered
under this POSH Act.
The main objectives of the POSH Act, 2013 are as follows:
i. To ensure safe working places for women and to build an
enabling environment that respects women’s right to equality of
status and opportunity
ii. To ensure right to gender equality, life, liberty, and equality of
working conditions
iii. To improve women participation in work which may lead to economic empowerment and their inclusive growth
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The main features of this POSH Act are as follows:
‰‰ This
POSH Act defines sexual harassment at workplace and
provides for a mechanism for redressing the complaints.
‰‰ The
POSH Act defines ‘aggrieved woman’ as a woman who has
faced sexual harassment at workplace and it includes all women
irrespective of their age and employment status. It is applicable
for women working in organised as well as unorganised sector,
public as well as private sector, and it covers clients, customers
and domestic workers.
POSH Act includes workplaces, hospitals, nursing homes,
educational institutions, sports institutes, sports complex, any
place visited by employee during course of employment including
transportation as workplace.
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‰‰ This
this POSH Act, the employer needs to set up an Internal
Complaints Committee in each office or branch which has 10 or
more employees.
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‰‰ Under
‰‰ District
officers need to create a committee at the district level.
‰‰ Complaints committees are empowered with the powers similar to
civil courts for collection of evidence.
the complainant requests for conciliation before formal inquiry
begins, the committee must arrange for the same.
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‰‰ If
‰‰ Employers that do not comply with the provisions of the POSH Act
can be fined up to ` 50,000. Repeat cases involve higher penalties
and may even lead to cancellation of license and registration of
business.
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4.4.4 COMMITTEE ON PREVENTION OF SEXUAL
HARASSMENT – APPOINTMENT, MEMBERS,
PROCEDURES AND ACTIONS TO BE TAKEN
Under the redressal mechanism laid down in the Sexual Harassment
of Women at Workplace (Prevention, Prohibition and Redressal) Act,
2013, employers are required to establish an Internal Complaints
Committee (ICC).
Appointment
The employer must establish an Internal Complaints Committee (ICC)
in order to look into the complaints of sexual harassment at workplace
if it employs 10 or more employees. While appointing the members of
the committee, the employer needs to remember these rules:
‰‰ ICC
shall be established by a written order.
‰‰ Women must have a representation of at least 50% in the committee.
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Members
The members and their eligibility for being appointed as a member in
the ICC are shown in Table 4.1:
Table 4.1: Members of the ICC
Eligibility
1.
Chairperson
(Presiding Officer)
Women working at the senior level as an
employee. If a senior woman employee is
not available, then a woman is nominated
from the other office or unit or department
of the same employer.
2.
Two Members
(minimum)
Atleast one woman who possesses legal
knowledge and/or experience in social
work.
3.
Member
A person from an NGO or any association
that is working for women-centric issues
and sexual harassment.
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Member
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S. No.
All the members of the ICC can hold office for a period not more than
three years from the date of their nomination. In case the members
are appointed from NGOs or associations, they must be paid fees or
allowances as may be prescribed by the employer.
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Procedure
The Sexual Harassment Complaint procedure is shown in Figure 4.4:
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Sexual Harassment Complaint Process
Receiving Complaint
Interviewing Complainants
Witnesses and
Respondents
Providing Findings and
Recommendations in a
Report
Analysing the Information to
Understand the Sequence of Events
related to Complaints
Preparing the File
Figure 4.4: Sexual Harassment Complaint Procedure
After the ICC has created its report, it is forwarded to the District Officer by the employer.
Actions to be Taken
An employer may be subjected to a penalty of up to ` 50,000 in the
following cases:
‰‰ If
it fails to constitute the ICC
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‰‰ If
it fails to implement the recommendations of the ICC
‰‰ Contravening
or attempting to contravene the rules or provisions
of the POSH Act
‰‰ If
an employer repeats any breach, he shall be subjected to twice
the punishment, higher punishment, cancellation/withdrawal/nonrenewal of registration/license required for carrying on business
or activities.
4.4.5 IMPACT OF SEXUAL HARASSMENT CASES ON INDIAN
AND FOREIGN ORGANISATIONS
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The notoriety attached to sexual harassment has a negative economic
impact on organisations. Sexual harassment brings bad reputation
and may prevent good and efficient personnel from joining such firms
impacting its competitive market efficiency. A congenial work environment is bound to positively affect productivity, human relations
and work satisfaction.
The cases of sexual harassment can create various challenges for
organisations, such as:
‰‰ Higher
employee turnover
employee productivity
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‰‰ Lower
‰‰ Increased
absenteeism
‰‰ Increased
sick leaves
‰‰ Hurts
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the value and bottom line of the companies
self assessment Questions
6. After the ICC has created its report, it is forwarded to the
________ by the employer.
7. Which of the following acts or behaviours cannot be considered as sexual harassment?
a. Sexual advances
b. Requests for sexual favours
c. Touching inappropriately
d. Offering a handshake
Activity
Find some cases of sexual harassment at a workplace that you have
heard about in the recent past. Make a list of all these cases and
discuss the facts of each case.
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LAWS THAT COMMONLY AFFECT BUSINESSES
4.5 INFORMATION TECHNOLOGY LAW
The Information Technology Act, 2000 (“IT Act”) was notified on 17th
October, 2000. This IT Act is also the law that governs cybercrime and
e-commerce activities. The Indian Government enacted the IT Act
in June 2000 based on the Model Law on E-Commerce of the United
Nations Commission on International Trade Law (UNCITRAL).
This IT Act provides a legal framework to e-governance which recognises electronic records, digital signature and electronic transactions.
This IT Act was amended in the years 2002, 2008 (effective 27th October, 2009) and 2017.
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4.5.1 INFORMATION TECHNOLOGY ACT, 2000 AND ITS
OBJECTIVES
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The IT Act consists of 94 sections and four schedules. The sections are
divided into 13 chapters. Apart from paper-based methods of communication and storage of information, there are electronic methods of
communication and information storage and exchange. This IT Act
provides legal recognition to all such transactions. Following this IT
Act, data storage was given recognition for being used by legal purposes. After the enactment of this IT Act, some other Acts, such as
the Indian Evidence Act, 1872 and the Indian Penal Code, 1860 were
also amended to provide legal recognition to the documents that were
specified in IT Act.
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The purpose of developing the IT Act was to promote the use of e-commerce, e-transactions and e-governance practices. This law had intent
to increase the use of e-transactions. IT Act grants legal recognition
and validation to all the online transactions and data exchange only if
they are done using authorised websites.
The objectives of IT Act are as follows:
‰‰ Granting
legal recognition to transactions that are carried out
by means of Electronic Data Interchange (EDI) or other means
of electronic communication which are usually called electronic
commerce transactions
‰‰ Enabling electronic filing of documents with government agencies
‰‰ Amending
the Indian Penal Code, 1860, the Indian Evidence Act,
1872, the Banker’s Book Evidence Act, 1891 and the Reserve Bank
of India Act, 1934
‰‰ Granting
legal recognition to digital signatures for authentication
of any information as required by the law
‰‰ Enabling
electronic filing of documents and its acceptance by the
government
‰‰ Facilitating
electronic storage of data
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‰‰ Protecting
the interests of the Internet users against computerrelated offenses and cyber threats
‰‰ Creating civil and criminal liabilities for contravention of provisions
of the Act
‰‰ Providing
a legal framework for mitigating and checking cyber-
crimes
‰‰ Facilitating
the electronic transfer of funds between banks and
financial institutions
4.5.2 FEATURES OF THE INFORMATION AND
TECHNOLOGY ACT, 2000
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Some most important features of the IT Act are listed as follows:
‰‰ All electronic contracts made using secure electronic channels are
legal and valid as per this IT Act
digital signatures have a legal recognition
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‰‰ All
‰‰ Digital
signatures and electronic records are secured by relevant
measures
‰‰ Controllers
of Certifying Authorities (CCAs) are appointed for
licensing and regulating the Certifying Authorities
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‰‰ Certifying
Authorities act as repositories of all digital signatures
‰‰ This Act empowers the senior police officers (not below the rank of
a Deputy Superintendent of Police) to enter any public place and
they can even search and arrest without having a warrant
‰‰ Cyber
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Regulations Advisory Committee has been established to
advise the Central Government and Controller
‰‰ This
Act has various provisions relating to various offenses,
breaches of law and penalties
4.5.3 SCOPE AND MAJOR PROVISIONS UNDER THE
INFORMATION AND TECHNOLOGY ACT, 2000
The Information Technology Act, 2000 is applicable to the whole of
India. This Act applies to India as well as outside of India for offences
and contraventions of the provisions contained under this Act. If any
offence or contravention of any provision of the IT Act is committed
with the help of a computer, computer system or computer network
that is located in India, then the person who commits such offence can
be punished.
As per Section 1(4) of the Information Technology Act, 2000, this law
is not applicable to documents and transactions that are specified in
the first schedule of this Act. Therefore, the scope of the Information
Technology Act, 2000 is restricted to documents that have been men-
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tioned in the First Schedule. There are five types of documents that
are included in the First Schedule as follows:
‰‰ A
Negotiable Instrument (other than a cheque) as defined in
Section 13 of the Negotiable Instruments Act, 1881 (26 of 1881)
‰‰ A
Power of Attorney as defined in Section 1A of the Power
of Attorney Act (7 of 1882)
‰‰ A
trust as defined in Section 3 of the Indian Trusts Act, 1882
(2 of 1882)
‰‰ A will as defined in Clause (h) of Section 2 of the Indian Succession
Act, 1925 (39 of 1925), any testamentary deposition
‰‰ Any
contact for the sale or conveyance of immovable property or
any interest in such property
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All electronic transactions fall under the scope of the Information
Technology Act, 2000 except the following electronic transactions:
Information Technology Act, 2000 is not applicable for
attestation for creating trust using electronic means. It means that
physical attestation is a must for creating a trust.
‰‰ The
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‰‰ The
Information Technology Act, 2000 is not applicable for
attestation using non electronic means.
‰‰ The Information Technology Act, 2000 is not applicable to contracts
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of sale of immovable properties.
‰‰ Electronic
records and electronic attestation cannot be used for
giving power of attorney of property.
‰‰ Legal
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The major provisions under the Information Technology Act, 2000 are
as follows:
recognition to electronic documents: As per the law,
information or any matter shall be in writing (typewritten or
printed form) Such requirement shall be deemed to have been
satisfied if such information or matter is:
 rendered
or made available in the electronic form
 accessible
to be used as a subsequent reference
‰‰ Legal recognition to digital signatures: If any information/matter
is required by the law to be authenticated by affixing the signature,
such requirement shall be deemed to have been satisfied. If
such information/matter is authenticated by the means of digital
signature, it should be affixed in the prescribed manner.
‰‰ Offences:
The Act lists various offences and punishments related
to information technology.
4.5.4 E-COMMERCE
During the 1990s, most countries started using electronic communication and email for conducting international trade. This phenomenon
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necessitated the need for the development of e-commerce in India.
Development of e-commerce also required the following:
‰‰ Granting
legal recognition to e-commerce transactions, digital
signatures, electronic fund transfers, electronic storage of data,
etc., to support e-commerce
‰‰ Facilitating
‰‰ Licensing
‰‰ Defining
electronic filing and acceptance of documents
and recognising foreign certifying authorities
the offences and contraventions related to e-commerce
‰‰ Implementing a system for ensuring justice in case of cybercrimes
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E-commerce or electronic commerce or the Internet commerce refers
to buying and selling of goods or services or transmitting funds or
data using online means. Transfer of money and data is necessary for
buying and selling using the Internet. In simple terms, any kind of
business transaction that is conducted electronically is called e-commerce. Customers, business organisations, suppliers, banks, financial
institutions, financial service enablers, government agencies, etc., are
all involved in e-commerce transactions.
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The Indian markets too have gained a lot of importance and growth
in e-commerce. Such high levels of growth in the Indian e-commerce
markets pose numerous legal and regulatory challenges. Some important challenges that are related to the Indian e-commerce include:
‰‰ Legal
validity of electronic transactions
‰‰ Security
of electronic transactions
‰‰ Content
regulation
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‰‰ Intermediary
liability and jurisdiction
ADVANTAGES AND DISADVANTAGES OF E-COMMERCE
Some of the advantages of e-commerce are as follows:
‰‰ Reduces
‰‰ Saves
the time required in buying and selling
the time of customers
‰‰ E-commerce
companies can customise the online stores based on
the product choice and past purchase history
‰‰ Easy
retargeting of customers
‰‰ Encourages
impulse purchases
‰‰ Buyers can decide whether or not to buy based on the reviews and
comments of people who have already purchased
‰‰ Provides
videos
‰‰ Low
detailed product descriptions along with images and
cost of operations
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‰‰ Cost
of marketing is low
‰‰ E-commerce
transactions can be conducted round the clock all
seven days of the week and 365 days of the year
‰‰ Avoids
the cost of setting up stores
‰‰ Increased
return on investment
‰‰ Low
cost of hiring and training
‰‰ Low
rate of human errors
‰‰ Top
and most frequently bought products can be showcased
‰‰ Easy
access to customer data
Some disadvantages of e-commerce are as follows:
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‰‰ Large number of orders can be processed in a small period of time
‰‰ Security: With the ease of online transactions, cyber malpractices,
mail and spamming: This issue is not discussed in detail
in IT Act, but this is one of the upcoming issues where a person
receives a large number of unwanted promotional mails from
organisations advertising their products and services. There is no
personal or business relationship with the recipient and because
of such mails, sometimes fraudulent activities take place.
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‰‰ Junk
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such as authenticity, privacy and data protection, have also
increased to a large extent. Nowadays, many cyber complaints are
registered regarding security issues.
‰‰ Issue of obscenity: Obscene and objectionable content is prohibited
‰‰ Cyber
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on the Internet and the host is asked to block such content. This
issue is highlighted in the Indian Penal Code, but is not highlighted
in the Information and Technology Act, 2000.
defamation: Cyber defamation is a broad term which
includes any act, deed, word, gesture or thing on the Internet or
the cyberspace which is designed to harm a person’s reputation or
goodwill with a malaise intention so that others in the community
– whether online or offline – will view the person with contempt,
ridicule, hatred, indifference or with a negative attribute. It can
be committed through World Wide Web, discussion groups, the
Internet, mailing lists, bulletin boards and e-mails.
IMPACT OF DE-REGULATION IN E-COMMERCE
Deregulation refers to the removal of any regulations and restrictions
that are imposed on any industry.
RECENT EXAMPLES OF INTRODUCING REGULATIONS IN
E-COMMERCE
In India, the Information and Technology Act, 2000 and IT (Amendment) Act, 2008 are the acts that govern and regulate the use of the
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Internet and e-commerce. Online transactions and other important
aspects of the e-commerce, such as online buying and selling, electronic contracts, cybercrimes, internet surveillance, etc., are all covered under the Information and Technology Act, 2000.
There are various rules and regulations related to e-commerce in
India. India issued the first set of e-commerce rules and regulations in
December 2018. The main provisions of these rules were:
‰‰ Barring
e-tailers from selling products from companies in which
they had an equity stake
‰‰ Barring
e-tailers from entering into exclusive agreements with
sellers
‰‰ Protecting the Indian retailers from the unfair advantage to foreign
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sellers due to their e-commerce platform
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Thereafter, the second set of e-commerce rules was drafted in February 2019. The main provisions of these rules were:
‰‰ Ensuring
that the data is stored locally
‰‰ More
and more data centres and server farms should be located
within India
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On 26th June, 2019, the Press Information Bureau of the Indian Government notified that the draft national e-commerce policy has been
prepared and placed in public domain. This policy addresses six areas
related to e-commerce, such as:
1. Data
2. Infrastructure development
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190
3. E-commerce marketplaces
4. Regulatory issues
5. Stimulating domestic digital economy
6. Export promotion
This policy has been drafted keeping in mind the interests of all e-commerce stakeholders who include investors, manufacturers, MSMEs,
traders, retailers, start-ups and consumers.
Some important provisions of the draft national e-commerce policy
are as follows:
‰‰ Discouraging
the free inflow of foreign capital in e-commerce
‰‰ Data
localisation in India in accordance with Srikrishna
Committee’s draft data protection bill. Since data storage
infrastructure is not very well developed in India, India would
provide waivers on import duties required for setting up the data
storage centres
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‰‰ E-commerce
entities need to move personal data to India
‰‰ Government
can access personal data for national security and
public policy objectives and this is subject to privacy laws
‰‰ Provision
for a national encryption policy for the personal and
institutional data held by corporates
‰‰ All
the Indian e-commerce platforms selling the Indian products
will have to be managed by the Indian leadership and should not
have foreign equity exceeding 49%
‰‰ Central
Consumer Protection Authority or the CCPA will be
created as a nationwide regulator for e-commerce platforms
‰‰ Preferential
to be made necessary for all e-commerce websites
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‰‰ RuPay
treatment will be given to the Indian products
‰‰ All
foreign e-commerce sites need to follow the Indian 2-factor
authentication while processing payments by Indian cards
‰‰ Creating
for domestic standards for the Internet of Things (IOT)
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‰‰ Provision
conducive environment for angel investors.
‰‰ No e-commerce companies should buy phones and other expensive
electronics in bulk quantity as these distort the market price of
such products.
e-commerce organisations will be required to disclose their
data collection practices.
‰‰ Auditing
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‰‰ All
foreign companies’ source code
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4.5.5 E-GOVERNANCE – MEANING AND STATUS IN INDIA
Electronic Governance (e-governance) refers to the application of
Information and Communication Technology (ICT) for providing government services, exchange of information, transactions, integration
of previously existing services and information portals. Using e-governance, the government is able to address the needs of citizens.
Using e-governance, the government aims to encourage good governance. ICT can be used for various governance services, such as the
following:
‰‰ Dissemination
‰‰ Efficient
of information
and speedy communication
Through e-governance, the government plans to raise the coverage
and quality of information and services provided to the general public
in an effective and efficient manner. Following are the major benefits
of e-governance:
‰‰ Helps
in reducing corruption
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‰‰ Brings
transparency
‰‰ Increases
‰‰ Helps
convenience
in reducing overall cost
‰‰ Increases
the reach of government
‰‰ Provides
a chance to the constituents to directly participate with
the help of e-governance
Following are various types of e-governance:
‰‰ G2G
(Government to Government): When the exchange of
information takes place between government bodies, it is termed
as G2G e-governance. It can be at the horizontal level as well as
vertical level.
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Example: Within government entities at the national level, the state
level or local bodies, the exchange is at the horizontal level, while
between one state government and another, the exchange is at the
vertical level.
‰‰ G2C
(Government to Citizen): The interaction among the
government and general public is said to be G2C. It helps
citizens access a wide variety of services. The general public can
share views and grievances on government policies anytime and
anywhere.
(Government to Business): The interaction between
government and business class is said to be G2B. It helps in
saving cost, time, red tapism and establishing transparency in the
business environment.
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‰‰ G2B
‰‰ G2E
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(Government to Employees): The G2E model aims at
providing information and services by the government organisation
to their employees to facilitate communication and learning. The
G2E model offers career advice and information on performance
management, training and development of employees, etc. Thus,
e-governance plays an important role in improving and supporting
the tasks performed by the government departments and agencies.
4.5.6 THE INFORMATION TECHNOLOGY AMENDMENT
ACT, 2008
In 2008, the Indian Government amended the Information Technology Act, 2000 to enact the Information Technology (Amendment) Act,
2008. Owing to this Act, a strong data protection regime was established in India. This law addressed various concerns of the industries,
such as data protection, cyber-crime measures, predictive legal environment, etc.
This Amendment requires that organisations that hold sensitive and
personal information of consumers in digital environment must be
protected and secured reasonably. According to this Amendment, all
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LAWS THAT COMMONLY AFFECT BUSINESSES
lawful contracts must be secured by provisions for penalty for breach
of confidentiality and privacy. The Amendment also provides for protecting the privacy of consumers. This will have the impact of promoting trust in trans-border data flows to India. This Amendment further
strengthens data protection laws by creating provisions for cybercrimes, such as identity theft, phishing, data leakage, cyber-terrorism,
data security and data privacy, etc.
This Amendment Act has strengthened the security practices within
India by including many cybercrimes in the Amendment Act, which
were not present in the IT Act, 2000. Cybercrimes, such as sending of
offensive or false messages (s 66A), receiving stolen computer resource
(s 66B), identity theft (s 66C), cheating by personation (s 66D), violation of privacy (s 66E) are included in the IT Act.
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The Act has redefined the terms like ‘communication device’ in context of current usage and validating electronic signature, etc., in order
to deal with electronic commerce and cybercrime. This Act has introduced various provisions to foster an effective enforcement of cyber
law in India.
In 2015, Section 66A of the IT (Amendment) Act, 2008 was struck
down by the Supreme Court vide the case of Shreya Singhal vs. Union
of India decided on 24th March, 2015.
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KEY PROVISIONS OF THE AMENDMENT
Some of the important provisions of the IT (Amendment) Act, 2008
are as follows:
offensive message is a crime
‰‰ Authority
‰‰ Child
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‰‰ Sending
has power to monitor any information for any source
porn is crime
‰‰ Cyber
terrorism
‰‰ Voyeurism
is a crime
‰‰ Certificate
to identify the authenticity of the device to introduce
as a proof
‰‰ Tampering
‰‰ Hacking
with computer document is crime
computer is considered to be a crime
‰‰ Purchasing
or selling any electronic device
IMPACT OF THE INFORMATION TECHNOLOGY AMENDMENT ACT
ON E-COMMERCE, IT INFRASTRUCTURE AND CYBERCRIMES
The Information Technology Act, 2000 had Sections 65 to 78 which
provided provisions for offences and penalties for activities, such as
tampering with computer source code documents, hacking systems,
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MARK IT!
As per Pavan Duggal, who is
a cyber-law consultant and
advocate at the Supreme Court
of India, the IT (Amendment) Act,
2008 has provided the Indian
government with the power of
surveillance, monitoring and
blocking data traffic. The new
powers under the Amendment
Act tend to give the Indian
government a texture and colour
of being a surveillance state.
194
Business Law
Study
Hint
The IT (Amendment) Act, 2008
brought cyber cafes under its
ambit along with various cyber
terrorism provisions.
publishing and disseminating obscene information in electronic form
or for fraudulent purposes. The scope and extent of dealing with
cybercrimes was quite limited. With the enactment of the IT (Amendment) Act, 2008 amendments were introduced for eight different types
of offences that affect individuals or other persons including the following:
‰‰ Using
any computer resource code or communication device to
compose and disseminate false or offensive information
‰‰ Making
fraudulent or dishonest use of electronic signatures or
passwords
‰‰ Using any computer source or communication device for capturing,
4.5.7
CYBERCRIME
A cybercrime refers to any and all types of crimes that are used with
the help of computers and computer networks. According to the Interpol, ‘Pure cybercrime’ refers to crimes against computers and information systems, where the aim is to gain an unauthorised access to a device
or deny access to a legitimate user.
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? DID YOU KNOW
Cybercrime is also called the
bane of the Internet.
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publishing or transmitting any form of obscene images and visuals
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With an increase in the use of internet for trade and communication,
criminals now use new technologies to commit various types of cybercrimes, such as cyber-attacks against governments, businesses and
individuals. Cybercrimes are extremely critical for economies because
these crimes know no borders and can potentially cause serious harm
to an individual, nation, business, etc.
Some of the cybercrimes include online fraud, illegal gambling, selling fake medicines, etc. It can be said that cybercrime is now growing
at a tremendous speed, and the police and various other regulating
authorities need to acquaint themselves with the technologies, tools
and methods that cyber criminals use to carry out their crimes.
TYPES OF CYBERCRIMES
The types of cybercrimes according to the entity that is affected by the
crime are as follows:
‰‰ Cybercrime
against individuals: Such cybercrimes are those
which directly affect a person or his/her property.
Example: Phishing, cyber stalking and publishing illegal adult
materials are cybercrimes against individuals.
‰‰ Cybercrime
against companies/organisations: Such crimes are
those that directly target any company, its online presence or its
products and services.
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LAWS THAT COMMONLY AFFECT BUSINESSES
Example: Data breaches, data theft, etc. are cybercrimes against
companies.
‰‰ Cybercrime
against society: Such crimes are those which affect
the society as a whole.
Example: Forgery, financial crime against a public organisation,
selling illegal products, etc. are cybercrimes against society.
‰‰ Cybercrime
against government: Such crimes are those which
are targeted at law enforcement agencies and various government
entities.
Example: Hacking government systems, networks and websites is a
cybercrime against government.
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The different types of cybercrimes that affect various individuals,
organisations, government and society are as follows:
‰‰ Phishing: Malicious websites are created to look like real websites
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which trick users to provide their login IDs, passwords and other
details.
‰‰ E-mail
bombing: It takes place when a large number of e-mails
are sent to one particular e-mail address.
media hacking: This malpractice takes place when the
hackers hack the social media accounts, such as the Twitter,
Facebook, etc., of a person, company or government entity.
This malpractice is all about sharing malicious links
in order to harm, mislead or damage the device.
‰‰ Software
software.
‰‰ Salami
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‰‰ Spamming:
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‰‰ Social
piracy: It is the unauthorised distribution and use of
slicing attacks: This is a type of cybercrime that takes
when cyber criminals steal money in small and tiny amounts which
are not noticeable to account holders.
‰‰ Hacking:
It is illegal intrusion into the computer system or
computer network.
‰‰ Cyber
stalking: This malpractice involves following and stalking
any person on his/her social media account.
‰‰ Cyber
bullying: This malpractice involves sending harmful,
offensive and abusive messages over the Internet to a person or
an organisation.
‰‰ Identity
theft: This happens when cyber criminals steal the
identity of any other person and pretend to be a particular person
over the Internet.
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PENALTIES UNDER THE INFORMATION TECHNOLOGY ACT, 2000
AND THE AMENDMENT TO INFORMATION TECHNOLOGY
ACT, 2008
The offences, penalties and punishments under the Information Technology Act, 2000 are listed in Table 4.2:
TABLE 4.2: OFFENCES, PENALTIES AND PUNISHMENTS
UNDER THE ITA, 2000
Offence
Punishment/Imprisonment Term
Penalty/
Fine (`)
Up to 3 years
2,00,000
Dishonestly or fraudulently accessing
a computer, computer system or computer network without the permission
of the owner for downloading, copying
and extracting any data
Up to 3 years
5,00,000
Dishonestly or fraudulently receiving or retaining any stolen computer
resource or communication device
Up to 3 years
1,00,000
Dishonestly or fraudulently making
use of electronic signature, password
or any other Unique Identification Feature of any other person
Up to 3 years
1,00,000
Dishonestly or fraudulently cheating
any person by means of any communication device or computer resource by
personating
Up to 3 years
1,00,000
Intentionally capturing, publishing or
transmitting any image of private area
of any person without his/her consent
Up to 3 years
2,00,000
Any act done electronically or by using
computer which threatens the unity,
integrity, security or sovereignty of
India
Lifetime imprisonment
Publishing or transmitting in electronic form any material which
appeals to prurient interest, or if its
effect is such as to tend to deprave and
corrupt persons who are likely to read,
see or hear matter contained in it
Up to 3 years
(1st event)
5,00,000
(1st event)
Up to 3 years
(2nd event)
10,00,000
(2nd event)
Publishing or transmitting any sexually explicit material in electronic form
Up to 5 years
(1st event)
10,00,000
(1st event)
Up to 7 years
(2nd event)
10,00,000
(2nd event)
Up to 2 years
1,00,000
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IM
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Tampering, concealing, destroying, or
altering any computer source document intentionally
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If any person intentionally or knowingly fails to comply with the order of a
Certifying Authority
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LAWS THAT COMMONLY AFFECT BUSINESSES
TABLE 4.2: OFFENCES, PENALTIES AND PUNISHMENTS
UNDER THE ITA, 2000
Punishment/Imprisonment Term
Penalty/
Fine (`)
Securing access to any electronic
record, book, register, correspondence, information, document or other
material without the consent of the
person concerned and disclosing such
electronic record, book, register, correspondence, information, document or
other material to any other person
Up to 2 years
1,00,000
Securing access to any material containing personal information about
another person, with the intent to
cause wrongful loss or wrongful gain
discloses, without the consent of the
person
Up to 3 years
5,00,000
Publishing an electronic signature certificate and making it available to any
other person with the knowledge that
the Certifying Authority has not issued
it, or the Subscriber has not accepted it,
or the Certificate has been revoked or
suspended
Up to 2 years
S
Offence
M
IM
1,00,000
Knowingly creating, publishing, or
making available Electronic Signature Certificate for any fraudulent or
unlawful purpose
Up to 2 years
1,00,000
N
Source: https://taxguru.in/corporate-law/offences-penalties-information-technology-act-2000.
html
The offences, penalties and punishments under the IT (Amendment)
Act, 2008 are listed in Table 4.3:
TABLE 4.3: OFFENCES, PENALTIES AND PUNISHMENTS
UNDER THE IT (AMENDMENT) ACT, 2008
Offence
Punishment/
Imprisonment
Term
Penalty/
Fine (`)
Section 65 (Tampering with computer
source documents)
Up to 3 years
2,00,000
Section 66 (Computer-related offences)
Up to 3 years
5,00,000
Section 66B (Receiving stolen computer or
communication device)
Up to 3 years
1,00,000
Section 66C (Fraudulently or dishonestly
making use of the electronic signature,
password or any other unique identification feature)
Up to 3 years
1,00,000
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Business Law
TABLE 4.3: OFFENCES, PENALTIES AND PUNISHMENTS
UNDER THE IT (AMENDMENT) ACT, 2008
Offence
Punishment/
Imprisonment
Term
Penalty/
Fine (`)
Up to 3 years
1,00,000
Up to 3 years
2,00,000
Section 67 (Publishing or transmitting
obscene material in electronic form)
Up to 3 years
(1st event)
5,00,000
(1st event)
Up to 3 years
(2nd event)
Up to 5 years
(1st event)
10,00,000
(2nd event)
10,00,000
(1st event)
Up to 7 years
(2nd event)
Up to 5 years
(1st event)
10,00,000
(2nd event)
10,00,000
(1st event)
Up to 7 years
(2nd event)
Up to 3 years
10,00,000
(2nd event)
Not
Specified
IM
S
Section 66D (Cheating by personating
using communication device or computer
resource)
Section 66E (Violating the privacy of a person without his or her consent)
Section 66F (Committing or conspiring to
commit cyber terrorism)
Section 67A (Publishing or transmitting of
material containing a sexually explicit act
in an electronic form)
M
Section 67B (Publishing or transmitting
material depicting children in a sexually
explicit act in an electronic form)
Imprisonment
extendable to
imprisonment
for life
Section 67C (Intermediaries who intentionally or knowingly fail to preserve and
retain such information as may be specified
for such duration, manner and format as
the Central Government may prescribe)
Section 68 (Any Certifying Authority or any Up to 2 years
employee of such Authority who intentionally or knowingly fails to comply with any
order of the Controller which is necessary
to ensure compliance)
Section 69 (Subscriber or intermediary or
Up to 7 years
any person who fails to assist the agency of
the Central Government or the State Government to intercept, monitor or decrypt
or cause to be intercepted or monitored
or decrypted any information generated,
transmitted, received or stored in any computer resource)
Section 69A (Intermediary who fails to
Up to 7 years
comply with the direction issued by the
Central Government to block for access
by the public any information generated,
transmitted, received, stored or hosted in
any computer resource)
N
198
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N.A.
1,00,000
Not
Specified
Not
Specified
LAWS THAT COMMONLY AFFECT BUSINESSES
TABLE 4.3: OFFENCES, PENALTIES AND PUNISHMENTS
UNDER THE IT (AMENDMENT) ACT, 2008
Offence
Punishment/
Imprisonment
Term
Not
Specified
S
Section 69B (Any intermediary who inten- Up to 3 years
tionally or knowingly contravenes the provisions of sub-section 2 which states that
the intermediary shall when called upon
by the agency of the Central Government
to provide technical assistance and provide
online access to the computer resource
generating, transmitting, receiving or
storing such traffic data or information for
cyber security)
Penalty/
Fine (`)
Up to 10 years
Section 70B (Punishment for not complying with the directions of the Indian Computer Emergency Response Team
Up to 1 year
Not
Specified
IM
Section 70 (Punishment of any person who
secures access or attempts to secure access
to a protected system which has been
declared to be a protected system by the
appropriate government)
1,00,000
1,00,000
Section 72 (Securing access to any electronic record, book, register, correspondence, information, document or other
material without the consent of the person
concerned and discloses the same to any
other person)
Up to 2 years
1,00,000
Section 72A (Any person including an
Up to 3 years
intermediary who while providing services under a lawful contract has secured
access to any material containing personal
information about another person with the
intent to cause or knowing that he is likely
to cause wrongful loss or wrongful gain
disclosed without the consent of the person
concerned or in breach of the lawful contract such material to any other person)
5,00,000
Section 73 (Publishing an Electronic
Signature Certificate or otherwise makes
it available to any other person with the
knowledge that the certifying Authority
listed in the certificate has not issued it or
the subscriber listed in the certificate has
not accepted it or the certificate has been
revoked or suspended)
1,00,000
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Section 71 (Obtaining any license or Digital Up to 2 years
Signature Certificate if any person makes
any misrepresentation or suppresses any
material fact)
Up to 2 years
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Business Law
TABLE 4.3: OFFENCES, PENALTIES AND PUNISHMENTS
UNDER THE IT (AMENDMENT) ACT, 2008
Offence
Punishment/
Imprisonment
Term
Section 74 (Any person knowingly creates,
publishes or otherwise makes available an
Electronic Signature Certificate for any
fraudulent or unlawful purpose)
Up to 2 years
Penalty/
Fine (`)
1,00,000
Source: https://taxguru.in/corporate-law/offences-penalties-information-technology-act2000.html
Self Assessment Questions
S
8. One of the objectives of the Information Technology Act,
2000 is providing a legal framework for mitigating and checking ___________.
IM
9. The purpose of developing the Information Technology Act,
2000 was to promote the use of e-commerce, e-transactions
and e-governance practices.
a. True
b. False
M
Activity
Prepare a case study related to any cybercrime that had recently
been directed at the Indian Government websites.
S
N
200
4.6 Summary
‰‰ A
negotiable instrument is a document which promises the
payment of a certain sum of money to the assignee or some specific
person.
‰‰ A negotiable instrument means a promissory note, bill of exchange
or cheque payable either to order or to bearer.
‰‰ All
the payments and settlements are regulated and governed by
the Payment and Settlement Systems (PSS) Act, 2007.
‰‰ Section
138 of the Negotiable Instruments Act, 1881 deals with
the penalties that are applicable in case of dishonour of certain
cheques due to insufficient funds.
‰‰ Creations
and inventions that are created by the human mind,
such as literary works, artistic works, symbols, names, images,
designs, etc., are called Intellectual Property (IP).
‰‰ India
is a member of the WTO and is a signatory to the TRIPS
agreement. The Trade Related Aspects of Intellectual Property
Rights is an international and legal agreement signed between all
member countries of the WTO.
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LAWS THAT COMMONLY AFFECT BUSINESSES
‰‰ Various intellectual properties, such as trademarks and copyrights,
have been protected in India.
‰‰ IPRs
are similar to any other rights which enable their creators or
owners to benefit from their own work or investments.
‰‰ According
to the doctrine of sweat of brow, an author gains rights
during the creation of a work. According to this doctrine, the skill
and labour of the author forms the basis for judging the ownership
of the IPR.
‰‰ The
TRIPS agreement provides the minimum set of standards or
rules for protecting the intellectual property all over the world.
‰‰ The
major types of intellectual property rights include the
following:
S
 Patent
 Trademarks
 Designs
 Biodiversity-Geographical
of designs of Semiconductors and Integrated
Circuits
 Trade
Secrets
‰‰ Sexual
Indications
M
 Registration
IM
 Copyrights
harassment involves unwelcome act(s) or behaviour(s),
such as sexual advances, requests for sexual favours and any other
verbal or physical conduct of a sexual nature.
case judgement of Bhanwari Devi Rape case led to framing
of Vishakha Guidelines which formed the basis of the Sexual
Harassment of Women at Workplace (Prevention, Prohibition and
Redressal) Act, 2013.
N
‰‰ The
‰‰ The
Information Technology Act, 2000 is the law that governs the
cybercrime and e-commerce activities.
key words
‰‰ Digital signature: A mathematical technique for presenting the
authenticity of a digital document
‰‰ Drawee:
A person in whose favour the note is drawn
‰‰ Drawer: A person who makes the promise to another to pay the
debt
‰‰ Electronic
document: A document intended to be in an
electronic form or in a printed copy
‰‰ Infringement:
The practice of making, using or selling a
patented product or process without permission
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Business Law
‰‰ Novelty:
An invention that is new, original, unusual and does
not form part of any existing development, and not published or
available in the public domain
‰‰ Payee: A person to whom the payment of a negotiable instrument
is to be made
?
4.7 Descriptive Questions
1. Describe the three important types of negotiable instruments.
2. Explain the significance of TRIPS.
3. List various types of intellectual properties and the laws that
govern them.
S
4. Explain the main provisions of the Sexual Harassment of Women
at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
IM
5. Outline various provisions of the Information Technology Act,
2000.
4.8 Answers and Hints
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Q. No.
Negotiable Instruments Act, 1881
1.
b.
2.
2
3.
a. True
4.
intellectual property
5.
c.
6.
district officer
7.
d.
8.
cyber-crimes
9.
a.
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Topic
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202
Intellectual Property Law
Prevention of Sexual Harassment
Information Technology Law
Answer
Ante-dated cheque
Copyrights
Offering a handshake
True
HINTS FOR DESCRIPTIVE QUESTIONS
1. According to Section 13 of the Negotiable Instruments Act, 1881,
promissory notes, bills of exchange and cheques are negotiable
instruments. Refer to Section 4.2 Negotiable Instruments Act,
1881
2. TRIPS is an international agreement on IPRs that has been
signed by the member countries of the WTO. This agreement
includes patents, copyrights, trademarks, geographical indications, industrial designs and trade secrets. Refer to Section 4.3
Intellectual Property Law
NMIMS Global Access - School for Continuing Education
LAWS THAT COMMONLY AFFECT BUSINESSES
3. Various types of intellectual properties include patents (for
inventions), trademarks, industrial designs, trade secrets and
copyrights. Refer to Section 4.3 Intellectual Property Law
4. In 2013, the Indian Government enacted the Sexual Harassment
of Women at Workplace (Prevention, Prohibition and Redressal)
Act, 2013. This law was enacted to provide protection to women
against sexual harassment at workplace and prevent and redress
the complaints of sexual harassment at workplace. Refer to Section 4.4 Prevention of Sexual Harassment
S
5. The major provisions under the Information Technology Act,
2000 include legal recognition to electronic documents, legal recognition to digital signatures, etc. Refer to Section 4.5 Information Technology Law
Suggested Readings
‰‰ Sushma
IM
4.9 Suggested Readings & References
Arora. (2018) Business Laws. Taxmann
‰‰ Tulsian, P. (2014). Business Law. New Delhi: McGraw Hill Education
(India) Private Limited.
policy framework to be ready in 6 months. (2020).
Retrieved 18 April 2020, from https://economictimes.indiatimes.
com/small-biz/policy-trends/e-commerce-policy-framework-tobe-ready-in-6- months/articleshow/63902314.cms
‰‰ Home
N
‰‰ E-commerce
M
E-REFERENCES
page. (2020). Retrieved 18 April 2020, from https://
magnetoitsolutions.com/blog/advantages-and-disadvantages-ofecommerce
‰‰ Imminent
need for uniform laws for ecommerce in India. (2020).
Retrieved 18 April 2020, from https://economictimes.indiatimes.
com/industry/services/retail/imminent-need-for-uniform-laws-forecommerce-in-india/articleshow/73692139.cms?from=mdr
‰‰ India
proposes new e-commerce regulations with focus on data
rules. (2020). Retrieved 18 April 2020, from https://www.reuters.com/
article/us-india-ecommerce/india-proposes-new-e-commerceregulations-with-focus-on-data-rules-idUSKCN1QC0LO
‰‰ India’s New E-Commerce Rules Challenge E-Retailers | American
Express. (2020). Retrieved 18 April 2020, from https://www.
americanexpress.com/us/foreign-exchange/articles/e-commerceregulations-in-india-challenge-for-retailers/
‰‰ National,
Science, Sports, World, Variety, & Education et al.
(2020). Govt unveils draft e-commerce norms. Retrieved 18 April
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203
Business Law
2020, from https://www.thehindubusinessline.com/info-tech/govtunveils-draft-e-commerce-norms/article28826848.ece#
‰‰ Sen,
K. (2020). IT Act 2008 gets tougher with cyber crime.
Retrieved 18 April 2020, from https://www.business-standard.
com/article/economy-policy/it-act-2008-gets-tougher-with-cybercrime-109070600096_1.html
D. (2020). Salient features of the Information Technology
(Amendment) Act, 2008 - Indian Cyber Security - We Provide
services in Cyber crimeInvestigation,EthicalHacking,Hacking
Coarse, Consultation, Online Security, IT laws, case studies, cyber
safety tips, and articles, hacking tips and tricks, Hacking Tutorials
,submit your complaint, complaint, cyber crime complaint.
Retrieved 18 April 2020, from http://www.indiancybersecurity.com/
cyber_law/10_salient_features_of_the_information_technology_
amendment_act_2008.html
M
IM
S
‰‰ Sharma,
N
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h
5
a
pt
e
LAWS RELATED TO ENFORCEMENT AND
REDRESSAL MECHANISM IN BUSINESS
IM
N
5.3
Introduction
Alternative Dispute Resolution (ADR)
5.2.1
Meaning and History of ADR
5.2.2
Features of ADR
Advantages of ADR
5.2.3
Self Assessment Questions
Activity
Types of ADR
5.3.1
Negotiation
5.3.2
Mediation
5.3.3
Conciliation
5.3.4
Lok Adalats
5.3.5
Arbitration and Conciliation Act, 1996
5.3.6
Leading Case Studies
Self Assessment Questions
Activity
Anti-Corruption Laws
5.4.1
Anti-Corruption Laws in India
5.4.2Difference between US Anti-Corruption Laws and Indian
Anti-Corruption Laws
Leading Cases
5.4.3
Self Assessment Questions
Activity
Summary
Descriptive Questions
Answers and Hints
Suggested Readings & References
M
5.1
5.2
S
Contents
5.4
5.5
5.6
5.7
5.8
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Business Law
Introductory Caselet
CONVENIENCE IN ARBITRATION
Case Objective
S
This caselet discusses the
important role arbitration
plays in the service industry.
By opting for arbitration,
parties save various types
of expenses, which enables
substantial financial saving.
The use of the arbitration is significant in the service industry and
especially in the field of brokerage because if there is any dispute
between a client and a stockbroker about the trades executed at
the Bombay Stock Exchange or the National Stock Exchange,
those disputed transactions can be referred to the arbitral tribunal of that particular exchange. After the receipt of the complaint,
an arbitrator is appointed by the choice of both parties. Thereafter, relevant evidence is submitted with the sole arbitrator who,
on the basis of the submissions, makes a decision that is binding
on the parties. However, the parties have a right to challenge the
legality and impropriety of the order given by the arbitrator, in the
appropriate civil court.
N
M
IM
The parties who refer their disputes to an arbitral tribunal are not
required to pay the court fee. Moreover, the parties may not have
to engage a lawyer to put forward their arguments to the arbitral
tribunal, since the procedural law is not applicable to arbitral proceedings. There is no bar on the disputing parties arguing their
own case before the tribunal. The commercial parties benefit by
keeping their dispute away from the prying eyes of the press. It
helps in maintaining the confidentiality of their business matters.
In a nutshell, by opting arbitration, the parties save various types
of expenses such as court fee, suit valuation fee, stamp duties
and other procedural fees (like application fee, notice fee, which
enables substantial financial saving), therefore being convenient
to parties.
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LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 207
Learning objectives
After studying this chapter, you will be able to:
Discuss the Alternative Dispute Resolution (ADR)
Describe various types of ADRs
Explain the concept of negotiation
Describe the meaning of mediation
Analyse the Arbitration and Conciliation Act, 1996
Discuss the concept of conciliation
Interpret the Anti-Corruption Laws
>>
>>
>>
>>
>>
>>
>>
S
5.1 Introduction
Quick Revision
IM
In the previous chapter, you have studied various laws that affect businesses such as Negotiable Instruments Act, 1881, Intellectual Property
Law and Information Technology Law. All these laws play an active
role in offering a legal framework to businesses to operate ethically.
N
M
Whenever there are disputes between two or more parties, an option
is to take the case to a court of law for the settlement of disputes. Such
a course of action is time consuming, expensive and burdensome. It
may even take years or decades to get the court decision. Later, the
hierarchy of courts also delays the final decision as the affected parties appeal to the higher courts. Due to these reasons, multinational
companies (MNCs) doing business in India are not always happy to
get their disputes settled through law court proceedings. They want
quick, less expensive and simple modes of settlement of disputes.
Hence, the Alternative Disputes Resolution (ADR) system is quintessential in order to keep up with the rapid pace.
To overcome the problems encountered in pursuing cases before the
courts, the jurists have developed several alternative dispute settlement methods such as arbitration, mediation and conciliation. Thus,
for example, under the arbitration process, parties have the option
to refer their dispute to a mutually determined adjudicator known as
‘arbitrator’ who decides the issue by means of a quasi-judicial process.
The award given by such a private adjudicator has the same validity
as the judgement of a judicial court.
This chapter describes the various alternative methods of dispute resolution. Additionally, this chapter will also look into anti-corruption
laws of India.
5.2
ALTERNATIVE DISPUTE RESOLUTION
(ADR)
Alternative Dispute Resolution, also called ADR, a generic term
that involves various processes used for dispute resolution without
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? DID YOU KNOW
The statute such as Code of Civil
Procedure, 1908, was amended
in 1999 to provide for the
settlement of disputes outside
the court.
Business Law
formal and conventional resolution of disputes. In other words, ADR
provides an alternative to the adversarial justice system that is based
on public litigation. The basic thrust of ADR mechanism is to assist
disputing parties in resolving their dispute amicably, creatively and
effectively. Moreover, the resolution of dispute is achieved expeditiously and cost-effectively. The ADR process is purely voluntary and
both the parties need to agree to resolve dispute through ADR. It has
the same legal sanctity as is applicable to judgements by the courts.
The ADR mechanism is suitable for all types of disputes by means of a
harmonious procedure. This mechanism does not supplant traditional
court-based methods of dispute settlement but supplements them to
ensure expeditious resolution leading to a reduction in the burden on
formal courts.
IM
S
ADR methods provide ‘participatory justice’ in which disputants have
an opportunity of active participation in the resolution process. They
can decide the place of sitting of tribunal, dispense with formal legal
procedure, settle the fees payable to the private adjudicator, and prescribe a time schedule for giving the award. ADR methods may include
early neutral evaluation, negotiation, mutual give and take and alike.
5.2.1 MEANING AND HISTORY OF ADR
M
During ancient times, there were no courts to resolve disputes. There
were panchayats and other informal ways of redressal mechanisms in
place for dispute resolution. The Indian judiciary was initially set up
to make the legal framework more formal and authorised. However,
there were a large number of pending cases in courts. Due to time
and cost crunch, even trial courts were struggling to fulfil the need of
the system. This necessitated the formation of an alternative formal
dispute resolution mechanism. As a result, the ADR mechanism came
into existence. An ADR is an alternative to existing formal legal system which lessens the burden of cases in law courts.
N
208
Section 89 of the Civil Procedure Code, 1908, was the first legislation
that empowered the court to persuade parties to choose ADR for
resolving their disputes. At that time, there was no other law that provided for any alternative to formal litigation. Subsequently, the first
Arbitration Act, 1940, provided for arbitration, but there was considerable judicial interference in arbitration during that period. Much
later, the Arbitration and Conciliation Act of 1996 came into force
which reduced the judicial interference to almost a negligible extent.
The Legal Services Authority Act, 1985, provided for the establishment of Lok Adalat in every judicial court, from district court to the
Supreme Court. Similarly, Sections 5, 6 and 9 of the Family Courts
Act, 1984 provide for the appointment of agencies and counsellors
besides obliging the court to make efforts for settlement before taking
evidence. Thus, the central focus of the legal system is to encourage
ADR.
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LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 209
ADR can be used along with existing legal systems within common
law jurisdictions. ADR traditions differ by country and culture. These
methods are used for resolving disputes outside of official formal judicial mechanisms such as informal tribunals, informal mediation processes formal tribunals and formal mediation processes. These methods have become global necessity as it offers cheaper, informal and
speedier redressal. ADR has also found favour with parties engaged
in international commercial disputes as it is neutral to the law, language and institutional culture of the parties. This helps in maintaining equality among parties and prevents some parties getting the
home-court advantage when compared to the court-based litigation
in respective countries.
S
5.2.2 FEATURES OF ADR
The process of ADRs is relatively less formal than
the judicial processes. The proceedings are flexible without any
formal extensive written documentation or formal pleading or
technicalities which make it quite easy and appealing to seek
redressal for settlement. The rules of procedure and evidence,
as practiced in courts, do not strictly apply to alternative dispute
settlement proceedings.
of equity: Every case addressed in alternate dispute
resolution is settled using the third party or by disputing parties
themselves. ADR programmes are the application of equity rather
than rule of law.
‰‰ Transparent
N
‰‰ Application
M
‰‰ Informality:
IM
ADR provides a better, time-saving and cost-effective way to resolve
disputes among private parties as compared to court litigation. There
are certain common features among several alternate dispute resolution mechanisms, which are as follows:
and confidentiality in communication between
disputants: The participation of disputing parties in the dispute
resolution is direct with a higher level of confidentiality and
transparency. The proceedings of ADR are private, thus facilitate
confidentiality.
‰‰ Substitute of conventional method of dispute resolution: ADR is
out-of-court settlements to maintain social order and cooperation.
It has several methods such as arbitration, negotiation and
mediation that are the substitute of the conventional method of
dispute redressal.
‰‰ Resolution
of all types of matters: Be it commercial, or civil,
family or industrial cases, ADR addresses all types of litigation
matters. Parties can reach or negotiate to reach the settlement in a
more easy and time-saving way.
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NOTE
There are two categories of
ADR, which are court-annexed
options (mediation and
conciliation) and communitybased dispute resolution
mechanism (Lok-Adalat).
Business Law
5.2.3 ADVANTAGES OF ADR
ADR techniques are considered as one of the most acceptable dispute
resolution techniques used worldwide, either alongside or combined
with respective legal systems of various countries. The main advantages of ADR are as follows:
‰‰ It
can competently resolve multi-party disputes.
‰‰ It
has a flexible procedure. The parties can decide when and how
they want the dispute to be resolved. Therefore, the process is
controlled by the conflicting parties.
‰‰ It
is less expensive than traditional court litigation.
is less complex as the hard and fast rules of litigation and court
procedure do not strictly apply.
third party involved in ADR happens to be neutral to provide
unbiased decisions. Also, the said third party is chosen by both the
disputing parties by a mutual agreement.
IM
‰‰ The
S
‰‰ It
‰‰ It
settles the dispute without too much delay.
‰‰ It provides practical solutions to parties that protect their interests.
‰‰ It
maintains the privacy of the disputing parties.
maintains relationships and reputations of the conflicting
parties. This is best suited for businesses that would prefer to
continue doing business with each other in future.
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‰‰ It
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210
self assessment Questions
1. ADR includes:
a. Informal tribunals
b. Informal mediation processes
c. Formal tribunals
d. All of these
2. Section 89 of the Civil Procedure Code, 1908, was the first
legislation that empowered the court to persuade parties to
choose ADR for resolving their disputes.
a. True
b. False
Activity
Search on the Internet and find out various modes of ADR.
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LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 211
5.3 TYPES OF ADR
There are various types of ADRs available other than court proceedings. These types are evolving and the list is quite exhaustive. Classifications are based on the procedures followed in alternate dispute
mechanisms:
‰‰ Agreement: There are procedures such as mediation, negotiation,
mini trial and facilitation that help disputing parties to derive outof-court settlement on the basis of agreement. The settlement
involves the agreement of the parties involved in it.
‰‰ Decision: There are various procedures through which settlement
IM
S
of a dispute can be done one of which is on the basis of decision or
adjudication by an outsider. The dominant procedure of decision
is arbitration. In the case of arbitration, an outsider decides how
to resolve a dispute between the conflicting parties. Hence, he/she
is the ultimate decision maker. The arbitrator arrives at a decision
based on the facts and arguments presented by the disputing
parties.
‰‰ Advice: There are procedures that involve a neutral or non-binding
party to inform or advice the conflicting parties on the basis of case
evaluation or expert opinion. It involves non-binding arbitration,
facts finding, neutral evaluation, etc.
N
5.3.1 NEGOTIATION
M
In the sub-section, you will study some of the major ADR mechanisms
in detail.
Negotiation is an informal technique of resolving a dispute, where
parties in dispute directly try to communicate with each other and
reach a conclusion. In a negotiation, the process is akin to bargaining
between two or more parties having opposing interests to arrive at
a consensus to manage and ultimately resolve the dispute through a
non-binding process. This is a preferred technique of dispute resolution when the parties want to maintain an on-going relationship with
each other. The characteristics of negotiation are as follows:
‰‰ Voluntary:
There is no formal obligation to resort to negotiations.
The parties have full freedom to initiate, continue, adapt or
terminate negotiations.
‰‰ Bilateral/multilateral:
There is no limit to the number of parties
involved in a negotiation.
‰‰ Informal:
There are no formally prescribed rules to carry out
negotiations.
‰‰ Flexible: The process of negotiation is flexible as its scope depends
on the choice of the involved parties.
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? DID YOU KNOW
Negotiation is the simplest mode
of ADR.
212
Business Law
The process of negotiation offers the following advantages:
‰‰ Confidentiality:
The negotiation process maintains the privacy of
involved parties.
‰‰ Economical:
The fee paid for negotiation is minimal.
‰‰ Congenial
relationship: The negotiation process helps in
establishing and maintaining harmonious relationships among
parties in the future.
5.3.2
Mediation is a voluntary, non-binding, confidential and structured
process wherein a neutral third-party possessing special communication, negotiation, social and interactive skills help the disputing
parties arrive at a mutual settlement. Since the settlement is done on
mutually agreed terms, there emerges a win-win situation for the parties involved in the dispute. Each of the parties tries to focus on their
particular interests and priorities. Mediation is centered on active and
direct participation of the parties. Also, mediation implies the involvement of a third party called a mediator, who facilitates the resolution
of disputes between the parties. The function of the mediator is that
of a facilitator. The mediator cannot be called to the court or be asked
to testify to any of the proceedings or reveal any discussion that may
have taken place during the mediation process. The entire mediation
process is carried out confidentially and without prejudice. On account
of the reconciliatory nature of proceedings, parties have greater trust
in the mediator. The statements made during the mediation process
cannot be disclosed.
N
M
IM
S
? DID YOU KNOW
For the first time, the concept of
‘conciliation’ is given statutory
recognition by the Arbitration
and Conciliation Act, 1996.
MEDIATION
In India, the mediation is still primarily court-annexed. Section 89 of
the Civil Procedure Code, 1908, vests the authority in the court, which
is seized of the dispute, to suggest the parties to opt for any of the
ADR methods. It is for the parties to decide whether to accept the
court proposal. In case, the parties reach a settlement, the ‘settlement
agreement’ will be duly signed by the parties and the mediator and
then sent to the Court for passing of an appropriate order in terms
thereof. Mediation can take place when:
‰‰ Direct
negotiations have failed, leading to an increase in dispute
‰‰ Direct
negotiations are complex and difficult
‰‰ Multiple
parties are involved, leading to confusion
The following are some fundamental principles of mediation:
‰‰ Presence
of a neutral mediator: A presence of a neutral mediator
is essential for a successful mediation. He must not have any
personal or monetary interest in the dispute or in either party.
‰‰ Self-determination by the parties: Mediation is based on the self-
determination by the disputant parties. They make free choices of
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various available alternatives which minimises mental differences
and caters to the interests of the concerned parties. The role of a
mediator is to facilitate dialogue rather than direct the parties to
any particular end. The outcome of the settlement is reached by
the parties on their own.
Confidentiality of proceedings is the critical
element of successful mediation. The participants need an
assurance that all their discussions, statements, concessions and/
or admissions are protected by confidentiality. The confidentiality
shall extend to the settlement agreement, unless there is a
necessity for the disclosure in order to implement and enforce it. It
is imperative that the mediator is also bound by the confidentiality
clause so that he may not required to disclose in any forum all that
may have transpired during the process. The mediator must have
the ‘confidentiality’ so that he may not require disclosing in any
forum whatever may have transpired during the process.
S
‰‰ Confidentiality:
of process: The mediation process of dispute resolution
should be performed in a fair manner, i.e., all parties are treated
fairly and not arbitrarily. Also, their concerns should be addressed
properly.
IM
‰‰ Fairness
process: The element of voluntariness is the magic
of mediation which encourages autonomy and party selfdetermination. Any compulsion to participate is counterproductive and makes mediation similar to litigation.
M
‰‰ Voluntary
The main advantages of mediation are as follows:
expensive: Mediation is a less expensive process, requiring
less money for the service rendered
N
‰‰ Less
‰‰ Less time consuming: Mediation is a process that is comparatively
less time consuming than the litigation process, hence mediations
allow the speedy disposal of a matter
‰‰ Confidentiality of the proceedings: In the mediation process, total
confidentiality is maintained, as the whole process is not public
‰‰ Amicable
resolution: Mediation allows parties to arrive at a
mutually agreeable decision, with as little hostility as possible
5.3.3 CONCILIATION
Conciliation refers to a process of settling disputes through the good
offices of a third party, which attempts to minimise the points of conflict
between parties to enable them to reconcile. Conciliation depends on
the discretion of the involved parties. The whole purpose is to bridge
the gap that may arise and to reach a point of equilibrium so that a
mutual agreement is obtained. Under the Arbitration and Conciliation Act, 1996, the party initiating conciliation proceedings shall send
a written invitation to the other party to conciliate.
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NOTE
In the case of conciliation, the
conciliator provides assistance
to the parties to resolve a
dispute by reaching a mutually
agreed settlement. A conciliator
is a third impartial party.
214
Business Law
Conciliation involves interaction between conflicting parties through
a third party, who tries to balance the demands of both parties.
A third party that acts as a conciliator and solves the dispute. The
representatives of the parties brought for consultation with the conciliator try to reduce the differences or concerns of both parties.
The conciliator can be an individual or a group with whom both
the parties agree to share their concerns. Under the Arbitration
and Conciliation Act, there shall be one conciliator, unless parties
decide to have two, or three, in which case they must all act jointly
(Section 63).
MEANING OF CONCILIATION
IM
S
Conciliation is a method of resolving a conflict with the help of a thirdparty (conciliator), who intervenes in the dispute situation upon a
request by either or both the parties. The conciliator simply assists them
in their negotiations and decision making, resolves the impasse and
removes bottlenecks.
M
In a manual for workers’ education on collective bargaining published
by the International Labour Organization (ILO), conciliation has been
defined as practice by which the services of a neutral party are used in a
dispute as a means of helping the disputing parties to reduce the extent
of their differences and to arrive at an amicable settlement or agreed
solution.
ROLE OF CONCILIATOR
N
NOTE
According to the United Nations Commission on International Trade
Law (UNCITRAL) Conciliation Rules, 1980, the role conciliator can be
stated as follows:
United Nations Commission
on International Trade Law
(UNCITRAL) is a subsidiary body
of the UN General Assembly
responsible for facilitating
international trade and
investment.
(i) To assist the parties in reaching an amicable settlement of their
dispute
(ii) To keep in mind principles of objectivity, fairness, and justice,
giving consideration to the rights and obligations of the parties,
the usage of trade and the circumstances surrounding the dispute
including any previous business practices between the parties
(iii) To conduct the proceedings in an appropriate manner taking into
account the circumstances of the case, the wishes of the parties,
oral statements and the need for a speedy settlement
(iv) To make proposal for settlement of dispute at any stage without
putting things in writing and without any statement of reasons
therefore.
Therefore, conciliation can be defined as a voluntary proceeding
where the disputing parties are free to agree to and resolve their dispute with the aid of a conciliator. It is a flexible process that allows the
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concerned parties to define the time, structure and content of proceedings.
In conciliation, the conciliator usually has no right to seek evidence
or call witnesses. Section 66 of the Arbitration and Conciliation Act
states that a conciliator is not bound by the Civil Procedure Code,
1908, or the Indian Evidence Act. The goal is to conciliate, mostly by
seeking concessions. In conciliation, the parties rarely face each other
during the entire process.
5.3.4 LOK ADALATS
S
In case of providing timely justice, Lok Adalats are set up to promote
justice by providing timely and cost-effective legal aid on the basis of
principles of equity, justice and fair play. Lok Adalat is a promising,
participative ADR method. It is considered to be the people’s court,
which provides an easy access to justice with mutual consent.
M
IM
As per Section 19(5) of the Legal Services Authorities Act, 1987, Lok
Adalat shall have jurisdiction to determine and arrive at a compromise or settlement between the parties to a dispute in respect of any
case pending before, or any matter which is falling within the jurisdiction of and is not brought before, any court for which the Lok Adalat
is organised.
N
Lok Adalat means people’s court. When disputes are referred to Lok
Adalat for settlement, it is done in accordance with the provisions of
the Legal Services Authority Act, 1987.
5.3.5 ARBITRATION AND CONCILIATION ACT, 1996
The Arbitration and Conciliation Act is based on the United Nations
Commission on International Trade Law (UNCITRAL’s) Model Law
on International Commercial Arbitration, 1985. This Act extends to
the whole of India. The essence of arbitration is that some dispute is
referred to by the parties for settlement to a tribunal/person of their
own choosing instead of a court. In popular parlance, arbitration may
be defined as a private process set up by the parties as a substitute for
court litigation to obtain a decision on their disputes.
The Arbitration and Conciliation Act was enacted in 1996 for achieving the following objectives:
‰‰ To
consolidate and modify the law relating to domestic arbitration
and international commercial arbitration
‰‰ To
enforce foreign arbitral awards
‰‰ To define the law relating to conciliation and for matters connected
therewith or incidental thereto
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? DID YOU KNOW
Justice S. M. Dharamadhikari
has described Lok Adalat as
indianisation, humanisation
and spiritualisation of justice
dispensation on following
accounts:
yyIndianisation of justice
dispensation: Based on customs and traditions found in
villages and societies of India
yyHumanisation of justice
dispensation: More and more
participation of human beings
involved with large consideration to human aspects in the
course
yySpiritualisation of justice
dispensation: Process of
uplifting society by educating
its members to do justice to
each other
Know More
As per Justice Ramaswamy,
“Resolving disputes through
Lok Adalat not only minimizes
litigation expenditure, it saves
valuable time of the parties
and their witnesses and also
facilitates inexpensive and
prompt remedy appropriately
to the satisfaction of both the
parties”.
? DID YOU KNOW
The process of arbitration is
governed by the Arbitration
and Conciliation Act, 1996 (the
Act). The Act has been brought
into force with effect from 25
January, 1996. The model law
on arbitration adopted by the
United Nations Commission
on International Trade Law
(UNCITRAL) is the foundation of
this Act.
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Business Law
S
The settlement of disputes through arbitration is an alternative system of dispute resolution through the intervention of a neutral third
party. The role of the court is limited to the extent of regulating the
process. The first legislation on arbitration was enacted in 1940. But
the legislation authorised the courts to interfere in the arbitration process at various stages such as modification of the Award, remitting the
Award for reconsideration by the arbitrator, and setting it aside the on
specific grounds. It led the Supreme Court to point out in Guru Nanak
Foundation vs. M/s. Rattan Singh & Sons [1981] that Interminable, time
consuming, complex and expensive court procedures impelled jurists to
search for an alternative forum, less formal, more effective and speedy
for resolution of disputes avoiding procedural claptrap and this led them
to the Act of 1940. Finally, based on the UNCITRAL Model law on Arbitration, the Arbitration and Conciliation Act, 1996, was passed which
is at par with such legislation existing anywhere in the world.
IM
The first part of the law deals with domestic arbitration and international arbitration held in India. The second part is designed to deal
with international commercial arbitration. There is an exclusion of
judicial intervention though the arbitral tribunal may take judicial
assistance for technical matters such as the recording of evidence.
DEFINITION OF ‘ARBITRATION’
Arbitration is the reference of a dispute or difference between parties
for deciding a dispute after hearing both sides in a judicial manner by
arbitrator(s). It is a method of binding private adjudication or settlement of disputes-whether present or future, relating to civil matters
(money, property, breach of contract) between two disputing parties in
a quasi-judicial proceeding after both parties have been given a hearing by an independent and impartial private adjudicator called an
arbitrator selected by the disputing parties who decides in an expeditious manner by avoiding procedural technicalities peculiar to courts
besides maintaining privacy of parties.
M
Know More
N
In Jivaji Raja vs. Khimiji Poonja
& Company (1933), the Bombay
High Court observed that
arbitration is the reference of
dispute or difference between
two or more parties to a
person chosen by the parties
or appointed under statutory
authority for determination of the
same.
OBJECTIVES OF ARBITRATION AND UNCITRAL COMMITMENT
When a dispute is resolved through a tribunal rather than a court
under the arbitration agreement, it is said to be an out of court settlement method. An impartial or neutral partner known as arbitrator
is appointed who listens to both the disputing parties and makes a
decision. The main objectives of arbitration is the settlement of differences through determination and investigation with minimum
cost and length of time for dispute resolution. Arbitration is a private
process and is governed by the UNCITRAL Arbitration Rules. The
UNCITRAL offers a comprehensive set of procedural rules for arbitral proceedings arising from commercial relationships. It facilitates
transparency in the process of arbitration by laying down the norms
to be facilitated by the arbitrator and the disputing parties.
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ARBITRATION AGREEMENT
The formulation of the arbitration agreement is the first stage in the
arbitration process whereby the disputing parties agree to submit
their present or future differences to arbitration. In fact, an arbitration agreement is the sine qua non of arbitration. Without an arbitration agreement, arbitration cannot commence.
Section 7 of the Arbitration and Conciliation Act has defined the
arbitration agreement as:
“An agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of
a defined legal relationship, whether contractual or not”.
IM
S
Thus, the provision of arbitration can be made at the time of entering
into the contract itself so that if any dispute arises in the future, the
dispute can be referred to the arbitrator as per the agreement. It is
also possible to refer to a dispute to arbitration after the dispute has
arisen. The important aspects of an arbitration agreement are as follows:
‰‰ Must be in writing: Section 7(3) requires the arbitration agreement
to be in writing and an oral agreement is not valid.
‰‰ Must relate to the reference of dispute to arbitration: Arbitration
right of reference: Either of the parties may make the
reference of dispute to arbitration in the prescribed manner. In
case, the arbitration agreement gives a unilateral right of referring
to only one of the parties, it shall not be valid. It is not mandatory
to mention the arbitrator’s name.
N
‰‰ Bilateral
M
agreement must relate to the reference of a present or future
dispute between the parties to arbitration. The dispute forming
the subject matter of arbitration must belong to the category of
arbitrable matters.
Effect of Arbitration Agreement
Sometimes, a valid arbitration is in existence, the parties are not
allowed to proceed with a law suit in a court. If a party still approaches
the court, the other party shall submit a certified copy of the arbitration agreement to the court. Section 8 requires that any matter
before a judicial authority containing an arbitration agreement shall
be referred to arbitration. The court shall then direct the parties to
arbitration in terms of Section 8 upon the objection of non-applicant
not later than submitting its statement of defence on merits.
COMPOSITION OF THE ARBITRATION TRIBUNAL
The ‘Arbitral Tribunal’ means a ‘sole arbitrator’ or a ‘panel of arbitrators’. Section 10 deals with the composition of an arbitral tribunal.
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NOTE
An arbitration agreement is
said to be valid if it meets the
following requirements:
yyContractual capacity
yyFree consent
yyLawful object
yyLawful consideration
Business Law
The disputing parties involved in the arbitration process have a right
to determine the number of arbitrators, but the total number of arbitrators should not be an even number. Among the arbitrators, there
should be a presiding arbitrator. If parties are unable to decide on the
number of arbitrators, they shall appoint only a sole arbitrator.
Exhibit
Appointment of Arbitrators
While appointing arbitrators, the following points should be considered:
‰‰ The arbitrator can be of any nationality unless otherwise agreed
by the parties.
parties are free to finalise the procedure of selecting an
arbitrator.
case, both the parties have appointed their nominees, these
arbitrators shall in their turn nominate a third arbitrator who
shall act as the presiding arbitrator. If the party in dispute
cannot appoint the arbitrator within 30 days or the first two
arbitrators fail to appoint the sole arbitrator, the arbitrator shall
be appointed by the Chief Justice of a High Court or any other
person or institution designated by him in the case of domestic
arbitration.
M
IM
‰‰ In
S
‰‰ The
‰‰ If there is any doubt as to whether the appointed arbitrator shall
be able to act impartially or independently, then in that case his
appointment can be challenged under Section 12 of the Act.
N
218
INTERIM MEASURES BY THE ARBITRAL TRIBUNAL AND COURT
The Arbitrator or Arbitral Tribunal may, at the request of the parties,
take any interim measure for the protection of any of the parties as it
may deem fit in the best interest of the parties in dispute. The interim
measure may be of the following nature:
‰‰ To
withhold the sale/or assets of any of the products related to the
subject matter of the dispute and secure the interests of the parties
by protecting the subject matter
‰‰ Any
other relief the respective parties feel is necessary for the
settlement of the dispute
The arbitral tribunal may also provide adequate security to the party
for any of the interim measures provided in the above points.
PROCESS OF ARBITRATION
The process of arbitration starts when one disputing party provides
notice to another party for their intent to arbitrate a dispute. The
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S
party filing the claim is called the Claimant, and the party against
whom the claim is filed is called the Respondent. The Respondent is
provided with ample time to respond in writing whether they agree
to resolve the dispute through arbitration. The acceptance from both
parties to start the proceedings through arbitration starts the actual
process of arbitration where the role of arbitrator comes into the picture. An arbitrator is selected by the parties or a panel of arbitrators is
approved by the parties to continue the proceedings. Then, there will
be prehearing conferences and formalities. Then, after several arbitration hearings, testimony from both the parties and their respective
witnesses are heard, and all the evidence is submitted. In the end,
closing arguments are made by the attorneys. The final decision is
made after considering all the evidences that have been notified to the
parties, usually in 30-90 days.
ARBITRAL AWARD: MAKING, FINALITY AND ENFORCEMENT
IM
Meaning of Award
M
The decision of the Arbitral Tribunal is termed as ‘Arbitral Award’.
It is analogous to a court judgment although it is made by a mutually
private adjudicator. An award is a determination on merits about all
the matters in dispute which have been referred to the tribunal. It
includes any final, interim or partial award and any award on costs or
interest. Authority of the tribunal ceases after the submission of the
award.
N
Awards coming from the tribunals situated in convention countries
are recognised as foreign awards and they are enforceable the same
as a decree of court in India.
Form & Content of Award [Section 31]
There is no particular form for the validity of an award except for the
following rules contained in Section 31 of the Arbitration and Conciliation Act:
(i) An arbitral award shall be made in writing and signed by the
sole arbitrator or majority of the members of the arbitral tribunal. In case a particular member of tribunal has omitted to sign,
reasons for the same must be given. Once the award has been
signed, the tribunal becomes functus officio. (no further official
authority).
(ii) The arbitral award shall state the reasons for the award unless
the parties have dispensed with the need to give reasons, or the
award is an arbitral award on agreed terms as per Section 30.
(iii) The arbitral award shall state its date and the place of arbitration as determined under Section 20.
(iv) A signed copy of the arbitral award shall be delivered to each
party to the arbitration agreement in accordance with the
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NOTE
A judgement or final decision
of an arbitrator on matters
referred to him is called the
‘arbitral award’ or ‘award’. The
arbitrator’s authority ceases as
soon as the award is made.
Business Law
requirement of Section 31(5) [Union of India vs Tecco TrichyEngineers and Contractors (2005)].
(v) The arbitral tribunal may, at any time during the arbitral proceedings, make an interim arbitral award on any matter subject
to the making of a final arbitral award.
(vi) Unless otherwise agreed by the parties, an arbitral award may
provide for paying interest on the amount payable under the
arbitral reference.
S
(vii) Unless otherwise agreed by the parties, the tribunal shall fix the
costs of arbitration which means fees and expenses of arbitrators
and witnesses, administration fees of the supervising institution
and other expenses connected with arbitral proceedings. It shall
specify the party entitled to costs, the party who shall pay the
costs, the amount of costs or method of determining that amount
and the manner in which the costs shall be paid.
M
IM
Additional Award: The tribunal may make an additional award either
on the basis of the agreement between the parties or on the request of
a party within 30 days of the receipt of the copy of the award provided
a copy of the notice has been given to the other party. The additional
award shall be made within 60 days of the receipt of request, provided
that the members of the arbitral tribunal consider it necessary and
in the interest of the parties. The purpose of additional award is to
include an award that was made in the arbitral proceedings but omitted from the arbitral award.
Correction of the Award
N
220
The parties may request the tribunal to correct clerical or computation errors in the award within 30 days of the receipt of the award by
them.
Finality and Enforcement of the Award
Under Section 35 of the Arbitration and Conciliation Act, an arbitral
award shall be final and binding upon the parties. The arbitral award
shall be endorsed under the Civil Procedure Code, 1908, in the same
manner as if it is a decree of a court of law.
GROUNDS FOR SETTING ASIDE AN ARBITRAL AWARD
(SECTION 34)
Section 34 provides for the basis on which an arbitral award may be
set aside by a court. For setting aside an award, the aggrieved who is
a party to the arbitration agreement or its legal representative shall
make an application under Section 34 stating the grounds of challenge. Section 34 in Part I of the Arbitration and Conciliation Act, 1996
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has specified the following grounds on which the court may set aside
an arbitral award rendered in India:
1.Incapacity of Parties [Section 34(2) (a) (i)]: An arbitral award is
not binding and may be set aside if it has been made against a
party that is incapable looking after its interests such as a minor
or a person of unsound mind or it does not have a guardian or
another person to represent its interests. Therefore, it is essential to get a guardian appointed in terms of Section 9 of the Arbitration and Conciliation Act in respect of minors and persons of
unsound mind for the purpose of arbitral proceedings. On failure to do so, the award given against the incompetent party shall
be liable to be set aside.
IM
S
2.Invalidity of Arbitration Agreement [Section 34(2) (a) (ii)]: The
validity of an arbitral agreement may be challenged on the same
grounds on which the validity of a contract may be challenged
[State of U.P. v. Allied Constructions]. The validity of the arbitral
agreement shall be examined by reference to the law to which
the parties are subjected it and is in force.
3. Failure to Give Notice to Other Party [Section 34(2) (a) (iii)]:
An arbitral award is liable to be set aside if the other party has
not been given proper notice of the following:
 of
appointment of an arbitrator
M
 the
arbitral proceedings
 the
other party was for some reasons unable to present his case
N
If a party is prevented from appearing and presenting its case
before the tribunal, the award will be liable to be set aside as the
deprivation of a party from an opportunity of being heard negates
the principles of natural justice [Vijay Kumar vs. Bathinda Central Co-operative Bankand Ors [2013] ].
4. Award Beyond Scope of Reference [Section 34(2) (a) (iv)]: An
arbitral award relating to matters which were beyond the scope
of reference made to Arbitrator or were not contemplated by the
reference, or did not fall within the terms of the reference shall
be liable to be set aside. An arbitrator cannot go contrary to the
terms of the contract. Where the terms of the contract are not
clear or unambiguous, the arbitrator gets the power to interpret
them. In State of Rajasthan v. Nav Bharat Construction Co.[ix],
a majority of claims allowed were against the terms of the contract.
5.Illegality in Arbitral Procedure-Composition of Tribunal not
in Accordance with Arbitration Agreement [Section 34(2) (a)
(v)]: An arbitral award may be set aside on the following grounds:
 Procedural
misconduct: Not following the agreed procedure
for the conduct of arbitral proceedings, or in the absence of
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such agreement as to procedure, the procedure prescribed by
the Arbitration and Conciliation Act, 1996 was not followed.
Examples of misconduct of arbitral proceedings include
overlooking material evidence, conducting examination of
witnesses in the absence of parties, closing the case hastily
without giving the parties a fair and reasonable opportunity
of placing their respective cases, etc.
 Misconduct
of arbitrator: Where the arbitral tribunal takes
up a matter which is clearly beyond the scope of its authority,
or the arbitrator deliberately deviates from the terms of reference and arbitration agreement.
S
Example: Arbitrator’s misconduct involves accepting hospitality
from either party, refusal to record evidence, erroneous breach of
duty leading to miscarriage of justice, failure to perform essential
duties, etc.
IM
CASE LAW
State Trading Corp. vs. Molasses Co., the Bengal Chamber of
Commerce [1981],
M
Facts: A permanent arbitral institution did not allow a company to be represented by its Law Officer, who was a full-time
employee of the company. The court stated that it was not only
the arbitrator’s misconduct of but also the misconduct of the
arbitration proceedings.
6. Subject Matter of Dispute Not Being Arbitrable [34(2)(b)(i)]:
The existence of a dispute is a condition precedent to arbitrators
proceeding with arbitration. Only matters on which parties have
differences and which affect their private rights can be referred
to arbitration. Therefore, criminal matters, taxation issues,
insolvency proceedings, corporate law matters, etc., cannot be
decided by arbitration.
N
222
7. Award Against Public Policy: Section 34(2)(b)(ii) provides that
an application for setting aside an arbitral award can be made if
the arbitral award is in conflict with the public policy of India.
Appeals (Section 37)
Section 37 of the Arbitration and Conciliation Act deals with appeals.
Appeals shall lie from the following orders to the court authorised by
law to hear appeals from the original decrees of the court which are
as follows:
‰‰ Granting
or refusing to set aside the award as mentioned above in
Section 34 (2) and/or Section 34 (3)
‰‰ Granting
or refusing to grant a measure in Section 9, wherein
interim measures are to be provided by the court
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Appeals shall also lie with the court if the arbitral tribunal refuses to
provide interim measures to the parties and where the arbitral tribunal is exceeding its jurisdiction or deciding the matters that are not in
its scope.
AMENDMENTS IN THE ARBITRATION AND CONCILIATION ACT
The Arbitration and Conciliation Act, 1996 was amended in 2015 and
2019. The Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as the ‘Amendment Act, 2015’) was enacted to make
the arbitration process cost-effective and speedy with minimum court
intervention.
Some of the key highlights of the Amendment Act, 2015, are as follows:
S
‰‰ The Amendment Act, 2015, distinguishes between an international
2(2) of the Arbitration and Conciliation Act has been
amended insofar as Section 9 (interim measures), Section 27 (taking
of evidence), Section 37(1) (a), and 37(3) shall apply to international
commercial arbitrations even if the seat of arbitration is outside
India, unless there is an agreement to the contrary. In matters
where the seat of arbitration is India, Part-I of the Arbitration and
Conciliation Act, 1996 shall apply.
‰‰ Section
N
M
‰‰ Section
IM
commercial arbitration and domestic arbitration insofar as the
definition of court is concerned. For domestic arbitration, the
definition of Court is the same as defined in the 1996 Act. For
international commercial arbitration, Court means the High Court
of competent jurisdiction.
8, which deals with referring the parties of dispute to
arbitration, was amended and it now mandates that any judicial
authority may refer the parties to arbitration if a matter is brought
before it.
‰‰ The
exercise of power under Section 9 after constitution of the
tribunal has been made more onerous and the same can be exercised
only in circumstances where remedy under Section 17 (interim
measures by arbitration tribunal) appears to be non-efficacious to
the Court concerned.
‰‰ Section 11 relates to appointment of arbitrators. As per this Section,
the Supreme Court or the High Court or a person designated
by them can appoint arbitrators within 60 days from the date of
service of notice on the opposite party.
‰‰ Section 12 has also been amended and it requires that the arbitrator
make a declaration about his independence and impartiality. In
this Amendment Act 2015, a fifth schedule has been inserted and
it lists the grounds that may give rise to doubt to independence
and impartiality of the arbitrator. The seventh schedule was added
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and if the relationship between the arbitrator and any party falls in
any of the categories mentioned in the seventh schedule, then the
arbitrator will be ineligible.
‰‰ Section
14 was amended and it provides for the termination of the
mandate of the arbitrator.
‰‰ Section
17 relates to interim measures by arbitral tribunal and as
per the amended section, an arbitral tribunal shall have the same
powers as are available to a court under Section 9. Also, interim
orders passed by an arbitral tribunal will be enforceable in same
manner as if it is an order of a court.
23 of the amended Arbitration and Conciliation Act, 1996
empowers the respondent to submit a counter claim or plead a
set-off.
24 of the amended Arbitration and Conciliation Act,
1996 states that the arbitral tribunal should hold hearing for the
presentation of evidence or oral arguments on day-to-day basis.
Also, the tribunal should not grant any adjournments if there is
no sufficient cause. In case of adjournments, the tribunal may also
impose exemplary cost.
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‰‰ Section
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‰‰ Section
sections, namely Section 29A and 29B were inserted. Section
29A deals with the time limit for arbitral award and Section 29B
deals with fast track procedure. These sections provide for time
bound arbitrations. The arbitral tribunal must address the case
within 12 months extendable by a maximum 6 months by the
consent of the parties.
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‰‰ New
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224
‰‰ Section
25 of the amended Arbitration and Conciliation Act,
1996 empowers the tribunal to treat the respondent’s failure to
communicate his statement of defence as the forfeiture of his right
to file such statement of defence. However, the respondent’s failure
to communicate cannot be treated as admission of the allegations
made by the opposite party.
‰‰ Section
28 of the amended Arbitration and Conciliation Act, 1996
requires that the tribunal should take into account the terms of
contract and trade usages applicable to the transaction.
‰‰ Section
31 of the amended Arbitration and Conciliation Act, 1996
provides that if the arbitrator does not give any award, then, the
tribunal should levy future interest on the awarded amount at a
rate which is 2% higher than the current rate of interest prevalent
on the date of award.
‰‰ Section
34 of the amended Arbitration and Conciliation Act,
1996 deals with limiting the gamut of public policy of India. The
Amendment Act, 2015, states that an award that is passed in an
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LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 225
international arbitration can only be set aside on the ground that
it is against the public policy of India if, and only if,
 The
award was affected by fraud or corruption.
 It
is in contravention with the fundamental policy of Indian
law.
 It
is in conflict with most notions of morality and justice.
‰‰ Section
36 of the amended Arbitration and Conciliation Act, 1996
states that an award will not be stayed automatically by only filing
an application under Section 34. In fact, there must be a specific
order from the Court for staying the execution of award.
1(ca) defined ‘arbitral institution’ as an institution
designated by the Supreme Court or High Court.
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‰‰ Section
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In August, 2019, amendments to the Arbitration and Conciliation
(Amendment) Act, 2019, (hereinafter referred to as the ‘Amendment
Act, 2019’) received the assent of the President of India. Some of the
key highlights of the Amendment Act, 2019, are as follows:
‰‰ Amendment of Section 11 relates to the appointment of arbitrators.
of the concept of Arbitration Council of India
which will be established by the Central Government and will be
headquartered at Delhi.
‰‰ The
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‰‰ Introduction
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This section empowers the Supreme Court and the High Courts
to designate arbitral institutions for appointing arbitrators. These
arbitration institutions are graded by the Arbitration Council of
India.
Arbitration Council of India will make grading of arbitral
councils on the basis of infrastructure, quality, calibre of arbitrators,
etc.
‰‰ Introduction of Section 23 (4) which provides that the statement of
claim and defence must be completed within six months from the
date of appointment of the arbitrator.
‰‰ The
timeline for making award has been dealt with more
comprehensively.
‰‰ Section
87 clarifies that Amendment Act, 2015, shall have a
prospective effect, i.e., it shall apply to proceedings instituted after
23rd October, 2015.
‰‰ Section
34 states clearly that at the stage of challenging of award,
the court will only look at the record of arbitration tribunal, no
fresh recording of evidence at this stage.
‰‰ Addition of Schedule 8 that provides qualifications of an arbitrator.
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5.3.6
Leading Case Studies
WHEN CAN A NON-SIGNATORY TO ARBITRATION AGREEMENT
MAY BE A PARTY TO ARBITRATION AGREEMENT
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This issue arose in Chloro Controls (India) Pvt Ltd. vs Severn Trent
Water Purification Inc&Ors (2013) 1 SCC 641 where disputes arose
between an Indian company and its foreign collaborator due to latter’s parent company operating through entities other than those
covered by the agreement. The Indian party sought injunction to
prevent breach by the respondents and for referring the parties to
arbitration under Sections 45 of the Arbitration and Conciliation Act,
1996. Respondents alleged that Shareholders Agreement (SHA) was
the main document incorporating the arbitration clause to which
the other two respondents were not signatories. Other agreements
between parties did not have the arbitration clause. Appellant contended that the expression ‘person claiming through or under’ in
Section 45 covers within its ambit persons who are in legal relationships via multiple and multi-party agreements, though they may not
all be signatories to any one agreement or arbitration clause. Hence,
even non-signatory parties can pray for and be referred to arbitration. The Section did not refer only to parties to agreement but ‘persons in general’ and that the Shareholders’ Agreement is a composite
document.
The following factors must be kept in mind while referring third parties to arbitration:
(a) The parties must have a direct relationship with the party signatory to the arbitration agreement
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(b) Subject matter of the agreement must be common
(c) Agreement between parties must form a composite transaction
(d) The transaction must be of a composite nature
(e) A transaction is considered to be composite if the performance
of the principal agreement is not possible without the execution
and performance of the supplementary or ancillary agreements
A party to arbitration may not necessarily mean only the “signatory”
to the arbitration agreement. Inappropriate contexts, it may mean a
person (s) “claiming through or under” such signatory, for instance,
successors-of-interest of such parties, alter-egos of such parties, composite contracts, inter-related contracts, joint ventures, etc. Section
2(1)(h) has defined the term “party” to mean “a party to an arbitration
agreement.” This cannot be read restrictively to imply a mere “signatory” to an arbitration agreement.
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ARBITRATION AGREEMENT MADE DURING PENDENCY OF
APPEAL IN SUPREME COURT HELD TO BE VALID
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APPLICATION OF PRINCIPLE OF RES JUDICATA TO
ARBITRATION
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In P. Anand Gajapathi Raju vs. PVG Raju (2000) 4 SCC 539, during the
pendency of the appeal before the Supreme Court, all the parties made
a jointly signed application that included an arbitration agreement to
refer their dispute to a retired SC Judge as the sole arbitrator. This
agreement was challenged. It was held that the agreement need not
already be in existence at the time when the dispute arose. The phrase
‘which is the subject of an arbitration agreement’ does not necessarily
require the agreement to be already in existence before the filing of
suit in the court. The phrase also includes an arbitration agreement
brought into existence while the action is pending provided it meets
the requirements of Section 7 of the Arbitration and Conciliation Act.
Under Section 8, it is obligatory for the court to refer the parties to
arbitration in terms of their agreement.
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In K.V. George vs. Secretary Water & Power, Trivandrum AIR1990SC53,
a contractor filed successive arbitration proceedings to make different types of claims arising from the termination of contract. Held all
contentions should have been raised in the first proceedings and subsequent petition will be res judicata (issues that were supposed to be
raised in first petition but were not raised/omitted are considered to be
adjudicated once and for all; can’t be raised in fresh petition); the award
in second proceedings will be infructuous.
self assessment Questions
3. In __________, since the settlement is done on mutually
agreed terms, there emerges a win-win situation for the parties involved in the dispute.
a. Negotiation
b. Conflict
c. Mediation
d. Arbitration
4. Mediation can take place when:
a. Direct negotiations have failed, leading to an increase in
dispute
b. Direct negotiations are complex and difficult
c. Multiple parties are involved, leading to confusion
d. All of the above
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228
Business Law
5. Spiritualisation of justice dispensation is the process of uplifting society by educating its members to do justice to each
other.
a. True
b. False
6. The settlement of disputes through arbitration is an alternative system of dispute resolution through the intervention of a
_____________.
7. Write the full form of UNCITRAL.
8. Which is the first stage in an arbitration process?
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9. While appointing the arbitrators, the following points should
be considered:
a. The arbitrator can be of any nationality unless otherwise
agreed by the parties
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b. The parties are free to finalise the procedure of selecting
an arbitrator
c. Both a. and b.
d. None of these
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10. In conciliation, the third party who solves the dispute is called
a __________.
Activity
N
Meet the HR manager of an organisation in your vicinity and discuss with him/her the advantages of ADR techniques for resolving
disputes.
5.4 ANTI-CORRUPTION LAWS
? DID YOU KNOW
The Indian government
has established Lokpal, an
independent ombudsman to
investigate and prosecute
corruption cases of bribery,
money laundering, benami
transaction, etc.
Corruption is delineated as the abuse of public office or entrusted
power for personal gain. It involves bribery, extortions, fraud, theft,
favouritism, conflicts of interests and taking undue advantages.
There are various types of corruption, naming a few, administrative corruption, political corruption or public corruption. These are
the social disease that cripples equal competition in the market
which decreases the economic deficiency. Therefore, it is quintessential for the governments and the World Bank to update the
anti-corruption legislations time-to-time. The anti-corruption laws
are legal tools or compliances that help to curb corruption practices
from society. The violation of anti-corruption laws can apply criminal penalties, civil penalties, disciplinary recourse and reputational
repercussions.
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LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 229
5.4.1 ANTI-CORRUPTION LAWS IN INDIA
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After independence of India, the Indian government has been making consistent efforts to fight against the problem of corruption. The
administration system of India is not free from corruption which is
impeding the growth and development of the nation because of the
misallocation of resources. Therefore, it became quintessential for the
Indian government to establish legislations against corruption and it
came up with a few acts such as Prevention of Corruption Act, 1988,
The Benami Transactions (Prohibition) Act, 1988, and The Prevention
of Money Laundering Act, 2002, to deal with corruption. Initially, the
original regulation concerned with bribery, extortion, theft, fraud, etc.,
was the Indian Penal Code, 1860, where public servants are penalised
for corruption. It was felt that a separate legislation was required to
deal specifically with offences of bribery and corruption, with their
own procedures and authorities. In 1988 came the ‘Prevention of Corruption Act, 1988’ (further referred to as the ‘PC Act’) which is considered as the primary law to fight against corruption. However, regular
amendments have been made in this Act. The last amendment was
made in 2018.
‰‰ Prevention
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As per the Corruption Perceptions Index, 2018, India has attained 78th
position out of 180 countries. The Indian government has started taking strong steps on corruption issues by introducing and amending
several anti-corruption laws. The following are the three crucial acts
that play a pivotal role in dealing with corruption:
of Corruption Act, 1988
Benami Transactions (Prohibition) Act, 1988
‰‰ The
Prevention of Money Laundering Act, 2002
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‰‰ The
PC ACT, 1988 AS AMENDED BY THE (AMENDMENT) ACT, 2018
The PC Act, 1988 came into existence to deal with the corruption specifically in government departments. It offers the provision of prosecution and punishment for public servants who are involved in corrupt practices such as bribery. The PC Act was first set up in 1988. The
amendment in the Act is done to review anti-bribery and anti-corruption and the provisions provided in the Act ensure more transparency
and accountability in the government or public servants working.
Under the Prevention of Corruption (Amendment) Act, 2018, (hereinafter referred to as the ‘Amendment Act 2018’), the ‘public servant’
comprised employees of universities, office bearers of cooperative
societies attaining financial help from the government and public service commission and banks and they all are liable to their respective
legal remunerations. In case, they take the gratification apart from
their authorised remuneration in respect of official act, they become
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liable to receive a minimum punishment of six months and maximum
of five years and fine. These public servants are also charged or penalised if in case they influence the public through illegal means or for
exercising their influence. In case, a public servant accepts a valuable
thing or undue advantage without paying for it or paying the partial
amount from a person with whom he is involved in a business transaction in his official capacity, he will be liable for a minimum punishment of six months to a maximum of five years or fine. In order to put
a public servant on trial, prior sanction from Central or State government is necessary.
As per Section 2(c) of the PC Act, a public servant is defined as:
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(i) Any person in the service or pay of’ the Government or remunerated by the Government by fees or commission for the performance
of any public duty.
(ii) Any person in the service or pay of a local authority.
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(iii) Any person in the service or pay of a corporation established by or
under a Central, Provincial or State Act, or an authority or a body
owned or controlled or aided by the Government or a Government
company as defined in section 2(45) of the Companies Act, 2013.
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(iv) Any Judge, including any person empowered by law to discharge,
whether by himself or as a member of any body of persons, any
adjudicatory functions.
(v) Any person authorised by a court of justice to perform any duty, in
connection with, including a liquidator, receiver or commissioner
appointed by such court.
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(vi) Any arbitrator or other person to whom any cause or matter has
been referred for decision or report by a court of justice or by a
competent public authority.
(vii) Any person who holds an office by virtue of which he is empowered
to prepare, publish, maintain or revise an electoral roll or to conduct an election of part of an election.
(viii) Any person who holds an officer by virtue of which be is authorised
or required to perform any public duty.
(ix) Any person who is the president, secretary or other office-bearer of
a registered co-operative society engaged in agriculture, industry,
trade or banking, receiving or having received any financial aid
front the Central Government or State Government or from any
corporation established by or under a Central, Provincial or State
Act, or any authority or body owned or controlled or aided by the
Government or a Government company as defined in Section 2(45)
of the Companies Act, 2013;
(x) Any person who is a chairman, member or employee of any Service
Commission or Board, by whatever name called, or a member of
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LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 231
any selection committee appointed by such Commission or Board
for the conduct of any examination or making any selection on
behalf of such Commission or Board.
(xi) Any person who is a Vice-Chancellor or member of any governing
body, professor, reader, lecturer or any other teacher or employee,
by whatever (resignation called, of any university and any person
whose services have been availed of by a University or any other
public authority in connection with holding or conducting examinations;
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(xii) Any person who is an office-bearer or an employee of an educational, scientific, social, cultural or other institution, in whatever
manner established, receiving or having received any financial
assistance from the Central Government or any State Government
or local or other public authority
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A public servant is also penalised if he gets involved in criminal misconduct. As per section 13 of this PC Act, 1988, the criminal misconduct by a public servant is stated as follows:
A public servant is said to commit the offence of criminal misconduct in
following cases:
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(a) If he habitually accepts or obtains or agrees to accept or attempts
to obtain from any person for himself or for any other person any
gratification other than legal remuneration as a motive or reward
such as is mentioned in Section 7
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(b) If he habitually accepts or obtains or agrees to accept or attempts to
obtain for himself or for any other person, any valuable thing without consideration or for a consideration which he knows to be inadequate from any person whom he knows to have been, or to be, or to
be likely to the concerned in any proceeding or business transacted
or about to be transacted by him or having any connection with the
official functions of himself or of any public servant to whom he is
subordinate, or from any, person whom he knows to be interests in
or related to the person so concerned
(c) If he dishonestly or fraudulently misappropriates or otherwise converts for his own use any property entrusted to him or under his
control as a public servant or allows any other person so to do; or
(d) If he, (i) By corrupt or illegal means, obtains for himself or for any other person any valuable thing or pecuniary advantage
(ii) By abusing his position as a public servant, obtains for himself or for any other person any valuable thing or pecuniary
advantage
(iii) While holding office as a public servant, obtains for any person
any valuable thing or pecuniary advantage without any public
interest
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(e) If he or any person on his behalf, is in possession or has, at any time
during the period of his office, been in possession for which the public servant cannot satisfactorily account, of pecuniary resources or
property disproportionate to his known sources of income.
THE BENAMI TRANSACTIONS (PROHIBITION) ACT, 1988
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To understand this law, one needs to know the actual meaning of
‘benami transactions’. It involves the financial transactions made for
the purchase of property in the false name of another individual who
does not pay for the property. An exception in this case is the property purchased in the name of wife or unmarried daughter’s name.
Under ‘The Benami Transaction Act, 1988’(hereinafter referred to
the ‘Benami Act’), benami transactions are prohibited and whosoever
enters into such transactions becomes liable to gain a punishment of
imprisonment of upto three years or a fine and the property that is
considered as benami is acquired by a prescribed authority in return
of no money. It helps in tracing black money, illegal financial transaction and safeguarding the adjudicating authority.
The Act states that:
(1) No person shall enter into any benami transaction.
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(2) It shall apply to the purchase of property by any person in the name
of his wife or unmarried daughter and it shall be presumed, unless
the contrary is proved, that the said property had been purchased
for the benefit of the wife or the unmarried daughter.
(3) Whoever enters into any benami transaction shall be punishable
with imprisonment for a term which may extend to three years or
with fine or with both.
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(4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, an offence under this section shall be non-cognizable
and bailable
THE PREVENTION OF MONEY LAUNDERING ACT, 2002
Money laundering is an offence or an illegal process of disguising the
origins of money obtained by means of complex sequence of bank
transfers, it may also include money transfers through foreign banks.
It is conducted to convert money obtained through illegal sources into
legitimate money.
It imposes a threat on the Indian financial system since money laundering fosters high profile embezzlement and financial crimes. Financial institutions are making consistent efforts to detect and prevent
money laundering. The Prevention of Money Laundering Act, 2002,
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(hereinafter referred to as the ‘Money Laundering Act’) is the comprehensive legislation that was enacted to prevent money laundering.
It provides a provision for the confiscation of property acquired from
money laundering. It came into force from 1st July, 2005 and was further amended by the Prevention of Money Laundering (Amendment)
Act, 2012 w.e.f. 15-02-2013. An Act is considered as an offence of money
laundering when a person is a party to a process concerned with the
proceeds of crime and projects such as proceeds of untainted property. As per the Section 2(1) (u) of the Prevention of Money Laundering Act, 2002 Act, ‘Proceeds of crime’ means any property derived or
obtained, directly or indirectly, by any person as a result of criminal
activity relating to a scheduled offence or the value of any such property.
The ‘Proceeds of crime’ is the property attained by a person or party
as a result of criminal activity related to certain offences that are mentioned in the schedule of the Prevention of Money Laundering Act,
2002. The penalty and punishment under this Act mentioned for the
offence of money laundering is a fine of up to ` 5 lakh or imprisonment
of three to seven years. The Central government appoints the adjudicating authority that decides whether any of the property attached or
seized involved in money laundering.
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5.4.2 DIFFERENCE BETWEEN the US ANTI-CORRUPTION
LAWS AND INDIAN ANTI-CORRUPTION LAWS
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The internationally accepted definition of corruption is the abuse of
entrusted power or public offices for private gain. The US and India
both ascribe to the same definition, in form. The US has anti-corruption legislation known as the Foreign Corruption Practices Act (FCPA)
which involves two provisions, the first one prohibits bribery of foreign public officials and the second one says that publically traded
companies need to maintain their book of accounts to ensure financial controls. The FCPA covers both criminal and civil proceedings
and imposes fines, disgorgements, forfeitures and other sanctions on
corrupt practices that are collected by the US government. The FCPA
does not involve coverage of private-level bribery. However, some
other US legislations cover such practices. The FCPA says the person
involved in offering the bribe with a ‘corrupt’ intent is the real culprit
and it only covers active bribery, which means it penalises the person who offers bribe. Under the FCPA, the culprit is penalised up to
$250,000 per violation or he may be given five years of imprisonment.
Also, under the FCPA, a company is held liable to pay a fine up to USD
$2,000,000 per violation. However, under the PC Act, a public servant is punished for accepting bribes or any other undue advantages
and criminal misconduct. For instance, X gives Y, a public servant, `
1,00,000 in return for Y to give fast approval for the X’s construction
project. Here, Y is held liable for this corruption practice.
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? DID YOU KNOW
In 2014, the Parliament of India
passed The Whistleblower
Protection Act. However, it
has still not come into effect.
This law tried to establish a
mechanism to gather complaints
relating to corruption or wilful
misuse of power by public
servants and to inquire into
those complaints.
Business Law
5.4.3
Leading Cases
CHANDA KOCHHAR AND ICICI CASE (2019)
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Chanda Kochhar, the former ICICI Bank MD was alleged for “dishonestly sanctioning loans to the Videocon Group” under CBI FIR
as she received illegal gratification from her husband, Deepak Kocchar who was the Videocon MD. Since, by sanctioning a term loan of
` 300 crore to Videocon International Electronics Ltd., she misused her
official position, various charges were leveled up on her for criminal
conspiracy and cheating. The FIR against her says On August 26, 2009,
a rupee term loan of Rs 300 crore was sanctioned to Videocon International Electronics Ltd (VIEL) in contravention of rules and policy by the
sanctioning committee… Kochhar was one of the members of the sanctioning committee, who in criminal conspiracy… dishonestly by abusing
her official position sanctioned this loan in favour of VIEL, She violated
the bank’s code of conduct. ICICI bank also released a statement for
this case stating “Ms Chanda Kochhar was in violation of the ICICI
Bank Code of Conduct, its framework for dealing with conflict of interest and fiduciary duties, and in terms of applicable Indian laws, rules
and regulations”
SIEMENS CASE (2008)
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Siemens is a German engineering group that dealt with a long-running corruption and bribery scandal. The company was penalised
worth �395m (£354m) to settle a case for securing huge public works
contracts such as a nationwide cell phone network in Bangladesh,
a national identity card project in Argentina around the world from
bribes and slush funds. The company was held guilty in the Federal
court in Washington because of violating the 1977 law that bans the
corrupt practices in foreign business dealings. According to Joseph
Persichini Jr., the head of the Washington office of the Federal Bureau
of Investigation, They were standard operating procedures for corporate executives who viewed bribery as a business strategy.
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self assessment Questions
11. _____________ is an offence or an illegal process of disguising
the origins of money obtained by means of complex sequence
of bank transfers or money transfers through foreign banks.
12. A public servant is also penalised if he gets involved in criminal misconduct.
a. True
b. False
13. As per the ‘Corruption Perceptions Index, 2018, India has
attained __________ position out of 180 countries.
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LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 235
Activity
Search the Internet and find out the ‘anti-corruption laws’ of other
nations and mark the distinction among them.
5.5 Summary
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‰‰ Alternative
dispute resolution, also called ‘ADR’, is a generic
term that refers to a wide range of methods of dispute resolution,
which provide an alternative to the adversarial court-based public
litigation.
is neutral to the law, language and institutional culture of
the parties that helps in maintaining equality among parties which
prevents some parties from getting the home-court advantage when
compared to the court-based litigation in respective countries.
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‰‰ ADR
are various types of alternate dispute resolution available
other than the court proceedings such as negotiations, arbitration,
and mediations.
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‰‰ There
‰‰ Negotiation
is an informal technique of resolving a dispute, where
the parties in dispute directly try to communicate with each other
and reach a conclusion.
is a voluntary, non-binding, confidential and structured
process wherein a neutral third party possessing special
communication, negotiation, social and interactive skills helps the
parties arrive at a mutual settlement.
Adalat is a promising, participative ADR method. Lok Adalat
is considered as people’s court, which provides easy access to
justice with mutual consent.
‰‰ The
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‰‰ Lok
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‰‰ Mediation
Arbitration and Conciliation Act, 1996 is divided into 86
sections and 4 chapters and extends to the whole of India. It is
based on the Model Law on arbitration suggested by UNCITRAL.
‰‰ The first stage in the arbitration is the formulation of the arbitration
agreement whereby the parties agree to submit their present or
future differences to arbitration.
‰‰ The decision of the Arbitral Tribunal is termed as ‘Arbitral Award’.
It is analogous to a court judgment although it is made by a
mutually agreed private adjudicator.
‰‰ Conciliation
refers to a process of settling disputes through the
good offices of a third party which attempts to minimise the points
of conflict between the parties to enable them to reconcile.
‰‰ Anti-corruption
laws are legal tools or compliances that help to
curb the corruption practices from society. The violation of anti-
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corruption laws can apply criminal penalties, civil penalties,
disciplinary recourse and reputational repercussions.
‰‰ Indian legislations involve Prevention of Corruption (Amendment)
Act, 2018, The Benami Transactions (Prohibition) Act, 1988, and
The Prevention of Money Laundering Act, 2002, to deal with
corruption.
key words
‰‰ Arbitration:
A method of dispute resolution between two
parties by an impartial third party outside courts
‰‰ Dispute:
A state of argument or conflict between two or more
parties
The amount paid as compensation to the party
initiating the process of arbitration
‰‰ Litigation:
The process of settling disputes through legal
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procedures
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‰‰ Redressal:
‰‰ Confidentiality:
A set of rules to ensure the privacy of the
disputing parties
‰‰ Seized: The legal possession or having an ownership of property
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or an estate
?
5.6 Descriptive Questions
1. Discuss the advantages of the alternative dispute resolution
method.
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2. Define negotiation. List its characteristics.
3. Describe the fundamental principles of mediation.
4. Write a short note on Lok Adalats in India.
5. List some important aspects of an arbitration agreement.
6. Explain various anti-corruption laws of India
5.7 Answers and Hints
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic
Alternative Dispute Resolution
Types of Alternate Dispute Resolution
Q. No.
Answer
1.
d.
2.
a. True
3.
c.
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All of these
Mediation
LAWS RELATED TO ENFORCEMENT AND REDRESSAL MECHANISM IN BUSINESS 237
Answer
4.
d.
All of the above
5.
b.
False
6.
Neutral third party
7.
United Nation Commission on International
Trade Law
8.
Formulation of the arbitration Agreement
9.
c.
10.
Conciliator
11.
Money laundering
12.
a.
13.
78th
Both a. and b.
True
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Anti-Corruption Laws
Q. No.
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Topic
HINTS FOR DESCRIPTIVE QUESTIONS
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1. Today, ADR techniques are considered as one of the most acceptable dispute resolution techniques used worldwide, either alongside or combined with the legal systems. Refer to Section 5.2.3
Advantages of Alternative Dispute Resolution
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2. Negotiation is an informal technique of resolving a dispute,
where the parties in dispute directly try to communicate with
each other and reach a conclusion. Refer to Section 5.3.1 Negotiation
3. Mediation is a voluntary, non-binding, confidential, and structured process wherein a neutral third party possessing special
communication, negotiation, social and interactive skills help
the parties arrive at a mutual settlement. Refer to Section 5.3.2
Mediation
4. In order to provide timely justice, Lok Adalats are set up to promote justice by providing timely and cost-effective legal aid on
the basis of principles of equity, justice and fair play. Refer to
Section 5.3.4 Lok Adalats
5. The Arbitration and Conciliation Act, 1996 is divided into 86 sections and 4 chapters, and extends to the whole of India. Refer to
Section 5.3.5 Arbitration and Conciliation Act, 1996
6. Indian government enforced ‘The Prevention of Corruption Act’
in 1988 which is considered as the primary law to fight against
corruption. However, time to time amendments have been made
in this Act. The last amendment was made in 2018. Refer to Section 5.4 Anti-Corruption Laws
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5.8 Suggested Readings & References
Suggested Readings
‰‰ Clarkson,
K., Miller, R., Jentz, G., & Cross, F. (2014). Business law:
Text and cases (11th ed.). Cengage Learning.
‰‰ Keenan,
D., & Riches, S. (2007). Business law. Harlow: Pearson
Longman.
E-REFERENCES
Retrieved 27 April 2020, from http://www.nishithdesai.com/
fileadmin/user_upload/pdfs/Research_Papers/Overview-of-AntiCorruption-Laws-in-India-Web1.pdf
‰‰ ADR
S
‰‰ (2020).
Types & Benefits - alternative_dispute_resolution. (2020).
Retrieved 27 April 2020, from https://www.courts.ca.gov/3074.htm
of Alternative Dispute Resolution (ADR). (2020). Retrieved
27 April 2020, from https://www.legalmatch.com/law-library/
article/types-of-alternative-dispute-resolution-adr.html
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‰‰ Types
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6
a
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CONSUMER PROTECTION ACT, 2019
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Introduction
Consumer Protection Act, 2019
6.2.1
Objective of the Act
6.2.2
Scope of the Act
Important Definitions
6.2.3
6.2.4
Important Provisions and Features of the Consumer Protection Act, 2019
6.2.5 Difference between Consumer Protection Act, 1986 and Consumer
Protection Act, 2019
Self Assessment Questions
Activity
6.3
Rights of a Consumer
Self Assessment Questions
Activity
6.4
Consumer Protection Councils (CPCs)
6.4.1
Functions of CPCs
6.4.2
Central Consumer Protection Council (CCPC)
6.4.3
State Consumer Protection Councils (SCPCs)
District Consumer Protection Councils (DCPCs)
6.4.4
Self Assessment Questions
Activity
Consumer Disputes Redressal
6.5
6.5.1
Consumer Disputes Redressal Machinery
Procedure of Dispute Resolution
6.5.2
Procedure for Filing a Complaint before the Consumer Protection Body
6.5.3
6.5.4
Nature and Scope of Remedies
6.5.5
Appeals and Limitations
Self Assessment Questions
Activity
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6.1
6.2
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Contents
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CONTENTS
6.6
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6.7
6.8
6.9
6.10
Comparison of Consumer Law in Other Countries
Self Assessment Questions
Activity
Summary
Descriptive Questions
Answers and Hints
Suggested Readings & References
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240
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CONSUMER PROTECTION ACT, 2019 241
Introductory Caselet
CONSUMER RIGHTS VIOLATION
S
In 2015, Nestle’s Maggi Noodles had to face a ban on its production and distribution. It was due to high levels of Mono Sodium
Glutamate (MSG) found in different samples of Maggi all across
the country. From this case, an interesting fact could be observed.
The alleged violation of the consumer’s right to safety under the
Consumer Protection Act, 1986, (hereinafter referred to as ‘Consumer Protection Act, 1986’) was pointed out by a food inspector
of the Indian Food Regulator FSSAI and not by any consumer.
The food regulator stated that such high amounts of MSG can be
dangerous to consumers’ health and safety. This case also demonstrated that consumers are highly dependent upon the regulator
for ensuring and protecting consumers’ rights.
IM
In India, consumers are mostly unaware of their rights and they
think of bad products and services as unavoidable. It has been
noted that even if some consumers file consumer complaints and
pursue legal battles, they often lose interest in the case because
litigation takes a lot of time. Sometimes, consumers also refrain
from filing complaints because of a lack of evidence.
N
M
The infamous case of Maggi and various other cases were followed by the enactment of the new Consumer Protection Act,
2019. Under this Act, the central government will establish a Central Consumer Protection Authority (CCPA) to specifically intervene in matters related to unfair trade practices and misleading
advertisements.
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Case Objective
This caselet aims to highlight
the consumer rights violation
by Nestle Maggi.
Business Law
Learning objectives
After studying this chapter, you will be able to:
Explain the objectives and scope of the Consumer Protection
Act, 2019
Define certain important terms under the Consumer
Protection Act, 2019
Outline the important provisions and features of the
Consumer Protection Act, 2019
Discuss the significance of intermediaries under the
Consumer Protection Act, 2019
Describe how e-commerce has been covered under the
Consumer Protection Act, 2019
Explain various product liability provisions under the
Consumer Protection Act, 2019
Outline the revised amounts of pecuniary jurisdiction
Explain how mediation and alternate dispute redressal is
used to dispose of consumer complaints under the Consumer
Protection Act, 2019
Discuss new provisions such as e-filing of complaints
Explain the newly created regulator Central Consumer
Protection Authority
Discuss the various provisions related to false or misleading
advertisements, deletion of healthcare from the definition of
services, mediation and penalties
Explain various rights of a consumer as per the Consumer
Protection Act, 2019
Describe the role and functions of the Consumer Protection
Councils (CPCs)
Discuss how the consumer disputes redressal machinery
works under the Consumer Protection Act, 2019
Compare consumer laws of various countries
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6.1 Introduction
Quick Revision
In the previous chapter, you studied various laws related to enforcement and redressal mechanism in the business including dispute
resolution, alternate dispute resolution and anti-corruption laws as
applicable in India.
In any country, it is the duty of the government to protect all consumers from unfair and restrictive trade practices of organisations, sellers
and service providers. The parliament of India enacted the Consumer
Protection Act in 1986 for protecting the consumer’s interest in India.
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CONSUMER PROTECTION ACT, 2019 243
The Consumer Protection Act, 1986 is replaced by the Consumer Protection Act, 2019. This is considered as the ‘Magna Carta’ (royal charter of rights) in the context of consumer protection.
The ‘Magna Carta’ keeps a check on the following:
‰‰ unfair
trade practices
‰‰ defects
in goods
‰‰ deficiencies
in services as far as India is concerned
S
The Consumer Protection Act, 2019 has been enacted for protecting
the interests of consumers by establishing various provisions, consumer councils, commissions and a central authority for settling disputes of consumers. The Consumer Protection Act, 2019 formed the
Central Consumer Protection Authority (CCPA) which is responsible
for promoting, protecting and enforcing the rights of consumers.
M
IM
In this chapter, you will study the Consumer Protection Act, 2019, its
objective, scope and provisions. The chapter explains various provisions and definitions such as unfair trade practices, product liability,
e-filing facility, etc. All the rights of consumers as per this Act have
also been discussed. The role of consumer protection councils as advisory bodies and the consumer disputes redressal mechanism under
the law is also described. Towards the end, the state of consumer laws
across the globe has been discussed briefly.
6.2 CONSUMER PROTECTION ACT, 2019
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We are living in an increasingly digital age that is characterised by
increased trade activities, e-commerce, digital branding and increased
customer expectations. The use of digital means has offered various
benefits such as ease of access, a large variety of choices, convenient
payment mechanisms, increased choice of payment options, improved
service experience, etc. Along with all these conveniences, there has
been a more than a proportionate increase in the challenges related to
consumer protection. To meet these challenges faced by consumers,
the Indian Government enacted the Consumer Protection Act, 2019.
The objective of this Act is to provide timely and effective administration and settlement of consumer disputes. The Consumer Protection
Act, 2019 is the latest and updated law that has replaced its predecessor Consumer Protection Act, 1986 which was a law that was over
three decades old.
The Consumer Protection Act, 2019 received the assent of the President of India in August 2019 and was published in the official gazette
on 9th August 2019. The Consumer Protection Act, 2019 came into
force on 20th July, 2020. It was a long-awaited Act because it intends
to resolve a large number of consumer complaints that are pending in
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NOTE
The Consumer Protection
Act, provided for three-tier
consumer dispute redressal
machinery at the national,
state and district levels.
Business Law
various consumer courts of the country. It contains several provisions
that can help in providing a speedy solution to consumer grievances.
CASE LAW
Karnataka Power Transmission Corporation (KPTC) vs. Ashok
Iron Works Private Limited
IM
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Facts: Ashok Iron Works, a private company, used to obtain electricity from the Karnataka Power Transmission Corporation (KTPC) for
iron production. Ashok Iron Works paid charges and got confirmation from KTPC for the supply of 1500 KVA energy in February 1991.
KTPC did the actual supply after 10 months in November 1991. As
a result, Ashok Iron Works had to incur losses. A complaint was filed
at the Consumer Dispute Forum, Belgaum and later at the Karnataka High Court by the respondent Ashok Iron Works, under the
Consumer Protection Act, 1986.
KPTC raised legal argument:
‰‰ Complaint
was not maintainable since the Consumer Protection
Act, 1986, excludes commercial supply of goods.
is not maintainable because the complainant is not a
‘person’ under Section 2(1)(m) of the Act, 1986.
M
‰‰ Complaint
The ruling of the Supreme Court in this case:
‰‰ Supreme
N
244
Court cleared that the word “Includes is an inclusive
definition”. Therefore, Ashok Iron Works Private Company was
held to be a person.
‰‰ Supply is not sale or supply is not equivalent to a sale. Therefore,
the electricity supply by the KPTC would be covered under
Section 2(1)(o) being ‘service’ and in case the supply of electrical
energy to a consumer is not provided in time as is agreed upon,
then under Section (2)(1)(g), there may be a case for deficiency in
service. Thus, the clause stating “supply” of goods for commercial
purposes would not apply.
Thus, the court allowed the complaint on the two grounds that the
applicant – Ashok Iron Works Private Limited, can sue as a person,
and that supply of electricity if found deficient can be a fit ground
for claiming compensation. The Court sent the case back to District
Forum for retrial on these grounds.
Source: https://vakilsearch.com/advice/the-top-ten-consumer-court-cases-and-trials-in-india/
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CONSUMER PROTECTION ACT, 2019 245
6.2.1 OBJECTIVE OF THE ACT
The main objective of the Consumer Protection Act, 2019 is to protect
the rights of consumers and establish various authorities for timely
and effective administration and settlement of all consumer disputes.
Some of the other objectives of the Consumer Protection Act, 2019 are
as follows:
‰‰ To
provide a simple and effective consumer grievance redressal
process
‰‰ To
dispose of all the consumer grievance complaints in the least
amount of time
ensure effective disposing of all the cases pending in the
consumer courts
‰‰ To
S
‰‰ To
conduct investigations into violations of consumer rights and
institute complaints
order the recall of unsafe goods and services
IM
‰‰ To
‰‰ To
order the discontinuance of unfair trade practices and
misleading advertisements
impose penalties on manufacturers/endorsers/publishers of
misleading advertisements
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‰‰ To
6.2.2 SCOPE OF THE ACT
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The Consumer Protection Act, 2019, extends to the whole of India.
This Act contains 107 sections divided into 8 chapters. The Consumer
Protection act, 2019 has included various new definitions for various terms such as advertisement, central authority, consumer rights,
design, direct selling, director general, e-commerce, electronic service
provider, misleading advertisement, product liability, product liability
action, etc.
In addition, the scope of this Consumer Protection Act, 2019 has also
been widened by providing a wider definition to terms such as the
complainant, consumer, deficiency, etc.
6.2.3 IMPORTANT DEFINITIONS
As per Chapter I Preliminary of the Consumer Protection Act, 2019,
under section 1 Short title, extent, commencement and application:
‰‰ This
is known as the Consumer Protection Act, 2019.
‰‰ As
otherwise expressly provided by the Central Government, by
notification, this Act shall apply to all goods and services.
Source: http://egazette.nic.in/
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? DID YOU KNOW
On 20th July 2020, the Consumer
Protection Act, 2019, came into
force.
246
Business Law
Some of the important definitions that have been included under the
Act are as follows:
‰‰ Advertisement:
Any audio or visual publicity, representation,
endorsement or pronouncement made by means of light, sound,
smoke, gas, print, electronic media, internet or website and
includes any notice, circular, label, wrapper, invoice or such other
documents is an advertisement.
‰‰ Central authority: Under Section 10 of the Consumer Protection
Act, 2019, the Central Authority refers to the Central Consumer
Protection Authority (CCPA).
‰‰ Complainant:
 A
Complainant may mean any of the following:
consumer
voluntary consumer association registered under any law
for the time being in force
S
 Any
Central Government or any State Government
 The
Central Consumer Protection Authority
IM
 The
 One
or more consumers, where there are numerous consumers having the same interest
 In
the case of the death of a consumer, his legal heir or legal
representative
the case of a consumer being a minor, his parent or legal
guardian
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 In
N
‰‰ Consumer:
NOTE
The consumer purchases goods
and services only for self-use.
When a person purchases any
goods or avails any service for a
resale or commercial purpose,
he/she is not considered a
consumer.
A consumer may be any of the following:
 Any
person who buys any goods for a consideration whether
paid or promised
 Any
person who buys goods for a consideration that is partly
paid and partly promised
 Any
person who hires or avails of any service for a paid consideration or for a consideration that is partly paid and partly
promised
 Any
person who makes online purchases
‰‰ Consumer dispute: It is a dispute where the person against whom
a complaint has been made, denies or disputes the allegations
contained in the complaint.
‰‰ Defect:
Any fault, imperfection or shortcoming in the quality,
quantity, potency, purity or standard must be present in the good.
‰‰ Deficiency:
Any fault, imperfection, shortcoming or inadequacy
in the quality, nature and manner of performance of a good
required by the law. In addition, any act of negligence or omission
or commission by a person due to which a consumer experiences
loss or injury or any act of deliberately withholding relevant
information from a consumer by a seller is a deficiency.
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CONSUMER PROTECTION ACT, 2019 247
‰‰ E-commerce:
Buying and/or selling of goods or services including
digital products over digital or electronic network.
‰‰ Electronic
service provider: A person who provides technologies
or processes to enable a product seller to engage in advertising or
selling goods or services to a consumer and includes any online
market place or online auction sites.
‰‰ Endorsement:
Endorsement is described in relation to
advertisements and refers to any message, verbal statement,
demonstration or depiction of the name, signature, likeness or
other identifiable personal characteristics of an individual or
depiction of the name or seal of any institution or organisation,
which makes the consumer to believe that it reflects the opinion,
finding or experience of the person making such endorsement.
Any kind of moveable property and food are considered to
be goods.
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‰‰ Goods:
Any harm that is caused illegally to a person’s body, mind
or property is considered to be an injury.
‰‰ National
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‰‰ Injury:
Commission: The National Consumer Disputes
Redressal Commission (NCDRC) can also be simply called the
National Commission.
‰‰ Product: Any goods or substance or raw material present in either
liability: In case of goods purchases, the sellers and
product manufacturers have a responsibility to compensate the
consumer for any harm caused to a consumer due to a defective
product.
‰‰ Product
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‰‰ Product
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gaseous, liquid, or solid state and that possesses an intrinsic value
and may be delivered as a component or as a whole and is usually
meant for trade or commerce. A product does not include human
tissues, blood, blood products and organs.
service provider: This is a person who provides any
service in respect of any product.
6.2.4 IMPORTANT PROVISIONS AND FEATURES OF THE
CONSUMER PROTECTION ACT, 2019
The present Consumer Protection Act, 2019 is an advancement over
the previous Consumer Protection Act, 1986 and includes several new
provisions and features. Some important features and provisions of
this Act are as follows:
‰‰ Broadening
the term consumer: According to the new definition
of the term consumer, consumers are those persons who buy goods
or avail services using offline as well as online mode or using means
such as teleshopping or direct selling or Multi-Level Marketing
(MLM). It means that consumers of multi-level marketing will now
have a legal recourse in the case of fraud. It should be noted that
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Business Law
all sellers at each level of MLM can be exposed to liability and not
just product manufacturers.
‰‰ Inclusion
of e-commerce: As per the new Act, buying or selling
of goods and services including digital services using digital or
electronic means are also considered valid. This Act also states
that consumers are also eligible for buying and selling using direct
selling, e-commerce and electronic service providers. After the
government officially notifies the Act, the central government may
also prescribe certain rules relevant for e-commerce and direct
selling.
grounds for filing complaints: This Act contains seven
grounds using which a consumer can file a complaint against a seller
or manufacturer, where earlier there were six. The introduction
of unfair contracts and the expansion of the definition of unfair
trade practices are the chief additions. Now, the seven grounds are
[Section 2(6)]:
When any trader or service provider adopts any unfair contract or a unfair or restrictive trade practice
IM
i.
S
‰‰ New
ii. When the goods purchased by a consumer suffers from one or
more defects
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iii. When the services hired or availed or agreed to be hired or
availed of by a consumer suffer from any deficiency
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248
iv. When a trader or a service provider has charged from the consumer a price that is more than the price that has been fixed as
per law or the price that is printed over the goods or the price
that is displayed by the trader in a price list or the price that is
mutually agreed by both the parties.
v. When a seller offers goods to the public that are hazardous
to life and safety in contravention of standards relating to the
safety of such goods or where a trader offers for sale such
hazardous goods despite knowing that they are unsafe for
consumption
vi. When the services that are hazardous or potentially hazardous to life and public safety are offered by a person who provides any service despite knowing that it could be injurious to
life and safety.
vii. The consumer can make a claim for product liability action
against the product manufacturer, product seller or product
service provider.
‰‰ Introduction
of product liability: A separate chapter has been
inserted for product liability and it is now a new ground for filing a
complaint under this Consumer Protection Act, 2019.
‰‰ Advertising
claims: This Consumer Protection Act, 2019 has
brought advertising claims under its ambit.
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CONSUMER PROTECTION ACT, 2019 249
‰‰ Introduction
of the CCPA: In accordance with Section 10(1) of
the Consumer Protection Act, 2019, the Central Government has
been empowered to establish a Central Consumer Protection
Authority (CCPA) or the Central Authority. The primary work of
the CCPA will be to regulate matters relating to the violation of
rights of consumers, unfair trade practices and false or misleading
advertisements that are prejudicial to the interests of the public
and consumers and to promote, protect and enforce the rights of
consumers as a class.
‰‰ Misleading advertisements: As per the Consumer Protection Act,
2019, a misleading advertisement related to a product or service
may demonstrate any of the following characteristics:
advertisement which falsely describes such a product or
service or gives a false guarantee which can mislead the consumers with respect to the nature, substance, quantity or quality of such product or service.
S
 Any
advertisement that deliberately conceals important information.
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 Any
 Any
advertisement which conveys an express or implied representation made by the manufacturer or seller or service provider and constitutes an unfair trade practice.
M
‰‰ Deletion of healthcare from the definition of services: Healthcare
services have been removed from the list of services covered under
this Act. It was removed after a lot of opposition from medical
fraternity that this Act is highly likely to be misused against them.
in the pecuniary jurisdiction of the commissions: As
per this Act, the pecuniary jurisdictions of the district, state and
national commission have been increased.
N
‰‰ Increase
INTERMEDIARIES
Under the Act, e-commerce is considered similar to direct selling. All
online platforms used for selling goods and services are governed in
a manner similar to direct selling. All these platforms and organisations can be held liable for consumer rights violation. The platforms
and the providers that have been included under the new Act include
e-marketplaces, product service providers, electronic service providers, online auction sites and service aggregators, intermediaries and
endorsers.
The government has also drafted the Consumer Protection (e-commerce) Rules 2020. The objective of drafting these rules is to set the
guiding principles for e-commerce in India to prevent fraud, unfair
trade practices and to protect the rights and interests of consumers.
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NOTE
Every e-commerce entity is
required to give the following
information on its platform,
displayed to its users, namely:
a. its legal name
b. principal geographic address
of its headquarters and all
branches
c. website name and details
d. contact details like e-mail
address, fax, landline and
mobile numbers of customer
care as well as of grievance
officer
Business Law
E-COMMERCE
All e-commerce transactions related to the purchase and sale of goods/
services have been included in the Consumer Protection Act, 2019.
PRODUCT LIABILITY
S
In business laws, organisations and individuals usually follow the rule
of Caveat Emptor, which translates to let the buyer beware. In general, it means that the ultimate responsibility of products and services
lies on the buyer. However, now this rule is not applied anymore and
the burden of ensuring the product or service appropriateness has
been shifted to the seller. The new Act of 2019 provides for protecting
the interests of consumers by creating a mechanism for the settlement
of consumer disputes. It also contains provisions for product liability
and misleading advertisements. To this end, the Act also provides for
the establishment of CCPAs.
IM
Product liability means that in any commercial relationship, the
responsibility and accountability of buyers and sellers with respect to
the products and services has to be fixed.
According to Section 82 of the Consumer Protection Act, 2019, a complainant can claim compensation for product liability under two circumstances – when the complainant has suffered harm due to:
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i. defective product manufactured by a product manufacturer
ii. the fault of some service/product service provider/seller
Section 83 of the Consumer Protection Act, 2019 says that a complainant has the right to bring a product liability action against a product manufacturer or a product seller or a service provider if he/she has
suffered harm due to a defective product or service.
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250
Section 84 lists the grounds for liability of a product manufacturer.
which are as follows:
‰‰ The
product has a manufacturing defect.
‰‰ The
product has a defective design.
‰‰ The
product is not as per the manufacturing specifications.
‰‰ The
product is in non-conformance of the express warranty.
‰‰ The
product does not contain adequate instructions regarding the
proper and correct usage of the product so that no harm is caused
as a result of incorrect or improper usage.
In case of product liability actions, product manufacturers can be held
liable even if they are able to prove that they did not act with negligence or with the intention to defraud in making the express warranty
of a product.
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CONSUMER PROTECTION ACT, 2019 251
Section 85 holds a service provider liable in the following cases:
‰‰ The service provided by the service provider was faulty, imperfect,
deficient, inadequate in terms of quality, nature or manner of
performance.
‰‰ An
act of omission or commission or negligence or conscious
withholding of any information due to which harm was caused.
‰‰ The
service provider does not issue adequate instructions or
warnings to prevent any harm.
‰‰ Non-conformity
with an express warranty or the terms and
conditions of the contract.
S
As per Section 86, a product seller can be held liable in the following
situations:
the seller had exercised substantial control over the
designing, testing, manufacturing, packaging or labelling of a
product that caused harm
‰‰ When
IM
‰‰ When
the seller had altered or modified the product due to which
harm was caused
the seller has made an express warranty of a product
independent of any express warranty made by a manufacturer
and the harm is caused due to failure of such express warranty
made by the product seller
the product has been sold by the product seller and the
identity of product manufacturer of such product is not known, or
if the identity is known, the service of notice or process or warrant
cannot be effected on him
‰‰ When
N
‰‰ When
M
‰‰ When
the seller fails to exercise reasonable care in assembling,
inspecting or maintaining the product such as failing to convey the
warnings or instructions of the product manufacturer with respect
to the dangers involved, proper usage of the product and the harm
was caused due to such failure.
Section 87 lays down cases under which liability action can be
exempted. A product liability action cannot be brought:
‰‰ against
the product seller if the product was misused, altered, or
modified at the time of harm.
‰‰ against the product manufacturer on the basis of failure to provide
adequate warnings or instructions if the product was purchased
by an employer for using it at the workplace and the product
manufacturer had provided warnings or instructions to such
employer.
‰‰ against
the product manufacturer on the basis of failure to
provide adequate warnings or instructions if the product was
sold as a component or material to be used in another product
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Business Law
and the manufacturer had provided all the necessary warnings or
instructions to the buyer but the harm was caused due to the end
product in which the component or material was used.
‰‰ against the product manufacturer on the basis of failure to provide
adequate warnings or instructions if the product was legally meant
to be used or dispensed under the supervision of an expert(s).
‰‰ against the product manufacturer on the basis of failure to provide
adequate warnings or instructions if the complainant was under
the influence of alcohol or any other prescription drug at the time
of using the product and such medicine was not prescribed by any
medical practitioner.
the product manufacturer if the complainant suffers harm
due to his own negligence and could not take precautions that are
commonly known to users of such products.
S
‰‰ against
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REVISION OF JURISDICTION AMOUNTS
Under the Consumer Protection Act, 2019, the government will constitute multiple bodies for redressing consumer disputes.
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At the base level, Consumer Protection Councils (CPCs) would be
set up at three levels namely district, state and national level. These
will basically serve as advisory councils and will provide advice to the
Central Government for the promotion and protection of consumers’
rights under this Act at the national, state and district levels.
After the CPCs, the second level of the consumer redressal is the Consumer Disputes Redressal Commissions (CDRCs) that will be set up
at three levels. This is also called the three-tier Consumer Dispute
Redressal Commission. All the consumer dispute complaints are submitted in these Commissions (Courts). The complaints may be sent
to the district level, state level or national commission based on the
pecuniary jurisdiction.
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252
Pecuniary jurisdiction is the ability of a court to hear a case depending
upon the amount of money or the value of money involved in the case.
The pecuniary jurisdiction of the commissions at three levels is shown
in Table 6.1:
Table 6.1: Pecuniary Jurisdiction of the Commissions at Three Levels
Level of Commission Pecuniary Jurisdiction Amount
District Commissions
District commissions can entertain complaints
where the value of goods or services does not
exceed ` 1crore.
State Commissions
State commissions can entertain complaints
where the value of goods or services falls in the
range of ` 1 crore and ` 10 crores.
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CONSUMER PROTECTION ACT, 2019 253
Level of Commission Pecuniary Jurisdiction Amount
National Commission National commission can entertain complaints
where the value of goods or services is above ` 10
crores
PROVISION OF ADR TO DISPOSE CONSUMER COMPLAINTS
The Consumer Protection Act, 1986, did not have a provision for alternate dispute resolution. However, in accordance with Section 74 of the
new Consumer Protection Act, 2019, the State Government will establish mediation cells to be attached to all the district and state commissions of that state. In addition, the Central Government will establish
a consumer mediation cell to be attached to the National Commission.
IM
E-FILING OF COMPLAINTS
S
If the parties to a dispute that is pending with a commission agree to
settle their disputes using mediation, the commission can refer the
matter to mediation.
The Consumer Protection Act, 2019 allows for the filing of complaints
using electronic or online means, also called e-filing.
‰‰ A
consumer
consumer who alleges that there has been a use of unfair trade
practice with respect to such goods or service.
‰‰ Any
N
‰‰ A
M
Section 35 of the Act deals with the manner in which the complaint
can be made. This section states that a complaint may be filed with a
district commission by any of the following:
recognised consumer association and in such case the
aggrieved consumer may or may not be a member of such
association.
‰‰ One
or more consumers can file a complaint as a class after taking
permission of the District Commission if all of them have a similar
interest and the complaint is made for the benefit of all consumers.
‰‰ The
Central Government, the Central Authority or the State
Government.
These complaints can also be filed electronically.
CENTRAL CONSUMER PROTECTION AUTHORITY AS THE NEW
REGULATOR
One of the most significant features of the Act of 2019 is that it calls for
the setting up of a regulatory body known as the Central Consumer
Protection Authority (CCPA). This regulator is to be set-up because,
under the previous version of the Act, there was no provision for a
central regulator to look after the consumer rights issues.
NMIMS Global Access - School for Continuing Education
NOTE
It must be remembered that
every complaint must be filed
along with a prescribed fee and
the fee will also be payable in an
electronic form.
254
Business Law
The primary objective of setting up the CCPA is to regulate the matters related to the violation of consumers’ rights and take suitable
actions to prevent unfair trade practices. Apart from this, some other
objectives of the CCPA are as follows:
‰‰ Regulating
the unfair trade practices
‰‰ Regulating
false or misleading advertisements
‰‰ Promoting,
protecting and enforcing the rights of consumers as a
class
‰‰ Ensuring
that no publication of any advertisement which is false
or misleading
‰‰ Initiating an enquiry in case of consumer’s rights violations and/or
unfair trade practices in the following three cases:
CCPA has received a complaint.
CCPA has received directions from the central government.
IM
 The
S
 The
 The
CCPA may also take suo moto cognisance of the consumer
rights violations in any form.
‰‰ Undertaking
an action against the accused, if proved guilty.
M
The CCPA is headed by a Chief Commissioner and other commissioners that are appointed by the Central Government. The headquarters
of the CCPA would be set up at a place within the National Capital
Region (NCR) and the regional offices of CCPA will be established at
multiple places across India as decided by the Central Government.
N
The Central Authority has the authority to engage any number of
experts and professionals who have knowledge and expertise in matters related to consumer rights and welfare, consumer policy, law,
medicine, food safety, health, engineering, product safety, commerce,
economics, public affairs or administration as it deems fit to help the
CCPA in discharging its functions.
NOTE
The Director-General may
delegate all or some of his
powers to the Additional
Director-General or Director,
Joint Director or Deputy
Director or Assistant Director
for conducting inquiries or
investigations and these need to
be submitted with CCPA in the
written form.
The CCPA is authorised to regulate its business transactions and also
allocate its business among the Chief Commissioner and Commissioners as specified by regulations. The Chief Commissioner has the powers of general superintendence, direction and control for all administrative matters of the CCPA.
The CCPA will also have an Investigation Wing that would be headed by
a Director-General and would be responsible for conducting enquiry
and investigation in matters that are referred to it by the CCPA.
The Central Government has been empowered to appoint a Director-General and any number of Additional Director-General, Director,
Joint Director, Deputy Director and Assistant Directors as it deems fit
and these members would exercise their powers and discharge their
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functions in accordance with the general control, supervision and
direction of the Director-General.
The District Collector of a district enjoys certain powers. If the District
Collector receives a complaint referred by the CCPA or from any Commissioner of a regional office, then, he must inquire into the complaint
falling in his jurisdiction regarding:
‰‰ Violation
of rights of consumers as a class
‰‰ Consumer
‰‰ Unfair
‰‰ False
rights violation
trade practices
or misleading advertisements
S
After conducting the enquiry, the District Collector has to submit his
report to the CCPA or to the Commissioner of a regional office which
is the same source through which the complaint was received.
IM
A complainant may file a complaint in written or electronic mode to
the District Collector or the Commissioner of the regional office or to
the CCPA in case of violation of consumer rights, unfair trade practices, misleading advertisements, etc., which are prejudicial to the
interests of consumers as a class. The powers and functions of the
CCPA are as follows:
promoting and enforcing the rights of consumers as a
‰‰ Preventing
the violation of consumers’ rights
‰‰ Preventing
unfair trade practices
class
that no person engages himself in unfair trade practices
N
‰‰ Ensuring
M
‰‰ Protecting,
‰‰ Ensuring that no false or misleading advertisement is made of any
goods or services which contravenes the provisions of this Act
‰‰ Ensuring
that no person takes part in the publication of any false
or misleading advertisement
‰‰ Enquiring or ordering an investigation into violations of consumers’
rights or unfair trade practices, either suo motu or on a complaint
received or on the directions from the Central Government
‰‰ Filing
complaints before the District Commission, the State
Commission or the National Commission
‰‰ Intervening
in the proceedings of any of the three consumer
courts namely District Commission, State Commission or National
Commission for any case of consumer rights violation or unfair
trade practices
‰‰ Reviewing
the matters and factors inhibiting the enjoyment of
consumer rights, including safeguards for protecting consumers
and recommending appropriate remedial measures for their
effective implementation
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Business Law
‰‰ Recommending
the adoption of international covenants and best
international practices on consumer rights
‰‰ Ensuring
effective enforcement of consumer rights
‰‰ Undertaking
and promoting the research related to consumer
rights
‰‰ Spreading
and promoting consumer rights awareness
‰‰ Encouraging
co-operation among NGOs and other institutions
working for consumer rights
‰‰ Using unique and universal goods identifiers for preventing unfair
trade practices and protecting consumers’ interests
‰‰ Issuing safety notices for alerting consumers against dangerous or
S
hazardous or unsafe goods or services
the Central and State Government departments and
ministries regarding the consumer welfare measures
IM
‰‰ Advising
‰‰ Issuing
guidelines for preventing unfair trade practices
M
The Central Authority may conduct or order preliminary inquiry after
receiving any information or complaint from the Central Government
or on its suo moto cognizance to see if a prima facie case is made out
of violation of consumer rights or any unfair trade practice or false or
misleading advertisement. If, after enquiry, it is found that there exists
a prima facie case, the CCPA can direct Director General or District
Collector to conduct an investigation.
After the CCPA is satisfied that there is sufficient evidence to prove
consumer rights violation or unfair trade practices by a person, the
CCPA has the power to order:
N
256
‰‰ Recalling
goods or withdrawing the dangerous, hazardous or
unsafe services
‰‰ Reimbursing
the purchasers against the price of goods or services
recalled
‰‰ Discontinuing
unfair practices that are harmful to consumers’
interest
‰‰ Modifying
such advertisements
‰‰ Imposing
a penalty of up to ` 10 lakhs on the manufacturer or
endorser of the good/service for the first offence
‰‰ Imposing
a penalty of up to ` 50 lakhs on the manufacturer or
endorser of the good/service for the subsequent offences
‰‰ Prohibiting the endorser of such false and misleading advertisement
from endorsing any good/service for a maximum period of one
year for the first offence
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CONSUMER PROTECTION ACT, 2019 257
‰‰ Prohibiting the endorser of such false and misleading advertisement
from endorsing any good/service for a maximum period of three
years for every subsequent offence
‰‰ Imposing a penalty of up to ten lakh rupees if any person publishes
or is a party to the publication of a misleading advertisement
‰‰ If
a person has published or arranged for publication in the
ordinary course of business, no penalty is to be awarded
‰‰ Where
an endorser is able to show that he exercised due diligence
to verify the truth of the claims made in the advertisement in the
ordinary course of his business, he shall not be liable to any penalty.
FALSE OR MISLEADING ADVERTISEMENTS
IM
S
Before describing the provisions related to the false and misleading
advertisements contained in the Consumer Protection Act, 2019, let us
first study some relevant definitions as follows:
M
According to Section 2 (1), advertisement means any audio or visual
publicity, representation, endorsement or pronouncement made by
means of light, sound, smoke, gas, print, electronic media, internet or
website and includes any notice, circular, label, wrapper, invoice or such
other documents.
According to Section 2 (18), endorsement in relation to an advertisement, means—
i. Any message, verbal statement, demonstration
N
ii. Depiction of the name, signature, likeness or other identifiable personal characteristics of an individual; or
iii. Depiction of the name or seal of any institution or organisation,
which makes the consumer to believe that it reflects the opinion,
finding or experience of the person making such endorsement.
According to Section 2(19), establishment includes an advertising
agency, commission agent, manufacturing, trading or any other commercial agency which carries on any business, trade or profession or
any work in connection with or incidental or ancillary to any commercial activity, trade or profession, or such other class or classes of persons
including public utility entities in the manner as may be prescribed;
According to Section 2(28), misleading advertisement in relation to any
product or service, means an advertisement, which—
i. falsely describes such product or service
ii. gives a false guarantee to, or is likely to mislead the consumers as
to the nature, substance, quantity or quality of such product or service
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NOTE
If any party to a consumer
complaint is aggrieved by any
order passed by the CCPA, then,
he/she may file an appeal to the
National Commission within 30
days of receiving such an order.
Business Law
iii. conveys an express or implied representation which, if made by the
manufacturer or seller or service provider thereof, would constitute an unfair trade practice
iv. deliberately conceals important information
The Consumer Protection Act, 2019, contains strict penalties for misleading or false advertisements. The CCPA has the authority to regulate matters relating to the violation of unfair trade practices and false
or misleading advertisements. The CCPA has the authority to impose
a penalty of up to ` 10 lakhs on a manufacturer or an endorser for the
first offence and imprisonment of up to two years if it is found responsible for the false or misleading advertisement.
S
For any subsequent offence, the manufacturer or endorser may be
fined a penalty of up to ` 50 lakhs and the imprisonment may extend
up to five years.
M
IM
The inclusion of endorsers under the Consumer Protection Act, 2019
implies that now the celebrities who endorse or promote false or misleading advertisements and adulterated goods can be penalised under
this Consumer Protection Act, 2019. In addition, the endorsers may be
prohibited from doing any promotions or endorsements for a period of
one year for the first offence and a period of up to three years for any
subsequent offence.
HEALTHCARE DELETED FROM DEFINITION OF SERVICES
In its present form, the Consumer Protection Act, 2019 does not cover
healthcare in the list of services listed under the definition of service.
Interestingly, the bill that was passed by the Lok Sabha included
healthcare under services. In Parliament, an amendment known as
Healthcare Amendment was introduced to exclude healthcare from
the list of services. It was a direct result of opposition from the medical
fraternity and there were genuine concerns that Consumer Protection
Act, 2019 may be misused against them. Now, after this amendment,
it is not clear whether or not healthcare as a service will be included
under the Consumer Protection Act, 2019.
N
258
MEDIATION
Under Consumer Protection Act, 2019, there is a provision to establish
a mediation cell to be attached with each District and State Commission (to be done by State Government) and also for National Commission along with all its regional benches (to be done by Central Government). This provision has been added to provide a resolution for
consumer disputes by mediation.
If both the parties to a dispute want to seek settlement by the way of
mediation either at the time of admission of a complaint or any later
stage, the concerned consumer court shall refer the matter to mediation.
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PENALTIES
In case any party defies any order of the commission, the punishment
of imprisonment shall be for atleast 1 month, or a fine, which shall not
be less than twenty-five thousand rupees, but which may extend to
one lakh rupees, or both.
6.2.5 Difference between Consumer Protection
Act, 1986 and Consumer Protection Act, 2019
IM
S
Instead of amending the Consumer Protection Act, 1986, the Government of India repealed it and introduced the new consumer act titled
the Consumer Protection Act, 1986. This Act was introduced to make
way for numerous measures and to further tighten the existing rules for
safeguarding the rights of consumers in India. The new law also takes
care of the fact that India has been witnessing a booming e-commerce
industry and the methods of providing goods and services to consumers have changed and now includes online sales, tele-shopping, direct
selling and multi-level marketing apart from the traditional methods.
Some major differences between the Consumer Protection Act, 1986
and the Consumer Protection Act, 2019 are shown in Table 6.2:
Table 6.2: Difference between Consumer Protection Act, 1986 and Consumer Protection Act, 2019
Consumer Protection
Act, 1986
This act considered all goods
and services while free
and personal services were
excluded
Consumer Protection
Act, 2019
This act considers all goods
and services, including telecom and housing construction, and all modes of transactions (online, teleshopping,
etc.). It excludes free and
personal services and healthcare services.
zz District: Up to ` one crore
Pecuniary
Jurisdiction
of Commission
zz
District: Up to ` 20 lakh
zz
State: Between ` 20 lakh
and up to ` one crore
zz
State: Between ` one crore
and up to ` 10 crore
zz
zz
National: Above ` 10 crore
Composition of
Commissions
zz
National: Above ` one
crore
District: Headed by current or former District
Judge and two members.
zz
District: Headed by a
president and at least two
members.
zz
State: Headed by a current or former High Court
Judge and at least two
members.
zz
State: Headed by a president and at least four
members.
zz
zz
National: Headed by
a current or former
Supreme Court Judge and
at least four members.
National: Headed by a
president and at least four
members
N
M
Basis of
difference
Ambit of
Law
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Business Law
Basis of
difference
Penalties
Consumer Protection
Act, 1986
Imprisonment between one
month and three years or
fine between ` 2,000 to
` 10,000, or both.
Consumer Protection
Act, 2019
Imprisonment up to three
years, or a fine not less than
` 25,000 extendable to ` one
lakh, or both.
self assessment Questions
1. Which of the following cannot be a complainant as per the
Consumer Protection Act, 2019?
a. Consumer
b. Central Government
c. A minor
d. CCPA
IM
a. True
S
2. Under the Consumer Protection Act, 2019, consumers of
multi-level marketing would now have a legal recourse in case
of fraud.
b. False
3. ____________ means that in any commercial relationship, the
responsibility and accountability of the sellers with respect to
the products and services has to be fixed.
M
Activity
N
Prepare a synopsis of any consumer dispute case between a hotel
service provider and a guest. Explain the important points of judgment.
6.3 RIGHTS OF A CONSUMER
You are already aware that any person who buys any good or avails any
service in exchange for a consideration is called a consumer. Also, the
consumer may purchase the goods or services using traditional modes
as well as online modes. However, any person who obtains a good for
resale or for any commercial purpose is not considered as a consumer.
On 15th March 1962, the former US President John F. Kennedy established four basic rights of consumers. These four rights are as follows:
1. Right to safety: This right ensures that consumers have a
defence against the injuries and harm caused by products if the
users use the goods in a manner as has been prescribed. Right to
safety also protects consumers from marketing and advertising
of goods and services that may be harmful to life and property.
? DID YOU KNOW
All over the world, 15th March is
celebrated as Consumer Rights
Day.
Example: A substandard pressure cooker may cause injury
or harm to consumers, so the consumers have the right to safety
against the loss caused by such substandard products.
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2. Right to be informed: This right means that consumers have
access to appropriate information to aid them in making intelligent and informed product choices. It means that manufacturers and service providers should provide complete and truthful
information. Consumers have a right to be informed about the
quality, quantity, purity, standard and price of goods or services
so that they may be protected against unfair trade practices and
misleading information.
Example: At the time of purchasing cosmetics or skin-related products, every consumer has the right to ask the shopkeeper about the
information like suitability of the product as per skin type, quality
standards, etc.
S
3. Right to choose: This right ensures that the consumers have
a right to choose among various product offerings and that
consumers are given a variety of options at competitive prices
offered by different companies.
IM
Example: There are different brands of tea like Tata, Taj Mahal,
Red Label, Wagh Bakri, etc. Consumers have the right to choose the
preferred tea for consumption.
M
4. Right to be heard: This right ensures that consumers are able
to raise their complaints and concerns related to a product
which ensures that their disputes can be handled efficiently and
responsively.
N
Example: Heena received a parcel from an e-commerce company
and got a defective product. She has the right to raise a complaint
related to the product.
In 1985, the United Nations added four more rights to the existing four
rights in order to protect consumers as follows:
1. Right to satisfaction of the basic needs: This right is related to a
consumer’s right to have access to the basic, essential goods and
services, such as food, clothing, shelter, healthcare, education,
public utilities, water and sanitation.
2. Right to redress: This right relates to the consumers’ right to
seek redressal in terms of a fair settlement of just claims, compensation for misrepresentation, unscrupulous exploitation of
consumers’ unsatisfactory services, unfair trade practices, etc.
3. Right to consumer education: Consumers have a right to acquire
the knowledge and skills needed for making informed decisions.
The consumers must also be aware of the basic rights and duties
of consumers.
4. Right to a healthy environment: Consumers have a right to live
and work in a safe, clean, healthy and sustainable environment
that does not threaten their well-being.
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NOTE
In India, consumers enjoy all
eight consumer rights.
Business Law
With the introduction of the Consumer Protection Act, 2019, consumers have been given five new rights as follows:
1. Right to file a consumer complaint anywhere: Consumers can
file a consumer complaint from anywhere in any District or State
Commission. The courts accept applications not only on the basis
of geographical jurisdiction but on the basis of pecuniary jurisdiction.
S
2. Right to get compensation for product liability: Consumers
have the right to file a complaint against a manufacturer or
seller or a service provider and claim compensation for the loss
or damage caused due to any deficiency in the product or service
or in case of a manufacturing defect or when the goods do not
conform to the warranty that was provided by the manufacturer
or seller or service provider.
IM
3. Right to present case via video conferencing: The new law has
a provision for hearing of a complaint using video conferencing
in addition to the traditional mode of hearing in person in the
District Commissions.
M
4. Right to file a complaint against unfair contract: The Consumer Protection Act, 2019 has a provision that allows consumers to file a complaint against sellers or service providers for any
of the unfair trade practices or one-sided contracts that favour
sellers or service providers and impact the rights of consumers.
5. Right to know the reason for complaint rejection: The law
gives the consumers the right to know the reason due to which
their complaint is rejected by the commission.
N
262
self assessment Questions
4. The right to _______ ensures that the consumers are able
to raise their complaints and concerns related to a product
which ensures that their disputes can be handled efficiently
and responsively.
5. The Consumer Protection Act, 2019, gives the consumers
the right to know the reason due to which their complaint is
rejected by the commission.
a. True
b. False
Activity
Discuss the measures taken by the Central and State Governments
for educating consumers.
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6.4
CONSUMER PROTECTION COUNCILS
(CPCs)
Under the Consumer Protection Act, 2019, the Central Government
will establish the Consumer Protection Councils (CPCs) at three levels, namely Central, State and District levels. These are named as:
‰‰ Central
Council)
‰‰ State
Consumer Protection Council (CCPC or the Central
Consumer Protection Council (SCPC or the State Council)
‰‰ District
Council)
Consumer Protection Council (DCPC or the District
S
6.4.1 FUNCTIONS OF CPCs
IM
CPCs have been created as advisory bodies whose function is to advise
for the promotion and protection of consumers’ rights within their
jurisdictions.
6.4.2 CENTRAL CONSUMER PROTECTION COUNCIL (CCPC)
M
The Central Government will form the CCPC or the Central Council
as an advisory body that will be chaired by the Minister-in-Charge of
the Department of Consumer Affairs. The CCPC must meet at least
once a year. The objective of the CCPC is to advise for the promotion
and protection of the consumers’ rights at the national level.
N
6.4.3 STATE CONSUMER PROTECTION COUNCILS (SCPCs)
All the states will form the SCPC or the State Council as an advisory
body that will be chaired by the Minister-in-charge of the Department
of Consumer Affairs in the State Government. The SCPCs must meet
at least twice a year. The objective of the SCPC is to provide advice for
the promotion and protection of consumers’ rights within their states.
6.4.4 DISTRICT CONSUMER PROTECTION COUNCILS (DCPCs)
All the states will form the DCPC or the District Council as an advisory
body that will be chaired by the collector of the district. The DCPCs
must meet at least twice a year. The objective of the DCPC is to provide advice for the promotion and protection of consumers’ rights
within their respective districts.
self assessment Questions
6. Under the Consumer Protection Act, 2019, the Consumer
Protection Councils (CPCs) have been created as regulatory
bodies.
a. True
b. False
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264
Business Law
7. The objective of the _____________ is to provide advice for promotion and protection of the consumers’ rights within their
states.
Activity
List a few activities that have been carried out by the CPCs for the
protection of consumer rights.
6.5 CONSUMER DISPUTES REDRESSAL
IM
S
In highly industrialised and service-oriented economies such as India,
consumers are always at a risk and may fall prey to unfair practices,
warranty violations, etc. All these are considered consumer rights violations. For all such violations, consumers have a right to lodge consumer disputes with the appropriate consumer disputes redressal
machinery.
6.5.1
CONSUMER DISPUTES REDRESSAL MACHINERY
M
As per the Consumer Protection Act, 2019, consumers can get a resolution to their consumer complaints with the three-tier structure.
Under this structure, the Consumer Courts are set up at three levels
as follows:
‰‰ District Consumer Disputes Redressal Commission (DCDRC), also
known as the District Commission
N
‰‰ State
Consumer Disputes Redressal Commission (SCDRC), also
known as the State Commission
‰‰ National
Consumer Disputes Redressal Commission (NCDRC),
also known as the National Commission
6.5.2
? DID YOU KNOW
If the consumer court does
not admit the complaint within
21 days, the complaint will be
deemed to have been admitted.
PROCEDURE OF DISPUTE RESOLUTION
Under the Consumer Protection Act, 2019, disputes are resolved
through consumer courts or the Consumer Commissions. Whenever
there is a dispute among two parties the consumer court based on the
pecuniary jurisdiction, needs to admit or reject the consumer complaint within 21 days of filing the complaint.
When a complaint is admitted in the court, the courts have two options.
If the parties to a dispute agree, the court may refer the matter to the
mediation cell attached with the concerned court. There can be three
outcomes of mediation as follows:
i. All the points of the dispute are mutually resolved by both the
parties and the court passes an order stating the same. This is a
case of successful mediation.
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ii. None of the points of the dispute are mutually resolved by the
parties and the court passes an order stating the same. This is a
case of failed mediation. In this case, the matter is moved back to
the court.
iii. The parties to a dispute can resolve one or more points of disputes but not all. This is a case of partially successful mediation.
Here, the designated Commission shall record settlement of
the issues that have been so settled and continue hearing other
issues that could not be resolved through mediation.
6.5.3 PROCEDURE FOR FILING A COMPLAINT BEFORE
THE CONSUMER PROTECTION BODY
IM
S
The first step in filing a complaint with the consumer protection body
is to file a complaint in a written or electronic form with the concerned
Consumer Commission or the consumer court. As already discussed,
the complainant may be an individual consumer, the State Government or the Central Government or even the CCPA. The complaint
is accepted only if it is accompanied by the requisite amount of fees.
M
After the Consumer Commission receives the complaint, it has to
decide whether or not to admit the complaint. The Consumer Commission has to decide whether to admit or reject the complaint within
21 days and if the Consumer Commission does not give any decision
within this period, the complaint is deemed to be admitted automatically.
N
If a case is admitted and if the Consumer Commission finds certain
elements of the settlement which both parties can accept, the Consumer Commission can ask the parties to settle their dispute through
mediation within five days from the date of submitting such mediation
application. The proceedings of the case continue as per the results of
mediation.
6.5.4 NATURE AND SCOPE OF REMEDIES
As per Section 39(1) of the Consumer Protection Act, 2019, where
the District Commission is satisfied that the goods complained against
suffer from any of the defects specified in the complaint or that any of
the allegations that are contained in the complaint about the services
provided or any unfair trade practices or claims for compensation
under product liability are proved, the District Commission has the
authority to issue an order to the opposite party directing him to do
one or more of the following, namely:
(a) Removing the defect from the goods in question
(b) Replacing the defective goods with similar new goods that are
defect-free
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NOTE
If the Commission finds the
allegations against the product
manufacturer to be true, it shall
make an order in accordance
with Section 39 of the Act.
266
Business Law
(c) Returning the total price or the charges paid by the complainant
along with the interest on such price
(d) Paying compensation to the consumer for any loss or injury
suffered by the consumer due to the negligence of the opposite
party
(e) Awarding compensation in case of product liability action
(f) Removing the defects in goods or deficiencies in the services
(g) Discontinuing the unfair trade practices or restrictive trade
practices and not repeating them
(h) Not offering sale of hazardous or unsafe goods
(i) Withdrawing the offer for sale of hazardous or unsafe goods
S
(j) Discontinuing the manufacture of hazardous goods and restraining from offering hazardous services
IM
(k) Awarding a sum determined by the commission if the commission is of the opinion that loss or injury has been suffered by
a large number of consumers who cannot be identified conveniently
M
(l) Issuing corrective advertisement to neutralise the effect of misleading advertisement at the cost of the opposite party responsible for issuing such misleading advertisement
(m) Providing adequate costs to parties
N
(n) Discontinuing and restraining from issuing of any misleading
advertisement
6.5.5 APPEALS AND LIMITATIONS
The various appeals and their period of limitation under the Consumer Protection Act, 2019 are as follows:
‰‰ If
a person has been aggrieved by any order that has been passed
by the CCPA, then he/she may file an appeal with the National
Commission within 30 days from the date of receipt of such order.
‰‰ If
a person has been aggrieved by an order made that has been
passed by the District Commission, then, he/she may file an appeal
against such order with the concerned State Commission within
45 days from the date of such an order.
‰‰ If
NOTE
An appeal always lies with the
National or State Commission if
the State or District Commission
respectively has passed an ex
parte order.
a person has been aggrieved by an order made that has been
passed by the State Commission, then, he/she may file an appeal
against such order with the concerned National Commission
within 30 days from the date of such an order.
‰‰ If
a person is aggrieved by an order made by the National
Commission, then he/she may appeal against such order to the
Supreme Court within 30 days of such order.
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CONSUMER PROTECTION ACT, 2019 267
self assessment Questions
8. Whenever there is a dispute among two parties and one or
both of them reach the consumer court, the court needs to
admit or reject the consumer complaint within ______ days of
filing the complaint.
a. 30
b. 15
c. 14
d. 21
a. True
b. False
Activity
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9. If a person has been aggrieved by any order that has been
passed by the CCPA, then, he/she may file an appeal with the
National Commission within 30 days from the date of receipt
of such order.
COMPARISON OF CONSUMER LAW IN
OTHER COUNTRIES
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6.6
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Describe the various orders that can be passed by a commission
while giving any judgment with respect to a consumer complaint.
In general, most countries have consumer protection measures that
comprise consumer protection acts, national policy on consumer protection and a master or strategic plan for consumer protection.
N
The governments of most countries have constructed a regulatory
framework comprising various laws, price and distribution controls,
regulators, standards for manufacturers and service providers to protect the interests of consumers against any exploitation.
You have already learned about the consumer protection measures
that have been taken in India along with the enactment of the recently
introduced Consumer Protection Act, 2019. India has now amended
its consumer laws in line with global standards. However, it still
lags behind certain countries like the USA, which has stringent and
advanced laws for consumer protection. For instance, the USA has
strict laws for drug manufacture and sale and for checking adulteration. There are strict provisions for non-compliance.
There are four main objectives that form the foundation of any country’s state policy and include:
1. Consumers are fully informed and can take decisions.
2. Consumers are not discriminated on the basis of their gender,
race, colour, region, income level, religion, culture, caste, etc.
NMIMS Global Access - School for Continuing Education
NOTE
Consumers International is an
organisation for consumer rights
groups and it was established
in 1960. The goal of this
organisation is to ensure that
consumer rights are not ignored.
It has members from over 120
countries.
268
Business Law
3. Marketing of goods and services is done keeping in mind the
safety and security of public at large.
4. The welfare of society is considered of prime importance.
Know More
The Federal Service for
Surveillance on Consumer
Rights Protection and Human
Wellbeing or Rospotrebnadzor is
the federal service responsible
for the supervision of consumer
rights protection and human
wellbeing in Russia.
State policies are constructed to ensure that there are no misleading
or false advertisements, and the pricing, selling and retailing practices
are kept fair. Consumers are also regulated so that they may not file
false claims against the sellers.
In the USA, various self-regulatory bodies may carry considerable
influence on organisations and government. In India, there is no concept of self-regulatory bodies and only the government regulatory bodies have the authority and influence over government and industries.
IM
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Researchers in countries like the USA also work to understand if the
marketing practices of the country benefit or harm the different sections of society. Such countries establish laws to ensure that the children and other psychologically vulnerable sections do not fall prey to
the marketing tactics of organisations. When compared to the USA,
India remains behind and needs to work on these aspects.
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Various countries protect their consumers against uncertainty in warranty and all the manufacturers need to give a proper warning with
respect to the risks related to the goods, shares and mutual funds,
etc. India also has in place provisions for implicit and explicit types
of warranties and conditions but the level of awareness in the general
public is quite low.
N
The Indian Government has prescribed minimum standards for products or services in order to minimise physical risks faced by government or voluntary organisations. In India, general insurance for automobile buyers is mandatory, which acts for product safety. In India,
the minimum standards are fixed for a large number of products by
the Bureau of Indian Standards. Consumer education measures are
also being promoted by the government.
self assessment Questions
10. The USA has strict laws for drug manufacture and sale and
for checking adulteration.
a. True
b. False
Activity
Make a list of ten developed countries of the world and study their
consumer protection laws. Compare these laws and their provisions with the consumer laws of India.
NMIMS Global Access - School for Continuing Education
CONSUMER PROTECTION ACT, 2019 269
S
6.7 Summary
‰‰ The
use of digital means has offered various benefits as well
as challenges related to consumer protection. To meet these
challenges faced by consumers, the Indian Government enacted
the Consumer Protection Act, 2019.
‰‰ The
objective of the Consumer Protection Act, 2019 is to provide
timely and effective administration and settlement of consumer
disputes.
‰‰ Some
important features and provisions of the Consumer
Protection Act, 2019 are:
 Broadening
grounds for filing complaints
 Introduction
 Advertising
of product liability
claims
IM
 New
of e-commerce
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 Inclusion
the term consumer
 Introduction
of the CCPA (Central Consumer Protection Authority), a regulatory body
 Including
within its scope misleading advertisements
of healthcare from the definition of services
 Increase
in the pecuniary jurisdiction of the Commissions
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 Deletion
‰‰ The
pecuniary jurisdictions of the Consumer Disputes Redressal
Commissions (CDRCs) at three levels are:
commissions can take up cases whose valuation is up
to ` 1 crore.
 State
N
 District
commissions can take up cases whose valuation is in the
range of ` 1 crore and ` 10 crores.
 National
commission can take up cases whose valuation is
above `10 crores.
‰‰ In
accordance to Section 74 of the Consumer Protection Act, 2019,
the State government will establish mediation cells to be attached
to all the district and state commissions of that state.
‰‰ The primary objective of setting up the CCPA is to regulate matters
related to the violation of consumer’s rights and take suitable
actions to prevent unfair trade practices.
‰‰ The
Consumer Protection Act, 2019 contains strict penalties for
misleading or false advertisements.
‰‰ Various
rights of a consumer are:
 The
right to safety
 The
right to be informed
 The
right to choose
NMIMS Global Access - School for Continuing Education
Business Law
 The
right to be heard
 The
right to satisfaction of the basic needs
 The
right to redress
 The
right to consumer education
 The
right to a healthy environment
 The
right to file a consumer complaint anywhere
 The
right to receiving compensation for product liability
 The
right to present a case via video conferencing
 The
right to file a complaint against unfair contract
 The
right to know the reason for the complaint rejection
Protection Council have been created as advisory
bodies whose function is to provide advice for the promotion and
protection of consumer’s rights.
disputes are resolved through the consumer courts or the
consumer commissions.
IM
‰‰ The
S
‰‰ Consumer
the commission receives the complaint, it has to decide
whether or not to admit the complaint. The commission has to
decide whether to admit or reject the complaint within 21 days and
if the commission does not give any decision within this period, the
complaint is deemed to be admitted automatically.
M
‰‰ After
‰‰ State
N
270
policies are constructed to ensure that there are no
misleading or false advertisements, and the pricing, selling and
retailing practices are kept fair. Consumers are also regulated so
that they may not file false claims against the sellers.
key words
‰‰ Consumer
dispute: A dispute where the person against whom
a complaint has been made denies or disputes the allegations
contained in the complaint
‰‰ E-commerce:
The process of buying and selling goods and
services using digital means
‰‰ Pecuniary
jurisdiction: The jurisdiction of a court to hear a
matter based on the amount involved in the consumer dispute
‰‰ Product
liability action: A manufacturer or seller or service
provider is held liable for a defective product that reaches a
consumer
‰‰ Unfair trade practices: The practices that involve the adoption
of unfair methods or deceptive practices to promote the sale,
supply or use of goods or services
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CONSUMER PROTECTION ACT, 2019 271
6.8 Descriptive Questions
1. Explain the objective, scope and significance of the Consumer
Protection Act, 2019.
2. What are the provisions for product liability and false or misleading advertisements in the Consumer Protection Act, 2019?
3. What are the various rights that are enjoyed by a consumer in
India?
4. Discuss the Consumer Disputes Redressal mechanism under the
Consumer Protection Act, 2019.
6.9 Answers and Hints
Q. No.
Answer
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Topic
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ANSWERS FOR SELF ASSESSMENT QUESTIONS
Consumer Protection Act, 2019
Rights of a Consumer
c.
A minor
2.
a.
True
3.
Product liability
4.
be heard
5.
a. True
6.
b. False
7.
SCPC
8.
d.
9.
a. True
10.
a. True
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Consumer Protection Councils
1.
Consumer Disputes Redressal
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Comparison of Consumer Law in Various Countries
21
HINTS FOR DESCRIPTIVE QUESTIONS
1. The main objective of the Consumer Protection Act, 2019 is to
protect the rights of consumers and establishing various authorities for timely and effective administration and settlement of all
consumer disputes. Refer to Section 6.2 Consumer Protection
Act, 2019
2. According to Section 82 of the Consumer Protection Act, 2019, a
complainant can claim for compensation for product liability in
certain specific cases. Refer to Section 6.2 Consumer Protection
Act, 2019
3. With the introduction of the Consumer Protection Act, 2019, the
consumers have been given five new rights namely right to file
a consumer complaint anywhere, right to get compensation for
product liability, right to present case via video conferencing,
right to file a complaint against unfair contract and right to know
NMIMS Global Access - School for Continuing Education
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Business Law
the reason for complaint rejection. Refer to Section 6.3 Rights of
a Consumer
4. Under the Consumer Protection Act, 2019, the disputes are
resolved through the consumer courts or the Consumer Commissions. Refer to Section 6.5 Consumer Disputes Redressal
6.10 Suggested Readings & References
Suggested Readings
‰‰ Tiwari,
G. (2014). Understanding Laws Consumer Rights (1st ed.).
Lexis Nexis.
A. (2016). Practical Guide to Consumer Protection Law
(4th ed.). Universal Law Publishing Co Pvt Ltd.
S
‰‰ Kaushal,
E-REFERENCES
Retrieved 27 April 2020, from http://egazette.nic.in/
WriteReadData/2019/210422.pdf
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‰‰ (2020).
‰‰ Roysam, V. (2020). Marketers say, ‘so jaograhak so jao’. Consumers,
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do you know these important rights?. Retrieved 27 April 2020, from
https://yourstory.com/2017/03/consumer-rights
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272
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C
h
7
a
pt
e
r
RIGHT TO INFORMATION ACT, 2005
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7.4
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7.3
Introduction
The Right to Information (RTI) Act, 2005
7.2.1
Objectives of the RTI Act
Self Assessment Questions
Activity
Public Authorities (Chapter II of the Act)
Obligations/Duties of Public Authority (Chapter II of the Act)
7.3.1
Framework of Public Information Authority (Section 5)
7.3.2
7.3.3
Public Information Officers (PIO) and their Duties
Self Assessment Questions
Activity
Procedure for Obtaining Information (Sections 6 and 7)
Self Assessment Questions
Activity
Information Exempted from Disclosure (Section 8)
Self Assessment Questions
Activity
Information Commissions (ICs)
Central Information Commission (CIC) (Chapter III of the Act)
7.6.1
State Information Commission (SIC) (Chapter IV of the Act)
7.6.2
7.6.3Powers and Functions of Information Commissioners (Chapter V of the
Act)
Procedure for Appealing to CIC and SIC (Section 19)
7.6.4
Penalties (Section 20)
7.6.5
7.6.6Jurisdiction
7.6.7
Role of Central and State Governments
Self Assessment Questions
Activity
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7.1
7.2
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Contents
7.5
7.6
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Business Law
CONTENTS
7.7
7.8
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7.9
7.10
7.11
7.12
Impact of the RTI Act, 2005
Self Assessment Questions
Activity
Leading Case Studies
Self Assessment Questions
Activity
Summary
Descriptive Questions
Answers and Hints
Suggested Readings and References
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274
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RIGHT TO INFORMATION ACT, 2005 275
Introductory Caselet
ROLE OF RTI IN UNEARTHING POLITICAL SCAMS
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The Right to Information (RTI) Act , 2005 not only brought about
greater transparency and accountability in the functioning of
various governmental agencies but also helped bust multiple
scams in the country. It is rightly called the ‘sunshine law’ due
to its potential to expose the scandalous actions of the high and
the mighty. Since its inception, the law has been contributing in
revealing scams worth billions, whereby the taxpayers’ money or
public property has been looted by the corrupt politicians and corporations. Some of the infamous scams that had been brought into
light include Public Food Distribution Scam in Assam (2007), the
2G Scam (2008), Adarsh Society Scam (2010) in which the defence
was cornered by several well-known politicians and bureaucrats,
Commonwealth Games Scam and scams involving diversion
of Dalit funds, Wakf Board Land Scam in Karnataka (2012), the
Coal Allocation Scam (2012), Indian Red Cross Society Scam, and
many others. The significance of the legislation lies in compelling
the leaders working in various positions to improve governance
for the socio-economic betterment of the citizenry, rather than
personal aggrandisement.
NMIMS Global Access - School for Continuing Education
Case Objective
This caselet discusses how
the Right to Information (RTI)
Act has been contributing
in revealing scams worth
billions, whereby the
taxpayers’ money or public
property has been looted by
the corrupt politicians and
corporations.
Business Law
Learning objectives
After studying this chapter, you will be able to:
Discuss the salient features of the Right to Information (RTI)
Act, 2005
Know about the various public authorities established under
the Act and their obligations
Explain the Information Exempted from Disclosure
Understand the procedure for filing requests to obtain
information
Describe the Central and State Information Commission
Comprehend the impact of the Right to Information
Act, 2005
>>
>>
>>
>>
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>>
>>
In the previous chapter, you have studied consumer-oriented laws
such as the Consumer Protection Act, 2019. This chapter discusses
the RTI Act, 2005 (hereinafter referred to as ‘RTI Act’). The right to
information is the pivot of a participatory democracy, which aims
to bring about accountability and good governance. The higher the
ease of access about the quality of governance, the higher shall be
the degree of responsiveness of the public authorities towards their
responsibilities.
M
Quick Revision
IM
7.1 Introduction
Denial of access to information induces a feeling of helplessness and
the consequent public alienation from the government. This chapter
describes the significant provisions of the RTI Act to highlight the
manner in which a common citizen can approach designated public authorities to seek information for determining whether they are
functioning towards their envisaged objectives. The right to information has been indirectly guaranteed by the Constitution of India. The
need, however, was to enact legislation that may establish a practical regime enabling the citizens to secure relevant information about
the functioning of various administrative and political authorities. To
meet this end, Parliament enacted the RTI Act in 2005. It is a comprehensive legislation taking all matters of governance falling within the
ambit of all levels of government, namely the Central, State, Local, as
well as those financed by the government.
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276
In this chapter, you will study the objectives of the RTI Act. Next, you
will study the public authorities and their framework. The chapter will
then discuss the procedure for obtaining information. Then, you will
study the role of Information Commissions (ICs). Finally, the chapter
discusses the impact of the RTI Act.
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RIGHT TO INFORMATION ACT, 2005 277
7.2
THE RIGHT TO INFORMATION (RTI) ACT,
2005
In a democratic country, ‘transparency’ and ‘accountability’ in the
government administration play a key role in its growth and devel
opment. Information empowers society by making the citizens more
informed and aware. Before 2005, the citizens of India had no fundamental right to access any information that was dealt by a public
authority. The RTI Act provides a statutory right to citizens to access
information from a public agency within a definite time period. This
Act facilitates transparency in government administration and functioning.
? DID YOU KNOW
The RTI Act has six chapters and
two schedules.
IM
(i) inspection of work, documents, records;
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According to Section 2(j) of the RTI Act, 2005 the term “right to
information” means the right to information accessible under this
Act which is held by or under the control of any public authority and
includes the right to—
(ii) taking notes, extracts, or certified copies of documents or records;
(iii) taking certified samples of material;
M
(iv) obtaining information in the form of diskettes, floppies, tapes,
video cassettes or in any other electronic mode or through printouts where such information is stored in a computer or in any
other device;
N
The type of information that may be obtained under the RTI Act is
defined in Section 2(f) as ‘any material in any form, including records,
documents, memos, e-mails, opinions, advices, press releases, circulars, orders, logbooks, contracts, reports, papers, samples, models,
data material held in any electronic form and information relating to
any private body which can be accessed by a public authority under
any other law for the time being in force’. The RTI Act was passed ‘to
provide for setting out the practical regime of right to information for
citizens’. The main aim of the Act is to provide secure access to information for promoting transparency and accountability.
According to the Preamble to the RTI Act, it aims:
‰‰ To be able to access the required information from public authorities
‰‰ To
encourage transparency and accountability at work
‰‰ To
set up Central Information Commission (CIC) and State
Information Commission (SIC)
7.2.1
OBJECTIVES OF THE RTI ACT
The main objective of this Act is to set up a practical regime where citizens can get secure access to information which is under the control
NMIMS Global Access - School for Continuing Education
NOTE
The type of information that may
be obtained under the RTI Act
is defined in Section 2(f) and
covers all mediums and modes
of information which can be
accessed by a public authority
established under any law in
force.
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Business Law
of public authorities; thereby encouraging transparency and accountability in the working of public authorities. It aids in preventing corruption by holding the government and its instrumentalities answerable to the citizenry.
With the principal goal of providing secure access to information
available with the public authorities, the RTI Act seeks to attain the
following objectives:
‰‰ To
set out a practical regime of right to information
‰‰ To
secure access to information under the control of public
authorities and give power to citizens to question the government
‰‰ To
promote transparency and accountability in the working of
every public authority
contain corruption and hold the government and its
instrumentalities accountable to those governed
‰‰ To
S
‰‰ To
preserve the confidentiality of sensitive information
uphold democratic ideals by the virtue of transparency in
information
IM
‰‰ To
self assessment Questions
M
1. The RTI Act entitles a citizen of India to seek information
from any __________ authority.
N
2. The main aim of the RTI Act is to promote _______ and _______.
Activity
Briefly describe some cases known to you or which you may have
read somewhere about the way the RTI Act, 2005 was used by any
Indian citizen(s) to obtain information.
7.3
NOTE
According to Article 19 of the
Universal Declaration of Human
Rights: ‘Everyone has the right
to freedom of opinion and
expression; this right includes
freedom to hold opinions without
interference and to seek,
receive, and impart information
and ideas through any media
regardless of frontiers’.
PUBLIC AUTHORITIES (CHAPTER II OF
THE ACT)
Basically, public authorities include all the repository of information
that the citizens have the statutory right to have under the RTI Act,
2005. As per Section 2 (h) of the RTI Act, 2005 means ‘Public authority
refers to any authority or body or institution of self-government established or constituted:
(i) by or under the Constitution;
(ii) by laws made by the Parliament or state legislature;
(iii) all bodies so notified by the Central or State government;
(iv) also, bodies owned, controlled, or substantially financed by the
government whether directly or indirectly, including non-governNMIMS Global Access - School for Continuing Education
RIGHT TO INFORMATION ACT, 2005 279
ment organisations substantially financed, directly or indirectly by
funds provided by the appropriate Government’.
As per the RTI Act, there are two sets of organisations that are considered to be ‘public authority’. The first one involves bodies that are
formulated by the enactment of the legislation or constitution of India,
such as all the political parties, state legislatures such as Securities
and Exchange Board of India (SEBI), Reserve Bank of India (RBI),
and Telecom Regulatory Authority of India (TRAI). The second type
of public authorities includes bodies that are substantially financed
by the government. For instance, planning commission or education
institutions created by law, etc. Therefore, they owe their existence
to the funds given directly or indirectly by the government. These
authorities can be at the state level or district level or sub-district level.
IM
S
Also, the RTI Act mandates that every public authority shall proactively disclose information pertaining to it and maintain its documents
and records to facilitate the right to information under the Act. These
authorities have statutory or public duties that are to be performed for
the benefit of the public.
7.3.1 OBLIGATIONS/DUTIES OF PUBLIC AUTHORITY
(Chapter II of the Act)
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Various obligations of a public authority are as follows:
‰‰ To maintain all records duly catalogued, indexed, and computerised
to facilitate the proper exercise of the right to information [Section
4 (1) (a)]
provide access to computerised records with public authorities
all over the country through a network
‰‰ To
N
‰‰ To
publish within 120 days from the enactment of RTI Act, the
details of particulars of the organisation, its functions and duties,
the powers vested in officials, the name of the particular officer
who shall provide information for framing of rules and regulations,
etc. [Section 4 (1) (b)]
‰‰ To
publish all relevant facts relating to important policies as well
as the decisions affecting the general public [Section 4 (1) (c)]
‰‰ To
disseminate all the information widely and in a manner that it
is easily accessible to public [Section 4 (3)]
‰‰ To
give reasons for its administrative or quasi-judicial decisions
and make the same available to the affected persons [Section 4 (1)
(f)]; it is the suo motu responsibility placed on public authorities
[Section 4 (1) (d)]
‰‰ To
provide as much information suo motu to the public at large at
regular intervals through various means of communication
NMIMS Global Access - School for Continuing Education
? DID YOU KNOW
It is mandatory for public
authorities under the RTI
Act to periodically publish
information about its
organisation, employees, rules,
regulations, remuneration
received by its employees,
budgetary allocations, proposed
expenditures, etc.
Business Law
7.3.2 FRAMEWORK OF PUBLIC INFORMATION AUTHORITY
(Section 5)
Every public authority, within 100 days of enactment of the Act, shall
designate the Central Public Information Officers (Central PIO) or the
State Public Information Officers (State PIO) in their respective public or administrative offices. These designated officers shall be responsible for providing necessary information to the public. The Central
PIO or the State PIO officer shall provide reasonable help to the persons seeking information from them. Any officer whose assistance is
required by the above-mentioned officers shall render such assistance
at a reasonable time. At every sub-divisional level and sub-district
level, Central PIO or State PIO, as applicable, shall be designated to
receive requests for information and to arrange to provide the same.
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7.3.3 PUBLIC INFORMATION OFFICERS (PIO) AND THEIR
DUTIES
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Public Information Officers (PIO) are required to furnish the necessary information as demanded by the public. The various duties to be
undertaken by the PIO are as follows:
‰‰ To
deal with requests from persons seeking information; and
where the request cannot be made in writing, to render reasonable
assistance to the person to reduce the same in writing
the information requested is held by or its subject matter is
closely connected with the function of another public authority,
the PIO shall transfer such request within 5 days to that other
public authority and inform the applicant immediately.
M
‰‰ If
‰‰ To seek the assistance of any other officer for the proper discharge
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280
of his/her duties.
‰‰ Section 7 obligates the PIO to provide the information expeditiously
within 30 days of the receipt of the request provided the requisite
fees has been paid, either provide the information on payment of
such fee as may be prescribed or reject the request for any of the
reasons specified in Sections 8 or 9 of the Act.
‰‰ If the requested information concerns the life or liberty of a person,
the same shall be provided within 48 hours of the receipt of the
request.
‰‰ If
the PIO fails to give a decision on the request within the period
specified, he/she is deemed to have rejected the request. Where a
request has been rejected, the PIO needs to communicate to the
requester: (a) the reasons for such rejection, (b) the period within
which an appeal against such rejection may be preferred, and (c)
the particulars of the appellate authority.
‰‰ To
provide information in the form in which it is sought unless
it would disproportionately divert the resources of the public
authority or would be detrimental to the safety or preservation of
the record in question.
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RIGHT TO INFORMATION ACT, 2005 281
‰‰ If
the PIO allows only partial access, where such part is not
exempted from disclosure and such part can be easily severed
from the part exempt, the PIO should give a notice to the applicant
informing: that only part of the record requested, after severance
of the record containing information which is exempt from
disclosure, is being provided.
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The PIO should give reasons for the decision, including any
findings on any material question of fact, referring to the material
on which those findings were based; the name and designation of
the person giving the decision; the details of the fees calculated by
him/her and the amount of fee which the applicant is required to
deposit; and his/her rights with respect to review of the decision
regarding non-disclosure of part of the information, the amount of
fee charged, or the form of access provided.
the information sought has been supplied by a third party or
is treated as confidential by that third party, the PIO shall give
a written notice to the third party within 5 days from the receipt
of the request and take its representation into consideration. The
third party must be given a chance to make a representation before
the PIO within 10 days from the date of receipt of such notice.
IM
‰‰ If
self assessment Questions
a.
M
3. A public authority is an authority, body, or institution of
self-government.
True
b. False
N
4. The RTI Act seeks to attain the following objectives:
a.
To set out a practical regime of right to information
b.
To secure access to information under the control of public authorities
c.
To promote transparency and accountability in the working of every public authority
d.
All of the above
Activity
Find out and discuss the process for filing RTI.
7.4
PROCEDURE FOR OBTAINING
INFORMATION (SectionS 6 and 7)
This RTI Act provides a statutory right to the citizens to inspect documents, works, records, notes, certified copies of documents, etc.,
relating to the private body or public offices that can be assessed by
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NOTE
During the enquiry of any
complaint under the Act, the
Commission shall be entitled
to examine any record which
is under the control of the
public authority, and the public
authority shall not be entitled to
withhold any such record on any
grounds.
the public authority. The procedure to obtain information under the
RTI Act, 2005 starts with making a request in writing or via electronic
media in Hindi or English, depending upon the official language of
the region/state in which the request is being made along with a fee.
The concerned public authority in such cases can be either State PIO
or Central PIO. The applicant making a request for information need
not provide any reason for requesting the required information except
his/her contact details. Applications without fee are straightaway
rejected by the public authority. The following factors that need to be
considered by an applicant while obtaining the information under the
RTI Act:
‰‰ Application: The RTI Act has not prescribed any particular format
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for seeking information under this law. The request for getting the
information is required to be submitted in writing or by using the
electronic means in English, Hindi, or the official language of the
state. The request should clearly state the information sought for.
There is no need to give reasons for seeking the information in the
application.
‰‰ Time limit and fees: The time limit for obtaining information is as
follows:
 The
time limit of supplying the information is 30 days from the
date of receipt of the application.
the information relates to the life and liberty of a person, it
shall be provided within 48 hours of the receipt of the application.
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 If
N
 An
additional 5 days shall be added to the above-mentioned
time limits if the information is to be furnished by the Assistant
PIO.
 If the interest of a third party is involved, then an additional 10
days are to be provided making the total time of response to a
total of 40 days.
 The
PIO shall furnish the information free of cost if the above
time limits are breached.
‰‰ Fee:
The norms for the application are as follows:
 The application fee must be reasonable and prescribed through
a notification from time-to-time.
 People
living below the poverty line should not be charged.
 The
information must be furnished free of cost if the PIO fails
to furnish the information within the prescribed time.
 The applicant has the right to seek a review of the fees charged
by the PIO by submitting an application to the appropriate
appellate authority.
 The
prescribed fee shall be paid in the form of demand draft,
postal order, or in cash for obtaining the information.
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RIGHT TO INFORMATION ACT, 2005 283
‰‰ Grounds
for refusal to provide information: The following are
the grounds for the refusal to provide information:
 If
the information is covered under the exemption from disclosure under Section 8.
 If
the information infringes the copyright of any person other
than the State as per Section 9.
self assessment Questions
5. It is mandatory to mention the reason for which information is
required under the Right to Information Act, 2005.
a.
True
b. False
S
Activity
7.5
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Visit the RTI Act’s website to find the details of the fee applicable to
people living below the poverty line.
INFORMATION EXEMPTED FROM
DISCLOSURE (Section 8)
‰‰ Information,
the disclosure of which would prejudicially affect the
following:
and integrity of India
N
 Sovereignty
 Security,
M
Under the RTI Act, the following types of information are exempted
to be provided to the public:
strategic, scientific, or economic interests of the state
 Relations with foreign states or lead to incitement of an offense
For instance, in Nusli Wadia, Mumbai vs. Ministry of External
Affairs, Appeal No. CIC/OK/A/2008/00245, dated 1st October, 2008,
the information about the Jinnah House sought by the appellant
was declined on the ground that the disclosure of the information
would prejudicially affect the relations of India with a foreign state.
‰‰ Information,
which has been expressly forbidden to be published
by any court of law, tribunal, or the disclosure of which may
constitute contempt of court
‰‰ Information,
the disclosure of which would cause a breach of
privilege of Parliament or the state legislature
‰‰ Information
relating to commercial confidence, trade secrets,
or intellectual property, the disclosure of which would harm the
competitive position of a third party unless the competent authority
is satisfied that larger public interest warrants the disclosure of
such information
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Business Law
‰‰ Information
available to a person in his/her fiduciary relationship,
unless the competent authority is satisfied that the larger public
interest warrants the disclosure of such information
‰‰ Information
received in confidence from the foreign government
‰‰ Information,
the disclosure of which would endanger the life or
physical safety of any person or identify the source of information
or assistance given in confidence for law enforcement or security
purposes
‰‰ Information,
which would impede the process of investigation or
apprehension or prosecution of offenders
‰‰ Cabinet papers including records of deliberations of the Council of
Ministers, Secretaries, and other officers
S
information, the disclosure of which is not related to
any public activity or interest or which would cause unwarranted
invasion of the privacy of the individual
IM
‰‰ Personal
self assessment Questions
6. The Public Information Officer can reject the application:
If private rights are affected
b.
If copyright is to be infringed
c.
Both a and b
d.
None of the above
M
a.
N
Activity
Give examples of the information that is exempted from disclosure.
7.6 INFORMATION COMMISSIONS
NOTE
A two-tier appeal mechanism
is provided under the Act for
persons who do not receive
information from a PIO or who
are aggrieved by a decision of
the PIO.
An Information Commission is considered as an adjudicator or second appellate authority that manages and approves the disclosure of
information under RTI Act. It plays a crucial role in deciding whether
to allow or deny the disclosure of information to the applicant. These
commissions are the interpreters of public interest as they help the
citizens in raising the request for information under the RTI Act.
Information Commission have two separate bodies to hear complaints
and appeal under the RTI Act—State Information Commission (SIC)
and Central Government Commission (CIC).
7.6.1 CENTRAL INFORMATION COMMISSION (CIC)
(Chapter III of the Act)
? DID YOU KNOW
You can file RTI online by visiting
the rtionline.gov.in website.
CIC deals with the matter pertaining to public authorities under the
central level. The Section 12 of the RTI Act deals with the CIC. The
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RIGHT TO INFORMATION ACT, 2005 285
headquarter of the CIC is in Delhi. As per Section 12(2), the Central
Information Commission (CIC) shall consist of the following members:
1. A Chief Information Commissioner
2. Such number of Central Information Commissioners, not
exceeding ten, as may be deemed necessary
The Chief Information Commissioner and the Information Commissioners shall be appointed by the President on the recommendation of
a committee consisting of the Prime Minister (who shall be the chairperson of the committee), leader of opposition in the Lok Sabha, and
Union Cabinet Minister to be nominated by the Prime Minister.
S
7.6.2 STATE INFORMATION COMMISSION (SIC) (CHAPTER
IV OF THE ACT)
The constitution of SIC is provided in Section 15 of the Act. The SIC
shall be constituted by the State government, which will consist of the
following:
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a. The State Chief Information Commissioner
b. Such number of State Information Commissioners, which shall
not exceed ten
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The State Chief Information Commissioner and State Information
Commissioners shall be appointed by the Governor of the State on the
recommendation of a committee consisting of the following:
a. The Chief Minister, who shall be the chairperson of the committee
b. The leader of opposition in the Legislative Assembly
N
c. The cabinet minister who shall be nominated by the Chief Minister
The Central or State Information Commissioner and other commissioners appointed are required to be the persons having varied experience in areas of law, science, technology, social service, management, journalism, mass media, or administration or governance. The
Central or State Information Commissioner or other commissioners
appointed cannot be the members of Parliament or legislature. They
cannot hold any office of profit of any political party. The headquarters
of the CIC or SIC shall be based as per the notification in the official
gazette and the CIC or SIC may, with the prior approval of the Central
or State government (as case may be), establish the office at any other
place. The Central or State Information Officer shall hold the office for
a term of 5 years from when he/she has entered his/her office and shall
not be eligible for re-appointment.
7.6.3 POWERS AND FUNCTIONS OF Information
Commissioners (Chapter V of the Act)
The powers of both CIC and SIC are contained in Section 18 of the
Act. The following are the powers of the Information Commissioners:
‰‰ To
conduct an enquiry
NMIMS Global Access - School for Continuing Education
Business Law
‰‰ To
exercise the powers of a civil court
‰‰ To
examine any record during the enquiry
‰‰ To
take disciplinary action against an information officer
‰‰ To
impose a monetary penalty
The duty of the Information Commissioners involves:
‰‰ Receiving
and filing complaints in case of non-appointment of
PIO, or refusal to accept the application. The Central and State
Information Commissioners are empowered to enquire about the
complaint of any person:
has not been able to submit a request to the Central/
State PIO either for the reason that no such officer has been
appointed under the provisions of this RTI Act or his/her
application under this RTI Act has been rejected for further
forwarding
S
 Who
has been denied access to the information requested
under this RTI Act
IM
 Who
 Who
has not been given a response to a request or access to
information within the time limit specified
 Who
has been required to pay any fee which he/she feels is
unreasonable
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 Who believes that the information given is completely misleading
 Who
has not been given a response for the information
enquired for
‰‰ The Central/State Information Commissioner while enquiring into
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286
the matter shall have the same rights as are available to a court
under the Civil Procedure Code, 1908 in respect of the following
matters:
 Summoning
or enforcing the attendance of persons and compelling them to give oral or written representation
 Receiving
evidence on affidavits
 Requisitioning
 Issuing
 Any
any public record from any court or office
summons for the examination of witnesses
other matter which may be prescribed
7.6.4 PROCEDURE FOR APPEALING TO CIC AND SIC
(Section 19)
In case the PIO of a public authority does not supply the information
within the specified time or supplies incorrect and incomplete information, the RTI Act has made appeal provisions to enable the citizens
to approach the appellate authorities. Making an appeal is a two-step
process: (i) appeal is made to the appellate authority and (ii) appeal is
made to the appropriate Information Commissioners.
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RIGHT TO INFORMATION ACT, 2005 287
In every public authority, an officer is appointed to hear appeals. This
officer is senior in rank to the Central PIO or State PIO, as the case
may be, and is referred to as the appellate authority.
FIRST APPELLATE AUTHORITY
Any person who does not receive the decision within the time limit
specified in the RTI Act or who is aggrieved with any of the decisions
of the PIO may file an appeal within 30 days from the expiry of such
period or from the receipt of the decision to the officer who is senior in
rank to the PIO as the case may be who is the First Appellate Authority. However, the aggrieved party may appeal even after 30 days, if
sufficient reason is shown for the delay.
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SECOND APPELLATE AUTHORITY
APPEAL BY A THIRD PARTY
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The second appeal shall be filed within 90 days from the date by which
decision should have been made or is actually received. The appeal
shall be made before the Information Commissioners.
N
M
An appeal against the order of PIO of disclosing third party information shall be filed by concerned third party before the First Appellate Authority within 30 days from the date of order. Also, where an
appeal is filed by an aggrieved party relating to the information of a
third party (usually where the PIO initially rejected the application
for disclosing information of a third party), then the concerned PIO
must send a written notice to such third party within 5 days of receipt
of application and give them an opportunity to be heard on why such
information shall not be disclosed.
DISPOSAL OF APPEAL (SECTION 19(6))
In case an appellate authority decides that more information should
be provided to the appellant in addition to what has already been furnished by the PIO, it may either:
a. pass an order directing the PIO to give such information to the
appellant
b. he/she himself may give information to the appellant
In the first case, the appellate authority should make sure that the
desired information has immediately been supplied to the appellant.
TIME LIMIT OF APPEAL
The first appellate authority should dispose-off the appeal within
30 days of receipt of the appeal. The appellate authority can also take
45 days to dispose-off the appeal in exceptional cases; however, it
should record the reasons for the delay in writing.
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7.6.5
PENALTIES (Section 20)
A penalty of ` 250 per day may be imposed on the PIO by CIC/SIC,
as the case may be, till the time the information is furnished for failing to furnish the information on time or for furnishing misleading
information. However, the total amount of penalty imposed shall in
no case exceed ` 25,000. Further, if CIC/SIC is of the opinion that the
PIO has not provided the requisite information due to any mala fide
intentions, it can recommend disciplinary action to be taken against
the concerned PIO (Section 20).
7.6.6
JURISDICTION
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Section 23 of the Act has excluded the jurisdiction of civil courts in
respect of any suit, application, or other proceedings filed against any
order made under the RTI Act. The complete code for appeal and
challenge has been laid out in the Act. The appeal against the decision
of the information officer shall be made to the first appellate authority.
The second appeal shall be made to the Information Commissioners.
However, the orders of the authorities under the Act or the denial of
the information can be challenged by way of the writ petition before
the High Court or by means of a Special Leave Petition before the
Supreme Court in terms of Article 226 or 32, as the case may be. The
Supreme Court after reference may remove the State/Central Commissioner and thereupon the Governor or the President, as the case
may be, may remove them from their office.
7.6.7
ROLE OF CENTRAL AND STATE GOVERNMENTS
The role of the Central government or the State government in the
RTI Act, 2005 includes the following:
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288
a. To develop or organise educational programmes to advance the
understanding of the public about the provisions of the RTI Act
b. To encourage the public authorities to participate in the development and implementation of educational programmes
c. To promote timely and effective dissemination of the information by public authorities about their activities
d. To train the central/state public information officers and facilitate the provision of relevant training materials
self assessment Questions
7. The Chief Information Officer shall have the same rights as
specified in:
a.
Civil Procedure Code, 1908
b.
India Evidence Act, 1872
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RIGHT TO INFORMATION ACT, 2005 289
c.
Negotiable Instrument Act, 1996
d.
All of the above
8. The first appellate authority should dispose-off the appeal
within ______ of the receipt of the appeal.
a.
30 days
b. 20 days
c.
15 days
d. 25 days
9. It is the responsibility of the public information officer of a
public authority to supply correct and complete information
within the specified time.
a.
True
b. False
S
10. The second appeal against the decision of a public information officer shall be made to the:
Information Commission
b.
First appellate authority
c.
Supreme Court
d.
Any public office of your choice
M
Activity
IM
a.
Make a list of the powers held by the Information Commissioners
under the RTI Act.
N
7.7 IMPACT OF THE RTI ACT, 2005
As mentioned earlier, the Central Government has been playing an
active role in the implementation of the provisions of the RTI Act,
2005 in all the states and union territories. It offers all the citizens
a statutory right to ask information on issues that affect their lives.
The citizens are entitled to know their rights, benefits, and services
through the RTI Act, since it becomes easy to get access to reliable,
timely, and understandable information on government activities. The
impact of RTI is palpable as it aids in mitigating the corruption in public life by fostering transparency and accountability in the functioning of government institutions. Public administrations are more open
to scrutiny as their accountability has increased. For instance, RTI
exposed that 94% of rice and 87% of wheat for the poor were siphoned
by the rationing shopkeepers and food grain officers. Therefore, various steps were taken by the government to streamline the Public Distribution System.
This law aims to ensure informed citizenry and transparency of information. It is a people-friendly legislation. It is much easier for citizens
to get their passports, ration cards, pension, birth certificates, income
NMIMS Global Access - School for Continuing Education
NOTE
Every state has an Information
Commission involving a Chief
Information Commissioner and a
few information commissioners.
Business Law
tax refunds, etc. People are massively using the RTI Act to get their
work done and they feel empowered. With greater transparency in
governance, RTI Act has given a boost to the freedom of speech and
expression. All the levels of government, centre, state, or village-level
Panchayats should put their record in the public domain.
self assessment Questions
11. The impact of RTI is palpable as it aids in mitigating the
___________ in public life by fostering transparency and
accountability in the functioning of government institutions.
Activity
S
Research on the Internet and find out how the RTI Act has revealed
the scam in the Crawford Market redevelopment issues in Mumbai.
IM
7.8 LEADING CASE STUDIES
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Reserve Bank of India vs. Jayantilal Mistry (Supreme Court, 2015):
The issue, in this case, has been as to whether the Reserve Bank of India
can deny providing information pertaining to other banks on the ground
of economic interest, commercial confidence, and the fiduciary relationship with other banks. RBI also considered the information sought to
be exempt under Section 8(1) (a), (d), and (e) of the Act. It was further
contended that as the regulator and supervisor of the banking system
in the country, the disclosure of information is barred in view of public
interest. In delivering the judgement, the Supreme Court observed
that RBI is supposed to uphold public interest and not the interest of
individual banks. RBI neither has a fiduciary relationship with any of
the banks nor is it legally bound to further the benefit of any public or
private sector bank. There is not even a relationship of ‘trust’ between
them. Instead, the RBI has the statutory duty to uphold public interest
in addition to safeguarding the interests of the depositors, the country’s economy, and the banking sector as a whole. Consequently, the
RBI must act with transparency and desist from hiding information
that might embarrass individual banks. It is obligatory for it to comply with the provisions of the RTI Act and to disclose the information
sought by the respondents herein. If the information is available with
a regulatory agency with which RBI does not have a fiduciary relationship, it cannot withhold the disclosure of the same.
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290
Girish Ramchandra Deshpande vs. CIC & Ors. (Supreme Court,
2012): The Apex Court had held that the details disclosed by a person
in his/her income tax returns constitute ‘personal information’ which
is exempt from disclosure under Section 8(1) (j) of the Act. Such kind
of personal information cannot be disclosed except in case where the
Central PIO or the State PIO or the Appellate Authority is satisfied
that disclosure of such information will aid in the larger public interest.
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Harinder Dhingra vs. Bar Associations, Rewari, Faridabad, Panchkula (CIC, 2016): The case involved the seeking of information regarding the number of complaints against the advocates for violation of
the Advocates Act, 1961 and the number of advocates who had violated the provisions of Advocates Act, 1961. To this, the CIC held that
the Bar Council is a statutory body. It has been constituted under the
Advocates Act, 1961 to protect and maintain the ethical standards of
advocates and to admonish the members for misconduct. Since such
information forms the core function of the Bar Council, it cannot be
denied to the appellant as it does not fall within the ambit of exemption under the RTI Act.
self assessment Questions
True
b.
False
Activity
IM
a.
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12. Section 8 of the RTI Act, 2005 relates to the exemption from
disclosure of information.
7.9 Summary
Right to Information (RTI) Act was passed ‘to provide for
setting out the practical regime of right to information for citizens’.
The main aim of the Act is to provide secure access to information
for promoting transparency and accountability.
N
‰‰ The
M
Using the Internet, find out about the role played by PIO with
respect to the RTI Act.
‰‰ The main objective of the RTI Act is setting up of a practical regime
where citizens can have secure access to information that is under
the control of public authorities in order to promote transparency
and accountability in the working of public authorities.
‰‰ Every
public authority, within 100 days of enactment of the RTI
Act, shall designate the Central Public Information Officers
(Central PIO) or the State Public Information Officers (State PIO)
in respective public or administrative offices.
‰‰ The
procedure for obtaining the information under the RTI
Act involves four main steps—Application, Time limit, Fee, and
Grounds for rejection.
‰‰ In accordance with the doctrine of severability, only the part of the
record that does not contain any information which is exempt from
disclosure and can reasonably be severed from the part containing
the exempt information may be provided to the applicant.
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S
Business Law
‰‰ Section
12 of the RTI Act provides that the Central government
shall, by notification in the Official Gazette, constitute a body
which shall be known as Central Information Commission (CIC)
to exercise the powers and to perform the functions assigned to it
under the Act.
‰‰ The
general superintendence, direction, and management of the
affairs of the CIC shall vest in the Chief Information Commissioner.
‰‰ The
State Information Commissioner and other commissioners
appointed are required to be the persons having varied experience
in areas of law, science, technology, social service, management,
journalism, mass media, or administration or governance.
‰‰ The powers of the Central and State Information Commissions are
contained in Section 18 of the RTI Act.
S
‰‰ In case the PIO of a public authority does not supply the information
IM
within the specified time or supplies incorrect and incomplete
information, the RTI Act has made appeal provisions to enable the
citizens to approach the appellate authorities.
‰‰ A
penalty of ` 250 per day may be imposed on the PIO by the
Central/State Information Commission, as the case may be, till
the time the information is furnished for failing to furnish the
information on time or for furnishing misleading information.
‰‰ People are massively using the RTI Act to get their work done and
M
they feel empowered. With greater transparency in the governance,
RTI Act has given a boost to the freedom of speech and expression.
key words
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292
‰‰ Appropriate
government: The public authority that is owned,
controlled, or substantially financed by the respective Central
or State government
‰‰ Information:
Any information in the form of documents,
memos, mails, logbooks, contracts, etc.
‰‰ Official
gazette: A official journal in which the government
publishes public information
‰‰ Public Information Officer: An officer appointed at the Central
or State level, as the case may be, to provide information to
citizens about its organisation and its functioning
?
7.10 Descriptive Questions
1. What is the main aim of the RTI Act? List some of its features.
2. Discuss the main obligations of a public authority.
3. List the various duties assigned to a public information officer.
4. Describe the procedure of obtaining information under the RTI
Act.
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RIGHT TO INFORMATION ACT, 2005 293
5. Explain the role of the Central Information Commission.
6. Write a detailed note on the impact of RTI Act, 2005.
7.11 Answers and Hints
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic
Q. No.
a. public
2.
transparency and
accountability
3.
a.
True
4.
d.
All of the above
Procedure for Obtaining
Information (Sections 6 and 7)
5.
b.
False
Information Exempted from
Disclosure (Section 8)
6.
Public Authorities (Chapter II
of the Act)
Information Commissions (ICs)
7.
8.
Impact of the RTI Act, 2005
a.
Civil Procedure Code, 1908
a. 30 days
a.
True
10.
a. Information Commission
11.
corruption
12.
a.
True
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Leading Case Studies
c. Both a and b
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9.
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1.
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The Right to Information
(RTI) Act, 2005
Answer
HINTS FOR DESCRIPTIVE QUESTIONS
1. The Right to Information Act was passed ‘to provide for setting
out the practical regime of right to information for citizens’.
Refer to Section 7.2 The Right to Information (RTI) Act, 2005
2. The main aim or objective of this RTI Act is to set up a practical
regime where citizens can get secure access to the information
which is under the public authorities control to encourage transparency and accountability in the public authorities working.
Refer to Section 7.2 The Right to Information (RTI) Act, 2005
3. Public Information Officers are required to furnish the necessary information as demanded by the public. Refer to Section 7.3
Public Authorities (Chapter II of the Act)
4. The procedure for obtaining the information under the RTI
Act involves four main steps: Application, Time limit, Fee,
and Grounds for rejection. Refer to Section 7.4 Procedure for
Obtaining Information (Sections 6 and 7)
5. Section 12 of the RTI Act provides that the Central government
shall, by notification in the Official Gazette, constitute a body
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Business Law
which shall be known as Central Information Commission to
exercise the powers and to perform the functions assigned to it
under the RTI Act. Refer to Section 7.6 Information Commissions (ICs)
6. The impact of RTI Act is palpable as it aids in mitigating the
corruption in public life by fostering transparency and accountability in the functioning of government institutions. Refer to
Section. 7.7 Impact of the RTI Act, 2005
7.12 Suggested Readings & References
Suggested Readings
Galgotia.
S; Singhal, K. (2006). Indian business laws. New Delhi:
S
‰‰ Aggarwal,
‰‰ Padhi, P. (2013). Legal aspects of business. New Delhi: PHI Learning.
R; Bagavathi. (2010). Business law. New Delhi: S. Chand.
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‰‰ Pillai,
‰‰ Tulsian, P. (2014). Business law. New Delhi: McGraw Hill Education
(India) Private Limited.
E-REFERENCES
‰‰ (2020). Retrieved 4 May 2020, from http://nromoef.gov.in/Guide%20
M
For%20the%20Public%20Authorities.pdf
‰‰ (2020).
Retrieved 4 May 2020, from https://cic.gov.in/sites/default/
files/Impact%20of%20the%20Right%20to%20Information%20Act.
pdf
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‰‰ aburman,
V. (2020). What entities are public authorities under the
RTI Act?. Retrieved 4 May 2020, from https://anirudhburman.
org/2013/09/27/publicauthoritiesunderthertiact/
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C
h
8
a
pt
e
r
COMPETITION ACT, 2000
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Introduction
Competition—What and Why
8.2.1
Need for a Competition Policy
8.2.2
Genesis of Competition Law
Comparison of the US and Indian Competition Laws
8.2.3
Self Assessment Questions
Activity
Competition Act, 2002
8.3
8.3.1
Objectives of the Competition Act, 2002
8.3.2
Features of the Competition Act, 2002
8.3.3
Acquisition
Self Assessment Questions
Activity
8.4
Anti-competitive Agreements
8.4.1
Vertical Agreements
8.4.2
Horizontal Agreements
Cartels
8.4.3
8.4.4
Bid Rigging
Self Assessment Questions
Activity
8.5
Competition Commission of India (CCI)
8.5.1
Composition of CCI
Powers and Jurisdiction of the CCI
8.5.2
8.5.3
Inquiry into Certain Agreement and Dominant Position of Enterprises
8.5.4
Powers and Jurisdiction of the Director General
Procedure for Enquiry into the Complaints (Section 19)
8.5.5
8.5.6Anti-competitive Acts taking place Outside India but having Adverse
Effect on Competition in India (Section 32)
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8.1
8.2
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Contents
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CONTENTS
Enforcement Powers of CCI
Self Assessment Questions
Activity
8.6
Combination
Regulation of Combinations (Section 6)
8.6.1
8.6.2Factors to be considered in Determination of Adverse Effect of Combination on Competition in Relevant Market (Section 20(4))
Self Assessment Questions
Activity
8.7
Penalties Imposed Under the Competition Act, 2002
Self Assessment Questions
Activity
Leading Cases under the Competition Law in India
8.8
Self Assessment Questions
Activity
Summary
8.9
Descriptive Questions
8.10
Answers and Hints
8.11
8.12
Suggested Readings and References
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8.5.7
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COMPETITION ACT, 2000
Introductory Caselet
ABUSE OF DOMINANCE
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M.P. Mehrotra alleged Jet Airways and Kingfisher for entering
into an anti-competitive alliance. These airlines have entered into
an alliance in October 2008. This alliance has lessened the competition in the market as two dominant airlines proposed cooperation in order to reduce cost and increase services. Such practices affect the market position of other players negatively as the
combined market share is approximately 60% of both the airlines.
Such instance is termed as the ‘abuse of dominance’. However,
both the airlines have argued that the alliance was performed due
to the global recession in order to foster joint fuel management,
common ground handling and cross-selling of flight tickets. Their
aim was to increase operational and commercial cooperation.
However, these airlines were alleged for the violation of Sections
3 and 4 of the Competition Act as they formed a cartel by dominating the market share and hampering the competitor’s market
and profit share. The Competition Commission of India (CCI) held
both the airlines responsible for violating Sections 3 and 4 of the
Act because such tricks of the trade can lessen the competition
within the market.
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Case Objective
This caselet relates to
stopping anti-competitive
practices.
297
Business Law
Learning objectives
After studying this chapter, you will be able to:
Explain the meaning of the term competition
Understand the origin of competition law
Compare the competition laws of the US and India
Highlight the objectives and features of the Competition Act,
2002
Describe various types of anti-competitive agreements
including vertical agreements and horizontal agreements
Discuss the role of Competition Commission of India (CCI),
its composition, powers, and jurisdiction
Explain the role of Director General, his/her powers and
jurisdiction
Explain the meaning of combinations
Examine how combinations are regulated
Identify the factors that are considered while determining
an Appreciably Adverse Effect on Competition (AAEC) in
the relevant market
List the penalties imposed under Competition Act, 2002
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8.1 INTRODUCTION
Quick Revision
In the previous chapter, you studied about the Right to Information (RTI) Act, 2005 and its objectives. You also studied about public
authorities, the procedure for obtaining information, information that
is exempted from disclosure, the role of Information Commissions
(ICs) and the impact of the RTI Act, 2005. This chapter discusses the
Competition Act, 2000 which governs competition policies and practices in the Indian market.
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298
Competition refers to a situation that exists in a market in which
organisations and sellers attract buyers independently for achieving some business objectives such as increasing profits or increasing
sales, increasing turnover or increasing the market share. However,
in order to gain maximum market share and other objectives, organisations usually resort to various strategies and tactics. At times, these
tactics may also be of a nature that hinders fair competition in the
market and creates a market situation in which the players do not
get a level playing field. If all big players collude and engage in such
anti-competitive practices, it creates a situation of disadvantage for all
other players in the market.
In order to ensure that organisations do not indulge in any anti-competitive practices, the governments of all countries enact laws that
can help them in dealing with all such cases of anti-competition laws.
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COMPETITION ACT, 2000
The Indian legislature had also passed the Competition Act, 2002. This
Competition Act, 2002 defines various anti-competitive practices such
as entering into anti-competitive agreements, abuse of dominant position and combinations. The different authorities involved, penalties
and punishments for violations and the procedure using which the
authorities decide whether or not violation has indeed taken place are
all described under this Competition Act, 2002.
In this chapter, you will study about the importance of competition,
the role of competition policy and competition laws in India. You will
also study about the Competition Act, 2002 (which is the competition
law of India) and its various aspects.
8.2 COMPETITION—WHAT AND WHY
IM
S
Business competition is a condition wherein organisations in the same
industry engage or participate in an attempt to gain or win something
by establishing superiority over others. While doing business, business owners have to face competition in every form such as price,
quality, design, sales, location, etc. In markets, competition can be
direct, indirect or potential.
M
Competition is not necessarily negative; in fact, healthy competition
among organisations is actually good for businesses. For example,
competition helps in keeping the prices of products under control.
Competition is important for organisations as it helps to:
‰‰ Encourage organisations to find out about the actual needs, wants,
and demands of customers
organisations to serve customers better than their
competitors in a bid to gain maximum market share
N
‰‰ Motivate
‰‰ Analyse the strengths and weaknesses of organisations to compete
aggressively and gain more market share
‰‰ Create
an optimum combination of product offerings that would
satisfy the needs of customers
‰‰ Focus on making more efforts with respect to marketing, branding,
customer service and customer retention
‰‰ Inculcate a culture of innovation and improve the existing products
‰‰ Encourage
businesses to learn about the working of markets,
positioning brands how to produce and sell efficiently, and so on
‰‰ Provide
various options to customers to choose from
‰‰ Increase
the demand for goods, which encourages competitors to
develop more unique products
‰‰ Find
its areas of competitive advantage
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8.2.1 NEED FOR A COMPETITION POLICY
In simple terms, a competition policy refers to the legal framework or
structure that the government of any country establishes to regulate
markets and monopoly organisations. The main aim of the competition policy of any country is to maintain healthy competition and protect individual competitors.
A competition policy involves rules to ensure that businesses compete
fairly with each other. Unfair competition usually involves the use of
certain unfair business practices which can harm other businesses. A
few advantages of competition policy are:
‰‰ Controlled
or reduced price
quality
‰‰ Increased
choice for consumers
‰‰ Increased
innovation
S
‰‰ Improved
IM
A competition policy also enhances consumer welfare by controlling
practices that could restrict healthy competition. The rationale for
having a competition policy is to:
‰‰ Prevent
organisations from undertaking activities that can harm
competition and consumer welfare
monopolies
M
‰‰ Curb
‰‰ Promote
healthy competition
‰‰ Regulate
how businesses are conducted
N
‰‰ Create
a level playing field and promoting effective competition
‰‰ Encourage businesses to compete on the basis of their strengths as
against anti-competitive agreements and/or conduct
‰‰ Make
it for weaker businesses which require that profitable
businesses forgo their market share
8.2.2
Know More
Articles 38 and 39 of the
Constitution of India address the
competition law.
GENESIS OF COMPETITION LAW
In India, no formal competition policy or competition law existed prior
to independence. However, after India gained independence in 1947,
the government started regulating competition among businesses by
using policies, laws, rules, regulations and executive orders; and this
continued till 1969 when the Indian government enacted the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969.
In 1990-91, the liberalisation, privatisation and globalisation reforms
were implemented, which led to the opening up of the Indian economy. Following these reforms, the MRTP Act, 1969 was repealed and
the new competition law called the Competition Act, 2002 was enacted.
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COMPETITION ACT, 2000
301
The MRTP Act, 1969 was the first competition law of India that defined
restrictive trade practices. However, this law was not adequate for
promoting competition and trade, and reducing anti-competitive
practices.
The MRTP Act, 1969 was based on the following laws:
‰‰ Sherman
‰‰ Clayton
Act of the US
Study
Hint
Act of the US
‰‰ The
Monopolies and Restrictive Trade Practices (Inquiry and
Control) Act, 1948 of the UK
‰‰ The
Resale Prices Act, 1964 of the UK
‰‰ The
Restrictive Trade Practices Act, 1964 of the UK
US Federal Trade Commission Act, 1914 as amended in 1938
of Canada
Combines Investigation Act, 1910 of Canada
IM
‰‰ The
S
‰‰ The
The MRTP Act, 1969 was meant to regulate the concentration of economic power, competition law and consumer protection. This Act was
applicable to almost all areas of business such as production, distribution, pricing, investment, procurement, packaging, advertising, sales
promotion, mergers, amalgamations, takeovers, undertakings, etc.
M
The primary objectives of the MRTP Act were:
prevent the concentration of economic power
‰‰ To
control monopolies
‰‰ To
prohibit monopolistic, restrictive and unfair trade practices
N
‰‰ To
The MRTP Act underwent various amendments, the most important
of them being in the years 1984 and 1991. Despite various amendments,
the Indian government felt a need for a new competition law. In 1999,
then Finance Minister, Yashwant Sinha, stated that “The MRTP Act
has become obsolete in certain areas in the light of international economic developments relating to competition laws. We need to shift our
focus from curbing monopolies to promoting competition. The Government has decided to appoint a committee to examine this range of issues
and propose a modern competition law suitable for our conditions”.
In October 1999, the Indian government set up the Raghavan Committee to give its recommendations for modernising the competition law
in line with global developments.
This committee was set up to suggest the legislative framework, which
may entail a new law or suitable amendments in the MRTP Act, 1969.
The Raghavan Committee presented its report to the government in
May 2000.
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The Resale Prices Acts 1964,
a body of UK legislation
providing for the control of
RESALE PRICE MAINTENANCE
(RPM) by suppliers of a
product.
Business Law
The Raghavan Committee suggested the preparation of a new and
improved competition law. Thereafter, the Government of India presented the new draft competition law in November 2000 and this competition bill was introduced in the Parliament. This bill was referred
to the Standing Committee. Based on the recommendations of the
standing committee, the Competition Act, 2002 was enacted on 13th
January, 2003. The MRTP Act was repealed and was replaced with the
Competition Act, 2002, with effect from 1st September 2009.
8.2.3 COMPARISON OF THE US AND INDIAN COMPETITION
LAWS
S
The US was the first to employ a system of competition law, whereas
India has enacted antitrust laws in the recent past. India has created
an extremely institutional environment and a coherent competition
law.
IM
The US Competitive Law regime is based on three statutes, which are
as follows:
Act: The Sherman Antitrust Act of 1890 states that
contracts in restraint of trade and contracts that attempt to create
a monopoly are not valid. As per this law, only those contracts that
are unreasonably in restraint of trade are prohibited. This law
was enacted to prevent any unreasonable contract, combination,
or conspiracy in restraint of trade and monopolisation, attempted
monopolisation or conspiracy or combination to monopolise. Any
organisation or individual that violates this law can be fined up
to $100 million (for organisations) and $1 million (for individuals)
along with a prison sentence of up to 10 years.
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‰‰ Sherman
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‰‰ Clayton
Act: This Act was enacted to address certain areas not
addressed by the Sherman Antitrust Act. The scope of this law is
as follows:
 Preventing
mergers and acquisitions that may substantially
lessen the competition or tend to create a monopoly
 Preventing
discriminatory prices, services and allowances in
dealings between merchants, requiring large firms to notify
the government of possible mergers and acquisitions
‰‰ The
Federal Trade Commission Act: This law bans all unfair
methods of competition and deceptive acts or practices.
In the US, there are six institutions that help in implementing the
competition law of US, which are as follows:
‰‰ The
Department of Justice
‰‰ Juries
‰‰ The Federal Trade Commission ‰‰ Private
‰‰ The
Courts
‰‰ State
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Parties
Attorney Journals
COMPETITION ACT, 2000
303
In the case of India, the antitrust law is the Competition Act, 2002. The
institutions that help in implementing the competition law of India
include the following:
‰‰ Competition
‰‰ National
Commission of India
Company Law Appellate Tribunal (NCLAT)
‰‰ Supreme
Court Competition Commission of India, the National
Company Law Appellate Tribunal (NCLAT) and the Supreme
Court.
self assessment Questions
a. True
b. False
S
1. The Clayton Act of 1890 states that contracts in the restraint of
trade and contracts that attempt to create monopoly are valid.
a. Wider choice for consumers
b. Reduced competition
c. Decreased prices
Activity
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d. Improved quality
IM
2. Which of the following is not a sign of healthy competition
policy?
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Find out which of the countries have the strongest and weakest
competition policy.
8.3 COMPETITION ACT, 2002
The Competition Act, 2002 was enacted on 13th January, 2003 to regulate and govern competition and related practices in India. It includes
a set of criminal and civil provisions that help in preventing anti-competitive practices in the Indian market. The Competition Act, 2002
regulates combinations (acquisition, acquiring of control, merger, and
acquisition). There are three negative instances that are curbed out
with the help of the Competition Act. The first is when the existing
enterprises enter into an agreement among themselves in order to
limit competition in the market; the second is the abuse of dominant
position in the market segment; and the last is the merger of two or
more enterprises leading to the formation of monopolies. This law
came into force to restrict practices having an adverse effect on competition. There are four major elements of the Competition Act, 2002,
which are as follows:
1. Anti-competitive Agreements (Section 3)
2. Abuse of Dominant Position (Section 4)
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? DID YOU KNOW
With the rapid pace of
international economic
development, the focus of
competition law has shifted
from curbing monopolies to the
promotion of competition.
Business Law
3. Combination Regulations (Sections 5 and 6)
4. Competition Advocacy (Section 49)
8.3.1
OBJECTIVES OF THE COMPETITION ACT, 2002
The Competition Act, 2002 is based on the philosophy of modern competition laws. It prohibits anti-competitive agreements and abuse of
the dominant position by organisations. The Act also regulates combinations (acquisition, acquiring of control, merger, and acquisition),
which may lead to appreciable adverse effects on competition in India.
This Act ensures the adequate promotion and sustainability of competition. Some important objectives of the Competition Act, 2002 are
as follows:
provide a legal framework for ensuring the implementation
of competition policies
S
‰‰ To
prevent anti-competitive practices
‰‰ To
penalise organisations engaging in any such acts
‰‰ To
protect free and fair competition and freedom of trade
‰‰ To
protect the interests of consumers
‰‰ To
prevent monopolies
‰‰ To
prevent needless intervention by the government
M
IM
‰‰ To
‰‰ To
establish the Competition Commission of India (CCI)
8.3.2
FEATURES OF THE COMPETITION ACT, 2002
Features of the
Competition Act, 2002
Figure 8.1 shows major features of the Competition Act, 2002:
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Prohibits Anti-Competitive Agreements
Prohibits Abuse of Dominant Position
Provides for Regulation of Combinations
Enjoins Competition Advocacy
Figure 8.1: Features of the Competition Act, 2002
Let us now study these features of the Competition Act, 2002 in detail.
‰‰ Prohibits anti-competitive agreements (Section 3): An agreement
is considered anti-competitive if it causes or may potentially cause
an adverse effect on competition. An important feature of the
Competition Act, 2002 is to prohibit anti-competitive agreements
such as tie-in arrangements, exclusive supply and distribution
agreements, etc.
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COMPETITION ACT, 2000
‰‰ Prohibits
abuse of dominant position (Section 4): The abuse
of a dominant position means that an organisation or a group of
organisations which is in a superior or dominant position in a
certain market engages in acts which might be aimed at one of the
following:
 Eliminating
 Deterring
the future entry by new competitors
 Preventing
tion
or disciplining competitors
competition or creating a kind of monopoly situa-
Examples of abuse of dominant position include indulging in
unfair or discriminatory conditions or restricting the production
of goods or services and restricting market access.
S
‰‰ Provides for regulation of combinations (Section 6): In the context
IM
of businesses, combination may refer to any type of corporate
restructuring such as merger, amalgamation, acquisition of shares,
acquiring of control, etc.
M
If one organisation (or a group of organisations) is able to
regulate combinations, it can potentially cause adverse effect on
competition within the concerned market. The Competition Act,
2002 also regulates operations and activities of combinations. It
is important to note that the operation of this Act is not limited
to combination transactions within India but it also regulates
combination transactions that take place outside India.
competition advocacy (Section 49): Under the
Competition Act, 2002, the CCI has been entrusted with various
tasks such as facilitating competition advocacy, creating awareness
and providing training. The term ‘competition advocacy’ refers
to all the activities carried out by the CCI that aim at promoting
competition. Apart from this, the basic task of the CCI is to enforce
the competition law.
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‰‰ Enjoins
8.3.3 Acquisition
To understand competition we need to understand the definition of
the Acquisition as below:
ACQUISITION
According to Section 2 (a), acquisition means, directly or indirectly,
acquiring or agreeing to acquire—
(i) shares, voting rights, or assets of any enterprise; or
(ii) control over management or control over assets of any enterprise.
In simple terms, acquisition is a kind of corporate restructuring
wherein an organisation acquires all or majority number of shares
of another organisation. As a result, the acquiring organisation gains
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control over the acquired assets or organisation. For example, a social
media start-up ShareChat has recently acquired a meme-sharing app
Memer.
APPRECIABLE ADVERSE EFFECTS ON COMPETITION (AAEC)
This term, Appreciable Adverse Effects on Competition (AAEC), is not
defined in the Competition Act, 2002; only references have been made
to it. It has already been mentioned that one of the primary objectives of the Competition Act, 2002 is to establish the CCI; and it is the
responsibility of the CCI to prevent practices that have an adverse
effect on competition.
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Section 3 (1) of the Competition Act, 2002 states that no enterprise
or association of enterprises or person or association of persons shall
enter into any agreement in respect of production, supply, distribution,
storage, acquisition, or control of goods or provision of services, which
causes or is likely to cause an appreciable adverse effect on competition
within India.
There are no clear instructions or rules which can be used to state
whether an agreement causes or is likely to cause AAEC. However,
Section 19 (3) of the Competition Act, 2002 lists certain factors that the
CCI must consider while determining whether or not an agreement
has an AAEC. These factors are:
M
‰‰ creation
‰‰ driving
of barriers to new entrants in the market;
existing competitors out of the market;
‰‰ foreclosure
‰‰ accrual
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of competition by hindering entry into the market;
of benefits to consumers;
‰‰ improvements
of services; or
in production or distribution of goods or provision
‰‰ promotion
of technical, scientific, and economic development
by means of production or distribution of goods or provision of
services
Public Sector Undertaking (PSU)
The Public Sector Undertakings are statutory organisations where
majority stake is held by government. It is relevant to discuss the
enforcement of competition law on PSUs.
In India, PSUs are engaged in two kinds of functions, namely sovereign functions and non-sovereign functions. The Competition Act,
2002 can be applied only to the non-sovereign functions of the PSUs.
Competition Appellate Tribunal (COMPAT)
The central government has established the National Company Law
Appellate Tribunal (‘NCLAT’, an Appellate Tribunal), also known as
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COMPETITION ACT, 2000
the Competition Appellate Tribunal (COMPAT) in accordance with
Section 53A of the Competition Act, 2002. The two main objectives
and purpose of the Act are as follows:
‰‰ To
hear and dispose any appeals against any directions issued or
decisions or orders passed by the CCI
‰‰ To
adjudicate on the claim for compensation that may arise from
the findings of the CCI
In May 2017, the central government dissolved the CAT and replaced
it with NCLAT. Now, NCLAT is the appellate body that works under
the Competition Act, 2002. The right to appeal to NCLAT remains
unchanged. It is also the relevant authority to seek compensation
under the Competition Act, 2002.
S
GROUP
‰‰ Exercise
IM
According to the Competition Act, 2002, a group refers to two or more
enterprises which may directly or indirectly are in a position to do one
of the following:
20% or more of the voting rights in the other enterprise
‰‰ Appoint
more than 50% of the members of the Board of directors in
the other enterprise
the management or affairs of the other enterprise
PREDATORY PRICING
M
‰‰ Control
N
Predatory price has been defined under Section 4 of the Competition Act, 2002. It refers to selling of goods or services at a price that is
even below the cost of producing them. By selling goods at predatory
prices, large groups or organisations usually aim at reducing or eliminating their competitors.
ANTITRUST LAW
Antitrust law is nothing but another name for competition laws
enacted by the government of any country. The objective of establishing antitrust law is to protect consumers from predatory pricing and
ensuring existence of fair competition in markets. In India, the Competition Act, 2002 is the antitrust law.
MONOPOLY
A monopoly is a type of market that exists when a specific person or
enterprise is the only supplier of a particular commodity. Section 19
empowers the Commission to inquire whether an organisation enjoys
a monopoly or a dominant position. It is one of the primary objectives
of the Competition Act, 2002, to prevent the monopoly organisation
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Business Law
from engaging in unfair trade practices that impact consumers negatively.
PERFECT COMPETITION
Perfect competition refers to a hypothetical market structure where
competition exists at its highest possible level. If such a market structure exists in reality, perfect competition will help in producing the
best possible outcomes for consumers and society.
Some of the important characteristics of perfect competition are as
follows:
‰‰ Large
number of producers
‰‰ Large
number of consumers
‰‰ Entry
are price takers
S
‰‰ Producers
and exit are easy
IM
When there are a large number of players, no market participant can
affect market prices. If any market player attempts to change market
dynamics, the buyers can go for any of the available alternatives.
M
When an organisation is able to act independently of market forces,
it achieves a dominant position. In a perfectly competitive market, no
single organisation can determine the price of the product. It must be
remembered that perfect competition is an ideal condition and not
reality. Taking an account of all these conditions, the Competition Act,
2002 specifies various factors that the CCI takes into account while
determining if an organisation is dominant or not.
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OLIGOPOLY
An oligopoly is a type of market structure wherein there are only a few
producers who constitute a dominant majority of the market system.
Oligopoly players do enjoy certain pricing power but not as much as in
the case of monopoly. The oligopoly market needs to be regulated by
the government and the competition law because if the government
does not regulate it, the oligopolists may collude with each other in
order to control prices and markets.
MONOPOLISTIC COMPETITION
Monopolistic competition is a type of market structure wherein there
are many producers but all of them sell differentiated products. The
differentiation is done by differing branding, quality, etc. This differs
from a monopoly where different products offered by different producers are perfect substitutes of each other. In monopolistic competition, goods are not perfect substitutes for each other. This type of
market system is a combination of monopoly and perfect competition.
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COMPETITION ACT, 2000
RELEVANT MARKET
At times, the CCI may require determining what a relevant market is
under the Competition Act, 2002. The Act states that for determining
whether a market constitutes a relevant market, the CCI shall have
due regard to the relevant geographic market and relevant product
market.
The Act defines the relevant market as the market which may be determined by the commission with reference to the relevant product market
or the relevant geographic market or with reference to both the markets.
S
The Competition Act, 2002 defines the relevant geographic market as
a market comprising the area in which the conditions of competition for
supply of goods or provision of services or demand of goods or services
are distinctly homogenous and can be distinguished from the conditions
prevailing in the neighbouring areas.
IM
The Competition Act, 2002 defines the relevant product market as a
market comprising all those products or services which are regarded as
interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices, and intended use.
self assessment Questions
a. Section 2
b. Section 3
N
c. Section 4
M
3. Which section of the Competition Act, 2002 deals with the
abuse of dominant position?
d. Sections 5 and 6
4. Under the Competition Act, 2002, the CCI has been entrusted
with various tasks such as __________, creating awareness,
and providing training.
5. The Competition Act, 2002 prohibits any agreement that is
related to the production, supply, distribution, storage, and
acquisition or control of goods or services and which has
caused or may potentially cause an __________.
6. The CCI consists of a Chairperson and not less than two and
not more than 6 members which are appointed by the central
government.
a. True
b. False
Activity
Find out the instances of rigged bidding in the recent past in the
Indian market.
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8.4 ANTI-COMPETITIVE AGREEMENTS
Section 3 of the Competition Act, 2002 relates to the prohibition of
anti-competitive agreements. The anti-competitive agreements are
the types of agreements that unduly benefit a person or group and
which might harm competition in any particular market. All such
agreements are prohibited under Competition Act, 2002.
S
As per section 3(1) of the Competition Act, 2002, no enterprise or association of enterprises or person or association of persons shall enter
into any agreement in respect of production, supply, distribution, storage, acquisition, or control of goods or provision of services, which
causes or is likely to cause an appreciable adverse effect on competition within India. If any agreement violates Section 3(1) of this Competition Act, 2002, it would be void.
IM
Based on the provisions contained in Sections 3(3) and 3(4), the
anti-competitive agreements can be classified into horizontal agreements and vertical agreements.
8.4.1 VERTICAL AGREEMENTS
M
Vertical agreements are the types of agreements that are formed
among non-competing enterprises or individuals working at different
stages or levels of production in respect of production, supply, distribution, storage, sale or price of goods, etc. Such agreements among
manufacturers and wholesalers can adversely affect competition in
the market and are known as vertical anti-competitive agreements.
Various types of vertical agreements as per Competition Act are as
follows:
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‰‰ Tie-in
arrangement: A tie-in arrangement means any agreement
that requires a purchaser of goods to purchase some other goods
as a condition for such purchase. For such an arrangement, the
purchaser of certain goods must purchase some goods along with
the goods required by him/her as a precondition for effecting the
primary purchase. Such tie-in agreements are used by sellers to
increase their sale and earn more profit. For example, a pencil
manufacturer and seller agrees to sell pencils to a customer only if
the customer purchases sharpeners also.
‰‰ Exclusive
agreement: An exclusive agreement may be of two
types—exclusive supply agreement and exclusive distribution
agreement.
Under exclusive supply agreement, the supplier restricts the
purchaser of the goods from acquiring or dealing in goods other
than those offered by the supplier. Such agreements are entered
into by a seller or supplier because he/she enjoys a dominant
position in the market. For example, an automobile manufacturer
purchases engines from a particular supplier and he/she enters
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COMPETITION ACT, 2000
into an agreement with the supplier that he/she would not make
the same engine for any other buyer.
Under exclusive distribution agreement, restrictions are imposed
on the supply of certain goods which may limit the availability of
the goods. At times, such restrictions with respect to allocation of
any area or market or sale of goods are also covered under this
Competition Act, 2002.
price maintenance: Any agreement to sell goods on
condition that the prices to be charged on the resale by the
purchaser shall be the prices stipulated by the seller unless it is
clearly stated that prices lower than those prices may be charged
is called resale price maintenance. In simple words, resale price
maintenance involves any attempt by an upstream supplier to
control or maintain the minimum price at which a product can be
resold by a customer. Such restrictions ensure that the resellers
do not compete too fiercely which leads to lower profits. If an
agreement prescribes that a product is resold at a specific margin
or limits, the discount offered by a reseller restricts a reseller’s
ability to set a price; such agreements are prohibited.
to deal: Any agreement that restricts or may potentially
restrict the persons or classes of persons to whom goods are sold
or from whom goods are bought are prohibited under the Act.
Such agreements are considered as anti-competitive.
8.4.2
M
‰‰ Refusal
IM
S
‰‰ Resale
HORIZONTAL AGREEMENTS
N
Horizontal agreements are agreements that are entered into by two or
more competing businesses working at the same level in the market,
and the purpose of such agreements is to ensure that all businesses
cooperate and manipulate competition among all competitors in the
market. The businesses cooperate with respect to pricing, production,
and distribution of the products. Such agreements are presumed to be
anti-competitive due to their pernicious effect on competition.
Various types of horizontal agreements are discussed as follows:
‰‰ Fix
prices: Price fixing is one type of horizontal agreement
wherein two or more competitors collude to increase, decrease, fix
or stabilise prices in a specific market. In this way, businesses are
able to manipulate the prices, which cause an unfair advantage
to them. When price manipulation leads to setting same prices on
their products, it negatively affects others in the marketplace.
‰‰ Limit
or control production supply: Two or more businesses
may enter into an agreement to limit or control the production
output. The production output is fixed by fixing a particular
production level or setting quotas for production. For example,
competing producers of antiseptic liquid meet and allocate annual
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Business Law
sales volume ration amongst themselves as the idea being gaining
control over the market.
‰‰ Allocate
customer/products/territories or market division
agreements or market-sharing: At times, two or more businesses
may enter into an agreement with one another to share market
in terms of customers they serve, the products they produce and
the territories they serve. In other words, businesses may restrict
their sales of goods and services to certain geographic areas. This
leads to the development of monopoly which is an anti-competitive
activity.
8.4.3
S
A cartel refers to an association of organisations that work in the same
industry and they collude with each other for preventing, restricting,
reducing or eliminating competition. Such a collusive agreement may
be explicit or tacit in nature.
Businesses involved in a cartel take decisions or steps which would
help them to dominate the market and control market prices. Such
collusive decisions lead to the creation of a monopoly or a duopoly.
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? DID YOU KNOW
The association of organisations
on a horizontal arrangement are
known as cartels.
CARTELS
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Most cartels and collusive agreements are illegal. When cartels are
able to convert the perfectly competitive market into a monopoly
or a duopoly, they gain control over all critical business areas such
as pricing and market control. Collusive agreements usually lead to
anti-competitive practices such as price-fixing and market-sharing.
Such practices are aimed at reducing output and raising prices.
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Cartels may also indulge in making decisions that lead to misallocation of resources. For instance, cartels may willfully create an artificial
shortage of goods or services demanded by customers.
Most cartels are illegal; however, export cartels in most countries and
at international level are legal. For example, the Organisation of the
Petroleum Exporting Countries (OPEC) is a legal international cartel.
8.4.4
? DID YOU KNOW
Bid rigging is an unfair trade
practice of making secret
agreements, where the firms
agree not to compete against
each other in the market.
BID RIGGING
Bid rigging is an illegal practice or agreement created between different organisations or persons that are engaged in production of identical or similar products or trading of services which leads to eliminating
or reducing competition for bids. It adversely affects or manipulates
the bidding process. Under bid rigging, different competing parties
collude with each other and choose a winner of the bidding process by
making all competitors submit uncompetitive bids.
Rigged bidding creates an illusion of real bidding even though the
result of bidding is already predetermined. Due to this manipulation,
competitors do not get a fair chance for participating in the bidding
process which creates a case of unfair competition.
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The Competition Commission of India has the power to prohibit such
anti-competitive agreements which involve bid rigging.
Bid rigging involves the submission of non-competitive bids that are
submitted by organisations with the help of corrupt officials and a set
of orchestrated collusive activities.
There are three major types of bid rigging, which are as follows:
1. Cover bidding: It is also known as complementary bidding.
Under cover bidding, a group of bidders submit collusive bids so
that some other bidder can win the contract.
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2. Bid suppression: It occurs when many bidders agree not to bid
or they withdraw their bids. This is done in order to make a particular bidder win the bid.
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3. Bid rotation: It refers to a process wherein all bidders take turns
to submit a low bid with an intention to make each bidder win on
a rotational basis.
self assessment Questions
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7. Under_____________, the supplier restricts the purchaser of
the goods from acquiring or dealing in goods other than those
offered by the supplier.
8. Which of the following is not a vertical agreement?
a. Price fixing
b. Tie-in agreement
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c. Exclusive distribution agreement
d. Resale price maintenance
Activity
Find out about the cartels which were recently in news.
8.5
COMPETITION COMMISSION OF INDIA
(CCI)
The Competition Commission of India (CCI) is the regulatory authority that oversees competition in Indian market. It was established with
an aim to enforce the Competition Act, 2002. This Act was amended
by the Competition (Amendment) Act, 2007. This amended Act led to
the establishment of the CCI. The primary objective of the CCI is to
create a fair and competitive business environment. CCI is able to do
that with the help of all the stakeholders including industry members,
government and international jurisdictions.
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NOTE
The judicial function under the
Competition Act is performed by
CCI as it possesses the power of
the civil court.
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CCI believes that competition is a means for ensuring that the common people of India can access a range of goods and services at competitive prices. It aims to regulate competition so that the producers
can have maximum incentive for facilitating innovation and bringing specialisation. Healthy competition in markets leads to reduced
costs and increased choice available to consumers. Therefore, the
CCI works towards providing a level playing field to the market participants and at the same time take care of the interests of the consumers as well.
‰‰ Eliminating
practices having AAEC
and sustaining competition
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‰‰ Promoting
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The CCI is the body through which the central government aims at
achieving the objectives of the Competition Act, 2002. The CCI consists of a Chairperson and not less than two and not more than 6 members which are appointed by the central government. The major activities of the CCI are as follows:
‰‰ Protecting
‰‰ Ensuring
the interests of consumers
the freedom of trade in Indian markets
‰‰ Undertaking
public awareness
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‰‰ Creating
competition advocacy
‰‰ Imparting
training on competition issues to its staff, within and
outside country
NOTE
COMPOSITION OF CCI
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8.5.1
The objectives of the Act are
sought to be achieved through
the aegis of the CCI which has
been established by the central
government with effect from 14
October, 2003.
As per Section 8 of the Competition Act, 2002 as amended by the Competition (Amendment) Act, 2007, the CCI comprises of a Chairperson
and other members which may range from two to six in number. The
members of the CCI are appointed by the central government and
they serve as full-time members.
The central government selects the members of the CCI based on certain characteristics, which are:
‰‰ Members must be persons of proved ability, integrity, and standing.
‰‰ Members
must possess certain special knowledge.
‰‰ Members must have a professional experience of at least 15 years in
international trade, economics, business, commerce, law, finance,
accountancy, management, industry, public affairs, or competition
matters, including competition law and policy.
‰‰ Each
member, including the Chairperson is appointed for a term
of 5 years and is eligible for re-appointment.
‰‰ No
member can remain a member after reaching 65 years of age.
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8.5.2 POWERS AND JURISDICTION OF THE CCI
After inquiring into agreements or abuse of dominant position, CCI
can pass appropriate orders. It can order the division of enterprise
enjoying the dominant position. CCI has powers to grant interim
relief, award compensation, regulate its own procedure and review
and rectify its own orders. CCI has the power to inquire into acts taking place outside India but having their effect on competition in India.
Apart from this, the powers of the CCI are as follows:
‰‰ Eliminating
the business practices that have Appreciably Adverse
Effect on Competition (AAEC)
‰‰ Conducting inquiry into certain agreements and dominant position
of enterprises
related to any anti-competitive agreements
inquiry into cases of combinations and determining if
such an agreement has AAEC
‰‰ Regulating
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‰‰ Conducting
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‰‰ Conducting suo moto inquiries if they receive any such information
its own procedure for discharging its functions, as it is
not bound by rules of Civil Procedure Code, 1908
‰‰ Imposing
monetary penalty
‰‰ Issuing interim orders if the CCI is satisfied that it is a case of anti‰‰ Awarding
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competitive agreements or abuse of dominant position
compensation after making inquiry into allegations
‰‰ Reviewing
its own order if no appeal is filed within 30 days from
the order and the aggrieved party applies to the Commission
in competition advocacy
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‰‰ Engaging
As of now, the jurisdiction of the CCI has been widely debated. There
have been cases wherein some other courts have stayed the verdict
of the CCI. There are various jurisdictional challenges related to CCI
encroaching the jurisdiction of another regulator or court. The CCI
actually faces a lot of issues because it sees an overlap between its own
jurisdiction and that of other regulators.
The Competition Act, 2002 does not specify any rules based on which
the CCI can decide the cases to be taken cognisance of. There have
been numerous instances of overlap and exercise of authority between
CCI and other regulators. This often leads to delay in justice.
Exhibit
Examples of Jurisdictional Disputes involving the CCI
1. In 2018, the TRAI and CCI were involved in a case dispute for
which they approached the Supreme Court. Both TRAI and
CCI laid claim that they have
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exclusive jurisdictional rights on matters related to anti-competitive issues in the telecom industry.
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2.JCB and Bull Machines are construction equipment manufacturers. There was a dispute between JCB and Bull Machines.
JCB filed a civil suit against Bull Machines for infringement of
its intellectual property to restrict Bull Machines from accessing the market. This case was pending before the High Court
but the Bull Machines proceeded against JCB before the CCI
on the grounds that JCB had denied market access to Bull
Machines by obtaining an injunction from the High Court.
CCI took cognisance of this matter. JCB moved the High
Court against the CCI as the institution of this investigation
would have inter-alia translated into the CCI pre-deciding the
outcome of the civil suit even though the same is pending disposal before the High Court.
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Source: https://www.mondaq.com/india/antitrust-eu-competition-/392738/jurisdiction-of-the-cci-navigating-through-muddy-waters [Retrieved on DD-MM-YYYY]
8.5.3 INQUIRY INTO CERTAIN AGREEMENT AND
DOMINANT POSITION OF ENTERPRISES
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The CCI has the power to inquire into any alleged violation of Sections 3 and 4, i.e., anti-competitive agreements and abuse of dominant
position by taking suo moto cognisance (on its own motion) or in the
following cases:
‰‰ When the CCI receives any information from any person, consumer,
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or their association which is accompanied with the required fee
amount
‰‰ When
the CCI receives a reference made to it by the central
government or state government or statutory authority
8.5.4 POWERS AND JURISDICTION OF THE DIRECTOR
GENERAL
According to Section 2 (g) of the Competition Act, 2002, ‘Director
General’ (DG) means the Director General that has been appointed
under Section 16 (1) of the Competition Act, 2002 and it includes any
Additional, Joint, Deputy, or Assistant Directors General appointed
under that section.
Section 16 of the Competition Act, 2002 relates to the appointment of
DG of the CCI. This section states that the central government may
appoint a DG for assisting the CCI. The DG helps the CCI in conducting inquiry into the contraventions of any provisions of the Competition Act, 2002 along with certain other functions as specified in the
Act. The office of the DG also comprises Additional, Joint, Deputy,
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or Assistant General. All the Additional, Joint, Deputy or Assistant
Director Generals, advisers, consultants, and officers are required to
exercise their powers and discharge their functions under the supervision and direction of the DG. The appointment, number, the manner of appointment and the salary and allowances of the Additional,
Joint, Deputy, or Assistant Director Generals, advisers, consultants,
and officers is decided by the central government. The DG and the
other officers who are appointed must be the persons of integrity and
proven ability. Such officers must have experience related to investigation and having knowledge of accountancy, management, business
public administration, international trade, law, economics, etc.
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The DG does not have powers to initiate investigation by taking suo
motu cognisance of any matter. The DG has to follow the process by
submitting information to the CCI. Thereafter, the CCI can cause an
inquiry in accordance with Section 19 of the Act. The CCI can order
for an investigation to be initiated by the DG. The CCI must not form
any opinion before the investigation is initiated.
8.5.5 PROCEDURE FOR ENQUIRY INTO THE COMPLAINTS
(SECTION 19)
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M
The CCI has to follow a thorough procedure for carrying out an
enquiry into any complaint received by it. Whenever the CCI receives
any complaint or reference from the central government or state government or from a statutory authority or on its own knowledge or
information (received from a consumer, trade association, etc.), there
can be two situations.
In the first situation, the CCI is satisfied that there exists some substance in the complaint; then, in such a situation, the CCI directs the
DG to investigate the matter. If the CCI receives any complaints or
information that is similar to any previously received information,
then all the new information should be clubbed with the previously
available information.
In the second situation, the CCI is not satisfied with the matter
referred to it and it does not find that a prima facie case is made out;
then, the CCI closes the matter and passes orders as it deems fit. The
CCI also has to send a copy of this order to the central government
or the state government or to the authority from which the complaint
was received.
When a case is referred to the DG, he/she carries out a thorough investigation and prepares a report of his/her findings. If the report of the
DG states that there was no contravention of any provisions of the
Competition Act, 2002, the complainant may rebut and appeal against
the findings of the DG to the CCI. Following this, the CCI hears the
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case of the complainant. If the CCI agrees with the recommendations
of the DG, it shall close the matter and pass necessary orders. However, if, after examining all the objections and suggestions, the CCI is
of the opinion that the matter requires further investigation, then the
CCI may order the DG to conduct further enquiry. If the report of the
DG finds that there has been a contravention of the provision(s) of the
Competition Act, then the CCI may order further inquiry if it feels the
need for such further inquiry.
8.5.6 ANTI-COMPETITIVE ACTS TAKING PLACE
OUTSIDE INDIA BUT HAVING ADVERSE EFFECT ON
COMPETITION IN INDIA (SECTION 32)
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The CCI has the power to inquire into an anti-competitive agreement
or agreement that involves the abuse of dominant position or agreement with respect to combinations if such an agreement is likely to
have an appreciable adverse effect on competition in the relevant
market in India. This is applicable even if:
‰‰ An
anti-competitive agreement has been entered into outside of
India
party to such agreement is outside India
‰‰ Any
enterprise abusing the dominant position is outside India
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‰‰ Any
‰‰ A
combination has taken place outside India
‰‰ Any
party to combination is outside India
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‰‰ Any other matter or practice or action arising out of such agreement
or dominant position or combination is outside India
8.5.7 ENFORCEMENT POWERS OF CCI
Know More
While formulating the
competition policy (including
a review of competition law),
the central government may
ask for the opinion of the CCI,
which is termed as competition
advocacy.
The CCI has the authority to impose monetary penalty on a defaulting
party/person. If a person fails to pay the monetary penalty imposed,
the CCI has the authority to recover such penalty in accordance with
the regulations specified by regulations.
self assessment Questions
9. The Competition Commission of India (CCI) is the regulatory
authority that oversees ___________ in the Indian market.
10. No member of the CCI can remain a member of this body after
reaching 65 years of age.
a. True
b. False
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Activity
Make a list of a few anti-competitive agreements that have recently
been pointed out by the CCI.
8.6 COMBINATION
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The acquisition of one or more enterprises by one or more persons or
acquiring of control or merger or amalgamation of enterprises under
certain circumstances (exceeding monetary limits of assets or turnover as specified in Section 5 of the Act and given below) shall be construed as a combination. The combination is defined as acquisition
of one or more enterprises by way of merger or acquisition or control
over the enterprise. Regulating the combinations is one of the primary
tasks of the Competition Act, 2002 and the Competition Commission
of India.
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8.6.1 REGULATION OF COMBINATIONS (SECTION 6)
Some important provisions of Section 6 of the Regulation of Combinations of the Competition Act, 2002, are as follows:
‰‰ No individual or organisation should enter into a combination that
individual or organisation that proposes or enters into a
combination deal should give notice to the CCI containing the
details of such combination deal within 30 days of approval of
the proposal relating to merger or amalgamation, referred to by
the board of directors of the enterprises concerned with such
merger or amalgamation, or execution of any agreement or other
document for acquisition or acquiring of control.
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‰‰ Any
M
has caused (or can potentially cause) an AAEC within the relevant
market in India. All such combinations shall be void.
‰‰ Execution
of any agreement or other document for acquisition or
acquiring of control.
‰‰ No combination would come into existence till 210 days have been
passed after giving notice to the CCI.
‰‰ The
CCI has to deal with the notice in a manner as prescribed in
Sections 29, 30 and 31 of the Competition Act, 2002.
‰‰ Provisions
of Section 6 do not apply to share subscription or
financing the facility or any acquisition, by a public financial
institution, foreign institutional investor, bank or venture capital
fund, pursuant to any covenant of a loan agreement, or investment
agreement.
‰‰ In
the case of acquisition involving public financial institutions,
foreign institutional investors, banks, or venture capital funds
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must file with the CCI details of such deal within 7 days of the date
of acquisition.
8.6.2 FACTORS TO BE CONSIDERED IN DETERMINATION
OF ADVERSE EFFECT OF COMBINATION ON
COMPETITION IN RELEVANT MARKET (SECTION
20(4))
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Section 20 of the Competition Act relates to the inquiry of combinations by the CCI. According to this section, the CCI may inquire into
the cases of combinations such as acquisition, merger, amalgamation,
etc., by taking into account its own knowledge or information in order
to determine if such a combination has caused or may potentially
cause an AAEC in India. In the same way, if the CCI receives a notice
under Section 6 of the Act, as mentioned (in the previous paragraph)
regarding entering into a combination, it shall inquire into whether
such a combination would cause AAEC in India.
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However, the CCI may initiate such an inquiry into the combination
only within one year after such a combination has taken effect and no
later than that.
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This section also states that the central government should enhance
or reduce the value of assets or the value of turnover every two years
in consultation with the CCI and must notify the same.
The CCI needs to determine if a combination will have an AAEC in the
relevant market or not by considering the following factors:
‰‰ Actual
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and potential levels of competition through imports in the
market
‰‰ Extent
‰‰ Level
of barriers to entry into the market
of combination in the market
‰‰ Degree
of countervailing power in the market
‰‰ Likelihood
that the combination would result in the parties to the
combination being able to significantly and sustainably increase
prices or profit margins
‰‰ Extent
of effective competition likely to sustain in a market
‰‰ Extent to which substitutes are available or are likely to be available
in the market
‰‰ Market
share, in the relevant market, of the persons or enterprise
in a combination, individually, and as a combination
‰‰ Likelihood
that the combination would result in the removal of a
vigorous and effective competitor or competitors in the market
‰‰ Nature
and extent of vertical integration in the market
‰‰ Possibility
‰‰ Nature
of a failing business
and extent of innovation
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‰‰ Relative
advantage, by way of the contribution to the economic
development, by any combination having or likely to have
appreciable adverse effect on competition
‰‰ Whether
the benefits of the combination outweigh the adverse
impact of the combination, if any
self assessment Questions
11. No individual or organisation should enter into a combination
that has caused (or can potentially cause) an AAEC within
the relevant market in India. All such combinations shall
be__________.
b. One year
c. Two years
d. Three years
Activity
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a. Six months
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12. The CCI may initiate an inquiry into the combination only
within _______ after such a combination has taken effect.
Find out the examples of a few combinations which had an adverse
effect on competition in the relevant market in India.
PENALTIES IMPOSED UNDER THE
COMPETITION ACT, 2002
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8.7
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Chapter VI of the Competition Act, 2002 (which contains Sections
42–48) deals with the penalties that can be imposed under this Act. All
sections of this Act came into effect from 2009 except Section 44 which
came into effect from 2011. These sections have been amended from
time to time.
Sections contained in Chapter VI are as follows:
‰‰ Section
42: Contravention of orders of Commission
‰‰ Section
42A: Compensation in case of contravention of orders of
Commission
‰‰ Section
43: Penalty for failure to comply with directions of
Commission and Director General
‰‰ Section
43A: Power to impose a penalty for non-furnishing of
information on combinations
‰‰ Section
44: Penalty for making false statement or omission to
furnish material information
‰‰ Section
45: Penalty for offence in relation to furnishing of
information
‰‰ Section
46: Power to impose lesser penalty
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‰‰ Section
47: Crediting sums realised by way of penalties to
Consolidated Fund of India
‰‰ Section
48: Contravention by companies
SECTION 42: CONTRAVENTION OF ORDERS OF COMMISSION
Section 42 of the Competition Act, 2002 relates to the penalty that
can be imposed for the contravention of the orders of the CCI. The
CCI may order an inquiry of its orders or directions that it orders
while exercising its powers. The CCI may order or give directions
under the following sections:
‰‰ Section
27: Orders by Commission after inquiry into agreements
or abuse of dominant position
28: Division of enterprise enjoying dominant position
‰‰ Section
31: Orders of Commission on certain combinations
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‰‰ Section
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‰‰ Section 32: Acts taking place outside India but having an effect on
competition in India
‰‰ Section
33: Power to issue interim orders
‰‰ Section
42A: Compensation in the case of contravention of orders
of Commission
43A: Power to impose penalty for non-furnishing of
information on combinations
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‰‰ Section
If any person fails to comply with the orders or directions issued
under the above sections, then he/she can be punished with a fine of
up to ` 1 lakh for each day during which such non-compliance occurs.
The total amount of such fine may extend up to ` 10 crores.
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If the person does not comply with the orders or directions or
fails to pay the fine imposed under this section, he/she can be
awarded an imprisonment for up to 3 years or a fine which may extend
to ` 25 crores or both.
SECTION 42A: COMPENSATION IN CASE OF CONTRAVENTION OF
ORDERS OF COMMISSION
This section was inserted by the Competition (Amendment) Act, 2007.
This section states that any person may make an application to the
Appellate Tribunal for an order for the recovery of compensation from
any enterprise for any loss or damage that he/she may have suffered
because of the following reasons:
‰‰ Enterprise
violating the directions issued by the CCI
‰‰ Contravening
the orders of CCI under Sections 27, 28, 31, 32,
and 33
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‰‰ Contravention,
without any reasonable ground, of any restriction
subject to which any approval, sanction, direction, or exemption
has been accorded
SECTION 43: PENALTY FOR FAILURE TO COMPLY WITH
DIRECTIONS OF COMMISSION AND DIRECTOR GENERAL
This section states that if a person fails to comply with either the
directions of the CCI under Sections 36(2) and 36(4) or the directions
of the DG under Section 41(2), without any reasonable cause, then the
person can be fined an amount of up to ` 1 lakh for each day during
which such failure continues subject to a maximum of ` 1 crore. The
amount is decided by the CCI.
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Section 41(2) states that the DG shall have all powers as are conferred
upon the CCI as mentioned in Section 36(2) of the Competition Act,
2002.
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SECTION 43A: POWER TO IMPOSE PENALTY FOR NONFURNISHING OF INFORMATION ON COMBINATIONS
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Section 43A of the Act states that if any person or enterprise fails
to give notice to the CCI when they are entering into a combination
agreement [under Section 6(2) of the Act], the CCI may impose a
penalty of up to 1% of the total turnover or the assets of the combination. This provision was inserted into the Act by the Competition
(Amendment) Act, 2007.
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SECTION 44: PENALTY FOR MAKING FALSE STATEMENT OR
OMISSION TO FURNISH MATERIAL INFORMATION
Section 44 is related to statements made before the Commission in
connection with Combination Agreement. Section 44 states that the
CCI can impose a penalty not less than ` 50 lakh but not more than
` 1 crore on any person, who is a party to a combination, if that person:
‰‰ Makes
a false statement
‰‰ Omits
to state any material information
SECTION 45: PENALTY FOR OFFENCE IN RELATION TO
FURNISHING OF INFORMATION
This section is related to statements or documents required to be furnished under any provisions or orders under this Act. A person who
furnishes or has to furnish certain documents or information may be
fined with an amount of up to ` 1 crore in the following cases:
(a) If the person makes any statement or furnishes any document
which is false or if the person furnishes document which he/she
believes is false
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(b) If the person omits any material fact which he/she knows is material to the case
(c) If the person changes, suppresses, or destroys any document
which is required to be furnished out of his/her own free will
SECTION 46: POWER TO IMPOSE LESSER PENALTY
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Section 46 empowers the CCI to impose a lesser penalty on the person
or individual than what amounts are mentioned for penalties specified in the Act. However, the CCI can exercise this power only when it
is satisfied that any producer, seller, distributer, trader, or service provider included in any cartel on which there are allegations of violation
of Competition Act has made full and true disclosure in the respect of
these alleged violations. Also, disclosure of such information must be
vital to impose upon such person a lesser penalty.
The CCI cannot impose a lesser penalty in the following cases:
the CCI receives the report of investigation before such
disclosures are made; or
IM
‰‰ If
‰‰ If
the person who is making the disclosure does not continue to
cooperate with the CCI till the proceedings come to an end; or
the CCI is satisfied that a producer, seller, distributor, trader, or
service provider which is a part of a cartel had not complied with
the condition on the basis of which the lesser penalty was imposed;
or
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‰‰ If
‰‰ If
the CCI is satisfied that a producer, seller, distributor, trader, or
service provider which is a part of a cartel had given false evidence; or
‰‰ Where
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the CCI realises that the information provided is not vital,
and thereby the person providing the information may be liable to
be tried in respect of that offense.
SECTION 47: CREDITING SUMS REALISED BY WAY OF PENALTIES
TO CONSOLIDATED FUND OF INDIA
Section 47 of the Competition Act, 2002 states that the amount that
the CCI receives by imposing penalties must be credited to the consolidated fund of India.
SECTION 48: CONTRAVENTION BY COMPANIES
Section 48 of the Competition Act, 2002 states that when there is a person committing any contravention of any of the provisions of this Act
or of any rule, regulation, order, or direction issued under this Act, is a
company; then, every person who is in charge of and was responsible
to the company for the conduct of the business of the company at the
time when the contravention was committed along with the business
will be considered as guilty of the contravention. The CCI will carry on
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punishment proceedings against such persons and businesses. However, such a person will not be punishable in the following cases:
‰‰ If the person proves that the alleged contravention was committed
without his/her knowledge
‰‰ If
the person proves that he/she had exercised all due diligence to
prevent such contravention
self assessment Questions
13. Section 47 of the Competition Act, 2002 states that all the
amount that the CCI receives by imposing penalties must be
credited to the_____________.
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Activity
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14. Amit was a party to a combination and he had made a false
statement with the CCI. What is the maximum penalty that
CCI can impose on Amit?
Explain how non-furnishing of information can hamper the proceedings of the cases being handled by CCI.
LEADING CASES UNDER THE
COMPETITION LAW IN INDIA
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8.8
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CASE LAW 1: RELIANCE BIG ENTERTAINMENT PRIVATE LIMITED
VersuS TAMIL NADU FILM EXHIBITORS ASSOCIATION [CCI]
(Case No. 78 of 2011)
This case was contested between M/s Reliance Big Entertainment
Private Limited (hereinafter referred to as the ‘Informant’) and Tamil
Nadu Film Exhibitors Association (now known as Tamil Nadu Theatre Owners Association). The former was the informant whereas the
latter was the opposite party.
This case was filed by the M/s Reliance Big Entertainment Private
Limited against Tamil Nadu Film Exhibitors Association (hereinafter
referred to as the ‘Opposite Party’ or ‘TNFEA’) under Section 19(1)(a)
of the Competition Act, 2002. The informant alleged that the TNFEA
had contravened the provisions of Sections 3 and 4 of the Act.
The informant organisation was incorporated under the provisions of
the Companies Act, 1956. This organisation was engaged in the business of production and distribution of cinematographic films. TNFEA
was a trade association registered under the Tamil Nadu Societies
Registration Act, 1975 and it has control over its members who are
film exhibitors/theatres in Tamil Nadu.
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Facts of the case
‰‰ An
agreement was made between the informant and M/s Balaji
Real Media Private Limited on 28-07-2011. As per this agreement,
the informant was entitled to distribute a film titled ‘Osthi’ in Tamil
language. This movie was a remake of Hindi film ‘Dabbang’. This
film was to be released on 08-12-2011.
‰‰ The
informant entered into an agreement with M/s Kural TV
Creations Private Limited (‘M/s Kural TV’) and granted exclusive
distribution rights of the film to M/s Kural TV on 09-09-2011 for
Tamil Nadu, Kerala, and Karnataka.
informant entered into an agreement with M/s Sun TV
Network Limited on 18-11-2011 granting the Satellite Rights of the
film.
S
‰‰ The
‰‰ On 29-11-2011, Shri T. Rajhendherr, MD of M/s Kural TV informed
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the informant via an e-mail that the TNFEA has decided not to
screen the said film in any of the screens of its members since the
said film’s satellite rights were granted to M/s Sun TV. Rajhendherr
also attached a copy of the letter issued by the TNFEA to its theatre
members on 24-11-2011. Rajhendherr also informed the informant
that he was unable to block and book the theatres because of this
act of TNFEA.
29-11-2011, the informant received another e-mail from Shri
Ashok Kumar of M/s PVR Cinemas. PVR Cinemas was a member
of the TNFEA. In this e-mail, Ashok Kumar had attached a letter
issued by the TNFEA to it on 24-11-2011 in which the TNFEA has
asked PVR Cinemas to check with them before confirming the
said film along with another film, viz. Mambttiyan.
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‰‰ On
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‰‰ The informant also informed the CCI that it had learnt from various
newspaper sources that M/s Sun TV owed some money to a few
members of the TNFEA and it had ordered for recovering all the
money from M/s Sun TV by banning all films which are produced
or distributed by M/s Sun TV. TNFEA has also banned films whose
satellite rights were granted to M/s Sun TV.
‰‰ The informant told the CCI that the TNFEA’s ban on the given film
on theatres in Tamil Nadu because its satellite rights were granted
to M/s Sun TV was unfair and were clearly in contravention of the
provisions of the Act.
‰‰ The
informant alleged that TNFEA was acting in an arbitrary
manner. The film of the informant was boycotted by TNFEA with
an aim to secure a claim of its members against a third party, i.e.,
M/s Sun TV.
‰‰ The
informant claimed that it was not related to the third party in
any manner and the dues that had to be paid by it. The informant
contented that TNFEA’s decision to ban the said film was an abuse
of dominant position.
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COMPETITION ACT, 2000
On the basis of the above facts of the case, the informant prayed the
following:
‰‰ TNFEA
should be restrained and it should be ordered not to
compel its members for not dealing with the film (Osthi) of the
informant including all its upcoming films also.
‰‰ TNFEA should be restrained and it should be ordered to not allow
the release and exploitation of the said film and forthcoming films
of the informant.
‰‰ TNFEA
should be restrained from imposing any unfair and
unjustified restrictions on the release and exploitation of the
informant’s said film.
should be restrained from entering into any anticompetitive agreements with its members.
‰‰ TNFEA
S
‰‰ TNFEA
should be restrained from abusing its dominant position.
‰‰ M/s
IM
The CCI considered this case and after considering all the facts, it
noted the following:
Sun TV owed money to a few members of TNFEA.
resorted to arm twisting tactics and threatening and in
order to recover its money by ordering that theatres associated
with TNFEA not to exhibit the film with which M/s Sun TV was
associated.
M
‰‰ TNFEA
Following this, the CCI ordered the DG to investigate the matter for
contravention of Sections 3(3) of the Act.
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The DG submitted its report in which it had concluded that the
TNFEA is the biggest and most powerful association of cinema theatre owners in Tamil Nadu and it is in a position to control the market and restrict the services in the market for the producers and distributors.
The case proceedings took place for a considerable amount of time
and the CCI passed an order. The main points of the order are as follows:
‰‰ CCI
directed the TNFEA not to indulge in such anti-competitive
conduct in future
‰‰ CCI
imposed penalty on TNFEA
CASE LAW 2: Indian National Shipowners’ Association
(INSA) Versus Oil and Natural Gas Corporation Limited
(ONGC) (Case No. 1 of 2018)
The present information was filed by Indian National Shipowners’
Association (INSA) (hereinafter, the ‘Informant’) under Section 19(1)
(a) of the Competition Act, 2002 (hereinafter, the ‘Act’) against Oil and
Natural Gas Corporation Limited (hereinafter, the ‘Opposite ParNMIMS Global Access - School for Continuing Education
327
Business Law
ty’/‘OP’/‘ONGC’) alleging a contravention of the provisions of Section
4 of the Act.
Facts of the case
Informant is a representative body of various ship owners
formed in the year 1929. At the time of filing of the information,
it had 42 members which included Indian shipping companies
and offshore oilfield service providers, i.e., companies providing
services such as offshore logistics services to offshore oilfield
operators such as ONGC, Cairn India Limited (CAIRN), Reliance
Industries Limited (Reliance), British Gas Exploration and
Production India Limited (BGEPIL), etc. The member companies
of the Informant include Shipping Corporation of India Limited
(‘SCI’), Global Offshore Services Limited (‘Global Offshore’),
Ocean Sparkle Limited (‘OSL’), TAG Offshore Limited (‘TAG
Offshore’), Triton Maritime Private Limited (‘Triton’), Greatship
(India) Limited (‘Greatship’), etc.
is stated that ONGC, in order to undertake Oil & Natural Gas
(hereinafter, O&NG) Exploration and Production (E&P) activities
seek support services from offshore oilfield services providers
(such as the member companies of the Informant) pursuant to a
competitive bidding process. One of the services is the charterhire of offshore support vessels (hereinafter, the ‘OSVs’) which are
specialized vessels that support various stages of offshore O&NG
E&P activities undertaken by ONGC. There are several types of
OSVs, amongst which the following two are predominantly used
for the offshore E&P activities in the Indian Exclusive Economic
Zone (‘EEZ’).
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‰‰ It
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‰‰ The
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328
a.Anchor Handling Tug Supply Vessel (‘AHTSV’) designed to
tow rig anchors from one location to another and to lift and
position rig’s anchors; and
b.
Platform Supply Vessels (‘PSV’) to carry out supply duties
and transit of manpower, fuel, fresh water, tools, and materials
(such as pipes and cement) to offshore drilling locations.
‰‰ The
Informant submitted that for procuring the services of the
aforesaid OSVs, ONGC used to float International Competitive
Bidding (hereinafter, the ‘ICB’) tenders which contained detailed
technical eligibility requirements, bid evaluation criteria, a model
contract comprising General Conditions of Contract (hereinafter,
the ‘GCC’) and Special Conditions of Contract (hereinafter, the
‘SCC’), collectively referred to as the ‘Charter Hire Agreement’
(hereinafter, the ‘CHA’). The CHA sets out the terms and conditions
which govern the contractual relationship between ONGC and the
successful bidder. The Informant claimed that ONGC possesses
a dominant position in the hiring of OSVs and owing to such
dominant position, it had been able to put one-sided clauses in the
CHAs in the nature of boiler plate agreements, allegedly not open
for negotiations.
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COMPETITION ACT, 2000
Further, the CHAs between ONGC and the respective member
companies of the Informant contained certain clauses which
were alleged to be onerous in nature and favourable to ONGC.
Specifically, the Informant alleged the following clauses of the
CHA to be one-sided, unfair and hence, abusive:
i.
Clause 14.2 of the SCC: Unilateral right to terminate the
agreement;
ii. C
lauses 18.2 and 23 of the GCC: Unilateral termination in case
of force majeure;
iii. Clauses 27.1.2 and 27.1.4 of the GCC: Onerous clauses in
relation to appointment of arbitrator.
addition to the above, the Informant alleged that the ONGC
issued termination notices for few contracts with its member
companies which is indicative of abuse on its part owing to the
dominant position held by it. Based on these allegations, the
Informant alleged contravention of Section 4(2)(a)(i) of the Act by
ONGC.
Commission examined the aforesaid facts and after hearing
both the parties, in a preliminary conference held on 17-05-2018,
was prima facie satisfied that the allegations raised by the Informant
in the information had merit. Prima facie, the Commission found
ONGC to be dominant in the ‘market for charter hire of OSVs
(PSVs and AHTSVs) in the Indian EEZ’. Further, with regard
to the unilateral right of termination (Clause 14.2 of SCC), the
Commission found the said stipulation as well as its invocation by
ONGC against some of the member companies of the Informant
to be prima facie abusive in nature. However, the allegations with
regard to unilateral termination in case of force majeure (Clauses
18.2 and 23 of the GCC) and alleged onerous clauses in relation to
appointment of arbitrator (Clauses 27.1.2 and 27.1.4 of the GCC)
were not found to be abusive in nature.
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M
‰‰ The
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S
‰‰ In
‰‰ Based on the finding with regard to unilateral right of termination
being prima facie abusive, the Commission vide its order dated
12-06-2018 directed the DG to carry out a detailed investigation
into the matter under Section 26(1) of the Act.
‰‰ Thereafter,
the DG proceeded to delineate the relevant market in
the matter. The DG observed that the present case pertained to
allegations of abuse of dominant position by ONGC as a procurer
of services towards its suppliers (i.e., the OSVs). Relying on the
approach adopted by the Commission in past few cases [Rajat
Verma and Public Works (B&R) Department (Case No. 70 of 2014
decided on 09-07-2018), Adcept Technologies Private Limited and
Bharat Cooking Coal Limited (Case No. 16 of 2013 decided on 0805-2013), and VE Commercial Vehicles Limited and UPSRTC (Case
no. 80 of 2015 decided on 07-01-2016)] which pertained to abuse
of buyer power, the DG applied the demand-side substitutability
NMIMS Global Access - School for Continuing Education
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Business Law
in an inverse manner. The DG undertook the assessment of
available suppliers and their ability to switch to alternative sales
opportunities, both product-wise and geographically. The DG also
referred to similar cases in matured jurisdictions wherein while
dealing with cases of buyer power, the market was delineated
by considering whether suppliers have alternative distribution
channels for their goods or services.
‰‰ The DG observed that the physical characteristics/end-use of goods
(i.e., OSVs) demonstrates that the relevant product comprises
specialised vessels used for performing specific tasks to support
offshore O&NG E&P activities, which in the present case pertains
to two specific OSVs, namely AHTSV and PSV.
14.2 of the SCC which gives unilateral right of termination
without assigning any reasons to ONGC, in itself is not found abusive
given the disproportionate risk that ONGC has to bear in case of
such termination by the OSVs; especially when the Commission
has found, in the given facts and circumstances, that the invocation
of such clause was not in bad faith. It is unambiguously established
by the evidence on record that the conduct of ONGC was driven
solely in response to an exceptional change in market conditions.
Further, the right of termination for convenience was exercised by
ONGC for the first time in thirty years of the existence of such
clause in the CHA and there is no evidence that any party has raised
any objections to the existence of such clause all this while. Had
it been found that ONGC invoked this clause capriciously and/or
frequently in order to make illegitimate gains at the expense of the
other contracting party, the Commission may have had the occasion
to look at this case differently. No such situation seems to exist in
the present case. Thus, the Commission is of the considered view
that in the present case the conduct of ONGC does not tantamount
to an abuse of dominant position within the meaning of Section 4
of the Act. Hence, the case is directed to be closed.
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‰‰ Clause
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330
Source: https://www.cci.gov.in/sites/default/files/01-of-2018.pdf
self assessment Questions
15. In the case of Reliance Big Entertainment Private Limited vs.
TNFEA, the TNFEA had abused its dominant position.
a. True
b. False
Activity
Prepare a synopsis of any case judgement held by the CCI.
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COMPETITION ACT, 2000
8.9 Summary
S
‰‰ Competition
is not necessarily negative, and in fact healthy
competition among organisations is actually good for businesses.
‰‰ Competition
policy involves applying rules to ensure that the
businesses and companies compete fairly with each other.
Presence of a healthy competition policy ensures wider choice for
consumers and helps in reducing prices and improving quality.
Monopolies and Restrictive Trade Practices (MRTP) Act was
meant to regulate concentration of economic power, competition
law, and consumer protection and was applicable to almost all areas
of business such as production, distribution, pricing, investment,
procurement, packaging, advertising, sales promotion, mergers,
amalgamations, takeovers, undertakings, etc.
S
‰‰ The
Competition Act, 2002 was enacted on 13th January, 2003
to regulate and govern the competition and related practices in
India.
IM
‰‰ The
3 of the Competition Act, 2002 relates to the prohibition of
anti-competitive agreements. The Competition Act, 2002 is based
on the philosophy of modern competition laws. It prohibits anticompetitive agreements and abuse of the dominant position by
enterprises.
M
‰‰ Section
objectives of the Act are sought to be achieved through the
aegis of the Competition Commission of India (CCI) which has
been established by the central government with effect from 14th
October, 2003.
‰‰ The
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‰‰ The
CCI is the regulatory authority that oversees competition in
Indian market.
‰‰ The primary objective of the CCI is to create a fair and competitive
business environment.
‰‰ Section
20 of the Competition Act relates to the inquiry of
combinations by the CCI. According to this Section, the CCI may
inquire into the cases of combinations such as acquisition, merger,
amalgamation, etc., by taking into account its own knowledge
or information in order to determine if such a combination has
caused (or may potentially cause) an Appreciably Adverse Effect
on Competition (AAEC) in India.
key words
‰‰ Antitrust
laws: The laws that are created primarily for
promoting competition among sellers and limiting monopolies
‰‰ Contravention:
The act of violating any provision of a law
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Business Law
‰‰ Corporate restructuring: Any action that is taken by a corporate
entity to modify its capital structure or its operations
‰‰ Monopoly: A type of market in which a single enterprise has an
exclusive possession of a market
‰‰ Restrictive
trade practices: The practices restricted in a
particular market
?
8.10 Descriptive Questions
1. What is the meaning of competition and competition policy?
2. Explain the objectives and features of the Competition Act, 2002.
S
3. Define the terms Cartel, AAEC, and Bid Rigging.
4. Explain the various types of vertical and horizontal agreements.
IM
5. What are the powers and jurisdiction of the Director General of
the CCI?
6. Describe the factors that must be considered while determining
the adverse effect of the combination on competition in the relevant market.
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8.11 Answers and Hints
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic
Q. No.
Competition—What and Why
1.
b.
False
2.
b.
Reduced competition
3.
c.
Section 4
4.
competition advocacy
5.
Appreciable Adverse Effect
on Competition (AAEC)
6.
a.
7.
exclusive supply agreements
8.
a.
9.
competition
10.
b.
11.
void
12.
b.
13.
consolidated fund of India
14.
` 1 crore
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332
Competition Act, 2002
Anti-competitive
Agreements
Competition Commission of
India (CCI)
Combination
Penalties Imposed under
Competition Act, 2002
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Answer
True
Price fixing
False
One year
COMPETITION ACT, 2000
Topic
Q. No.
Leading Cases under
Competition Law in India
Answer
15.
a.
True
HINTS FOR DESCRIPTIVE QUESTIONS
1. Business competition is a condition wherein various organisations and individuals compete in the same industry or field. A
competition policy refers to the legal framework or structure
that the governments of any country establish in order to regulate the markets and monopoly organisations. Refer to Section
8.2 Competition—What and Why
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S
2. There are four major features of the Competition Act, 2002: Prohibits anti-competitive agreements; Prohibits abuse of dominant
position; Provides for regulation of combinations; and Enjoins
competition advocacy. Refer to Section 8.3 Competition Act,
2002
3. According to Section 2 (c), cartel includes an association of producers, sellers, distributors, traders, or service providers who, by
agreement amongst themselves, limit, control, or attempt to control
the production, distribution, sale or price of, or, trade in goods or
provision of services. Refer to Section 8.3 Competition Act, 2002
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4. The anti-competitive agreements are the types of agreements
that unduly benefit a person or group and which might harm
the competition in any particular market. All such agreements
are prohibited under Competition Act, 2002. Refer to Section 8.4
Anti-competitive Agreements
5. The DG helps the CCI in conducting inquiry into the contraventions of any provisions of the Competition Act, 2002 along with
certain other functions as specified in the Act. Refer to Section
8.5 Competition Commission of India (CCI)
6. The CCI needs to determine whether or not a combination will
have an AAEC in the relevant market by considering factors such
as actual and potential levels of competition through imports in
the market, the extent of barriers to entry into the market, etc.
Refer to Section 8.6 Combination
8.12 Suggested Readings & References
Suggested Readings
‰‰ Pathak,
A. (2020). Legal Aspects of Business (7th ed.). McGraw Hill
HED.
‰‰ Dhall,
V. Competition Law Today (2nd ed.). Oxford.
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E-REFERENCES
‰‰ (2020).
Retrieved 6 May 2020, from https://www.oecd.org/
investment/toolkit/policyareas/competition/Competition%20
Policy%20Guidance,%20Thomsen.pdf
‰‰ (2020).
Retrieved 6 May 2020, from https://assets.publishing.
service.gov.uk/media/57a08d5b40f0b652dd00190e/CRCwp2.pdf
‰‰ Pierce,
R. (2020). Comparing the Competition Law Regimes of the
United States and India. Retrieved 6 May 2020 from https://papers.
ssrn.com/sol3/papers.cfm?abstract_id=2951944
V. (2020). Competition Commission of India - Hyundai Case
Study - India Business Law Journal. Retrieved 6 May 2020 from
https://www.vantageasia.com/hyundai-case-a-lesson-for-cci/
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‰‰ Editor,
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C
h
9
a
pt
e
r
EMPLOYEE RELATED LAWS
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Introduction
Factories Act, 1948
9.2.1
Objectives and Applicability
9.2.2
Key Provisions and Features of the Law
Occupation of Occupier (Employer) and Responsibilities of Occupier
9.2.3
Self Assessment Questions
Activity
Industrial Disputes Act, 1947
9.3
9.3.1
Objectives and Applicability
9.3.2
Examples
Self Assessment Questions
Activity
9.4
Minimum Wages Act, 1948
9.4.1
Objectives and Applicability
9.4.2
Key Provisions and Features
Self Assessment Questions
Activity
9.5Employees Compensation Act, 1923
9.5.1
Objectives and Applicability
Key Provisions and Features
9.5.2
Self Assessment Questions
Activity
Employees Provident Fund and Miscellaneous Provisions Act, 1952
9.6
9.6.1
Objectives and Applicability
9.6.2
Key Provision and Features
9.6.3Calculation of Provident Fund and Apportionment of the Fund against
Various Schemes
Self Assessment Questions
Activity
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9.1
9.2
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Contents
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Business Law
CONTENTS
9.8
9.8.1
9.8.2
9.8.3
9.8.4
9.8.5
9.8.6
9.9
9.9.1
9.9.2
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9.10
9.10.1
9.10.2
9.10.3
9.10.4
S
9.7.1
9.7.2
Payment of Bonus Act, 1965
Objectives and Applicability
Key Provisions and Features
Self Assessment Questions
Activity
Payment of Gratuity Act, 1972
Objectives and Applicability
Entitlement of Gratuity (Section 2A)
Calculation of Gratuity
Time of Payment of Gratuity
Forfeiture of Gratuity [Section 4(6)]
Maximum Limit and Amount of Gratuity Payable
Self Assessment Questions
Activity
Maternity Benefit Act, 1961
Objectives and Applicability
Key Provisions
Self Assessment Questions
Activity
Code on Labour Laws
Code on Wages
Code on Industrial Relations
Code on Social Security
Code on Safety, Health and Working Conditions
Self Assessment Questions
Activity
Summary
Descriptive Questions
Answers and Hints
Suggested Readings & References
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9.7
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9.11
9.12
9.13
9.14
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EMPLOYEE RELATED LAWS 337
Introductory Caselet
INDUSTRIAL DISPUTE IN TEA PLANTATION
Sheila was a 30-year old plantation woman worker at Thellar Tea
Estate in Munnar. There are six members in her family. Many years
ago, Thellar Tea Estate was facing an acute shortage of plantation
labour and the management of the estate recruited many workers
from Tamil Nadu. The management was willing to provide basic
facilities such as food, shelter, clothes and a reasonable wage to
workers. In those days, the cold climate of the tea plantation was
one of the main difficulties faced by plantation workers.
IM
S
They had to collect 18 kg of tender leaves every day from a field.
Incentives were given if they collected more than this amount.
In the past, the management was very keen to provide all amenities for the welfare of the workers, including health facilities and
financial assistance. The management maintained that healthy
workers were very important for the work of the estate. The major
welfare efforts of the management were as follows:
‰‰ The workers were given raincoats and woolens during the wet
and cold seasons
employees were given an assistance of ` 50 for procuring
food grains from ration shops
M
‰‰ The
‰‰ The
concept of partial payment was introduced to avoid delay
in payment of wages
management promptly provided incentives for additional
work done by the workers
‰‰ No
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‰‰ The
major disputes took place between workers and the
management as there was an environment of trust between
the two
‰‰ The workers were assisted with the education of their children.
‰‰ The
estate started a crèche near the workers’ quarters and
appointed women to look after the children of workers.
‰‰ The
children in the crèche were provided with free food and
milk.
‰‰ Estate vehicles were provided to take sick workers to hospitals
in case of emergencies
‰‰ Provident
fund was also provided for permanent workers
However, trouble started in the estate as soon as there was a
change of leadership about five years back. The old members
of the management were now gone and the estate was taken
up by the new management and leadership. With this change
of ownership, the plight of the workers started. The new manage-
NMIMS Global Access - School for Continuing Education
Case Objective
This caselet shows the impact
of the industrial dispute and
role of management in solving
the dispute.
Business Law
Introductory Caselet
ment communicated to workers that the estate was facing a financial crisis in the tune of ` 5 crores due to the excessive welfare
schemes provided to the workers. The new management came up
with the following guidelines for the workers:
‰‰ No
increase in the wages of the workers for the next seven
years as a result of the financial loss faced by the estate
‰‰ The
estate would be downsized and voluntary retirement
would be sought from the permanent employees
‰‰ The
temporary workers would leave the estate within five
months
current welfare facilities would be reduced in the coming
years
‰‰ Increase
S
‰‰ The
in working hours and workers would be required to
collect more kilos of tea leaves every day
workers would be barred from taking casual as well as
sick leaves
IM
‰‰ The
‰‰ No
special consideration for sick workers
‰‰ No
raincoats or woolens for workers
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The management also took several additional steps to curb the
excess financial outlay. These steps were as follows:
‰‰ Discontinuance
‰‰ Reduction
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338
of the ` 50 ration allowance
in the present daily wage of workers from ` 80 to
` 50
‰‰ Discontinuance
of the incentive system
‰‰ Discontinuance
of crèches for the children of the workers
‰‰ Announcement
of the voluntary retirement scheme
‰‰ Zero
tolerance for trade union activities
‰‰ Discontinuance of educational assistance for workers’ children
‰‰ Reduction
in the number of members in a family employed in
the estate from three to two
Apart from this, there were frequent delays in the payment of
wages. Moreover, the payment of bonuses was also delayed. The
workers also reported cases of harassment and injustice to the
management, which chose to take no action and remained silent.
These cases have been listed as follows:
‰‰ Use
of goondas by the management to evacuate workers from
their quarters
‰‰ Silence of trade union leaders to the actions of the management
NMIMS Global Access - School for Continuing Education
EMPLOYEE RELATED LAWS 339
Introductory Caselet
‰‰ Sexual
harassment of women labourers at work
‰‰ Discrimination
in the amount of wages for female and male
workers
‰‰ Stringent
disciplinary measures
‰‰ Frequent
cuts in the power supply of the workers’ quarters
‰‰ The
workers were of the view that they were being harassed
in order to get them evicted from the plantation so that the
management could appoint new workers
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As a consequence, the workers called one-day strike against the
management, pointing out the issues at work. However, the management decided to do nothing. The workers now went on a weeklong strike. This had the desired result because the management
realised, though reluctantly, that production was getting affected.
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Business Law
Learning objectives
After studying this chapter, you will be able to:
Understand the previous laws affecting employment such as
>>
a. Factories Act, 1948
b. Industrial Disputes Act, 1947
c. Minimum Wages Act, 1948
d. Employees Compensation Act
e. Employee Provident Fund and
sions Act, 1952
Payment of Bonus Act, 1965
S
f.
Miscellaneous Provi-
g. Payment of Gratuity Act, 1972
Quick Revision
IM
>>
h. Maternity Benefit Act
State the importance of code on labour laws and provide
features of each of the Code
9.1 Introduction
M
In the previous chapter, you have studied about the Competition Act,
2000. In this chapter, you will study employment-related laws.
In India, there are about 60 laws concerning labour dealing with working conditions, industrial relations, monetary benefits and social security issues in Indian ministries and commercial establishments. The
main objective of these laws is to promote the welfare of workers and
employees and improve their social life. There are three categories of
labour laws in the country as follows:
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340
A. Laws framed and administered by the Central Government such
as the law relating to provident fund, mines, beedi workers,
industrial disputes etc.
B. Laws framed by the Central Government but administered by
the State Governments such as the law on factories, employment exchanges (compulsory notification of vacancies), bonded
labour, trade unions, employees’ compensation, etc.
C. Laws framed by Central Government but administered by both
the Central and the State Governments include laws such as the
payment of wages, gratuity, child labour, apprenticeship, equal
remuneration, contract labour and inter-state migrant workers.
This chapter contains a snapshot of the various laws designed to promote the welfare of workers, improve industrial relations, provide
various monetary benefits and finally to ensure that they have some
social security after completing their tenure.
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9.2 FACTORIES ACT, 1948
The Factories Act, 1948 came into force on April 1, 1949. The Factories
Act, 1948 has been enacted with an object to protect workers for which
different provisions are imposed on the owner and the occupier of factories. It is the principal law concerning working conditions designed
to protect labour against industrial and occupational hazards. For this
purpose, it seeks to impose certain boundaries on the owner and protect the right of the labour. It is considered to be the social welfare
legislation.
On August 7, 2014, the Factories
(Amendment) Bill, 2014, was
introduced in the Lok Sabha.
The amendments in the bill
were on the basis of the
modification or changes in
manufacturing practices and
technologies, ratification of ILO
conventions, recommendations
of committees, judicial decisions
and the decisions taken in the
conferences of chief inspectors
of factories.
IM
9.2.1 OBJECTIVES AND APPLICABILITY
S
The Factories Act, 1948 has given many new provisions that protect
workers employed in a factory against industrial and occupational
hazards. There are many provisions related to health, safety and welfare provisions of workers. Apart from these, some provisions are also
taken related to working hours of child, young persons and female
workers in a factory.
NOTE
N
M
The Factories Act, 1948 regulates working conditions in manufacturing or commercial establishments. These establishments come under
the definition of the term “factory” as used in the law. In 1881, the first
law relating to the subject was passed in India. Then, various laws
came into existence in the years 1891, 1911, 1922 and 1934. The most
comprehensive law came in the year 1948. It offers detailed provisions
for the health, welfare and safety of workers inside factories. It talked
about the working conditions of workers with respect to the hours
of work, minimum age, leave with pay and so on. Consequently, the
Factories Act, 1948 was amended several times. The objectives of the
Factories Act, 1948 are as follows:
‰‰ To
promote the health, welfare and safety of workers employed in
factories
‰‰ To
prevent the haphazard growth of factories by providing the
provisions of approval for plans prior to the creation of a factory
‰‰ To
regulate working conditions in factories by regulating working
hours, leaves, holidays, overtime, employment of children, women
and young persons
The scope and coverage of the Factories Act, 1948 are as follows:
‰‰ It aims to improve the working conditions in factories across India
‰‰ It
provides basic minimum requirements to ensure safety, health
and welfare of workers
‰‰ It
also governs the following:
 Approval
sion
of factory building plans before construction/exten-
 Issue
of licenses and regulation of factories running without
license
NMIMS Global Access - School for Continuing Education
NOTE
The term ‘suo motto’ is usually
applied to actions taken by a
court without any prior motion or
request from the parties.
342
Business Law
 Renewal
of licenses
 Inspection
NOTE
To renew the licence of a
factory, the following documents
should be submitted:
yyAn application in form number 3 (duplicate)
yyTreasury receipt challan with
prescribed fees
yyOriginal licence
yyProcess flowchart
of factories in case of complaints/accidents/suo
motto
9.2.2 KEY PROVISIONS AND FEATURES OF THE LAW
Since the object of the Factories Act, 1948 is to protect the interest of
workers from exploitation, the Act recommends certain standards for
safety, welfare and working hours of workers, apart from other provisions. The main provisions of the Factories Act, 1948 are as follows:
‰‰ Compulsory
approval, licensing and registration of factories: It
is mandatory to obtain a licence before a factory is started. The
State Government may make rules related to the licensing and
registration of factories. As an initial step towards the approval
for licensing, detailed plans or any class of description of factories
must be submitted to the Chief Inspector or the State Government.
Later, the plans and specifications of a factory and its location are
presented in the required format in writing to the Chief Inspector
or the state government for its registration.
IM
As per Section 18, it is important
to make proper arrangements
for cool drinking water during
summers, if the factory employs
more than 250 workers.
S
NOTE
‰‰ Health
M
TURN TO THE
WEB
Details regarding the provisions
of safety of workers in the
Factories Act, 1948, can be taken
from the following link:
measures: Factories Act, 1948 is intended to ensure that
the conditions in factories do not affect the health of workers
adversely. Various provisions for cleanliness, disposal of wastes
and effluents, ventilation and temperature, lighting, artificial
humidification, spittoons, overcrowding, dust, fumes, drinking
water, latrines and urinals to ensure good working conditions for
the workers. It is important to repaint the inside walls, partitions,
ceiling or top of rooms, passages and staircases once in every 5
years. No person in the factory shall be allowed to spit at any place
other than spittoons. In case of violation, fine of not more than 5
rupees shall be paid.
N
https://labour.gov.in/sites/
default/files/Factories_Act_1948.
pdf
NOTE
Under Section 40B of the
Factories Act, 1948, it is
important to appoint a safety
officer by the occupier in case:
a. Where 1000 or more workers
are ordinarily employed
b. Where the state government
is of the opinion that manufacturing process involves
any kind of risk such as body
injury, poisoning disease or
other hazard to health
The state government can direct
or prescribe the occupier the
number of safety officers to be
appointed.
‰‰ Safety
measures: Following are the some of the important
provisions under these sections regarding the safety of workers:
 Dangerous
machinery such as electric generators must be securely fenced.
 Work on or near machinery in motion must be carried out only
by specially trained adult male workers wearing tightly fitting
c1othes.
 All floors, steps, stairs, passage and gangways shall be of sound
construction and properly maintained. Handrails shall be provided where necessary. Safe means of access shall be provided
to the place where the worker will carry on any work.
 No
worker shall be made to carry a load so heavy as to cause
him injury.
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EMPLOYEE RELATED LAWS 343
‰‰ Hazardous processes: State governments have the power to make
a site appraisal committee for advising on the initial location of
factory (hazardous factory) and expansion of any such factory. The
chairman of this committee will be the chief inspector of the state.
‰‰ Welfare
measures: Factories Act, 1948 lays out the provisions
of welfare measures comprise washing, storing, drying, first-aid,
welfare officers, shelters, etc., for the workers. It ensures social
security of workers.
‰‰ Working hours: Factories Act, 1948 imposes certain restrictions on
the working hours and provides the provisions for rest and leaves.
For an adult worker, 48 hours a week and 9 hours a day are fixed
as standard working hours.
of women and young persons: Factories Act, 1948
deal with the stringent provision of women and young persons.
These sections particularly deal with the length of working
hours with regard to women and young persons and the age of
employment. The maximum daily hours of work shall be 9 hours
for women.
IM
S
‰‰ Employment
Leave: There are provisions related to weekly holidays,
compensatory holidays and annual leaves. Factories Act, 1948
provides the grant of a leave period with wages to every worker
who has worked for a period of 240 days or more in a factory
during a calendar year. Such workers are allowed to leave with
wages during the subsequent calendar year.
M
‰‰ Annual
N
9.2.3 OCCUPATION OF OCCUPIER (EMPLOYER) AND
RESPONSIBILITIES OF OCCUPIER
Occupier is the person who has the ultimate control over the affairs
of a factory and is responsible for various functions. He cannot be
anyone who is a mere servant charged with specific duties in regard
to control of the machinery, workmen or office, for example, a manager [Emperor vs. Ram Pratap 20 (1905) Bom 423]. The term ‘occupier’
includes:
‰‰ Proprietor
‰‰ Partner
(owner) in case of sole proprietary concern
of a partnership firm
‰‰ Director
of a Company [J K Industries Ltd. vs. Chief Inspector of
Factories & Boilers & Ors. (1997 SC)]
‰‰ Person
nominated by government in case of government factory
CASE LAW
JK Industries Ltd. and others vs. Chief Inspector of Factories and
Boilers and others (1996)
Facts: In this case, the Supreme Court noted that where a company
owns or runs a factory, it is the company that has the ultimate control
over the affairs of the factory and would therefore be the occupier.
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Women shall not be required or
allowed to work in any factory
between the hours of 6 AM and
7 PM.
Business Law
self assessment Questions
1. The __________is the principal law concerning working conditions designed to protect labour against industrial and occupational hazards.
2. Name the person who has the ultimate control over the affairs
of a factory and is responsible for various functions.
Activity
S
Use the Internet and make a table showing the nature of offences
and penalties related to those offences under the Factories Act,
1948.
9.3 INDUSTRIAL DISPUTES ACT, 1947
M
IM
Industrial dispute is a major area of study in industrial relations and
labour laws. Employers worldwide spend a significant amount of
time and resources in solving industrial disputes. In simple, industrial disputes refer to various conflicts and differences taking place
between workers and employers in an industry. Industrial disputes
can take different forms, such as gheroas, strikes and demonstrations.
The disputes can originate from the side of employees, employers or
both. Whatever is the source, industrial disputes result in a significant
loss in production. Therefore, it is crucial for the management of an
organisation to understand the nature, reasons and ways of addressing industrial disputes to fulfill business objectives.
N
344
The Industrial Disputes Act, 1947, (hereinafter referred to as the ‘ID
Act’) offers the procedure and machinery for the investigation and settlement of industrial disputes by setting up of an in-house grievance
settlement authority to ensure fair terms between the employer and
the employees. The enactment of this ID Act was done to ensure peace
and harmony by resolving industrial disputes through negotiations in
order to facilitate industrial development. This ID Act made it mandatory for establishments having more than 100 employees to constitute work committee to facilitate good relations between workers and
employers.
9.3.1
OBJECTIVEs AND APPLICABILITY
The ID Act extends to the whole of India and applies to all the industrial establishments that carry on business, manufacturing units, trade
and services. The main aim is to ensure industrial peace by protecting
the interest of the workmen. The main objectives of this ID Act are:
‰‰ To maintain a better relationship between labourers and industries
by providing a medium of setting disputes through adjudicating
authorities
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EMPLOYEE RELATED LAWS 345
‰‰ To
prevent illegal and unauthorised lockouts and strikes
‰‰ To
help the labour that has been wrongfully dismissed or laid-off
‰‰ To
provide an easier platform or committee for dispute resolution
between the labour and industry through conciliation and
collective bargaining
‰‰ To set up a permanent conciliation committee to resolve industrial
disputes for speedy settlement
The ID Act also prohibits the pendency of the conciliation and adjudication settlement proceedings by providing a more organised and
legal way of settling disputes. The ID Act provides provisions to eliminate all forms of intimidation, coercion and violence.
S
CASE LAW
Workmen of Dimakuchi Tea Estate vs. Dimakuchi Tea Estate
(1958)
IM
Facts: In this case, the Supreme Court laid down the following objectives of the ID Act:
(i) Promotion of measures of securing and preserving amity and
good relations between the employer and workmen
M
(ii) Investigation and settlement of industrial disputes between
employers and employers, employers and workmen, or workmen and workmen with a right of representation by registered
trade union or federation of trade unions or an association of
employers or a federation of associations of employers
N
(iii) Prevention of illegal strikes and lockouts
(iv) Relief to workmen in the matter of lay-off and retrenchment
(v) Promotion of collective bargaining
Applicability
This law extends to the whole of India and shall come in force on the
first day of April, 1947. The Industrial Disputes Act, 1947, applies to
every industrial establishment carrying on any business, trade, manufacture or distribution of goods and services irrespective of the number of workmen employed therein.
RESOLUTION OF DISPUTES
There are three types of redressal machinery adopted to resolve
industrial disputes known as conciliation, adjudication and voluntary
arbitration. Let us discuss these in detail:
1. Conciliation: It is the state intervention to resolve the disputes
by bringing together the representatives of employers and
employees before a third party to reconcile and discuss the conNMIMS Global Access - School for Continuing Education
Business Law
flicting interest. The third-party acts as a facilitator in the conciliation process. A board of conciliation and conciliation officers
are appointed by the State and Central government, whenever
required. These authorities assist and persuade disputing parties to reach on a settlement. However, there is no force or power
to force a settlement and it totally depends upon the consent of
both the parties.
S
2. Voluntary arbitration: It is a process in which a third party is
appointed that acts neutral or impartial and listens to both conflicting parties in order to acquire the information related to disputes. Then, it makes a decision or judgment that binds both
parties. Both parties have good faith in the arbitration process
because the third party is appointed through mutual content. It
is a flexible and informal process to build a healthy industrial
relationship.
IM
3. Adjudication: It is the legal remedy to settle industrial disputes
by involving legal authorities appointed by the government. It
is a legal or mandatory authority to settle industrial dispute by
a tribunal or labour court. In case of industrial dispute, there
is three-tier machinery, which involves labour courts, industrial
tribunals and national tribunals.
M
It is mandatory to resolve a dispute through adjudication in case where
disputing parties jointly or separately apply for it or in case when the
dispute is related to public utility services provided that there is a
notice of lockout or strike.
Table 9.1 shows the differences between strike and lockout:
N
346
Table 9.1: Differences between Strike
and Lockout
Strike
Lockout
Acts as a weapon to workers
Acts as a weapon to employers
Involves cessation of work
Involves closure of place of business
Impedes production
Does not impede production
Happens with a collective decision
of employees
Takes place with the decision of
employer
The ID Act provides certain regulations for the settlement of industrial disputes through conciliation, arbitration and adjudication or
working committees. It also lays down a provision for the payment of
compensation for layoff and retrenchment.
9.3.2 EXAMPLES
Strike in Hero Honda Motors Limited
The joint venture of Hero Group of India and Honda of Japan faced
a financial loss of ` 100 crore because of a labour strike in 2006. In
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EMPLOYEE RELATED LAWS 347
Hero Honda Gurgaon Plant, 4000 workers were involved in the strike
during April 2006. They demanded hike in wages, medical benefits at
par and extra casual leaves. This resulted halt in production; thereby
lead to financial loss. These contractual workers were paid very low
wages and do not even get any pay slip. Therefore, under the aegis of
Industrial Dispute Act, 1947, a mutual negotiation was done between
Haryana’s Additional Labour Commission Management and workers’
representatives for settlement. It resulted in 30% hike in the salary
and provision of two casual leaves in a month was provided to the
workers.
WORKER RELATIONS IN HERO MOTOCORP LIMITED
IM
S
Hero MotoCorp Limited is a company with a market share of 46% in
the two wheeler market. The company started in the year 1983 and
has been wracked by continuous problems with workers. No wonder,
the rate of attrition in the company has been quite high. The company
analysed this situation and took the various steps to formulate better
and more worker-friendly policies. It also initiated better pay-outs. All
these steps have considerably helped in the retention of workers and
registering the appreciable growth of the company. This case highlights the significance of industrial relations in the growth of any company as evidenced by the case of Hero MotoCorp Limited.
M
Devkinandan K. Mishra VS. Sayaji Iron and Engineering
Company PVT. LTD & ANR – RespoNdent (S)
N
In this case, the appellant was working as a machinist charge-hand,
who used to supervise the work of other machinists. He was alleged
for not performing his supervising work. He was suspended because
of ‘misconduct’ as he was found sleeping on duty. A charge sheet was
filed against him and he was terminated. He, in his defence, argued
that he was working as a workman and not as a supervisor, whereas
the respondents stated that the people involved in managerial roles
are not considered as workmen. The Labour court passed the judgment that the petitioner was a supervisor and not a workman. Later,
in the Supreme Court, the misconduct was not considered as a grave
crime and the petitioner was reinstated and awarded with the continuity of service and be paid 30% of his wages.
self assessment Questions
3. Which of the following is not a tier of the adjudication machinery?
a. Labour courts
b. ILO
c. Industrial tribunals
d. National tribunals
NMIMS Global Access - School for Continuing Education
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Business Law
Activity
With the help of the Internet, gather information about some major
industrial disputes in India that took place in the last 10 years. Compare these disputes and find out their respective causes.
9.4 MINIMUM WAGES ACT, 1948
The Minimum Wage Act, 1948, provides protection to the labour
against the dangers of unfair methods and exploitation. Although
social welfare is a prime aim of determining the minimum wage structure, its immediate aim is to settle the dispute between employers and
employees and bring justice to the interests of both labour and capital.
It aims to establish harmony between them and facilitate cooperation
in task of production. The main object of this legislation on wages is
to regulate and fix the quantum of wages. Effective implementation
of legislation for workers for receiving a minimum wage is the hallmark of any progressive nation. It is one of the fundamental premises
of a genuine and harmonious workplace. In India, Minimum Wages
Act, 1948 offers for the fixation and enforcement of minimum wages
in respect of scheduled employment.
NOTE
NOTE
Minimum wages can be defined as the minimum amount of compensation an employee must receive for the discharge of his/her duties
and performing labour. Typically, a contract or legislation by the government establishes minimum wages. The Minimum Wages Act, 1948
was passed to provide fixed minimum wages in case of certain occupations.
N
M
Under Section 2(h) of the
Minimum Wage Act, 1948,
wages means all remuneration,
capable of being expressed in
terms of money, which would,
if the terms of the contract of
employment, express or implied,
were fulfilled, be payable to a
person employed in respect of
his employment or of work done
in such employment.
IM
S
In 1928, the Minimum Wages
Fixing Machinery Convention
was held at Geneva. It was
organised by International
Labour Organisation (ILO) for
eliminating labour exploitation,
checking wages level and
increasing their bargaining
power.
NOTE
The Minimum Wages Act, 1948,
contains 38 provisions, including
Sections 22A to 22F and 30A.
The Minimum Wages Act, 1948, protects employees from exploitation
by ensuring that they are paid their entitled wages, which enables
them to afford the basic necessities of life. According to this Minimum
Wages Act, 1948, it is illegal to pay an employee less than the minimum wages amount. Fluctuations in the rate of minimum wages are
common and vary across countries and sometimes across states or
provinces. The minimum Wages Act, 1948, ensures that workers and
employees earn wages that are sufficient for their livelihood.
9.4.1
OBJECTIVES AND APPLICABILITY
The objective of the Minimum Wages Act, 1948, is to promote the welfare of workers by fixing a minimum rate of wages in certain industries
where the labour is not organised and there is prevalence of sweat
labour. The Minimum Wages Act, 1948 seeks to prevent exploitation
of workers by ensuring that they are paid the prescribed minimum
wages for their subsistence and efficiency. The objects of the Minimum Wages Act, 1948, are as follows:
‰‰ To
fix and revise minimum wages in certain employments or
establishments
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‰‰ To
prevent exploitation of unorganised labour
‰‰ To
prevent the employment of sweated labour in the interests of
general public
‰‰ To
prescribe minimum wage rates, keeping into account the
capacity of the employer
The main objective of the Minimum Wages Act, 1948 is to safeguard
the interests of workers who are employed in the unorganised sector.
The Minimum Wages Act, 1948 lays down provisions for the fixation of
minimum wages in certain specified employment. It acts as a binding
force on employers to pay their workers the minimum wages fixed
under the Minimum Wages Act, 1948 at definite time periods.
S
Applicability
IM
Dr. B.R. Ambedkar, the father of our constitution, drafted the Minimum
Wages Bill on April 11, 1946. The bill was introduced and enforced on
March 15, 1948 due to delay by constitutional changes.
M
The Minimum Wages Act, 1948 is applicable to the whole of India. The
provisions of this Act are applicable to every employer that employs
more than 1000 employees in a state. The provisions of the Minimum
Wages Act, 1948 do not apply to the employees undertaken by the central government or railways unless the same has been consented by
the central government.
NOTE
All the provisions of the Act
equally apply to both male and
female workers.
N
9.4.2 KEY PROVISIONS AND FEATURES
There are two methods of fixing minimum wages, i.e., Committee
Method and Notification in Official Gazette method.
The following are some of the main provisions of this Minimum Wages
Act, 1948:
‰‰ Fixing
of minimum rate of wages by the appropriate government
‰‰ Minimum
rate of wages in respect of scheduled employments
‰‰ Procedure
for fixing and revising minimum wages
‰‰ Appointment
of an advisory board by the central government to
coordinate the work of committee and sub-committees
‰‰ Wages
in kind (under this Act, minimum wages shall be paid
in cash. However, appropriate government will authorise the
payment of minimum wages either wholly or partly in kind
‰‰ Payment of minimum rate of wages (rate not less than the minimum
rate of wages fixed)
‰‰ Normal
working hours
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The norms for fixation/
revision of employee minimum
wages are according to the
recommendations set by the
Indian Labour Conference in
its session held in 1957. These
norms are as follows:
yyThree consumption units for
one earner.
yyMinimum food requirements
of 2700 calories per average
Indian adult.
yyClothing requirements of 72
yards per annum per family.
yyRent corresponding to the
minimum area provided for
under the government’s
Industrial Housing Scheme.
yyFuel, lighting, and other miscellaneous items of expenditure to constitute 20 per cent
of the total minimum wages.
350
Business Law
 The
number of hours which shall constitute a normal working
day, shall be:
99 for
an adult – 9 hours
99 for
of a child – 4 &1/2 hours
‰‰ Overtime
wages (payment for every hour or for part of an hour
worked in excess of the number for hours constituting normal
working day).
‰‰ Maintenance
of registers and records (particulars in register
include the work performed by employee, wages paid to employee,
receipt given by employees and such other particulars as may be
prescribed).
‰‰ Penalties.
of inspector by appropriate government.
S
‰‰ Appointment
IM
self assessment Questions
4. Which of the following are some of the main provisions of the
Minimum Wages Act, 1948?
a. Fixing of minimum rate of wages by the appropriate government
M
b. Minimum rate of wages in respect of scheduled employments
c. Procedure for fixing and revising minimum wages
N
d. All of these
NOTE
As per the Employees
Compensation Act, 1923, “partial
disablement” means, where the
disablement is of a temporary
nature, such disablement as
reduces the earning capacity of
a workman in any employment
in which he was engaged at the
time of the accident resulting in
the disablement, and, where the
disablement is of a permanent
nature, such disablement as
reduces his earning capacity
in every employment which he
was capable of undertaking at
that time.
Activity
Trace the history of setting of the provisions for the Minimum
Wages Act, 1948, and prepare a chronology of the events that led to
the final provisions of the Act.
9.5 EMPLOYEES COMPENSATION ACT, 1923
The Workmen’s Compensation Act, 1923, has been renamed as the
Employees Compensation Act, 1923 (hereinafter referred to as ‘ECA
1923’) via the Workmen’s Compensation (Amendment) Act, 2009. ECA
1923 came in force on the first day of July, 1924. It is the first social
security legislation in India. This Act contains 4 chapters further
divided into 36 sections and 4 schedules. It protects the workers from
hardships arising from accidents during work. In case of injury/accident arising out of and in the course of employment and resulting in
disablement or death, payment is ensured and enacted as per provisions of the ECA 1923. The payment of compensation to workmen or
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their dependents is ensured by law. The law provides for the payment
by certain classes of employers to their workmen of compensation for
injury by accident.
9.5.1 OBJECTIVE AND APPLICABILITY
The law imposes an obligation on the employer to compensate the
employees for accidents arising out of and in the course of employment. The liability of the employer is not due to any wrongdoing committed by the employer but a statutory obligation. The compensation
of the employee is not in lieu of wages but due to injury sustained by
him.
The conditions for liability are as follows:
IM
ii. The employment must not be of a casual nature.
S
i. The concerned person must be employed within the meaning
of the law.
iii. The employment must be for the purpose of employer’s trade
or business.
iv. The capacity in which he is employed must be set out in
Schedule II of the ECA.
N
M
If an employee or worker dies during the course of employment while
undertaking the performance of his duty, his family or dependents
shall be provided relief in monetary terms so that their livelihood is
not affected. This relief is also provided in the case of disablement.
The liability of the employer for injury or death arising in the course
of and out of employment is unilateral so that he remains liable even
if there is no negligence on his part. The ECA provides protection
against occupational diseases. The compensation under the ECA is
linked to the worker’s wage and relevant factors based on the worker’s age.
The Employee’s Compensation Act, 1923, extends to the whole of India.
9.5.2 KEY PROVISIONS AND FEATURES
By virtue of Workmen’s Compensation (Amendment) Act, 2000, all
kinds of workers have been brought within the ambit of the ECA irrespective of the nature of the job for which they were employed. Hence,
workers employed on a casual basis or otherwise than for the purpose
of employer trade or business are covered under the ECA. Employees who have been engaged through the labour contractor or otherwise, who suffer any injury that makes them disabled or incapable for
earning the similar income or in other words, reduces their earning
capacity are entitled for compensation. The employer shall be liable to
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compensate the workers who have suffered an accident in the course
of the employment which leads to:
a. Death: The Death clause is applicable when the employee or
worker dies on the account of the accident.
b. Permanent total disablement: This applies when the earning
capacity of the worker is lost permanently.
Example: Shamyak has lost his leg in an accident while working
in the printing business. He can no longer work as a worker or do
any work of a similar nature. Shamyak can be considered 100%
disabled under the Employees Compensation Act, 1923.
c. Permanent partial disablement: Permanent partial disablement
takes place when the earning capacity of the worker is reduced.
IM
S
Example: Satyam, who worked in a manufacturing business, got
his fingers of the legs cut off by an accident. This is an example
of a “Partial Disablement” because this accident has reduced his
capacity to work in any such employment of similar nature.
d. Temporary disablement, total or partial: This applies when the
earning capacity of the worker is lost for a certain period.
M
The amount of compensation payable to a worker depends upon the
wages drawn by the worker and the nature of the injury caused.
N
Self Assessment Questions
5. The objective of the _________________ is to provide for payment of compensation to workmen and their dependents in
case of injury and accident in the course of employment and
resulting in disablement or death.
Activity
Calculate the compensation of a 35 year old worker who meets with
an accident and dies while at work. Salary at the time of death was
` 2,500. The relevant factor is ` 197.06.
NOTE
Provident fund is a retirement
benefit scheme for all the
salaried employees and help the
employees to save some part
of their salaries every month
which they can use at the time of
retirement.
9.6
EMPLOYEES PROVIDENT FUND AND
MISCELLANEOUS PROVISIONS ACT, 1952
The Employees Provident Fund and Miscellaneous Provisions Act,
1952 (hereinafter referred to as the ‘EPF Act’) is applicable to the
whole of India. The EPF Act aims to set up provident fund, pension
fund and deposit linked insurance as a means of social security. It
becomes applicable for establishments with 20 or more employees.
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9.6.1 OBJECTIVES AND APPLICABILITY
The EPF Act has been enacted to provide social security to the
employees after their retirement and to their dependents in case of
the employee’s death. Under the EPF Act, the following three schemes
have been provided:
1. Employees’ Provident Fund Scheme, 1952: Under this scheme,
the employee contributes up to 12% of basic wages, DA, including cash value of food concession, and retaining allowance. All
accumulations under the fund including contributions from the
employer are refunded with interest on superannuation/ voluntary retirement/permanent disability/migration from India. This
scheme allows making a partial withdrawal from the account.
IM
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2. Employees’ Pension Scheme, 1995: In this scheme, the contributory gets a monthly pension after he/she retires. The amount of
pension depends on the pensionable salary, which is the average
monthly salary in 12 months preceding the date of exit from the
membership of the Employees Provident Fund, and the length of
service. The pension is paid on superannuation on attaining 58
years of age/retirement/death during service/ death after superannuation/ permanent total disablement.
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3. Employees’ Deposit Linked Insurance Scheme, 1976: This
scheme is for those who are members of the provident fund
scheme for the purpose of providing life insurance benefit to
the employees of any establishment or class of establishments to
which the EPF Act applies. Here, the employees need not make
any contribution but the employer has to contribute 1% of the
total pay of the employee. In this scheme, if the employee dies,
the dependents are paid a lump sum amount.
9.6.2 KEY PROVISION AND FEATURES
The key provisions provided in the EPF Act addresses the post retirement needs of employees and their welfare. As per the EPF Act, every
employee of a commercial establishment with salary up to ` 15,000
or less is entitled to join the Employee Provident Fund. However,
employees with salary more than ` 15,000 can also join the scheme.
The retirement benefit plan requires contribution from both the
employer and employee. For employees, 12% of wages or more can
be contributed and for employers, 12% of wages go for contribution
out of which 3.67% goes to provident fund and 8.33% goes to pension
fund. Every employer is required to pay the contribution amount
received from the employee before or on 15th of the following month.
An employee can withdraw funds from the provident fund provided
that he/she does not have employment for a two month period.
Next, the EPF Act has Employees’ Pension Scheme which provides
the provision of superannuation pension, retiring pension and perma-
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nent total disablement pension to employees who are covered under
the Section 6A of the Employees’ Provident Fund and Miscellaneous
Provision Act, 1952. Also, the benefits of pension provided to the beneficiaries such as widow or orphan child is also provided in the EPF
Act. Next, this Act also offers life insurance benefits scheme to the
employees. Under this scheme, on the death of the employee, the
nominee is entitled to receive a lump sum insurance amount.
9.6.3 CALCULATION OF PROVIDENT FUND AND
APPORTIONMENT OF THE FUND AGAINST VARIOUS
SCHEMES
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The contribution of employer and employee is calculated on the basis
of Wages and Dearness Allowances (DA) paid on daily, weekly, fortnightly or monthly basis.
The following are the percentage of salary contributed by employer
and employee in various schemes:
Fund:
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‰‰ Provident
Employee’s contribution: 12% on Basic + DA
Employer:
(a) 3.67 % on Basic + DA
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(b) Administration Charges: 0.01 % on Basic + DA
‰‰ Pension
Scheme:
Employee’s contribution: No Contribution
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Employer: 8.33% on basic + DA
‰‰ Insurance
Scheme:
Employee’s contribution: No Contribution
Employer: 8.33% on Basic + DA
Self Assessment Questions
6. The Employees Provident Fund and Miscellaneous Provisions
Act, 1952, is applicable to the __________.
7. The Employees Provident Fund and Miscellaneous Provisions
Act, 1952, provides for which of the following?
a. The Employees Provident Fund Scheme
b. The Employees Pension Scheme
c. The Employees Deposit Linked Insurance Scheme
d. All of the above
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Activity
Using the Internet, prepare a report on how the contribution
amount is calculated and deposited under the various schemes of
the Employees Provident Fund and Miscellaneous Provisions Act,
1952.
9.7 PAYMENT OF BONUS ACT, 1965
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The Payment of Bonus Act, 1965 (hereinafter referred to as the ‘PBA
1965’) was made applicable from 25th September 1965. This law is applicable where 20 or more employees are employed. The law shall continue to apply notwithstanding that the number of persons employed
falls below 20 [Section 1]. It offers the regulation for the amount of
bonus that is to be paid to the employees in an establishment on the
basis of productivity and profit. The PBA, 1965 is applied on the establishment that has more than 20 or more persons employed.
9.7.1 Objectives AND APPLICABILITY
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The law provides for the payment of bonus to the persons employed
in certain establishments and for matters connected therewith. However, the Act has not defined the term ‘bonus’, which involves the
sharing of the prosperity of the concern with those employed therein.
The objectives of the PBA, 1965 are:
‰‰ To
impose a legal obligation on employer to pay the bonus to
employees
offer redressal mechanism in case of non-compliance
‰‰ To
designate minimum and maximum percentage of bonus
‰‰ To
prescribe the formulae for calculating bonus
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‰‰ To
Applicability
This law extends to the whole of India.
9.7.2 KEY PROVISIONS AND FEATURES
The law extends to the whole of India and covers all the employees
[Section 2(13)] receiving salary or wages up to ` 21,000 per month
[as amended by the Payment of Bonus (Amendment) Act, 2016] and
engaged in any kind of work whether skilled, unskilled, manual,
supervisory, managerial, administrative, technical or clerical, in the
factory or establishment of the employer provided the employee has
worked for at least 30 days in that particular accounting year (Section
8). The minimum bonus payable is 8.33% of the salary or wages of
the employee during the accounting year. This is payable even if the
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employers suffer a loss. The maximum bonus payable under the Act is
20% of the basic salary and wages.
The bonus is paid within 8 months of the closure of the accounting year
and is paid on an annual basis. There shall be no bonus to a worker
who has been dismissed for fraud, riotous behaviour, theft, misappropriation and sabotage of property.
On 31 December 2015, this Act was amended by the Payment of Bonus
(Amendment) Act, 2016 with retrospective effect from 1st April 2014 as
the threshold of the applicability of the Act has been increased from
` 10,000 to 21,000 per month. Also, the wage ceiling for bonus calculation has been increased from ` 3,500 to ` 7,000 per month. This amendment in the act has been brought into effect from the 1st April, 2014.
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self assessment Questions
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8. The minimum bonus payable is _____ of the salary or wages of
the employee during the accounting year.
9. The Payment of Bonus Act has 40 sections. (True/False)
Activity
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Explain how minimum bonus shall be calculated under the Payment of Bonus Act, 1965, by using the Internet.
9.8 PAYMENT OF GRATUITY ACT, 1972
The Payment of Gratuity Act, 1972 (hereinafter referred to as the
‘PGA 1972’) consists of 15 sections. Its main objective is to reward the
employee for his past meritorious services on his leaving the job after
5 years or more or on retirement. This law is a social security enactment or an extension of labour laws that has a sole aim of providing gratuity. Gratuity is defined as a monetary award provided to the
working employees for providing uninterrupted services during the
employment period.
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NOTE
The term ‘gratuity’ derives from
the Latin word “gratuitous”
which means given freely.
9.8.1 OBJECTIVES AND APPLICABILITY
Gratuity is an additional retirement benefit paid voluntarily by the
employer to the employee for sincere and continuous services rendered by him/her. The payment of gratuity is mandatory provided he
has rendered continuous services for a period of five years or more.
The PGA 1972 is applicable to the following:
a. Employees engaged in factories, mines, oilfields, plantations,
ports, railways and companies
b. Every shop and establishment within the meaning of any law
for the time being in force if 10 or more persons are employed or
were employed, on any day of the preceding twelve months
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c. Every motor establishment or class of establishment in which
10 or more employees are or were employed on any day of the
preceding 12 months
d. Such other establishments or class thereof in which 10 or more
persons are employed or were employed, on any day of the preceding twelve months as specified in the government notification
Applicability
The PGA 1972 extends to the whole of India.
NOTE
Gratuity is payable to employees who have rendered a continuous service of five years or more, interrupted only on account of sickness,
accident, leave, absence from duty without leave (not amounting to
break in service under the relevant standing orders), lay off, strike,
or lockout or cessation of work not due to the fault of the concerned
employee.
An employee of a seasonal
establishment shall be deemed
to be in continuous service if he
has actually worked for not less
than 75% of the number of days
for which the establishment was
in operation.
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9.8.2 ENTITLEMENT OF GRATUITY (section 2a)
CASE LAW
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Irel (india) limited vs p. N. Raghava panicker (2020)
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Facts: In this case, the court held that a trainee is not excluded from
the definition of the term ‘employee’ under the gratuity act, but only
an ‘apprentice’ is excluded. Section 2(e) of the payment of gratuity
act, 1972 defines an “employee” which excludes only apprentice. The
act says “employee means any person (other than an apprentice)...”.
9.8.3 CALCULATION OF GRATUITY
The basic formula for calculating gratuity amount is:
Gratuity = Last Drawn Salary × 15/26 × Number of years of service
The ratio of 15/26 represents 15 days out of 26 working days in a
month
Last Drawn Salary = Basic Salary + Dearness Allowances
Provided that for calculating gratuity amount of piece-rated employees, the average of the total wages received by him for a period of
three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work
shall not be taken into account.
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In case of seasonal employee, 7 days wages for each season is taken
into consideration.
NOTE
Here, Shaan has completed 14
years of service. The 7 months
of his first year (August 2005 to
March 2006) is to be counted as
one year as it is more than six
months of service.
Gratuity = (Basic + DA) × 15/26 × number of years.
Example: If Shaan had joined a job on 01-08-2004 and retired or
got his job terminated on 30-04-2018, with last drawn basic salary of
` 30,000 and DA of ` 13,000, his gratuity will be:
(` 30,000+ ` 13,000)× 15/26 × 14 = ` 3,47,307.70
9.8.4
TIME OF PAYMENT OF GRATUITY
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Gratuity is payable on the termination of employment after rendering
of a continuous service for not less than five years due to any of the
following:
a. Superannuation
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b. Retirement or resignation
c. Death or disablement due to accident or disease
NOTE
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In the case of death of the
employee, the gratuity is payable
to the nominee and if there is no
nomination, then to his heirs.
Where an employee has been discharged before the completion of a
minimum period of service as prescribed in the PGA. 1972, there shall
be no liability for payment of gratuity. However, completion of 5 years
of service is not mandatory where termination of service has been due
to death or disablement.
9.8.5
FORFEITURE OF GRATUITY [SECTION 4(6)]
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Gratuity can be forfeited in the following circumstances:
a. Any act, willful omission or negligence causing damage to the
employer’s property or loss to the employer. In such a case, the
forfeiture shall be to the extent of damage or loss.
b. Riotous or disorderly conduct or any other act of violence on the
part of the employee.
c. Any act constituting moral turpitude committed in the course of
employment.
d. Leaving employment before the completion of the continuous
service period of 5 years.
9.8.6 MAXIMUM LIMIT AND AMOUNT OF GRATUITY
PAYABLE
‰‰ The
minimum amount of the gratuity paid under the PGA, 1972 is
3.5 lakhs.
‰‰ The
maximum gratuity amount cannot exceed 20 lakhs (earlier it
was 10 lakhs), rupees, which is exempted from Income Tax.
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CASE LAW
Arasuri Ambajimata Mandir devasthan Trust vs. Jaitabhai Patel,
Shramjivi General Works Union (1983)
Facts: It was held that the post in Temple trust is controlled by State
Government. It is not a post under State government. So as to fall under
the exclusion under section 2(e) and hence it falls under the definition of employee and is entitled to gratuity under the act which means
though the temple is not mentioned in the section (e) of the act, court
held that it is applicable under this act.
self assessment Questions
a. True
b. False
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10. The main objective of the Payment of Gratuity Act is to reward
the employee for his past meritorious services on his leaving
the job after 5 years or more or on retirement.
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11. Gratuity is payable to the employee if he/she has served a minimum of ______ years with the company.
b. 7
c. 3
d. 10
Activity
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a. 5
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Use the Internet to identify the cases in which the gratuity can be
forfeited and how the gratuity amount is calculated.
9.9 MATERNITY BENEFIT ACT, 1961
Indian law has made it mandatory for certain commercial establishments to provide maternity benefits to women employees during and
after pregnancy and childbirth. The Maternity Benefit (Amendment)
Act, 2017, has added various benefits such as added paid leaves, work
from home in the Maternity Benefit Act, 1961. This law deals with the
regulations of maternity paid maternity leaves for women employees
at the time of childbirth or adoption. These maternity benefits aid in
improving the survival rates of children and the healthy development
of both mother and child. This law has provided the woman employee
a right to carry profession guaranteed under the Indian Constitution.
9.9.1 OBJECTIVES AND APPLICABILITY
This Maternity Benefit Act, 1961 extends to the whole of India and
it applies to commercial establishments with 10 or more employees. A woman employee needs to complete a period of 80 days in the
establishment in order to get entitled to the maternity benefit. The
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NOTE
The covered woman employee
is entitled to receive maternity
benefit at the rate of the average
daily wages for the period of
maximum prescribed maternity
leave with a condition that the
woman covered under maternity
benefit has worked for at least
80 days in the last 12 months.
enactment of this Maternity Benefit Act, 1961 is done to regulate the
employment of women employees for a certain period during the
pregnancy and after the childbirth. Every factory, shop, plantations,
government establishments, mines or commercial establishment has
to follow this Act.
9.9.2 KEY PROVISIONS
The Maternity Benefit (Amendment) Act, 2017 has amended various
provisions pertaining to duration of maternity paid leaves and various
other benefits which are described in the sub-section. Table 9.2 shows
the amendments done in the Act:
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Table 9.2: Amendments in the Maternity
Benefit Act
Maternity Benefit Act, 1961
Maternity Benefit (Amendment)
Act, 2017
MATERNITY
BENEFIT
The maximum
time period of
maternity benefit
was 12 weeks
This amendment Act has increased
the duration of the paid maternity
leaves from 12 weeks to 26 weeks,
out of which most of the 8 weeks of
such benefits can be opted by the
woman employees prior to the date
of expected delivery.
CRECHE
FACILITY
No such benefit
was given
It has become essential for commercial establishments of 50 or more
employees to provide the facility of
‘Creche’ to the employees.
WORK FROM No such benefit
HOME
was given
OPTION
Can be availed after the expiry of 26
weeks – the employer and claimant
to decide the terms mutually
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Provisions
NO INCREASED BENEFIT FOR THIRD CHILD
Know More
When a modern medical
technology known as Surrogacy
is used, the woman employee
gets entitled to maternity leave
for 12 weeks from the day the
child is handed over to her.
In the case of a third child, the maternity paid leaves is provided only
for 12 weeks out of which 6 weeks leaves can be taken prior to the
expected date of delivery. The increased paid maternity leave benefit
is only provided for the first two children.
CASE LAW
Dr. Rachna Chaurasiya vs. State of U.P. and others passed (2017)
Facts: Division Bench of the Court directed the State Government
to grant maternity leave to all female with full pay of 180 days, irrespective of nature of employment, i.e., permanent, temporary/ad hoc or
contractual basis. State respondent was further directed to grant Child
Care Leave of 730 days to all female employees, who are appointed
on regular basis, contractual basis, adhoc or temporary basis having minor children with the rider that the child should not be more than
18 years of age or older.
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CRÈCHE FACILITY
This provision is effective from July 1, 2017. It has become essential
for commercial establishments of 50 or more employees to provide the
facility of ‘Creche’ to employees. The working mothers have the right
to visit minimum crèche four times a day.
WORK FROM HOME
In case where the nature of work assigned to a woman is of such
nature that she may work from home, the employer may allow her
to do so after availing of the maternity benefit for such period and on
such conditions as the employer and the woman may mutually agree.’
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CASE LAW
Rakhi P.V. and Others V. State of Kerala & Another [2018 (2) KHC 251
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Facts: It was held that a woman employee cannot be denied maternity
benefits merely because her status is a contractual employee. And held
that a women cannot be compelled to choose between motherhood and
employment.
self assessment Questions
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12. As per the Amendments in the Maternity Benefit Act, the work
from home option can be availed after the expiry of 26 weeks
of maternity leave (the employer and claimant to decide the
terms mutually)
a. True
b. False
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13. A woman employee needs to complete a period of _________
days in the establishment in order to get entitled to the maternity benefit.
Activity
Research the Internet and find out real-life examples of organisations penalising for not following The Maternity Benefit (Amendment) Act, 2017.
9.10 CODE ON LABOUR LAWS
The code on Labour laws was introduced in order to streamline labour
laws businesses in India. These reforms are performed to ensure accountability, transparency and effective implementation of labour laws.
9.10.1
CODE ON WAGES
The Code on Wages, 2019 (hereinafter referred to as the ‘CW 2019’) is
the act that was introduced in Lok Sabha in July and approved by the
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Know More
‰‰ The
Payment of Wages Act, 1936
‰‰ The
Minimum Wages Act, 1948
‰‰ The
Payment of Bonus Act, 1965
The minimum wages decided by the State or Central government are
set as the minimum wages that have to be paid by employers. Employers cannot reduce the standard minimum wages fixed by the government, they have to pay wages higher than the floor wages. Therefore,
the Code on Wages prohibits employers from paying less than the
minimum wages. The Code on Wages protects the interest of workers.
Also, the government has fixed the minimum working hours in a normal day. Therefore, if the employees or workers perform their duty or
service more than a normal working day, they are entitled to overtime
wages that has to be at least twice the normal rate of wages. Also,
the Code on Wages provides the provisions for penalties for offences
committed by the employer such as paying less than the due wages
or for contravening the provisions of the Code on Wages. The maximum amount of penalty can be either the imprisonment for the three
months and a fine up to one lakh rupees.
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In 2019, the Ministry of Labour
and Employment introduced
four bills to consolidate 29
central laws. These codes
regulate: (i) Wages,
(ii) Industrial Relations,
(iii) Social Security, and
(iv) Occupational Safety, Health
and Working Conditions. While
the Code on Wages, 2019, has
been passed by the Parliament,
bills on the other three areas
were referred to the Standing
Committee on Labour. The
Standing Committee has
submitted its report on all three
bills. The government has
replaced these bills with new
ones on September 19, 2020.
Parliament in August, 2019 and assented by the President of India on
8th August 2019. The Code on Wages regulates the bonus and wages
payment in all the commercial establishments. The Code on Wages
2019 subsumes the following legislations:
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9.10.2
CODE ON INDUSTRIAL RELATIONS
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The Industrial Relations Code, 2020 was introduced in Lok Sabha
in November 2018 and after passing from the Lok Sabha and Rajya
Sabha, it received the President’s assent on 28th September, 2020. It
results in calmer industrial environment as it would introduce the recognition of trade unions and notice period for the resolution of industrial disputes, strikes and lock-outs. It subsumes:
‰‰ The
Industrial Dispute Act, 1947
‰‰ The
Trade Union Act, 1926
‰‰ The
Industrial Employment Act
Any employer or worker cannot go for strike without giving a prior
notice of 14 days in order to reduce the workers’ ability to strike and
employees to lock-down. It also defines the constitution of Industrial tribunals to resolve industrial disputes. Also, in order to lay off
or retrenching workers, an organisation with 100 or more employees
or workers need to take prior permission from the State or Central
government. In this code, the registration of Trade Union is same as
mentioned in the Trade Union Act, 1926 which states that at least 10%
of the workers or all the workers need to be the members of the Union
on the date of application for union registration.
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9.10.3
CODE ON SOCIAL SECURITY
Social security is defined as a measure to assure access to health care
and income security to workers. The Code on Social Security, 2020
came into force on 28th September, 2020 as notified in the Official
Gazette. It replaces nine laws related to social security, which are:
1. The Employees’ Compensation Act, 1923
2. The Employees’ State Insurance Act, 1948
3. The Employees’ Provident Funds and Miscellaneous Provisions
Act, 1952
5. The Maternity Benefit Act, 1961
6. The Payment of Gratuity Act, 1972
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7. The Cine Workers Welfare Fund Act, 1961
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4. The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959
8. The Building and Other Construction Workers Welfare Cess Act,
1996
9. The Unorganised Workers’ Social Security Act, 2008
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Under this law, the central government may introduce various social
security schemes for the worker’s benefit. These schemes can include
provisions for Employee’s Provident Fund (EPF) Scheme, Employees’
Pension Scheme (EPS) or insurance schemes, etc. The provision of
penalties is also available in the code for various offences such as failure of payment from employer contribution etc.
9.10.4 CODE ON SAFETY, HEALTH AND WORKING
CONDITIONS
The Code on Occupational Safety, Health and Working Conditions,
2020 involves the regulation of health and safety conditions of workers with 10 or more employees or workers in mines or docks. It has
replaced 13 labour related laws relating to safety, health and working
conditions which are:
1. The Factories Act, 1948
2. The Contract Labour (Regulation and Abolition) Act, 1970
3. The Mines Act, 1952
4. The Dock Workers (Safety, Health and Welfare) Act, 1986
5. The Building & Other Construction Workers (Regulation of
Employment and Conditions of Service) Act, 1996
6. The Plantations Labour Act, 1951
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7. The Inter-State Migrant Workmen (Regulation of Employment
and Conditions of Service) Act, 1979
8. The Working Journalist and other News Paper Employees (Conditions of Service and Miscellaneous Provision) Act, 1955
9. The Working Journalist (Fixation of rates of wages) Act, 1958
10. The Cine Workers and Cinema Theatre Workers Act, 1981
11. The Motor Transport Workers Act, 1961
12. The Sales Promotion Employees (Conditions of Service) Act,
1976
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13. The Beedi and Cigar Workers (Conditions of Employment) Act,
1966
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The central and state governments fix the working hours, working
conditions and welfare facilities for various types of establishments. It
would simplify and consolidate the existing health and safety laws. All
the factories, mines, docks, buildings, construction company labour,
construction workers, plantation labour, contract labour, cine workers, etc., are included in this code. According to the Code on Occupational Safety, Health and Working Conditions, 2020, the following are
the duties of employers:
a workplace that is free from hazards that may cause
injury or diseases
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‰‰ Providing
‰‰ Providing
free annual health examinations to employees in notified
establishments
‰‰ Issuing
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appointment letter to employees
‰‰ Informing
relevant authorities in case an accident at the workplace
leads to death or serious bodily injury of an employees
Also, the certified government would notify the factories, mines,
docks, etc., to include working and welfare facilities such as canteen,
ambulance rooms, and temporary housing. The commercial establishments are also asked to include medical officers to certify, examine
and supervise the health of workers. Also, they have to maintain suitable working conditions and medical facilities for the employees.
self assessment Questions
14. The Industrial Relations Code amalgamates essential elements from which of the following acts?
a. The Trade Union Act, 1926
b. The Industrial Employment Act, 1946
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c. The Industrial Dispute Act, 1947
d. All of the above
15. The code on __________ 2019 is the Act that was introduced in
Lok Sabha in July and approved by the Parliament in August,
2019.
Activity
Research on the Internet and find out the comparison of existing
laws with the labour code.
9.11 Summary
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‰‰ In India, there are various laws that ensure equitable remuneration
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for employees working in various organisations and factories.
Besides this, there are various provisions to ensure that even
after retirement or in case of an accident, sufficient amount of
money is accumulated for the survival of the employees and their
dependents.
this direction, the Acts enacted by the Parliament include the
Provident Fund Act, Gratuity Act, Minimum Wages Act, Bonus
Act, Workmen Compensation Act, etc.
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‰‰ In
‰‰ The
government of India has enacted various labour laws,
including the Industrial Disputes Act, 1947, to improve industrial
relations and establish industrial peace.
Maternity Benefit (Amendment) Act, 2017, is regarded as a
vital piece of labour to provide maternity benefit and certain other
benefits.
‰‰ Under
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‰‰ The
the virtue of labour reforms initiatives, the ministry of
labour has decided to amalgamate 44 labour laws under four
labour codes. These reforms are performed to provide flexibility in
retrenchment and to ensure accountability, transparency, effective
implementation of labour laws.
‰‰ The
government also keeps on amending these acts from time to
time for the betterment of labourers and employees.
key words
‰‰ Bonus:
The payment made to employees over and above the
salary
‰‰ Occupational disease: A chronic ailment that occurs as a result
of work or occupational activity
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‰‰ Permanent
partial disability: The disability that is permanent
in nature but not completely disabling
‰‰ Permanent
total disability: A condition when the individual
becomes totally and permanently disabled due to accidental
bodily injury, adverse sickness or fatal disease
‰‰ Strike:
The stoppage of work by employees
‰‰ Trade
unions: A continuous association of wage earners and
employees
?
9.12 Descriptive Questions
1. Explain the objectives of the Factories Act, 1948.
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2. Explain the objectives of Industrial Disputes Law.
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3. Discuss the obligation of the occupier as per the Factories Act,
1948.
4. What is Employees Compensation Act? Discuss its scope.
5. Explain the scope and major provisions made in the Payment of
Bonus Act.
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6. Discuss the various schemes provided under the Employees
Provident Fund and Miscellaneous Provisions Act.
7. Define the conditions of applicability for the Payment of Gratuity
Act, 1972.
8. Discuss the scope and major provisions made in the Minimum
Wages Act, 1948.
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9. What are the objectives of the Maternity Benefit Act?
9.13 Answers and Hints
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic
Factories Act, 1948
Q. No.
Answer
1.
Factories Act, 1948
2.
Occupier
Industrial Dispute Act, 1947
3.
b.
ILO
Minimum Wages Act, 1948
4.
d.
All of these
Employee Compensation Act, 1923
5.
Employee’s Compensation
Act, 1923
Employees Provident Fund & Miscellaneous Provisions Act, 1952
6
Whole of India
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Q. No.
Payment of Bonus Act, 1965
Payment of Gratuity Act, 1972
Maternity Benefit (Amendment)
Act, 2017
Code on Labour Laws
Answer
7.
d.
All of the above
8.
8.33%
9.
a.
10.
a. True
11.
a.
12.
a. True
13.
80
14.
d.
15.
Wages
True
5
All of the above
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HINTS FOR DESCRIPTIVE QUESTIONS
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Topic
1. The Factories Act, 1948 is the principal law concerning working conditions designed to protect labour against industrial and
occupational hazards. Refer to Section 9.2 Factories Act, 1948
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2. An industrial dispute is settled according to the Industrial
Disputes Act, 1947. Refer to Section 9.3 Industrial Disputes
Act, 1947
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3. The Factories Act, 1948 is the principal law concerning working conditions designed to protect labour against industrial and
occupational hazards. Refer to Section 9.2 Factories Act, 1948
4. The Employees Compensation Act, 1923 came in force on the
first day of July, 1924. It is the first social security legislation in
India. Refer to Section 9.5 Employees Compensation Act, 1923
5. The Payment of Bonus Act was made applicable from
25th September, 1965. Refer to the Section 9.7 Payment of Bonus
Act, 1965
6. The Employees Provident Fund and Miscellaneous Provisions
Act, 1952 is applicable to the whole of India. Refer to Section 9.6
The Employees Provident Fund and Miscellaneous Provisions
Act, 1952
7. The Payment of Gratuity Act, 1972 consists of 15 sections. Its
main objective is to reward the employee for his past meritorious
services on his leaving the job after 5 years or more or on retirement. Refer to Section 9.8 Payment of Gratuity Act, 1972
8. The Minimum Wages Act, 1948 ensures that workers and employees earn wages that are sufficient for their livelihood. Refer to
Section 9.4 Minimum Wages Act, 1948
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9. The Act was enforced to provide maternity benefit and certain
other benefits to women and regulate their employment in certain establishments for a certain period before and after childbirth. Refer to Section 9.9 Maternity Benefit (Amendment)
Act, 2017
9.14 Suggested Readings & References
SUGGESTED READINGS
‰‰ Abbott,
K., Pendlebury, N., &Wardman, K. (2013). Business law.
Andover: Cengage Learning.
‰‰ Emerson,
R. (2016). Business Law. Hauppauge: B.E.S. Publishing.
G., &Singhania, R. (2008). Employment law in India. Hong
Kong: CCH Hong Kong Ltd.
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‰‰ Sahi,
IM
E-References
‰‰ (2020).
Retrieved 15 May 2020, from http://adapt.it/adapt-indicea-z/wp-content/uploads/2014/09/Labour_Employment_Laws_
India.pdf
Retrieved 15 May 2020, from https://knowledge.leglobal.
org/wp-content/uploads/sites/2/LEGlobal-Employment-LawOverview_India_2019-2020.pdf
M
‰‰ (2020).
‰‰ Employment & Labour Law 2020 | India | ICLG. (2020). Retrieved
N
368
15 May 2020, from https://iclg.com/practice-areas/employmentand-labour-laws-and-regulations/india
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ENVIRONMENT-RELATED LAWS
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Contents
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10.1
Introduction
Laws Aimed at Protecting and Conserving the Environment
10.2
10.2.1
The Environment Protection Act (EPA), 1986
10.2.2
The National Green Tribunal (NGT) Act, 2010
The Air (Prevention and Control of Pollution) Act, 1981
10.2.3
10.2.4
The Water (Prevention and Control of Pollution) Act, 1974
10.2.5The Hazardous and Other Wastes
(Management and Transboundary Movement) Rules, 2016
The Wildlife Protection Act, 1972
10.2.6
10.2.7
The Forest Conservation Act, 1980
10.2.8
The Public Liability Insurance Act, 1991
The Biological Diversity Act, 2002
10.2.9
10.2.10Cases where Companies have faced Consequences of
Violating Environment Protection Laws in India
Self Assessment Questions
Activity
10.3
Summary
10.4
Descriptive Questions
Answers and Hints
10.5
10.6
Suggested Readings and References
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Introductory Caselet
BHUSHAN STEEL’S VIOLATION OF THE ENVIRONMENT
PROTECTION ACT (EPA)
Case Objective
This caselet discusses about
violations of the Environment
Protection Act (EPA).
Bhushan Steel Limited (BSL) was a prominent player in the steel
industry. It was engaged in the manufacturing and marketing of
Cold Rolled Close Annealed (CRCA) coils, galvanised sheets, precision tubes, high-tensile steel, hardened and tempered steel strips,
wire rods, colour-coated sheets, etc. In 2018, BSL was acquired by
Tata Steel and is now known as Tata Steel BSL.
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Also, in 2012, the State Pollution Control Board (SPCB) served
the BSL with a closure notice because the plant was lacking various environment protection measures, which restrained the company from pursuing construction activities. In 2012-13, BSL faced
allegations for expanding its work at Meramandali, Dhenkanal
district of Odisha in violation of the Environment Protection Act
(EPA), 1986.
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In March 2012, the Ministry of Environment and Forest (MOEF)
pointed out the violation of the EPA, 1986 and sent an expert team
to the BSL plant to probe whether the BSL had indeed gone ahead
with the expansion work to expand the production capacity from
3.1 million tonnes to 5.6 million tonnes. The team validated all the
allegations and asked the state government to take an appropriate
action. Following this, the state environment secretary ordered
the district collector to file a case against BSL.
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Following the orders of the state environment secretary, the District Collector (DC) of Dhenkanal filed a case against BSL in the
court of local Sub-divisional Judicial Magistrate (SDJM) for violating the provisions of the EPA, 1986. The SDJM court admitted
the case and a criminal case was registered against A. Berma (the
Chief Operating Officer (COO) of the company) for violating Sections 15 and 16 of the EPA.
If allegations against BSL are proved, the guilty can get a maximum punishment of five years jail or `1 lakh fine or both.
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ENVIRONMENT-RELATED LAWS
Learning objectives
After studying this chapter, you will be able to:
Realise the need to protect and conserve the environment
Describe the Environment Protection Act (EPA), 1986
Discuss the National Green Tribunal (NGT) Act, 2010
Examine the Air (Prevention and Control of Pollution) Act,
1981 and the Water (Prevention and Control of Pollution)
Act, 1974
Outline the Hazardous and Other Wastes (Management and
Transboundary Movement) Rules, 2016
Describe the Wildlife Protection Act, 1972
State the significance of the Forest Conservation Act, 1980
Describe the Public Liability Insurance Act, 1991
Discuss the Biological Diversity Act, 2002
>>
>>
>>
>>
>>
10.1 Introduction
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>>
>>
>>
>>
In the previous chapter, you studied various laws that are relevant for
labour welfare.
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For the last three decades, the Indian environment law has been evolving for the good. Initially, India participated in the United Nations
Conference on the Human Environment which resulted in the emergence of Indian environment in 1972. It had been realised in that conference that a framework of laws was necessary to deal with environmental hazards that would result from the stage of development that
India was entering in the 1970s. It is a common aspiration of countries
to reduce the damage to the environment and work in a sustainable
manner. However, due to multiple factors, almost all countries harm
and exploit the environment. Therefore, various international organisations, like the United Nations, have come forward and laid down
the standards and the basic law framework that can be adopted by
countries to ensure that they are able to set environmental standards
and can punish individuals or organisations that violate any of the
environmental laws. In India, there are multiple environmental laws.
Some of these laws are discussed in this chapter. These laws protect
the environment; regulate the discharge of pollutants; handle hazardous substances; provide a speedy response in the event of accidents
threatening environment; and award deterrent punishment to those
who endanger human environment, safety and health.
In this chapter, you will study about the Environment Protection Act
(EPA), 1986; the National Green Tribunal (NGT) Act, 2010; the Air
(Prevention and Control of Pollution) Act, 1981; the Water (Prevention
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and Control of Pollution) Act, 1974; the Hazardous and Other Wastes
(Management and Transboundary Movement) Rules, 2016; the Wildlife Protection Act, 1972; the Forest Conservation Act, 1980; the Public
Liability Insurance Act, 1991 and the Biological Diversity Act, 2002.
10.2
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Article 48A of the Constitution
of India states that the state
shall endeavour to improve and
protect the environment and
safeguard the flora and fauna of
the country.
In this highly industrialised world, it has become extremely important
to protect and conserve environment and make a sustainable use of
natural resources. This is also reflected in the constitutional framework of India and its international commitments. In the Constitution
of India, the Fundamental Duties are laid out in Article 51A. This Article states that every citizen of India must protect and improve the
natural environment such as forests, lakes, rivers, wildlife, etc. They
must have compassion for all living creatures. Also, Article 48A of the
Indian Constitution deals with the Directive Principles of the State
Policies and stipulates that the state must also safeguard its forests
and wildlife.
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NOTE
LAWS AIMED AT PROTECTING AND
CONSERVING THE ENVIRONMENT
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The regulation and
administration of environmental
protection laws in India are
done by a combination of the
MoEF, the Central Pollution
Control Board (CPCB) and the
State Pollution Control Boards
(SPCBs).
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? DID YOU KNOW
In India, the thrust and necessity for putting in force a well-developed
framework came after the UN Conference on Human Environment
held in Stockholm, 1972. After the Stockholm Conference, in the same
year, the National Council for Environmental Policy and Planning
was set up under the Department of Science and Technology. The
National Council for Environmental Policy and Planning was set up
as a regulatory body to look after environmental issues, which later
developed into the Ministry of Environment and Forest (MOEF). In
2014, the MOEF was renamed as the Ministry of Environment, Forest
and Climate Change (MOEFCC), which is the apex body that regulates and ensures environmental protection. It also lays down the legal
and regulatory framework for environment protection.
Starting from the 1970s, a lot of environment legislations have been
introduced in India. Some of these environment-related legislations
include:
‰‰ The
National Green Tribunal (NGT) Act, 2010
‰‰ The
Air (Prevention and Control of Pollution) Act, 1981
‰‰ The
Water (Prevention and Control of Pollution) Act, 1974
‰‰ The
Environment Protection Act (EPA), 1986
‰‰ The
Hazardous Wastes Management (HWM) Regulations
‰‰ The
Wildlife Protection Act, 1972
‰‰ The
Forest Conservation Act, 1980
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‰‰ The
Public Liability Insurance Act, 1991
‰‰ The
Biological Diversity Act, 2002
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You will study about these legislations in the upcoming sections.
10.2.1
THE ENVIRONMENT PROTECTION ACT (EPA), 1986
Environmental protection is attributed to a blend of initiatives from
the legislature, the executive and the judiciary. The EPA of India is
the most important statute for the protection of environment in India.
This Act was enacted on 23rd May, 1986 soon after the Bhopal Gas
Tragedy (1984) and came into force on 19th November, 1986. This Act
is applicable throughout India.
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The EPA, 1986 provides for the protection and improvement of environment and the prevention of hazards to human beings, other living
creatures, plants and property. EPA has been divided into 4 chapters
and 26 sections.
Some important definitions as per the EPA, 1986 are:
‰‰ Environment
includes water, air and land and the interrelation
which exist between water, air, land, human being, plants, animals
other living creatures, micro-organism and property.
pollutant means any solid, liquid, or gaseous substance present in such concentration as may be, or tend to be, injurious to environment.
pollution means the presence in the environment
of any environmental pollutant.
‰‰ Handling
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‰‰ Environmental
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‰‰ Environmental
(in relation to any substance) means the manufacture,
processing, treatment, package, storage, transportation, use, collection, destruction, conversion, offering for sale, transfer, or the
like of such substance.
‰‰ Hazardous
substance means any substance or preparation which,
by reason of its chemical or physico-chemical properties or handling, is liable to cause harm to human beings, other living creatures, plant, micro-organism, property, or the environment.
‰‰ Occupier
(in relation to any factory or premises) means a person
who has control over the affairs of the factory or the premises and
includes in relation to any substance, the person in possession of
the substance.
‰‰ Prescribed
means prescribed by rules made under this Act.
Some important objectives of the EPA, 1986 are as follows:
‰‰ To implement decisions made at the UN Conference on the Human
Environment held in Stockholm in 1972
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? DID YOU KNOW
In the Environment Protection
Act, 1986, subject to the
provisions of this Act, the
central government shall have
the power to take all such
measures as it deems necessary
or expedient for the purpose
of protecting and improving
the quality of the environment
and preventing, controlling and
abating environmental pollution.
Business Law
‰‰ To
create authority for government protection
‰‰ To
coordinate activities of various regulatory agencies created
under the Act
‰‰ To
protect forests and wildlife in the country
‰‰ To
create authorities for protecting the environment
‰‰ To
fix the liability on persons carrying industrial operations or
handling hazardous substances to comply with rules related to the
prevention, control and abatement of environmental pollution
‰‰ To
enact laws for environment protection
‰‰ To
provide punishment provisions for those people who are
involved in endangering human environment, safety and health
ensure sustainable development
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‰‰ To
‰‰ To ensure the protection of life as laid down under Article 21 of the
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Constitution of India
Some important provisions of the EPA, 1986 are as follows:
of the central government: The government can make
laws as and when needed, i.e., when they analyse the degradation
of the environment. The various actions that the government can
take under the Act inter alia include the following:
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‰‰ Power
 To
fix the standards of quality of air, water, or soil for various
areas and purposes
 To
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374
fix the maximum allowable limits of concentration of various environmental pollutants (including noise) for different
areas
 To
establish procedures and safeguards for the handling of
hazardous substances
 To
prohibit and restrict the handling of hazardous substances
and the location of industries and carrying on of processes and
operations in different areas
 To
establish procedures and safeguards for the prevention of
accidents which may cause environmental pollution and provide remedial measures for such accidents
Under EPA, the government has the power to issue directions,
make rules, prescribe standards of emission and obligation to furnish information.
‰‰ Power
of the court: Section 22 of the EPA bars the jurisdiction of
civil courts to entertain any suit or proceeding in respect of anything done, any action taken or order or direction issued by any of
the authorities under this EPA. However, nothing can take away
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ENVIRONMENT-RELATED LAWS
the power of the Supreme Court to do justice, as it sees fit, related
to EPA, 1986.
‰‰ National
Environment Appellate Authority (NEAA): The NEAA
Act, 1997 provides for the establishment of NEAA for discharging
the following duties:
i.To hear appeals with respect to restriction of areas in which
any industry, operations, or processes or class of industries,
operations, or processes shall or shall not be carried out subject to certain safeguards under the Environment Protection
Agency (EPA) and for matters connected therewith or incidental thereto.
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ii.To bring transparency and accountability in the process and
ensure a smooth and expedited implementation of developmental schemes and projects.
10.2.2
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Section 11 of the NEAA Act, 1997 says, any aggrieved person may file
an appeal within 30 days of passing of an order granting environmental clearance in the areas in which any industries, operations, or processes shall not be carried out or shall be carried out subject to certain
safeguards under the EPA. Also, NEAA may entertain an appeal even
after the expiry of the said term if a sufficient cause for delay in filing
such an appeal exists but not after 90 days from the date of such order.
The NEAA is required to dispose of the appeal within 90 days from
the date of filing of the same. However, it may, for reasons that are to
be recorded in writing, dispose of the appeal within a further period
of 30 days.
THE NATIONAL GREEN TRIBUNAL (NGT) ACT, 2010
The National Green Tribunal Act (NGT Act) was enacted in 2010
with an aim to establish the National Green Tribunal (NGT) which
would be responsible for dealing with cases related to environment
protection, conservation of forests and other natural resources, etc.,
in an effective and speedy manner. The NGT also has to look after the
enforcement of any legal rights relating to environment. It also has the
powers to give relief and compensation for damages to persons and
property.
The most important provision and objective of this NGT Act is the
establishment of the NGT to look after the laws as mentioned in
Schedule I of the NGT Act as follows:
‰‰ Water
(Prevention and Control of Pollution) Act, 1974
‰‰ Water
(Prevention and Control of Pollution) Cess Act, 1977
‰‰ Forest
Conservation Act, 1980
‰‰ Air
(Prevention and Control of Pollution) Act, 1981
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‰‰ Environment
‰‰ Public
Protection Act, 1986
Liability Insurance Act, 1991
‰‰ Biodiversity
Diversity Act, 2002
After the establishment of NGT, the National Environment Tribunal
Act, 1995 and the NEAA Act, 1997 were repealed. The NEAA established under the NEAA, 1997 was also dissolved.
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The NGT has a full-time chairperson and members. There must be
not less than 10 and maximum of 20 full-time judicial members (Section 4). Also, there must be not less than 10 and maximum 20 full-time
expert members. Section 14(1) states that the Tribunal has jurisdiction
over all civil cases involving a substantial question relating to environment (including enforcement of any legal right relating to environment) and such question arises out of implementation of any of the
Acts mentioned in Schedule I (as mentioned above). The NGT has the
power to settle disputes referred to disputes arising from implementation of abovementioned Acts and pass orders such as order for relief
and compensation to the victims of pollution and other environmental
damage; restitution of property damaged; and restitution of the environment in such areas [Section 15 (1)]. The principles guiding NGT
are those of sustainable development, precautionary principle and
polluter pays. NGT acts as the appellate authority for orders passed
by Tribunals having powers under the Acts mentioned in Schedule I
of the NGT Act, within a period of 30 days from the passing of such
order/decision/direction (Section 16).
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10.2.3 THE AIR (PREVENTION AND CONTROL OF
POLLUTION) ACT, 1981
Know More
In 1981, the Air (Prevention and
Control of Pollution) Act was
introduced and amended in
1987 for prevention and control
of air pollution in India. The Air
Act deals with the control of
emission of noxious substances
from industries and automobiles.
However, it applies only to
specified industrial processes,
in notified areas, called the Air
Pollution Control Areas (APCAs).
The Air (Prevention and Control of Pollution) Act, 1981 is also called
the Air Act. This Air Act extends to the whole of India. The major
objectives of this Act are as follows:
‰‰ To
provide for the prevention, control and abatement of air pollution
‰‰ To
provide for the establishment of the Pollution Control Boards
(PCBs) at the central and state levels
Two important terms defined under the Air Act are:
‰‰ Air pollutant means any solid, liquid, or gaseous substance (includ-
ing noise) present in the atmosphere in such concentration as may
be or tend to be injurious to human beings or other living creatures or plants or property or environment
‰‰ Air pollution means the presence in the atmosphere of any air pol-
lutant
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This Act contains 54 sections divided into seven chapters. Chapters II
and III describe the roles and responsibilities of the central and state
PCBs. Chapter IV relates to the prevention and control of air pollution or setting, regulation and monitoring of the pollution standards.
Chapter VI deals with penalties that can be imposed and the procedure of inquiry into matters related to air pollution.
Under this Air Act, the ambient air quality standards were established.
These standards were meant for resolving the problems associated
with air pollution. The PCBs that have been set up under this Air Act
are responsible for ensuring that air pollution in the country can be
controlled. The Boards also have the power to take action against entities which do not meet the required air quality standards.
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This Air Act seeks to combat air pollution by deploying various provisions. Some major features of this Air Act are as follows:
the use of polluting fuels and substances
‰‰ Regulating
appliances that lead to air pollution
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‰‰ Prohibiting
‰‰ Empowering the state government in consultation with the respec-
tive State PCBs to declare any area as APCA (Air Pollution Control Area) (Section 19)
‰‰ Establishing or operating any industrial plant in the pollution con-
air in Air Pollution Control Areas
‰‰ Inspecting
processes
the pollution control equipment and manufacturing
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‰‰ Testing
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trol areas that require consent from the respective State PCBs
‰‰ Empowering the boards to cancel the consent on non-fulfilment of
the required conditions
Some major provisions of the Air Act are:
‰‰ Section
3 states that the Central Pollution Control Board (CPCB),
which is constituted under Section 3 of the Water (Prevention and
Control of Pollution) Act, 1974, will also be responsible for exercising the powers and performing the functions of the CPCB for the
prevention and control of air pollution under this Act. It means
that the CPCB has powers and functions for dealing with matters
relating to air pollution as well as water pollution.
‰‰ Section
4 states that in states where it has already set up the State
Water Pollution Control Board, the same board will also be given
the joint responsibility of controlling and monitoring air pollution
as well. Such board would be called the State Pollution Control
Board (SPCB). This SPCB will exercise powers and perform the
functions as specified under this Act for preventing and controlling
the air pollution.
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‰‰ Section 5 states that in states where there is no existing Water Pol-
lution Control Board, a new SPCB will be set up.
‰‰ Some
of the functions of the CPCB, as given under Section 16, are
as follows:
 Improve
the quality of air
 Prevent,
control, or abate air pollution in the country
 Advise
the central government on any matter concerning the
improvement of the quality of air and the prevention, control,
or abatement of air pollution
 Plan and cause to be executed a nationwide programme for the
prevention, control, or abatement of air pollution
the activities of the State and resolve disputes
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 Co-ordinate
among them
technical assistance and guidance to SPCBs to, carry
out and sponsor investigations and research relating to problems of air pollution and prevention, control, or abatement of
air pollution
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 Provide
 Perform such of the functions of any SPCB as may be specified
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by Central Government in case of default by SPCB to comply
with any directions of CPCB due to which grave emergency
has arisen or it is in public interest. Under sub-section (2) of
Section 18
 Plan
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and organise the training of persons engaged or to be
engaged in programmes for the prevention, control, or abatement of air pollution on such terms and conditions as the CPCB
may specify
 Organise
through mass media a comprehensive programme
regarding the prevention, control, or abatement of air pollution
 Collect,
compile and publish technical and statistical data
relating to air pollution and the measures devised for its effective prevention, control, or abatement and prepare manuals,
codes, or guides relating to prevention, control, or abatement
of air pollution
 Lay
down standards for the quality of air
 Collect
and disseminate information in respect of matters
relating to air pollution
 Perform
such other functions as may be prescribed
‰‰ Some
of the functions of the SPCB as given under Section 17, are
as follows:
 To
plan a comprehensive programme for the prevention, control, or abatement of air pollution and to secure the execution
thereof
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 To
advise the state government on any matter concerning the
prevention, control, or abatement of air pollution
 To collect and disseminate information relating to air pollution
 To collaborate with the CPCB in organising the training of per-
sons engaged or to be engaged in programmes relating to prevention, control, or abatement of air pollution and to organise
mass-education programme relating thereto
 To
inspect, at all reasonable times, any control equipment,
industrial plant, or manufacturing process and to give, by
order, such directions to such persons as it may consider necessary to take steps for the prevention, control, or abatement
of air pollution
inspect Air Pollution Control Areas at such intervals as it
may think necessary, assess the quality of air therein and take
steps for the prevention, control, or abatement of air pollution
in such areas
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 To
 To lay down, in consultation with the CPCB and having regard
 To
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to the standards for the quality of air laid down by the CPCB
standards for emission of air pollutants into the atmosphere
from industrial plants and automobiles or for the discharge of
any air pollutant into the atmosphere from any other source
whatsoever not being a ship or an aircraft: Provided that different standards for emission may be laid down under this clause
for different industrial plants having regard to the quantity and
composition of emission of air pollutants into the atmosphere
from such industrial plants
advise the state government with respect to the suitability
of any premises or location for carrying on any industry which
is likely to cause air pollution
 To
perform such other functions as may be prescribed or as
may, from time to time, be entrusted to it by the CPCB or the
state government
 To
do such other things and to perform such other acts as it
may think necessary for the proper discharge of its functions
and generally for the purpose of carrying into effect the purposes of the Air Act.
‰‰ The
officers of the SPCBs can take samples from any chimney,
duct, etc., of any industry for the purpose of testing whether the
emissions are within prescribed standards or not (Section 26).
Such samples shall be sent to State Air Laboratories (Section 28)
and examined by analysts appointed by the State Government
(Section 29) and the reports of these analysts may be used in evidence at any proceedings under this Act (Section 30).
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Business Law
‰‰ The
Air Act contains the provision of imprisonment of minimum
one year and 6 months which might be extended up to 6 years with
fine for the violation of provisions mentioned in Sections 21 and
22. If the violation continues, an additional fine of ` 25,000 per day
can also be imposed. If violations exceed for more than a year, then
the culprit can be awarded a punishment ranging between 2 years
and 7 years with fine (Section 37).
‰‰ A
person aggrieved by any order of SPCB can appeal within 30
days to an Appellate Authority set up by the state government
(Section 31).
‰‰ No
civil court shall have jurisdiction to entertain any suit or proceeding arising under this Act (Section 46).
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offences committed by companies, every person who, at the
time the offence was committed, was directly in charge of, and was
responsible to the company shall be deemed to be guilty and liable
to be punished accordingly (Section 40).
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‰‰ For
‰‰ For
offences committed by a Government Department, the Head
of the Department is the person responsible for department’s acts
and hence he/she is liable to be proceeded against and punished
under this Act (Section 40).
Water is extremely essential for the survival of life. It is required for
multiple reasons, drinking being the most important reason. Also,
water is essential for the purpose of sanitation, cleaning, sewage disposal, agriculture, industry, bathing, preparation of food, etc. However, water is useful only if it is in a non-polluted form. For instance,
dirty and polluted water flowing in a drain cannot be used for agriculture or bathing. Contaminated water can be extremely injurious to the
health and safety of life.
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10.2.4 THE WATER (PREVENTION AND CONTROL OF
POLLUTION) ACT, 1974
The Water (Prevention and
Control of Pollution) Cess Act,
1977 provides for the levy and
collection of cess or fees on
water-consuming industries and
local authorities.
It is important to maintain and use water wisely because India has
a limited supply of fresh water and the standards of water safety are
not up to the mark. According to the available data, the population of
India is approximately 17.7% of the world population. India occupies
only about 2.45% of the total land area of the world and has only about
4% of the world’s water resources. This is a major reason due to which
India needs to manage its water resources in an efficient manner.
Taking a stock of the water situation and in order to prevent and control water pollution, the Indian Parliament passed the Water (Prevention and Control of Pollution) Act, 1974. It is also known as the Water
Act.
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The major objectives of this Water Act are:
‰‰ To
provide for the prevention and control of water pollution
‰‰ To
provide for maintaining or restoring the wholesomeness of
water
‰‰ To
establish boards for preventing and controlling water pollution
‰‰ For conferring upon and assigning powers and functions to boards
for achieving the above-mentioned objectives
‰‰ To establish central and state water testing laboratories which can
be used by the boards in discharging their functions
‰‰ To
penalise offenders for the contravention of the provisions of
the Water Act
deal with matters related to prevention and control of water
pollution
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‰‰ To
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The Water Act, 1974 consists of 64 sections divided into eight Chapters.
Chapter I defines a few preliminary aspects. Chapter II deals with the
central and state boards for preventing and controlling water pollution. Chapter III deals with Joint Boards. Chapter IV defines powers
and functions of the boards. Chapter V contains various provisions for
preventing and controlling water pollution. Chapter VII defines penalties and the procedure for prosecuting under this Act.
‰‰ Public
health or safety
‰‰ Domestic,
‰‰ Life
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Pollution refers to the contamination of water or the alteration of the
physical, chemical, or biological properties of water, or the discharge
of any sewage or trade effluent (whether directly or indirectly) which
is likely to render such water harmful or injurious for:
commercial, industrial, agricultural, or other uses
and health of plants, animals, or aquatic organisms
Some important features of this Water Act are as follows:
‰‰ Prohibiting
the discharge of pollutants into water bodies, such as
streams and wells, beyond a certain standard
‰‰ Laying
down of penalties in case any entity does not comply with
the standards
‰‰ Setting
up of the Central Pollution Control Board (CPCB) at the
central that preventing and controlling water pollution
‰‰ Setting up of the State Pollution Control Board (SPCB) at the state
levels, which work as per the directions of the state and the CPCB
‰‰ Defining
important terms such as stream, outlet, sewer, pollution,
trade effluent, etc.
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‰‰ Directing
the discharges into streams and wells and for opening
new outlets for discharge requires the concerned entity to take
consent from the concerned PCB
‰‰ Providing
the entity affected by the actions of the PCB to appeal
‰‰ Providing
penalties for offences related to violation of the Water
Act
Setting up of CPCB and SPCBs under the Act:
‰‰ Section
17 of the Water Act, 1974 lists the functions of SPCBs,
which includes planning state-wide comprehensive training and
education programme; inspect sewage or trade effluents; and
review all purification plants.
S
25 prescribes that before setting up any industry, plant, or
process which is likely to discharge sewage or trade effluents into
a stream or well or sewer or on land, prior consent of the SPCB is
necessary.
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‰‰ Section
‰‰ Under the powers of Section 32 to take emergency actions, SPCBs
may issue orders to move matters which are causing pollution of a
stream or well.
for contravention of the provisions of and orders and
directions issued under the Act are mentioned in Sections 41 to
45A, ranging from 6 months to maximum 6 years, or fine, or both.
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‰‰ Penalties
10.2.5 HAZARDOUS AND OTHER WASTES (MANAGEMENT
and TRANSBOUNDARY MOVEMENT) RULES, 2016
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382
India is a developing country and is on its way to progress. It is developing rapidly and its economy is growing fast. One of the most critical factors responsible for the growing economy of India is industrial development. When the level of industrialisation increases, it
also leads to a simultaneous increase in the generation of hazardous
wastes. Organisations majorly focus on maximising production and
recovery with minimum disposal.
In India, majority of the hazardous waste is produced by industries
such as petrochemicals, pharmaceuticals, chemicals, fertilisers, textiles, general engineering, etc.
As per the MOEFCC, hazardous waste is any waste which can potentially harm the health or environment due to its physical, chemical,
or biological composition. The waste may be harmful alone or when
in contact with other wastes. Most hazardous wastes have their own
chemical composition. Most industries discharge these hazardous
wastes without any treatment which ends up poisoning the land and
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water posing serious threats to life in all forms, ecology and the environment.
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Hazardous wastes that are dumped or stored on open land areas may
seep and enter into the groundwater leading to contamination of aquifers and regional water supply. If such hazardous wastes are mixed
into the groundwater, they can contaminate the agricultural produce
and may cause serious health issues if it is used for drinking purpose
by the public. Hazardous wastes are hazardous in nature because
they usually contain heavy metals and carcinogens which may affect
the health of public. When such contaminated food and water is consumed for a long period of time, it might lead to serious conditions
such as gene alteration, reproductive abnormalities, physical deformities, permanent disorders, deaths, etc. Apart from the hazardous
waste that is produced by industries, India also imports hazardous
waste as raw material for recovering metals.
‰‰ Lack
of political will
‰‰ Lack
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In India, the management of hazardous wastes is extremely ineffective due to the following reasons:
of technical know-how for treatment and disposal of hazardous wastes
of compliance and regulations
‰‰ Limited
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‰‰ Lack
number of trained and skilled stakeholders
N
In India, hazardous industrial wastes are divided into two categories
as follows:
1. Hazardous wastes produced from industries in India: Industries such as petrochemicals, pharmaceuticals, pesticides, paint
and dye, etc., generate hazardous wastes in the form of metals,
cyanides, pesticides, complex aromatic compounds and other
chemicals. These hazardous wastes may be toxic, flammable, reactive, corrosive, or have explosive properties.
2. Hazardous wastes brought into India from foreign countries
for recycling and re-processing: Imported waste is used by certain industries as raw material. Also, some amount of hazardous
waste is used for recycling or extracting metals.
Previously, Hazardous Wastes Management and Handling Rules were
notified in 1989, and then expanded in 2008 to cover within its ambit
transboundary movement—Hazardous Wastes (Management, Handling, and Transboundary Movement) Rules, 2008. The 2016 version
of the rules Hazardous Waste Management Rules, 2016 (HWM Rules,
2016) has added ‘And Other Wastes’ to its scope, and it was notified on
4th April, 2016. Salient features of the HWM Rules, 2016 are as follows:
‰‰ Distinguishing
between hazardous and ‘other wastes’
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‰‰ Registering
workers involved in recycling activities
‰‰ Exempting
import of metal scrap, paper waste and some categories of electronic equipment for the reuse purpose from the
requirement of obtaining the Ministry of Environment, Forest and
Climate Change permission
‰‰ Revising
forms for permission, import/export, filing of annual
returns, etc.
in order of priority, the hierarchy of waste management. Section 4 of the HWM Rules, 2016 relate to the responsibilities of the occupier of hazardous and other waste generators
for the management of hazardous and other wastes. Hazardous
and other wastes can be managed by following certain steps as
follows:
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‰‰ Recognising,
 Prevention
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 Minimisation
 Reuse
 Recycling
 Recovery,
utilisation including co-processing
disposal
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 Safe
‰‰ The
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384
government agency that has been authorised by the state
government for the matters related to the management of hazardous wastes has to allocate industrial space or shed for recycling,
pre-processing and other utilisation of hazardous or other wastes
in the existing and upcoming industrial park, estate and industrial
clusters.
The HWM Rules, 2016 have been further amended by the Hazardous and Other Wastes (Management and Transboundary Movement)
Amendment Rules, 2019 (hereinafter referred to as ‘Amendment
Rules, 2019’). Some important features of the Amendment Rules, 2019
are as follows:
‰‰ Banning
the import of solid plastic waste into India even in the
Special Economic Zones (SEZs) and in Export Oriented Units
(EOUs)
‰‰ Exempting
the silk waste exporters from the requirement of
obtaining permission from the Ministry of Environment, Forest
and Climate Change (MOEFCC).
‰‰ Exempting
the electrical and electronic assemblies and components that were manufactured in and exported from India for
importing back if these are found defective within a year of export
from the requirement of obtaining permission from the MOEFCC.
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ENVIRONMENT-RELATED LAWS
‰‰ Exempting
industries that are exempted from obtaining permission under the Water Act, 1974 and the Air Act, 1981, from the
requirement of obtaining authorisation under the HWM Rules,
2016. However, this exemption is applicable only if the hazardous
and other wastes generated by such industries are handed over to
the authorised actual users, waste collectors, or disposal facilities.
The biggest problem facing India at the moment is the high density of
plastic scrap imported by the country, especially since China banned
these imports. However, the country has been making strides in developing methods for recycling plastic waste.
10.2.6
THE WILDLIFE PROTECTION ACT, 1972
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The rules have been further amended by the Hazardous and Other
Wastes (Management and Transboundary Movement) Amendment
Rules, 2019 (hereinafter referred to as ‘Amendment Rules, 2019’).
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IM
Article 48A of the Indian Constitution imposes a duty on the states to
protect and improve the environment and safeguard the forest and
wildlife. The Directive Principles of the State Policy also require that
the states develop a mechanism and formulate laws for protecting
wildlife. Article 51A also states that the citizens of the country have
a fundamental duty to protect and improve the environment which
includes forests, lakes, rivers and wildlife and to have compassion for
living creatures.
N
Wildlife is an important part of the environment, which includes wild
animals, plants, birds, etc. Due to unsustainable industrialisation and
development, a lot of harm has been done and is continued to be done
to forests and wildlife. In order to protect wildlife, the Indian Government enacted the Wildlife Protection Act, 1972. The major objectives
of the Wildlife Protection Act, 1972 are as follows:
‰‰ To provide for the protection of wild animals, birds and plants and
related matters
‰‰ To ensure the ecological and environmental security of the country
‰‰ To
prohibit hunting of wild animals and birds
‰‰ To
penalise and prosecute the people who violate any provision of
the Wildlife Protection Act, 1972
‰‰ To
prevent extinction of animals
‰‰ To
provide for provisions for hunting with a license within the
restricted areas
‰‰ To
empower the central and state governments to declare certain
areas as sanctuaries and parks
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Business Law
Some of the important features of the Wildlife Protection Act, 1972
(Wildlife Act) are as follows:
‰‰ Defining
various important terms such as animal, animal article,
collector, forest officer, habitat, meat, license, permit, etc.
‰‰ Providing
for the appointment of wildlife advisory board, wildlife
warden and their powers and duties
‰‰ Helping in becoming a party to the Contravention of International
Trade in Endangered Species of Fauna and Flora (CITES), 1976
‰‰ Supporting
in launching the national component of UNESCO’s
Man and Biosphere Programme, 1971
‰‰ Constituting National Board for Wildlife (a statutory organisation),
National Tiger Conservation Authority, a statutory
body under the Ministry of Environment
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‰‰ Establishing
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the apex body of all such advisory boards established under the
Wildlife Act
‰‰ Making
NOTE
of a comprehensive list of endangered wildlife species
‰‰ Structuring lists in 6 Schedules appended to the Act that give pro-
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tection to different classes of flora and fauna, e.g., those in Schedule I get absolute protection. Also, trade of animals under Schedules I and II is strictly prohibited and the act is made punishable.
‰‰ Establishing 5 types of ‘protected areas’ for protection and welfare
of endangered species—Sanctuaries, National Parks, Conservation Reserves, Community Reserves and Tiger Reserves
‰‰ Providing
various powers to officers to enforce the Wildlife Act
‰‰ Providing
punishment to offenders
N
The Wildlife Protection
Amendment Act, 2002 dictates
that sanctuaries and national
parks cannot be exploited for
commercial purpose, while the
local community is allowed to
collect forest produce for their
bona fide requirements.
10.2.7
NOTE
As per the Forest Conservation
Act, 1980, the restriction was
made on the use of the forests
for non-forest purposes.
THE FOREST CONSERVATION ACT, 1980
A forest can be defined as a biotic community composed predominantly of trees, shrubs and climbers. It is an old saying that forests are
the lungs of our land. This is in fact true because oxygen that humans
and other animals require for survival is produced by plants and trees.
Trees and plants provide not only oxygen but also various natural
resources. Just like humans would die if their lungs did not function
effectively, our environment will die slowly if the rate at which forests
are being destroyed is not lowered or brought to zero.
In order to ensure continuity of human life, conservation of forests is
extremely crucial. Forest conservation means protecting and preserving forests and reversing deforestation and environmental pollution.
It is only relevant to preserve something that is extremely critical for
our own survival.
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The reasons that justify the major push for the conservation of forests
are as follows:
‰‰ Trees
produce oxygen.
‰‰ Trees
absorb carbon dioxide (CO2) which is a major component of
air pollution.
‰‰ Forests
prevent soil erosion.
‰‰ Forests
keep soil pollution under control.
‰‰ Forests
help in maintaining water cycle and the underground
water table.
‰‰ Forests
help in maintaining the moisture level in the ecosystem.
‰‰ Forests are the natural home and habitat for innumerable animals,
‰‰ Controlled
deforestation
‰‰ Afforestation
‰‰ Protecting
‰‰ Improved
against forest fires
farming practices
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Some ways in which forests can be conserved include:
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birds, insects, reptiles, aquatic animals and various types of flora.
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In order to manage forest conservation and related activities, the Government of India enacted the Forest Conservation Act, 1980. This law
was amended in 1988.
‰‰ To
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The main objectives of this Forest Conservation Act, 1980 are as follows:
‰‰ To
ensure the judicious use of forest produce
‰‰ To
check the diversion of forest land for non-forest purposes
provide for the protection and conservation of forests and
related matters
Some important features of this Forest Conservation Act, 1980 are as
follows:
‰‰ Discourages
private sector from any kind of involvement in state
forest lands
‰‰ Disallows
any kind of developmental activities in forest areas
‰‰ Provides
for the judicious use of tribal and non-tribal forest land
‰‰ Provides
for restrictions on the de-reservation of forests
‰‰ Restricts
the use of forest land for non-forest purpose
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Business Law
‰‰ Empowers
the state governments to regulate and prohibit the
clearing of any land for cultivation, pasturing of cattle, etc., in any
forest
‰‰ Empowers
the central government to constitute a committee for
advising on imposing restrictions on de-reservation of forests or
use of forest for non-forest purposes as per Section 3 of the Forest
Conservation Act, 1980
‰‰ Empowers
the state governments to declare any land or waste
land as reserve forest
10.2.8
S
It has already been stated that there has been a remarkable growth
in the number and types of industries that have been set up in India.
When the number of industries increases, the probability of industrial
accidents also increases. There is a risk to the workmen employed in
such industries, to the general public staying in nearabout areas and
to the owners of the industries.
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Know More
In various instances, an industry or business may cause an unexpected and unintentional damage to a third party. There are usual
circumstances wherein the members of the public interact with a
business such as clients visiting the office, employees working off-site,
and customers receiving deliveries from a business. All these circumstances do not involve the business owner directly. In any of these
circumstances, some kind of unwelcome event like an accident may
take place. For example, a business had installed an advertisement
signboard on a busy street which suddenly falls over a person standing under it which leads to an injury or death. Public liability insurance offers protection from risks associated with all such liabilities.
If a business is not covered under public liability insurance, the business can be sued by the third party or its representative which suffers
injury, illness, damage to property, or death.
N
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As per the EPA, 1986 and the
Public Liability Insurance Act,
1991, the businesses dealing in
a hazardous environment must
take suitable insurance.
THE PUBLIC LIABILITY INSURANCE ACT, 1991
In order to deal effectively with the cases of public liability, the Government of India enacted the Public Liability Insurance Act, 1991 which
was amended in 1992 and the Public Liability Insurance Rules, 1991.
The prime objective of enacting the Public Liability Insurance Act,
1991 and the related rules is to provide for public liability insurance
and for providing immediate relief to persons affected by accidents
while handling hazardous substances and all such related matters.
This law is applicable to all owners associated with production or handling of the hazardous chemicals. In India, there are three main types
of public liability insurance:
‰‰ Public liability insurance related to industrial risks: Such insur-
ance is used by manufacturers and warehouses.
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ENVIRONMENT-RELATED LAWS
‰‰ Public
liability insurance related to non-industrial risks: Such
insurance is used by businesses that do not manufacture any products, such as hospitals, retail outlets, IT companies, BPOs, schools,
colleges, clubs, etc.
‰‰ Insurance related due to handling of hazardous substance: Such
a policy is usually used by businesses to protect themselves from
legal liability to indemnify third parties in case of any sudden or
unintentional accident while they are handling any hazardous substance which results in death, injury, or damage to any property.
Some important features of this Public Liability Insurance Act, 1991
are as follows:
fault liability (Section 3): The owner of a business is liable to
give relief if any person dies or gets injured or suffers damage to
his/her property. It must be remembered that the death, injury, or
damage to property should be due to an accident only.
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‰‰ No
of the owner to take out insurance policies (Section 4):
Before starting the handling of hazardous substances, a business
owner has to take out insurance policies to insure against his/her
liability to provide relief in case of an accident, have it renewed
from time to time.
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‰‰ Duty
‰‰ Verification and publication of accident by Collector (Section 5):
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For any accident that occurs within the jurisdiction of a Collector,
the Collector is dutybound to verify the occurrence of such an accident. In addition, he/she must also invite applications for claim for
relief under Section 6 of Public Liability Insurance Act,1991.
‰‰ Application for claim for relief (Section 6): In case of an accident,
an applicant has to make an application for relief to the Collector
within five years from the date of occurrence of such accident. The
application can be filed by any of the following:
 By
the person who sustains injury or his/her authorised agent
 By
legal representative of the person who died in accident or
his/her authorised agent
 By
owner of property to which damage was caused by his/her
authorised agent
‰‰ Award
of relief (Section 7): After receiving the application for
relief, it is the duty of the collector to hold an inquiry into the claim
made by the applicant. First, the applicant has to make an application with the collector. Thereafter, the collector has to hear all the
parties. After hearing all parties, the collector holds inquiry and
makes an award determining the amount of relief. It means that
the Collector will decide upon the amount that must be paid by the
insurer or owner to the applicant.
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‰‰ Establishment
of Environment Relief Fund (Section 7A): Section 7A of this Public Liability Insurance Act, 1991 provides for
the establishment of an Environment Relief Fund by the central
government. If the Collector orders the payment of relief amount,
such payment has to be made through the Environment Relief
Fund.
‰‰ Provisions
as to other right to claim compensation for death,
etc. (Section 8): This provision states that in the event of death
of the victim, or injury or damage to property, the compensation
claimed under the Public Liability Insurance Act, 1991 shall be in
addition to any other right to claim compensation under any other
legislation.
Biological diversity (or biodiversity) refers to the variety of life forms
that exist in our ecosystem. Presence of biological diversity is critical
for the sustenance and functioning of the ecosystem in which they are
present. Ecosystems provide an array of natural gifts that are critical
for survival of life on Earth. For instance, we get oxygen, food, water,
soil, fuel, etc., from ecosystem. The ecosystem also provides ecological
services such as preventing soil erosion, moderating storms, mitigating climate change, etc. All these gifts and services that ecosystems
provide us help in supporting life. In the absence of all these, life in all
forms would come to an end.
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IM
? DID YOU KNOW
Convention on Biological
Diversity is a multilateral treaty.
The objective is to develop
national strategies for the
conservation and sustainable
use of biological diversity,
and it is often seen as the key
document regarding sustainable
development.
THE BIOLOGICAL DIVERSITY ACT, 2002
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10.2.9
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On 5th June 1992, India signed the United Nations Convention on
Biological Diversity (CBD). To give effect to the CBD held at Rio De
Janeiro in 1992, the Indian Government enacted the Biological Diversity Act, 2002.
The main objectives of the Biological Diversity Act, 2002 are as follows:
‰‰ To
conserve the biological diversity in India
‰‰ To
regulate access to Indian biological resources
‰‰ To
ensure fair and equitable benefit sharing arising from the utilisation of those biological resources and knowledge
‰‰ To
ensure the sustainable use of the components of the biological
diversity
‰‰ To
establish governing bodies such as the National Biodiversity Authority (NBA) at the national level, the State Biodiversity
Boards (SBBs) at the State level and Biodiversity Management
Committees (BMCs) at the local level.
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ENVIRONMENT-RELATED LAWS
Some important features and provisions of the Biological Diversity
Act, 2002 are as follows:
‰‰ The
NBA and the SBBs have to consult the BMCs while making
decisions related to bioresources and related knowledge within
their respective jurisdictions.
‰‰ Knowledge of local communities must be respected and protected.
‰‰ Traditional
biodiversity knowledge must be protected.
‰‰ Benefits
derived from the biological resources must be shared
with local people because they act as the conservers of biological
resources and all related knowledge.
the foreign nationals and organisations must seek prior
approval from the NBA in order to obtain any biological resources
or knowledge.
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‰‰ All
the Indian scientists and individuals must take prior approval
from the NBA for transferring the results of their research to foreign nationals or organisations.
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‰‰ All
‰‰ Certain biodiverse areas should be declared as biological diversity
heritage sites in order to conserve and develop these areas.
‰‰ Threatened
species must be protected and rehabilitated.
to be constituted as per the Biological Diversity Act,
2002 by the respective state governments.
‰‰ Check
biopiracy
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‰‰ Committees
‰‰ Protect the rich biodiversity and the associated knowledge of India
‰‰ Indian
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against use by foreign individuals and organisations if such organisations and individuals do not share the benefits that arise due to
such biodiversity and organisations.
organisations must give intimation to the respective SBBs
if they wish to obtain any bioresource and the SBB has a right
to restrain such organisation from obtaining the said resources if
the organisation violates conservation, sustainable use and benefit
sharing.
‰‰ State
governments in consultation with local bodies can notify
heritage sites.
‰‰ Create Biodiversity Fund at the national, state and local levels and
its use for conservation of biodiversity.
‰‰ No
person can apply for any Intellectual Property Rights (IPR)
by any name in or outside India for any invention that is based
on a research or biological resource obtained from India without
obtaining a prior approval from the NBA.
‰‰ BMC has to prepare the People’s Biodiversity Register (PBR) after
consulting the local people.
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Exhibit
Powers of NGT
The NGT deals with civil cases related to environment under the
following Acts:
i. The Water (Prevention and Control of Pollution) Act, 1974
ii. The Water (Prevention and Control of Pollution) Cess Act,
1977
iii. The Forest (Conservation) Act, 1980
iv. The Air (Prevention and Control of Pollution) Act, 1981
v. The Environment (Protection) Act, 1986
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vi. The Public Liability Insurance Act, 1991
vii. The Biological Diversity Act, 2002
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If there is any violation related to any of these laws or of any decision made by the Government under these laws, such a violation
can be challenged before the NGT.
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10.2.10 CASES WHERE COMPANIES HAVE FACED
CONSEQUENCES OF VIOLATING ENVIRONMENT
PROTECTION LAWS IN INDIA
In India, despite having laws for protecting the environment, there
are various organisations and individuals that openly violate these
laws. Let us study about a few cases to demonstrate the violations of
the environment protection laws in India:
N
392
‰‰ In 1989, a writ petition was filed in the Supreme Court against Hin-
dustan Agro Chemicals Limited. The writ petition alleged that the
said organisation was polluting the land and water in Bichhri Village of Udaipur, Rajasthan. The verdict of this case was announced
in 2011. The verdict of the Supreme Court was as follows:
In 1996, the court observed that ‘toxic untreated waste waters were
allowed to flow out freely and because the untreated toxic sludge
was thrown in the open in and around the complex, the toxic substances have percolated deep into the bowels of the earth polluting
the aquifers and the sub-terrain supply of water’. It said water in
the wells and the streams had become unfit for human consumption and the soil was unsuitable for cultivation. In November 1997,
the court ordered the company to immediately pay ` 37.4 crore
towards the costs of remediation. Following the judgement, the
company filed several interlocutory applications. Calling the applications as delaying tactics, the Supreme Court in 2011 asked
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ENVIRONMENT-RELATED LAWS
the company to pay the fine along with compound interest @12
per cent per annum from November 1997 till the amount is paid or
recovered. The company was also asked to pay costs of litigation.
‰‰ In
2019, the NGT ordered the UP’s PCB to prepare a report for
matter related to disposal of bio-medical waste by M/s Medical
Pollution Control Committee, Growth Center which is a Common
Bio-Medical Waste Treatment Facility (CBMWTF) located near
Jhansi, Uttar Pradesh. The UPPCB filed its report and found various discrepancies at CBMWTF as follows:
 Plant
machinery of CBMWTF was not working properly
because it was undergoing modernization.
 Incineration of bio-medical waste was done at wrong tempera-
S
ture.
 Bio-medical
waste transported from various medical facilities
was stored within the CBMWTF.
was transporting dry-wet bio-medical waste to its
sister concern at Panki, Kanpur without the permission of
UPPCB.
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 CBMWTF
The case is still being heard and final order is awaited.
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self assessment Questions
1. The term ___________ includes water, air and land.
a. NEAA
b. CPCB
c. NBA
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2. Which of the following authorities looks after the enforcement
of any legal rights relating to environment?
d. NGT
3. Under the __________ Act, ________, a concerned entity has to
take consent from the concerned PCB to direct the discharges
into streams and wells.
4. When the level of industrialisation increases, it also leads to a
simultaneous increase in the generation of hazardous wastes.
a. True
b. False
5. Which of the following industries does not produce hazardous
wastes?
a. Petrochemical
b. Pulp and paper
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c. Pharmaceutical
d. Paint
6. Article _______ of the Indian Constitution states that the individual citizens of the country have a fundamental duty to
protect and improve the environment.
a. 29
b. 21
c. 51A
Activity
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d. 14A
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Perform a research on the Internet and find out the real-life examples of the organisations who violated the environment protection
laws in India.
10.3 Summary
‰‰ In the Constitution of India, the fundamental duties are laid out in
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Article 51A. This Article states that it is the duty of every citizen
of India to protect and improve the natural environment such as
forests, lakes, rivers, wildlife, etc.
‰‰ The
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394
regulation and administration of environmental protection
laws in India is done by a combination of the Ministry of Environment, Forest and Climate Change (MoEFCC), the Central Pollution Control Board (CPCB) and the State Pollution Control Boards
(SPCBs).
‰‰ The
EPA, 1986 provides for the protection and improvement of
environment and the prevention of hazards to human beings,
other living creatures, plants and property.
‰‰ The
National Green Tribunal Act (NGT Act) was enacted in 2010
by the Indian Government with an aim to establish the National
Green Tribunal (NGT) which would be responsible for dealing
with cases related to environment protection, conservation of forests and other natural resources.
‰‰ The
Air (Prevention and Control of Pollution) Act, 1981 provides
for the prevention, control and abatement of air pollution.
‰‰ The major objective of the Water (Prevention and Control of Pollu-
tion) Act, 1974 is to provide for the prevention and control of water
pollution.
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ENVIRONMENT-RELATED LAWS
‰‰ For
effectively dealing with the hazardous wastes, India has
devised certain rules and regulations known as the Hazardous
Waste (Management, Handling and Transboundary Movement)
Rules, 2016. The major objective of this Act is the minimisation of
wastes and maximisation of the disposal rates.
‰‰ The
major objective of the Wildlife Protection Act, 1972 is to provide for the protection of wild animals, birds, plants and related
matters
‰‰ In
order to manage forest conservation and related activities,
the Indian Government enacted the Forest Conservation Act,
1980.
order to deal effectively with cases of public liability, the Indian
Government enacted the Public Liability Insurance Act, 1991
which was amended in 1992 and the Public Liability Insurance
Rules, 1991.
S
‰‰ In
5th June, 1992, India signed the United Nations Convention on
Biological Diversity (CBD). To give effect to the CBD held at Rio
De Janeiro in 1992, the Indian Government enacted the Biological
Diversity Act, 2002.
IM
‰‰ On
main objective of the Biological Diversity Act, 2002 is to conserve the biological diversity in India.
key words
An action that is against any law
N
‰‰ Contravention:
M
‰‰ The
‰‰ Environmental
pollution: The contamination of the physical
and biological components of the earth, which hampers the
environmental processes
‰‰ Hazardous
wastes: The wastes that are potentially harmful for
health and safety of humans, animals and the environment
‰‰ Pollution
standards: The prescribed limits of environmental
pollution
10.4 Descriptive Questions
1. Write a brief note on the important environment-related legislations enacted in India.
2. What are the key objectives of the Environment Protection Act,
1986?
3. Explain the important bodies set up for controlling pollution.
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Business Law
10.5 Answers and Hints
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic
Answer
1.
environment
2.
d.
3.
Water, 1974
4.
a. True
5.
b.
Pulp and paper
6.
c.
51 A
NGT
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Laws Aimed at Protecting and
Conserving the Environment
Q. No.
HINTS FOR DESCRIPTIVE QUESTIONS
M
1. Some important environment-related legislations include the
National Green Tribunal Act, 2010; the Air (Prevention and
Control of Pollution) Act, 1981; the Water (Prevention and Control of Pollution) Act, 1974; the Environment Protection Act,
1986; the Hazardous Waste Management Regulations, etc. Refer
to Section 10.2 Laws Aimed at Protecting and Conserving the
Environment
2. Some key objectives of the Environment Protection Act, 1986
are to create authority for government protection, to coordinate
the activities of various regulatory agencies created under the
Act, etc. Refer to Section 10.2 Laws Aimed at Protecting and
Conserving the Environment
N
396
3. The Pollution Control Boards that have been set up at the central and state levels namely the CPCB and the SPCBs which are
responsible for ensuring that the air and water pollution in the
country can be controlled. Refer to Section 10.2 Laws Aimed at
Protecting and Conserving the Environment
10.6 Suggested Readings & References
SUGGESTED READINGS
‰‰ Gupta,
K. (2006). Environmental legislation in India. New Delhi:
Atlantic.
‰‰ Sahasranaman,
P. (2012). Handbook of environmental law. New
Delhi, India: Oxford University Press.
NMIMS Global Access - School for Continuing Education
ENVIRONMENT-RELATED LAWS
E-REFERENCES
‰‰ Top
6 Environmental Acts Enacted in India. (2020). Retrieved 20
May, 2020, from https://www.biologydiscussion.com/environment/
top-6-environmental-acts-enacted-in-india/16775
‰‰ (2020). Retrieved 20 May, 2020, from http://awsassets.wwfindia.org/
downloads/mle_024_block_2.pdf
B. (2020). Bhushan Steel in soup for violating Environment Protection Act. Retrieved 20 May 2020,
from
https://www.business-standard.com/article/companies/bhusan-steel-in-soup-for-violating-environment-protection-act-112070900073_1.html
N
M
IM
S
‰‰ Reporter,
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IM
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N
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11
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CASE STUDIES
CONTENTS
N
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Case Study 1 National Insurance Company Ltd., vs. Seema Malhotra (2001
Supreme Court)
Case Study 2Ravinder Raj vs. Maruti Udyog Limited and M/S Competent Motors
Co. Pvt. Ltd. (2011 Supreme Court)
Case Study 3Kanodia Knits Pvt. Ltd., vs. Registrar of Companies Delhi & Haryana
(Company Appeal No. 216 of 2018)
Case Study 4 Sampelly Satyanarayan Rao vs. Indian Renewable Energy
Development Agency Ltd. (2016 Supreme Court)
Case Study 5Tulsi Narayan Garg vs. The M.P. Road Development Authority,
Bhopal and Ors (2019 Supreme Court)
Case Study 6TDM Infrastructure Pvt. Ltd., vs. UE Development India (2008
Supreme Court)
Case Study 7 National Insurance Company Ltd. vs. Hindustan Safety Glass Works
Ltd. (2007 Supreme Court)
Case Study 8Institute of Chartered Accountants of India vs. Shaunak H. Satya
(2011 Suprme Court)
Case Study 9Rajni Maindiratta vs. Directorate of Education (2017, High Court of
Delhi)
Case Study 10 Competition Commission of India vs. Bharti Airtel Ltd. & ANR (2018
Supreme Court)
Case Study 11
Labour Unrest at Maruti Suzuki India Ltd.
Case Study 12State of Rajasthan vs. Salman Khan and Others (2012 High Court
of Rajasthan)
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Case Study 1
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NATIONAL INSURANCE COMPANY LTD., VS.
SEEMA MALHOTRA (2001 SUPREME COURT)
Case Objective
On 21st December 1993, the insured, Yash Paul Malhotra signed
an insurance contract with National Insurance Company. He had
insured a Maruti car for a sum of ` 1,50,000 and gave a premium
cheque to the insurance company. In return, the insurance company issued a cover note in accordance with Section 149 of the
Motor Vehicles Act, 1988. Unfortunately, the insured met with an
accident in which he died and the vehicle was damaged. Subsequently, the bank on which the cheque was drawn by the insured
intimated the insurance company about the dishonour of the premium cheque due to insufficiency of funds in the account of the
deceased. At this, the insurance company informed the insured
party and also intimated them of the cancellation of the insurance
policy with immediate effect.
IM
S
This case study discusses
the facts and judgement of
the case, National Insurance
Company Ltd., vs. Seema
Malhotra on issue of
Consideration in a contract
FACTS
N
M
The widow of the insured filed a claim for the loss of the vehicle,
which the insurance company repudiated. At this, the respondents moved the State Consumer Protection Commission. The
State Commission rejected the claim for the absence of consideration (premium). The decision of the Commission was challenged
in the Jammu & Kashmir High Court. The Division Bench of
J&K High Court ruled that the insurance company is liable on
the ground where it chose the policy cancellation from the date of
bouncing of the cheque though it has been liable from the date of
the accident.
ISSUE
Whether the insurer is liable to honour the contract of insurance
in the event of dishonour of the premium cheque.
JUDGEMENT
The Supreme Court held that the insurer can cancel the policy
notwithstanding the issue of the cover note if the premium cheque
given to it gets dishonoured due to the cardinal rule of ‘no consideration, no contract’. According to Section 64VB of the Insurance
Act, 1938, in case of the absence of any consideration, there can be
no contract. Therefore, the insurer repudiating the contract was
justified after the bouncing of the premium cheque.
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Case Study 1 : NATIONAL INSURANCE COMPANY LTD.
VS. SEEMA MALHOTRA (2001 SUPREME COURT) 401
Case Study 1
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Only the premium received by insurance companies may provide them profits assuming that no accident or damage occurs.
To obligate an insurance company to pay for the damages without
receiving any premium runs contrary to the principles of equity.
When an insurer provides insurance to indemnify the insured
against the damage, loss or liability arising from an uncertain contingent to the insured, it is known as an insurance contract.
As per section 64 VB of the Insurance Act, 1938, No risk to
assumed unless premium is received in advance-
IM
S
(1) No insurer shall assume any risk in India in respect of any
insurance business on which premium is not ordinarily
payable outside India unless and until the premium payable
is received by him or is guaranteed to be paid by such person
in such manner and within such time as may be prescribed or
unless and until deposit of such amount as may be prescribed,
is made in advance in the prescribed manner.
M
(2) For the purposes of this section, in the case of risks for which
premium can be ascertained in advance; the risk may be
assumed not earlier than the date on which the premium has
been paid in cash or by cheque to the insurer.
N
Under Section 64 VB (1), the insurer is not liable until he receives
the amount of the premium. However, Section 64VB (2) makes the
receipt of the premium a pre-condition for honouring the obligation to indemnify by the insurer.
The crucial question is about the legal position under the law of
contracts when the premium is paid by means of a cheque, which
gets bounced. In this context, there are three relevant provisions
under the Indian Contract Act, 1872, namely: Sections 51, 52 and
54. These provisions have been included under the ‘Performance
of Reciprocal Promises’ title. Section 51 is concerned with a contract that deals with reciprocal promises to be simultaneously
performed. In this type of contract, the promisee is released from
performing his promise only if the promisor is ready to perform
his part of the promise willingly. Section 52 provides the provision for the reciprocal promises that are not expressly provided in
the contract but have to be performed. These promises must be
performed in an order that the nature of the transaction warrants
it.
Section 54 of the Insurance Act, 1938 provides that when a contract consists of reciprocal promises, such that one of them cannot
be performed, or that its performance cannot be claimed till the other
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Case Study 1
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has been performed, and the promisor of the promise last mentioned
fails to perform it, such promisor cannot claim the performance of
the reciprocal promise, and must make compensation to the other
party to the contract for any loss which such other party may sustain
by the non-performance of the contract.
S
A contract of insurance is a reciprocal promise in which the payment of premium must be actually paid before the insurer could
be held liable to indemnify the insured. When an insurer breaks
his promise to pay promised premium amount, or if the premium
cheque is dishonoured or returned, then, under Section 25 of the
Contract Act, 1872 the insurance agreement is considered as void.
Under Section 25 of the Contract Act, 1872 an agreement made
without consideration is void. As per Section 65 of the Contract
Act, 1872 a contract is considered void when any person who has
received any advantage under the contract restores it to the person from whom he has received it. Therefore, an insurer is entitled to receive his money back when he has disbursed the insured
amount before the cheque was dishonoured or returned to the
insured, whereas if the insured person pays the premium after
the cheque was dishonoured but prior to the date of the accident,
then the case would be entirely different. The payment of consideration in cash can then be treated as a payment in the order
in which the nature of the transaction required it. However, in
this case, no such event has happened. Therefore, the insurer can
legally refuse to pay the amount claimed by the respondents.
IM
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On the basis of the above arguments, the Supreme Court upheld
the contention of the appellant insurance company and set aside
the impugned judgement of the Division Bench of the J & K High
Court.
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questions
1. Explain the provisions of 64 VB (1) and 64 VB (2) of the
Insurance Act.
(Hint: Section 64 VB (1) says that the insurer is not liable
until he receives the amount of the premium. Section
64VB (2) says that the receipt of the premium is a precondition for honouring the obligation to indemnify by
the insurer.)
2. Do you think that the insurer is liable to honour the
contract of insurance in this case? Give reasons.
[Hint: The principle of equity is disturbed as the premium
amount was not received by the insurer. Also, read Section
64 VB (1) and 64 VB (2).]
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Case Study 2: RAVINDER RAJ VS. MARUTI UDYOG LIMITED AND
M/S COMPETENT MOTORS CO. PVT. LTD. (2011 SUPREME COURT) 403
Case Study 2
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RAVINDER RAJ VS. MARUTI UDYOG LIMITED AND
M/S COMPETENT MOTORS CO. PVT. LTD. (2011 SUPREME COURT)
FACTS
IM
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Mr. Ravinder Raj, the complainant filed a case against M/S Competent Motors who was the first respondent and Maruti Udyog
Limited, the second respondent. He booked a car from the dealer
M/S. Competent Motors by paying ` 78,351 as an initial booking
amount. Then, on 5th April 1989, the balance amount was called
upon and he paid the remaining amount. The official billing of
the car was done on 5th April 1989. Then, the car was delivered
to him on 13th April 1989. However, the price of the vehicle was
escalated by ` 6000 during the intervening period. Therefore, he
had to pay an amount of ` 7000 extra for receiving the delivery of
the car. The complainant filed a case with the complaint number
1133/1990 to get a refund of the excess amount paid against the
pro forma invoice.
ISSUE
N
M
Whether the consumer is liable to pay the increased amount of
excise duty on the product when he had already paid the initial
booking amount, also considering the fact that the excise duty
increased after the Company had sent a letter of allotment to the
consumer, but the billing date is at a later date, after the price had
increased.
JUDGeMENT
The District forum rejected the petition. After verifying details,
the Commission came to the conclusion that the prices, in this
case, were revised as there was an increase in the Central Excise
Duty. The district forum dismissed the complaint and declined
the refund of the extra amount paid by the complainant because
an increase in the future tax rate is not in the hands of the producer, therefore, he should not bear the extra burden. The additional amount asked by the dealer is to be deposited to the government authorities. The amount was not retained by the dealer or
by Maruti Udyog Limited. However, when appealed in the State
Commission, the Commission directed the respondents to refund
the extra amount received by them. Both the respondents filed
an appeal before the National Commission, which reversed the
decision of the State Commission and ruled in the favour of the
car dealership and manufacturers.
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Case Objective
This case study discusses
the facts and judgement of
the case, Ravinder Raj vs.
Maruti Udyog Limited and M/S
Competent Motors Co. Pvt.
Ltd. on a purchasers liability
to pay tax in transaction once
goods are sold.
Business Law
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Case Study 2
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National Commission considered Section 64A (2) of The Sales of
Goods Act 1930, which states, Any contract for the sale or purchase of goods without the stipulations about the payment of tax
where the tax was not charged at the time of making the contract, or
for the sale or purchase of such good any increase in the tax or any
part of tax is payable, the seller may add the amount equivalent to
the increase in tax to the contact price and he shall be entitled to be
paid and to sue for the recovery of the additional amount.
S
Therefore, the respondents possess the right of an unpaid seller
stated in Section 46A (1) of the Act. Considering all the facts and
findings, the revised petition was heard on 28th July 2008 which
stated that the verdict passed by the State Commission was
refuted and the conclusions passed by the District Forum were
approved. Therefore, the complainant was asked to file an affidavit by stating whether the said undertaking is correct or not.
However, he avoided filing an affidavit denying its veracity.
Against the said order of the National Commission, a Special
Leave petition was filed in the Supreme Court of India by the
Petitioner Ravinder Raj, his main contention was that the delay
in the delivery of the car was not his fault – neither failure nor
negligence on his part – hence he should not bear the brunt of the
increase in price. However, the Apex Court found that the receipt
given to the petitioner clearly indicated that the price prevailing
on the date of billing would apply. The price on the date of billing
included the increased rate of excise duty. Keeping in view this
fact, and Sections 46(1) and 64A(2) of the Sale of Goods Act, 1930,
Supreme Court dismissed the petition of the consumer and held
that he is liable to pay the amount due on the increase of excise
duty.
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questions
1. As per your understanding, do you think the extra amount
paid by the complainant would have to be paid by the
dealer or manufacturer?
(Hint: The increased excise duty shall not be borne by the
manufacturer or dealer.)
2. Which section of ‘The Sales of Goods Act, 1930’ defended
the respondents in this case?
(Hint: Section 64A (2) of ‘The Sales of Goods Act, 1930’
states the sellers have the right to ask for the additional
amount on the contract price in case of an increase in the
tax or duties as a purchaser is bound to pay the additional
amount.)
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Case study 3: KANODIA KNITS PVT. LTD. VS. REGISTRAR OF COMPANIES DELHI & HARYANA
(Company APpeal no. 216 of 2018) 405
Case Study 3
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KANODIA KNITS PVT. LTD., VS. REGISTRAR OF COMPANIES
DELHI & HARYANA (Company APpeal no. 216 of 2018)
FACT
Case Objective
IM
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This appeal has been filed against the order of the National Company Law Tribunal (NCLT). The appellant company, Kanodia
Knits Private Limited had two directors, who were also its shareholders, namely Mr. Ajay Kanodia and his wife Mr. Anjana Kanodia with 100% shareholding. The appellant, Mr. Ajay Kanodia, and
the appellant company’s name were struck off by the Registrar of
the Companies (ROC) because the company had not been carrying any business activity, operations or financial transactions for
the past few years. Also, the company did not get the status of a
dormant company under Section 455 of the Companies Act, 2013.
Before NCLT, the appellant claimed that they had not received
any notice under Section 248 (1) of the Act.
ISSUE
JUDGeMENT
M
Whether the name of the appellant company was liable to be
struck off from the Register of ROC.
N
The ROC replied against the appellant’s complaint that the appellant company had not submitted financial statements from the
financial year starting from 31st March 2004 till 31st March 2011.
On part of the appellant, no convincing documents were provided
to prove that the company was operational during the last few
years, which is why the ROC struck off its name in June 2017.
Also, as per ROC, it had issued the notice under Section 248 (5)
of the Companies Act, 2013 to the company on 21st March 2017, a
copy of the same was filed with the court. The appellant did not
respond to the notice. Therefore, further steps to strike off the
name of the company were taken. The appeal was dismissed by
the court because the company documents could not prove that
the organisation was working.
The NCLAT (Appellate Tribunal) examined the audited balance
sheets of the company, bank statements, and other documents
brought on record by the appellant company and concluded that
the company was neither carrying on business, nor was it in operation when its name was struck off by the Registrar from ROC.
NMIMS Global Access - School for Continuing Education
This case study discusses the
facts and judgement of the
case, Kanodia Knits Pvt. Ltd.,
vs. Registrar of Companies
Delhi & Haryana where
Registrar of Companies have
a right to strike off the names
of non-operational company
under Companies Act, 2013.
Business Law
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Case Study 3
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Hence, there is no just reason to restore the name of the company
on the ROC.
questions
1. What were the main reasons that the appellant company
name was struck off from ROC?
(Hint: The company had not been carrying any business
activity, operations or financial transactions from the past
few years. Also, the company did not get the status of a
dormant company under Section 455 of the Companies
Act, 2013.)
S
2. On what grounds the appeal was dismissed in this case?
(Hint: The company documents could not prove that the
organisation was working.)
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Case study 4: Sampelly Satyanarayan Rao vs. Indian Renewable Energy Development Agency Ltd. (2016 SUPREME COURT) 407
Case Study 4
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Sampelly Satyanarayan Rao vs. Indian Renewable
Energy Development Agency Ltd. (2016 SUPREME COURT)
FACTS
ISSUE
IM
S
The appellant is the Director of the Company whose cheques have
been dishonoured. The case involves the loan of ` 11.5 crores, in
the agreement it was stated that for loan installment repayment,
post-dated cheques will be issued by the company, signed by its
Director, by way of security. Cheques to the tune of ` 10.3 crores
were dishonoured and the appellant was named as a co-accused
in criminal complaints against the company by the respondents.
The appellant contends that on the date the cheques were issued,
no debt or liability was created or it was due, hence the dishonour
of post-dated cheques did not fall within the dishonour of cheques
rules.
Whether dishonoured post-dated cheques given by way of security fall within the ambit of Section 138 of the Negotiable Instruments Act, 1881.
M
Judgement
N
The appellant contended that the effect of the agreement was
that the deposit of post-dated cheques towards the repayment of
instalments was of “security”, and hence did not create any debt
or liability, post-dated cheques were given towards the amount
payable in the future.
High Court turned down Appellant’s contention, from which arose
this appeal to the Supreme Court. It was held that the dishonour
of cheque issued for discharge of later liability is clearly covered by
the Negotiable Instruments Act, 1881 (as amended by the Amendment Act of 2002). It is to be noted that whether a post-dated cheque
is for “discharge of debt or liability” depends on the nature of the
transaction. If on the date of the cheque liability or debt exists or the
amount has become legally recoverable, then Section 138 of the N.I.
Act is attracted and not otherwise.
questions
1. Which Act addresses the dishonour of cheque as an
offence because of insufficient funds?
(Hint: As per the Negotiable Instruments (Amendment
and Miscellaneous Provisions) Act, 2002, the dishonour of
cheques due to insufficiency of funds was deemed to be
an offence.)
NMIMS Global Access - School for Continuing Education
Case Objective
This case study discusses the
facts and judgement of the
case, Sampelly Satyanarayan
Rao vs. Indian Renewable
Energy Development Agency
Ltd. on issuance of post dated
cheques and its dishonour.
Business Law
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Case Study 4
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2. What is the issue in this case study?
S
(Hint: Whether dishonoured post-dated cheques given by
way of security fall within the ambit of Section 138 of the
Negotiable Instruments Act, 1881)
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Case Study 5: Tulsi Narayan Garg vS. The M.P. Road Development Authority,
Bhopal and Ors. (2019 SUPREME COURT) 409
Case Study 5
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Tulsi Narayan Garg vS. The M.P. Road Development
Authority, Bhopal and Ors. (2019 SUPREME COURT)
FACTS
M
IM
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Here, the appellant is the proprietorship firm. The appellant and
first respondent entered into an agreement, where the appellant
has to construct and maintain two roads. As per the agreement,
the completion data was twelve months, culminating on 21st
October 2009. However, the first respondent being a state party
invoked clause 52 of the agreement and terminated the agreement. The reason for this termination given was the slow progress
of work by the appellant. Clauses 44.1 and 53.1 of the agreement
were used by the first respondent to invoke and send a notice to
the appellant for ascertaining the liquidated damages that were
challenged by the appellant before the high court of Madhya
Pradesh. The same was disposed of, with the option to the appellant of challenging the order by virtue of arbitral tribunal, which
the appellant undertook before the MP Arbitral tribunal under
Section 7, Adhiniyam, 1983. When the same was pending, the
respondent served notice to the appellant for certain packages to
recover the above-said damages. The appellant then challenged
this action stating that the questions of damages were sub-judice
before the arbitral tribunal.
N
ISSUE
Whether a party to an agreement may be an arbiter in his own
cause.
Rule
1. Agreement clauses 44.1 r/w 53.1: The case wherein the
liquidated damages are needed to be paid on the frustration
of the agreement by the contractor, the parties must
follow the procedure as mentioned under Clause 24 of the
agreement.
2. S. 24 of the agreement: The clause specifies a procedure
for the redressal of disputes under the contract through the
arbitration tribunal.
Judgement
The three-member bench of Hon’ble Mr. Justice N.V. Ramana,
Hon’ble Ms. Justice Indira Banerjee and Hon’ble Mr. Justice Ajay
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Case Objective
This case study discusses the
facts and judgement of the
case, on the issue of whether
a person having interest in the
matter can be an arbitrator
Tulsi Narayan Garg vs. The
M.P. Road Development
Authority, Bhopal and Ors.
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Case Study 5
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Rastogi (Bench) has reaffirmed the position of law laid down in
State of Karnataka vs. Shree Rameshwara Rice Mills Thirthahalli, which stated that a party to an agreement cannot be an arbiter in his own cause.
The Bench observed that if the demand raised by a state authority
has been challenged by the contractor and the same is pending adjudication, then initiation of recovery proceedings against the contractor by the concerned state authority at this stage is not justified
and cannot be considered as legally sustainable in law.
Source: https://fastforwardjustice.com/a-party-to-an-agreement-cannot-be-an-arbiter-inhis-own-case/
S
questions
1. Describe the facts of this case.
(Hint: The agreement between parties where the
appellant has to construct and maintain two roads, a state
party invoked clause 52 of the agreement and terminated
the agreement. Clauses 44.1 and 53.1 of the agreement
were used by the first respondent to invoke and send a
notice to the appellant.)
IM
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2. What was the Judgement given by the court?
M
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(Hint: The judgements of the High Court were quashed
and set aside, disposal of the instant appeals and the
Arbitral Tribunal may not be influenced/inhibited by the
observations made and decide the pending reference
petition independently in accordance with the law.)
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Case study 6: TDM INFRASTRUCTURE PVT. LTD. VS. UE DEVELOPMENT INDIA
(2008, SUpREME COURT) 411
Case Study 6
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TDM INFRASTRUCTURE PVT. LTD. VS. UE DEVELOPMENT
INDIA (2008, SUpREME COURT)
FACTS
Case Objective
IM
S
The case involves the resolution of a dispute between two companies both of which were incorporated under the Indian Companies Act, 1956. The respondent company namely UE Development India Private Limited (UED) had been awarded a contract
for up-gradation by the National Highways Authority of India.
A portion of this contract was subcontracted to the TDM Infrastructure Private Limited (TDM). All the TDM’s directors and
shareholders were residents of Malaysia. The contract between
the parties provided for the resolution of disputes between them
by means of reference to arbitration under the provisions of the
Arbitration and Conciliation Act, 1996. The seat of the arbitration
was to be New Delhi.
N
M
On the occurrence of the dispute, the parties failed to decide on
the nomination of an arbitrator. Consequently, in accordance with
the provisions of Arbitration and Conciliation Act, TDM requested
the Chief Justice of India to appoint an arbitrator in terms of Section 11(5) and Section 11(9) of the Arbitration and Conciliation
Act, 1996. Section 2(f) of the Arbitration and Conciliation Act, 1996
has defined the international commercial arbitration’ to mean an
arbitration relating to disputes arising out of legal relationships,
whether contractual or not, considered as commercial under the law
in force in India and where at least one of the parties is: (i) A body
corporate which is incorporated in any country other than India; or
is(iii) a company or an association or a body of individuals whose
central management and control is exercised in any country other
than India. The application by the TDM to the Chief Justice of
India was challenged by the respondent on the ground that the
petitioner being a company registered in India must be held to
be a company situated and controlled in India and therefore not
entitled to approach the Chief Justice of India for the nomination
of an arbitrator.
ISSUE
Whether the agreement between the contending parties falls
within the purview of Section 2 (1)(f) of the Arbitration and
Conciliation Act, 1996 and constitutes ‘international commercial
arbitration.
NMIMS Global Access - School for Continuing Education
This case study discusses the
facts and judgement of the
case, TDM Infrastructure Pvt.
Ltd. vs. UE Development India
on the issue of whether Indian
domiciled entities can opt
for international commercial
arbitration.
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Case Study 6
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JUDGEMENT
Section 2(1) (f) of the Arbitration and Conciliation Act, 1996 relates
to international commercial arbitration in which a legal relationship between the parties is commercial or otherwise under the law
in force in India. This legal relationship is established between
an individual who is a national or habitually resident in some
other country. The ‘nationality’ or ‘habitually residence’ of a body
corporate in any country other than India should also receive a
similar construction. The determination of nationality of parties
particularly in the case of international commercial arbitration is
crucial from the standpoint of the appointment of an arbitrator.
For the purpose of the Arbitration and Conciliation Act, 1996, a
company incorporated in India can only have Indian nationality. Under Section 2 (1) (f) of the Act, if both the parties possess
Indian nationalities, then the arbitration between them cannot be
said to be international commercial arbitration. Notwithstanding
the control and management of a company being located outside
India, it will still be regarded as an Indian company by virtue of its
being registered in India. In the event of its dispute with another
company, which is also an Indian entity, it will not be permissible
to have recourse to foreign law as the governing. If a company
is registered in India, although its directors or shareholders are
based outside India, it would be an Indian outfit for the purpose
of the Arbitration and Conciliation Act, 1996.
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412
Therefore, when both the parties are incorporated in India,
Clause (ii) of Section 2(f) would apply and not Clause (iii) thereof.
The dispute between two domestic companies shall fall outside
the purview of “international commercial arbitration”. Also, if
a company is incorporated in India but its central management
and control are exercised in any country other than India, then it
cannot be included in the definition of international commercial
arbitration.
Section 28 (1) (a) of the Act will be attracted to the case in view of
Section 2(6) of the Act which excludes the domestic arbitration
from derogating from the provisions of Indian law. This is part
of the public policy of the country. Therefore, if both the companies involved in a dispute are domiciled in India by virtue of their
incorporation under Indian law, they will have Indian nationality. Any dispute between them shall be a domestic dispute. They
cannot derogate from the provisions of the Indian law in view of
its being the public policy of the country. Since there is no case
of international commercial arbitration, it is wrong to approach
NMIMS Global Access - School for Continuing Education
Case study 6: TDM INFRASTRUCTURE PVT. LTD. VS. UE DEVELOPMENT INDIA
(2008, SUpREME COURT) 413
Case Study 6
n
the Chief Justice of India for the purpose of the nomination of an
arbitrator under International Commercial Arbitration.
questions
1. Discuss the judgment of the court passed in this case
under the clauses of the Arbitration and Conciliation Act,
1996.
(Hint: For the purpose of the Act, a company incorporated
in India can only have Indian nationality. Under Section
2 (1) (f) of the Act, if both the parties possess Indian
nationalities, then the arbitration between them cannot
be said to be international commercial arbitration.)
S
arbitration
from
2. What
distinguishes
domestic
international commercial arbitration? Give reasons in
support of your answer.
N
M
IM
(Hint: The process of international arbitration can be held
in India in accordance with the same domestic arbitration
process. However, international arbitration involves one
party or domiciled or controlled from outside India or
when the subject matter is abroad.)
NMIMS Global Access - School for Continuing Education
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414
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Case Study 7
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NATIONAL INSURANCE COMPANY LTD., Vs. HINDUSTAN
SAFETY GLASS WORKS LTD. (2007 SUPREME COURT)
FACTS
Case Objective
The case involves the purchase of two insurance policies by the
respondent Hindustan Safety Glass Works Ltd. from the appellant, National Insurance Company. The insurance was subsequently renewed for another year. The policies included the
damage or loss due to flood and inundation besides buildings,
machinery, stock, fixture and furniture, etc. On account of heavy
rains in 1992, there was a heavy accumulation of rainwater inside
and around the factory of the insured, which caused considerable
damage to raw materials, stocks and goods, furniture, etc., in the
factory of the respondent. The respondent filed a total claim of
` 72 lakhs. The insurance company appointed a surveyor to assess
the loss. The surveyor estimated the loss to be worth of ` 24 lakhs.
Since the company did not agree with the report of the surveyor,
it appointed another surveyor who also gave the same estimated
amount of loss as given by the first surveyor. Despite notice to
the insurance company, no reply was given by the insurance company. As a result, a complaint was filed by the insured with the
National Commission under the provisions of the Consumer Protection Act, 1986. The insured claimed an amount of ` 52.32 lakhs
along with a number of expenses incurred for loss minimisation
as well as interest.
N
M
IM
S
This case study discusses
the facts and judgement of
the case, National Insurance
Company Ltd., vs. Hindustan
Safety Glass Works Ltd. on the
issue of relief to consumers
under Consumer Protection
Act, 1986
The National Commission decided the dispute in the favour of the
respondents and it is against this finding that an appeal has been
filed in the Supreme Court.
ISSUES
(i) Is the plea of a claim that has become time-barred valid?
(ii) Did the National Commission give the correct decision
against the insurance company?
JUDGEMENT
The Supreme Court accepted that financial loss has been caused
to the insured company on account of heavy and unusual rains
for which the claim was filed the very next day of the incident.
However, the surveyor appointed by the insurance company
submitted its report after more than one year of his appointment.
Another year was taken by the second surveyor. Two years were
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Case Study 7: NATIONAL INSURANCE COMPANY LTD., Vs.
HINDUSTAN SAFETY GLASS WORKS LTD. (2007 SUPREME COURT) 415
Case Study 7
n
spent in assessing the loss suffered by the insured. This delay
is attached to the insurer because the insured had paid the
claim amount well within time. Therefore, it cannot be allowed to
prejudice the claim of the insured. Moreover, the insurance company rejected the claim of the insured much after the lodging of
the claim. It is for such reasons that the Consumer Protection Act,
1986 has been enacted to help provide relief to hapless consumers.
questions
IM
S
Therefore, a consumer must not face any disadvantage when a
service provider itself is responsible for causing a delay in the
settlement of the claim of consumers. Thus, the plea of the time
bar will not be available to the insurance company. The insurance company could not explain the reasons for considering the
report of the second surveyor as tainted. In any case, the loss or
damage has been caused to the insured company as already held
by the National Commission. Hence, the appeal of the insurance
company against the finding of the National Commission was dismissed.
M
1. What is the meaning of the period of limitation for filing
a case under the provisions of the Consumer Protection
Act, 1986?
N
(Hint: Section 24-A of the Consumer Protection Act, 1986
states that the period of limitation to file a case is 2 years
from the date of the course of action.)
2. On what grounds did the National Commission and the
Supreme Court overrule the limitation plea taken by the
insurance company?
(Hint: A consumer must not face any disadvantage when
a service provider is responsible for causing a delay in the
settlement of the consumer’s claim.)
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o
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416
Business Law
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Case Study 8
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INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
Vs. SHAUNAK H. SATYA (2011 SUPRME COURT)
Case Objective
The appellant in the case is the Institute of Chartered Accountants of India (ICAI), which is a body corporate engaged in the
function of conducting examinations for the enrolment of those
passing out as Chartered Accountants. The first respondent was
declared not successful in the Chartered Accountants’ final examination in November, 2007.
Thereupon, he applied for verification of marks. It was done and
no discrepancy was found in the evaluation of the answer script.
On receiving this information, the respondent sought the following information under 13 heads in terms of the RTI Act, 2005:
S
This case study discusses
the facts and judegment
of the case, Institute of
Chartered Accountants of
India vs. Shaunak H. Satya
on the scope of exemption
of disclosures under Right to
Information Act, 2005.
FACTS
IM
1. Educational qualification of the examiners and moderators
with subject-wise classifications
2. Procedure established for evaluation of exam papers
3. Instructions issued to the examiners, and moderators oral as
well as written, if any
M
4. Procedure established for selection of examiners &
moderators
N
5. Model answers, if any, given to the examiners and moderators,
if any
6. Remuneration paid to the examiners & moderators
7. Number of students appearing for exams at all levels in the
last 2 years (i.e., PE1/PE2/PCC/CPE/Final with break up)
8. Number of students that passed at the 1st attempt from the
above
9. From the number of students that failed in the last 2 years
(i.e., PE1/PE2/PCC/CPE/Final with break up) from the
above, how many students opted for verification of marks as
per Regulation 38
10. Procedure adopted at the time of verification of marks as
above
11. Number of students whose marks were positively changed
out of those students that opted for verification of marks
12. Educational qualifications of the persons performing the
verification of marks under Regulation 38 and remuneration
paid to them
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Case Study 8: INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Vs.
SHAUNAK H. SATYA (2011 SUPRME COURT) 417
Case Study 8
n
13. Number of times that the council has revised the marks of
any candidate, or any class of candidates in accordance with
regulation
Not satisfied with the information provided by the ICAI, the
respondent appealed before the apex court.
ISSUES
(i) Do the instructions and solutions to the questions given by
the ICAI to the examiners and moderators constitute the
intellectual property of the ICAI so that the disclosure thereof
is exempt under Section 8(1)(D) of the RTI Act?
S
(ii) Will the access to the afore-noted information sought by the
respondent involves an infringement of the ICAI’s copyright
and therefore liable to be rejected under Section 9 of the RTI
Act?
IM
(iii) Is the aforementioned information made available to
examiners and moderators in their fiduciary capacity and
therefore exempted under Section 8(1)(E) of the RTI Act?
JUDGeMENT
N
Question (i)
M
(iv) Was the High Court justified in directing the appellant ICAI to
furnish five items of information to the respondent relating to
Regulation 39(2) of Chartered Accountants Regulations, 1988?
Question papers, instructions regarding evaluation and solutions to
questions (or model answers) which are furnished to examiners and
moderators in connection with evaluation of answer scripts constitute literary works and are intellectual property and are, therefore,
subject to a copyright. The paper setters and authors thereof (other
than employees of ICAI), who are the first owners of the literary
work are required to assign their copyright in regard to the question
papers/solutions in favour of ICAI.
Hence, Section 8(1) (d) of the RTI Act does not bar or prohibit the disclosure of question papers, model answers (solutions to questions)
and instructions, if any, given to the examiners and moderators
after the examination and after the evaluation of answers scripts
is completed since at that stage, such disclosure will not harm the
competitive position of any third party. The apex court rejected the
contention of the ICAI that if information is exempt once, it continues to be exempt for all time to come.
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Case Study 8
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Question (ii)
Section 9 of the RTI exempts the furnishing of information which
would involve an infringement of copyright subsisting in a person
other than the State. The provision of the information in respect of
which ICAI holds a copyright does not amount to the infringement of
a copyright subsisting in a person other than the State.
Question (iii)
S
Therefore, ICAI cannot claim protection against disclosure under
Section 9 of the RTI Act nor does the furnishing of information by an
examining body, in response to a query under the RTI Act be termed
as an infringement of copyright in view of the provisions of Sections
51 and 52(1)(a) of Copyright Act.
As regards the ICAI contention that the information is held in
a fiduciary capacity and therefore protected by Section 8(1) (e),
it was pointed out that the impugned section has used the words
“information available to a person in his fiduciary relationship”
rather than the words “information available to a public authority
in its fiduciary relationship”. The use of the words “person” in the
impugned provisions widens its scope. Accordingly, the instructions
and solutions to questions communicated by ICAI to the examiners,
head examiners and moderators in their fiduciary relationship is
exempted from disclosure under Section 8(1)(D) of RTI Act.
IM
ot
M
n
Question (iv)
N
418
As regards the scheme of the moderation of marks by the ICAI, its
objective is to bring about uniformity in evaluation. The ICAI must
disclose the said standards of moderation drawn up by it.
Source: https://indiankanoon.org/doc/1548289
questions
1. Summarise the issues and the decisions of the court on
each of the questions raised in this case.
(Hint: Read Section 8(1) (d), Section 9, of the RTI Act and
Sections 51 and 52(1)(a) of Copyright Act.)
2. Discuss the judgment of the court given in this case under
the provisions of Sections 51 and 52(1)(a) of the Copyright
Act.
(Hint: The furnishing of information by an examining
body, in response to a query under the RTI Act cannot be
termed as an infringement of the copyright in view of the
provisions of Sections 51 and 52(1)(a) of Copyright Act.)
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Case Study 9: Rajni Maindiratta vs.
Directorate of Education (2017, HIGH COURT OF DELHI) 419
Case Study 9
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Rajni Maindiratta vs. Directorate of Education
(2017, HIGH COURT OF DELHI)
FACTS
Case Objective
S
The appellant, Aditi, filed an RTI application to obtain information
on affiliation, extension and upgradation provided to Vidya Bharti
School, Rohini. She approached the Commission on 05.06.2014
to provide an opportunity to her for inspection. The CIC put her
application on hold after it was discovered that she filed the RTI
application only after she was removed from the school. She had
already filed a petition before the Delhi School Tribunal against
the termination order. CIC ruled that she should wait for the final
verdict of the Tribunal rather than taking the RTI route.
ISSUE
JUDGeMENT
IM
Whether the appellant’s application for information was rightly
rejected by the school and hence the ruling of the CIC was correct.
N
M
CIC adjudicated about 20 appeals filed by the petitioner. It
admonished the petitioner after verifying the motives for filing
the RTI. It expressed the opinion that since the appellant is using
RTI for personal vengeance and lack of public interest behind
her request for information dated 6th May, 2015, her application
has been correctly rejected. The Commission noticed vengeance
and total lack of public interest behind her requests for information. It is highly unethical and immoral for such a guilty teacher to
abuse RTI. After CIC’s verdict, the appellant approached the High
Court of Delhi in second appeal in order to get access to requested
documents. The High Court stated that Though undoubtedly, the
reason for seeking the information is not required to be disclosed
but when it is found that the process of the law is being abused, the
same becomes relevant. Neither the authorities created under the
RTI Act nor the Courts are helpless if they witness the provisions of
law being abused and, in fact, they owe a duty to immediately put a
stop to such nuisance activities.
On 08.10.2015, the appeal was dismissed with the observation
that the appellant has been using the RTI route for personal vengeance instead of public interest. Her motives were totally unethical and immoral and she wanted to build up pressure on the
school’s management and harass the school authorities.
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This case study discusses the
facts and judgement of the
case, Rajni Maindiratta vs.
Directorate of Education on
the issue of abuse of Right to
Information Act, 2005.
Business Law
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Case Study 9
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questions
1. What were the reasons that her second appeal was
dismissed by the courts?
(Hint: She has been using the RTI application to satiate
her personal agenda of harassing the school. There was
no motive of public interest.)
2. Why did the CIC suggest the appellant to wait for the
verdict of the Delhi School Tribunal?
S
(Hint: CIC had adjudicated about 20 appeals filed by the
petitioner. It has admonished the petition after verifying
the motives of filing the RTI. Therefore, she should wait
for the final verdict of the tribunal rather than taking the
RTI route.)
IM
ot
M
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420
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Case Study 10: COMPETITION COMMISSION OF INDIA VS.
BHARTI AIRTEL lTD & ANR (2018 SUPREME COURT) 421
Case Study 10
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COMPETITION COMMISSION OF INDIA VS. BHARTI
AIRTEL lTD. & ANR (2018 SUPREME COURT)
FACTS
IM
S
A complaint was filed under Section 19 of the Competition Act,
2002 by Reliance Jio Infocomm Ltd. (RJIL) against three telecom
operators namely Bharti Airtel, Vodafone and Idea Cellular, for
adopting anti-competitive agreement and cartelisation. Upon
receipt of the complaint, the Commission directed the Director-General to conduct an investigation into the complaint filed
by Reliance Jio. Against the order of the investigation, four writ
petitions were filed in the High Court of Delhi by Bharti Airtel,
Vodafone, Idea Cellular, and the Cellular Operators Association
of India, with a prayer for quashing the investigation order. The
High Court ordered the quashing of investigation on the ground
that CCI has no jurisdiction to look into various agreements and
contracts, which are to be settled by the authority under the Telecom Regulatory Authority of India (TRAI) Act, 1997. Aggrieved by
the decision of the High Court, both the CCI and Reliance Jio filed
a petition in the Supreme Court.
M
ISSUE
(i) What are the powers of TRAI and CCI in regard to
investigation in this matter?
N
(ii) Whether there exists an anti-competitive agreement or
cartelisation by the parties against whom Reliance Jio has
filed the complaint before the Competition Commission of
India (CCI).
JUDGeMENT
After noting down various features of the Competition Act, 2002
the Supreme Court stated that since TRAI has been set up as an
expert regulatory body to specifically govern the Telecom sector, the aforesaid aspects of the disputes need to be decided by
TRAI, in the first instance. Only after the determination of the
jurisdictional facts by the TRAI, the next questions raised by the
appellants regarding whether there has been any concerted or
anti-competitive agreement between the respondents shall be put
to the CCI. Therefore, the CCI can go into the interrogation as to
whether provisions violation of TRAI Act should be considered
the ‘abuse of dominance’ or ‘anti-competitive agreements’. The
apex court did not agree with the contention of the appellants that
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Case Objective
This case study discusses the
facts and judgement of the
case, Competition Commission
of India vs. Bharti Airtel Ltd.
& ANR.
Business Law
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Case Study 10
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CCI can investigate the matter before the conduct of inquiry by
the TRAI. The Apex court also rejected the argument of respondents that CCI has no jurisdiction in the matter. The function
assigned to CCI is altogether different from that given to TRAI.
Therefore, the appeal was dismissed.
questions
1. Why was the appeal made by the CCI and Reliance Jio
dismissed by the apex court?
(Hint: The disputes need to be decided by TRAI in the first
instance as TRAI has been set up as an expert regulatory
body to specifically govern the Telecom sector.)
S
2. Discuss the functions and the areas of jurisdiction of both
CCI and TRAI.
(Hint: CCI deals with matters related to unfair trade
practices or anti-competitive agreements, abuse of
dominance and combination, whereas TRAI has been set
up as an expert regulatory body to specifically govern the
Telecom sector.)
IM
ot
M
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N
422
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Case Study 11: LABOUR UNREST AT MARUTI SUZUKI INDIA LTD. 423
Case Study 11
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LABOUR UNREST AT MARUTI SUZUKI INDIA LTD.
Facts
Maruti Suzuki India Limited, a subsidiary of Suzuki Motor Corporation of Japan, has been the leader of the Indian car market
for many years. Maruti faced various problems in handling industrial relations with its labour force. In 2012, Maruti’s Manesar
plant observed labour (contract workers) strikes, a lockout and
the brutal murder of the General Manager of the company. These
happenings led to a loss of ` 25 billion to the company.
M
IM
S
The main causes of the strikes were differences in salary, working
conditions and the demand for a new union. As per the workers,
the Maruti Udyog Kamgar Union (MUKU) that was in place was
inefficient. Thus, after a lot of struggle, they set up a new union,
Maruti Suzuki Workers’ Union (MSWU), with new committee
members. The union negotiated for higher wages (contract workers were paid half the minimum wage of permanent employees),
transportation facilities, regularisation of leave benefits and easing the robotic work. It demanded an increase in the basic salary,
a monthly conveyance allowance of ` 10,000, a gift with every new
car launch and a house/home loan for every worker. However,
these demands were not fulfilled.
N
Violence broke out when a worker (Jiyalal) was suspended without any reason. Workers demanded the rejoining of Jiyalal. As per
the workers, the management started the violence by getting hundreds of bouncers to attack the workers. The violence killed and
injured many people. The Human Resource General Manager
was charred to death by workers.
As per the police, the Manesar violence was planned by some
sections of workers and union leaders. The work at the Manesar
plant was suspended, and it led to a loss of Rs. 75 crores per day.
outcome
Under the Industrial Disputes Act, 1947, a lockout was announced
by the company, and it was announced that the workers will not
be paid for the period of the lockout. The company also decided
not to use contract workers in future.
The managing director and chief executive of Maruti Suzuki
India, Shinzo Nakanishi announced, We are going to de-recognise
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Case Objective
This case study highlights
the labour unrest at Maruti
Suzuki India Limited issue
of maintaining industrial
relations.
Business Law
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Case Study 11
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Maruti Suzuki Workers’ Union and dismiss all workers named in
connection with the incident. We will not compromise at all in such
instances of barbaric, unprovoked violence.
This case of violence at the Manesar plant is undoubtedly condemnable. For avoiding the repetition of such incidents, the organisation’s management needs to handle industrial labour issues with
more understanding, kindness and humaneness.
questions
S
1. The Manesar incident underlines the fact that it is
essential to ensure sound industrial relations for a
smooth continuation of operations and the safety of the
management, workers and plant. What were the main
reasons for the failure of sound industrial relations in the
Manesar strike?
IM
ot
(Hint: Lack of communication between HR people and
workers, discrimination between workers’ pay)
2. What could have been done to solve the grievances of the
workers and avoid the Manesar violence?
(Hint: Management should have dealt in an unbiased way
and listened to workers)
M
n
N
424
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Case Study 12: STATE OF RAJASTHAN Vs.
SALMAN KHAN AND OTHERS (2012, High court of rajasthan)
Case Study 12
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425
s
STATE OF RAJASTHAN Vs. SALMAN KHAN AND OTHERS
(2012, High court of rajasthan)
FACTS
Case Objective
IM
S
In 1998, Salman Khan, one of the prominent bollywood actors
was alleged of poaching two blackbucks, an endangered species,
in Rajasthan. There were four other co-accused stars, Sonali
Bendre, Tabu, Neelam and Saif Ali Khan, during the shooting of
the film “Hum Saath-Saath Hain” on 26th September, 1998. As per
the Wildlife (protection) Act, hunting of such species is prohibited by the law. Therefore, firstly, Salman Khan was arrested on
12th October, 1998 by the Forest Department and spent 18 days
in imprisonment in Jodhpur Jail. Subsequently on February 17,
2006, Salman Khan was sentenced to undergo one-year imprisonment in Jodhpur Central Jail along with a fine of ` 5000. Later on,
the case was transferred to the High Court. The State of Rajasthan also appealed to increase the period of sentence awarded to
Salman Khan. An Appeal was filed against this order in the High
Court.
M
ISSUE
N
The issue before the Hon’ble High Court of Rajasthan was that
since the charge levied against the accused was that he has committed an act of mischief, as defined in Section 425 of the Indian
Penal Code, whether the mischief or damage to animals herein
would only mean domesticated animals or wild animals as well?
JUDGeMENT
As per the court judgment, A damage caused to the wild life even
if the same cannot be evaluated or calculated in terms of money is
definitely a loss to the ecology and as a result thereof, it can be considered to be a loss to the public and society at large… It is the firm
opinion of this Court that by the act of using fire arms for killing
wild life, the accused committed the offence of mischief as defined
in Sections 425 and 429 IPC. Since the Clause Thirdly of Section 141
Indian Penal Code, 1860 (IPC) covers in its ambit, mischief, criminal trespass or other offence..., the provision of Section 141 IPC can
very well be applied to an offence of mischief when committed in
relation to a wild animal also. Accordingly, the term ‘other offence’
as mentioned in Section 141 covers in its ambit, an offence under
Wild Life Protection Act. Therefore, every member of the unlawful
assembly which participates in the act of hunting is definitely liable
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This case study discusses the
facts and judgement of the
case, State of Rajasthan vs.
Salman Khan and Others.
Business Law
e
Case Study 12
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for being prosecuted for the offence under Section 51 of the Wild
Life Protection Act with the aid of Section 149 IPC. According to
Section 51 of the Wildlife (Protection) Act, it is not allowed to hunt
or capture any animal species that are included in the Schedules
I-IV.
HM Saraswat, the lawyer of Salman Khan said that the act has
been targeted in a “false and malicious campaign”. However, On
5th April, 2018, he was sentenced to five years imprisonment along
with a fine of ` 10,000 after he was found guilty for killing two
blackbucks in Jodhpur. The court took exactly twenty years to
convict Salman Khan. All other co-accused, Saif Ali Khan, Tabu,
Neelam and Sonali Bendre were acquitted by the court under the
virtue of ‘benefit of doubt’ for the incident. The verdict states that
The accused is a popular actor whose deeds are followed by people.
Despite this, the accused hunted two black bucks. It is not justified
to give Salman Khan the benefit of probation in view of the manner
in which he hunted by shooting two innocent, moot black bucks that
come under the purview of the Wildlife Conservation Act. After the
court provided its sentence, the accused filed an application for
bail in the session court. The appeal against the High Court’s verdict is still pending.
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questions
N
426
1. Who requested to increase the period of one-year
imprisonment imposed on Salman Khan in the first
sentence hearing under Section 51 of the Wildlife
Protection Act?
(Hint: The State of Rajasthan appealed to increase the
period of sentence awarded to Salman Khan.)
2. What all penalties have been imposed on Salman Khan in
the verdict of High Court?
(Hint: An imprisonment of five years along with a fine of
` 10,000)
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