Legal Aspects of Business (PDFDrive)
Legal Aspects of Business (PDFDrive)
Legal Aspects of Business (PDFDrive)
BUSINESS
TEXT AND CASES
Second Revised Edition : 2016
LEGAL ASPECTS OF
BUSINESS
TEXT AND CASES
(With Leading Decided Cases of Supreme Court and High Courts)
Dr. K. RAMACHANDRA
M.Com., MBA, LL.B., DPM & IR, Ph.D.
Former High Court Advocate,
Presently Professor and HOD of Commerce & Management,
Maharani’s Arts, Commerce & Management College for Women.
NAAC Accredited ‘A’ Grade College,
BANGALORE -560 001.
E-mail: drkrc@rediffmail.com
Dr. B. CHANDRASHEKARA
M.Com., MBA, MTM, M.Phil., Ph.D.
Professor,
P.G. Department of Commerce & Management,
Government R.C. College of Commerce & Management,
Palace Road, BANGALORE – 560 001.
E-mail: drbcs2007@rediffmail.com
MUMBAI z NEW DELHI z NAGPUR z BENGALURU z HYDERABAD z CHENNAI z PUNE z LUCKNOW z AHMEDABAD
z ERNAKULAM z BHUBANESWAR z KOLKATA z GUWAHATI
© AUTHORS
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording and/or otherwise without the prior written permission of the publisher.
Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,
“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.
Phone: 022-23860170/23863863, Fax: 022-23877178
E-mail: himpub@vsnl.com; Website: www.himpub.com
Branch Offices
New Delhi : “Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road, Darya Ganj,
New Delhi - 110 002. Phone: 011-23270392, 23278631; Fax: 011-23256286
Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.
Phone: 0712-2738731, 3296733; Telefax: 0712-2721216
Bengaluru : No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar,
Race Course Road, Bengaluru - 560 001. Phone: 080-22286611, 22385461, 4113 8821, 22281541
Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda,
Hyderabad - 500 027. Phone: 040-27560041, 27550139
Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai - 600 017.
Mobile: 9380460419
Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth
(Near Prabhat Theatre), Pune - 411 030. Phone: 020-24496323/24496333; Mobile: 09370579333
Lucknow : House No 731, Shekhupura Colony, Near B.D. Convent School, Aliganj,
Lucknow - 226 022. Phone: 0522-4012353; Mobile: 09307501549
Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura, Ahmedabad - 380 009.
Phone: 079-26560126; Mobile: 09377088847
Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi – 682011.
Phone: 0484-2378012, 2378016 Mobile: 09387122121
Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha).
Phone: 0674-2532129, Mobile: 09338746007
Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata - 700 010,
Phone: 033-32449649, Mobile: 7439040301
Guwahati : House No. 15, Behind Pragjyotish College, Near Sharma Printing Press,
P.O. Bharalumukh, Guwahati - 781009, (Assam). Mobile: 09883055590, 08486355289, 7439040301
DTP by : Asha
Printed by : Geetanjali Press Pvt. Ltd, Nagpur. On behalf of HPH.
This Book is
Dedicated
to
Our Beloved Parents
and
Teachers
Preface to the Second Revised Edition
Orderly conduct of human behaviour is the touchstone of Law. Morality ensures self-control, whereas law regulates
social control. If every individual in the society practice morality, then there is no need for law. It cannot be possible
because the universe consists of equal number of saints and sinners and that way, it is balanced. Law provides the rules of
the game for the individuals in the civilised society. The journey of life of a mortal from womb to tomb is comprehensively
governed, guided, and directed by law of the land.
Business Law is a part of general law, wherein the orderly conduct of business affairs is ensured by it. Our country is
gifted with creative and innovative entrepreneurs like Ratan Tata, Brijmohanlal Munjal of Hero Honda, Narayana Murthy of
Infosys, Azim Premji of Wipro, Shivnadar of HCL, Kiran Mazumdar Shaw of Biocon Limited, Karshanbhai Patel of Nirma
Industries, Mukesh and Anil Ambani of Reliance Group and host of others. These established stars and best brains of India
possess entrepreneurial skills and business acumen, but certainly they are not familiar with business laws, for sure. They
have to avail the services of legal luminaries at all point of time, because business and law are inseparable.
To develop a textbook that would stand out in an extremely competitive and discerning market, it was important to
produce a high quality book that would be comprehensive and flexible. It was felt that a text book entitled Legal Aspects
of Business – Text and Cases, shall to be delivered to the beginners and vigorous readers of Business Law of national and
international importance.
People in business, whether they own, manage, or simply work for someone else, must be familiar with the law.
Everyday people in business do things that may result in serious legal consequences for their employers or themselves.
When a person plans on entering into an agreement with another person, he or she needs to know the formalities
necessary to create an enforceable agreement. Business people are called upon to sign a wide variety of forms and need
to understand the nature and consequences of the documents they are signing.
An employer who hires workers needs to be aware of the law governing employment relationships. People contemplating
entering into a business relationship with someone else need to be aware of the types of business entities used in the Indian
context. Of course, business people do not need to be lawyers in order to engage in business. However, the client who
understands the law can avoid many legal problems. Sometimes business people end up in court because they have
entered into a transaction without first consulting with a lawyer. Knowing when to call a lawyer is very important.
One of the functions of this text is to introduce the student to various topics in law important to business people, to
familiarise the student with common problems, and teach the student when to consult with a lawyer before taking any
action. Of course, no one is a walking encyclopedia of the law. For this reason, it will probably be useful for you to keep
this text after you have completed your management course. When a problem arises, you can refer to the text to refresh
your memory of the legal terminology.
The entire text book is presented in twelve modules ranging from Introduction to Business Law, to IPR, Cyber Law,
RTI, Contract Act, Companies Act, Human rights, Competition Laws and Environmental Laws. Each module is pregnant
with rich contents, meticulously arranged case laws of Supreme Court, High Courts and International Conventions. As a
ready reckoner, the present book caters to the needs of business people, teachers, students, professionals and lay persons.
For easy understanding of legal concepts and jargons, paragraph summary is provided at appropriate places. The meticulous
arrangement of the contents serves the purpose of the book. We invite constructive suggestions from the reading community
for further improvement of the book.
We have harped upon the above topics and believe this new book is more comprehensive, more flexible and more
interesting. The content of this text book is based on extensive experience, research, successful teaching and a careful
analysis of the strengths and weaknesses of competing textbooks. Every module in the book starts with learning objectives
followed by meticulous arrangement of sub-chapters and concludes with a detailed summary, objective, analytical, and
essay type questions. It is a comprehensive book with leading decided cases chapter-wise for management students,
professionals, academicians, entrepreneurs, business persons and the researchers.
We thank profoundly our spiritual gurus - Bhagawan Sri Sai Ram and Sri Sri Dr. Shivakumara Swamiji of Siddaganga
Mutt, Tumkur, Sri Sri Dr.Balagangadharanatha Swamiji of Sri Adichunchanagiri Mutt, Karnataka, for their grace
and benevolence in bringing out this text book.
We also thank Sri Niraj Pandey, Sri Vijay Pandey and the staff of Himalaya Publishing House Pvt. Ltd., Mumbai.
We also thank Sri Madhu and family for excellent DTP work, and Sri Rajashekar for wonderful cover design.
Dr. K. Ramachandra
Dr. B. Chandrashekara
Prof. Chandrakanth Kanakatte
Brief Contents
MODULE: 1 INTRODUCTION TO BUSINESS LAW 1 — 28
MODULE: 8 INDIAN PATENT LAWS AND WTO PATENT RULES 269 — 292
MODULE: 8 INDIAN PATENT LAWS AND WTO PATENT RULES 269 — 292
8.1 What is Intellectual Property?
8.2 Intellectual Capital
8.3 Intellectual Property
8.4 Patent Act, 1970
8.5 International Intellectual Property Organizations
8.6 Decided Case on Basmati Rice, Turmeric, and Pharma Products
MODULE: 9 FOREIGN EXCHANGE MANAGEMENT ACT, 1999, and
THE PREVENTION OF MONEY LAUNDERING ACT, 2002 293 — 326
9.1 Objects of the FEMA
9.2 Regulation and Management of Foreign Exchange
9.3 Authorised Person
9.4 Contravention and Penalties
9.5 Adjudication and Appeal
9.6 Director of Enforcement
9.7 Money Laundering with Decided Cases
9.8 Attachment, Adjudication and Confiscation
9.9 Obligations of Banking Companies, Financial Institutions and Intermediaries
9.10 Summons, Searches and Seizures, etc.
9.11 Hawala Transactions
INTRODUCTION
TO BUSINESS LAW
Module Objectives
After reading this chapter, you should be able to
Explain the Nature of law
Discuss the Overview of Business Laws in India
List the Sources of Law
Know the Constitution of India with special reference to Economic
Principles
2 2 Legal Aspect of Business • Module One
1.1 INTRODUCTION
People in business, whether they own, manage, or simply work for someone
else, must be familiar with the law. Everyday people in business do things that
may result in serious legal consequences for their employers or themselves. When
a person plans on entering into an agreement with another person, he or she
needs to know the formalities necessary to create an enforceable agreement.
Business people are called upon to sign a wide variety of forms and need to
understand the nature and consequences of the documents they are signing.
An employer who hires workers needs to be aware of the law governing
employment relationships. People contemplating entering into a business
relationship with someone else need to be aware of the types of business entities
used in the Indian context.
Of course, business people do not need to be lawyers in order to engage in
business. However, the client who understands the law can avoid many legal
problems. Sometimes business people end up in court because they have entered
into a transaction without first consulting with a lawyer. Knowing when to call a
lawyer is very important.
One of the functions of this text is to introduce the student to various topics
in law important to business people, to familiarise the student with common
problems, and teach the student when to consult with a lawyer before taking any
action. Of course, no one is a walking encyclopedia of the law. For this reason, it
will probably be useful for you to keep this text after you have completed your
management course. When a problem arises, you can refer to the text to refresh
your memory of the legal terminology.
the children, a judge can order the husband to pay her for child support. If a thief
robs a convenience store, a judge may sentence the thief to prison.
Constitution
Constitution is the A Constitution is the fundamental law of a nation. It was written with specific
fundamental law of
a nation.
goals in mind. They wrote the Constitution so that the three branches of
government — the legislative, the executive, and the judicial — had checks over
one another to prevent an abuse of power by one branch of government. The
Constitution also created a system of checks and balances between the powers of
the states and the central government.
Sometimes constitutional law is classified as an additional category of public
law. It is sometime defined as the fundamental law which sets out the powers and
limitations of government as prescribed in the constitution. Whether you have
the right to have your own lawyer when under prosecution for a serious crime is
a constitutional law problem. Constitution is one of the sources of law. All the
Central and State laws should be within the confines of Indian Constitution Law.
Legislation/Statute
A Statute is a law passed by a legislative body. A statute is defined as “the
will of the legislature.” A statute is thus a written “will” of the legislature expressed
according to the form necessary to constitute it as a law of the state. The statutes
Legis lation is the are subject to assent by the President in case of central laws and by the governors
common source of in respect of state laws.
law. Both Par lia-
ment and state as- Legislation is the common source of law. Both Parliament and state assemblies
semblies have en- have enacted a number of legislations that cover various aspects of business. For
acted a number of
legis lations that
example: Indian Income Tax Act, 1961, Information Technology Act, 2000,
cover various as- Competition Act, 2002 and so on.
pects of business.
Custom
A custom, when ac- A substantial part of business law is customary, not withstanding advances
c ept ed by c o urts
made in science and technology. This is true both in developed and developing
and incorporated in
judicial interpreta- countries. A custom, when accepted by courts and incorporated in judicial
tions , bec omes a interpretations, becomes a law. Many of the business customs or usages have
law. already been adopted and legalised. The Indian Contract Act provides that nothing
their contained, “shall affect any usage or custom of trade.” Similarly, the
Negotiable Instruments Act provides that nothing therein contained, “shall affect
any local usage relating to instruments in an oriental language.”
Natural Law
Natural law or natural justice is another source of law. The natural justice The natural justice
that no man can be
that no man can be punished twice for the same crime is a guiding principle for punished twice for
any legisaltion. Similarly, natural justice demands that no individual can be the same crime is a
dubbed guilty unless the charges are proved against him. guiding principle for
any legis alt ion.
A historic case to be quoted in this context is the National Textile Unions vs. Simil arly , na tural
jus t ic e dem ands
Ramakrishna (1983). The dispute raised before the Supreme Court involved the that no indiv idual
point whether or not the workers of a company have locus standi to be heard in c an be dubbed
proceedings relating to the winding up of the company. The court found no guilt y unles s the
charges are proved
provision to the effect in the Companies Act though it runs into more than 650
against him.
sections. The court actually created the rights for the workers by falling upon the
principle of natural law and natural justice.
English Law
Our business laws are largely based on English Acts applicable in England.
Our Sale of Goods Act, for instance, has been taken directly from the English Sale
of Goods Act. Similarly, our Companies Act corresponds with the English
Companies Act. Again in any discussion on the Indian Contract Act, reference is
invariably made to the English Law.
Ordinances
Laws are also passed by local authorities like Municipality, Zilla Panchayats, Laws ar e als o
passed by local au-
Mahanagar palika, State governments and Central government. These laws are thorities like Munici-
like the statutes passed by the above authorities and governments. Although pality , Zilla
ordinances apply in only relatively small geographical areas, business people must Panchayats,
Mahanagar palika,
be aware of the ordinances that apply where they operate. Bangalore Mahanagar
State governments
palika (BBMP) has passed an ordinance stating that goods that enter Bangalore and Central govern-
city are subject to entry tax called “octroi.” Business people entering into Bangalore ment.
city with the goods shall have to comply with this ordinance. However, business
people outside the Bangalore city need not comply with. Similarly, the Government
of Karnataka in order to regulate admissions of students into professional courses
of medicine, dental and engineering had promulgamated an ordinance in this
regard. This is applicable only within the territory of Karnataka.
6 6 Legal Aspect of Business • Module One
Administrative Law
Administrative law Administrative law is one of the major divisions or branches of public law.
adjust differences
aris i ng from dis -
Administrative law adjust differences arising from disputes between administrative
putes between ad- officials of governmental agencies and the general public. Whether the post office
ministrative officials has authority to limit the size of parcel post packages is an example of
of g ov ernme ntal
administrative law.
agenc ies and the
general public.
Dharma
Dharma was the What is unfortunately ignored is the fact that Dharma was the main source
main source of law
during ancient peri-
of law during ancient periods and we have no doubt in asserting that it continues
ods and we have no to be main spirit behind every law even today. To prove the role of Dharma in
doubt in asserting judiciary we quote A.H. Basham, “Though we know very little about the legal
that it continues to system of the Rigveda period”, wrote he, “it is clear that the idea of a divine
be main spirit be-
hind every law even cosmic order already existed. Rta, the regulatory of the universal process, was
today. perhaps the forerunner of the alter concept of Dharma.”
As well as Dharma there are, according to the textbooks, other bases of law;
contract, customs and royal ordinance. The earlier religious law books paid little
attention to these, but their importance increased with line. It was recognised
that, owing to the decadence of the age, Dharma was not now known in its fullness,
and purity and therefore supplementary sources of law were needed. Generally
Dharma was thought to override all other bases of law, but the Arthasastra and
one other lawbook maintain that the royal ordinance overrides the other, a doctrine
which we must ascribe to the totalitarianism of the Mauryas, which few later
jurist have supported.
“The king’s duty of protection was chiefly the protection of Dharma, and as
protector of Dharma he was Dharma incarnate. From Ashoka onwards kings
sometimes assumed the title of Dharmaraja, which was also one of the names of
Yama, the god of death and departed. Both Yama and King maintained the sacred
law by punishing evil-doers and rewarding the righteous.”
Dharma is guiding Dharma continues to be the guiding principle of justice even today. For
principle of justice example, a debtor who owed Rs. 100 and who executed a bond by which he was
even today.
required to put forth manual labour until the amount was repaid and in case of
default would be required to pay exhorbitant interest would be freed from such
an obligation. In other words, the agreement would be declared void (Ram Sarup
V. Bansi Mandir, 1915). It is Dharma which makes such agreements void.
As the merchant leagues became common, the local courts were often found
inadequate to settle disputes among league members. The local governmental
courts had no understanding of diverse business and trade customs and problems,
especially those relating to trade between nations. Furthermore, there was no
uniformity in court decisions or in the way laws were applied from country to
country. In addition, foreign traders frequently had no standing in local courts.
Members of these international trade leagues realized that they needed speedy, Setting up their own
c ourt s , the l arge
inexpensive, and non-technical ways of settling business disputes among members.
leag ue’s ju dges
The leagues already had regulations and rules that were understood among trav elled to the
individual merchants, but local courts would not enforce rules when a member busier ports, major
ignored them. The trade leagues, therefore, set up their own courts and code of trade centers, and
large country fairs.
international law for business transactions. This system included definite rules In each plac e the
for honouring contracts, purchase and sales agreements, and enforcing shipping leag ue’s ju dges
requirements in all commercial countries in Europe. An individual trader who settled merc antile
and s hipping dis -
ignored the league rules and resorted to the local governmental courts soon putes and gradually
learned that it was almost impossible to do business on a large scale. Setting up built up a re c og-
their own courts, the large league’s judges travelled to the busier ports, major nized code of busi-
ness law.
trade centers, and large country fairs. In each place the league’s judges settled
mercantile and shipping disputes and gradually built up a recognized code of
business law. Thus, the law merchant legal system did not originate in any one
country exclusively, but came to be used and accepted throughout the Western
commercial world.
For several hundred years, these merchants courts continued to operate on
their own — no connection whatever with the existing governmental court system.
This separation from the regular court systems continued in France, Belgium,
and Latin American colonies of Spain until comparatively recent times.
In England, however, by the end of the seventeenth century, law merchant
courts had ceased to exist. Their rules and decisions were gradually absorbed
into the English common law and came to be recognized in English court decisions.
In short, then, the principles of the law merchant became English commercial
law eventually serving as the basis for all business law in the United States and
India. This body of rules and principles, drawn from the practical ideas of these
medieval merchants, is still the source of most of our current business laws. This
includes, our law in the areas of contracts, agency, sales, bailments, torts,
partnership, shipping, insurance, corporations, and marine law, loans from
financial institutions, obtaining electricity, iron and steel, customs clearance,
allotment of materials, import of capital goods, pollution control and the like.
Equity
Many years ago, the courts in the U.K. and U.S.A. were divided into courts of
law and courts of equity. Today, in the U.K., U.S.A., Indian and other courts hear
both law and equity matters.
Generally, people who went to law courts wanted monetary damages. People Whenev er mo-
netary relief is not
who desired some remedy other than money went to the equity courts. Today an adequate rem-
whenever monetary relief is not an adequate remedy, the courts grant some form edy , the c o urts
of equitable relief. For example, a person enters into a contract to purchase a grant some form of
equitable relief that
particular painting and paid the amount thereon, subsequently, if the seller refuses
is called equity.
to deliver the paintings to the buyer, the buyer may file suit. In this situation, the
8 8 Legal Aspect of Business • Module One
court requires the defendant (seller) to honour the contract and deliver the painting.
The order is an example of an equitable remedy. In India, we have the Specific
Performance Act, 1963, which ensures equitable remedy.
Civil Law
Civil law deals with Civil law deals with violations against an injured party. In a civil case, a
v iolations agains t
private party, the plaintiff, files suit against the defendant to recover for the injury
an injured party and
recovery for the in- the plaintiff has sustained as a result of the defendant’s conduct. To win the suit,
jury the plaintiff has the plaintiff must establish his or her case by a preponderance of the evidence.
sustained as a re- That is, the court must find that more evidence favours the plaintiff’s position in
s ul t of the
defe ndant’s c on- the case than supports the defendant’s position. The purpose of a civil law suit is
duct. to compensate the injured person.
Suppose that Mr. Harish purchased a new motorcycle from a dealer for Rs.
42,500. The dealer delivered the motorcycle to Mr. Harish, who agreed to pay the
dealer Rs. 7,500 per month. After Mr. Harish got the motorcycle, he refused to
make payments. In this situation, the dealer could file a civil suit against
Mr. Harish either for Rs. 42,500 or to force Harish to return the cycle to the
dealer. The dealer would be the plaintiff, and Harish would be the defendant. The
dealer would have to convince the court that Harish agreed to purchase the cycle
Module One • Introduction to Business Law 9
for Rs. 42,500. If the court agreed and Harish had no defense, the court would
order Harish to pay the Rs. 42,500 or to return the cycle to the dealer.
Procedural Law
Civil Procedure
Criminal Procedure
Kinds of
Constitution
Flexible constitution smoothness with which it can be adapted to new conditions and altered conceptions
is that which is not
s tabl e. It c a n be
in the community.” Bryce has said, “They (flexible constitutions) can be stretched
c hanged at any or bent so as to meet emergencies without breaking their framework; and when
time by the ruling the emergency has passed they slip back into their old form like a tree whose
party
outer branches have been pulled aside to let a vehicle pass. However, the main
defect of flexible constitution is that which is not stable. It can be changed at any
time by the ruling party.”
5. Supremacy of Constitution
Actions of any or- The Constitution of India is the Supreme law of the country. Act of any organ
gan of the govern-
ment wh ic h is
of the government which is against the Constitution of India is invalid and of no
against the Consti- force. The legislature, executive or judiciary cannot violate the Constitution. Thus,
tution of India is in- the Constitution of India controls all the organs of the government. No person or
v ali d and o f no
force.
governmental authority is above the Constitution and, therefore, act of any person
or of any governmental authority which is contrary to the Constitution will be
invalid and of no force.
Rule of Law
The rule of absolute According to Dicey, A.V., Rule of law has three meanings:
supremacy or pre-
dominance of regu- (1) It means, in the first place, the absolute supremacy or predominance of
lar law as opposed
regular law as opposed to the influence of arbitrary power and excludes the
to the influence of
arbitrary power. existence of arbitrariness, of prerogative or even of the wide discretionary authority
on the part of the government. It implies that a man may be punished for a
breach of law but he can be punished for nothing, else. No man can be punished
except for a breach of Law.
(2) It means, again, equality before the law or the equal subjection of all
Rule of law is equal- classes to the ordinary law of the land administered by the ordinary law Courts.
ity before the law or
the equal s ubjec -
In this sense, the “rule of law” excludes the idea of any exemption of officials or
tion of all classes to other from the duty of obedience to the law which governs other citizens or from
the ordinary law of the jurisdiction of the ordinary tribunals. This implies that no man is above law.
the land adminis -
tered by the ordi- (3) The rule of law, lastly may be used as a formula for expressing the fact
nary law Courts. that the law of the constitution is not the source but the consequence of the
regular activities of individuals as defined and enforced by the courts. The
constitution is the result of the ordinary law of the land. This implies that the
legal rights of the people are secured not by guaranteed rights proclaimed in the
constitution but by the operation of the ordinary remedies of private law available
against those who lawfully interfere with his rights. Free access to Courts of justice
is an efficient guarantee against the wrong doers.
Judicial Review
Judicial review, in short, is the authority of the Courts to declare void, the
acts of the legislature and executive, if they are found in the violation of the
provisions of the Constitution. Judicial Review is the power of the highest court
of a jurisdiction to invalidate on Constitution-grounds, the acts of other government
agency within that jurisdiction.
J udic ial rev iew is The doctrine of judicial review has been originated and developed by the
the authority of the
Courts to declare
American Supreme Court, although there is no express provision in the American
void, the acts of the Constitution for the judicial review. In Marbury v/s Madison, the Supreme Court
legislature and ex- made it clear that it had the power of Judicial Review. Chief Justice George
ecutive, if they are Marshall said: “Certainly all those who have framed the written constitution
found in the viola-
tion of t he prov i- contemplate them as forming the fundamental and paramount law of the nations,
sions of the Consti- and consequently, the theory of every such government must be that an act of the
tution. legislature, repugnant to the constitution, is void.” There is supremacy of
Constitution in U.S.A. and therefore, in case of conflict between the Constitution
Module One • Introduction to Business Law 17
and the Acts passed by the Legislature, the Courts follow the Constitution and In case of conflict
between the Con-
declare the Acts to be unconstitutional and therefore, void. The Courts declare s titu tion and the
void the acts of the legislature and executive, if they are found in the violation of Acts passed by the
the provisions of the Constitution even in our country. Legi s lature, the
Courts follow the
In England there is supremacy of Parliament and therefore, the Act passed Cons titution and
declare the Acts to
or the law made by Parliament cannot be declared to be void by the Court. The
be unconstitutional
function of the judiciary is to ensure that the administration or executive function and therefore, void.
conforms with the law. The Constitution of India expressly provides for judicial
review. Like U.S.A. there is supremacy of the Constitution in India. Consequently,
an Act passed by the legislature is required to be in conformity with the
requirements of the Constitution and it is for the judiciary to decide whether or
not the Act is in conformity with the Constitutional requirements and if it is found
in violation of the constitutional provisions the Court has to declare it
unconstitutional and, therefore, void, because the Court is bound by its oath to
uphold the Constitution. The courts can declare the acts of the executive and
Acts passed by the legislature void if they are found in violation of the Constitution. The Constitution of
In the written and federal constitution the power of judicial review is of special India expressly pro-
importance. The federal constitution provides for division of powers between the vides for judicial re-
v iew. Lik e U.S.A.
Central Government and the State Government and on account of it there may be there is supremacy
disputes between the Central Government and the State Governments. In such a of the Constitution
condition there must be independent judiciary having power to declare the acts in India.
of any Government or any of the organs of the Government void if they are found
in violation of the Constitution.
Let us discuss the Preamble, important terms, fundamental rights, and
Directive Principle of State Policy as envisaged in our Constitution one by one.
The preamble to an forth its ground and intention. The preamble to an Act sets out the main objectives
Ac t s ets out the
main objec t iv es
which the legislation is intended to achieve. It contains in a nutshell the ideals
which the legisla- and aspirations of the Act. Preamble is a key to open the minds of the maker of
tion is intended to the Act and the mischief which they intent to redress. Preamble is very useful to
achieve. It contains
in a nutshell the ide-
understand the intention of the makers of the Act and the general purpose behind
als and aspirations the provisions of the Act. The preamble to the Constitution indicates the type of
of the Act. Government which the Constitution is intended to establish and rights and
freedoms which the Constitution is intended to provide to the Citizens. The
preamble to the Indian Constitution makes it clear that the people of India have
adopted and given to themselves the Constitution and, thus, the sovereignty lies
in the people. It indicates that the ultimate source for the validity of, and the
sanction behind the Constitution is the will of the people. In short, reading through
the preamble one can see the purpose that it serves, namely, the declaration of
the sources of the Constitution, a statement of its objectives and the date of its
adoption.
The preamble is very useful in the interpretation of the Constitution. In case
the word used in a particular statute is capable of being both the narrower and
the liberal interpretation and a doubt arises as to whether the narrower or the
more liberal interpretation should be adopted, the court may look into the object
and policy of the Statute as recited in the Preamble.
Preambl e forms
part of the Constitu- The view that Preamble does not form the part of the Constitution has been
tion and the Consti- rejected by the Supreme Court in the case of Kesavanand Bharti vs. State of Kerala.
tution. The Supreme court has held that the Preamble forms part of the Constitution and
the Constitution should be read and interpreted in the light of the ground and
noble vision expressed in the Preamble.
As regards the issue of the power of the Parliament to amend the Preamble,
it may be concluded that the preamble is the part of Constitution and therefore it
can be amended by the Parliament under Article 368 but the “basic features’ in
the preamble cannot be amended. The preamble has been amended by the
Constitution (Forty-Second Amendment) Act, 1976.
Socialist: The word “socialist” has been added by the Constitution (Forty- It indicates that the
Second Amendment) Act, 1976 w.e.f. 3-1-1977. After the addition of the word s tate d oes not
recognise any reli-
“socialist” it has become more clear that the goal of Indian Policy is socialism. The
gion as its own reli-
addition of the word “socialist” in the Preamble may enable the Courts to lean gion and, t hus ,
more and more in favour of nationalisation and state ownership of an industry. treats all religions
equally.
Secular: The word “secular” has been added by the Constitution (Forty Second
Amendment) Act, 1976 w.e.f. 3-1-77. It indicates that the state does not recognise
any religion as its own religion and, thus, treats all religions equally.
Democratic Republic: The term “Democratic Republic” indicates that the
government is carried on by the people of the state through their representative
and executive head of the State (i.e., the President of India) is an elected Democratic Repub-
representative of the people (and not a hereditary monarch as like the king of lic indicates Gov-
England). ernment is carried
on by the people of
Justice, Liberty, Equality, Fraternity, Unity and Integrity of Nation: these the s tate through
their representative
words indicate the objects to be achieved. The Preamble secures to all its citizens and executive head
social, economic and political justice. The Directive Principles have been inserted of the State.
for this purpose. Article 15 makes it clear that state shall not discriminate against
any citizen, on ground only of religion, race, caste, sex, place of birth or any of
them. It provides that no citizen shall, on ground only of religion, race, sex, place
of birth or any of them, be subject to any disability restriction or condition with
regard to access to shops, public restaurants, hotels and place of public
entertainment or the use of wells, tanks, etc. Article 17 abolishes “untouchability.”
Article 38 and 39 makes provisions for socio-economic justice. Socio-economic
justice implies also the forced distribution of wealth for the purpose of fair division
of material resources among the members of society. Political justice has been
secured by providing for universal adult franchise.
The Preamble ensures the liberty of thought, expressions, faith and worship.
Article 19 (1), Article 25 and Article 26 make provisions for such liberty.
The Preamble also ensures the Equality of Status and Opportunity. Articles
14 to 18 make provisions for such Equality.
The Preamble aims to promote, among the people of India Fraternity assuming All c itiz ens hav e
been given the right
the dignity of the individual. Many provisions have been made to promote the to mov e freely
feeling that the people of India are members of the same family. For example, the throughout the ter-
Indian Constitution provides for a single citizenship. All citizens have been given ritory of India and to
the right to move freely throughout the territory of India and to reside and settle reside and settle in
any part of the ter-
in any part of the territory of India (Article 19 (1) and 19 (1) (e)). ritory of India [Ar-
ticle 19(i) (e)]
The Preamble aims to promote the unity and integrity of the Nation. The
word “integrity” has been added by the Constitution (42 nd Amendment) Act 1976
w.e.f. 3.1.1977.
Article 41 lays down that the State shall, within the limits of its economic
capacity and development, make provision for securing the right to work, to
education and to public assistance in cases of unemployment, old age, sickness
and disablement.
Article 42 states that the State shall make provision for securing just and
humane conditions of work and for maternity relief.
Article 43 emphasises the necessity of an adequate or living wage in all sectors
of economic activity. The article enjoins that healthy conditions of work should be
provided and a decent standard of living should be guaranteed. It also stresses
the right to leisure for all working people. The cottage industries in rural areas
should be promoted either through individual or cooperative efforts.
Article 43 (A) states that the State shall take steps to secure the participation
of workers in the management of undertakings, establishments or other
organisations engaged in any industry.
The State shall promote, with special care, the educational and economic
interest of the weaker sections of the people, and in particular, of the Scheduled
Castes, Scheduled Tribes and shall protect them from social injustice and all
forms of exploitation (Article 46).
The State shall endeavour to protect and improve the environment and to
safeguard the forests and wildlife of the country {Article 48(A)}.
Thus, the Directive Principles of State Policy enjoin upon the State varied
responsibilities and provide vast scope for State intervention in the economy.
Questions
2
MODULE
INFORMATION TECHNOLOGY
ACT, 2000
Module Objectives
After reading this chapter, you should be able to
Explain the Nature of Cyber Law, advantages of Cyber Law
Discuss the Overview of Cyber Laws in India
List the characteristics of IT Act, 2000
Know the concepts of E-commerce, and E-Governance with the decided
cases
Understand all about paperless society
Know the concept of Digital Signatures and the procedure for Legal
recognition of electronic records
Comprehend cyber crimes, and their offences level including penalties
30 30 Legal Aspect of Business • Module Two
Initially it may seem that a cyber law is a very technical field and that it does not
have any bearing to most activities in cyberspace. But the actual truth is that
nothing could be further than the truth. Whether we realize it or not, every action
and every reaction in Cyberspace has some legal and cyber legal perspectives.
As the nature of internet is changing and this new medium is being seen as
the ultimate medium ever evolved in human history, every activity of yours in
Cyberspace can and will have a cyber legal perspective. From the time you register
your domain name, to the time you set up your website, to the time you promote
your website, to the time when you send and receive e-mails, to the time you
conduct electronic commerce transactions on the said site, at every point of time,
there are various cyber law issues involved.
• Cyber Appellate Tribunal: Also the law sets up the Territorial Jurisdiction
of the Adjudicating Officers for cyber crimes and the Cyber Regulations
Appellate Tribunal.
• Guidelines for Licences: The law has also laid guidelines for providing
Internet Services on a licence on a non-exclusive basis.
2.6 E-COMMERCE
Elec tronic c om- Electronic commerce, commonly known as (electronic marketing) e-commerce
merce, consists of
the buying and sell-
or eCommerce, consists of the buying and selling of products or services over
ing of products or electronic systems such as the internet and other computer networks. The amount
services over elec- of trade conducted electronically has grown extraordinarily with widespread
tronic systems. Internet usage.
The use of commerce is conducted in this way, spurring and drawing on
innovations in electronic funds transfer, supply chain management, internet
marketing, online transaction processing, electronic data interchange (EDI),
inventory management systems, and automated data collection systems. Modern
electronic commerce typically uses the World Wide Web at least at some point in
the transaction's lifecycle, although it can encompass a wider range of technologies
such as e-mail as well.
A large percentage of electronic commerce is conducted entirely electronically
for virtual items such as access to premium content on a website, but most
electronic commerce involves the transportation of physical items in some way.
Online retailers are sometimes known as e-tailers and online retail is sometimes
known as e-tail. Almost all big retailers have electronic commerce presence on
the World Wide Web.
Online retailers are
sometimes known Electronic commerce that is conducted between businesses is referred to as
as e -tailers and
onli ne retai l is business-to-business or B2B. B2B can be open to all interested parties (e.g.,
sometimes known commodity exchange) or limited to specific, pre-qualified participants (private
as e-tail. electronic market). Electronic commerce that is conducted between businesses
and consumers, on the other hand, is referred to as business-to-consumer or
B2C. This is the type of electronic commerce conducted by companies such as
Amazon.com.
Electronic commerce is generally considered to be the sales aspect of e-
business. It also consists of the exchange of data to facilitate the financing and
payment aspects of the business transactions.
Virtual Stores
In case of electronic transactions there is transfer of ownership rights for
better usage. E-commerce stores can be termed as virtual stores showing entire
range of concerned products through websites.
According to recent market surveys it has been found that the total profit
earned through physical stores is lower than the overall revenue they have to
bear to sustain their existence.
Saving Time
The fast paced life of modern time has restricted people of wasting time in
activities like shopping. With the advent of plastic money and internet, people are
turning towards websites for purchasing many products they need. To fulfill it,
the best option is definitely e-commerce websites.
Online Transactions
The procedure of buying and selling of goods online has been totally undergone
transformation and changed the method of online business conduction. Now people
can purchase, sell, advertise, make online payments, accept payments through
plastic money, etc., with e-commerce solutions.
Integrated Services
Internet has become integral and one of the most important parts of any
country's economic set-up and infrastructure. Several e-commerce service
providers are available online that provide professional customized designing
services that suit their client's needs.
Business Applications
Some common applications related to electronic commerce are the following:
• E-mail
• Enterprise content management
• Instant messaging
• Newsgroups
• Online shopping and order tracking
• Online banking
• Online office suites
• Domestic and international payment systems
• Shopping cart software
Module Two • Information Technology Act, 2000 37
• Teleconferencing
• Electronic tickets
What is E-Governance?
E-Governance is managing, controlling and reporting of processes, using E-G o v ernanc e is
managing, control-
electronic systems such as computers, internet, etc. within a private as well as ling and reporting of
public organization. E-Governance forces organizations to consider all the relevant proc es s es , u s ing
stakeholders, such as employees, financers, shareholders, government, customers, electronic systems
suppliers and the community at large; by using Information Technology. such as computers,
internet, etc. within
Governance has become a major requirement in most organizations and business a private as well as
communities. Do not confuse with the word 'Governance' with 'Government.' E- public organization.
Governance applies to both, Government as well as private organizations.
Where any law provides that information or any other matter shall be in
writing or in the typewritten or printed form, then, notwithstanding anything
contained in such law, such requirement shall be deemed to have been satisfied
if such information or matter is–
• rendered or made available in an electronic form; and
• accessible so as to be usable for a subsequent reference.
Where any law provides that information or any other matter shall be
authenticated by affixing the signature or any document shall be signed or bear
the signature of any person then, notwithstanding anything contained in such
law, such requirement shall be deemed to have been satisfied, if such information
or matter is authenticated by means of digital signature affixed in such manner
as may be prescribed by the Central Government.
E-Governance in India
• Delivery of Government Services: E-governance is now also practiced
by the government of India. Information technology enables the delivery
of government services as it caters to a large base of people across different
segments and geographical locations.
• Saving Cost and Ensuring Transparency: The effective use of IT services
in government administration can greatly enhance existing efficiencies,
drive down communication costs, and increase transparency in the
functioning of various departments.
• Access to Tangible Benefits: E-governance also gives citizens easy
access to tangible benefits such as online form filling, bill sourcing and
payments, or complex applications like distance education and tele-
medicine.
• National e-Governance Plan (NeGP): The Government of India has
launched the National e-Governance Plan (NeGP) with the intent to
support the growth of e-governance within the country. The Plan
envisages creation of right environments to implement G2G, G2B, and
G2C services.
38 38 Legal Aspect of Business • Module Two
Bhoomi Project
• The Ka rna ta ka gove rnment's 'B hoomi' proje ct ha s led to the
computerisation of the centuries-old system of handwritten rural land
records. Through it, the revenue department has done away with the
corruption-ridden system that involved bribing village accountants to
procure land records; records of right, tenancy and cultivation
certificates (RTCs).
• The project is expected to benefit seventy lakh villagers in 30,000
villages.
E-Seva
• In Gujarat there are websites where citizens log on and get access to
the concerned government department on issues such as land, water
and taxes.
• In Hyderabad, through e-Seva, citizens can view and pay bills for water,
electricity and telephones, besides municipal taxes. They can also avail
of birth / death registration certificates, passport applications, permits
/ licenses, transport department services, reservations, Internet and
B2C services, among other things.
information can be available at many different locations and at all hours, there is
no pressure on individuals to physically visit a Government Office.
E- GAZETTE
Where any law pro- Where any law provides that any rule, regulation, order, byelaw, notification
vides that any rule,
or any other matter shall be published in the Official Gazette, then, such
regulation, order,
byelaw, notification requirement shall be deemed to have been satisfied if such rule, regulation, order,
or any other matter byelaw, notification or any other matter is published in the Official Gazette or
shall be published Electronic Gazette: Provided that where any rule, regulation, order, byelaw,
in the Official Ga-
zette. notification or any other matter is published in the Official Gazette or Electronic
Gazette, the date of publication shall be deemed to be the date of the Gazette
which was first published in any form.
The Central Government may by rules, prescribe—
• the type of digital signature;
• the manner and format in which the digital signature shall be affixed;
• the manner or procedure which facilitates identification of the person
affixing the digital signature;
• control processes and procedures to ensure adequate integrity, security
and confidentiality of electronic records or payments; and
• any other matter which is necessary to give legal effect to digital
signatures.
Module Two • Information Technology Act, 2000 41
Meaning
The paperless society is a concept, where the use of paper as a document is The paperless soci-
ety is a c onc ept,
replaced by the electronic document in the form of personal computers, laptops, where the us e of
palmtops and other electronic devices. paper as a docu-
ment is replaced by
The paperless society concept is enabled by a combination of technologies the electronic docu-
and processes mediated through the personal computer, is already facilitated by ment in the form of
pers onal c omput-
such technologies as the PDF document system. Electronics and Computer Science ers , la ptops ,
(Communications and Information) relating to means of communication, record palmtops and other
keeping, and so on, especially electronic medium that does not use paper in human electronic devices.
and economic activity of the society is called the paperless society.
Paperless society does not require paper because of the use of computers
and other electronic media to record, convey, and store information. The term
Paperless is used to describe business or office work which is done by computer
or telephone, rather than by writing things down. It is recording or relaying
information by electronic media rather than on paper. It also involves storing and
communicating information in electronic form rather than on paper.
claims, medical records, video clips and even voice mail. Today, organizations
use Document Management Systems to organize and manage these electronic
documents. With the addition of each item, the move toward a paperless society
again takes a step forward.
Who knows what would follow? Once the public warms to the idea of not
worrying about receipts, perhaps paper currency itself can be phased out (saving
not only many trees, but billions of dollars a year). Or maybe train/metro/bus/
lightrail/subway tickets via cell phones.
A significant percentage of each professional's workday is spent searching,
manipulating, and reviewing documents. With the increasing popularity of creating
and maintaining documents on personal computers as part of sophisticated
networks, it is imperative major improvements be made in tools that support the
creation, review, collaboration, modification, dissemination, editing, and archiving
of documents.
and capable being used in conjunction with external files which contain computer
programmes, electronic instructions, input data and output data that performs
logic, arithmetic, data storage and retrieval, communication control and other
functions.
Data means a representation of information, knowledge, facts, concepts or
instruction which are being prepared or have been prepared in a formalized
manner, and is intended to be processed, is being processed or has been processed
in a computer system or computer network, and may be in any form (including
computer printouts magnetic or optical storage media, punched cards, punched
tapes) or stored internally in the memory of the computer.
Digital Signature means authentication of any electronic record by a Digital Signature
means authentica-
subscriber by means of an electronic method or procedure in accordance with tion of any e lec -
the provisions of section 3 of IT Act, 2000. tronic record by a
s ubs c ri ber by
Digital Signature Certificate means a Digital Signature Certificate issued means of an elec-
under sub-section (4) of section 35 of IT Act, 2000. tron ic metho d or
procedure in accor-
Electronic Form means, any information generated, sent, received or stored dance with the pro-
in media, magnetic, optical, computer memory, micro film, computer generated visions of section 3
of IT Act, 2000.
micro fiche or similar device.
Electronic Gazette means Official Gazette published in the electronic form.
Electronic record means data, record or data generated, image or sound
stored, received or sent in an electronic form or micro film or computer generated
micro fiche.
Information includes data, text, images, sound, voice, codes, computer
programmes, software and databases or micro film or computer generated micro
fiche.
Key Pair, in an asymmetric crypto system, means a private key and its
mathematically related public key., which are so related that the public key can
verify a digital signature created by the private key.
Originator means a licence granted to a Certifying Authority under section
24.
Private Key means the key of a key pair used to create a digital signature. Private Key means
the key of a key pair
Public Key means the key of a key pair used to verify a digital signature and us ed to c rea te a
digital signature;
listed in the Digital Signature Certificate.
Secure System means computer hardware, software and procedure that— Public Key means
the key of a key pair
(a) are reasonably secure from unauthorised access and misuses; used to verify a digi-
tal s ignature and
(b) provide a reasonable level of reliability and correct operation; listed in the Digital
Signature Certifi-
(c) are reasonably suited to performing the intended functions; and cate;
(b) the initial electronic record is retained intact or has been altered since
such electronic record was so affixed with the digital signature.
Any reference in this Act to any enactment or any provision thereof shall, in
relation to an area in which such enactment or such provision is not in force, be
construed as a reference to the corresponding law or the relevant provision of the
corresponding law, if any, in force in that area.
Certifying Authority
2.16 CERTIFYING AUTHORITIES means a pers on
who ha s been
Certifying Authority means a person who has been granted a licence to issue granted a licence to
a Digital Signature Certificate under section 24. issue a Digital Sig-
nature Certific ate
under section 24.
46 46 Legal Aspect of Business • Module Two
Where in the opinion of the Certifying Authority any event has occurred or
any situation has arisen which may materially and adversely affect the integrity
of its computer system or the conditions subject to which a Digital Signature
Certificate was granted, then, the Certifying Authority shall—
— use reasonable efforts to notify any person who is likely to be affected by
that occurrence; or
— act in accordance with the procedure specified in its certification practice
statement to deal with such event or situation.
Web Hijacking
By hacking web server taking control on another person’s website called as
web hijacking.
50 50 Legal Aspect of Business • Module Two
TYPES OF HACKERS
Cracker
A group that calls Use of the term "cracker" is mostly limited (as is "black hat") to some areas of
themselves hackers
refers to a group
the computer and security field and even there, it is considered controversial.
that c ons is t s of Until the 1980s, all people with a high level of skills at computing were known as
s k il led c omp uter "hackers." A group that calls themselves hackers refers to a group that consists
enthusiasts.
of skilled computer enthusiasts.
Module Two • Information Technology Act, 2000 51
The common usage of the term cracker, refers to those who attempt to gain The common usage
of the term cracker,
unauthorized access to computer systems. Over time, the distinction between refers to those who
those perceived to use such skills with social responsibility and those who used attempt to gain un-
them maliciously or criminally, became perceived as an important divide. authorized access
to c omputer s y s -
Many members of the first group attempt to convince people that intruders tems.
should be called crackers rather than hackers, but the common usage remains
ingrained. The former became known as "hackers" or (within the computer security
industry) as white hats, and the latter as "crackers" or "black hats." The general
public tends to use the term "hackers" for both types, a source of some conflict
when the word is perceived to be used incorrectly; for example Linux has been
criticised as "written by hackers." In computer jargon the meaning of "hacker"
can be much broader.
Usually, a black hat is a person who uses their knowledge of vulnerabilities
and exploits for private gain, rather than revealing them either to the general
public or the manufacturer for correction. Many black hats hack networks and
web pages solely for financial gain. Black hats may seek to expand holes in systems;
Zero-day ex ploits
any attempts made to patch software are generally done to prevent others from (priv ate s oft ware
also compromising a system they have already obtained secure control over. A that exploits secu-
black hat hacker may write their own zero-day exploits (private software that rity vulnerabilities;
0-day exploits have
exploits security vulnerabilities; 0-day exploits have not been distributed to the
not been distributed
public). In the most extreme cases, black hats may work to cause damage to the public).
maliciously, and/or make threats to do so as extortion.
d) Email bombing
E-mail "bombing" is characterized by abusers repeatedly sending an
identical e-mail message to a particular address.
e) Sending threatening e-mails, defamatory e-mails, and committing email
frauds and IRC related attacks such as verbal attacks, clone attacks, and flood
attacks.
7. PORNOGRAPHY
The literal meaning of the term 'Pornography' is "describing or showing sexual
acts in order to cause sexual excitement through books, films, and the like."
This would include pornographic websites; pornographic material produced
using computers and use of internet to download and transmit pornographic
videos, pictures, photos, writings and the like. Adult entertainment is largest
industry on internet. There are more than 420 million individual pornographic
webpages today.
Research shows that 50 percent of the websites containing potentially illegal
contents relating to child abuse were 'Pay-Per-View'. This indicates that abusive
images of children over Internet have been highly commercialized. Pornography
delivered over mobile phones is now a burgeoning business, "driven by the increase
Module Two • Information Technology Act, 2000 53
in sophisticated services that deliver video clips and streaming video, in addition
to text and images."
Effects of Pornography
Research has shown that pornography and its messages are involved in
shaping attitudes and encouraging behaviour that can harm individual users
and their families. Pornography is often viewed in secret, which creates deception
within marriages that can lead to divorce in some cases. In addition, pornography
promotes the allure of adultery, prostitution and unreal expectations that can
result in dangerous promiscuous behaviour. Some of the common, but false
messages sent by sexualized culture. Sex with anyone, under any circumstances,
any way it is desired, is beneficial and does not have negative consequences.
Women have one value — to meet the sexual demands of men. Marriage and
children are obstacles to sexual fulfillment. Everyone is involved in promiscuous
sexual activity, infidelity and premarital sex.
8. FORGERY
Counterfeit currency notes, postage and revenue stamps, mark sheets etc.
can be forged using sophisticated computers, printers and scanners. Also
impersonate another person is considered forgery.
regard to all relevant circumstances, to read, see or hear the matter contained or
embodied in it, shall be punished on first conviction with imprisonment of either
description for a term which may extend to five years and with fine which may
extend to one lakh rupees and in the event of a second or subsequent conviction
with imprisonment of either description for a term which may extend to ten years
and also with fine which may extend to two lakh rupees (Section 67).
Any person who secures access or attempts to secure access to a protected
system in contravention of the provisions of the act shall be punished with
imprisonment of either description for a term which may extend to ten years and
shall also be liable to fine.
Whoever makes any misrepresentation to, or suppresses any material fact
from, the Controller or the Certifying Authority for obtaining any licence or Digital
Signature Certificate, as the case may be, shall be punished with imprisonment
for a term which may extend to two years, or with fine which may extend to one
lakh rupees, or with both.
Any person who has secured access to any electronic record, book, register,
correspondence, information, document or other material without the consent of
the pe rson concerned disclose s such electronic record, book, registe r,
correspondence, information, document or other material to any other person
shall be punished with imprisonment for a term which may extend to two years,
or with fine which may extend to one lakh rupees, or with both (Section 72).
No person shall publish a Digital Signature Certificate or otherwise make it
available to any other person with the knowledge that—
(a) the Certifying Authority listed in the certificate has not issued it; or
(b) the subscriber listed in the certificate has not accepted it; or
(c) the certificate has been revoked or suspended, unless such publication
is for the purpose of verifying a digital signature created prior to such
suspension or revocation.
Cyber Security
• New section for designating agency for protection Section 70A of Critical
Information Infrastructure
• New Section for power to CERT-In to call and Section 70B analyse
information relating to breach in cyber space and cyber security
• Revision of existing Section 79 for prescribing liabilities Section 79 of
service providers in certain cases and to Empower Central Government
to prescribe guidelines to be observed by the service providers for
providing services. It also regulates cyber cafes.
Module Two • Information Technology Act, 2000 57
Cyber Terrorism
• For the first time, defined the concept of cyber terrorism and has made
it a heinous crime.
• Cyber terrorism as an offence that has been made punishable with life
imprisonment and fine.
• This move should do tremendous service to the cause of the Indian nation
as also the sovereignty, integrity and security of India.
• Highly commendable move after Mumbai 26/11 attacks.
New Cyber Crimes Added
— Provide far more exhaustive coverage off cyber crimes in the law.
— Various new cyber crimes have been added
— Like the activities defined in Section 43 off the IT Act,, 2000.
— The new amendments have added identity theft and publishing as cyber
crimes.
— Have also covered breach of privacy, child pornography as specific
offences.
Interception
— The new amendments have strengthened
— The hands of the nation by increasing the ambit of the powers off
interception of the Government,
— Interception, blocking and monitoring powers have been more detailed
and elaborately stated.
Section 2 Amendments
"Communication Device" means cell phones, personal digital assistance or
combination of both or any other device used to communicate, send or transmit
any text, video, audio or image (Section 2(ha).
"Computer network" means the interconnection of one or more computers
or computer systems or communication device through (Section 2j).
The use of satellite, microwave, terrestrial line, wire, wireless or other
communication media; and (section 2(i)
Terminals or a complex consisting of two or more inter-connected computers
or communication device whether or not the inter-connection is continuously
maintained (section 2(ii).
58 58 Legal Aspect of Business • Module Two
A Terror SMS From Your Cell? Possible, Sending `Masked SMS' Can
Attract 3-Year Jail Term
Imagine getting a lewd SMS from a number you know,
going to police with a complaint and then finding out that the
supposed sender is clueless about what happened.
Two such cases have been reported to Mumbai police in
the past. Though they are yet to track down the sender, they
have managed to unearth a bizarre truth, that of the `masked
SMS'. The user has to register on a website (for as little as $10)
and can send text messages to and from any mobile number
on the planet without being identified.
Mumbai police have managed to track down two or three
websites that are used to send masked messages and are
collaborating with IT experts to get to the bottom of the matter.
``We have received two complaints in the last one month where
the sender's number was camouflaged,'' joint commissioner of
police (crime) Rakesh Maria told TOI on a Saturday.
IT industry sources said, ``It's rare for the real miscreant to be caught in such a situation
because people might register under false identities and also commit credit card fraud to pay the
small registration fee,'' says IT expert Vijay Mukhi.
If caught, can the culprit be charged under our laws? ``Yes,'' says IT expert Vijay Mukhi. ``Section
66 A of the IT Act talks about sending offensive messages using any communication device, Section
66 C is the identity theft section and Section 66 D the cheating by impersonation section.'' A
pornographic message will be charged under Section 66 E, while Section 66 F is quoted in the case of
cyber terrorism.
If proved, the offence of identity theft attracts a 3-year jail term plus a cash fine of upto Rs. 1
lakh in India. While there is a misuse of computer act that is invoked in such cases in the US, the law
in India is still inadequate to handle such innovative mobile spoofing. ``Based on our findings we will
decide what action should be taken against these websites. If need be, we could pull them down as
well,'' he added. The masked SMS service is easy to operate. Giving TOI a demo, the IT expert logged
on and sent this reporter an SMS from his colleague's number with utmost ease. Of course, the friend
had no record of the said message in his outbox. Senior Nasscom officials say these websites can be
blocked but it's long process.
Module Two • Information Technology Act, 2000 59
Can anything be done at all? ``Not immediately,'' says Mukhi. ``As of now, one just has to be
careful and cross-check the credibility of a message before filing a complaint.'' He added that the need
of the hour is to spread awareness about the problem. ``Time was when wifi was misused but we've
managed to tackle that. Camouflaging is a dangerous issue and must be dealt with seriously and
immediately,'' he added.
Can Existing Laws Help?
• Section 66A of the Indian IT Act talks about sending offensive messages using any
communication device. Section 66C is the identity theft section and Section 66D the cheating
by impersonation section. In the two cases reported to the Mumbai police, a combination of
these three sections will apply.
• A pornographic message will be charged under Section 66E, while Section 66F is quoted in the
case of cyber terrorism.
• If proved, the offence of identity theft attracts a 3-year jail term plus a cash fine of upto Rs. 1
lakh in India. While there is a ‘misuse of computer act’ that is invoked in such cases in the US,
the law in India is still inadequate to handle such innovative mobile spoofing.
Questions
3
MODULE
Module Objectives
After reading this chapter, you should be able to
• Comprehend the significance, objectives and salient features of Indian
Competition Act, 2002
• Know the components of Competition Act, 2002
• Distinguish between the MRTP Act, 1969 and the Competition Act, 2002
• Diagnose all about the competition commission of India (CCI)
• Appreciate the nuances of competition appellate tribunal (CAT)
• Understand the offences and penalties under the competition law
• Know the history of Competition Law and policy across the nations of the
world.
62 62 Legal Aspect of Business • Module Three
Act. The committee presented its competition policy report to the Government in
May 2000 (The report will be referred to hereinafter as High Level Committee
(2000)]. The draft competition law was drafted and presented to the Government
in November 2000. After some refinements following extensive consultations and
discussions with all interested parties, the parliament passed in December 2002
the new law, namely, the Competition Act, 2002.
Sl.
MRTP Act, 1969 Competition Act, 2002
No.
1 Based on the pre-reforms scenario Based on the post-reforms scenario
2 Based on an undertaking’s size as a Based on an undertaking’s structure as a factor
factor
3 Competition offences are implicit or not Competition offences are explicit and defined
defined
4 Complex in arrangement and language Simple in arrangement and language and
easily comprehensible
5 14 percent offences negating the 14 percent offences and all the rest subjected to
principles of natural justice rule of reason.
6 Frowns upon dominance Frowns upon abuse of dominance
7 Registration of agreements compulsory No requirement of registration of agreements
8 No combination regulation Combinations (mergers and amalgamations)
beyond a high threshold limit are regulated
9 MRTP Act, 1969 Competition Act, 2002
10 MRTP commission appointed by the Competition commission selected by a
Government collegiums (search committee)
11 Very little administrative and financial Relatively more autonomy for the competition
autonomy for the competition commission
commission
12 No competition advocacy role for the Competition commission has competition
MRTP commission advocacy role
13 No penalties for offences Penalties for offences
14 Reactive and rigid Proactive and flexible
15 Unfair trade practices (UTPs) covered Unfair Trade Practices omitted are
16 Does not vest MRTP commission to Competition law
Competition law seeks to regulate
regulate them
cartels of
inquire into cartels of foreign origin in a Indian and Foreign origin of India
direct manner
Module Three • The Competition Act, 2002 67
The Competition Act is therefore a new wine in a new bottle—wine gets better
as it ages. The law provides for a competition fund, which shall be utilized for
promotion of competition advocacy, creating awareness about competition issues
and training in accordance with the rules that may be prescribed. The extent
MRTP Act, 1969 has aged for more than three decades and has given birth to the
new law (the Act) in line with changed and changing economic scenario in India
and rest of the world and is in line with the current economic thinking comprising
liberalization, privatization, and globalization.
The message is loud yet clear that a well planned exhaustive competition
compliance programme can be a great benefit to all enterprises irrespective of
their size, area of operation jurisdiction involved, nature of products supplied or
services rendered and the same is essential for companies, its directors and the
delegate key corporate executives to avoid insurmountable hardships of monetary
fines, and civil imprisonment besides loss of hard-earned reputation when the
competition authorities, the media and others reveal the misdeeds in public.
In the changed scenario, India required a fresh law for competition and new
regulatory authority, which under this policy is the competition commission of
India.
Meeting of Commission
The commission shall meet at such times and Paces, and shall observe such
roles of procedure in regard to the transaction of business at its meetings as may
be provided by regulations.
The Chairperson, if for any reason, is unable to attend a meeting of
commission, the senior — most member present at the meeting shall preside at
the meeting.
All questions which come up before any meeting of the commission shall be
decided by a majority of the members present and voting, and in the event of an
equality of votes, the Chairperson or in his absence the member presiding shall
have a second or/ casting vote; provided that the quorum for such meeting shall
be three members.
Selection Committee
The Chairperson and members of the Appellate Tribunal shall be appointed
by the Central Government from a panel of names recommended by the selection
committee, composition of which has been specified for CCI.
refer the matter to CCI. The commission, which is having the power of a civil
court, after following the due process of law and the principles of natural justice
shall pass appropriate orders. Let us discuss the penalties and offences under
the Act.
(1) If a person fails to pay any monetary penalty imposed on him under this
Act, the commission shall proceed to recover such penalty in such manner
as may be specified by the regulations.
(2) In a case where the commission is of the opinion that it would be
expedient to recover the penalty imposed under the Act in accordance
with provisions of the Income Tax Act, 1961, it may make a reference to
this effect to the concerned Income Tax Authority under the Act for
recovery of the penalty as tax due under the said Act.
(3) Where a reference has been made by the commission for recovery of
penalty as tax due, the person upon whom the penalty has been imposed
shall be deemed to be the assessee in default under the Income Tax Act,
1961.
(4) Without prejudice to the provisions of this Act, if any person violates any
directions issued or contravenes without any reasonable ground, any
decision or order of the commission issued under sections 27, 28, 31,
32 and 33 or any condition or restriction subject to which any approval,
sanction, direction or exemption in relation to any matter has been
accorded, given, made or granted under this Act or fails to pay the penalty
imposed under this act, then he shall without prejudice to any proceeding
under section 39, be liable for imposition of additional penalty not
exceeding Rupees 120 lakh or imprisonment for a term upto one year or
both as the civil court having jurisdiction in the matter may deem fit.
The commission may cause an investigation to be made into compliance
of its orders, and based on the results of the investigation or otherwise,
file a complaint before the civil court having jurisdiction in the matter,
which shall pass such order under this section as it may deem fit.
Provided that the civil court shall not take cognizance of any offence
punishable under this section save on a complaint filed by the commission
(or) any of its officers authorized by it.
(5) Where during an inquiry, the commission is satisfied that an act in
contravention of the provisions of the act has been committed and
continues to be committed or that such act is about to be committed,
the commission may, by order, grant a temporary injunction restraining
any parties from carrying on such act until the conclusion of such inquiry
or until further orders, without giving notice to the opposite party, where
it deems it necessary.
(2) Every appeal under sub-section (1) shall be filed within a period of sixty
days from the date on which a copy of the direction or decision or under
made by the commission is received by the Central Government or the
State Government or a local authority or enterprise or any person referred
to in that sub-section and it shall be in such form and be accompanied
by such fee as may be prescribed.
Provided that the Appellate Tribunal may entertain an appeal after the
expiry of the said period of sixty days if it is satisfied that there was
sufficient cause for not filing it within that period.
(3) On receipt of an appeal under sub-section (1), the Appellate Tribunal
may, after giving the parties to the appeal, an opportunity of being heard,
pass such orders thereon as it thinks fit, confirming, modifying or setting
aside the directions, decision or order appealed against.
(4) The appellate tribunal shall send a copy of every order made by it to the
commission and the parties to the appeal.
(5) The appeal filed before the appellate tribunal under sub -section (7) shall
be dealt with by it as expeditiously as possible and endeavour shall be
made by it to dispose of the appeal within six months from the date of
receipt of the appeal.
liable to be detained in civil prison for a term which may extend to one year,
unless in the meantime the civil court directs his release and he shall also be
liable to a penalty not exceeding rupees ten lakhs.
INDIAN CONTEXT
• Adopted the new competition law (Competition Act, 2002) to replace MRTP
Act, 1969
• At the cross-roads of implementing new competition law.
• However, the country is yet to have a stated competition policy.
CONCLUSION
The competition law is very significant in the post liberalization era. Since
India is a member country of WTO, the latter insists on fair and free competition
in the trade across the nations of the globe. In line with, WTO requirements, the
Government. India replaced the old MRTP Act, 1969 with the new Competition
Act, 2002.
The objectives of Act are to ensure fair competition in India by prohibiting
trade practices that have an adverse effect on competition, promoting and
protecting competition, protecting the interests of consumers and ensures fair
trade.
The law has four components to deal with, they are: anti-competition
agreements, abuse of dominance, combinations regulations in relation to mergers,
amalgamations, strategic alliance and take-over and also having competition
advocacy through a commission called competition commission of India. For
redressing the grievances of orders of CCI, the government set-up Competition
Appellate Tribunal. Further, this chapter discussed the history of competition
law and policy across the world.
KEY WORDS
• Competition • Competition Law
• Anti-competition agreements • Combinations
• Competition Advocacy • WTO
• CCI • CAT
• Competition Policy • Offences and Penalties
• Compensation
Questions
4
MODULE
Module Objectives
After reading this chapter, you should be able to
Understand the nature, scope and objectives of the RTI Act, 2005
Know the salient features of the RTI Act, 2005
Comprehend the concepts such as information commissioner, public
authority, and information officer
Distinguish between the information that are included and exempted
from disclosure
List the characteristics of the RTI Act, 2005
Know the procedure to get information under RTI Act
Understand all about the Act with interesting cases and landmark
judgements.
78 78 Legal Aspect of Business • Module Four
Country /
India USA UK JAPAN
Attributes
Title of the Act. Right to Freedom of Freedom of Freedom of
Information Act. Information Act. Information Act Information Act
Date of 15 June 2005 4 July 1966 30 Nov. 2000 May 1999
enactment
Date of 12 Oct. 2005 4 July 1967 January 2005 April 2001
Implementation
Time in 4 Month 1 Year 4 Year 2 Year
implementation
Delivery of 30 Day 20 Day 20 Day 30 Day
information
All the 24 hours in a day, millions of virtual fuse wires have been snaking
across India, connecting to mini-bombs under chairs and tables in government
offices that have gone progressively arrogant since Independence. In these
government cells are pockets of information, concealing which, bureaucrats
and politicians derive and share power and pelf.
This optimism is caused by the path traveled so far. Until we adopted our
Constitution in 1950, there had been no scope for individual freedom at any time
in India's history. Arbitrary rule has been the norm. It is our Constitution's Article
19 that guarantees us the right to freedom of speech and expression. It is on this
Article that India's celebrated freedom of the press based. While most people
intuitively connect and see the need for media to be free, they do not quite presume
the same right for themselves. The media must know to inform. And because it is
a principle of democracy that people are their own masters.
The first stirrings of people to claim the right to know began in Rajasthan
in the early nineties. Aruna Roy, an ex-IAS officer brought her experience as a
government insider to bear in favour of villagers wanting to know where their
unpaid wages went. Partnering with Nikhil Dey and Shankar Singh, she formed
the Mazdoor Kisaan Shakti Sangathan [MKSS]. From those little reported days,
grew a nation wide movement demanding the right to know. In Maharashtra
Anna Hazare applied the pressure.
80 80 Legal Aspect of Business • Module Four
Finally in 2002, politicians were dragged kicking, to pass a token law, the
Freedom of Information Act. It was still-born, because the Act was never notified.
Not that it mattered, because it was a toothless law, any way: it did not provide
for any punishment for an officer who failed to provide the information sought.
But the demand to know did not die down. Nine states had already yielded to
public pressure and passed their own state-level laws, most weak but some [as in
Delhi, Rajasthan, Maharashtra and Karnataka], quite effective.
Private bodies are not within the Act's ambit directly. However, information
that can be accessed under any other law in force by a public authority can also
be requested for. In a landmark decision of 30th Nov., 2006 ('Sarbajit Roy versus
DERC') the Central Information Commission also reaffirmed that privatised public
utility companies continue to be within the RTI Act, their privatisation
notwithstanding. The Act also explicitly overrides the Official Secrets Act and
other laws in force on 15-June-2005 to the extent of any inconsistency.
4. Right to know relations with other Basic Rights: Right to know is also
closely linked with other basic rights such as freedom of speech and expression
and right to education. Its independent existence as an attribute of liberty cannot
be disputed. Viewed from this angle, information or knowledge becomes an
important resource. An equitable access to this resource must be guaranteed.
5. Transparency: Soli Sorabjee stressing on the need of Right to Information
aims at bringing transparency in administration and public life, says, "Lack of
transparency was one of the main causes for all pervading corruption and Right
to Information would lead to openness, accountability and integrity."
82 82 Legal Aspect of Business • Module Four
According to Mr. P.B. Sawant, "the barrier to information is the single most
cause responsible for corruption in society. It facilitates clandestine deals, arbitrary
decisions, manipulations and embezzlements. Transparency in dealings, with their
every detail exposed to the public view, should go a long way in curtailing
corruption in public life."
• The right of the public to access the information and the corresponding
duty of the Government to meet the request, unless specifically defined
exemptions apply;
The RTI Ac t Pro- 1. More Progressive, Participatory and Meaningful Role: The Act promises
mises to make the
to make the right to information more progressive, participatory and meaningful,
right to information
more progressive, as it encourages the common citizen to enthusiastically participate in the whole
parti c ipatory and
meani ngful, a s it
process of governance. The citizens are not only free to ask for information from
enc oura ges the the Government, but also have the right to get it. The scope of the Act extends to
common citizen to
enthusiastic ally
all authorities and bodies under the Constitution or any other law, and inter alia
partic ipa te in the includes all authorities under the Central Government, State Governments and
whole proc es s of
governance.
Local Bodies. The non-governmental organizations (NGOs) substantially funded,
directly or indirectly, by the public funds also fall within the ambit of this Act.
2. Suo motu Information: A duty has been cast, in section 4 of the Act, on
every public authority to suo motu provide to the public with the information as
prescribed therein, so that the public has to take minimum recourse to the use of
this legislation for obtaining information.
Module Four • The Right to Information Act, 2005 83
norms for disclosure of information with a view to enabling the people to observe
and scrutinize the decision making process. The powers vested with the
Information Commissioners, who are appointed by the President of India/Governor
of a state, ensure effective implementation of the Information.
State Public Information Officer means the State Public Information Officer
designated under sub-section (1) and includes a State Assistant Public Information
Officer designated as such under sub-section (2) of section 5; [Section 2(m)]
Third Party means a person other than the citizen making a request for
information and includes a public authority. [Section 2(n)]
(b) the reasons for the decision, including any findings on any material
question of fact, referring to the material on which those findings
were based;
(c) the name and designation of the person giving the decision;
(d) the details of the fees calculated by him or her and the amount of
fee which the applicant is required to deposit; and
(e) his or 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;
(f) if information sought has been supplied by 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;
(g) 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.
4.11 TRANSPARENCY
With a view to ensuring maximum disclosure of information regarding
government rules, regulations and decisions, every public authority is mandated
to `maintain all its records duly catalogued and indexed in a manner and the
form which facilitates the right to information under the Act.'
The public authorities are therefore required to make pro-active disclosures
The public authori- through publication of relevant documents. Besides, the public authorities are
ties are als o re-
quired to 'provide
also required to 'provide as much information suo motu to the public at regular
as much informa- intervals through various means of communication, including internet, so that
tion suo motu to the the public have minimum resort to the use of this Act to obtain information.'
public at regular in-
tervals through vari- In compliance of the above provisions of the Act, all the levels of the
ous means of com-
munication, includ-
Government — the Centre, States and Local Bodies, including Village level
ing internet. Panchayats — have put the records in public domain, through publications as
well as internet in the regional languages. And, to facilitate the access to
information, a citizen has the right to:
Module Four • The Right to Information Act, 2005 91
It shall publish within one hundred and twenty days of the enactment:
(i) the particulars of its organization, functions and duties;
(ii) the powers and duties of its officers and employees;
(iii) the procedure followed in its decision making process, including
channels of supervision and accountability;
(iv) the norms set by it for the discharge of its functions;
(v) the rules, regulations, instructions, manuals and records used by its
employees for discharging its functions;
(vi) a statement of the categories of the documents held by it or under its
control;
(vii) the particulars of any arrangement that exists for consultation with, or
representation by the members of the public, in relation to the
formulation of policy or implementation thereof;
(viii) a statement of the boards, councils, committees and other bodies
consisting of two or more persons constituted by it. Additionally,
information as to whether the meetings of these are open to the public,
or the minutes' of such meetings are accessible to the public;
(ix) a directory of its officers and employees;
(x) the monthly remuneration received by each of its officers and employees,
including the system of compensation as provided in its regulations;
(xi) the budget allocated to each of its agency, indicating the particulars of
all plans, proposed expenditures and reports on disbursements made;
(xii) the manner of execution of subsidy programmes, including the amounts
allocated and the details and beneficiaries of such programmes;
Module Four • The Right to Information Act, 2005 95
Since the information is to be paid for, the reply of the PIO is necessarily
limited to either denying the request (in whole or part) and/or providing a
computation of "further fees." The time between the reply of the PIO and the time
taken to deposit the further fees for information is excluded from the time allowed.
If information is not provided within this period, it is treated as deemed refusal. If information is not
Refusal with or without reasons may be ground for appeal or complaint. Further, provided within this
period, it is treated
information not provided in the times prescribed is to be provided free of charge. as deemed refusal.
For Central Departments as of 2006, there is a fee of Rs. 10 for filing the
request, Rs. 2 per page of information and Rs. 5 for each hour of inspection after If the applicant is a
Below Poverty Card
the first hour. If the applicant is a Below Poverty Card holder, then no fee shall holder, then no fee
apply. Such BPL Card holders have to provide a copy of their BPL card along with s hall apply . Suc h
their application to the Public Authority. State Governments and High Courts fix BPL Card holders
hav e to provide a
their own rules. copy of their BPL
c ard along with
A citizen who desires to obtain any information under the Act, should make their application to
an application to the Public Information Officer of the concerned public authority the Public Authority.
in writing in English or Hindi or in the official language of the area in which the
application is made. The application should be precise and specific. He should
make payment of application fee at the time of submitting the application
As prescribed in the Fee Rules. The applicant can send the application by
post or through electronic means or can deliver it personally in the office of the
public authority. The application can also be sent through an Assistant Public
Information Officer.
PEOPLESEEKING
PEOPLE SEEKING FOR
FORINFORMATION
INFORMATION
REQUEST
REQUESTFOR
FORINFORMATION TOPIO
INFORMATION TO PIO
INFORMATION GATHERINGBY
INFORMATION GATHERING BY PIO
PIO
Box 4.1
FORM A
(Section 6(1) and 7(1) of the Right to Information Act, 2005)
(1) How many notifications we re issued since last 10 years from your
department for appointment of various categories/ cadre. Issue the
copies of all those appointment notifications.
(2) How m any disabled are appointed since last 15 years in your
corporation ? Give the details of appointment and cadre with names
and cadre of candidate.
(3) What are the norms for appointment of disables / physically
handicapped in your corporation. What are the Ac ts applicable for
appointment of disable d?
(4) What is the basis for not entertaining the applic ation of the
handicapped in the notification dated : 13.07.2009 vide No.
ksrtco/recruitment/c1/510/09-10, Advertisement No. 1/2009 Class-
2 and what is the basis for giving reservation for handicapped in the
class-3 appointments su ch as Traffic Superintendent and other
categories?
(5) How many vacancies meant for handicapped are unfilled?
Place : Bangalore
Date : 15.10.2009
Signature of the applicant
Module Four • The Right to Information Act, 2005 101
Complaints
If any person is unable to submit a request to a Public Information Officer
either by reason that such an officer has not been appointed by the concerned
public authority; or the Assistant Public Information Officer has refused to accept
his or her application or appeal for forwarding the same to the Public Information
Officer or the appellate authority, as the case may be; or he has been refused
access to any information requested by him under the RTI Act; or he has not been
given a response to a request for information within the time limit specified in the
Act; or he has been required to pay an amount of fee which he considers
unreasonable; or he believes that he has been given incomplete, misleading or
false information, he can make a complaint to the Information Commission.
4.18 APPEALS
If an applicant is not supplied information within the prescribed time of thirty If an applicant is not
s upplied informa-
days or 48 hours, as the case may be, or is not satisfied with the information
tion within the pre-
furnished to him, he may prefer an appeal to the first appellate authority who is s c ri bed tim e of
an officer senior in rank to the Public Information Officer. Such an appeal, should thirt y day s o r 48
be filed within a period of thirty days from the date on which the limit of 30 days hours, as the case
may be, or is not
of supply of information is expired or from the date on which the information or s atisfied with the
decision of the Public Information Officer is received. The appellate authority of info rmation fur-
the public authority shall dispose of the appeal within a period of thirty days or in nished to him, he
may prefer an ap-
exceptional cases within 45 days of the receipt of the appeal. peal to the first ap-
pella te autho rity
If the first appellate authority fails to pass an order on the appeal within the who is an offic er
prescribed period or if the appellant is not satisfied with the order of the first senior in rank to the
appellate authority, he may prefer a second appeal with the Central Information Public Information
Officer.
Commission within ninety days from the date on which the decision should have
been made by the first appellate authority or was actually received by the appellant.
PENALTY PROVISIONS
Every PIO will be liable for fine of Rs. 250 per day, up to a maximum of
Rs. 25,000/-, for —
i. Not accepting an application;
ii. Delaying information release without reasonable cause;
iii. Malafidely denying information;
iv. Knowingly giving incomplete, incorrect, misleading information;
v. Destroying information that has been requested and
vi. Obstructing furnishing of information in any manner.
The Information Commission (IC) at the Center and the State levels will
have the power to impose this penalty. The Information Commission can also
recommend disciplinary action for violation of the law against an erring PIO.
(S.20)
Jurisdiction of Courts
Lower Courts are barred from entertaining suits or applications against any
order made under this Act (S.23). However, the writ jurisdiction of the Supreme
Court and High Courts under Articles 32 and 225 of the Constitution remains
unaffected.
enquiry was ordered against the teacher and he was asked to report to the
school instantly.
The villagers were overwhelmed with the fact that their use of Right to
Information could reap such instant results.
Source: PACS
SUCCESS STORY 2
CAMPAIGN REPORT TO THE DISTRICT MAGISTRATE, BANDA
Another interesting facet of the campaign was the process of filing RTI
applications in Banda (UP). A group of ten volunteers and villagers went to
various offices for submitting their RTI applications. None of the applications
could be filed easily. Most of the offices were ill-equipped for the task. One of
the major problems faced during the filing process was that the clerks, and
sometimes even the officers, appeared non-conversant and at times completely
ignorant about the RTI Act itself. The applications were filed after a lot of
trepidation, struggle and running around the offices. These experiences were
submitted in the form of a report to the District Magistrate of Banda District,
which had the desired effect and considerably improved the situation in most
of the offices.
Source: PACS Report
SUCCESS STORY 3
TRANSPARENCY IN PUBLIC DISTRIBUTION
SYSTEM FOR BPL FAMILIES
The 'Mere Gaon Ke Sawaal' Campaign volunteers noticed that the residents
of Nai Basti (Bahraich, UP) were also facing the same problems as the other
economically backward villages of the region. The 'Kotedar' had been apathetic
towards their requests. The use of Right to Information by the villagers, the
women being in majority, was successful in curbing the corruption that had
seeped in the Public Distribution System to some extent.
When the campaign volunteers saw the BPL ration cards of the villagers,
they found that no entries had been made during February 2006 to December
2006. It was evident that the villagers had not received any ration in the said
time period. Immediately, 51 village residents agreed to file group RTI
applications on the issue and demanded information regarding the acquisition
and the distribution of the ration and also asked for copies of the ration records.
The applications were filed by the applicants personally after a lot of difficulty
at the District Supply Office. Exactly within a fortnight, the Kotedar reached
the village and narrated a long sob story, which moved few of the innocent
villagers so much that they even agreed to take back their RTI applications.
They very next day the Kotedar brought a mini bus to the village along with
"pooris" made with one quintal flour and asked the villagers to come to the
SDM's office and take back their RTI applications. But, the women of the forest
village rights forum refused to do so.
This initiative by the women of the village encouraged the other villagers
and they also refused to take back their RTI applications. The Kotedar trying
104 104 Legal Aspect of Business • Module Four
another of his tactics, one day announced in the village that all those who
requested for information can collect it from him. When few villagers reached to
take the information, they were forced to make thumb imprints on a blank
paper. The Dehat Sanstha volunteers immediately reported this scam to the
SDM. Finally, the Kotedar was suspended.
Source: PACS Report
SUCCESS STORY 4
SCHOOL UNIFORMS DISTRIBUTED AT THE
END OF THE DECEMBER SESSION
Despite several claims of the Government, school uniforms of the session
— December 2006-07 — were not PricewaterhouseCoopers Final Understanding
the "Key Issues and Constraints" in implementing the RTI Act distributed among
the students of the Gulrahai Primary School in Allahabad. Workers from KABIR
and ABSSS conducted a meeting with the villagers of Gulrahai and educated
them on the RTI Act. Immediately thereafter, nine parents prepared an RTI
application and questioned the administration regarding the school uniforms
of the children. In the first week of January 2007, the school dresses were
distributed to the children. Similarly, in the Bharthaul Village primary school
of Chitrakoot district, school dresses were not distributed among the children
till December. Under 'Mere Gaon Ke Sawaal' Campaign, KABIR & ABSSS
conducted a meeting with the villagers of Gulrahai and educated them on the
RTI Act. The very next day, parents of these children submitted an RTI
application with the District Education Officer and within 15 days, school dresses
were distributed and a video shoot of the court was also conducted.
Source: PACS report
SUCCESS STORY 5
EXPOSING CORRUPTION IN MEDICINE
PROCUREMENT AT PUBLIC SECTOR UNIT
Applicants belonging to Anuppur, Madhya Pradesh and Koria district of
Chhattisgarh filed RTI applications with the PIO of South Eastern Coal Fields
Ltd. (SECL) situated at its head office in Bilaspur during the months of February
— April 2006. They sought the following information:
" Names of all medicines procured by SECL for distribution through its
primary health centres and its OPD clinics in the Hasdev coal mines
area during the financial year 2005-06. (They cater exclusively to the
employees of SECL and their families).
" Quantity of medicines procured during the same period.
" Supply price of each item.
" Copies of all purchase orders issued by SECL for these medicines.
" Name and contact details of suppliers who bagged the purchase order.
All three applicants received the requested information within the 30
day deadline stipulated in the RTI Act. Armed with these documents,
applicants worked for several weeks crosschecking the data along with
Module Four • The Right to Information Act, 2005 105
SUCCESS STORY 6
PAYMENT OF PENSION DUES FROM RAILWAYS
"Payment of interest on arrears due on account of recomputation of pension
and other retirement benefits as a result of implementation of Supreme Court's
Judgment dated 25-07-1997 in CA No. 4174/88of 1995 and other tagged SLPs"
Indian Railway Pensioners Association Bhavnagar Division of Western Railway,
over the years, submitted hundreds of representations to GM Western Railway
and DRM Bhavnagar to get the payment in the above case. 137 specific cases of
non-payment were filed in the pension Adalat, but nothing happened. When, a
request under RTI ACT 2005 was submitted to CPIO Western Railway for
disclosing the reasons for not implementing the judgment of the Apex court,
things started moving and the Western Railway accepted the liability for making
payment and all the Divisions of Western Railway were advised to take immediate
steps for making payment.
The Supreme Court elevated the right to know and the right to information to the status of a
by a generous inter-
pret ation of the
fundamental right, on the principle that certain unarticulated rights are immanent
guarantee of free- and implicit in the enumerated guarantees.
dom of speech and
ex pr es s ion ele- The court declared: The concept of an open government is the direct emanation
v ated the right to from the right to know which seems to be implicit in the right of free speech and
know and the right
expression guaranteed under article 19 (1) (a).
to information to the
status of a funda-
The Supreme Court of India has emphasized in the S.P.Gupta case (1982)
mental right.
that open Government is the new democratic culture of an open society towards
which every liberal democracy is moving and our country should be no exception.
In a country like India which is committed to socialistic pattern of society, right to
know becomes a necessity for the poor, ignorant and illiterate masses.
In 1986, the Bombay High Court followed the S.P.Gupta judgment in the
well-known case Bombay Environmental Group and others vs. Pune Cantonment
Board.
The Bombay High Court distinguished between the ordinary citizen looking
for information and groups of social activists. This was considered a landmark
judgment concerning access to information.
easy to seek the details of decision making process that affected or harmed him. Until 2005, an ordi-
nary citizen had no
Without access to relevant information, it was not possible for a common man to access to informa-
participate in a meaningful debate on political and economic options or choices tion held by a pub-
available to him for realizing socio-economic aspirations. The Constitution of India lic authority. Even in
matte rs affec ting
has guaranteed (u/s 19) the freedom of expression and speech. Even then a citizen legal entitlements
had no legal right to know about the details of public policies and expenditures. for such subsidized
And, therefore, it was not possible for a common man to observe and scrutinize services as food for
the public actions with a view to providing feed back for rectifying the deficiencies work, wage employ-
ment, basic educa-
in policy planning and the execution of programmes. tion and he alth
c are , it was not
Under the Official Secret Act, 1923, the entire development process has thus eas y to s eek the
been shrouded in secrecy. The people who voted for the formation of democratically details of decision
elected governments and contributed to the huge costs of financing public mak ing proc es s
that affec te d or
activities, had no legal rights to know as to: what process has been followed in harmed him.
designing the policies affecting them, how the programmes have been implemented,
who are the concerned officials associated with the decision making process and
execution of the schemes and why the promises made for delivery of essential
services to the poor have not been fulfilled?
TABLE 4.3 PROBLEMS AND SUGGESTED SOLUTIONS DUE TO THE
IMPLEMENTATION OF RTI ACT, 2005
7. High Nil -
8. High Nil -
9. High Nil -
Not surprisingly, the Not surprisingly, the culture of secrecy beginning from the colonial rule till
culture of secrecy
beginning from the
the first six decades of Independence fuelled rampant corruption, in which large
colonial rule till the amount of public money was diverted from development projects and welfare
first six decades of schemes to private use through mis-use of power by the authorities. Lack of
Independenc e fu-
elled rampant cor-
openness in the functioning of the Government, provided a fertile ground for
rupti on, in w hic h breeding inefficiency and lack of accountability in the working of the public
larg e amoun t of authorities, which, in turn, has perpetuated all forms of poverty, including
public money was nutritional, health and educational. In order to rectify the deficiencies in the
diverted from deve-
lopm ent proj ec ts mechanisms for ensuring the reach of entitlements, particularly the basic human
and welf are needs, the people in general and NGOs, in particular, demanded for a greater
schemes to private access to the information held by the public bodies, which was acceded to by the
us e through mis -
use of power by the Government in 2005.
authorities.
In this backdrop, the Right to Information Act 2005, was enacted by the
National Parliament to dismantle the culture of secrecy and to change the mindset
of the bureaucrats and political leaders and to create conditions for taking informed
decisions. The major concern of the Act is to allow for greater probity in the
functioning of the government departments so as to promote transparency and
accountability in the working of the public bodies and contain the scourge of
corruption, which are critical for ensuring good governance.
have yielded positive results. Sharing of information, for instance, about the new Every individual or
section of the soci-
techniques of farming, health care facilities, hazards of environmental degradation, ety, whether work-
opportunities for learning and earning, legal remedies for combating gender biases, ing in farm, indus-
etc., have, overtime, made significant contributions to the well being of poor people. trial or s erv ic es
sectors, requires a
Every individual or section of the society, whether working in farm, industrial or wide range of infor-
services sectors, requires a wide range of information to be able to effectively mation to be able to
function in the knowledge and technology driven economy. effectively function
in the k nowledge
Democratization of information and knowledge, by way of creating conditions and tec hnology
for sharing among the people, who are partners in development, is critical to the driven economy.
task of equalizing opportunities for development. In view of this, the RTI seeks to
set up the facilitation process for free flow of information, which forms the basis
for a healthy debate on issues of vital importance to every section of the society.
feedback from the people about their socio-economic aspirations and the manner
in which the accepted goals are to be realized, it is not possible to design and
implement schemes that may eradicate poverty and liquidate illiteracy. The RTI
therefore empowers every citizen to take charge of his life and make proper choices,
on the basis of freely available information and knowledge, for effective participation
in political and economic processes or activities.
Briefly, RTI has been implemented in response to the major challenges of
development, mainly the urgency for democratization of information and knowledge
which are vital for equalizing opportunity for development, increasing NGOs
participation in decision making and democratic governance and for evolving
citizen-centric approaches for addressing the concerns of every member of the
society. In the following paragraphs, an attempt is made to present the salient
RTI ha s been features of the Act and to examine the extent to which the stated objectives of the
implemented in re- RTI Act are realized.
sponse to the major
challenges of deve-
lopment, mainly the Promotion of Citizen-Government Partnership
urgency for demo-
cratization of infor- The RTI Act provides a framework for promotion of citizen-government
mation and know- partnership in carrying out the programmes for welfare of the people. The principle
ledg e whic h are
vital for equalizing
of partnership is derived from the fact that people are not only the ultimate
opportunity for de- beneficiaries of development, but also the agents of development. The stakeholders'
velopment, participation leads to better projects and more dynamic development.
Under the RTI regime, citizens' participation has been promoted through—
(a) access to information and involvement of affected groups/communities
in design and implementation of projects; and
(b) empowerment of local government bodies at village level through the
involvement and cooperation with NGOs/self-help groups.
The proactive disclosure of information has enabled the beneficiaries, mainly
through NGOs, to assume a central role in design and execution of projects. RTI
has instilled a wider sense of ownership in the development activities. Besides,
access to information has enabled the people to participate in economic and
political processes through a dialogue between people and the government officials
or public campaign on public policies. For instance, information obtained under
RTI, in respect of utilization of funds allocated under rural employment guarantee
scheme, has been used by NGOs for campaign in favour or against the political
leaders during recent elections in some States, with a desirable impact on political
process. Almost all the welfare projects, particularly at Village and Panchayat
levels, are being designed and developed in cooperation and support with the
NGOs or affected persons, with a view to raising the satisfaction level of people.
Lac k of tran s pa-
rency and account-
ability enc ourage Reduction in Corruption
the government of-
ficials to indulge in Lack of transparency and accountability encourage the government officials
corrupt prac tices, to indulge in corrupt practices, which result in lower investments due to misuse
whic h res ul t in
lower investments or diversion of funds for private purposes. As a result, the government's social
due to mis us e or spending yields no worthwhile benefits, because, for instance, the teachers do
diversion of funds not teach, doctors and nurses do not attend health centres, ration card holders
for priv ate pur-
poses.
do not receive subsidized food grains and the promised jobs are not provided to
the people. In the process, it perpetuates poverty and harms the poor. It creates
an environment of distrust between the people and the government, which impinge
Module Four • The Right to Information Act, 2005 111
upon the development and jeopardize democratic governance. Under the RTI
regime, there is unprecedented transparency in the working of public departments.
As a result, there is better understanding of the decision making process and
greater accountability of government. This has led to reduction in corruption in
the country as evident from the following:
• The Transparency International (TI) has consecutively reported in the
last two years that perceived corruption in India (a score of 3.5 out of
10)has declined at the rate of about 15-20 per cent per year, due mainly
to the implementation of the RTI Act.
• The Centre for Media Studies in collaboration with TI has recently
accomplished an all India survey study (unpublished) of the poor below
the poverty line. The views of the poor have been elicited in respect of all
the flagship programmes that have been implemented for alleviation of
poverty. At least 40 per cent of the respondents have reported that
corruption has declined.
• It has also been observed that wherever NGOs are actively involved in
the development activities, the perceived corruption is abysmally low.
Questions
112 112 Legal Aspect of Business • Module Four
5
MODULE
Module Objectives
After reading this chapter, you should be able to
• Know the salient features covering essentials of contract, offer,
acceptance, considerations and contingent contract.
• Understand the concepts of free consent, coercion undue influence, fraud,
misrepresentation and mistake.
• Know the various modes of discharge of a contract.
• Understand the concept of breach of contract and their remedies.
114 114 Legal Aspect of Business • Module Five
* Sections 76 123 were repealed from the Act and separate Acts called the Sale of Goods Act and the
Partnership Act were enacted in 1930 and 1932 respectively.
Module Five • Indian Contract Act, 1872 115
3. X gives a promise to his son to give him a pocket allowance of Rs. 200
every month. If the promise is not fulfilled by X, the son cannot sue his father.
In the above illustrations only the first results in a contract. Second and
third do not constitute contracts as they are only social obligations.
Case Laws
In agreements relating to business, the law will presume that the parties
have the intention of legal relationship. However, such presumption have the
intention of legal relationship. However, such presumption may be negated by
express terms to the contrary. For example, in an agreement between R company
and C company, the former was appointed as the agent of the latter. One of the
clauses in the agreement read thus: “This agreement is not entered into…as a
formal or legal agreement, and shall not be the subject to legal jurisdiction in
the Law Courts.” It was held that the agreement was not enforceable as there
was no intention to create legal relations. (Rose and Frank Co. v. Crompton
Bros. (1925) A.C. (445).
(x) Legal Formalities: One aspect of legal formalities is whether the agreement
must be written or it can be oral. A contract can be both. But it is in the
interest of both the parties that they must reduce the contract into writing
because “an oral contract is the refuge of Scoundrels. Registration is another
aspect of legal formalities. Registration is again optional, though it is
compulsory in cases like gift and mortgages. Similarly, in some cases the
documents containing agreements, besides being in writing, need to be
stamped and attested too.
118 118 Legal Aspect of Business • Module Five
Express Contract
In an express con- Express Contracts: In an express contract, the terms are made clear in
tract, the terms are
made clear in writ- writing or orally at the time of entering into an agreement.
ing or orally at the An express contract is one that is explicitly set forth in words, either spoken
time of entering into
an agreement. or written. It does not arise from actions or implications of the parties.
Implied Contract: In an implied contract, the terms are not made clear but
In an implied con- the acts, conduct or dealing of the parties lend themselves to form a contract.
tract, the terms are Sometimes individuals may not actually express in specific language their intent
not made clear but to enter into a contract. The implied-in-fact contract is entered into based on the
the acts, conduct or
dealing of the par- conduct of the parties. If you accept services from another and those services are
ti es l end the m- usually paid for, you will be expected to pay the individual who performs that
s e lv es to form a service, if you hire a gardener to take care of your lawn, you will be expected to
contract.
pay him. An implied contract is formed and the gardener could enforce the
agreement if you refused to pay. In this case, the gardener is expected to be paid
for his services, and you intended to pay him when you asked him to take care of
your lawn.
Basically, in an implied contract, neither party will use words of promise or
explicit words indicating that a contract has been formed. However, by nature of
your conduct in calling the gardener and his conduct in performing the work, a
valid contract will be implied. In this case, the court would look at the facts and
circumstances surrounding the transaction to determine whether both parties
intended to enter into an agreement.
Quasi Contract: There are certain transactions which cannot be strictly called
contracts but which create peculiar obligations. Such obligations are :
(i) Supplier of necessaries to minors, lunatics, married woman etc.,
(ii) Person paying money owned by another,
(iii) Person enjoying benefit of non-gratuitous act of Quantum Meruit,
(iv) Person receiving money or goods belonging to another under mistake or
under coercion,
(v) Finder of goods.
Module Five • Indian Contract Act, 1872 119
Now, in all the above cases the person receiving the benefit has an obligation A contract whic h
to compensate the person paying the benefit. Law recognizes this obligations as a was v alid when it
was f irs t ent ered
contract though there is no explicit agreement between giver and receiver of benefit. in to b ut s ubs e-
Contracts of this nature are called Quasi contracts. qu entl y b ec om es
unenforceable due
B. Classification Based on Validity to impos sibility of
performance,
Valid Contract: A contract which satisfies all the legal requirements laid c hange o f law or
down in Sec. 10 of the Act is known as a valid contract. These requirements were other reas ons , is
called void contract.
explained earlier.
Void Contract: A contract which was valid when it was first entered into but
subsequently becomes unenforceable due to impossibility of performance, change
of law or other reasons, is called void contract. Example is a contract to import
goods from a foreign country. If war breaks out between countries, it becomes
impossible to import goods. The contract, therefore, cannot be enforced.
Void Agreement: Void agreement is an agreement not enforceable by law.
An agreement with a minor, an agreement in restrain of trade, etc., are examples
of void agreements.
It is widely argued that void contract must be rightly called void agreement Void agreement is
because when the contract is void, it is no contract at law. The terms ‘void’ and an agreement not
enforceable by law.
‘contract’ apparently cannot go together. An agreement with
Voidable Contracts: A voidable contract is the one that can be set aside at a minor, an agree-
ment in restrain of
the option of one of the parties to the contract. The party who can rescind the trade.
contract is the aggrieved. The other party who causes wrong cannot set aside the A vo ida ble co n-
contract. tract is the one that
can be set aside at
It may so happen that a party may obtain the consent of the other party by the option of one of
force, undue influence, fraud or misrepresentation. The party whose consent is the parties to the
so obtained is the aggrieved party who can set aside the contract. The right of contract.
rescission must, however, exercised within a reasonable time and before a third
party acquires the rights of the contract. Otherwise the contract will be binding
on the aggrieved party. It may be stressing the obvious, but it needs to be stated
that the voidable contract remains valid until set aside by the aggrieved party.
Illegal Contract: As in voidable contract, the terms ‘illegal’ and ‘contract’ An unenforc eable
contract is valid but
cannot go together. What is illegal or against law cannot be enforced. More for certain technical
appropriate expression, therefore, would be ‘illegal agreement.’ An illegal agreement re as on s s uc h as
then is an agreement, the consideration or object of which (I) is forbidden by law, want of proof, ex-
piry of the period
(ii) defeats the provisions of any law, (iii) is fraudulent, (iv) involves or implies
wi thin whi c h e n-
injury to the person or property of another, or (v) the court regards it as immoral, forceable, ins uffi-
or opposed to public policy. Needless it is to say that illegal agreement cannot be c i enc y of s tam p,
enforced by law. and the like.
An ex ecuted con-
Are void agreements and illegal agreements one and the same? The answer tr ac t is t he o ne
is no. An illegal agreement is forbidden by law but not void agreement. Thus which is wholly per-
every illegal agreement is void but every void agreement is not unenforceable. fo rmed . Bo th t he
parties to the con-
Unenforceable Contract: An unenforceable contract is valid but for certain tr ac t hav e di s -
technical reasons such as want of proof, expiry of the period within which c ha rged t heir re-
spective obligations
enforceable, insufficiency of stamp, and the like, it becomes necessarily illegal. and there remains
nothing to be per-
C. Classification According to Performance fo rmed by eith er
party.
Executed Contracts: An executed contract is the one which is wholly
performed. Both the parties to the contract have discharged their respective
obligations and there remains nothing to be performed by either party. For example,
120 120 Legal Aspect of Business • Module Five
A agrees to paint picture for B for Rs. 100. When A paints the picture and B pays
Rs. 100 the respective obligations are performed, and the contract is executed.
It is possible that a contract may be executed but its effect may remain. For
example, when a person buys a bun for a penny and subsequently breaks his
tooth due to a stone in it, he has a right to recover damages from the seller
[Chaproniere v. Mason (1905) 21, T.L.R.633].
Unlike in executed Executory Contract: Unlike in executed contract, parties to an executory
contract, parties to
an executory con-
contract have not performed their respective obligations. In the example quoted
tract have not per- above, A has neither painted the picture nor B has paid Rs. 100.
fo rmed the ir r e-
s p ec ti v e o blig a-
A contract may be both executed and executory. In other words, the contract
tions. is partly performed and partly not. To continue the same example, B has paid
Rs. 100 but A has not yet painted the picture.
Another way of classifying contracts, on the basis of performance, is unilateral
and bilateral contracts.
Unilateral Contract: Here one party has already performed his part of
obligations at the time of or before forming the contract. Only the other party has
to fulfil his obligation. These contracts are also called contracts with executed
consideration.
Bilateral Contract: Here, both the parties to the contract have to fulfill their
respective obligations. In effect, bilateral contracts are executory contracts and
are also known as contracts with executory consideration.
Offer or Proposal
“when one person Proposal or offer is the starting point in the process of making an agreement.
signifies to another
his willingness to do
Sec. 2(1) defines a proposal thus: “when one person signifies to another his
or to obt ain from willingness to do or to obtain from doing anything, with a view to obtain the
doing anything, with assent of that other to such act or abstinence, he is said to make a proposal.”
a view to obtain the
assent of that other The person who makes the proposal is called the promiser or offerer, and the
to such act or absti- person to whom the proposal is made is called the promisee or offeree.
nence, he is said to
make a proposal.” Most contracts result from an offer and an acceptance. So our first concern is
whether an offer has actually been made. In contract law, we say that an offeror is
the person who makes the offer and an offeree is the person who accepts it.
Essentials of a
Valid Offer
Case Laws
In Harvey v. Facie (1839 A.C. 552), the plaintiffs telegraphed to the
defendants thus: “will you sell us Bumper Hall Pen? Telegraph lowest cash
price.” The defendants replied by a telegram saying, “Lowest price for Bumper
Pen, 900.” The plaintiffs immediately sent their last telegram stating: “ we agree
to buy Bumper Hall Pen for 900 asked by you.” The defendants refused to sell
the Bumper Hall Pen, a plot of land, and expectedly the plaintiffs sued the
defendants. The contention of the plaintiffs was that by quoting their minimum
price in response to the inquiry the defendants had made an offer to sell at that
price. But the Judicial committee rejected the contention. Their lordships pointed
122 122 Legal Aspect of Business • Module Five
out that in their first telegram the plaintiffs had asked two questions, first,
about the willingness to sell and second, about the lowest price. The defendants
by quoting the lowest price, answered only the first question. They served their
answer as to the willingness to sell. Thus, they had made no offer. The last
telegram of the plaintiffs was an offer to buy but the same was never accepted
by the defendants. “Their lordship are of the opinion that the mere statement of
the lowest price at which the vendor would sell contain no implied contract to
sell at that price to the person making the enquiry.”
Another interesting example to prove the point that an invitation to offer is
not valid offer is the Pharmaceutical Society of Great Britain v. Boots Cash
Chemists (1953). A customer picks up a drug from the shelf in a shop under
the self-service system. He takes it to the cash counter to make the payment. It
was held that the contract was not made when the customer picked up the
drug. Contract would have been made if the cashier received the price. Lord
Goddard, C.J. said : “It would be wrong to say that the shopkeeper is making
an offer to sell every article in the shop to any person who might come in and
that person can insist on buying any article by saying: ‘I accept your offer….’ In
most bookshops customers are invited to go in and pick up books and look at
them even they do not actually buy them, there is no contract by the shopkeeper
to sell until the customer has taken the book to the shopkeeper or his assistant
and said: ‘ I want to buy this book’ and the shopkeeper says ‘yes.’ That would
not prevent the shopkeeper, seeing the book picked up, saying, ‘I am sorry, I
cannot let you have that book; it is the only copy I have got and I have already
promised it to another customer.’ Therefore, I am of opinion — the mere fact
that a customer picks up a bottle of medicine from the shelves in this case does
not amount to an acceptance of an offer to sell. It is an offer by the customer to
buy. And there is no sale effected until the buyer’s offer to buy is accepted by
the acceptance of the price.”
A banker’s catalogue of charges is also not an offer. An auctioneer’s
announcement that specified goods will be sold by auction on a specified day is
not an offer to hold the auction and he will not be liable the auction. (Spencer
v. Harding, 1870). Even when an auction is held the bid is not an acceptance
so as to entitle the highest bidder to get the goods. The highest bid is nothing
more than an offer to buy which must be accepted by the auctioneer. A railway
time table is in the same category.
4. Offer must be Communicated : An offer to be complete, must be
communicated to the person to whom it is made. This is the essence of
the first part of the definition of proposal. As was pointed out in the
beginning of the chapter, willingness to make an offer must ‘signified’.
To signify means to communicate. Acceptance is not possible unless
offer is brought to the knowledge of offeree. Nor acceptance, in ignorance
of the offer, confer any right on the acceptor. This principle was acted
upon by the Allahabad High Court in Lalman Shukla v. Gauri Datt
(1913).
Acceptance
“When the person If an offer is the starting point of forming an agreement acceptance represents
to whom the pro-
posal is made sig-
the end point of the process. In between there are formalities to be fulfilled. These
nif ies his as s e nt formalities will be examined in the subsequent sub-chapters. Coming to the
the reto , th e pr o- acceptance, section 2(b) defines the term thus: “When the person to whom the proposal
posal is said to be
is made signifies his assent thereto, the proposal is said to be accepted. A proposal
ac c ept ed. A pr o-
pos al w hen ac - when accepted, becomes a promise.” Acceptance is, therefore, the assent given to a
cepted, becomes a proposal and it has the effect of converting the proposal into a promise.
promise.”
Revocation of Offer
Revocation of offer According to section 6 an offer is revoked under the following ways (see Fig. 5.5):
means withdrawing
the offer before its
acceptance.
(i) Notice of Revocation: Offer is revoked once the offerer gives notice of
revocation to the offeree. Notice must be given by the offerer anytime
before its acceptence as against him.
(ii) Lapse of Time: Offer lapses if it is not accepted within prescribed time.
Where definite time is stipulated, or within reasonable time where no
time limit is stipulated for acceptance.
(iii) Failure to Accept Precedent: Where the offer is subject to a condition
precedent thereto, it lapses on failure to accept it without fulfilling the
condition.
Module Five • Indian Contract Act, 1872 127
Revocation of Acceptance
As in the offer, acceptance is also revocable. An acceptor may cancel his
acceptance by a speedier mode of communication which will reach earlier than
the acceptance itself. Section 5 is the relevant provision. The Section reads thus
“An acceptance may be revoked at any time before the communication of
the acceptance is complete as against the acceptor, but not afterwards.”
Thus, the communication of revocation should reach earlier than the acceptance
itself. What if both acceptance and its cancellation reach the proposer at the
same time ? In such a case also, the acceptance will be deemed to have been
cancelled.
Communication of Proposal
An offer, to be made complete, must be communicated to the person to whom
it is made. Acceptance is not possible unless offer is brought to the knowledge of
the offeree. Nor acceptance, in ignorance of offer, confer any right on the acceptor
(Lalman Shukla vs. Gauri Dutt).
The communication According to Section 4 the communication of a proposal is complete when it
of a p ropo s al is
c omplete when it
comes to the knowledge of the person to whom it is made. Obviously, an offer
comes to the know- cannot be accepted unless and until it has been brought to the knowledge of the
ledge of the person offeree.
to whom it is made.
Communication of Acceptance
Acceptance of offer must be communicated to the proposer. Communication
of acceptance is complete —
A proposal may be
revoked at any time (i) As against the Proposer: When it is put in the course of transmission
before the commu- to him, so as to be out of the power of the accepter. In case of acceptance
nic ation of its ac-
c eptanc e is com- through post, the contract is complete on the date when the letter of
plete as against the acceptance is posted. Whether or not the letter is received by the offerer
proposer, but not is absolutely immaterial. The offer, however, becomes bound only when
afterwards.
a property addressed and adequately stamped letter of acceptance is
posted. The contract is completed when acceptance of offer is put in the
course of transmission to the offerer.
(ii) As Against the Accepter: When it comes to the knowledge of the proposer
(Section 4).
Is Silence Communication?
Silence on the part of the offeree cannot be construed as his acceptance.
This was underlined in the popular case Felthouse vs. Bindlay (1862).
It so happened that the plaintiff offered, by means of a letter, to purchase
his nephew’s horse. The letter said : “If I hear no more about the horse, I consider
the horse as mine at £33.15s.” To this letter no reply was sent. But the nephew
told the defendant, his auctioneer, not to sell the horse as it was already sold to
his uncle. The auctioneer, put up the horse for auction and sold it. The plaintiff
sued the auctioneer on the ground that under the contract the horse had become
his property and, therefore, defendant’s unauthorized sale amounted to conversion.
But the action failed since according to the court “It is clear that the nephew in
Module Five • Indian Contract Act, 1872 129
his own mind intended the uncle to have his horse, but he had not communicated
his intention to the uncle.” Thus, nephew’s silence did not entitle any right on the
horse to the plaintiff.
The case is also an authority for two further propositions. One of them is that
the acceptance must be communicated to the offerer himself or to the person he
has authorized to receive the acceptance. Communication to a stranger, like the
auctioneer in this case, will not do.
Secondly, an offerer cannot impose upon the offeree the burden of refusal.
The offerer cannot say that if no answer is received within a certain time, the
same shall be deemed to have been accepted.
Further, acceptance of offer must be communicated by the party who has
the authority to accept the offer. This is made clear in the popular case Powell
vs. Lee (1908). The plaintiff was an applicant for the headmastership of a school.
The managers passed a resolution appointing him, but the decision was not
communicated to him. One of the members, however, in his individual capacity
informed him. The managers cancelled their resolution and the plaintiff sued for
breach of contract. Rejecting the action the court observed; “there must be notice
of acceptance from the contracting party in some way. Information by an
unauthorized person is as insufficient as over-hearing from behind the door.”
5.9 CONSIDERATION
Consideration is one of the essentials of a valid contract. Section 25 of Indian
Contract Act opens with the declaration that “an agreement made without
consideration is void.” Same view is held in English Law too. What is consideration?
What are the rules regarding consideration? These and other related aspects require
detailed discussion. This sub-chapter is devoted for the purpose.
Definition
In simple words consideration may be understood as some value given in
exchange for a promise. In Fazalladdin vs. Panchamam Das (1957) the Calcutta
High Court observed thus, “Consideration is the price of a promisee, a return or
quid pro quo, something of value received by the promise as inducement of the
promise.”
130 130 Legal Aspect of Business • Module Five
defendants sold the types to sub-dealer who sold them below the stipulated price.
The plaintiffs sued for damages. The suit was rejected because the plaintiffs were
strangers to the contract.
3. Consideration May be an Act or Abstinence: In the definition it was
emphasized that consideration can be an act or abstinence. A person
may promise to do something or not do something for a promise. To do
or not to do something in return is consideration.
4. Consideration may be past, present or future.
(a) Past Consideration: Past consideration represents the value or
benefits given prior to the date of promise. For example, X renders
some service to Y in January. In March Y promises to compensate X
for the service s re ndered. The considera tion of X is a past
consideration.
According to English Law past consideration is no consideration at
all. But past consideration is valid according to the Indian Contract
Act.
(b) Present Consideration: Also called executed consideration, present
consideration moves simultaneously with promise. In cash sale, for
example, consideration is present or executed. For example, X
receives Rs. 200 in return for which he promises to deliver goods to
Y. The money X receives is present consideration for the promise he
makes to deliver the goods.
(c) Future or Executory Consideration: When consideration is to move
at a future date, it is called future or executory consideration. For
example, X promises to deliver certain goods to Y after a week. Y
promises to pay the price after a fortnight. The promise of X is
supported by the promise of Y. The consideration here is future or
executory.
5. Consideration Need not be Adequate: Consideration need not be
adequate nor equivalent to promise. What is important is that an
agreement must be supported by consideration. Its adequacy or
otherwise is the lookout of parties. The courts can hardly assume the
role of settling what should be the appropriate consideration for a promise.
This is the principle followed in English Law and the same is maintained
in our country too. In Devji Shivji vs. Karsandas Ramji (1954) the
transfer of the goods will and the whole of the assets of a business for a
mere Rs. 1,000 has been upheld.
The Indian Contract Act further provides (Explanation 2 to Section 25) that
an agreement to which the consent of the promisor is freely given is not void
because the consideration is inadequate, but the inadequacy of the consideration
may be taken into account by the court in determining the question whether the
consent of the promisor was freely given. For example, A agrees to sell a horse
worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely
given. The inadequacy of the consideration is a fact which the court should take
into account in considering whether or not A’s consent was freely given.
An agreement may be set aside provided the consideration (inadequate) is
given under coercion, fraud, or mistake. (R.B. Banerji vs. Commissioner of
Module Five • Indian Contract Act, 1872 133
(iii) Time-barred Debt: ‘A’ promised to pay a time-barred debt to Mr.’B’ and
that is enforceable by law. But the promise must be in writing and duly
signed by the promisor or by his authorised agent. The promise may be
to pay the whole or any part of the debt. The debt must be such “of
which the creditor might have enforced payment but for the law for the
limitation of suits.” For example, A owed to B Rs. 5,000 but the debt is
barred by limitation. A gives a letter to B promising to pay him Rs. 3,000
on account of debt. The agreement is valid.
(iv) Agency: “No consideration is necessary to create agency (Section 185).
(v) Completed Gift: According to explanation 1, Section 25 “ Nothing in
this section shall affect the validity, as between the donor and the donee,
if any gift actually made.” Thus, in the case of a gift actually made, not
being an agreement to make a gift, no consideration is necessary.
Minors
A minor is a person who has not completed 18 years of age, but in the following
two cases the person continues to be a minor upto 21 years of age:
(i) Where a guardian of a minor’s person or property has been appointed,
or
(ii) Where the superintendence or a minor’s property is assumed by a Court
of Wards.
was only resolved in 1903 by the Judicial Committee of the Privy Council in their
well-known pronouncement in Mohoribibi vs. Dharmodas Ghose.
Ever since this decision it has been held that an agreement with a minor is
‘absolutely void.’ But in the modern circumstances of society it does not seem to
be possible and much less desirable for law to adhere to the declaration that a
minor’s agreement is always ‘absolutely void.’ Minors are appearing in public life
today more frequently than ever before. A minor has to travel, to get his dress
tailored, or cleaned, to visit cinema halls and deposit his cycle at a stand. He has
to deal with educational institutions and purchase many things for the facility of
life and education. If, any one of these cases, the other party to the contract
would brush aside the minor on the ground that the engagement is void, the legal
protection against contractual liability would be too dear to minors. The earlier
decisions have been modified and the position now is that if a guardian, on behalf
of minor, enters into an agreement, it is enforceable. This was the opinion held in
Srikakulam Subramanyam vs. Kurra Subba Rao (1949). The facts of the case
are:
In order to pay-off the promissory note and the mortgage debt of his father,
the minor son and his mother sold a piece of land to the holders of the promissory
note in satisfaction of the note and he was also to pay-off the mortgage debt. He
paid-off the mortgage accordingly and the possession of the land was given over
to him. Later the minor brought an action to recover back the land, the action
was rejected on the ground that the sale of the land in question was valid as it
was done by the mother for her minor son and on his behalf.
Other Persons
As was explained above minors and persons of unsound are incompetent to
contract. In the same category are included alien enemies, insolvents and convicts
who are also incompetent to enter agreements.
Alien Enemy
An Alien enemy is a citizen of a foreign country which is at war with India.
The status of an alien enemy with regard to contractual capacity depends on the
timing of the contract in question. While the war is in progress the alien enemy
can neither enter into a contract with an Indian subject nor can be sued in an
Indian Court. He can do so only after obtaining a licence from the Central
Government.
140 140 Legal Aspect of Business • Module Five
Contracts made before the war breaks out may be either suspended or
dissolved. They will be dissolved if they are against public policy or if their
performance would benefit the enemy. Others are suspended till the war ends
and are revived provided they have not become time-barred under the law of
limitation.
Insolvent
An insolvent cannot enter into a contract as his property vests in the hands
of the Official Receiver or Assignee whom enters into contracts on behalf of the
insolvent. This disqualification is removed when he is obsolved from insolvency.
Convict
A convict is incapable of entering into a valid agreement while undergoing
imprisonment. He can, however, enter into a contract if he is lawfully at large
under a licence called “ticket of leave.” The disqualification comes to an end once
the term of imprisonment expires or when the convict is acquitted.
Coercion
In simple terms, coercion or duress may be understood as threat or force “C oerc ion is t he
c om mitt ing, or
used by one party against the other for making him enter into an agreement. threatening to com-
According to Section 15 “coercion is the committing, or threatening to commit, mit, any act forbid-
any act forbidden by the Indian Penal Code, or the unlawful detaining, or den by the Indian
threatening to detain, any property, to the prejudice or any person whatever, Penal Code, or the
unlawful detaining,
with the intention of causing any person to enter into agreement.” The explanation or thre aten ing to
to this section states that, “it is immaterial whether the Indian Penal Code is or is detain, any prop-
not in force in the place where the coercion is employed.” erty , to the preju-
dice or any person
Thus, consent is said to be caused by coercion when it is obtained by pressure whatever, with the
exerted by either of the following techniques: intention of causing
any person to enter
1. committing or threatening to commit any act forbidden by the Indian into agreement.”
Penal Code; or
2. unlawfully detaining or threatening to detain any property.
And an agreement the consent to which is caused by coercion is voidable at
the option of the party whose consent was so caused.
The leading case on this position is Ranganayakamma vs. Alwar Setty (1889).
In this case, a young Hindu girl of 13 years, who had just lost her husband, was
forced to adopt a boy of their choice by her relatives who refused to remove the
dead body of her husband unless she consented to the adoption. It was held that
the adoption was not binding on her since her consent was not free but included
by coercion in as much as any person who obstructed a dead body from being
removed would be guilty of an offence as per the Indian Penal Code.
Another interesting case on the same point is Chikkam Amiraju vs. Chikkam
Seshamma (1917). In brief the particulars about the case are: by threat of suicide,
a Hindu induced his wife and son to execute a release in favour of his brother in
respect of certain properties which they claimed as their own. It was held that the
threat of suicide amounted to coercion and the release was therefore voidable.
142 142 Legal Aspect of Business • Module Five
Undue Influence
“ A contract is said Undue influence is said to exist when one of the parties to the contract
to be in duc ed by
obtains, through dominance, consent of another party. Section 16 of the Act defines
“undue influence”
where the relations undue influence thus: “A contract is said to be induced by “undue influence”
subsisting between where the relations subsisting between the parties are such that one of the parties
the parties are such is in a position to dominate the will of the other and uses that position to obtain
that one of the par-
ties is in a position an unfair advantage over the other.”
to dominate the will A person is said to be able to dominate the will of another:
of the oth er a nd
uses that pos ition (a) Where he holds a real apparent authority over the other, or where he
to obtain an unfair stands in a fiduciary relation to the other; or
advantage over the
other.” (b) Where he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness, or mental
or bodily distress; or
(c) Where the parties to the contract are so related to each other than one of
them is able to dominate the will of another.
Instances of undue influence are : Income-Tax Officer in relation to an
assessee, magistrate and accused, spiritual adviser and his devotee, doctor and
patient, parent or guardian and child, creditor and debtor, wife and husband,
trustee and beneficiary, solicitor and client, and the like.
And as was pointed out earlier, when consent to an agreement is caused by
undue influence, the contract is voidable at the option of the party whose consent
was so caused.
A few leading cases are quoted below to make the meaning of undue influence
more clear.
(i) Manu Singh vs. Umadat Pandey (1890): U, a spiritual guru, induced
M, his devotee, to gift to him the whole of his property to secure benefits
to his soul in the other world. M applied for setting aside the agreement.
It was held that the agreement was improper as the consent under
influence. Observed the Allahabad High Court: “Would any reasonable
man, in full possession of his senses and not under unusual influence of
some kind or the other, do such a thing?”
An English case of the same kind but contrasting judgement is Alcard vs.
Skinner (1887). The plaintiff was living with her mother in London. She was
introduced to the defendant by a Parish priest Rev. Nihill. The defendant was the
lady superior of the sisterhood of St. Mary at the Cross. The plaintiff also joined
the sisterhood and became a sister. On becoming a sister, she took vows of
obedience, poverty and chastity. In accordance with the vows of poverty, she
made over to the sisterhood by a will, the whole of her property, valued at £8,500.
Subsequently she became a Roman Catholic and left sisterhood. Later she used
the defendant to recover the entire amount on the ground of undue influence.
Rejecting the appeal, Lindley L.J. observed that, “There is no evidence that
pressure was put upon her to enter upon the mode of life of which she adopted.
She chose it as the best for herself, she devoted her life to it, heart and soul; she
was to use her own expression, infatuated with the life and with the work. but
though infatuated, there is no evidence to show that she was in such a state of
mental imbecility as to justify the inference that she was unable to take care of
herself or to manage her affairs….The result of the evidence convinces me that no
pressure, except the inevitable pressure of the vows and rules, was brought to
Module Five • Indian Contract Act, 1872 143
bear upon the plaintiff, that no deception was practiced upon her, that no unfair
advantage was taken of her.”
The learned judge felt that although the money was recoverable in principle
owing to the fact she was not at liberty to consult any outsider without the leave
of her superior, it was too late for the plaintiff (the plaintiff joined the sisterhood
in 1868, left it in 1879, and sued for recovery of money in 1885) to invoke the
assistance of the court. Her argument that she did not know of her rights earlier
was not sustainable because “ignorance which is the result of deliberate choice is
no ground for equitable relief.”
(ii) Williams vs. Bavley (1866): A son forged his father’s signature on several
promissory notes and paid them into his bank account. When the truth
came to light, the manager of the bank threatened prosecution of the
son and “transportation” if a satisfactory solution were not found. To
avert this threat, the father agreed to give an equitable mortgage to the
bank on his property in return for the promissory notes. Subsequently
the father sought to have this agreement cancelled on the ground that
he was influenced by the threat. It was held that the agreement was
voidable.
The above case underlines the point that there is active trust and confidence
between the parties or the parties are not on equal footing and one of the parties
takes unfair advantage of the situation.
In the case cited above, the court observed that the father agreed to give
security for the promissory notes hoping it would relieve the son from the
consequences of his criminal act, and the fears of the father were stimulated and
operated on to an extent to deprive him of free agency, and to extort an agreement
from him for the benefit of the bankers. There was inequality between the parties
and one of them took unfair advantage of the situation of the other and used
undue influence to force an agreement from him.
(iii) Ranee Annapurni vs. Swaminatha (1910) is another case where undue
influence was proved to exist. The plaintiff, a poor Hindu widow, having
no financial means, borrowed Rs. 1,500 from a moneylender and 100
per cent interest per annum for the purpose of enabling her to establish
her right of maintenance. It was held that this was a clear case of undue
influence and the Madras High Court allowed interest at a reduced rate
of 24 per cent.
(iv) When one party can cause economic duress to the other there exists
undue influence. This principle was underlined in the popular case
Llyods Bank v. Bundy (1975). A contractor borrowed a sum of money
from a bank but could not repay it in time. The banker pressed for
repayment or for security. He suggested that his father (the defendant)
might mortgage the family’s only residential house. The banker visited
Bundy and obtained his signatures upon ready made papers. The
contractor still could not pay and the banker sought to enforce the
mortgage which might have meant throwing the family out from its only
residence. Bundy sought to set aside the mortgage which was promptly
done. Clearly the banker sought to take unfair advantage of Bundy whose
bargaining position was considerably weak.
144 144 Legal Aspect of Business • Module Five
Burden of Proof
To set aside an agreement on the ground of undue influence, the plaintiff
has to prove two main points. First, he must show that the other party was in
a position to dominate his will, and second, the other party actually used his
influence to obtain the plaintiff’s consent to the contract. The law says that
(a) not only must the defendant have a dominant position but, (b) he must use it.
Thus, in the cases cited above Manu Singh proved successfully that Umadat
Pandey had enjoyed dominant position, being spiritual adviser as he was. He
used the dominant position to obtain consent unduly from Manu Singh. But Allcard
failed to prove the effect of undue influence exerted on her by Skinner, the
defendant. Williams, on the other hand, proved the effect of undue influence
brought on him by Bavley, the defendant. He was afraid of the prosecution of his
son threatened by the bank manager. The fact that Ranee Annapurni was charged
100 per cent interest on a loan taken by her to establish her right to maintenance
was enough to prove the existence of undue influence. It was not difficult for
Annapurni to prove the undue influence nor it was difficult for the Madras High
Court to slash interest rate to 24 per cent. But Lloyds Bank was not lucky. The fact
that the Bank wanted to enforce the mortgage, the consent for which was obtained
from Bundy under economic duress, turned the judgement against the Bank.
Misrepresentation
Sec. 18 of the Act defines misrepresentation thus: “Misrepresentation
means and includes:
(i) the positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true;
(ii) any breach of duty which, without any intent to deceive, gains an
advantage to the person committing it, or any one claiming under him,
Module Five • Indian Contract Act, 1872 145
1. Unwarranted Statements
When a party to a contract positively asserts that a particular fact relating to
the subject-matter of the agreement is true, when his information does not warrant
it to be so, he is guilty of misrepresentation. In the Oceanic Steam Navigation
Co. v. Soonderdas Dharamsey (1890), the defendants chartered a ship from the
plaintiffs. The plaintiffs stated that the ship was certainly not more than 2,800
tonnage register. In fact, the ship had never been in Bombay and it was unknown
to the plaintiffs. She turned out to be of the registered tonnage of more than
3,000 tonnes. This was a clear case of misrepresentation and the defendants,
were therefore, entitled to avoid the charter-party.
2. Breach of Duty
When a person commits a breach of duty without any intention to deceive
the other party, and thereby gains an advantage to himself to the prejudice of the
other party, the person committing the breach of duty is said to be guilty of
misrepresentation. In other words, misrepresentation includes committing any
breach of duty, by which the person committing it gains an advantage to the
prejudice of another. There is no intent to deceive but the party representing
commits a breach off duty which he owes to the other by making a negligent
statement whereby the party represented is misled to his prejudice. The party
representing gains an advantage.
As is well-known, there exists a duty between buyer and seller, debtor and
creditor, insurer and insured, banker and customer, and landlord and tenant. Breach
of duty by one party in such a relationship by making an untrue statement would
definitely prejudice the other party if he acts upon it and causes gain to the party
making such representation. The contract is avoidable at the option of the prejudiced
party.
A popular case to be quoted in this context is the Oriental Banking
Corporation vs. John Fleming (1989). The plaintiff, having no time to read the
contents of a deed, signed it as he was given the impression by the defendant that
it contained nothing but formal matters already settled between them. The deed,
however, contained a release in favor of the defendants. The plaintiff was allowed
to set aside the deed. The court observed, “The defendant was under no obligation,
legally or morally to communicate the contents of the deed. But the plaintiff placed
confidence. It then became his duty to state fully without concealment, all that
was essential to a knowledge of the contents of a document.”
146 146 Legal Aspect of Business • Module Five
Is Silence Fraud?
The answer is not always. A contracting party is under no obligation to disclose
the whole truth about the subject-matter to the other party. A trader is, therefore,
justified in keeping silent about the change in prices. A seller who puts forth an
unsound horse for sale, but says nothing about the quality, commits a fraud.
Similarly, if a student does not disclose details about attendance shortage in his
application though he knew it, he cannot be stopped from appearing examination.
No fraud was committed by the student by not disclosing the attendance shortage.
It was the duty of the University to scrutinize forms and call for explanation in
case of doubts. (Sri Krishna vs. Kurukshetra University, 1976).
1. But silence cannot go too far. It amounts to fraud in certain cases.
One such case is when the party keeping silence under duty to speak.
Duty to speak arises when one party responses, and the other accepts,
confidence. A father selling a horse to his son, for example, has the duty
to tell his son whether the horse was of unsound mind, because the son
reposes confidence in his father. Duty to speak also arises when one
party is utterly without any means of discovering the truth and has to
depend on the good sense of the other party. In case of insurance, for
example, there is no way for the insurance company to obtain full details
about the life of assured. It is the duty of the assured to put the insurer
148 148 Legal Aspect of Business • Module Five
Mistake
An erroneous belief An erroneous belief about something is called ‘mistake.’ Consent caused by
about something is
called ‘mistake.’ mistake is not free. Mistake is of various types (see Fig. 5.11).
Mistake of Law
Mistake of Law in Force in India: A contract extended into an erroneous
belief as to a law is force in India is valid contract and cannot be avoided. This is
based on the famous principle, “ignorance of law is no excuse.”
Table 5.3 Fraud and Misrepresentation Compared and Contrasted
A. Similarities
1. Both fraud and misrepresentation render contract void.
2. There is false representation in both.
3. Consent should have been caused by fraud or misrepresentation.
B. Dissimilarities
Misrepresentation Fraud
1. Person making the false statement 1. Person making the false statement
honestly believes it to be true. believes it to be false, yet deliberately
makes the statement.
2. There is no intention to deceive 2. There is intention to deceive the
the other party. other party.
Module Five • Indian Contract Act, 1872 149
Mistake of Fact
Mistake of fact may be (a) bilateral mistake, or (b) unilateral mistake as to a
matter of fact essential to the contract.
a) Bilateral Mistake: Here both the parties to an agreement are under a
mistake as to a matter of fact essential to the contract. The contract is void.
Examples
P, a widow, thinks that she has lost occupancy rights on account of her
remarriage and as such agrees to hire the same land at enhanced rate from S,
her Zamindar. The widow cannot avoid the new contract as is a mistake as to law
of her own country.
Mistake of Law not in force in India: Mistake of law of a foreign country
vitiates the contract. The contract becomes void. Mistake of law not in force in
India is treated as a mistake of fact.
(i) Couturier vs. Hastie (1856): The defendant was employed to sell the
plaintiff’s cargo which was on voyage. After the defendant had sold the
cargo to a third person, it was discovered that the cargo having been
damaged by bad weather, had been sold at an intermediate port. The
buyer repudiated the contract and the defendant, being a delcredere
agent was sued for the price. But he was not held liable. It was observed
that, “what the parties contemplated, those who bought and those who
sold, was that there was an existing something to be sold and bought. ...
The contract plainly imparts that there was something which was to be
sold and was to be sold at the time of contract, and something to be
purchased. No such thing existing, there could be no contract” (non-
existence subject-matter).
(ii) Raffles vs Wichelhouse (1864): The defendant agreed to buy from the
plaintiff a cargo of cotton “to arrive ex-peerless from Bombay.” There
were two ships of that name sailing from Bombay, one sailing in October
and the other in December. The defendant meant the former but the
plaintiff meant the latter. It was held that the agreement was void because
there was a bilateral mistake as to the identity of the subject-matter.
(iii) Cooper vs. Phibbs (1867) : A person took a lease of fishery which,
unknown to either party already belonged to him. The lease was held to
be void. The buyer was already the owner of the fishery which the seller
purported to sell to him. The parties intended to effectuate a transfer of
ownership (title), which was held to be impossible.
(iv) Sheikh Bros. Ltd. vs. Ochener (1957): The appellant company, the
lessor of the forest in Kenya, granted a license to the respondent to cut,
process and manufacture all sisal growing in the forest. The respondent,
in return, undertook to manufacture and deliver to the appellant 50
tons of sisal fibre per month. But it turned out that the leaf potential of
the sisal area was of sufficient to permit the manufacture of the stipulated
quantity and the respondent was sued for the breach. The agreement
was held to be void. Bilateral mistake as to the quantity of the subject-
matter rendered the agreement void.
(v) Bell vs. Lever Bros. (1932) : Lever Bros. appointed one Bell as a
managing director for five years on an annual salary of 8,000 to manage
one of their subsidiaries in Africa. Much before the expiry of this term
his services of this term had to be dispensed with on account of the
merger of the subsidiary with a third company. Bell agreed to retire on a
compensation of 30,000. After this sum was paid, it was discovered that
during his term of service, Bell had made secret profits and was, therefore
guilty of breach of duty which entitled the company to dismiss him without
paying compensation. The company, therefore, claimed the return of the
money on the ground inter alia that it was paid under a mutual mistake
of fact. But the action of the company failed.
In Nicholson and Venn vs. Smith Marriott (1947), table napkins were sold
at an auction by a description “with the crest of Charbles I and the authentic
property of that monarch.” In fact the napkins were Georgian. The agreement
was held to be void.
Module Five • Indian Contract Act, 1872 151
Both the cases, viz., Bell vs. Lever Bros. and Nicholson and Venn vs. Smith
Marriott relate to the mistake of quality regarding the subject-matter. In the
former, the mistake was unilateral and, therefore, the contract was held valid. In
the latter, the mistake was bilateral and this rendered the agreement void.
(vi) Webster vs. Cecil (1861): The defendant, who had rejected an offer
from the Plaintiff to buy several plots of land for 2,000 made an offer to
sell the plots for £1,250. Immediately after making the offer, the defendant
discovered that there was a mistake in adding up the prices of the plots.
The figure should have been 2,250 instead of 1,250. He informed the
plaintiff of the mistake without delay, but by then, the plaintiff had
accepted the offer, although he knew that his own earlier offer for 2,000
had been refused. The plaintiff filed a suit for performance of the contract
which was rejected by the court. There was mutual mistake of price
relating to the subject-matter of the agreement.
(vii) Griffith vs. Brymer (1903): A contract for the hire of a room for
witnessing the coronation procession of Edward VII, made in ignorance
of both the parties that the procession had already been cancelled, was
held void on the ground of impossibility of performance.
(b) Unilateral Mistake: Unilateral mistake is the mistake of one of the parties
to a contract as to its subject-matter. Unlike bilateral mistake, unilateral mistake
does not cause the agreement to be void. Section 22 of the Act lays down that, “A
contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as to a matter of fact.”
Smith vs. Hughes (1871), the defendant wanted to buy old oats for his horses.
The plaintiff showed him the sample of the oats he had, but said nothing about
their age. The defendant kept the sample for 24 hours and then packed an order
for the oats. After a portion of them as delivered to him he found that they were
new and, therefore, rejected them on the ground that he was mistaken about
their quality. But the court felt that the defendant could not avoid the contract.
Similarly, in Singh vs. Union of India (1970), the Government sold, by
auction, the right of fishery and the plaintiff offered the highest bid under the
impression that the right was sold for three years, when in fact it was for one year
only. The plaintiff could not avoid the contract because of unilateral mistake
caused by his own negligence. He should have ascertained the tenure of fishery
before bidding at the auction.
— it is forbidden by law;
— is of such nature that, if permitted, it would defeat the provisions of any law;
— is fraudulent;
— involves injury to the person or property of another, or
— the court regards it as immoral or opposed to public policy (see Fig.
5.12).
In each of these cases the consideration or object of an agreement is said to
be unlawful. And every agreement of which the object or consideration is unlawful
is void.
The section covers the illegality of both the object of the contract and the
consideration for it. In some cases both “object” and “consideration” may be the
same, but they are usually distinct. The word “object” means purpose or design.
The word “consideration”, on the other had, refers to the benefit accruing to each
party in a contract. In some cases consideration for an agreement may be lawful
but the purpose or object for which the agreement was entered into may be
unlawful. For example, if money is borrowed for the purpose of the marriage of a
minor, consideration for the contract is loan which is lawful, but the object of
marriage of a minor is unlawful. Such an agreement would be void. Thus, to
render an agreement valid both object and consideration must be lawful, otherwise
the contract is void.
1. Forbidden by Law
As stated above, the object or consideration becomes unlawful when it is
forbidden by law. An agreement the consideration or object of which is unlawful
is void. “Law” in this connection means the law for the time being in force in India
and, therefore, includes Hindu and Mohammedan Laws and also principles of
unwritten law.
Examples: (i) A promises B to drop a prosecution which he has instituted
against B for robbery, and B promises to restore the value of things taken. The
agreement is void, as the object is unlawful.
(i) A promises to obtain for B an employment in the public service and B
promises to pay Rs. 1000 to A. The agreement is void, as its consideration
is unlawful.
Module Five • Indian Contract Act, 1872 153
(ii) In Nandlal vs. Thomas J. Williams the plaintiff was licensed under an
Excise Act to work a liquor shop. The Act forbade the sale, transfer or
sublease of the licence of the creation of a partnership to run the shop.
The partnership was held void as it would defeat the policy of the law if
unapproved persons could find their way into working liquor shop.
3. Fraudulent
An agreement made for a fraudulent purpose is void. Where the parties agree
to impose a fraud on a third person, their agreement is unlawful. Agreement to
defraud creditors, or to give fraudulent preference, to a creditor or to defraud
revenue authorities, or investors in a company are illegal.
Examples: (i) A, B, and C enter into an agreement for division among them of
gains acquired by them, by fraud. The agreement is void, as its object is unlawful.
(ii) A being agent for a landed proprietor, agrees for money, without the
knowledge of his principal, to obtain for B a lease of land belonging to his principal.
154 154 Legal Aspect of Business • Module Five
5. Immoral
Every agreement the object or consideration of which is immoral is void.
Clearly the law does not allow an agreement tainted with immorality to be enforced.
What is immoral is not made clear in the law and therefore if fell to the wisdom of
the courts to decide, from time to time, what immorality meant. The attitude of
the Courts has been based upon the premium placed by the society on the social
Institution of Marriage and the concept that nothing should be done to spoil the
relationship of a married couple. Thus, lending money to a lady with a promise to
marry her after the death of her present husband or after she secures a divorce
from him is immoral. In the same way a promise to marry by a married man to a
married woman after the death of his first wife or after obtaining divorce from her
is illegal.
Further, certain kinds of acts have been regarded as immoral since times
immemorial and will perhaps always be so regarded. Dealings with prostitute
come under this category. Thus, if articles are sold or something is hired to a
prostitute for the purpose of enabling her to carry on her profession, neither the
price of the articles sold not the rent of the thing hired can be recovered. Similarly,
settlements in consideration of concubinage and agreements to pay money for
future illicit cohabitation are considered to be immoral.
Public policy is very An agreement is unlawful if the court regards it as opposed to public policy.
unru ly hors e and
when once you get
What is public is not clearly defined anywhere and in the words of Justice Burrogh
astride it, you never “public policy is very unruly horse and when once you get astride it, you never
know where it will know where it will carry you.”
carry you.
However, in England the circumstances under which a contract can be struck
down as one opposed to public policy are fairly well established. Thus, in England
contract of marriage brokerage, the creation of perpetuity, a contract in restraint
of trade, a gaming or wagering contract, or the assisting of the king’s enemies are
all unlawfulness on the ground of public policy:
In our country too the same view is held to be specific, in our country the
following are held to be illegal as they are opposed to public policy.
(i) Trading with the enemy.
(ii) Inducing a public officer to act corruptly.
(iii) Interfering with the administration of justice.
(iv) Marriage brokerage contract agreement to procure the marriage of a
person in consideration of a sum of money.
Module Five • Indian Contract Act, 1872 155
do anything without her permission and if he did so, she would be at liberty to
divorce him. The later part of the agreement was unlawful. It was separated from
that part under which he promised to handover all earnings and this part was
enforced binding him to pay only maintenance amount and not every bit that he
might earn.
more, are contrary to public policy and, therefore, void. That is the general rule.
But there are exceptions. Restraints of trade…may be justified by the special
circumstances of a particular case. The only justification is that the restriction
should be reasonable — reasonable in reference to the interest of the parties and
reasonable to the public interest. The restriction should be so framed and guarded
as to afford adequate protection to the party in whose favour it is imposed while
at the same time it is in no way injurious to the public.
Thus, both in our country and in England the general principle is the same,
namely, that all restraints of trade whether partial or total, are void. The only
difference is that in England a partial restraint of trade is valid if reasonable and
not opposed to public interest. However, in our country even partial restraint is
void, except if it falls in one of the exceptions that are explained below.
Exceptions
There are two kinds of exceptions to the principle of restraint of trade:
(1) exceptions created by statutes, and (2) exceptions arising from judicial
interpretations of Section 27.
Statutory Exceptions
A. Sale of Goodwill: One who sells the goodwill of business may agree with
the buyer to restrain from carrying on a similar business, within specified local
limits so long as the buyer carries on a like business therein, provided that such
limits appear reasonable to the court, regard being had to the nature of the
business.
Thus, in the case of a sale of goodwill of business (a) the restraint on the
seller can be in respect of carrying on a similar business within the specified local
limits. (b) the restraint can be applied so long as the buyer carries on a similar
business, and (c) the restraint is reasonable.
In N.S. Golikari vs. Century Spinning and Manufacturing Co. Ltd. (1967),
A, the owner of a motor bus entered into a contract with B carrying on a similar
business plying buses between Pune and Mahabaleswar. To avoid competition,
B, purchased the entire business along with its goodwill. It was agreed by A that
he would not carry on similar business in the same place for three years. However,
at the end of one year, ‘A’ started a similar business. It was held that the contract
was valid as it was covered by the exception.
B. Partnership Act: The Partnership Act, 1932 provides certain exceptions
with regard to the principle of restraint of trade. The trade exceptions are:
(i) A partner of a firm may be restrained from carrying on a similar business
so long as he remains as a partner.
(ii) A partner may agree with his other partners that, on ceasing to be a
partner, he will not carry on a similar business within a specified period
and specified local limits.
(iii) Partners may, upon or in anticipation of the dissolution of the firm make
an agreement that some or all of them will not carry on a business similar
to that of the firm within specified local limits.
The above agreements, though in restraint of trade, are valid. But it is
necessary that —
158 158 Legal Aspect of Business • Module Five
(a) the agreement should specify the local limits or the period of restraint,
and
(b) the restriction imposed must be reasonable.
Judicial Interpretations
A. Trade Combinations: Traders and manufacturers in the same line of
business normally form associations in order to regulate such aspects
as price fixation, working hours, supply of materials, power supply and
the like. These restrictions are valid even though they are in restraint of
trade. Argument in support of such validity is that trade combinations
are desirable in the interest of trade and for promotion of public interest.
Trade combination seek, though restrictions, to carry on business in an
organized way. Restrictions are imposed not to prevent the business but
to carry it in an organized way. However, courts would not allow a
restraint to be imposed disguised as trade regulations. Thus, an
agreement between certain persons to carry on business with the
members of their caste only, and an agreement to restrict the business
of a sugar mill within a zone allotted to it, have been held void.
B. Exclusive Dealing Agreements: Exclusive dealing is a practice whereby
a manufacturer or supplier of goods restrains his distributors from dealing
in competitive goods and requires them to deal exclusively in the products
manufactured and supplied by him. The distributor, in turn, may agree
not to deal with the goods of any other manufacturer or supplier. Such
agreements are held to be valid. Thus, an agreement by a manufacturer
of dhotis to supply 1,36,000 pairs of certain description to the defendant
and not to sell goods of that kind to any other person for a fixed period is
valid. [Carliles Nephews & Co. vs. Ricknanth Bucktermull (1882)].
Similarly, an agreement by a person to send all the mica produced by
him to the plaintiffs, and not to send them to any other firm, nor to keep
in stock is also valid [Subha Naidu vs. Haji Badsha Sahib (1902)]. The
negative stipulations of the type found in exclusive dealings do not have
the effect of restraining the manufacturer. On the contrary, “he is
encouraged to exercise his business because he is assured market for
the products of his labour.”
It may be noted that exclusive dealings invite regulatory measures under
the Monopolies and Restrictive Trade Practices Act, particularly when
they effect competition on the market.
C. Restraints on Employees: An agreement of service by which a person
binds himself during the tenure of the agreement not to take service
with anyone else, or directly or indirectly take part in any business in
competition with the present employer is valid. The leading case in this
context is the Niranjan Shankar Golikari vs. Century Spinning &
Manufacturing Co. Ltd. (1967). A contract of employment for five years
provided that the employee should not serve anywhere else during the
five years even if he left the employment. This condition was imposed
because the employee had access to technical information. The employee
left the organization before the expiry of the period and joined another
company for better remuneration. The former employer sought injunction
and the court had no hesitation in granting it.
Module Five • Indian Contract Act, 1872 159
any law in force for the time being. Such an agreement shall not be
rendered illegal.
Amendment of Section 28 (Agreement in restrain of legal proceedings, void).
A bill to amend the Indian Contract Act, 1872 was introduced in Parliament
in the year 1996 for enactment of the Indian Contract (Amendment) Act, 1996.
The Bill was passed by Rajya Sabha on 3-12-1996. By virtue of this amendment
following part of Sec. 28 substituted:
“Every agreement, by which any party thereto is restricted absolutely from
enforcing his rights under or in respect of any contract, by the usual legal
proceedings in the ordinary tribunals, or which limits the time within which he
may thus enforce his rights, is void to that extent.”
Following text is substituted in place of the above by virtue of the amendment,
namely:
“Every agreement, by which any party thereto is restricted absolutely from
enforcing his rights under or in respect of any contract, by the usual legal
proceedings in the ordinary tribunals, or which limits the time within which he
may thus enforce his rights; or which extinguishes the rights of any party thereto,
from any liability, under or in respect of any contract on the expiry of a specified
All agreements, the period so as to restrict any party from enforcing his rights, is void to that extent.”
meaning of which is It is clear from the foregoing that a clause in a contract stating that failure of
not certain, or ca-
pab le o f be ing a party to enforce its rights within a shorter period, say 12 months. Stipulated in
made certain, are the contract shall be operated as release or forfeiture of such rights is also within
void. the scope of this section and such stipulations are void to that extent.
Illustration
ABC Ltd., an Insurance Company granted a shopkeeper’s insurance policy
to Mr. D. As per the terms of insurance policy, Mr. D shall file suit or other legal
proceedings in respect of any claim arising out of the policy within one year and
failure to do so within stipulated period of 12 months will operate as a forfeiture
of such rights and notwithstanding any other law or law of limitation, Mr. D is
deemed to have released ABC Ltd., from any liability under the Act. Whether
such a clause in a contract is valid? Such a provision in a contract was upheld
earlier by courts in Baroda Spinning v/s Satyanarayan 1914, 38 Bombay, 344
and by National Commission in M/s Paras Textile v/s The New India Assurance
Co. Ltd., 1993 (1) CPR 713 (NC). Amendment of Sec.28 has now changed the
above legal positions. As the effect of the agreement is to discharge a party from
liability on the expiry of specified period, the same is now void and the affected
party is entitled to initiate usual legal proceedings in the court or ordinary tribunal.
horse proved lucky. The agreement was held to be void for want of certainty. The
court has no machinery to determine what luck, bad or good, the horse had brought
to the buyer. Uncertainty normally arises in agreements relating to sale of goods,
particularly relating to price. Thus, where goods are sold, the price being payable
subject to ‘hire purchase terms or clause’ or at such price as should be agreed
upon between the parties, the agreement in each case was held to be void for
uncertainty as to price.
Exceptions
The following agreements are not held to be wagers:
(i) Horse Race: An agreement to contribute or subscribe towards any plate,
prize or sum of money of five hundred rupees or more to be awarded to
the winners of any horse race is a valid agreement and not a wager.
(ii) Crossword competitions: These competitions which involve the
application of skill and in which an effort is made to select the best and
most skilful competitor, are not wagers.
(iii) Share Market Transactions: Here there is a clear intention of give and
take, and delivery of shares and bonds. Hence these are not wagers. If
there is no such clear intention of give and take and if the parties are
only intend to gamble on the rise or fall of share prices, the transactions
become wagers.
Collateral Transactions
Though wagering agreements are void, agreements collateral, incidental or
subsidiary to them are valid. It has been laid down by the Supreme Court, in
Gherulal Parekh vs. Mahadev Das (1959) that the wager is not forbidden by law
not withstanding the fact it is void and unenforceable. Hence, a wagering agreement
is not unlawful under Section 23 of the Contact Act, and the transactions collateral
to the main transaction are enforceable. Accordingly, an agent who pays and
loses on wagering transactions can recover the amount from his principal.
Similarly, a partner who has paid the loss on wagering transactions may recover
proportionate indemnity from his co-partners.
Module Five • Indian Contract Act, 1872 163
DISCHARGE OF CONTRACT
(Completion of Contracts)
The rights and liabilities created by a contract subsist as long as the contract
is in force. Once the contract is discharged the rights and liabilities cease to
exist. A contract may be discharged in any of six ways: (i) by performance, (ii) by
agreement, (iii) by impossibility, (iv) by bar of limitation, (v) by operation of law,
and (vi) by breach of contract (see Fig.5.14).
Th e pa rtie s to a
contract must either
perform, or offer to
per form the ir r e-
spective promises,
unless such perfor-
mance is dispensed
wi th o r ex ec ut ed
un der the prov i-
sions of this Act.
1. Performance of Contract
Section 37 lays down that the parties to a contract must either perform, or
offer to perform their respective promises, unless such performance is dispensed
with or executed under the provisions of this Act, or of any other law.
Promises bind the representatives of the promisor in case of the death of
such promisors before performance, unless a contrary intention appears from
the contract.
164 164 Legal Aspect of Business • Module Five
Illustrations
(a) A promises to deliver goods to B on a certain day on payment of
Rs. 1000. A died before that day. A’s representatives are bound to deliver
the goods to B, and B is bound to pay Rs. 1000 to A’s representatives.
(b) A promises to paint a picture for B by a certain day, at a certain price. A
dies before the day. The contract cannot be enforced either by A’s
representatives or by B.
A. Tender of Performance
Tender of perfor- Tender of performance refers to the offer made by the promisor to perform
mance refers to the
offer made by the
his obligation under the contract to the promisee. On the tender of performance
promisor to perform being made by the promisor, it is upto the promisee to accept the performance. If
his obligation under he does not accept the promisee is not responsible for non-performance. Besides,
the contract to the
promisee.
the promisor will be entitled to sue the promisee for breach of contract.
Thus, a tender of performance is equivalent to performance. This is the essence
of Section 38.
Section 38 further stipulates that the tender of performance must fulfill the
following situations:
(i) The tender of performance must be unconditional. It becomes conditional
when it is not in accordance with the terms of the contract.
(ii) The tender must be made at a proper time and place, and under such
circumstances that the person to whom it is made may have a reasonable
opportunity to ascertain that the person by whom it is made is able and
willing there and then to do the whole of what he is bound by his promise
to do.
Module Five • Indian Contract Act, 1872 165
where the nature of the reciprocal promises is such that one cannot be performed
or its performance cannot be claimed unless the other party performs his promise
in the first place, then if the later fails to perform, he cannot claim performance
from the other, but must make compensation to him for his loss.
For example, A contracts with B to execute certain builder’s work for a fixed
price, B supplying the scaffolding and timber necessary for the work. B refuses to
furnish any scaffolding or timber, and the work cannot be executed. A need not
execute the work and B is bound to make compensation to A for any loss caused
to him by the non-performance of the contract.
How about promises to do certain legal and other things illegal? According to
Section 57 where a person reciprocally promises, firstly, to do certain things which
are legal, and secondly under specified circumstances, to do certain things which
are illegal, the first set of promises is a contract, but the second is a void
agreement.
For example, A and B agree that A shall sell B a house for Rs. 10,000, but
that if B uses it as a gambling house, he shall pay A Rs. 50,000 for it. The first
part, namely, sale of house for Rs. 10,000 is a contract but the second part is a
void agreement.
F. Appropriation of Payments
The issue of appropriation of payment becomes relevant when a debtor owes
several debts to a creditor and makes a payment which is insufficient to discharge
all the debts. The question is to which debt the payment should be appropriated?
The Act, in Sections 59 to 61, lays down the following three rules in this regard:
(a) Where the debtor intimates: Where the debtor intimates to which
particular debts his payment must be applied, the payment should be
applied accordingly (Section 59).
168 168 Legal Aspect of Business • Module Five
(b) Where the debtor does not intimate: Where the debtor has omitted to
intimate, and there are no other circumstances indicating to which debt
the payment is to be applied, the creditor may apply the payment even
to a debt which is time barred (Section 60).
(c) Where the debtor does not intimate and the creditor fails to apply:
In a situation where the debtor fails to intimate and the creditor does
not use his descretion to apply to a particular debt, the law gets the
right to appropriate the payment. And the law prefers to clear the debts
in the order of time in which they were incurred (Section 61).
G. Assignment of Contracts
Assignment means Assignment means transfer of contractual rights or liability by a party to the
transfer of contrac- contract to some other person, who is not a party. Transfer may take place (a) by
tual rights or liabi- an act of the parties, or (b) by operation of law.
lity by a party to the
c on trac t to s ome (a) Assignment by act of parties: parties, by mutual agreement and of their
other person, who own accord, drop out from the performance of promise and bring in other parties
is not a party. Trans-
fer may take place to perform their part of promise. However, contracts of personal skill and ability
(a) by an act of the cannot be assigned.
parties, or (b) by
operation of law. Benefits or rights can be assigned but not the burden of the contract except
with the consent of the parties. However, if rights are personal in nature they
cannot be assigned.
For example, A owes B Rs. 1,000. A cannot transfer his liability to a third
person. However, if B agrees to accept C as his debtor in place of A, the liability
can then be transferred from A to C.
A debtor, therefore, cannot relieve himself of his liability except by consent of
the creditor and new party to whom the burden is being assigned. If the parties
consent, original debtor is discharged. Notice of assignment must be given.
(b) Assignment by operation of law: (i) Upon death of a party to the contract,
his rights and liabilities devolve upon his heirs and legal representatives.
But when the personal skill and abilities are involved the contractual relations
are put to an end by the death of the promisor.
(ii) In case of insolvency by a party to the contract, his rights and obligations
pass on to the Official Assignee or Official Receiver, as the case may be.
Grounds of Frustration
The principle of frustration of contract is applicable to a variety of situations.
The well-established grounds, however are: (i) destruction of the subject-matter,
(ii) change of circumstances, (iii) non-occurrence of contemplated event, (iv) death
or inca pacity of pa rty, (v) Governme nt or legisla tive interve ntion, and
(vi) intervention of war (see Fig. 5.16).
the use of their music hall between certain dates for the purpose of
holding a concert there. But before the consent was given, the hall was
destroyed by the fire without the fault of either party. The contract was
held not to be absolute on the principle of frustration. Similarly, when a
cinema hall engaged for showing a film collapsed on account of heavy
rains, the contract was held to be frustrated (V.L. Narasu vs. P.S.V.
Iyer, 1953).
(ii) Change of Circumstances: A contract will frustrate when circumstances
arise which make the performance of the contract impossible in the
manner and at the time contemplated. The Punjab High Court observed
in [P.D. Mehra & Sons vs. Ramachandra Omprakash (1952)] thus: “it
is clear that if there is entirely unanticipated change of circumstances,
the question will have to be considered whether this change of
circumstances has affected the performance of the contract to such an
extent as to make it virtually impossible or even extremely difficult or
hazardous. If that be the case, the change of circumstances not having
been brought about by the default of either party, the court will not
enforce the contracts.”
(iii) Non-occurrence of a contemplated event: Sometimes, the performance
of a contract is possible, but owing to the non-occurrence of the event
contemplated by both parties as the reason for the contract, the value of
the performance is destroyed. The leading case to be quoted here is the
Krell vs. Henry (1903). In this case the defendant agreed to hire a flat
from the plaintiff for June 26 and 27, for witnessing a coronation
procession of Kind Edward VII. A part of the rent was paid in advance.
But the procession have been cancelled owing to the king’s illness, the
defendant refused to pay the balance. He was freed from paying the
balance because non-occurrence of the event, which was the basis for
the contract discharged the contract.
(iv) Death or incapacity of party: When the performance of a contract
depends on the existence of a given person, the contract is discharged
on the death of illness of that person. Thus, where the nature of terms of
a contract require personal performance by the promisor, his death or
incapacity puts an end to the contract. For example, A contracts B to act
at a theatre for six months in consideration of a sum paid in advance by
H. On several occasions, A is too ill to act. The contract to act on those
occasions becomes void.
(v) Government or legislative intervention: The performance of a contract
may be prevented by the passing of a legislation or even by an executive
decision as in the case of acquisition of property which might be the
subject-matter of a contract of sale. Certain transactions may be banned
and this ban will discharge the parties from contracts. Sale of agricultural
land, for example is affected by land reforms legislation. Similarly, sale
of urban land is affected by the urban land ceiling law. In Boothalinga
Agencies vs. V.T.C. Poraiswan Nadar (1969), the defendant had a
licence to import chicory for manufacturing coffee powder. The license
was subjected to the condition that he would use it for his factory. He
agreed to sell the whole shipload. Before the arrival of the ship, the sale
of such imported goods was banned. The contact to sell was held to be
frustrated because of the ban.
Module Five • Indian Contract Act, 1872 171
3. Discharge by Agreement
As a contract is created by means of an agreement, it may be discharged by
another agreement between the same parties nullifying the previous contract.
This may happen in any of the following ways (see Fig.5.17):
(a) Novation: When the parties to a contract agree to substitute the existing
contract with a new one, it is called novation. With novation, the old
agreement is discharged and in this place a new one comes into effect.
The new agreement must be enforceable.
For example, A owes money to B under a contract. It is agreed between A, B
and C that B shall henceforth accept C as his debtor, instead of A. The old debt Remiss ion means
between A and B comes to an end and the new debt from C to B has been the acceptance of
contracted. less than what was
agreed for. There is
(b) Remission: Remission means the acceptance of less than what was no nee d f or a ny
agreed for. There is no need for any consideration for remission. c on s ide rati on f or
remission.
172 172 Legal Aspect of Business • Module Five
(c) Waiver: Waiver means the deliberate abandonment of the rights by the
parties to a contract. The parties are no longer bound by the terms of
the contract. Consideration is not necessary for waiver.
(d) Rescission: Rescission of an agreement takes place when all or some of
the terms of the contract are cancelled. It may occur (i) by mutual consent
of the parties, or (ii) where one party fails in performing his obligation,
the other party may rescind the contract without prejudice to his right
to claim compensation for the breach of contract.
(e) Merger: Merger takes place when an inferior right accruing to a party
under a contract merges into a superior right accruing to the same party
under the same or some other contract.
4. Discharge by Limitation
Re s c is s ion of an Since man himself is mortal, his rights and duties cannot be immortal. It is
ag reem ent tak es on this assumption that the Limitations Act, 1963 lays down that a contract must
place when all or be performed within a specified period. The specified period is called period of
some of the terms
of the contract are limitation. Now, if the contract is not performed within the period of limitation, it
c anc elled. It may stands terminated. For example, the price of goods sold without any stipulation
occur (i) by mutual as to credit must be paid within three years. If the debtor fails to pay within three
consent of the par-
ties, years and if the creditor does not to sue the debtor for the recovery, the debt shall
become time-barred and irrecoverable.
However, it is upto the parties to rejuvenate a contract by acknowledgements.
If the promisor gives a written acknowledgement of debt before the expiry of
limitation, a new period of limitation will come into force. This acknowledgements
may be an endorsement on the original document or by means of a separate
communication.
6. Discharge by Breach
Discharge by breach is the last way of dissolving a contract. There is a breach
when one party to a contract repudiates his liability to the contract or conducts
himself in such a way as to make him impossible to perform the contract. Failure
to perform the promise may take place when the time for performance has arrived
or even before that. Thus, breach is of two kinds, viz., (a) anticipatory breach,
and (b) present or actual breach.
Anticipatory Breach: An anticipatory breach occurs when, prior to the
promised date of performance, the promisor absolutely repudiates the contract.
It is an announcement by the contracting party of his intention not to fulfill the
contact and that he will no be no longer be bound by it.
Present or Actual Breach: Actual breach occurs when the performance is
due or during the performance of the contact.
In an anticipatory breach the contract stands discharged unless the
aggrieved party chooses to keep it alive till the date of performance arrives. In the
present breach, the party not in breach, treats the contract as no longer binding
on him. In either case, the aggrieved party has certain remedies. These remedies
will be discussed in the next sub-chapter.
and fast rules for deciding whether the breach is major or minor. In general, a
minor breach involves a somewhat insignificant in quantity or quality — something
that may be corrected or offset without serious harm. A minor breach may involve
a small delay of an hour or two in performance when the time of completion is not
really critical.
This does not mean that the party bargaining for a specified product or service
can be cheated out of the contract specifications. The aggrieved party is entitled
to damages to make up for the differences. But if the breach is minor, the damages
or other remedies are limited to those caused by the breach, and the contract is
said to be “substantially performed.”
On the other hand, a major breach is something that goes on the very
substance of the agreement. In a situation of this kind, the injured party is
immediately excused from the counterperformance owing under the terms of the
agreement.
considered either arising naturally , i.e., according to the usual course of things,
from such breach of contract itself, or such as may reasonably be supposed to
have been in the contemplation of both parties, at the time they made the contract,
as the probable result of the breach of it.”
On the basis of this principle the defendants were not held liable for the loss
of profits. The judgement given by Alderson formed the basis for modern law of
damages both in our country and in England. Sec. 73 of our Contract Act is, in
fact, faced on the above judgement. To quote the section, “When a contract has
been broken, the party who suffers by such breach is entitled to receive, from the
party who has broken the contract, compensation for any loss or damage caused
to him thereby, which naturally arose in the usual course of things from such
breach, or which the parties knew, when they made the contract, to be likely to
result from the breach of it.
“Such compensation is not to be given for any remote and indirect loss or
damage sustained by reason of breach.”
Thus, the section recognizes two types of losses, viz., (a) general damages,
and (b) special damages.
General Damages: General or ordinary damages are those which arise
naturally in the usual course of things from the breach itself. The defendant is
liable for the reasonably foreseeable consequences of his breach. For example, A
contracts to buy rice of B, at Rs. 950 per quintal, 50 quintals of rice, no time
being fixed for delivery. A afterwards informs B that he will not accept the rice if
tendered to him. The market price of rice on that day is Rs. 930 per quintal. B is
entitled to receive from A compensation at the rate of Rs. 20 per quintal.
Special Damages: Special damages are those which arise on account of the
unusual circumstances affecting the plaintiff. They are not recoverable unless
the special circumstances were brought to the knowledge of the defendant so
that the possibility of the special loss was in the contemplation of the parties.
Failure to bring to the knowledge of the defendant about the unusual
circumstances prevented the plaintiff from recovering special damages.
One illustration is the decision of the Madras High Court in Madras Railway
Co. V. Govinda Rao (1898). The plaintiff, who was a tailor, delivered a sewing
machine and some cloth to the defendant railway company to be sent to a place
where he expected to carry on his business with special profit by reason of a
forthcoming festival. Through the fault of the company’s servants the goods were
delayed in transmission and were not delivered until some days after the conclusion
of the festival. The plaintiff had given no notice to the company of his special
purpose. He claimed as damages the expenses of travelling upto the place of
festival, and of staying there, and the loss of profits which he would have earned.
The court held that he could not claim damages for the loss of profit since the
special purpose was not known to the railway company.
Compensation and not Penal Damages: Damages for breach are given by
way of compensation for the loss suffered by the plaintiff and not for the purpose
of punishing the defendant for his breach. Punitive damages have no place in
contract law and are not recoverable. But in the case of breach of a promise to
marry, dishonour of a cheque by a banker wrongfully, and the issue of a cheque
by a customer when he has no adequate balance to his credit in the bank the
court may award penal damages.
178 178 Legal Aspect of Business • Module Five
Nominal Damages: Where the plaintiff suffers no loss the court may still
award him nominal damages in recognition of his right. But this is the discretion
of the court. The court may altogether refuse any award or award substantial
damages.
Mental Pain and Suffering : In the normal circumstances damages for mental
pain and suffering are not allowed. But damages are allowed in exceptional cases.
For example, where “the breach was wanton or reckless and caused bodily harm”
and when the defendant had reason to know that the breach would cause mental
suffering “the courts would not hesitate in awarding damages.”
In Diesen v. Samson (1971), a photographer who had been engaged to
cover a wedding failed to turn up resulting in the absence of mementos to the
parties and accordingly damages were allowed. Similarly, in Jarvis V. Swan Tours
Ltd. (1973), a tourist agency was sued for disappointment in expectations regarding
promised facilities and recreation in a conducted tour. The court observed that it
was a fit case for awarding damages for mental distress caused by bitter
disappointment.
Duty to Mitigate: The injured is expected to make reasonable efforts to avoid
the losses resulting from the breach so that his loss is kept to the minimum. This
rule is frequently applied to sale and purchase of goods. On the buyer’s refusal to
take delivery, the seller must resell the goods at the prevailing market rates. He
may then recover the difference between the price he realizes by the sale and
price he would have got had the contract been performed. If the seller fails to
resell the goods and the loss aggravates, he cannot recover the enhanced loss.
The principle also finds its application in premature termination of a contract
of employment. It is expected of a dismissed employee to find an alternative
employment. Failure to do so will deny him the right to damages. But if the
employment is for a particular period, termination of the service before the period
expires, entitles the dismissed employee for damages which will be equal to the
total salary he would have earned during the remaining part of the service period.
Liquidated Damages and Penalty: It is somewhat usual for the parties to a
contract to state in the contract that on its breach a certain specified sum will
become payable as damages. Such a sum may amount to either ‘liquidated
damages’ or a ‘penalty.’ The former represents a fair and genuine pre-estimate of
the probable loss that might ensure as a result of the breach. The later is a sum
named in the contract and is disproportionate to the damage likely to accrue as a
result of the breach. It is fixed in order to ensure performance of the contract.
The English law allows, ‘liquidated damages’ but relieves a party against
‘penalty.’ In our country no such distinction is made. The injured party is allowed
only reasonable compensation.
Statutory Damages: Where damages are payable in terms of a statutory
provision, the Supreme Court has held that the provision applicable would be
one that is in force at the time of cause of action and not that was in force when
the agreement was made.
In Padma Srinivasan v. Premier Insurance Co. Ltd. (1982), the plaintiff’s
husband was killed by a goods lorry which was insured with the defendant
company. When the policy was taken the amount payable for loss of life, under
the Motor Vehicles Act, was Rs. 20,000. By the time the accident took place, the
Act was amended and the compensation was raised to Rs. 50,000. The court
allowed the revised figure.
Module Five • Indian Contract Act, 1872 179
is up to the fairness and judgement of the court. Of course, the plaintiff cannot
expect to receive both an award of damages and an order for specific performance.
Such a judgement would constitute “double enrichment”, as the courts term it.
Judges consistently say that no one has an absolute right to specific
performance, since such relief is within the court’s discretion. In many situations,
however, the measure of damages that can be awarded will not be an adequate
remedy.
Almost invariably a court will order specific performance of an agreement to
sell a home or land, or to lease real estate of any kind. But specific performance
will seldom be ordered for the sale of personal property (chattels) unless the subject
matter of the sale is unique or almost impossible to obtain elsewhere. Usually,
personal goods can be bought on the open market and an award of monetary
damages will be considered adequate.
For example, a coin collector spent years in locating an owner who was willing
to sell a specific mintage of rare penny. The collector made a contract. A court
would likely order specific performance (delivery of the coin upon payment of the
price). This is because the coin would not be available in comparable conditions
from other coin dealers.
The courts will usually order specific performance of a contract for personal
services for an actor, artist, singer, portrait painter or some one with unique
talent; at the same time specific performance would not likely be ordered for a
contract to paint a house. The party inuured by the default could likely obtain
another house painter, swing the first for damages. In some other cases specific
performance of a contract for personal services for an actor, artist, singer, portrait
painter, or someone with unique talent: at the same time, specific performance
would not likely be ordered for a contract to paint a house. The party injured by
the default could likely obtain another house painter, suing the first for damages.
In some other cases, specific performance will not be ordered because the court
feels this requirement could work an undue hardship on the defaulting party. At
other times the court may simply not have sufficient technical background to
supervise specific performance of some matters. Thus, a judge might order specific
performance of a contract to sell an office building. But would not order specific
performance of a contract to build an office building.
Quasi Contracts
If the agreement involves services performed by one of the parties and the
other refuses to pay thereof, the injured party may sue under a quasi contract
theory. In that case, the court would allow recovery for the reasonable value of
the services performed. For instance, if you hire someone to paint your house
Module Five • Indian Contract Act, 1872 181
and then refuse to pay the amount due, the painter could sue under a theory of
quasi contract for the reasonable value of services performed. Usually, the court
requires the individual providing the service.
The Indian Contract Act contains provisions not only to cover cases of
contracts but also to cover certain types of situations which are analogous to
contracts. Sections 68 to 72 of the Act provide for such situations. For example,
as is well-known, a minor has no contractual capacity. But when necessaries are
supplied to him, the person so supplying to entitled to sue and get reimbursement
from the minor’s property. Similarly, a person in whose home certain goods have Quasi contracts as
been left by mistake is bound to restore them to the true owner. To cover cases of “certain relations
this nature, a new expression, namely, quasi contracts has been invented and res embli ng thos e
created by contract”
used widely. The Contract Act prefers to call quasi contracts as “certain relations but av o ids the
resembling those created by contract” but avoids the words quasi contracts. words quas i con-
tracts.
The rationale behind quasi contract is the principle that law as well as
justice should try to prevent “unjust enrichment.” That is, enrichment of one
person at the cost of another. A person who has received benefit from another
must pay for it. Otherwise, it would be unjust for him to retain such benefit.
Quasi contract is not a contract in strict sense as it is not intentionally created
by the parties to a contract. It is created only by law.
Contingent Contracts
Sections 31 to 36 of the Contract Act define and illustrate contingent contracts.
A contract is said to be contingent when its performance is made to depend upon
the happening or not happening of a future event which is collateral to the contract.
184 184 Legal Aspect of Business • Module Five
A c ontingent con- Section 31 of the Act defines a contingent contract thus: “A contingent contract is
tract is a contract to
do or not to some-
a contract to do or not to something, if some event, collateral to such contract,
thi ng, if s ome does or does not happen.”
event, collateral to
such contract, does
A contingent has the following features:
or does not happen. (i) The existence of a condition precedent which must be fulfilled before the
contract can be enforced.
(ii) The condition must relate to a future event which may or by not happen.
(iii) The event does not form an essential part of the transaction but is
collateral to it.
foolproof in all respects. There are a number of gaps in the Act and these gaps
have been filled up by case laws. Instead of relying on case laws which may be
vulnerable for subjective interpretation, it is advisable to amend the Act and
incorporate the principles derived from case laws in the Act itself.
QUESTIONS
A. Objective Type
1. Define the term contract.
2. What is a void contract?
3. What is voidable contract?
4. What is an illegal contract?
5. What is quasi contract?
6. What is executory contract?
7. What is an executed contract?
8. What is a bilateral contract?
9. What is an unilateral contract?
10. What is an offer?
11. State the essentials of valid offer.
12. What is a specific offer and a general offer?
13. What is cross offer and a counter offer?
14. What is acceptance?
15. State the essentials of valid acceptance.
16. What is consideration?
17. State the essentials of valid consideration.
18. State exception to consideration.
19. What is meant by legal capacity?
20. Who is a minor?
21. What is a tort?
22. What is doctrine of restitution?
23. What does English Law say about contractual capacity of a person with unsound
mind?
24. Who is an alien enemy?
25. What is a free consent?
26. What is coercion?
27. Define undue influence?
28. Define misrepresentation.
29. What is fraud ?
30. What is an unlawful agreement? Give examples.
31. What is a void agreement? Give examples.
32. What is an exclusive dealing?
33. What is an uncertain agreement?
34. What is a wagering agreement?
35. Give an example of a contract that might be struck down by the courts as against
public policy.
36. What are reciprocal promises?
37. What do you mean by doctrine of frustration?
38. Give the meaning of assignment of contracts.
39. State the contracts that need no performance.
40. What is novation?
41. What is remission?
42. What is anticipatory breach of a contract?
43. What is present breach of contract?
188 188 Legal Aspect of Business • Module Five
B. Analytical Type
1. “The Indian Contract Act, 1872, is not a complete code and is not exhaustive.” Discuss.
2. “All agreements are not contracts, but all contracts are agreements.” Discuss, pointing
out essentials of a valid contract.
3. “In business transactions, the presumption is that parties intend to create legal
relationship.” Comment.
4. Distinguish between (a) valid, void and voidable contracts, and (b) unilateral and
bilateral contracts.
5. Mr. Balfour carrying on business in Sri Lanka promised his wife Mrs. Balfour lining
in England to pay her a monthly allowance so long as she cannot come over to Sri
Lanka for reasons of health. Can Mrs. Balfour claim the allowance?
6. A fire broke out in P’s farm. He called upon the uptown Fire Brigade to put out the fire
which the latter did. P’s farm did not come under the free service zone although he
believed to be so. Is P liable to pay for the services?
7. X& Co. through a newspaper advertisement, announce a reduction sale of ready-
made woolen garments and exhibit articles in their showroom with the original and
reduced prices marked on them. B, who has read the advertisement, picks up a woolen
suit marked Rs. 400 as the original price and Rs. 200 as the reduced price. B, then,
offers Rs. 200 to the salesman of X & Co., who refuses to accept and hand over the
suit to B. What are B’s rights against the company?
8. X, an auctioneer, advertise through newspaper that the sale of office furniture will be
held in Bangalore. Y, a broker from Chennai, reaches Bangalore on the stipulated
date and time. X, the auctioneer, withdrew all the furniture from the auction sale. Y
sues X for the loss of time and expenses. Will he succeed?
9. Why is intention to create legal relations an essential requirement of a valid contract?
Give three examples of obligations arising from contracts which are not legal
obligations.
10. Having accepted an order from X, Y writes a letter and posts it. A few days later Y
sends a telegram expressing his inability to accept the offer. Both letter and the
telegram reach X at the same time. Is Y bound by the acceptance?
11. On 28 th November, 1990, B wrote to A offering to sell and deliver to him 20 bags of rice
at Rs. 600 a bag. On the same day A wrote to B offering to buy 20 bags of rice at
Rs. 600 a bag. The two letters crossed in post. Is A’s connection tenable? Give reasons.
12. A offers to sell his scooter to B for Rs. 10,000. B offers to buy it for Rs. 8,500. A
refuses to sell. B then says to A, “I accept your offer and shall purchase the vehicle
for Rs. 10,000.” Is A bound to sell his scooter for Rs. 10,000?
13. “A mental resolve to accept an offer does not give rise to a contract.” Comment.
14. Describe in your own words, the principles you have learnt from the following cases:
(a) Carlill vs. Carbolic Smoke Ball Co,
(b) Harvey vs. Facie.
(c) Lalman Shukla vs. Gauri Dutt.
(d) Boultan vs. Jones.
15. “An agreement without consideration is void, but an agreement with insufficient
consideration is valid.” Comment.
Module Five • Indian Contract Act, 1872 189
16. What principles did you learn from the two cases, viz., (1) Kedar Nath vs. Gorie
Mohammed, and (2) Abdul Aziz vs. Masum Ali? What is the main difference between
the two?
17. What principles of contract law have learnt from: (1) Chinnaya vs. Ramaya, and
(2) Dunlop Pneumatic Tyre Co. Ltd. Vs. Selgridge & Co. Ltd.?
18. Should the consideration be always at the desire of the promisor’s ? Discuss.
19. A and B are friends. B treats A during A’s illness. B does not accept payment from A
for treatment and A promises B’s son, X, to pay him Rs. 1,000. A, being in poor
circumstances is unable to pay. X sues A for the money. Can X recover?
20. What do you know about contract entered into with a minor from the legal point of
view in India? Are there contracts with minor that are valid? If yes, which are they?
21. What principles did you learn from the case Mororibibi vs. Dharmodas Ghose? How
do they differ from those of Srikakulam Subramanya vs. Kurra Subba Rao?
22. Write, in your own words, about what you learnt from Fig. 1.8 in this book.
23. A, a minor borrows Rs. 5,000 and executes a pronote for the amount in favour of B.
After attaining majority, A executes another pronote in settlement of the first pronote.
Will B succeed in recovering money from A? give reason in support of your answer.
24. A minor borrows Rs. 500 on a fraudulent representation of his age as a major. Can
the creditor sue for the amount?
25. What principle did you learn from the popular case, viz., Roberts vs. Gray?
26. Distinguish between fraud and misrepresentation.
27. “Mere silence to facts likely to affect the willingness of a person to enter into a contract
is not fraud.” Discuss.
28. “Undue influence is a subtle form of coercion.” Discuss.
29. Distinguish between coercion and undue influence.
30. A, falsely representing herself as the wife of a well-known millionaire, takes a ring
from a jeweler’s shop for the approval of her husband. She pledges it with a pawn-
broker, who in good faith and without notice of the first transaction pays her
Rs. 5000. Can the jeweler recover the ring from the pawn-broker?
31. X offers to sell his factory to Y stating that the factory produces 1,500 articles every
day. Y checks the amount and finds that the factory produces only 1,300 articles per
day. Y accepts the offer but later on refuses to buy the factory on the ground that it
products only 1,300 articles per day, while X had represented that it produces 1,500
articles per day. Give your opinion with reasons.
32. What differences do you notice between the decisions given in Bell vs. Lever Bros.
And in Nicholas and Venn vs. Smith Marriott.
33. What principles of contract law have you learnt from Allcard vs. Skinner and Mannu
Singh vs. Umadat Pandey?
34. “An agreement in restrain of trade is void.” Examine the statement stating exceptions,
if any.
35. What principles of contract law have you learnt from the two popular cases, namely:
(a) Madhub Chander vs. Rajcoomar, and
(b) Nordenfet vs. Maxim Nordenfelt Gun Co.? Discuss.
36. What criteria would you adopt to determine whether an agreement is a wager or not?
Applying the criteria can you say that the contract of insurance is a wager?
37. Miss Kokila agreed to sing at the star theatre for a period of three months commencing
from 1 st January 2011. She further agreed not to sing elsewhere during this period. Is
this agreement valid?
38. Ram joined a company as a manager. The management of the company obtained an
agreement from Ram to the effect that he should not leave the company for a period of
five years. Is the agreement valid?
39. A promises B, in consideration of Rs. 1,000, never to marry throughout his life. Is
this contract valid?
40. A, who bets with B and loses, applied to C for a loan in order to pay B. C gives the loan
to A to enable him to pay B. Can C recover the amount of loan from A?
41. Are concepts not to compete against a former employer valid? Explain.
190 190 Legal Aspect of Business • Module Five
42. How far are the liabilities of parties to a contract affected by supervening impossibility?
Discuss.
43. “Impossibility of Performance is as a rule, not an excuse for non-performance of a
contract.” Discuss.
44. What principle of Contracts Act did you learn from Taylor vs. Caldwell? Or Krell vs.
Henry? Or Karl Ettlinger vs. Chagandas & Co.?
45. Is the promisor discharged from his obligation in each of the following cases:
(a) A music hall was agreed to be let out on certain dates but before those dates it
was destroyed by fire.
(b) An artist to paint a picture for a certain price but before undertaking to do so, he
met with an accident and lost his eyesight.
(c) A contracts to marry B, being already married to C, and being forbidden by the
law to which he is subject to practice polygamy.
(d) A promised B, for a valuable consideration, to put back the life of a dead relation
of B by some supernatural powers but fails to keep up his promise.
(e) A agreed to sell to B the entire crop of apples growing in his orchard. After the
agreement was made a sudden frost destroyed the crop.
46. X let premises in Calcutta to Y in January 1942 at a high rent for opening a restaurant,
the agreement to remain in force as long as British European troops would remain
stationed in Calcutta. Although British European troops continued to be stationed in
the town, the particular locality of the restaurant was declared out of bounds for the
troops and thus Y lost their customer. Y refuses to pay X the dues of rent on the plea
of frustration of contract. Advise X.
47. “Where there is a right, there is a remedy.” Amplify this statement and briefly explain
the various remedies available for breach of contract.
48. What rules of damages have you learnt from Hadly v. Buxandale? Discuss the duty of
the aggrieved to mitigate damages.
49. When does a claim on quantum meruit arise? Discuss.
50. A, in Delhi, entrust 100 packages of crackers with the Railways to be carried to his
branch at Allahabad and instructs the Railway authorities to deliver the same by the
first week of November 1976. Due to negligence of Railways, the packages were delivered
by the third week of November, after Diwali season over. A sues Railway for the loss of
profit he might have earned by the sale of crackers during the Diwali season. Will A
succeed?
51. A agrees to pay Rs. 100,000 to B, a contractor, after he builds A’s house as per
specifications. After some time the work is abandoned. B demands part payment for
the work done. Will he succeed?
52. A contract was made to pay a sum of money to B on a specified day. A does not pay
the money on that day. B in consequence of not receiving the money on that day, is
unable to pay his debts and is totally ruined. B claims heavy damages. Will he succeed?
53. Distinguish between wagering contracts and contingent contracts.
54. X agrees to construct a building for Y for Rs. 500,000 on the terms that no payment
shall be made till the completion of the work. Is it a contingent contract?
55. A agrees to pay B a sum of money if b marries C. C married D, subsequently D dies.
C afterwards marries B. Is A legally bound to pay the agreed sum?
56. Critically review the operation of the Contract Act.
C. Essay Type
1. What is a contract? What are the essential of a valid contract?
2. Define the term contract. Bring out the various classes of contracts.
3. Define the term ‘offer.’ What are the essentials of a valid offer? When can an offer be
revoked?
4. Define the term acceptance. What are the essentials of a valid acceptance? When can
an acceptance be revoked?
5. What is consideration? What are the essentials of valid consideration?
6. What is the general rule regarding consideration? What are exceptions to the rule?
Module Five • Indian Contract Act, 1872 191
192 192 Legal Aspect of Business • Module Five
6
MODULE
Module Objectives
After reading this chapter, you should be able to
• Know the meaning of contract of sale and their essentials
• Distinguish between sale and agreement to sell, sale and hire purchase,
sale and bailment
• Bring out the differernces between condition and warranty along with
different types of implied conditions
• Know the different types of sale where ownership is transferred
• Explain the different types of goods and modes of delivery
• List the rights of an unpaid seller against goods and against the buyer.
194 194 Legal Aspect of Business • Module Six
dissolved and the surplus assets, including some goods, were divided
among the partners, in specie. Sales Tax Officer sought to tax this. The
action of the Officer was rejected on the contention that division among
partners did not amount to sale as the partners themselves were the
joint owners of the goods and they could not be both sellers and buyers
of the goods. But law recognises the sale of goods by a partner to the
firm and vice versa. Similarly, a contract of sale between one part owner
and another is also recognised.
(ii) Money Consideration: The consideration for a sale of goods must be The consideration
for a sale of goods
money, called the price. Where the property in goods is transferred for mus t be money ,
any consideration other than money, it is not sale. Thus, swap deals c alle d the pr ic e.
which are popular nowadays, are not contracts of sale in the strict sense. Where the property
But where goods are sold for a definite sum and the price is paid partly in goods is trans-
ferred for any con-
in valued up goods and partly in cash, it is sale. For example, where an s ide ration o ther
old car is returned to the dealer for anew one and the difference are paid than money, it is not
in cash, it should be sale. Same logic applies to an exchange of an old TV sale.
for a new one, the difference being paid in cash. This logic is derived
from the judgment in Aldridge V. Johnson (1857). In this case, fifty-two
bullocks, valued at $ 6 a piece, were exchanged for 100 quarters of barley
of $ 2 per quarter, the difference to be made up in cash. The contract
was treated to be a valid sale.
(iii) Transfer of Property: Transfer of property is another essential of contract The seller must ei-
ther trans fer the
of sale. The seller must either transfer the property or agree to transfer property or agree to
the property in goods to the buyer. Property here means ‘ownership’ trans fer the prop-
over the goods. What is important is that there must be a transfer of erty in goods to the
buyer.
general property as distinguished from special property in goods from
the seller to the buyer. If A owns certain goods, he has general property
in the goods. If he pledges them with B, B has special property or interest
in the goods. When it is said that the property in the goods has passed to
the buyer, it means that the goods have ceased to be the property of the
seller and have become the property of the buyer. Transfer of property
in goods is distinct from delivery of goods. Property in goods may pass
from the seller to the buyer without delivery of the goods. In other words,
the buyer may become owner of the goods without possessing them.
(iv) Goods: The subject-mater of the contract of sale must be goods. The The subject-mater
of the c ontrac t of
term ‘goods’ is defined in Sec.2(7) of the Act thus: “Goods mean every
sale must be goods.
kind of movable property other than actionable claims and money; and
includes stocks and shares, growing crops, grass, and things attached to
Every kind of mov-
or forming part of the land which are agreed to be severed before sale or able property ex -
under the contract of sale.” c ept ac tion able
claims and money
Thus, every kind of movable property except actionable claims and money is is rega rded as
regarded as ‘goods.’ To be specific, things like goodwill, copyright, trademark, ‘goods.’
patents, water, gas, electricity, ships, standing trees, grass; shares and stock, Things lik e good-
etc., are ‘goods’ for the purpose of this section. will , c opy ri ght,
trademark, patents,
Actionable claim is understood as a “thing in action.” Thing in action is where water, gas, electri-
a person has not the enjoyment of the thing, but merely a right to recover it by a city, ships, standing
trees, grass; shares
suit or action. A debt is a thing in action or actionable claim. A debt cannot be and stock, etc., are
goods because it can only be assigned under the Transfer of Property Act but ‘goods’ for the pur-
cannot be sold. pose of this section.
196 196 Legal Aspect of Business • Module Six
“Money” means cur- “Money” means current money. Current money is not ‘goods.’ Money is legal
rent money. Current
tender and is an essential aspect of every sale because the price of goods has to
money is not
‘goods.’ be expressed in terms of money. Money itself, therefore, cannot be the subject-
mater of sale. However, old and rare coins, which have ceased to be legal tender
and which have become objects of curiosity may be bought and sold. Foreign
currency may also be bought and sold.
(v) Sale and Contract of Work and Material: Contract for painting of a
portrait, contract for providing and fixing windows according to
specifications, contract for fabrication and installation of shutters
according to specifications and supply of meals in a hotel are not contract
of sale for the purpose of this Act. But contracts to take and supply
photographs, to build ships and to prepare medical prescription, have
been held to be contracts of sale. The former are not held to contracts of
sale because they are agreements involving the exercise of skill or labour
on some material. A contract of sale must be distinguished from a contract
The Sale of Goods of work and labour. The Sale of Goods Act applies to contracts of sale
Act applies to con- and not to contracts of labour and work.
tracts of sale and
not to contracts of (vi) Essentials of Valid Contract: It is only stressing the obvious that all
labour and work. the essentials of a valid contract must be present in the contract of sale
All the essentials of also.
a v a lid c ont rac t
must be present in
the contract of sale How is Contract of Sale Made?
also.
A contract of sale, like any other contract, is made by an offer and its
acceptance. It may be made in writing or a word of mouth; it may also be implied
from the conduct of the parties or the course of business between the parties.
Thus, if a person goes into a shop and selects an article exposed for the sale in
the shop and takes it away, it is a purchase of the article at the price fixed to it or
at a reasonable price, if no price is fixed.
The contract of sale 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 delivery or payment or both may be postponed.
“Where under a
contract of sale the Some Distinctions
prop erty in the
goods is transferred It is useful to make distinction between a sale and an agreement to sell,
from the seller to
the buyer the con- between a sale and a hire-purchase and sale and bailment. These differences
trac t is c all ed a help us understand the nature of sale more clearly.
sale, but where the
transfer of the prop- A sale must be distinguished from an agreement to sell. The legal implications
erty in the goods is of the two are vastly different. The basic difference between the two is brought
to take place at a out by Sec.4(3) of the Act. Thus, according to the Section “Where under a contract
future time or sub-
ject to some condi-
of sale the property in the goods is transferred from the seller to the buyer the
tion thereafter to be contract is called a sale, but where the transfer of the property in the goods is to
fulfilled, the c on- take place at a future time or subject to some condition thereafter to be fulfilled,
trac t is c alled an
agreement to sell.”
the contract is called an agreement to sell.” Table contains differences between a
sale and an agreement to sell more specifically.
Module Six • Sale of Goods Act, 1930 197
Sale Hire-purchase
1. Ownership of goods is transferred 1. Ownership is transferred to the hirer
to the buyer immediately. only after the last instalment has been
paid.
2. Buyer cannot terminate the contract. 2. Hirer is at liberty to terminate the
He is bound to pay the price. agreement at any stage. He cannot be
forced to pay his remaining
instalments.
3. When the buyer becomes insolvent, 3. When the hirer becomes insolvent the
the seller takes the risk of any loss. seller does not run the risk of any loss.
He can take back the goods.
4. A sale is subject to the implied 4. A hire-purchase agreement is not
conditions and warranties provided subject to such implied conditions and
under the Sale of Goods Act, 1930. warranties. It is, however, subject to
the implied conditions provided under
the hire-purchase agreement.
5. A sale is subject to levy of sales tax 5. Sales tax is not leviable on hire-
at the time of contract of sale. purchase until it finally converts into
sale.
6. If the payment is made by the buyer 6. The instalments paid by the hirer are
in instalments, the amount payable regarded as hire charges and not at
by the buyer to the seller is reduced, payments towards the price of the
for the payment made by the buyer goods till the option to purchase the
is towards the price of the goods. goods is exercised.
7. Sale is governed by the Sale of 7. Hire-purchase is governed by the
Goods Act, 1930. Hire-purchase Act, 1972.
Bailment Defined
A bailment is a de- A bailment is a delivery of possession of goods or personal property to another
livery of possession
of g oods or per-
for temporary custody, care, repair, or use by the recipient. The subject of a
s onal property to bailment transaction is always personal property. The person turning over the
another for tempo- property is called the bailor, and the person taking custody of the property is
rary custody, care,
known as the bailee. Under appropriate circumstances the concept of bailment
repair, or use by the
recipient. may include many types of transaction, among them the deposit, storage, rental,
loan, checking, pledge, or repair of property or the holding of lost property.
Bailments are sometimes divided into several classes by the courts, according to
who is to benefit. These courts impose a greater degree of care on those who
benefit most.
The bailor of property is usually the owner, but not necessarily. A thief who
checks a stolen briefcase at a parcel checkroom is a bailor, even though the thief
does not have title. A friend who borrows a set of golf clubs becomes a bailor
when the clubs are left at a repair shop.
Module Six • Sale of Goods Act, 1930 199
A bailee is never one who has title to the property or who is expected to gain
title. If the intent of the parties is for the receiver to gain title, then the transaction
is a sale or barter (a variation of a sale) rather than a bailment.
Title is to remain with the owner in every bailment.
As one of the requirements of a bailment, it is expected that the identical
goods will be returned to the bailor. The courts say that “bailment is characterized
by a transfer of possession, as distinguished from a change in ownership.”
It is often part of the bailment arrangement, however, that the property will
be returned in altered form. For example, a broker watch may be returned in
working condition; soiled laundry may be returned as clan; milk may be returned
as cheese; or wheat may be ground and returned as flour.
A bailment is usually regarded by the courts as a contract arrangement.
Sale Bailment
1. Property in goods is transferred 1. Only possession of goods is transferred
from seller to buyer. from bailor to bailee.
2. Consideration for a sale is the 2. Consideration may be in money or in
price in terms of money only. kind.
3. Buyer can deal with the goods 3. Bailor must return or dispose of goods
as he likes because he is the as directed by bailor after the purpose
owner of them. is served.
4. Goods once sold normally cannot 4. Goods must be returned to bailor after
be returned. the specified purpose is accomplished.
Goods include every kind of movable property other than actionable claims
and money. Goods may be either existing or future goods.
200 200 Legal Aspect of Business • Module Six
1. Existing Goods: Existing goods are owned and possessed by the seller at
the time of sale. Existing goods themselves are of three types, namely, (i) specific
goods, (ii) ascertained goods, (iii) unascertained or generic goods.
Specific goods are As the expression itself suggests, specific goods are identified and agreed
identif ied and
agreed upon at the
upon at the time a contract of sale is made. Ascertained goods are those which
time a contract of become ascertained subsequent to the formation of the contract of sale. In nature,
sale is made. As - ascertained goods resemble specific goods. But there is difference. Specific goods
certained goods are
thos e whic h be-
are identified at the time of forming the contract, whereas ascertained goods are
come as certained ascertained after the contract has been formed. Generic goods or unascertained
subsequent to the goods are not identified at the time of forming a contract but are defined by
form ation of the description and may form part of a lot.
contract of sale.
2. Future Goods: Future goods represent goods to be manufactured or acquired
by the seller after forming a contract. These goods are not therefore, in the
possession of seller at the time of entering into the contract of sale.
In order for this section to operate, the following essentials must be present:
(a) the goods must be specific goods.
(b) the goods must have perished or damaged before the risk passes to the
buyer.
(c) the goods must be perished or damaged without the fault of seller or
buyer.
In Howell V. Coupland (1876), the defendant agreed to sell to plaintiff 200
tonnes of regent potatoes to be grown on the land belonging to the defendant. the
defendant sowed sufficient land to grow more than 200 tonnes, but without any
fault in him, a disease attacked the crop, and he was able to deliver only about
eight tonnes. The agreement was held to have become void.
Condition Warranty
1. Essential to the main purpose of 1. Only collateral or subsidiary to the main
the contract. purpose of the contract.
2. Breach entitles the innocent party 2. Breach entitles the innocent party to
to repudiate the contract. sue for damage.
3. A breach of condition may be 3. A breach of warranty cannot be treated
treated as a breach of warranty. as a breach of condition.
Implied Conditions
Implied conditions (see Fig. 6.2) are explained the paragraphs that follow:
Module Six • Sale of Goods Act, 1930 203
invoke this section provided (i) there is a sale by description, and (ii) goods sold
do not correspond to the description.
‘Sale by description’ includes three situations as described below:
(a) Where the buyer has never seen the goods but relies entirely on their
description by the seller: The Varley V. Whipp (1900), is a case in point. A
agrees to sell and B agrees to buy a reaping machine which B has never
seen and which is represented by A to have been new the previous year
and used to cut only 50 or 60 acres. After delivery B finds that the machine
does not correspond with A’s representations. B is entitled to return the
machine.
(b) Where the buyer has not seen the goods but does not rely on what he has
seen — he believes what was stated to him and the deviation of the goods
from the description is not apparent: This principle has been underlined
in Nicholson & Venn V. Smith Marriott (1947). In an auction sale a set of
napkins and table cloths were described as “dating from the seventeenth
century.” The plaintiffs, who were dealers in antiquities, saw the set and
bought it. They subsequently found it to be an eighteenth century set
and sought to reject it. It was held that they could do so. The plaintiffs
relied on description and the deviation of quality from description could
not have been noticed with casual examination.
(c) Packing of goods may sometimes be a part of the description: In Moore &
Co.V. Landauer & Co., (1921), M Sold to L 300 tins of Australian fruits
packed in cases, each containing 30 tins. M tendered a substantial portion
in cases containing 24 tins. The method of packing was held to be a part
of description and, therefore, the buyers were entitled to reject the entire
lot.
Sale by Sample as 3. Sale by Sample as well as Description: If the sale is by sample as well
w ell as Descrip-
tion: bulk of the
as by description, it is not sufficient that the bulk of the goods correspond with
goods corres pond the sample. They must correspond with the description as well. If goods correspond
with the s am ple. with sample but not with description, the condition is breached, and the buyer is
They must c orre-
spond with the de-
entitled to reject the goods.
scription as well. In Nichol V. Godts (1854), the plaintiff sold to the defendant some oil described
as ‘foreign refined rape oil, warranted only equal to sample.’ The oil delivered was
equal to sample but contained a mixture of hemp oil. It was held that the defendant
was entitled to reject, because the goods, though correspondent with sample, did
not correspondent with the description.
4. Exceptions to the Principle of Caveat Emptor (Sec.16): Caveat Emptor
is a Latin expression, which when translated into English, means ‘let the buyer
beware.’ In the context of sale of goods, caveat emptor means that the seller is not
bound to supply goods which should be fit for any particular purpose or which
should possess any particular quality. It is the duty of the buyer to select goods
of his requirement. He must ‘take care’ but not ‘take chance’ while selecting goods.
This principle has been incorporated into the Sale of Goods Act. The opening
words of Sec. 16 of the Act reads thus: “Subject to the provisions of this Act and
of any other law for the time being in force, there is no implied warranty or
conditions as to the quality or fitness of for any particular purpose of goods supplied
under a contract of sale…. “
The principle of caveat emptor was applied in Ward V. Hobbs (1878). The
plaintiff bought some pigs in an auction from the defendant who knew that the
Module Six • Sale of Goods Act, 1930 205
pigs were suffering from swine fever. He did not disclose this fact to the plaintiff,
and the pigs were sold ‘with all faults.’ Subsequent to the purchase, all pigs,
except one, die of fever. They also infected a few of the plaintiff’s own pigs. Rejecting
the plaintiff’s claim for damages, it was observed that “although a vendor is bound
to employ no artifice or disguise for the purpose of concealing defects in the article
sold, since that amount to a positive fraud on the vendor, yet under the general
doctrine of a caveat emptor, he is not ordinarily bound to disclose every defect of
which he may be cognisant, although his silence may operate virtually to deceive
the vendee.”
The principle of caveat emptor appears to have had its origin in those days Doctine of Caveat
Emptor is not prac-
when sale of goods in the open market was common. The buyer and the seller ticable because of
came face to face, the seller exhibited his wares, the buyer examined them and the complex nature
bought them if he liked. This practice is no more possible nowadays. Most sale of the present day
goods, it is only the
deals are not effected through correspondence. Besides, because of the complex seller who can as-
nature of the present day goods, it is only the seller who can assure the structure sure the structure
and quality of the goods. It is because of these reasons that it became necessary and quality of the
to restrict the rule of caveat emptor by imposing certain exceptions to it. The goods. It is because
of t hes e rea s ons
exceptions to the rule of caveat emptor have now become more prominent than that it became ne-
the rule itself. ceessary to restrict
the rule of cav eat
Exceptions: There are four exceptions to the rule, viz.: (i) Fitness for buyer’s emptor by imposing
purpose, (ii) merchantable quality, (iii) implied conditions of trade, and (iv) express certain exceptions
terms. In these exceptions the rule of caveat emptor will not apply. The seller will to it.
be held liable for breach of any of these four exceptions. The exceptions are
explained below: (i) Fitness for buy-
ers p urpos e, (ii)
(i) Fitness for Buyers Purpose (Sec. 16(1)): (a) The rules in this context are: merchantable qua-
(a) Where the goods are ordered for a specific purpose, (b) the seller is made lity, (iii) implied con-
ditions of trade, and
aware of it, (c) the buyer relies on the skill or judgment of the seller, and (d) the (iv) express terms.
goods must be of a description dealt in by the supplier, whether he be the In these exceptions
manufacturer or not. the rule of caveat
emptor will not ap-
These four conditions must co-exist. And in any routine purchase these ply.
conditions are implicitly satisfied. For example, in Grant V. Australian Knitting
Mills (1936), the plaintiff, a doctor, bought two woolen underpants from a retailer. Fitness of buyers
The pants were manufactured by the defendants. Next day, after wearing one of purpo se: (a )
Where the goods
them he became ill. His illness was diagnosed as dermatitis caused by a chemical are ordered for a
irritant which the defendants had negligently omitted to remove in the process of s pec ific purpos e,
manufacture. It was held that the sale was within the exception and the implied (b) t he s elle r is
made aware of it,
conditions of fitness for the buyer’s purpose was broken. The doctor was, therefore, (c) the buyer relies
entitled to succeed. on the skill or judg-
ment of the seller,
The purpose for which goods are required is implied if goods are purchased and (d) the goods
from a specialised dealer, buying a TV set from a dealer in electronics, for example. mus t be of a de-
If the goods turn out to be unfit for the purpose intended, they can be rejected. scription dealt in by
the s up plier,
Particular purpose must be disclosed when goods are used for more than one whether he be the
purpose. manu fac ture r or
not.
However, where the sale of a specific article is under its patent or trademark,
there is no implied condition as to its fitness for a specific purpose the doctrine of
caveat emptor will apply. The buyer here relies more on the brand than on the
skill and judgment of the seller and it is “manifestly unjust to burden the seller
with responsibility for fitness.” For example, B writes to A the owner of a patent
invention for cleaning cotton, “send me your patent cotton-cleaning machine at
206 206 Legal Aspect of Business • Module Six
Similarly, P bought a bun containing a stone which broke one of P’s teeth. It
was held that P could recover damages (Chaproiere v. Manson (1905)).
But the courts usually consider the following claims as mere puffery: “This
coat is worth at least twice what we are asking for it!”
The courts ordinarily make the legal point that sale puffery may include
expressions that are somewhat extravagant so long as they do not misrepresent
some specific quality or feature of the article being sold.
For example, the seller could inform a lady looking at a fox fur coat that “you
will never be in better style than when you wear this cape.” However, had the
salesman misrepresented the item as a more expensive mink, then the seller
could have been held to the higher quality.
A warranty, then, is a legally binding representation by the seller that specifies
the quality or condition of the goods offered for sale. There is no magic in the
word “warranty” standing alone. In fact the term may be used in a document that
is not actually a warranty. Similarly, a statement that does not contain the word
“warranty” may still operate as a warranty.
Implied Warranties
The following the implied warranties in a contract of sale (see Fig. 6.3)
In every contract of
Fig. 6.3 Implied Warranties. sale, there is an im-
plied warranty that
(1) Quiet Possession: (Sec.14(b)): In every contract of sale, unless there is the buyer shall have
and enjoy q uiet
some agreement to the contrary, there is an implied warranty that the buyer pos session of the
shall have and enjoy quiet possession of the goods. It is a warranty that nobody, goods.
including the seller, shall interfere with the quiet enjoyment of the vendee. If the “the goods shall be
right of enjoyment or possession of the buyer is disturbed by the seller or any free fr om any
charge or encum-
other person, the buyer is entitled to sue the seller for damages. brance in favour of
(2) Free from Encumbrances (Sec 14(c)): The second implied warranty is that any third party not
declared or known
“the goods shall be free from any charge or encumbrance in favour of any third to the buyer before
party not declared or known to the buyer before or at the time when the contract or at the time when
is made.” If for example, a person has pledged his goods and, having taken them the c ontrac t is
made.”
from the pledge under some excuse, sells them, the goods being subject to an
The good s whic h
encumbrance, this warranty is broken and the buyer may recover compensation are dangerous or
if his possession is disturbed by the pledge. likely to be danger-
ous there is an im-
(3) Sale of Dangerous Goods: In the case of a sale of goods, which to the plied warranty that
knowledge of the seller, are dangerous or likely to be dangerous and if the buyer the seller shall warn
is ignorant of the same, there is an implied warranty that the seller shall warn the the buyer about the
danger.
buyer about the danger. Failure to do so will entitle the buyer to claim damages if
he incurs any loss consequent to the occurrence of the danger.
210 210 Legal Aspect of Business • Module Six
Transfer of Property
Transfer of property As was pointed out in chapter 17, a contract of sale of goods is a contract
is , t herefore , the
essence of a con-
whereby the seller transfers or agrees to transfer property in goods to the buyer
tract of sale. for a price. Transfer of property is, therefore, the essence of a contract of sale.
The most important question in the contract of sale naturally is when does the
property (ownership) in the goods pass from the seller to the buyer? The
determination of the time when ownership passes to the buyer is important for
atleast four reasons, viz.:
(i) The risk passes along with the property. In other words, risk of loss or
damage of goods will be passed by the seller to the buyer along with the
property.
(ii) When property has passed to the buyer, he can exercise proprietary
rights over the goods. For example, he can sue the seller for delivery and
if the seller has resold the goods to a mala fide buyer, the original buyer
can recover from him also.
(iii) The seller cannot sue for the price unless the goods have become the
property of the buyer.
(iv) In the event of insolvency of the seller or the buyer, the question whether
the Official Receiver can take over the goods or not depends on whether
the property in the goods has passed from the seller to the buyer.
Thus, in the case of specific goods, property in them passes to the buyer at In the case of spe-
cific goods , prop-
the time of making the contract, provided the goods are in a deliverable state, and erty in them passes
the contract is unconditional. The fact that the time of delivery or the time of to the buyer at the
payment (or both) is postponed does not prevent the property from passing at time of making the
contract, provided
once. the goods are in a
Deliverable state means such a state that the buyer would, under the contract, deliv erable s tate,
and the contract is
be bound to take delivery of them (Sec. 2(3)).
unconditional.
For example, in Tarling V. Baxer (1827), A, on the 4th Jan. agreed to sell to B,
a stack of hay to be paid on the 4th Feb. till then the stack to be allowed to stand
in A’s premises until 1st of May. A stipulated that the hay should not be cut until
it was paid for. The hay was destroyed before being cut. It was held that the
ownership had passed to B on the making of the contract and he was liable for
the loss.
(ii) Goods not in Deliverable State (Sec. 21 ): According to Sec. 21 “where
there is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable state,
the property does not pass until such thing is done and the buyer has notice
thereof.” Thus, if anything remains to be done on the part of the seller, until this
is done the property is not transferred to the buyer.
In Rugg v. Minett (1809), there was a sale of the whole of turpentine oil lying
in a cistern. The oil had to be filled by the seller in casks, which was partly done
in the buyer’s presence, but before he could remove the casks the whole oil was
212 212 Legal Aspect of Business • Module Six
consumed by fire. It was held that the buyer had to bear the loss for the casks
which had been filled up because the seller did everything that was necessary to
put the oil in deliverable state.
Prop erty in the (iii) Goods to be Weighted or Measures (Sec. 22): Where the specific goods
goods, which are to
be mea s ured,
are in deliverable state “but the seller is bound to weigh, measure, test or do
weighed or tested, some other act or thing with reference to the goods for the purpose of ascertaining
in order to ascertain the price, the property does not pass until such act or thing is done and the
their price, passes buyer has notice thereof.” Thus, property in the goods, which are to be measured
only when they are
actually measured, weighed or tested, in order to ascertain their price, passes only when they are
weig hed, te s ted actually measured, weighed, tested and the buyer has the knowledge of it. Symbolic
and the buyer has delivery without such weighing will not be sufficient.
the knowledge of it.
For example, if it is the duty of the seller to count the goat skins in each bale,
and the price is for certain sum per dozen skins, the seller has to bear the loss
caused by fire before he his counted the goods (Zagury v. Furnell (1809)).
Shoshi Mohun Pal v. Nobo Krishto Poddar (1979) is a contract to the case cited
above. Here, the contract was for the sale of 975 maunds of rice at a certain price.
The defendants paid the money and agreed to remove the entire quantity after
weighing, before a certain date. While part delivery had taken place, the goods
were destroyed by fire. In a suit by the seller for the price, the Calcutta High
Court held that property had passed to the buyer since nothing remained to be
done by the seller for ascertaining the price and weighing was only for the buyer’s
satisfaction.
time, or if no time is fixed, after expiry of a reasonable time. Till the expiry of such
time the goods remain the property of the seller. To illustrate this principle we
have the popular case, viz., Elphick v. Barnes (1880). In this case, a horse was
delivered to the defendant on terms that he should try it for eight days and then
return it if he did not like it. The horse died on the third day without the fault of
the defendant. The seller could not recover the price from the defendant as the
horse, being still his property when it died.
Property will pass to the buyer if he fails to return the goods sent to him after Property will pass
to the buyer if he
expiry of specified time. Seller can then sue the buyer for price. Where no time is fails to return the
fixed the buyer must return the goods after reasonable time, or else, they become goods sent to him
the property of the buyer. What is reasonable time is a question of fact in each afte r ex pir y of
s pec ified t ime.
case. In Poole v. Smith’s Car Sales Ltd. (1962) the plaintiff delivered, in August, a Seller can then sue
secondhand car to the defendants on “sale or return.” No time was fixed for return the buyer for price.
of the car. It was not returned till October. Plaintiff subsequently wrote to the
defendant that if the car was not returned by Nov. 10, it would be deemed to have
been sold to them. Even so it was not returned till November end and that too in
a very bad condition, the car having been damaged by the defendant’s employees.
It was held that reasonable time did elapse between August and November and
the plaintiff was entitled to recover the price.
Subsequently the seller filled 16 more hogheads and informed the buyer who
promised to take them away, but before he could do so the goods were lost. It was
held that the property had passed to the buyer. There was clear appropriation of
goods when the seller filled up the 16 bags and the buyer promised to take delivery
of the 16 bags.
Another point that needs emphasis is that the appropriation must be
unconditional. It is unconditional when the seller does not resume himself the
right of disposal of the goods. The appropriation, as pointed out above, may be
done by the seller with the buyer’s assent. Such assent may be express or implied,
and may be given either before or after the appropriation is made.
Delivery of goods by seller to a common carrier is a mode of extending
unconditional appropriation to the goods (Sec.23(2)). But it is necessary that
delivery to the carrier must show to which particular buyer the goods are
appropriated, otherwise the property does not pass.
Transfer of Title
Where goods are Where goods are sold by a person who is not the owner thereof and who does
s old by a pers on not sell them under the authority or with the consent of the owner, the buyer
who is not the
owner thereof and acquires no better title than the seller had (Sec. 27). As a general rule, no one can
who does not sell sell the goods and give a good title thereof unless he is the owner thereof. This
them under the au- general rule is expressed by the maxim — Nemo dat quod non habet which means
thority or with the
c ons ent of the “no one can give that which he possesses not.” The seller cannot give to the buyer
owne r, the b uy er of the goods a better title to the goods than he himself has. The rule is the same,
acquires no better even if the sale is accompanied by a transfer of a bill of lading, delivery order,
title than the seller
had “no one c an warrant, or similar other documents. Such documents are not negotiable
give that which he instruments and their transfer does not guarantee better title to the buyer.
possesses not.”
Exceptions
There are eight important exceptions to the rule that no seller of goods can
give to the buyer a better title than himself, namely:
Module Six • Sale of Goods Act, 1930 215
1. Estoppel.
2. Sale be mercantile agent.
3. Sale by joint owner.
4. Sale by person in possession under voidable contract.
5. Seller in possession after sale.
6. Buyer in possession.
7. Sale by an unpaid seller.
8. Other exceptions (see Fig.) A brief explanation of each follows:
1. Estoppel (Sec. 27): Section 27 lays down that the owner of the goods is,
by his conduct, precluded from denying the seller’s authority to sell. For example,
where a person sells his mother’s goods in her presence and if she raises no
objection, she cannot subsequently be permitted to deny her son’s authority to
sell and the sale will be binding on her.
2. Sale by Mercantile Agent (Sec. 27, Proviso): A mercantile agent is an
agent who, in the customary course of his business, has authority to sell, consign,
or buy goods, or raise money on the security of goods.
If a mercantile agent is, with the consent of the owner, in possession of the If a merc an tile
agent is, with the
goods or of a document to title to the goods, then any sale made by him shall be c ons ent of the
binding on the owner (Sec.27(2)). This rule is, however, subject to the following owner, in posses-
conditions: sion of the goods or
of a doc ument to
(a) the agent is in possession of the goods or of the document of title to the title to the goods,
goods, then any sale made
by h im s hal l be
(b) he is in possession of the goods as mercantile agent with the consent of binding on the
the owner, owner.
(c) the agent sells the goods in the ordinary course of his business as
mercantile agent,
(d) the buyer acts in good faith, and
216 216 Legal Aspect of Business • Module Six
(e) the buyer has no notice, at the time of contract of sale, that the agent
has no authority to sell.
In Folks v. King (1923), Folks, the owner of a car, delivered it to A, a mercantile
agent for sale, stipulating that the car should not be sold for less than $ 575. The
mercantile agent, however, sold the car to the king for $ 340 and misappropriated
the amount. Folks could not recover his car from king who got a good title to the
car.
If the mercantile agent obtains possession of goods without the consent of
the owner, for example, by theft, the agent cannot give a good title to the goods. It
must be noted that a person who is merely in possession of goods will not become
a mercantile agent. Thus, a caretaker, a servant, a friend, a lawyer and a carrier
are not mercantile agents. Therefore, to constitute a mercantile agent, he must
not only be in possession of the goods or the documents of title to the goods, but
he must be in a such a possession as a mercantile agent with the consent of the
true owner of the goods and must be given authority to sell the goods in the
ordinary course, of his business as such agent.
3. Sale by a Joint Owner (Sec.28): This section lays down that “if one of
several joint owners of goods has the sole possession of them by permission of the
co-owners, the property in the goods is transferred to any person who buys them
of such joint owner in good faith and has not at any time of the contract of sale,
notice that the seller has no authority to sell.” Two conditions must be fulfilled for
Sec.28 to operate: (a) the buyer must buy goods in good faith, and (b) at the time
of the contract the buyer has no knowledge about the seller’s non-existent authority
to sell.
For example, A,B,C are three brothers. They own a cow in common. B & C
entrust the work of looking after the cow to A. A sells the cow to D. D Purchases
bonafide for value. D gets a good title.
4. Sale by Person in possession under voidable Contract (Sec 29): When
the seller has obtained possession of the goods under a contract which is voidable,
and if the contract has not been rescinded at the time of the sale the buyer acquires
a good title provided he buys goods in good faith, and without notice that the
seller’s title is defective.
The essentials for the application of this exceptions are:
(a) goods must have been obtained under a voidable contract as opposed to
a void contract.
(b) contract must have not been rescinded at the time of sale.
(c) buyer must buy goods in good faith, and
(d) at the time of sale the buyer must have no knowledge of seller’s defective
title to goods.
In Phillips V. Brooks (1919), a fraudulent person posed himself to be a
respectable person and obtained from a shopkeeper a valuable ring by issuing a
worthless cheque. Before the fraud could be discovered the rouge had pledged
the ring with a bonafide pledgee. It was held that the pledgee obtained a good
title.
5. Seller in Possession after Sale [Sec.30(i)] : Where a seller having sold
goods continues in possession of them, and sells them again to another person
the buyer gets a good title provided he receives them in good faith and without
notice of the previous sale.
Module Six • Sale of Goods Act, 1930 217
In order to enable the seller to pass a good title the following conditions must
be satisfied:
(a) the seller must continue in possession of the goods or of the documents of
title to the goods. Possession as a hirer of the goods from the buyer after the
delivery of the goods to him will not do.
In Staffs Motor Guarantee Ltd. V. British Wagon Co. Ltd. (1934), the owner of a
lorry sold it to the defendants and took it back on hire-purchase. He then resold
it to the plaintiffs. The later could not get a good title because the seller was not
in possession ‘as seller’ but as a bailee under a hire-purchase agreement.
(b) the goods must have been delivered to the buyer or the documents of title
must have been transferred to him. A mere agreement for sale, pledge or other
disposition will not do.
(c) good faith and absence of notice of the previous sale on the part of the
second buyer.
6. Buyer in Possession (Sec. 30(2)): This section deals with converse case
of sale or other disposition by the buyer of the goods in which the property has
not yet passed to him. The section says that if the buyer obtains possession of the
goods before the property in them has passed to him, with the consent of the
seller, he may sell pledge or otherwise dispose of the goods in good faith and
without notice of any lien or other right of the original seller in respect of the
goods, he will get a good title to them.
In Marten V. Whale ( 1917), the plaintiff agreed to buy a plot of land from one
T in return for a car subject to the condition that his solicitor approved the title to
the land. Before anything was done in this connection, the plaintiff gave possession
of his car to T who sold it to the defendant acquired a good title.
7. Sale by an Unpaid Seller (Sec. 54(3)): Where an unpaid Seller, who has
exercised his right of lien or stoppage in transit resells the goods the buyer acquires
a good title to the goods as against the original buyer.
8. Other Exceptions: The other exceptions to the general rule Nemo dat
quod non habet are:
(a) Sale by the finder of lost goods, Sec. 169 of the Contract Act.
(b) Sale by Pawnee, Sec. 176 of the Contract Act.
(c) Sale by an Official Receiver or Assignee according to the Civil Procedure
Code.
6.11 DELIVERY
Since delivery of goods is an important element in the performance of the
contract of sale, it is useful to discuss, in detail, the nature, mode, and rules of
delivery.
‘Delivery’, “means ‘Delivery’, according to Sec.2(2) of the Act “means voluntary transfer of
voluntary transfer of
pos s es s ion from
possession from one person to another.” Voluntary transfer is important and
one person to an- anything transferred by force, by theft, for example, does not constitute delivery.
other.”
Section 33 of the Act provides for the mode of delivery. To quote the Section,
“Delivery of goods sold may be made by doing anything which the parties agree
shall be treated as delivery or which has the effect of putting the goods in the
possession of the buyer or of any person authorised to hold them on his behalf.
Rules as to Delivery
“Apart from any ex- Rules regarding delivery are summarised below (see Fig. 6.6):
press contract, the
seller of goods is 1. Demand for Delivery: Though it is the duty of the seller to deliver the
not bound to deliver goods to the buyer, the seller is not bound to do so unless demanded by the
them until the buyer buyer. Sec.35, which is a reproduction of Sec.93 of the Contract Act, underlines
applies for delivery.”
this principle. The Section reads thus: “Apart from any express contract, the
seller of goods is not bound to deliver them until the buyer applies for delivery.”
The place at which
the deliv er y of 2. Place of Delivery (Sec.36 ( 1)]: The place at which the delivery of goods is
good s is to tak e
to take place must be stated in the contract. Where it is done, the goods must be
plac e m us t be
stated in the con- delivered at the place (stated in the contract) during business hours on a working
tract. day. Where there is no specific mention about the place, the goods must be
delivered at the place at which they are at the time of sale. In the case of an
agreement to sell, the goods are to be delivered at the place, where they are at the
time of the agreement, or the goods are not then in existence, at the place where
they are manufactured or produced.
Module Six • Sale of Goods Act, 1930 219
3. Time of Delivery (Sec.36(2)): If the seller is bound to send the goods as Seller is bound to
per the terms of the contract, but the contract does not contain any time, the send the goods as
per the terms of the
seller must send the goods within reasonable time. What is reasonable time is a c ontr ac t, but the
question of facts (Sec.63). If the seller fails to do so he shall be guilty of breach contract does not
even if the delivery is subsequently prevented by the intervention of war or some c ontain any time,
the s eller mus t
Government order. s end th e goods
4. Goods in Possession of a Third Party (Sec.36(4)): Where the goods are within reasonable
time.
in the possession of a third person, there is no delivery unless and until such
third person acknowledges to the buyer that he holds goods on his (buyer) behalf.
Once the third person does this, it amounts to delivery to the buyer, and, therefore,
the third person cannot afterwards refuse to deliver on the ground that the goods
have to be paid for or that the buyer has become insolvent.
5. Time for Tender of Delivery (Sec.36(4)): Goods sold must be demanded
by the buyer at reasonable hour. Similarly, the seller must tender them at a
reasonable hour. What is the reasonable hour is a question of fact.
6. Expenses of Delivery (Sec.36(5)): Expenses of and incidental to delivery
are, as a general rule, to be borne by the seller. The parties may, however, agree
otherwise.
7. Delivery of Wrong Quantity (Sec.37): Delivery of quantity will be wrong
when the quantity supplied is less than, more than stated quantity or when it is
mixed delivery.
(i) Delivery of Goods less than Contracted for (Sec.37(i)): “Where the seller
delivers to the buyer a quantity of goods less than he contracted to sell, the buyer
may reject them. But, if the buyer accepts the goods so delivered he shall pay for
them at the contract rate.”
For example, A agrees to sell and deliver to B 500 quintals of rice, but only
420 are delivered. B has the rice weighed and he accepts the quantity sent. B
cannot afterwards object that the whole of 500 quintals was not delivered, and he
must pay for the 420 quintals accepted by him at the contract rate.
(ii) Excess Delivery ( Sec.37(2 ) ): Where the seller delivers a quantity larger
than he contracted to sell, the buyer may accept the goods included in the contract
and reject the rest, or he may reject the whole lot. He is not bound to accept the
contract quantity and reject only the excess.
220 220 Legal Aspect of Business • Module Six
For example, A orders B two dozen bottles of wine. B sends five dozen. A is
entitled to reject the whole or he may accept two dozens and reject the rest. If he
accepts all the five dozens, he must pay for them at the contract price.
(iii) Mixed Delivery (Sec. 37(3)): Where the seller delivers the goods mixed
with the goods of a different description not included in the contract, the buyer
may reject the whole, or he may accept those goods which are in accordance with
the contract and reject the rest. In Ebrahim Dawood Ltd. v. Heath Ltd. (1961), the
sellers contracted to sell 50 tons of galvanised steel sheet “assorted over 6, 7, 8,
9 and 10 feet long.” The buyers paid the whole of the purchase price in advance.
The sellers, however, delivered the entire quantity in 6 feet lengths. The buyers
accepted only 1/5 of the consignment and sought to recover 4/5 of the purchase
price in respect of the balance. It was held that they were entitled to do so.
Sec.37(4) declares that the provisions of this section are subject to any usage
of trade, special agreement or course of dealing between the parties.
8. lnstalment Delivery (Sec.38): Unless otherwise agreed, the buyer of goods
is not bound to accept delivery thereof by instalments (Sec.38(i)). It follows,
therefore, that instalment deliveries can be made or demanded only if the contract
so provides. The contract to make instalment deliveries may be express or implied.
If the parties have agreed to deliver and accept goods in instalments and the
price to be paid in the same manner, the problem arises as to what should happen
if the seller fails to deliver an instalment and delivers defective goods in one
instalment or the buyer refuses to take or pay for an instalment? Sec.(38(2) provides
answer to the problem. To quote the section, “It is a question in each case,
depending on the terms of the contract and the circumstances of the case, whether
the breach of contract is a repudiation of the whole contract, or whether it is a
severable breach giving rise to a claim for compensation, but not to a right to
treat the whole contract as .repudiated.” Thus, the section leaves the whole matter
to be determined on the merits of each case.
Maple Flock Co. Ltd. v. Universal Furniture Products (Wembley) Ltd. ( 1933) is
a case which lays down definite principles on the above issue. The facts of the
case are -the sellers contracted to sell 100 tonnes of rag flock by instalments, at
the rate of three weekly instalments of one and a half tonnes each. The first 15
deliveries were satisfactory but the 16th instalment contained much more chlorine
than was permitted. The subsequent four deliveries were, however, satisfactory.
This showed that there was no probability of the default being repeated, yet the
buyers sought to repudiate the entire contract.
It was held that they were not entitled to do so. The court felt that two tests
are necessary to be applied in a situation such as the one contemplated in sub-
section (2). The first is “the ratio quantitatively which the breach bears to the
contract as a whole and secondly, the degree of probability or improbability that
such a breach will be repeated.”
9. Delivery to a Carrier or Wharfinger (Sec.39): Where the seller is
authorised or is required as per the term of the contract, to send the goods to the
buyer, delivery of goods to a carrier for the purpose of transmission to the buyer,
or to a wharfinger for safe custody, is prima facie deemed to be a delivery to the
buyer (Sec.39(i)).
It is also the duty of the seller, unless otherwise agreed to enter into suitable
agreement with the carrier or wharfinger on behalf of the buyer considering the
nature of the goods and other circumstances of the case. The purpose of this duty
Module Six • Sale of Goods Act, 1930 221
is to secure entitlement for the buyer to sue the carrier in case the goods are lost.
If the seller fails to make such a contract the buyer may refuse to treat the delivery
to the carrier as delivery to himself or may hold the seller liable for damages. In
Thomas Young & Sons Ltd. v. Hobson & Partner (1949), fourteen electric machines
were sold, which, it was agreed should be sent to the buyers by sail. The sellers
despatched them “at owner’s risk” and not “at company’s risk.” There was no
difference in the freight rates. The only difference was that before accepting at
“company’s risk” the company would have inspected their packing and required
the machines to be properly secured in the wagons. “At owner’s risk”, they did
not bother about these things. The machines were lying loose in the wagons and
shunting damaged them. It was held that the sellers had not secured a contract
which the nature of goods required them to do. The buyers could reject the goods
and were not bound to pay the price.
Where goods are sent by the seller to the buyer a route involving sea transit,
the seller shall give notice to the buyer to the effect as to enable him to insure the
goods during the sea transit. If the seller fails to do so, the goods shall be deemed
to be at his risk during such sea transit (Sec.39(3)).
10. Deterioration during Transit (Sec.40): “Where the seller of goods agrees
to deliver the goods at his own risk at a place other than that where they are
when sold, the buyer shall nevertheless, unless otherwise agreed, take any risk
of deterioration in the goods necessarily incidental to the course of transit.” For
example, A agrees to sell hoop iron to B to be sent from post X to post Y. The iron
is clean and bright when despatched, but is rusted to a certain extent before it
reaches post Y. The rusting is no more than what would necessarily occur in the
course of transit. The seller is not responsible if the iron becomes unmerchantable
to that extent.
The section also applies to animals sent for human food from one place to
another.
This rule is based on the: following passage in the judgment in Bull v. Robinson
(1854): “A manufactured article at a distant place, must indeed stand the risk of
any extraordinary or unusual deterioration, but the vendee is bound to accept
the article if only deteriorated to the extent that it is necessarily subject to in its
course of transit from one place to another.”
11. Buyers Right of Inspection (Sec.4I): Where goods are delivered to the
buyer which he has not previously examined, he is not deemed to have accepted
them unless and until he has had reasonable opportunity of examining them for
the purpose of ascertaining whether they are in conformity with the contract
(Sec.41(1)).
When the seller tenders delivery of goods to the buyer, he is bound, on request,
to afford the buyer a reasonable opportunity of examining the goods to ascertain
whether they are in conformity with the contract. This provision operates unless
otherwise agreed upon (Sec.41(2)).
12. Acceptance (Sec.42): A buyer is deemed to have accepted the goods in
the following circumstances:
(a) When he intimates to the seller that he has accepted the goods.
(b) 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 sellers.
(c) When, after the lapse of a reasonable time, he retains the goods without
intimating to the seller that he has rejected them.
222 222 Legal Aspect of Business • Module Six
In Hardy & Co. v. Hillerns & Fowler (1923), a quantity of wheat arrived on
c.i.f. terms. The buyers, without making proper inspection, resold various parcels
to sub-buyers. Three days later the buyers found that the wheat was not of contract
quality and therefore sought to reject it. But they were not allowed to do so.
13. Buyer not Bound to Retum Rejected Goods (Sec.43): Where a buyer
rejects goods as not being of the contract description, it is not his duty to send
them back to the seller; it is enough for him to give a clear notice that they are not
accepted, and then they are at the seller’s risk. He is not bound to take the
trouble of returning the goods and bear expenses incidental to it. It is the seller’s
business to take away the goods if he is so minded. This principle applies when
the rejection is rightful and there is no agreement to the contrary.
14. Buyer’s Liability for Refusal ( Sec.44 ): If the property in the goods
has passed to the buyer, he is liable to the seller for any loss occasioned by his
(buyer’s) refusal to take delivery of the goods. He is also liable to the seller for a
reasonable charge for the case and custody of the goods. Conversely, if the seller
delays delivery, and the buyer notwithstanding the delay accepts delivery, the
seller is liable for any loss occasioned by the delay.
Rights
1. to have delivery of the goods as per contract.
2. right to repudiate contract if the seller commits any breach.
3. to have reasonable opportunity to examine the goods.
4. to sue the seller for damages for non-delivery of the goods.
5. to recover price paid if the seller has failed to deliver the goods.
6. to sue the seller for specific performance of the contract.
7. to reject the goods.
8. to receive notice of insurance.
9. to sue the seller for damages for breach of warranty.
Duties
1. to pay for the goods and take delivery thereof.
2. to apply for the delivery of goods as the seller is not bound to deliver the
goods until the buyer applies for delivery.
3. to compensate the seller for any loss occasioned by his neglect or refusal
to take delivery of the goods and also for reasonable charge for care and
custody of the goods.
4. to accept instalment delivery of goods and pay for the same.
5. to accept risk of deterioration in course of transit.
6. to intimate the seller if the goods are rejected.
Rights
1. to receive the price of the goods.
2. to receive compensation or sue for damages for any loss occasioned by
neglect or refusal of the buyer to take delivery of the goods.
3. to receive reasonable charge for case and custody of the goods.
4. if he is an unpaid seller
(i) to exercise right of lien.
(ii) to exercise right of stoppage in transit.
(iii) to exercise right of resale.
5. to recover interest, from the buyer if there is a specific agreement to that
effect or charge interest on the price when it becomes due.
6. to sue for the price of the goods.
7. to sue for damages on buyer repudiating the contract.
Duties
1. to deliver the goods when the buyer demands.
2. to compensate the buyer for any breach of contract.
3. to give unreasonable opportunity to the buyer to examine the goods.
4. to refund price paid by the buyer in case he fails to deliver the goods.
5. to compensate the buyer in case of delivery of wrong quantity of goods.
The unpaid seller’s rights against goods can be studied under two headings,
viz., (a) where property in the goods has passed to the buyer, and (b) where the
property in the goods has not passed to the buyer.
Where property has passed, the seller’s rights against goods are:
(i) a lien on the goods for the price while he is in possession of them;
(ii) if the buyer becomes insolvent before payment, a right to stop the goods
in transit after he has parted with the possession of them;
(iii) a right of re-sale, which implies that he is in possession of goods.
(Sec.46(i))
The seller’s rights, where the property in the goods has not passed to the
buyer, are:
(i) Withholding delivery of the goods when they are in his possession.
(ii) Stoppage in transit when goods are not in his possession (Sec.46(2)) (see
Fig. 6.7)
These rights are elaborated in the paragraphs that follow:
(ii) The seller may exercise his right of lien notwithstanding that he is in
possession of the goods as agent or bailee for the buyer (Sec.47(2)).
(iii) The right of lien exists only for the price of the goods. The seller is not
entitled to lien for any other charges like storage, because the goods are
stored against the buyer’s will. For these charges the seller has only
personal remedy against the buyer.
(iv) Right of lien may be exercised even if the seller has delivered to the
buyer a part of the goods. Lien may be exercised on the remainder, unless
such part delivery has been made under such circumstances as to show
an agreement to waive the lien.
(v) If goods are, at the time of sale, in the custody of a third person, they are
considered to be in the seller’s possession for the purpose of his lien
until the third person attorms to the buyer and thereby becomes a bailee
for the buyer.
(vi) The unpaid seller of goods, having a lien thereon, does not lose his lien
by reason only that he has obtained a decree for the price of the goods.
(vii) Termination of lien:
The lien is lost in any of the following four cases:
(a) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the
goods. For example, in Valpy v. Gibson (1847), the goods sold were
This right consists
delivered to the buyer’s shipping agents who had put them on board a in s topping the
ship. But the goods were returned to sellers for repacking. While they good s while they
were still with the sellers on this mission the buyer became insolvent are in the posses-
sion of a carrier.
and the sellers, being still unpaid, claimed to retain the goods in exercise
of their right of lien. It was held that they were not entitled to do so.
(b) When the buyer or his agent lawfully obtains possession of the goods.
(c) By waiver thereof (Sec.49). The waiver may be express or implied. It is
express waiver if the seller shall not be entitled to retain possession
until payment of the price.
The lien is waived by implication:
(i) When goods have been sold on credit, during the currency of the credit,
but the lien revives on the expiry of the credit;
(ii) When the seller takes a bill for the price payable at a future day, during
the currency of the bill, but the lien revives if the bill is dishonoured;
(iii) If the seller assents to a sub-lease;
(iv) If the seller parts with the documents of title so as to exclude his title by
estoppel;
(v) If the seller wrongfully refuses to deliver the goods, such a refusal being
a repudiation of the contract;
(vi) By tender of price — ’when the buyer tenders price for the goods, the seller
ceases to be an unpaid seller and therefore loses the right of lien.
2. Right of Stoppage in Transit (Sec.50): This is the second right of an
unpaid seller. This right consists in stopping the goods while they are in the
possession of a carrier or lodged at any place in the course of transmission to the
buyer. The seller can resume possession of the goods and retain them until the
price is tendered or paid.
226 226 Legal Aspect of Business • Module Six
(vii) Where the goods have been delivered in part, the seller may stop
remainder of the goods unless such part delivery shows an agreement to
give up the possession of the whole.
seller has issued to the buyer documents of title to the goods and he had sold or
pledged the goods by transferring the documents of this.
In Ant. Jurgens Margarine Fabrieken v. Louis Dreyfus & Co. (1914), the
defendants sold 2,649 bags of mowva seed to one F & Co., from out of a
consignment of 6,400 bags and gave them delivery orders. F & Co., paid the
defendants by cheque for the price. F & Co. sold the goods to the plaintiffs by
endorsing to them the delivery orders. The cheque was dishonoured. Consequently
the defendants became unpaid sellers and claimed lien on the goods. It was held
that their lien on goods was lost when the delivery orders issued by them were
transferred to bona fide buyers for value.
Similarly, in G.T:P. Railway Co. v. Hanumandas (1889), goods were sent by
the seller to the buyer through the G. T.P. Railway Co. At the place of destination
the railway company delivered the goods to the buyer who had loaded them on
his cart. Before the cart left the station compound, the railway company received
a telegram from the seller to stop delivery, as the buyer had become insolvent.
The railway company did not act upon the telegram, and hence, was sued by the
seller in damages. Since the railway receipt was already transferred to the
defendant, it was held that the seller could not exercise the right of stoppage in
transit.
An u npaid s e ller 3. Right of Re-sale (Sec.54): An unpaid seller who has exercised his right of
who has exercised
his right of lien or
lien or stoppage in transit is also empowered to resell the goods. This right is
stoppage in transit known as right of ‘resale’ since the goods are already sold once and the property
is also empowered therein was also transferred.
to resell the goods.
Sec.54 lays down that the contract of sale is not rescinded when the seller
exercises his right of lien or stoppage in transit. In other words, the contract is
still in force and it is upto the buyer to claim delivery of the goods on tendering
the price. The property having passed to the buyer cannot be reverted to the
seller. At the same time the seller cannot wait indefinitely till the buyer tenders
the price. The seller is, therefore, given a limited right to resell the goods. The
right is applicable in two cases, namely:
(i) Where the goods are perishable in nature, the seller can resell them
without even giving notice to the buyer.
(ii) If the goods are not of perishable nature, and the buyer does not pay the
price within reasonable time, the seller can resell the goods.
It is, however, necessary for the seller to given notice of resale to the defaulting
buyer.
Where notice of resale is given, the unpaid seller can recover from the
defaulting buyer any loss occasioned by the resale. In case of profit the unpaid
seller can keep it with himself. Where notice of resale is not given, the loss caused
by resale shall be borne by the unpaid seller. At the same time any profit arising
out of resale goes to the defaulting buyer.
Where the property in the goods has not passed to the buyer, and the buyer
becomes insolvent before paying the price, the seller can have no such right as
lien because a man cannot have lien on his own goods. But he has the right to
withhold delivery of goods. This right is analogous to a lien, and is often called a
quasi-lien.
2. Right of Stoppage (Discussed earlier).
1. Damages for Non-delivery (See. 57): Where the seller wrongfully neglects Wher e the s e ller
wrongfully neglects
or refuses to deliver the goods to the buyer, he may sue the seller for damages for or refuses to deliver
non-delivery. The measure of damages will be on the following lines: the goods to the
buyer, he may sue
(a) Where there is an available market for the goods in question, the measure the s eller for da-
of damages is to be ascertained by the difference between the contract mages for non-de-
price and the market price on the date of the breach. livery.
(b) Where there is no such market, the measure of damages is the estimated
loss directly or indirectly resulting in the ordinary course of events from
the breach of the contract.
2. Remedy for Specific performance (Sec. 58): In any suit by the buyer for In any suit by the
breach of contract to deliver specific or ascertained goods the court may, on buyer for breach of
contract to deliver
application by the buyer, direct the seller to deliver the goods in terms of contract spec ific or as cer-
instead of permitting him to retain the goods on payment of damages. This remedy tain ed goods the
is allowed to the buyer subject to two conditions, namely — court may, on appli-
cation by the buyer,
(a) the contract must be for the sale of specific goods. direct the seller to
deliver the goods in
(b) the power of the court to order specific performance of the contract is terms of contract.
subject to the provisions of the Specific Relief Act, 1877. This Act
empowers the court, in its discretion, to order specific performance
whenever damages would not be an adequate remedy.
3. Remedy for Breach of Warranty (Sec. 59): Where the seller commits Wher e the s e ller
commits breach of
breach of a condition, the buyer is entitled to reject the goods and treat the contract a c o ndition, the
as repudiated. But where there is a breach of warranty or where the buyer elects buyer is entitled to
or is compelled to treat the breach of a condition as a breach of warranty, the reje c t the g oods
and treat the con-
buyer cannot reject the goods. He can set-up the breach of warranty in extinction tract as repudiated.
or diminution of the price payable by him and if the loss suffered by him is more
than the price, he may sue the seller for damages. If he has already paid the
price, his only remedy is an action for damages.
4. Repudiation of Contract: Repudiation of the contract by the seller before
the date of delivery entitles the buyer to treat the contract as rescinded and sue
the seller for damages.
5. Recovery of Interest (Sec. 61): This section gives a right to the buyer to
recover interest or special damages from the seller. The same remedy is available
for the unpaid seller too. One of the require-
ment s of s m ooth
functioning of sale
Some Observations on the Act and purchase is the
dete rminatio n of
It may be said to the credit of the Sale of Goods Act that it has been regulating the time when own-
the activities relating to sale and purchase of goods which are the very basis of ership over the sub-
business. One of the requirements of smooth functioning of sale and purchase is ject-matter of sale
pas s es from the
the determination of the time when ownership over the subject-matter of sale seller to the buyer.
passes from the seller to the buyer. The Act lays down elaborate guidelines to
determine the time of the transfer of property.
Secondly, the Sale of Goods Act has been protecting the interests of consumers Sale of Goods Act
was one legislation
by applying certain principles of implied conditions and warranties and imposing which was protect-
exceptions to the maxim caveat emptor. In fact, this was one legislation which ing consumer inter-
was protecting consumer interests by the MRTP Act and the Consumer Protection ests prior to enact-
ment of the MRTP
Act came into force. Act and the Con-
Having said these, let us point out certain anomalies of the Act. Sec. 62 of s ume r Protec tion
Act came into force.
the Act say that “where any right, duty or liability would arise under a contract of
232 232 Legal Aspect of Business • Module Six
QUESTIONS
B. Analytical Type
1. Distinguish between a sale and an agreement to sell, and a sale and a bailment.
2. Distinguish between a sale and a hire-purchase agreement.
3. Discuss the legal effect of destruction of goods.
4. What principle of sale of goods have you learnt from the famous case, namely, the
State of Gujrath V. Ramanlal & Co.?
5. X delivered on OX to Y on a trial basis for 8 days agreeing that if found suitable for
intending buyer’s purpose, the bargain then would be absolute. The OX died within 8
days without any fault of either party. Was it a valid contract of sale? Who will bear
the loss in such case?
6. Discuss the legal rules regarding implied conditions.
7. “Exceptions to caveat emptor are more prominent than the rule itself.” Comment.
8. Discuss the legal rules regarding implied warranties.
9. A hirer, who obtains possession of a car from its owner under a hire-purchase
agreement, sells the car to a buyer who buys in good faith and without notice of the
right of the owner. Does the buyer get a good title to the car? Discuss.
10. N agreed to buy rice from S on inspection. He accepted part delivery of the goods and
later refused to accept the remaining quality on the ground that the rice was of inferior
quality. Was N entitled to do that?
11. A seller undertakes to supply 1,000 tons of Java Sugar warranted equal only to the
sample. The sample when supplied corresponds to the sample but is not Java Sugar.
Has the buyer any remedy against the seller?
12. There is a contract between A and B for the supply for 1000 articles to be packed in
200 containers of five pieces each. But the seller sends 150 containers of eight pieces
each. What are the rights of the buyers?
13. “Determination of the time when ownership passes from seller to buyer is significant.”
Elucidate.
14. “Where the intention of seller and buyer is about the transfer of property is not clear
from their contract, the intention will be ascertained according to the rules laid down
in Sec. 18 and 20 to 24.” Discuss.
15. “There are eight exceptions to the rule that no seller of goods can give to the buyer a
better title than himself.” Discuss.
16. A agreed to purchase 200 tons of wheat from B out of a large stock. A sent his men
with sacks and 150 tonnes of wheat were put into the sack. Then there was a sudden
fire and the entire stock was gutted. Who will bear the loss and why?
234 234 Legal Aspect of Business • Module Six
17. There is a contract for the sale of timber standing at B’s land. It is the duty of the
buyer A to the timber and take it away in his own transport. After making the contract,
the standing timber, is destroyed by a sudden fire. Who will suffer the loss and why?
18. A hirer, who obtains possession of a car from its owner under a hire-purchase
agreement, sells the car to a buyer who buys in good faith and without notice of the
right of the owner. Does the buyer get a good title to the car? Discuss.
19. A and B jointly purchased a cycle for Rs.1500. It was agreed that each of them would
keep the cycle in his possession for a period of one month by rotation. While the cycle
was in possession of A, he without the consent of B, sold it to C who bought it in good
faith. Does C get a good title? Give reasons for your answer.
20. A finds a costly ring and after making reasonable efforts to discover the owner, sells it
to B, who buys without knowledge that A was merely a finder. Can the true owner
recover the ring from B?
21. “Delivery does not amount to acceptance of goods.” Discuss when a buyer can be said
to have accepted the goods.
22. What rights and liabilities flow in case of part-delivery of goods. Of wrong delivery of
goods?
23. What are the liabilities of the buyer for rejecting the goods or neglecting or refusing
delivery of goods?
24. X contracts with Y to buy 50 copies of Business Law authorised by A. Y supplies 25
copies of the book written by A, and 15 copies written by B and 10 copies written by
C. Advise X.
25. A of Bangalore orders certain goods from B of Mumbai. B sends the goods, not ordered,
along with them. What should A do?
26. X sells to Y 200 bags of cement which are locked up in a godown. X hands over to Y
the key of the godown. Is there delivery of goods?
27. “The unpaid seller has the right to retain the goods until tender or payment of price.”
Discuss.
28. Distinguish between the right of lien and the right of stoppage in transit.
29. A, an unpaid seller, sends goods to B by Railway. B becomes insolvent and A sends a
telegram to Railway authorities not to deliver goods to B. B goes to the Railway,
presents the Railway Receipt and takes delivery of the goods and starts putting them
on his cart. Meanwhile, the station master comes running with the telegram in hand
and takes possession of the goods from B. Discuss the rights of A and B to the goods
in possession of Railway authorities.
30. X sells goods to Y. Y pays X through a cheque. Before y could obtain delivery of goods,
the cheque has been dishonoured by the bank. X therefore, refuses to give delivery of
the goods until paid. Is X’s action justified?
31. A sells to B a quantity of sugar which is in A’s warehouse. It is agreed that B shall get
two months’ credit. B allows the sugar to remain in A’s warehouse. B becomes insolvent
before the expiry of the two months, and the official receiver demands delivery of the
sugar without offering to pay. What are the rights of A?
32. A consigns certain goods to B and sends him the bill of lading. a is still an unpaid
seller. While the goods are in transit B becomes insolvent. B assigns the bills of lading
for cash to C who is unaware of B’s insolvency. Can A stop the goods in transit?
33. Critically examine the operation of the Sale of Goods Act.
34. X, a dealer in cars, bought a second hand car for Rs.50,000 and agreed to sell it to Y
for Rs.60,000. On Y’s refusal to take delivery, X sold the car to Z for Rs.65,000 and
sought to recover Rs.l0,000 as damages from Y. Can X succeed?
C. Essay Type
1. What is contract of sale? Explain its essentials.
2. Explain, in detail, the implied conditions. What happens when any implied condition
is breached?
3. What is a warranty? Explain the implied warranties.
4. Explain the rules regarding transfer of property and of title to goods.
Module Six • Sale of Goods Act, 1930 235
Module Objectives
After reading this chapter, you should be able to
• Know the terms consumer, consumer dispute, defect and deficiency
• Understand all about District Forum, State Commission, and National
Commission
• Comprehend the treatment of complaint of goods and services
• Diagonise the leading consumer case laws of India, USA, UK and Australia
238 238 Legal Aspect of Business • Module Seven
7.1 INTRODUCTION
The population in our country is ever increasing. But goods and services are
lacking. The buyers in the sellers’ market have low bargaining power. A consumer
in India does not pursue his complaint against cheap quality and high priced
goods, because of more cost and time consuming court process.
The Government enacted a number of laws to protect the interest of the
It marks the growth
consumers. Some of the acts are: The Essential Commodities Act, Trade and
of consumer move- Merchandise Marks Act, Drug (Control) Act, Indian Standard Institution
ment in our country. (Certification Mark) Act, etc. But the sections of most of these laws are not directly
It has the law relat-
ing to c ons umer
helpful to a single consumer.
protec tion. It pro- Hence, the Consumer Protection Act 1986 was enacted by the Government.
v ides s imple,
s pee dy and les s
It marks the growth of consumer movement in our country. It has the law relating
expensive remedy to consumer protection. It provides simple, speedy and less expensive remedy to
to c ons umers ’ consumers’ grievance.
grievance.
Definitions
1. Consumer Section 2(1)(d)
“Consumer” means any person who —
(i) buys any goods for a consideration which has been paid or promised or
partly paid and partly promised, or under any system of deferred payment
and includes any user of such goods other than the person who buys
such goods for consideration paid or promised or partly paid or partly
promised, or under any system of deferred payment when such use is
made with the approval of such person, but does not include a person
who obtains such goods for resale or for any commercial purpose; or
(ii) hires or avails of any services for a consideration which has been paid or
promised or partly paid and partly promised, or under any system of
deferred payment and includes any beneficiary of such services other
than the person who ‘hires or avails of the services for consideration
Module Seven • Consumer Protection Act, 1986 239
paid or promised, or partly paid and partly promised, or under any system
of deferred payment, when such services are availed of with the approval
of the first mentioned person but does not include a person who avails of
such services for any commercial purposes.
2. Consumer dispute
It means a dispute, where the person against whom a complaint has been
made, denies or disputes the allegation contained in the complaint [Section 2(1)(e)].
3. Defect
Defect means any fault, imperfection (or) shortcoming in the quantity, quality,
purity and potency in the nature and performance of contract which are required
to be maintained under any law for the time being in force, under by contract,
express or implied. [Section 2(1)(f)]
4. Deficiency
It means any fault, imperfection, shortcoming or inadequacy in the quality,
nature and manner of performance, which is required to be maintained under
any law for the time being on force. [Section 2(1)(g)]
5. Service
It means service of any description which is made available to potential users.
It includes the provision of facilities like (a) banking, (b) financing, (c) insurance,
(d) transport, (e) processing, (f) supply of electrical and other energy, (g) boarding
or lodging or both, (h) house construction, (i) entertainment or supplying of news
or other information. [Section 2(1)(o)]
It excludes any service done free of charge or personal service.
Period of office: Every member of the district forum shall hold office for a
period of 5 years, and there shall be no re-appointment.
Terms of Service: The salary, and terms and conditions of the members
may be prescribed by the state government.
Jurisdiction (Section 11): Its jurisdiction is based on the amount of
compensation. This Forum will have jurisdiction when the amount of compensation
claimed is up to Rs.20 lakhs. The complaint must be given to that district forum
in the district in which opposite party (the person answering the complaint) has
the business or the branch office or works for gain.
Who shall give complaint (Section 12): A complaint may be filed with a
district forum by:
(a) the consumer to whom such goods are sold or service rendered.
(b) any recognised consumer association (i.e., consumer association
registered under Companies Act 1956).
(c) the Central or State Governments.
Section 14: It can issue an order to the opposite party on one or more of the
following steps:
1. to replace the goods with new goods.
2. to remove the defect in the goods or services pointed by the lab report.
3. to repay the price to the complainant.
242 242 Legal Aspect of Business • Module Seven
4. to pay compensation to the consumer for any loss suffered due to the
negligence of the opposite party.
5. to discontinue unfair trade practices.
6. to stop the sale of hazardous goods.
This order of the district forum shall be signed by its president and the
members who conducted the proceedings.
Any per s on ag- Appeal (Section 15): Any person aggrieved by the order of District Forum
grieved by the order
of Di s tric t F orum
can go for an appeal, against such order in the state commission with 30 days
can go for an ap- from the date of the order.
peal, against such
order in the s tate
commission with 30 CONSUMER DISPUTES REDRESSAL COMMISSION
days from the date (The State Commission)(Sect.16-19)
of the order.
Constitution: It is set up by the state government by notification.
Composition (Section 16): It shall have a president and 2 members one of
whom must be a woman.
Appointment: The president is appointed in consultation with the chief justice
of the High Court.
They are appointed by the state government on the recommendation of a
selection committee of 3 persons (composition of the selection committee is the
same as referred under District Forum).
Qualification: The president of the state commission must be a Judge of a
High Court, and he is appointed by the state government. The qualification of the
2 members is the same as in case of members of District Forum.
Period of office: Same as in case of District Forum.
Terms of service: It is also prescribed by the state government as in case of
District Forum.
Jurisdiction (Section 17): The jurisdiction of the state commission is limited
to the extent of compensation value of above Rs.5 lakhs and upto Rs.one crore
and appeals against the orders of any District Forum in the state.
Treatment of complaint: The rule of Section 12, 13 and 14 and procedure
explained under District Forum may be applicable to the state committee also.
Power: It has the powers of a civil court. It can call for the records and issue
an appropriate order in any consumer dispute pending before it and also the
disputes decided by any District Forum within the state. It can issue an order to
the opposite party directly to do one or more thing referred under Sect.14.
Appeal (Section 19): The aggrieved party can appeal against the order of the
state commission within 30 days from the date of the order in the National Commission.
This selection committee has one chairman, and 2 members. The chairman
is a judge of the supreme court (nominated by the chief justice of India) and one
member is the secretary in the Department of Law in the Government of India
and another member is the secretary of the Department of Consumer Affairs in
the Government of India.
Qualification: The president of the National Commission is the judge of the
Supreme Court and he is appointed by the central government and the other 4
members must have the ability and integrity and have enough knowledge and
experience in economics, commerce, accountancy, law, industry and public affair.
Period of office: Same as in case of state commission.
Terms of service: The salary and terms and conditions of the service of the
members of National Commission is prescribed by the Central Government.
Place of office: The office of this commission must be in the state of Delhi.
Jurisdiction (Section 21): Its jurisdiction is limited to the extent of
compensation value of above Rs.one crore and appeals against the orders of any
state commission.
Treatment of complaint: Is the same as in case of District Forum.
Power (in form of procedure) Section 22: It has the powers of a civil court.
It can call for the records and issue an appropriate order in any consumer dispute
pending before it and also on the disputes decided by any district commission
within the country. It can issue an order to the opposite party directly to do one
or more thing referred under Sect.14.
Appea l Section 23: Any person aggrieved by the order of National
Commission, may appeal against such order in the Supreme Court within 30
days from the date of the order.
facts of the case was that a Bank wrongly debited an amount of Rs. 75,30,352/
- in the account of the society, which alleged that the cheques bore forged
signatures and in some of the cheques the figures had been altered. As many
as 72 cheques were issued on such dates when one of the two persons
purportedly drawing the cheques was already dead. The other one denied his
signatures and such disputed signatures did not at all tally with the standard
specimen signatures. Suspicion was raised against an official of the Bank.
Since numerous documents including about 150 cheques were required to
be proved, the experts were to be requisitioned for proof of the signatures and
Cons ume r Forum writings where in the figure in cheques had been altered and also the matter
under the Act can- was to be examined within a set frame of time, the National Commission returned
not shut the orders
to t he aggri ev ed
the complaint to the society to knock the doors of Civil Court. Hence the Society
person merely on filed an appeal before the Hon'ble Supreme Court of India.
the ground that the
matt er requ ired
The Supreme Court by setting aside the order of the National Commission
scrutiny of volumi- and subsequently the case was referred back to the National Commission for
nous rec ords and hearing afresh. The Supreme Court held that forum under the Act cannot shut
examination of wit-
the orders to the aggrieved person merely on the ground that the matter required
nesses etc.
scrutiny of voluminous records and examination of witnesses etc.
Further SC noticed that the Fora under the Act are specifically empowered
to follow such procedure what may not require more time or delay the
proceedings.
"Merely because it is mentioned that the Commission or Forum is required
to have summary trial would hardly be a ground for directing the consumer to
approach the Civil Court." So observed by the Hon'ble Justice R.C. Lahoti of
Supreme Court of India while allowing the appeal filed by appellant society.
Case – 2
Indian Medical Association v. Santha
Thes erv ic es ren-
dered by medic al
Inclusion of 'Health' as a 'Service' within the purview of the Consumer
prac t itioner or at Protection Act, 1986 was taken up in a landslide case of Indian Medical
hospitals or nursing Association Vs. Santha , the Facts and Judgment of the case that the consumer
homes if are defi-
cient then such de-
Protection Act, 1986 or subsequent amendment carried out in it in 1993, did
ficiency has to be not incorporate 'health as a service within the purview of the Act. However,
judged by applying Supreme Court in Indian Medical Association v. Santha, held that remedy against
the test of reason-
able skill and care
medical malpractice or negligence is available under the Act to affected persons
which is applicable as consumers. The three judges bench of Kuldip Singh, Agarwal and Hansaria
in action for dam- JJ held that medical hospitals, government or private are covered by the main
ages for ne gli- part of the definition of 'service' subject to the exclusion of definition like 'free
gence.
of charge' and 'contract of personal service.' The learned judges said, that
services rendered by medical practitioner or at hospitals or nursing homes if
are deficient then such deficiency has to be judged by applying the test of
reasonable skill and care which is applicable in action for damages for negligence.
Though the decision is welcome one because of its new dimension given to
'health service' as came to be read in Consumer Protection Act, 1986, but at
the same time the exclusion of 'free service' and 'contract of personal service'
needs reconsideration.
Whatever was done by the apex court in Santha's Case was undone by it in
Achutrao Haribhau Khodwa v. State of Maharastra. The division bench comprising
S.P. Bharucha and B.N. Kripal JJ refused to hold either doctor or government
liable for a death caused due to negligence on the part of the doctor.
Module Seven • Consumer Protection Act, 1986 245
Case – 3
Achutrao Haribhau Khodwa Vs. State of Maharashtra
Death of a patient amounts to medical negligence where 'reasonable care' Death of a patient
amounts to medical
expected of from the doctor Achutrao Haribhau Khodwa Vs.State of Maharashtra. negligence where
The facts and judgment in the instant case was that a doctor left towel inside 'reas onable c are'
abdomen while conducting sterilization operation in hospital, which caused ex pe c ted of from
the doctor.
pus. By second operation performed by another surgeon to ascertain cause of
aliment the towel was removed but the patient died thereafter. The court held
that neither doctor nor government is liable unless it is proved that the death
was caused due to leaving towel inside the abdomen. It was again submitted
with great respect that leaving towel inside the abdomen was itself an act of
negligence on the part of a doctor concerned and which ultimately resulted in
causing pus. Therefore, the further inquiry sought by the judges whether death
was caused due to leaving towel inside abdomen was an unwarranted and
uncalled for.
Professional and particularly doctors have to perform their duties with
utmost care and caution. It is also not only a duty of care but 'reasonable care'
expected from doctor wherein in the instant case he was failed to take the
same. Therefore, liability ought to have been imposed on doctor/government
for negligent conduct, which ultimately cost patient's life.
Case – 4
Spring Meadows Hospital Vs. Harjot Ahluwalia
'Parents are Consumers.' This was articulated in a famous case of Spring 'Parents are Con-
Meadows Hospital Vs. Harjot Ahluwalia. The Supreme Court took a very sumers'
progressive and dynamic step in Spring Meadows Hospital v. Harjot Ahluwalia,
and held that when a young child was taken to a private hospital by parents
and treated by doctors, then not only child but his parents are also be treated
as 'consumers.' Hence, when child suffered damage due to the hospital, nurse
and doctor, both the child and parents could claim compensation under the
Consumer Protection Act, 1986. These cases display some dynamism on the
part of the judges to give 'live' interpretation to the Act to do justice to consumers.
Case – 5
Smt. Savita Garg v. Director, National Heart Institute
A More important case from the point of view of consumer is: Smt. Savita Non-Impleading of
Garg v. Director, National Heart Institute. Non-Impleading of Particular Doctor Particular Doctor
Would Not Absolve
Would Not Absolve the Hospital of Its Responsibilities Smt. Savita Garg v. Director,
the Hospital of Its
National Heart Institute In this case the wife, children and brother of A.K. Garg, Responsibilities.
the deceased, filed a consumer complaint against the National Heart Institute
alleging negligence and deficiency in service on part of the Institute and its
doctors who had been treating him in the Institute. This original complaint
was dismissed by the National Commission holding that it was not maintainable
since the doctors who treated him were not impleaded as party.
On an appeal before the Supreme Court the question was whether the
non-impleadment of the doctors who treated the deceased as a necessary party
could result in the dismissal of the original petition?
In a justice savvy tone the Supreme Court observed that the consumer
forum is primarily meant to provide better protection to the interests of the
246 246 Legal Aspect of Business • Module Seven
consumers and not to short-circuit the matter or to defeat the claim on technical
grounds.
The Supreme Court further held that, if the hospital failed to discharge its
duties through their doctors, it was the hospital which had to justify the same
and non-impleading of particular doctor would not absolve the hospital of its
responsibilities.
With these observations the order was set aside by the Supreme Court and
the original petition was remitted to the National Commission to be decided in
accordance with law.
The decision has not only lightened the burden of proof on the aggrieved
patients or their kin in case of medical negligence, but also has put the hospitals
on the alert to take better care of the patients through the doctors employed by
them.
A Sensational Judgment in medical negligence was pronounced on 6th
August 2004, by the Apex Court.
Case – 6
Dr. Suresh Gupta Vs. Government of NCT New Delhi and another
If a patient dies If a patient dies due to an error of judgment committed by the doctors,
due to an error of
judgment commit-
then he is not criminally liable though he could be held liable to pay damages
ted by the doctors, in Dr. Suresh Gupta Vs. Government of NCT New Delhi and another. The decision
then he is not crimi- came as relief for the entire medical fraternity, the Supreme Court ruled that if
nally liable though a patent dies due to an error of judgment committed by the doctors, then he is
he could be held li-
able to pay dam- not criminally liable though he could be held liable to pay damages. The facts of
ages the case is that on 18th April 2004, Dr. Suresh Gupta of Delhi had conducted
an operation to remove nasal deformity, but the patient died on the same day.
According to the post-mortem report conducted after three days, the cause of
the death was "Blockage of respiratory passage by aspirated blood consequent
upon surgically incised margin of nasal septum." The cause of action in this
case is that the prosecution laid against the surgeon was that there was
negligence in "not putting a cuffed endo-tracheal tube of proper size" and in a
manner so as to prevent aspiration of blood blocking the respiratory passage.
Thus Dr. Suresh Gupta was facing charges under Section 304A of the Indian
Penal Code for causing death of the Patient.
This judgment was given by a Bench comprising Justice Y.K.Sabharwal
and Justice D.M. Dharmadhikari while quashing criminal proceedings against
a plastic surgeon who faced trial of criminal changes for causing the death of a
person who had wanted to remove a minor deformity in his nose. Held that
"Where a patient's death results merely from error of judgment or an accident,
no criminal liability should be attached to it. Mere inadvertence or some degree
of want of adequate care and caution might create civil liability but would not
suffice to hold him criminally liable." For fixing criminal liability on a doctor or
surgeon, the court laid down that the standard of negligence required to be
proved should be as high as could be described as "gross negligence" or
"reckless."
This Judgment brought a great relief to Doctors. If the doctor had made
criminally liable in this case, then the doctors would be scared of taking the
cases, which will finally result in the death of poor patients in India.
Module Seven • Consumer Protection Act, 1986 247
Case – 7
Pravat Kumar Hospital and others v. Ruby General Hospital
Doctors cannot in-
Doctors cannot insist and wait for fees when death is knocking the doors of s is t and wait for
the patient as held in Pravat Kumar Hospital and others v. Ruby General Hospital. fees when death is
The case involves unfortunate death of a young boy, Sri Sumanta Mukhejee, a knocking the doors
student of second year B. Tech, Electrical Engineering, was seriously injured of the patient.
Case – 8
Secretary, Thirumurugan Co-operative Agriculture Credit Society v.
M.Lalitha(Dead) through her L.R. and Others.
Whether consumer has the option of seeking relief in the consumer forum/
the CPA Ac t at-
commission by avoiding the arbitration clause ? in a case of the Secretary, tempts to remov e
Thirumurugan Co-operative Agriculture Credit Society v. M.Lalitha(Dead) through the helplessness of
her L.R. and Others. The Facts and Judgment is that when a potential consumer a consumer which
he f ac es aga ins t
goes to buy some goods, he may be required to sign on an agreement paper in powerful, influential
which an arbitration clause is also appended. In case a dispute arise out of the and well-organised
transaction, whether he has the option of seeking relief in the Consumer Forum/ sectors of manufac-
turers and traders.
Commission by avoiding the arbitration clause.
Recently in Secretary Thirumurugan Co-operative Agriculture Credit Society v.
M.Lalitha(Dead) through L.R. and Others, the Apex Court gave the reasoning for
the non-ouster of jurisdiction of Consumer Disputers Redressal Agencies in spite
the presence of non-obstante clause in the Arbitration and Concilliation Act of
1996. It observed that the remedies that are available to an aggrieved party
under the CPA Act of 1986 are wider. For instance, in addition to granting a
specific relief the Forums under the Act of 1986 have jurisdiction to award
compensation for the mental agony, suffering, etc., which possibly could not be
given under other statutes. Confirming its decision in State of Karnataka v.
248 248 Legal Aspect of Business • Module Seven
Vishwabharathi House Building Coop Society and Ors, the SC opined that the
CPA Act attempts to remove the helplessness of a consumer which he faces against
powerful, influential and well-organised sectors of manufacturers and traders.
The forums under this benevolent legislation supplements and supplants
the jurisdiction of the civil courts or other statutory authorities, therefore, an
arbitration clause in a contract cannot debar an aggrieved consumer from
knocking the door of the District Forum or the State/National Commission as
the case may be and seek shelter under the Act enacted specially and exclusively
to protect him.
Case – 9
Unnikrishanan v. State of Andhra Pradesh
Education is not Commerce but inherent charity of this Nation —
Impa rting ed uc a-
tion has never been Accountability of Educational Institutions and the Consumer Protection Act,
treated as a trade 1986 was held in Unnikrishanan v. State of Andhra Pradesh. Imparting of
or business in this education is the nature of a mission or a noble vocation. A teacher educates
country since time
immemorial. It has children, he moulds their character, builds up their personality and makes
been treated as a them fit to become a reasonable citizen. Children grow under the care of
charitable activity. teachers, as held by the Supreme Court in Academy Educational Society v. Gorary
Kumar.
In Unnikrishanan v. State of Andhra Pradesh, the Supreme Court observed
that, Education has never been commerce in this country. Making it one is
opposed the ethos and traditions and sensibilities of this nation. The argument
to the contrary has an unholy ring to it. Imparting education has never been
treated as a trade or business in this country since time immemorial. It has
been treated as a charitable activity.
Case – 10
S. Somasundaram v. International Matriculation Academy, Tamil Nadu.
Parents of s chool Parents of school going children are consumers — says Supreme Court in
going children are S. Somasundaram v. International Matriculation Academy, Tamil Nadu. The
consumers. petitioner S. Somasundram had moved the State Forum alleging that his three-
and-a half year old daughter Brinda, who was admitted to the school in upper
kg, died after she had fallen down in an open septic tank near the toilet in the
school premises on 2nd December 1993, and claimed Rupees Five lakhs as
compensation from the school authorities. Describing the negligence of the
school authorities as 'shocking.'
The State Commission while holding the school responsible for deficiency
in service had awarded only Rs. 10,000 as compensation to be paid by the
school authorities to parents.
Aggrieved by the decision of the State Commission regarding low amount
of compensation the petitioner filed an appeal to the National Commission.
National commission in a landmark judgment allowing an appeal against
State Commission of Tamil Nadu, The National Commission held that "there
clearly has been deficiency in service. Further held that in the present case
there are two consumers, one the child and the other the parents. Not only the
child suffered, parents have suffered as well for loss and injury to the child.
They are entitled to damages and has directed a private school in Tamilnadu to
cough off about Rs. 2.9 lakhs as compensation for negligence which had resulted
in the death of three-and-half year old child in 1993.
Module Seven • Consumer Protection Act, 1986 249
Case – 11
Sumathidevi v. Union of India
Traveling on the train by the passengers, the Railway Authorities’ 11. Traveling on the
responsibilities exists right from boarding the train and alighting at the train by the passen-
gers , the Railway
destination by the passengers in Sumathidevi v. Union of India, the petitioner Authorities respon-
Sumati Devi M. Dhanwatay traveled by first class air-conditioned berth from sibilities exists right
Nagpur to Bombay by Hawrah-Bombay Mail on 4th December 1991. She was from boarding the
train and alighting
carrying her luggage which included gold, pearl, silver and diamond jewelery of the destination
and other valuables valued at Rs. 1,11,756. by the passengers.
While she was traveling, she was assaulted by some unauthorized
passengers and her valuables were taken away forcibly. Many people entered
into the compartment and assaulted the passengers, the crowd committed so
many other illegal acts of assaulting the bonafide passengers, they molested
the women and even raped the young girl passengers, Sumathi Devi pulled the
alarm chain thrice, as a result of which, the train stopped at Igatpuri station.
She, along with other bonafide passengers got down at that station. She
approached the railway authorities for protection but they did not get any
assistance. On reaching Bombay she lodged a complaint with the police about
the incident. She approached the consumer disputes redressal commission,
Maharastra State. By filing a complaint claiming compensation of Rs. 9,32,256
against the railway administration.
The State Commission, after considering the material that was placed before
it, allowed the claim of the appellant partly awarding total compensation of
Rs 1,41,756.
The Railway administration, not satisfied with the said order filed an appeal
before the National Consumer Disputes Redressal Commission, the National
Commission set aside the order made by the State Commission. Hence, the
petitioner filed this appeal in the Supreme Court contending that the Railway
administration failed to take precaution and preventive measures and there
had been a deficiency in service on the part of the railway administration.
Supreme Court held that, there is a breach of common law duty of
reasonable care, which lies upon all carriers including railways. The standard
of care must be high and strict. It is not a case where the omission on the part
of railway officials can be said to be wholly unforeseen or beyond their control.
This being the position, in our view, the impugned order passed by the
National Commission cannot be sustained. Accordingly the appeal was allowed.
Case – 12
R.P. Jain v. Sahara India Airlines
Chicken Curry Served to Vegetarian in R.P. Jain v. Sahara India Airlines.
By an oversight Chicken-curry was served to a vegetarian airlines passenger.
There was no complaint of vomiting or food poisoning. The Passenger contended
that his religious sentiment had been hurt. The opposite party Sahara Airlines
tendered apology. Since the mistake was not malicious and no physical injury
has been caused, no compensation was allowed to the passenger.
250 250 Legal Aspect of Business • Module Seven
Case – 13
Udayaram v. Rajasthan S.R.T. Corporation
Bus booked for marriage not reached in Udayaram v. Rajasthan S.R.T.
Corporation. The complainant booked a bus of the Opposite Party for carrying
marriage party. Advance of Rs. 3,000 had been paid. The bus did not reach and
the complainant had to book another bus by paying Rs.4100. For this marriage
a Brass Band had also been booked for Rs. 3000 for availability at the specified
time. The marriage programme was considerably delayed causing lot of loss
and embarrassment to complainant. The Opposite Party was directed by the
State Commission to pay compensation of Rs. 8000 apart from the refund of
Rs. 3000 paid as advance, to the complainant for deficiency in service. The
opposite party was free to recover Rs. 8000 from the employee guilty of the
default.
Case – 14
Pravath Kumar Mukharjee Vs. Ruby General Hospital and others
In an medial emer- "Can treatment be refused because an accident results in a medico-legal
gency or a critical case" — the National Commission, Mumbai says, "first treat then ask for fee" in
case, it is the im- Pravath Kumar Mukharjee Vs. Ruby General Hospital and others. On the judgment
plicit duty of a noble
profession to treat of the Supreme Court in the case of Paramanand Katara Vs. Union of India and
the injured person others, the National Commission held that preservation of Human Life is of
without waiting ei- paramount importance. Hence an injured citizen for medical treatment should
ther for consent or
for fees. The refusal be instantaneously given medical aid to preserve life. This is also in consonance
to giv e treatment with the provisions of the Code of Medical Ethics.
would even be vio-
lative of the provi- Can treatment be refused because of non-payment of fees ? the commission
sions of the Code of held that recovery of fees can wait but the treatment trying to save a life cannot
Medical Ethics and be delayed or neglected. A person who agrees to pay also enjoys the status of a
would constitute a
defic iency in s er-
Consumer. Besides, the Supreme Court has laid down that in a hospital which
vice. has two categories of patients — those who pay and those who are treated free
— the free patients also acquire the status of consumer because it is deemed
that their treatment is being met by the paying patients (Indian Medical
Association Vs. V.P. Shantha and others ).
This same analogy can be extended to emergency cases of critically injured
persons who cannot pay. Hence even in the absence of payment, the complainant
would be considered a 'consumer.'
Can a doctor refuse to treat in an emergency for want of consent ? The
Commission held that in an emergency or a critical case, it is the implicit duty
of a noble profession to treat the injured person without waiting either for consent
or for fees. The refusal to give treatment would even be violative of the provisions
of the Code of Medical Ethics and would constitute a deficiency in service.
Would the inevitable certainty of death be a factor for refusal to treat ? On
merits the hospital claimed there was no evidence suggest that the failure to
give treatment resulted in Kolkata Youth Sumantha Mukharjee's death. On the
contrary, in such a serious accident, death was inevitable, and the post mortem
established this fact. The commission disagreed with the hospital's stand, and
held that it was contrary to established principles of Medical Jurisprudence. It
observed that present day medical sciences believes in treatment till the last
breath and for some time thereafter by resuscitation. Doctors do not say that
as the death is inevitable they will stop treatment. Hence the imminent certainty
of death was irrelevant and of no help to the hospital.
Module Seven • Consumer Protection Act, 1986 251
Case – 15
New India Assurance Co.Ltd., v. Goel Exports
Issues within the knowledge of the Insurance Company before Insurance Issues w ithin
the knowledge of
and dispatch of Consignment : Repudiation wrong in New India Assurance the Ins urance
Co.Ltd., v. Goel Exports. Respondent lodged a claim for Rs. 1213600 which Company bef ore
was not settled by the petitioner. Respondent filed the complaint before State Insurance and dis-
patch of Cons ign-
Commission. After filing the complaint petitioner repudiated the claim on the ment : Repudiation
basis of exclusion clause of International Chamber of Commerce. Complaint wrong.
allowed.
Pre-dispatch investigation report clinches the issue and now the insurance
company can not raise issues of insufficiency nature of packaging. The
commission felt that there was deficiency of service by insurance company who
raised many contentions only after the damage occurred. Although all these
issues were within their knowledge before the consignment was insured and
dispatched under the above circumstances. The commission finds that
repudiation of the claim by the insurance company is not correct.
Case – 16
Gurudeep Kaur v. Body and Care, Bangalore
Consumer Forum pulls up firm for weight loss advertisements in Gurudeep Cons ume r forum
Kaur v. Body and Care, Bangalore. The petitioner Gurudeep Kaur of Rajaajinagar, pulls up firm for
weight loss adver-
Bangalore had approached body care on Sankey Road after seeing an tisements.
advertisement in News Paper, 'claimed to help loss of weight upto 20 kgs' in one
month. The firm also promised the complainant that she could lose 17 kgs without
any dieting and diet supplement without any side effect. After paying Rs. 10,000
the complainant was given a list of diet requirements and also was asked to walk
every day for an hour. She was even told to buy massage oil costing Rs. 550.
Before starting the programme on December 10, 2004 the complainant
weighed 73.4 kgs. Seven months later after nearly 70 sessions she had lost
only five kgs.
Responding to the complaint by Gurudeep Kaur, the third Addl. Bangalore
Urban District Consumer Disputes Redressal Forum said it is a great
disappointment for a person having paid the money to the firm and undergone
inconvenience of time and effort, while directing the respondent firm to refund
the entire programme amount along with Rs. 25,000 as litigation cost to the
victim. The forum observed, "advertisements are made to attract attention and
generally tend to exaggerate the products and promises which can mislead
people."
252 252 Legal Aspect of Business • Module Seven
Case – 17
Y.S. Varma Vs. Union of India
Frivolo us and
Frivolous and vexatious complaint — deserved award of costs under
vexatio us com- section 26 of Consumer Protection Act, 1986 in (a) Y.S. Varma Vs. Union of
plaint - deserved India. The complainant booked a telephone under Own-Your-Telephone (OYT)
award of costs un-
scheme by depositing Rs. 8,000. He filed a complaint alleging that no telephone
der s ec tion 26 of
Consumer Protec- connection was issued to him while others were given telephone connections.
tion Act, 1986 The allegations were found to be false and the complaint was found to be frivolous
and vexatious which resulted in harassment of the respondent. The complaint
was dismissed and the complainant was ordered to pay the Opposite Party the
cost of Rs. 500 within one month and in (b) Biharilal Thavait v. Doctor Prakash
Ladekar case, the complainant, Biharilal, who was a polio patient was operated
upon by the Opposite Party free of cost in November 1988 and the calipers and
walkers were also provided to him free of cost.
He filed a complaint in 1996 which was time barred and also alleged that
fraud had been committed by the Opposite Party. Since the treatment had been
done free of cost it was held that the question of fraud did not arise.
The complaint was held to be frivolous and vexatious and the costs under
section 26 deserved to be awarded. However, looking to the poverty and disability
of the complainant no costs were in fact awarded.
Case – 18
Life Insurance Corporation v. S. Hymavathi
The burden of proof Suppression of material facts in LIC policy — burden of proof vests on LIC
is not discharged by in Life Insurance Corporation v. S. Hymavathi.
the LIC, by proving
that the act of repu- If the LIC alleged that the policy holder made the statement fraudulently
diation of the policy that is knowing that the same was false and he deliberately concealed material
is n ot bonaf ide, facts, the burden of proof was on the LIC. The burden of proof is not discharged
there is no error of
law warranting in- by the LIC, by proving that the act of repudiation of the policy is not bonafide,
terference in exer- there is no error of law warranting interference in exercise of revisional
c ise of rev is ional jurisdiction.
jurisdiction.
Case – 19
Abbay Chemicals Pvt. Ltd. v. Kanti Bhai D. Patel
Purc hasing of a Purchasing of a machinery by a customer for commercial purposes can not
machi nery by a come under the purview of 'Consumer' as defined under Consumer Protection
customer for com- Act, 1986. Hence no compensation for defective machines purchased for
merc ial purpos es
can not come under
manufacturing activities in Abbay Chemicals Pvt. Ltd. v. Kanti Bhai D. Patel.
the purview of 'Con- In the present case, the National Commission held that no compensation could
sumer' as defined be awarded in respect of defects of a machine worth more than Rs. 10 lakhs,
under C ons umer
Prot ec tion Ac t,
purchased for use in large scale manufacturing activity, since the purchase
1986. would be for a commercial purpose and the buyer in such case would not be a
consumer under the Consumer Protection Act. Similar decision was given in
the case of Synco Textiles Pvt. Ltd. v. Greaves Cotton & Co. Ltd.
Module Seven • Consumer Protection Act, 1986 253
Case – 20
Y. N. Gupta v. DESU
Highly inflated electricity bills and defective electricity meter amounts to
willful and reckless deficiency of service was noticed in Y N Gupta v. DESU.
The Highly inflated electricity bills and defective electricity meter, the National
Commission, New Delhi considered a complaint regarding the inflated electricity High ly infl ated
elect ricity b ills
bills served by DESU on the complainant. In this case, DESU did not raise bills and defective elec-
in keeping with the cycle normally adopted. It also did not replace the defective tric ity meter
meter. However, it slapped the bill for over Rs. 1.06 lacs for a period from 21st amounts to willful
and reckless defi-
December, 1988 to 25th March, 1990. The power connection was also c ienc y of s erv ic e
disconnected but restored after making a complaint to the General Manager. was noticed.
The National Commission ruled that it was difficult to envisage a situation where
the consumer could have utilised over 1 lakh units of electricity and the expect
a poor consumer to pay bills of over a lakh. The National Commission ruled
that the bills were casually prepared. DESU did not have the authority to raise
bills upon a defective meter beyond six months under the Electricity Act, 1910.
In these circumstances, the National Commission concluded that there was
deficiency in services on the part of DESU and awarded a compensation of
Rs.30000 and costs of Rs. 5,000.
Case – 21
P. Goel v. Collector of Stamps
Government servants not doing any service for consideration but a
Government ser-
statutory function in P. Goel v. Collector of Stamps. In the above case, it was vants not doing any
held that a government official does not render any service in the course of serv ice for cons i-
doing his statutory duties. Hence, no remedy can be granted under the CPA. In deration but a statu-
tory function.
this case, the complainant presented before the Sub-Registrar a document
claiming it to be a will for registration. The Sub-registrar did not register the
document claiming it to be a deed of conveyance and hence not adequately
stamped. He impounded the document and sent it to the Collector of Stamps
for action. Despite several notices issued to him by the Collector, the appellant
did not appear before him. When the appellant appeared before the Collector
he was asked to furnish certain other documents. In the meantime, however,
the appellant filed a complaint before the District Forum under the Consumer
Protection Act alleging harassment by the Sub-Registrar and Collector and had
prayed for compensation being awarded to him.
The District Forum held the view that the appellant having paid registration
fees, he shall be treated to have hired the services of the Sub-Registrar and the
Collector and since the Collector had not taken any decision as to the nature of
the document for about six years, allowed compensation to be paid to the
complainant.
On appeal by the Collector, the State Commission, upheld the order of the
District Forum and enhanced the compensation to Rs. 5,000.
On the revision petition filed by the Collector, the National Commission
held the view that the appellant was not a "consumer" under the CPA. because
there was no hiring of services by the complainant for consideration and because
a government official doing his duty as functionary of the State under law could
not be said to be rendering a service to the complainant. It stated that assuming
the Collector was discharging a service, he was doing the same as a functionary
254 254 Legal Aspect of Business • Module Seven
of the Government under the authority of the statute and for the benefit of the
revenue for which he was being paid by the Government and not by the
complainant.
The Supreme Court upheld the order of the National Commission on appeal.
Case – 22
Consumer Protection Act, 1986 in J.K. Puri Engineers v. Mohan
Breweries & Distilleries Ltd.
Mainten ance of Maintenance of Guest house - Not for commercial purpose - Service rendered
Guest house – Not by the Air Conditioning Company falls under the scope of Consumer Protection
for commercial pur- Act, 1986 in J.K. Puri Engineers v. Mohan Breweries & Distilleries Ltd. In
pose – Service ren-
dere d by the Air the instant case, it was held that a guest house maintained for company officials
Conditioning Com- is not for commercial purposes and hence benefit under the CPA can be availed
pany falls under the of.: The company maintained a guest house for use of its managing director
s c ope of Co n-
sumer Protection and other executives. It entered into a contract with the appellants for the
Act, 1986. installation of a central air-conditioning system. The company alleged that the
system installed did not properly, developed snags, and that there was leakage
of water from the ducting system. The appellant having failed to make good the
defects, the complainant appointed a consultant and obtained from him a report
on the working of the system which pointed out a number of defects. The State
Commission held that the complainant was a consumer under the CPA and
that the air-conditioning system had not been installed for a commercial purpose
because the guest house was not maintained for a commercial purpose. The
National Commission upheld the decision of the State Commission.
Case – 23
S.P. Dhavaskar v. Housing Commissioner, Karnataka Housing Board &
Vice Versa
Failure to deliver Failure to deliver houses by the housing board is deficiency in service in
hous es by the S.P. Dhavaskar v. Housing Commissioner, Karnataka Housing Board & Vice
hous ing boar d is Versa. In the above case, the complainant had made a deposit of Rs. 1.66
defic iency in s er-
vice. lakhs with the Housing Board for a house proposed to be built by the Board. He
was told that the construction be completed within two years from March, 1987.
In March, 1992 he was informed that the construction was not upto the expected
level because of the use of low cost technology and that the houses constructed
developed distress and might not long and suggested that the complainant might
take back the amount of deposit without interest or opt for a new house in lieu
of the house already allotted. The complainant made a claim of Rs. 4.65 lakhs
which was rejected. The State Commission held that the act of the Housing
Board amounted to a deficiency in service and returning deposit amount without
interest was unreasonable and ordered payment of interest at 18% p.a. In appeal,
the National Commission upheld the order of the State Commission.
Case – 24
Sashikant Krishnaji Dole v Shikshan Prasarak Mandali
Failure to provide Failure to provide basic safeguards in the swimming pool amounted to
basic safeguards in deficiency in service. Sashikant Krishnaji Dole v Shikshan Prasarak Mandali.
the swimming pool
amounted to defi- The National commission held that failure to provide basic safeguards in the
ciency in service. swimming pool amounts to deficiency in service. A school owned a swimming
pool and offered swimming facilities to the public on payment of a fee. The
Module Seven • Consumer Protection Act, 1986 255
school conducted winter and summer training camps to train boys in swimming
and for this purpose engaged a trainer/coach. The complainants had enrolled
their only son for learning swimming under the guidance of the coach. It was
alleged that due to the negligence of the coach, the boy drowned and died. The
school denied any responsibility on its part. The coach claimed that he had
considerable experience in coaching young boys in swimming. When the
deceased was found to have been drowned, the coach immediately took him
out of the water and removed the water from his stomach and gave him artificial
respiration and thereafter took him to a doctor. The doctor advised that the boy
be taken to the nearest hospital where the boy died. The State Commission
held the school and the coach deficient in rendering service to the deceased.
On appeal, the order was upheld by the National Commission.
Case – 25
Indian Airlines v. Dr. Jiteswar Ahir
Removal of ladder of an aircraft while disembarking by the passenger Removal of ladder
amounts to deficiency in service. Station Manager in Indian Airlines v. Dr. of an aircraft while
dis e mbark in g by
Jiteswar Ahir. The National Commission held that removal of ladder while a the pas s enger
passenger was disembarking, leading to injury to the passenger amounted to amou nts to d efi-
deficiency in service. The complainant after he was seated on the plane, was ciency in service.
intimated by announcement that part of his luggage was lying on the ground
unidentified. He moved towards the door and finding that the ladder was in
place, tried to get down. But before he could get his entire body on the ladder,
the ladder was moved as a result of which of which he fell to the ground and
sustained injuries. The passenger demanded compensation of Rs. 10 lakhs
from the Airline. The Airline was willing to pay Rs. 40000/- which was the
maximum amount payable under the Carriage by Air Act, 1972. The State
Commission ordered a compensation of Rs. 4 lakhs and Rs. 1 lakh for mental
agony and distress plus costs. The order of the State Commission was upheld
by the National Commission.
Case – 26
Poonam Verma v. Ashwin Patel
Homeopathic Doc-
Homeopathic Doctor is restrained from treating the patient with Allopathic
tor is res tra ined
Medicines in Poonam Verma v. Ashwin Patel. It was held that a doctor qualified from treating the
under the homeopathic system of medicines treats a patient with allopathic patient w ith Allo-
medicines, he is guilt of negligence and compensation is due if the patient dies pathic Medicines.
on such account.
Case – 27
Union of India v. Nathmal Hansaria
Passenger Passing through the different interconnected compartments of
a train falls due to deficiency in providing a error free intercepting plate in Passenger Pass-
ing through the dif-
Union of India v. Nathmal Hansaria, in this case, the deceased while traveling fere nt inter c on-
from Delhi to Gohati was going from one compartment to other through nec t ed c omp art-
interconnecting passage. The passage being unfenced, she fell down from the ments of a train falls
due to deficiency in
train and died by being run over by the train. It was held to be deficiency in prov i ding a e rror
service on the part of the Railways. The parents of the deceased girl were awarded free interc ep ting
compensation of Rs. 2,25,000/-. plate.
256 256 Legal Aspect of Business • Module Seven
Case – 1
Macperson v. Buick Motor Co.
A car manufacturer
A car manufacturer had to compensate a consumer who had been injured
had to compensate
a c ons u mer who when one of the car wheels collapsed because of a defect. The liability was fixed
had been inj ured in Macperson v. Buick Motor Co. case. In New York Court of Appeal, it was
when one of the car held that a car manufacturer had to compensate a consumer who had been
wheels c ollaps ed
becaus e of a de- injured when one of the car wheels collapsed because of a defect.
fec t. The liab ility The Court held that the manufacturer had been negligent because the
was fixed.
defect could have been discovered by reasonable inspection.
This decision helped in bringing out manufacturer's liability to compensate
injured consumers and to try to encourage manufacturers to take steps to
prevent defective products getting into market.
Case – 2
Tesco Stores Ltd. v. Pollard
Pers onal In jury Personal Injury Arising Out Of Dishwasher Powder from a Plastic Bottle —
Aris ing O ut O f Negligence of Service was held in Tesco Stores Ltd. v. Pollard. The appellants
Dishwasher Powder
from a Plas tic (T) appealed against a decision granting judgment in favour of the respondent
Bottle – Negligence (C) in a personal injury action. C, who was 13 months old at the time, was
of Service. injured when he ingested dishwasher powder from a plastic bottle. The powder
had been purchased from the first appellant, but the bottle had been
manufactured by the second appellant. The claim against T was that the bottle
and cap had been defective so that the cap was easier to detach than it should
have been. The cap was a child resistant closure (CRC) cap. T joined C's mother
(P) to the action on the basis of their claim that she had left the bottle in a place
where C could see and reach it, and had left the cap off or not properly screwed
up. The judge found T liable and acquitted P of any negligence.
Allowing the appeal and dismissing the cross appeal, that (1) this was a
case of breach of statutory duty or nothing. One aspect of the factual scenario
which, having exonerated P, the judge accepted, was that it was surely not
reasonably foreseeable that this injury would happen as he found it did. In a
case such as the instant, any calculation of foreseability had to assume that
the child's parents would take steps in the home to prevent the child having
access to the bottle. Every case must be judged by the colour of its own facts
and, in the instant case, foreseability could not be got out of the fact that it
Module Seven • Consumer Protection Act, 1986 257
proved possible for C to open the bottle coupled with the fact that the British
Standard certificate was not met. Accordingly, the case turned upon whether
there was a breach of the 1987 Act. (2) The test as to whether a product had a
defect under the 1987 Act was what persons generally were entitled to expect.
Persons were generally entitled to expect that the bottle in the instant case
would be more difficult to open than if it had an ordinary screwtop. Anything
more specific, as a test of public expectation, ran into difficulties. The bottle
was more difficult to open than an ordinary screw top, though not as difficult
as it would have been if the British Standard torque measure had been complied
with. Thus, there was no breach of the 1987 Act.
Case – 3
Marianne T. CAULFIELD, et al., Appellants v. Howard A. STARK, M.D., et
al., Appellees
Claims for Fraud, Unlawful Trade Practices to Perform Colonoscopy was
held in Marianne T. CAULFIELD, et al., Appellants v. Howard A. STARK,
M.D., et al., Appellees. The Patient brought action against gastroenterologist
and employer to recover for negligence, fraudulent misrepresentation, and
unlawful trade practices in connection with failure to perform colonoscopy and
detect colon cancer. The Superior Court, District of Columbia, Anna Blackburne-
Rigsby, J., granted defendants' motion for judgment as a matter of law (JMOL)
on claims for fraud, unlawful trade practices, and punitive damages and entered Claims for Fraud,
judgment on jury verdict for defendants on negligence claim. Patient appealed. Unlawfu l Trade
Prac tic es to Per-
The Court of Appeals, Ferren, Senior Judge, held that: form Colonoscopy.
• gastroenterologist did not engage in fraud;
• performance of medical services is a "trade practice" under the Consumer
Protection Procedures Act (CPPA);
• with respect to some alleged misrepresentations, patient could not
recover damages for personal injury under former version of CPPA;
• gastroenterologist did not violate CPPA with regard to code and diarrhea
diagnosis on billing form; and
• patient could not recover punitive damages.
Appeal allowed.
Case – 4
National City Home Loan Services, Inc. ("National"), Jr. Creditor v. In re
Thaddeus Rudolph JONES, Jr. Debtor.
Bankruptcy Abuse Prevention and order in favour of Judgment Creditor Bankruptcy, Abuse,
Prevention and or-
was held in National City Home Loan Services, Inc. ("National"), Jr. Creditor der in fav ou r of
v. In re Thaddeus Rudolph JONES, Jr. Debtor. Repeat Chapter 13 filer brought Judgment Creditor.
adversary proceeding for determination that, under provision of the Bankruptcy,
Abuse, Prevention and Consumer Protection Act (BAPCPA) purporting to limit
duration of automatic stay in successive bankruptcy cases commenced by certain
repeat filers, stay terminated 30 days after petition date only as to actions
against debtor, and not as to actions against debtor's property or property of
the estate.
The Bankruptcy Court, A. Thomas Small, J., held that phrase "with respect
to the debtor," as used in section of the Bankruptcy, Abuse, Prevention and
Consumer Protection Act (BAPCPA) providing that, 30 days after commencement
258 258 Legal Aspect of Business • Module Seven
Case – 5
Myracle, Deceased, Appellant, v. Gary McMICKLE, Individually and d/b/a
Creative Capital, Inc., McMickle Associates, Inc., and Creative Capital,
Inc., Appellees
Medic al Malprac - Medical Malpractice, Violations of Deceptive Trade Practices—Consumer
tice, Violations of Protection Act (DTPA). In Myracle, Deceased, Appellant, v. Gary McMICKLE,
Dec e ptiv e T rade
Prac tic es–C on- Individually and d/b/a Creative Capital, Inc., McMickle Associates, Inc.,
s ume r Protec tion and Creative Capital, Inc., Appellees Decedent's estate sued attorney who
Act (DTPA). had represented decedent in settlement of medical malpractice action, and
annuity broker, alleging negligence, breach of fiduciary duty, violations of
Deceptive Trade Practices—Consumer Protection Act (DTPA), and fraud, relating
to purchase, with portion of settlement proceeds, of deferred, life-only annuity
without guaranteed refund of premium. The County Court at Law No. 1, Wichita
County, David Cleveland, J., granted summary judgment to annuity broker
and later granted broker's motion to sever. Estate appealed.
The Court of Appeals, Dixon W. Holman, J., held that:
• annuity broker did not have duty of care to minor's mother, as minor's
ne x t fr ie nd , be c a use mot he r h a d b e e n re pl a ce d a s p e rso na l
representative by guardian ad litem, and
• evidence did not show false representation.
Affirmed / Appeal Allowed
Case – 6
Melrose Hotel Company, Plaintiff, v. ST. Paul Fire And Marine Insurance
Company
Commerc ial G en- Commercial General Liability of the Insurer under Telephone Consumer
eral Liability of the Protection Act. In Melrose Hotel Company, Plaintiff, v. ST. Paul Fire And
Insurer under Tele-
phone C ons umer Marine Insurance Company, Defendant Insured hotel company brought state-
Protection Act. court action seeking declaration that commercial general liability (CGL) insurer
had duty to defend and indemnify insured against class action brought under
Telephone Consumer Protection Act (TCPA) by recipients of insured's mass
facsimile advertisements. Insurer removed action on basis of diversity, and
parties cross-moved for summary judgment.
The District Court, Schiller, J., held that:
• insured's alleged violation of TCPA was outside "right to privacy" clause
of CGL policy's advertising injury coverage;
• recipients' complaint against insured alleged "property damage"
potentially within CGL coverage; but
• property damage alleged was not result of accident and thus was outside
CGL policy's property damage coverage provision; and
• CGL policy's "expected or intended" exclusion also applied.
Insurer's motion granted.
Module Seven • Consumer Protection Act, 1986 259
Case – 7
Power & Telephone Supply Company, Inc., Plaintiff-Appellant, v.
Suntrust Banks, INC.; SunTrust Bank; SunTrust Bank--Atlanta;
SunTrust Bank — Nashville, N.A.; SunTrust Equitable Securities
Corporation; SunTrust Capital Markets, Inc., Defendants-Appellees.
"swap" Agreements and Variable Interest Rates Power & Telephone Supply
Company, Inc., Plaintiff-Appellant, v. Suntrust Banks, INC.; SunTrust Bank;
SunTrust Bank—Atlanta; SunTrust Bank— Nashville, N.A.; SunTrust Equitable
Securities Corporation; SunTrust Capital Markets, Inc., Defendants-Appellees.
Commercial borrower brought action against financial services companies to
recover $6 million in costs incurred under two derivative interest rate "swap"
agreements which were to act as hedge against increases in variable interest
rate on its syndicated lines of credit. Defendants counterclaimed seeking
indemnification for attorney fees and costs incurred in defending action. The
United States District Court for the Western District of Tennessee, Jon Phipps
McCalla, J., 2005 WL 1329851, granted judgment for defendants. Borrower
appealed.
The Court of Appeals, Ralph B. Guy, Jr., Circuit Judge, held that:
• borrower could not wait to file suit under Tennessee Consumer
Protection Act (TCPA) until after all of injurious effects or specific type
of legal claim were known;
• representations made to induce borrower to work with companies
generally were not fraudulent;
• c om pa ni e s di d no t o we b or ro we r l e g a l d u ty t o a d v is e it o n
appropriateness of interest rate swap transactions;
• commitment letter's attorney fees provision applied to litigation
associated with credit agreement;
• indemnity clause in commitment letter was not superseded by allegedly
narrower indemnity clause found in restated credit agreement; and
• companies were collectively entitled to single recovery from commercial
borrower of total reasonable attorney fees and costs incurred.
Affirmed / Appeal Allowed.
In America, it is not the question of protecting Consumer rights and interests
that matter, what really happening in that country is the concept of self
regulation by the organizations supplying goods or rendering services. The
organizations adopts the famous adage that is prevention is better than cure.
In that the corporates take all proactive measures to restrain the consumer in
approaching the Hon'ble Court. Approaching the courts in America by the
consumer and the subsequent verdict by the courts will prove to be a costly
affair for the corporates. This speaks of the regulation and protection given to
the consumers in USA.
260 260 Legal Aspect of Business • Module Seven
Case – 1
Donoughue v. Stevenson
In Donoughue v. Stevenson the first leading case of this world relating to
consumer rights came before the court of England in the year 1932 in an
interesting way. In this case a person went to a restaurant with a women
friend and bought one bottle of ginger-beer manufactured by the defendants.
The women consumed part of the contents but when the remainder was poured
into the tumbler the decomposed body of a snail floated out of the ginger-beer.
The ginger-beer bottle being opaque and sealed, the presence of snail could not
have been observed earlier.
The women brought an action against the manufacturer for negligence and alleged
that by taking a part of the contaminated drink, she had contracted serious illness.
The House of Lords held that the manufacturer owed her a duty to take
care that the bottle did not contain noxious matter injurious to health. The
court said that every manufacturer owes a duty towards every ultimate
consumer, of its product even though there is no contract between them.
Case – 2
R v. Birmingham City Council, ex parte Ferrero Ltd.
R v. Birmingham City Council, ex parte Ferrero Ltd. The respondents
manufactured chocolate eggs, each of which contained a plastic capsule which
Every manufacturer
owes a duty to-
itself contained a kit which could be assembled to make a small toy representing
wards ev ery u lti- well-known cartoon characters, one of which was known as the 'Pink Panther.'
mate consumer, of In October 1989 a little girl accidentally swallowed part of a 'Pink Panther' toy
its produc t ev en
though there is no
and died from asphyxiation as a result. The appellant local authority, through
c ontrac t between its trading standards officer, issued a suspension notice under s 14a of the
them. Consumer Protection Act, 1987 prohibiting the supply of eggs containing the
'Pink Panther' toy for a period of six months. Despite attempts by the
respondents to persuade it to do so, coupled with offers of undertakings, the
local authority declined to withdraw it, contending, inter alia, that the council
had acted unfairly in failing to consult them before issuing the suspension
notice. The judge granted the relief sought. The local authority appealed,
contending, inter alia,
(1) that the judge had erred in entertaining the respondents' application
The Act aimed at and granting the relief sought when they had a statutory right of appeal under
withholding goods Section 15b of the 1987 Act, which provided that a person having an interest
from the public if in any goods in respect of which a suspension notice was in force could apply to
there was reason-
able suspicion that a magistrates' court for an order for setting aside the notice, and
they were uns afe (2) that the local authority had not acted unfairly in failing to consult the
and that the s us -
pension prohibiting respondents before issuing the notice.
supply was to re- The Court of Appeal, Civil Division Bench held, where there was an
main in force until
the goo ds were alternative remedy and especially where Parliament had provided a statutory
cleared of danger appeal procedure it was only exceptionally that judicial review would be granted.
even if the process In determining whether an exception should be made and judicial review granted
by w hic h the en-
forcement authority
it was necessary for the court to look carefully at the suitability of the statutory
reached its flawed. appeal in the context of the particular case.
Module Seven • Consumer Protection Act, 1986 261
It further held that, the statutory emphasis under the 1987 Act was on
consumer safety, that the Act aimed at withholding goods from the public if
there was reasonable suspicion that they were unsafe and that the suspension
prohibiting supply was to remain in force until the goods were cleared of danger
even if the process by which the enforcement authority reached its flawed.
The respondents should have been left to pursue their appeal under 15 of
Consumer Protection Act, 1987. The local authority's appeal would therefore
be allowed and the judge's decision to grant judicial review reversed.
Case – 3
R v. Secretary of State for Health, exparte US Tobacco International Inc.
R v. Secretary of State for Health, exparte US Tobacco International Inc
In 1984 the applicants, a United States corporation which imported oral snuff There was a causal
products into the United Kingdoms, were encouraged by the Department of link between snuff
Trade and Industry to set up a manufacturing plant in the United Kingdom and and oral c an c er,
whic h caus ed the
were provided with government incentive grants to build a factory in Scotland. government to ne-
The factory commenced operation in 1985 and the applicants become the sole gotia te v olun tary
manufacturer in the United Kingdom of oral snuff products. However, in January agreements with
1986 a committee of experts set up to advise the government on the the applicants not
to market oral snuff
carcinogenicity of chemicals in food, consumer products and the environment to persons under 18
reported that there was a causal link between snuff and oral cancer, which and to publi s h a
caused the government to negotiate voluntary agreements with the applicants health warning on
their product.
not to market oral snuff to persons under 18 and to publish a health warning
on their product.
On 17th June 1986 the committee advised the government to ban oral
snuff and on 26th February 1988 the Secretary of State for health announced
that he proposed to make regulations under S 10a of the Consumer Protection
Act 1987 banning oral snuff.
The applicants, who until then had been given no indication that their
product might be banned, were invited in accordance with s 11(5)(a)(b) of the
1987 Act to make representation by 26th May 1988. The applicants asked for
the evidence relied upon by the Secretary of State in deciding to propose the
regulations but were not informed until 27th October 1988 that the
government's proposals were based upon the advice of the committee in 1986.
The secretary of State refused to disclose the test of the committee's advice and
on 13th December 1989 he made the Oral Snuff (Safety) Regulations 1989,
which came into force on 13th March 1990.
The Applicants applied for judicial Review of the Secretary of State's decision
to make the regulations, contending, interalia, that the regulations were ultra
Vires because the Secretary of State's power to make regulations under the
Act was restricted to making regulations concerned with consumer protection
and safety in connection with defective products and not with matters of health,
and he had unfairly withheld the text of the committee's advice in 1986 from
the applicants.
The Secretary of State's power to make regulation under Section 11 of
Consumer Protection Act, 1987, included power to make regulations such as
the 1989 regulations since the purpose of the regulations was to protect the
consumer and the safety of the consumer, which included protection from the
risk of death or personal injury to any person whatsoever furthermore, the
decision to make regulation was not so disproportionate to the perceived risk
262 262 Legal Aspect of Business • Module Seven
Case – 4
West Yorkshire Metropolitan Country Council v. MFI Furniture Central
Ltd. and another appeal
West Yorkshire Metropolitan Country Council v. MFI Furniture Central
Ltd and another appeal. A furniture company inserted two advertisements in
the press. One stated that it was selling a Six-drawer chest at $24.95 which it
Misleading adver- described as a 'bargain price' and 'Britain's lowest price.' The other stated
tisement are barred that it was selling a Welser dresser at $69.95, which it described as a 'special
under CPA. clearance price.' The Company was charged and convicted in respect of both
advertisements as contravening art 2(1)(a)a and 3(1)(b)b of the Price Marking
(Bargain offers) Order 1979 by indicating that the price of the goods was 'lower
than… the amount of another price for the sale of goods of the same description.'
The company appealed to the Crown Court, contending:
(a) that in the first advertisement the words 'bargain price' and 'Britain's lowest
price' did not inevitably imply that the goods are cheaper than elsewhere, and
(b) that in the second advertisement the words 'special clearance price' did not
contravene art 3(1)(b) because they merely invited comparison between the
advertised price of the goods and another price for the sale of other goods of the
same description. The Crown Court allowed the appeals because in respect of the
first advertisement it was not satisfied beyond reasonable doubt that an ordinary
shopper would understand from the advertisement that he was getting a preferential
price and not just a bargain, i.e., good value for money, and in respect of the
second advertisement it had not been established that the words 'special clearance
price' contravened the terms of art 3(1)(b). The prosecutor appealed.
1. The court would not interfere with the Crown Court's decision regarding
the first advertisement, the words 'bargain price' and Britain's ‘lowest price'
contravened art 2 and 3 of the 1979 order, and the Crown Court had adopted
the correct approach of looking at the advertisement through the eyes of an
ordinary shopper and applying the criminal standard of proof. The appeal in
respect of the first advertisement would accordingly be dismissed.
2. The second advertisement infringed the terms of art 3(1)(b) of the 1979
order, because on the true construction of the article the words 'goods of the
same description' included a particular item of goods which was marked down
as against itself. The appeal in respect of the second advertisement would
accordingly be allowed.
Module Seven • Consumer Protection Act, 1986 263
Case – 5
Allen v. Redbridge London Borough Council
Allen v. Redbridge London Borough Council. The appellant owned a
pharmacy which also sold perfumes and cosmetics most of which were kept in
locked glass cabinets with their price labels being displayed either on the
back or underside of the individual items. Any person interested in the items
could ascertain their price by asking the appellant or a member of his staff to
unlock the cabinet and remove the items for closer examination. The appellant
was charged with failing to indicate the selling prices of those goods in accordance
with art 3a and 8b of the Price Marking Order 1991, contrary to s 7 of and the
schedule to the Prices Act 1974. Article 3 of the 1991, order provided that any
goods to be sold by retailer were required to have the selling price thereof
indicated in writing and art 8 provided that any goods to be sold by retail were
required to have the selling price thereof indicated in writing and art 8 provided
that the indication of price had to be unambiguous, easily identifiable and clearly
legible to a prospective purchaser and marked on the goods or their container
or on a ticket or notice in close proximity to the goods. The appellant was
convicted on the basis that a 'prospective purchaser' included someone who
could ascertain the price of goods without seeking the assistance of the
shopkeeper or his staff and that as the price labels could not be viewed from
the front of the cabinet they did not comply with art 8. The appellant appealed.
It was held by the Queen's Bench that the 1991 order did not lay down the
precise method by which a shopkeeper had to bring the prices of his goods to
the notice of the public, but left it open to the shopkeeper how it should be
done. Furthermore, art 8 of the order was not directed at any person who
walked into a shop but was specifically aims at a prospective purchaser.
Accordingly, it was sufficient for the purpose of art 8 if it was clearly stated on
or alongside of the particular article a price indicator which unmistakably related
to it and if the price could not be seen from outside a locked cabinet it did not
matter that the shopkeeper or one of his staff had to be asked to produce the
article from the cabinet for inspection.
The shopkeeper was not required either to put a label on the front of the
article or to put the article in a position where it could be handled by a customer
a proper opportunity of seeing the price on the article. It followed that the
appellant had not contravened art 3 and 8 of the 1991 order. The appeal would
therefore be allowed and the convictions quashed.
Case – 6
Warwickshire Country Council v. Johnson
Warwickshire Country Council v. Johnson, the appellant was employed
as the branch manager of a retail electrical goods shop. With the authority of
the owners he placed a free-standing notice outside the shop stating 'We will
beat any TV HiFI and Video price by $ 20 on the spot.' While the notice was
displayed a customer saw a television set offered for sale elsewhere in the area
at a price of $159.95. He took the appellant to see the set and then sought to
purchase an identical set at the appellant's shop for $139.95, but although the
appellant had one in stock he refused to sell it at the reduced price.
The customer reported the matter to the respondent council's trading
standards department, which preferred an information against the appellant
264 264 Legal Aspect of Business • Module Seven
under S. 20(1) a of the Consumer Protection Act, 1987 alleging that the appellant
had 'in the course of a business of his' given to the customer a misleading
indication by means of the notice as to the price at which the television set was
offered in that it was not $20 less than the price at which it was offered by
another shop in the area. After preliminary appeals the appellant appealed to
the House of Lords, where the issues were —
(i) whe ther a notice which wa s not misle ading on its face could
subsequently become misleading by a refusal to honour its term and
(ii) whether for the purposes of S.(20) the words 'in the course of a business
of his' could include an employee.
The House of Lords held that: (1) the notice was continuing offer and
therefore whether it was misleading or not could only be tested by somebody
taking up the offer. Accordingly, since the appellant had refused to honour
the terms of the notice by beating 'any Hifi, Video price by $ 20 on the spot' the
notice was a misleading indication as to the price at which the goods were
offered, contrary to S. 20(2)(1) of indication as the price at which the goods
were offered.
(2) However, the words 'in the course of any business of his' in S. 20(2)(a)
of the 1987 Act meant any business of which the defendant was whether the
owner or in which he had a controlling interest, since the 1987 Act was directed
against employers, i.e., the corporate body standing behind the misleading
price indication, rather than the individual employees. Accordingly, since the
appellant was only a manager of the shop he was not guilty of the offence
charged and the appeal would therefore be allowed.
The Consumer protection in UK can be treated in the same footing as that
of USA. The stringent product liability clause and other consumer related
laws adequately protects the consumer besides redressing their problems in
real time.
Case – 1
John L. Proprietary Limited Appellant; and The Attorney-General for
the State of New South Wales Respondent
John L. Proprietary Limited Appellant; and The Attorney-General for the
State of New South Wales Respondent Section 32(1) of the Consumer Protection
Act 1969 (NSW) provided that a person who, to promote the supply of goods or
services, published a statement "to his knowledge false or misleading in any
material particular" committed an offence. Section 56(1) provided that
proceedings for offences against the Act might be taken "only by a person acting
with the authority in writing of the Minister" and disposed of before magistrates
or "the Supreme Court in its summary jurisdiction." Section 56(4) required the
proceedings to be commenced by information.
John L. Pty. Ltd. ("the company"), a dealer in motor vehicles, published a
newspaper advertisement offering quantities of free petrol to every customer
buying a car over a nominated price during a limited period. The Department of
Consumer Affairs considered that the advertisement, being intended to promote
the supply of goods or services, was knowingly false or misleading in a "material
particular" and that its publication was an offence against S. 32(1) of the
Module Seven • Consumer Protection Act, 1986 265
Consumer Protection Act 1969 (NSW). John Michael Clayton, an officer of the
Department so authorized by the Minister for Consumer Affairs, laid in his own
name an information under that Act to the Supreme Court of New South Wales.
It was entertained in pursuance of S. 5C of the Criminal Appeal Act 1912 (NSW).
Objections to competency were overruled, the complaint was allowed. The
company appealed, by special leave, to the High Court.
The High Court Held that in the present case the information identified the
time, place and manner in which the present appellant was alleged to have
contravened S. 32(1) of the Consumer Protection Act. It failed to specify the
respect in which the advertisement was false or misleading. It is true that S.
32(1) of the Act makes it an element of the offence created by that sub-section
that a person publish a statement which is, to his knowledge, false or misleading
in any material particular. But it was held that information or application that
sets out the statement, identifying the time, place and manner of publication,
and then alleges that the statement was false or misleading in a material
particular, without identifying the particular, is bad in substance. Certainly
the material particular should have been identified and would be ordered by
way of particulars; nevertheless, in my view, the information or application is
not defective by reason of the omission. It is legally sufficient, to borrow the
words of Evatt J. in Davies v. Ryan. The distinction is an important one to
maintain even though statutory provisions may render it of little practical
importance at times.
For these reasons, it is unnecessary to deal with the appellant's submission
that S. 6 of the Supreme Court (Summary Jurisdiction) Act is limited to an
application, order or warrant and does not extend to an information under S.
56(4) of the Consumer Protection Act. The appeal should be dismissed.
Case – 2
Colgate Palmolive Pty Ltd v Rexona Pty Ltd
Colgate Palmolive Pty Ltd v Rexona Pty Ltd. The applicant held sixty
per cent of the toothpaste market in Australia. The respondent sought to capture
ten to twenty per cent of the Australian toothpaste market. The respondent
commenced a massive advertising campaign to obtain a market share for a new
toothpaste known as "Aim." Aim toothpaste included an ingredient known as
"citraden." The applicant claimed that the respondent had been guilty of false, Misleading and de-
misleading or deceptive conduct by its advertising of Aim. It sought interlocutory ceptive conduct via
advertis ement re-
injunctions pursuant to Ss. 52, 53 (a), (b), (c) and 55 of the Trade Practices Act sulted in interlocu-
1974. tory injunctions.
It was held that the interlocutory injunctions were granted for the following
reasons: (1) The applicant had established a prima facie case of false, misleading
or deceptive conduct in that the court was satisfied that the respondent had
made false claims in its advertising falling within one or more of the following
categories — that Aim with citraden reduced decay in teeth or that Aim was
better than other toothpastes in reducing decay.
Case – 3
Effem Foods Ltd v. Pamela Nicholls
Effem Foods Ltd v. Pamela Nicholls. Shortly before the evening meal on
the day in question the opponent decided to eat one of these bars, and having
selected this one from a kitchen cupboard she tore the wrapping across the top
266 266 Legal Aspect of Business • Module Seven
and down one side. She then pushed the bar partly out of what remained of the
wrapping and bit off a substantial portion. As she began to chew the bar she
felt a hard object at the back of her tongue which caused momentary pain that
led her to spit what was in her mouth onto a nearby coffee table. She went to
the bathroom, washed out her mouth, and became aware of the taste of blood.
Goods not of mer-
She rejoined her husband and discovered that the material she had spat out
chantable quality, included an open safety pin with a badly bent pin.
supplying of defec-
tiv e go ods by
Since the opponent's tongue had been penetrated she was given a tetanus
manufacture held li- injection which unfortunately produced an allergic reaction. Subsequently she
able for inju ries was tested for the presence of the HIV and Hepatitis B and C viruses. She
c aus ed to c on-
sumer.
developed an obsessive condition which manifested itself in poor appetite and
disturbed sleep.
The opponent brought an action in the District Court against the
manufacturer for breach of ss 74D and 75AD of the Trade Practices Act 1974.
The trial Judge (Phegan DCJ) held that the plaintiff had proved a prima facie
breach of S. 74D(1) because the bar was not of merchantable quality, and a
prima facie breach of S. 75AD because the defendant, in trade and commerce,
had supplied defective goods manufactured by it which had injured the plaintiff.
The manufacturer appealed against the trial judge's finding.
Mr. Hoeben J., while acknowledging that the liability of a manufacturer
under these provisions was strict, submitted, correctly, that it was not absolute.
He asked, rhetorically, what more could a manufacturer be expected to do to
discharge the onus under these provisions than was done in this case. His
point is valid, so far as it goes, but the manufacturer has to establish these
defences on the balance of probabilities and speculation and proof of mere
possibilities are not enough. This does not mean that a manufacturer's liability
is absolute. There is scope for these defences where an examination of the
product after the accident establishes that it has been deliberately tampered
with. Examples that come to mind include the sabotage of car tyres or brake
fluid lines or the presence of poison in a glass of soft drink. A manufacturer is
not required to lead direct evidence to support these defences and a case based
on circumstantial evidence is capable of discharging the onus
It was held that (1) Under the statutory defenses the manufacturer had to
establish on the civil onus that the defect occurred after the bar had left its
control and did not exist when it was supplied by the manufacturer; (2) It had
only proved that deliberate sabotage in the retailer's shop was a possibility;
(3) Since any such act would be a criminal offence the presumption of innocence
applied. Hence Appeal was dismissed.
Case – 4
Grace Bros Pty Limited v Magistrates of the Local Courts of New South
Wales and Another
Grace Bros Pty Limited v Magistrates of the Local Courts of New South
Wales and Another
In a summons returnable before the Local Court it was stated that the
appellant, Grace Bros, had, in contravention of Sec. 32 of the Consumer
Protection Act 1969 (NSW), caused to be published a statement which was
intended to promote the supply of certain specified goods which, to its knowledge,
was false in a material particular.
Module Seven • Consumer Protection Act, 1986 267
Section 32(1) of the Consumer Protection Act provided for a penalty for
publishing or causing to be published any false advertisement to promote the
supply of goods if it was published with knowledge of its false and misleading
nature.
Section 53 of the Trade Practices Act 1974 (Cth) prohibited the making in
trade or commerce, in connection with the promotion of the supply or use of
goods or services, of false representations of the kind specified in pars (a) to (g)
thereof. Certain defences were provided by S. 85 of the Act. False representations
other than those specified were not dealt with by the Commonwealth Act.
The alleged inconsistency was that the Commonwealth Act allowed the
making in trade of a wilfully false statement if it was not of the specified kind,
whereas the State Act prohibited the publication in trade of every false statement
unless it was innocently made. The application of Grace Bros was dismissed at
first instance and they went in appeal.
It was held that (1) The court had jurisdiction to hear the application
pursuant to s 163A of the Trade Practices Act. The subject matter of the
appellant's application was that by the combined operation of S. 109 of the
Constitution and certain provisions of the Trade Practices Act the relevant
provisions of the Consumer Protection Act were invalidated. This was thus a
matter arising under 1969 the Commonwealth Act because the operation of
that statute was a necessary ingredient in the constitutional process of the
invalidation of the State law.
(2) The appellant failed to establish any constitutional inconsistency. Just
because the federal legislation was aimed at certain defined conduct only, did
not mean that the Commonwealth Act was intended to create legal immunity in
respect of other conduct which was not made an offence. Appeal dismissed.
Case – 5
Australian Communications Authority v Viper Communications Pvt. Ltd.
Australian Communications Authority v Viper Communications Pvt.
Ltd. Section 128 of the Telecommunications (Consumer Protection and Service
Standards) Act 1999(Cth) (the Service Standards Act) and its predecessor, s
246 of the Telecommunications Act 1997(Cth), required "eligible carriage service
providers" to enter into the Telecommunications Industry Ombudsman scheme
(the TIO scheme), which was established by Pt 10 of the Telecommunications
Act and continued by Pt 6 of the Service Standards Act. The TIO scheme was
operated by Telecommunications Industry Ombudsman Limited (TIO Ltd) and
the Telecommunications Industry Ombudsman (the TIO). The scheme provided
for the investigation and determination of complaints by consumers about
carriage services. TIO Ltd. was a corporation registered in the ACT, the members
of which were the eligible carriage service providers. Clause 6.1 of the
Constitution of TIO Ltd. provided that the TIO could, after investigating a
complaint, resolve the complaint in various ways, including "by making a
determination that the member the subject of investigation pay compensation
to a complainant" not exceeding $10,000. Clause 6.1 also provided that
determinations made under it "shall be automatically binding upon members."
The costs of the TIO scheme were borne *381 by the members of the scheme
pursuant to Art 4 of the Memorandum and Articles of TIO Ltd.
The applicant sought to recover pecuniary penalties from the respondents,
who were internet service providers who had failed to enter the TIO scheme.
268 268 Legal Aspect of Business • Module Seven
The respondents alleged they had no obligation to join the scheme, but that
q ue st io n w a s r e s o lv e d a g a i ns t t he m in pr oc e e di n gs i n A u s t ra l i a n
Communic ations Authority v Vip er Communic ations Pty Ltd. The
respondents also challenged the constitutional validity of Section 128 of the
Service Standards Act. This was heard as a separate question. The grounds of
challenge were that Section 128 invalidly conferred the judicial power of the
Commonwealth on the TIO, a non-judicial body, and that Section 128 imposed
taxation on eligible carriage service providers otherwise than in conformity with
Section 55 of the Constitution of the Commonwealth (the Constitution).
It was held that (1) The decision-making functions conferred on the TIO by
or under the authority of s 128 of the Service Standards Act do not constitute
exclusive and inalienable exercises of judicial power contrary to Ch III of the
Constitution.
Determinations made by the TIO are not automatically enforceable. Although
expressed to be binding on a service provider, they can only be enforced by
proceedings taken in a court. Thus an independent exercise of judicial power is
required to give effect to a determination. Nor does s 128 require the TIO to
resolve complaints by making determinations on the basis of the application of
principles of law to the facts as found. The TIO is free to create norms to resolve
a particular dispute or class of dispute. Petition allowed.
In Australia, similar to UK and USA the consumer protection laws are
comprehensive, contemporary and relevant. The infringement of consumer rights
in any form is dealt with stringently by the consumer protection laws. Also the
law courts in that country is very serious on the defects of goods and deficiency
of service of any form.
Questions
8
MODULE
Module Objectives
After reading this chapter, you should be able to:
Know the meaning of Intellectual Property (IP), IP law, and moral rights
Understand Intellectual Capital (IC), segments of IP, the difference
between Intellectual capital, intellectual Assets and I P
Discuss the Provisions of Patent Act, 1970
Interpret the various aspects included in International Intellectual
Property Organizations, their treaties and agreements especially WIPO
— World Intellectual Property Organization
270 270 Legal Aspect of Business • Module Eight
Is it ‘intellectual’ ? Is it ‘property’?
The ordinary com- To this question there are two answers, one is based on an ordinary colloquial
mon-sense descrip- understanding of the literal meanings of the words ’intellectual’ and ‘property’;
tion of intellectual
property is that it the other is legal. The ordinary common-sense description of intellectual property
s imply compris es is that it simply comprises all those things that are ‘intellectual’ because they
all those things that emanate from the use of the human brain, for example Lara Croft, websites,
are ‘intellectual’ be-
c aus e they ema-
mobile phones, lists of names and addresses, the way to make genuine Coca-
nate from the use of Cola or a suitable seductive name for a new brand of perfume.
the human brain.
Some may take pedantic exception to the stipulation that it is specifically
from the brain that intellectual property must be taken to originate; what, for
example, of the computer which exercises its own ‘intellect’ in printing out the
results of its own calculations, or of the hypothetical monkey shackled eternally
to a presumably indestructible PC, hammering the keyboard at random until it
writes the next Harry Potter book? Are these also intellectual property? If the
answer to this question is answered in the affirmative, it is not because of any
inherent vice in the definition offered above, but rather because of a subtle
appreciation that there is a low level of human intellectual activity which we are
inclined to regard as enjoying the status of ‘property.’ After all, not only activities
of monkeys or computers but also the programming of the intelligent computer,
The legal descrip- the cunning juxtaposition of monkey and typewriter can be regarded as part of
tion of intellectual
prop erty dif fers the process of intellectual endeavour. But there is a level below which intellectual
from the colloquial activity is not capable of being treated as ‘property.’ Thus the decision to play
in that it foc us es Dwight Yorke up front alongside Andy Cole in the Manchester United football
upon the ri ghts
which are enjoyed
team may be the result of an intellectual process but most people would not
in the produc e of consider the result of that process as being ‘property.’
the mind, ra ther
than upon that pro-
The legal description of intellectual property differs from the colloquial in
duce itself. that it focuses upon the rights which are enjoyed in the produce of the mind,
rather than upon that produce itself. In legal terms we call a piece of land, a
painting or a motor car ‘property’ not because it is a solid, physical thing in itself
but because individuals or legal entities such as companies can assert a right in
it against some or all other persons. The word ‘property’ itself comes from the
Latin word proprius, which means ‘one’s own.’ If we bear this in mind, we can
take the expression ‘intellectual property’ to mean the legal rights which may be
asserted in respect of the product of the human intellect, for example, Channel’s
Right to stop people filling bottles with home made concoctions and selling them
on the street corner as CHANNEL NO 5. It is also convenient to treat as intellectual
property the rights and powers which one may enjoy over another’s work, such as
the manufacturer’s right to be allowed to use someone else’s invention where a
Legal rights which patent for that invention has been granted to that another person but has not
may be asserted in been industrially exploited.
respect of the pro-
duct of the human The intelligent observer of human behaviour will have spotted that the fruits
intellect. of exercise of human intellect would exist even if they enjoyed no legal protection-
in the same way as a plot of land or of chocolate would exist even if no one could
claim the legal right to own or possess it; but it is the existence of such a right to
do so which entitles us to refer to such physical things as ‘property.’ The ordinary
words which form the component parts of our day-to-day conversation are not
generally regarded as intellectual property, even if a great deal of thought went
into their being coined: words such as ‘chair’, ‘banana’ and ‘Tarzan’ do not exist
Module Eight • Indian Patent Laws & WTO Patent Rules 271
in nature—they have all been created by the use of the human intellect—but we
do not regard them as ‘property’ because the law does not provide a right to
prevent their expropriation. The opposite is true of words such as “Pepsi’,
‘champagne’ or ‘Darth Vader’, all of which are carefully guarded items of property
notwithstanding the frequency with which they find their way out of people’s
mouths. Confusingly, some words are sometimes property and sometimes not,
for example ‘aspirin’, ‘marigold’ and ‘Pocahontas.’
Thus the making of contracts, with regard to the result of intellectual endeavour,
and the validity of those contracts once made, inevitably becomes subjects of
interest to the intellectual property lawyer.
and selling it, or by charging others who wish to exploit his patent. This use is
capable of benefiting more than merely the patent’s owner. For example, a patent’s
user may derive profit through his use of it, the consumer will benefit through
the ability to acquire a product manufactured under it, members of the country’s
available workforce will gain employment, the government will take its taxes and
all will (in theory) be happy.
If a person who creates intellectual property subsequently derives some benefit
from its use, he will (in theory) be encouraged to endeavour to repeat the process A person who ac-
by which the pleasure of that benefit was previously obtained. An economy which quires an intellec-
tual property right
is incapable of creating its own intellectual property must import it. It is thus can derive no finan-
imperative for economic well-being of any country that it guard against a massive cial benefits from it
outflow of funds by providing a commercial environment in which the creation of except by using it
commercially.
intellectual property is rewarded; and it is this which has been perhaps the most
important function of intellectual property law.
Intellectual property of abuse or, more accurately, of use in a manner which may be regarded as
law is not a sacred
cow; it is merely a
prejudicial either to competing private interests or to the public interest. This is
body of laws which no mere hypothetical matter. In Service Corpn International Ptc v Channel
is intended to act as Four Television Corpn Lightman J based a decision not to grant an injunction
a means of achiev-
ing a particular set
to suppress alleged an infringement of copyright on a direct application of the
of ends. European Convention on Human Rights’ commitment to freedom of speech.
It is proper to emphasize the importance of intellectual property law as an
academic discipline and as a driving force in the economic life of the new
millennium. However, it must be recognized that, despite its importance,
intellectual property law is not a sacred cow; it is merely a body of laws which is
intended to act as a means of achieving a particular set of ends. Where such laws
do not achieve their stipulated ends, or the price which is paid for their doing so
exceeds the value of achieving those ends, then intellectual property law is as
much an object of scrutiny, criticism, amendment or repeal as is any other set of
normative or distributive rules.
In the UK at any rate, each brand of intellectual property law evolved as a
result of essentially practical consideration; those same considerations could lead
to its death. In many foreign jurisdictions, in contrast, intellectual property rights
are not dependent upon consideration of practical utility but are superior (and
possibly anterior) to them. At the time of writing, the shifting sands of necessity
and the adoption of policies of international harmony have brought British
intellectual property laws close to those of other countries; whether this state of
affairs is purely temporary, or not, is a matter for speculation beyond the covers
of this book, which has been written with the British reader particularly in mind.
Where subsequent chapters review and examine the law, they will therefore give
more scope to the investigation of their relation to the ends achieved than to the
irresoluble question of their metaphysical link between man, his creation and his
relations with others.
Like a magnet attracts iron filings, strategy and purpose create the
discernable Informational patterns that we call knowledge
Purpose strategy information knowledge
Intellectual capital
Intellectual Assets
Intellectual Property
276 276 Legal Aspect of Business • Module Eight
Trade Secrets
A trade secret is information that is not generally available and that confers
a competitive advantage on its possessor.
For example, a chemical formula
a manufacturing process
a machine design or
a business method
Know-how
Comprises a body of information, the components of which may be individually
known, but the compilation of which has competitive value
For example, Supplier lists, parts specifications
Quality Assurance and testing procedure
Non-competition Agreements
Employees comprise a firm’s human capital (HC), a constituent ingredient of
Intellectual Capital (IC)
Module Eight • Indian Patent Laws & WTO Patent Rules 277
Patents
A patent conveys to its owner (Inventor) the right to prevent others from
making, using, selling, offering for sale, or importing the patented invention,
patents are national in nature, having effect only within the territory of the issuing
country. Patent is the legal
right, for a limited
Conditions term , to ex c lude
others from using,
In order to qualify for a patent, an invention must be selling, or mak ing
an invention or dis-
Useful that is, it has some purpose c ov ery as de-
Novel that is, it differs in some way from the publicly known or existing s c ribed in the
patent claims
knowledge in the field
Non-obvious that is, person working in the field would not consider the
invention obvious
KINDS OF PATENTS
1. Utility Patent
Legal protection granted for inventions or discoveries that are categorized as
machines, processes, compositions, articles of manufacture, or new uses of any of
these.
2. Design Patent
Protects new, original, and ornamental designs for useful objects. The design
patent protects only the appearance of an article, not its structure or utilitarian
features.
278 278 Legal Aspect of Business • Module Eight
Design patents have been granted for stained-glass windows, Adidas shoes,
and the shape of an electric guitar.
3. Plant Patent
Protects distinctive plants reproduced asexually (i.e., by means other than
seeds) plant patents have been granted for new variations of tulips, roses, and
tomatoes.
Copyright
The legal right to The legal right to exclude others for a limited time, from copying, selling,
exclude others for a
limited time, from
performing, displaying, or making derivative version of a work of authorship.
c opy i ng, s ell ing, Copyright protects only the expression of an idea, not the idea being expressed.
performing, display-
ing, or making de- Copyrights are generally associated in the common mind with —
rivative version of a
work of authorship. — Literature
— Movie scripts
— Music
— Song lyrics
— Product manuals
— Instruction booklets
— Training materials
— Marketing & sales publication
— Computer software
Lasts for the life of the author + 70 years
Trademark
A trademark is any A trademark is any word, symbol, design, logo, or slogan that identifies and
word, symbol, de-
distinguishes one product or service from another.
sign, logo, or slo-
gan that identifies e.g.: Kodak trademark distinguishes Kodak film from other brands.
and distinguis hes
one product or ser- The trademark also informs consumers that a product has certain quality or
vice from another. reliability, this consumer connection, known as goodwill, strengthens the trademark’s
value.
The owner of a trademark can exclude others from using a similar trademark on
similar or related goods or services if it is likely that consumers will be confused by
the use.
The following tables 4.1, 4.2 and 4.3 give detailed information about different
components of IP, what is protected, length of protection with examples.
Module Eight • Indian Patent Laws & WTO Patent Rules 279
Copyright Books, photographs, Interview with the Vampire Life of the author plus 70
music, recordings, (book and movie); Andy years (for works created by
fine art, graphics, videos, Warhol print; Alanis a single author). Other
film, choreography, Morrisette’s Jagged Little works may be protected for
architecture, Pill (music recording, 120 years from date of
computer programs compact disc, artwork, creation of 95 years from
and videos); architectural first publication**
plans for the Trump
Tower; Microsoft Windows
computer program
Trademark Word, symbol, logo design, Coca-Cola name and For as long as the business
slogan, or device that distinctive “wave” logo; continuously uses the
identifies and Good Housekeeping seal; trademark in connection
distinguishes products Pillsbury doughboy with goods or services
or services character
Trade Formula, method, device, Coca-Cola formula; survey For as long as information
Secret or compilation of facts or methods used by professional remains confidential and
any information that is pollster; buying habits of functions as a trade secret
maintained in confidence ethnic groups; new invention
and gives a business an for which patent application
advantage over has not been filed
competitors
Grant of Patent
Certain procedures for the Grant of Patent are laiddown in the act. These
procedures are briefly explained here.
(1) Who should apply: (Sect. 6): The first inventor of the (invention or)
work who claims to be the true and first owner or his legal representative.
(2) Condition: For each invention separate application for a patent shall be
made.
(3) Application form (Sect. 7): The true and first owner shall apply in
Form I and legal Rep. of true owner shall apply in Form II.
282 282 Legal Aspect of Business • Module Eight
Surrender of Patent
Under the act the patentee can surrender the patent. The steps involved for
surrender of the patent are briefly given below:
(1) Notice of offer to the controller: The patentee may give a notice in the
prescribed manner to the controller offering to surrender the patent.
(2) Advertisement of the offer: The controller shall advertise such offer in
the prescribed manner and notify to those persons whose name appear
in the register as persons interested in the patent.
(3) Opposition to surrender: Any person interested shall give notice of
opposition to the controller. The controller shall notify the patentee of
such notice.
(4) Revocation of offer: After hearing both the parties, if the controller is
satisfied that, the patent, may be surrendered he may accept the offer
and revoke the patent by order.
284 284 Legal Aspect of Business • Module Eight
INFRINGEMENT OF PATENT
If the inv ention is Meaning: A patent granted to a person (patentee) gives him a bundle of
used by any other
exclusive rights to use the invention for a fixed period under the act. If the invention
person, without a li-
cense from paten- is used by any other person, without a licence from patentee, it leads to
tee, it leads to in- infringement of patent. This infringement means violation or misuse of the
fringem ent of exclusive right of the patentee.
patent.
Remedies for infringement: The remedies are available to patentee in case
of infringement. They are:
(1) Suit for an injunction (to stop future and infringement) and
(2) Suit for damages or an account for profit.
The patentee shall go to District court having jurisdiction to try the suit. But
when the defendants make counter-claim for the revocation of the patent, then it
shall be transferred to the High Court.
Right of Licencee: When a patentee gives licence to another person to use
his invention, then that another person is called licensee. In case of infringement,
the licencee shall ask the patentee to take proceeding to prevent any infringement
of the patent. If the patentee refuses or fails to do so within 2 months, then the
licencee may file a suit for Infringement in his own name as if he is the patentee.
Note: Scientific Adviser: He is an independent scientific adviser appointed by
the court to assist the court in any suit for infringement. He will conduct enquiry
into any such questions of fact or of opinion and submit a report to the court. His
remuneration is fixed by the court itself.
Intellectual Property rights: Intellectual property includes patent, copyright,
design Property and trade mark. They require intellectual effort. A person spends
considerable amount of time, energy and effort to produce something new. The
law gives an exclusive right to the owner to use his invention (or work) in the way
he likes for a certain period. This exclusive right protects the interest of the inventor
and prevents the other person from misusing the invention for a profit.
International Classifications
Anyone applying for a patent or registering a trademark or design, whether
at the national or international level, is required to determine whether their creation
is new or is owned or claimed by someone else. To determine this, huge amounts
of information must be searched. WIPO treaties (listed below) created classification
systems which organize information concerning inventions trademarks, and
industrial designs into indexed, manageable structures for easy retrieval. Regularly
updated to include changes and advances in technology and commercial practices,
the classification systems are used voluntarily by many countries which are not
member States of the related agreements.
286 286 Legal Aspect of Business • Module Eight
International Agreements
The major International agreements on intellectual property are: the Paris
Convention for the Protection of Industrial Property:
— the Berne convention for the Protection of Literary and Artistic Works
— the Universal Copyright Convention
— the Patent Cooperation Treaty
— the European Patent Convention
— Agreement on Trade-related Aspects of Intellectual Property Rights —
one of the Annexes of the World Trade Organization (1994 GATT)
— Common regulations under the Madrid Agreement Concerning the
International Registration of Marks and the Protocol relating to that
Agreement; adopted by the Assembly of the Madrid Union with effect
from April1, 1996.
What is Arbitration?
Arbitration is a pro- Arbitration is a procedure in which a dispute is submitted by agreement of
cedure in which a
dispute is submit-
the parties, to one or more arbitrators who make a binding decision on the dispute
ted by agreement of in choosing arbitration, the parties opt for a private dispute resolution procedure
the parties, to one instead of going to court.
or more arbitrators
who make a binding Its principal characteristics are:
decision on the dis-
pute. Arbitration is Consensual
An Arbitration can only take place if both parties have agreed to it. In the
case of future disputes arising under a contract, the parties insert an arbitration
clause in the relevant contract. An existing dispute can be referred to arbitration
by means of a submission agreement between the parties. In contrast to mediation,
a party cannot unilaterally withdraw from an arbitration.
Arbitration is Neutral
In addition to the selection of neutrals of an appropriate nationality, parties
are able to choose such important elements as the applicable law, language and
venue of the arbitration. This allows them to ensure that no party enjoys a home
court advantage.
Common
features of Court litigation Arbitration
many IP
disputes
International Multiple proceedings under different laws, A single proceeding under the law
with risk of conflicting results determined by parties
Possibility of actual or perceived home court Arbitral procedure and nationality
advantage of party that litigates in its own of arbitrator can be neutral to law,
country language and institutional culture
of parties
Technical Decision maker might not have relevant Parties can select arbitrator(s)
expertise with relevant experties
Urgent Procedures often drawn-out Arbitrator(s) and parties can
shorten the procedure
Injunctive relief available in certain WIPO Arbitration may include
jurisdictions provisional measures and does
not preclude seeking court-
ordered injunction
Require finality Possiblity of appeal Limited appeal option
Confidential/ Public proceedings Proceedings and award are
trade secrets confidential
and risk to
reputation
of biopiracy. It had also caused a brief diplomatic crisis between India and United
States with India threatening to take the matter to WTO as a violation of TRIPS
which could have resulted in a major embarrassment for the United States. Both
voluntarily and due to review decisions by the United States Patent Office, RiceTec
has lost most of the claims of the patent, including, most importantly, the right to
call their rice lines "basmati." This was a huge victory for Indian farmers who
could have faced enormous economic losses from the patent.
therefore was not patentable under Indian Law (Section 3(d) of the Indian Patents
Act 2005).
Novartis filed two lawsuits against Government of India. The first case appeals
rejection of patent application. The second case challenges Section 3(d) of the
Patents Act 2005, the provision that seeks to prevent evergreening of patents.
Novartis contended before the Chennai High Court that Section 3(d) is vague,
ambiguous and arbitrary. It is violative of Art 14 which guarantees right to equality
and non-discrimination. The Swiss MNC also claimed that section does not comply
with TRIPS agreement of the WTO which mandating a strict patent regime which
India has signed.
The Court ruled that it had no jurisdiction to decide whether Indian patent
laws comply with TRIPS; and that Section 3(d) does not suffer from vagueness,
ambiguity and arbitrariness and contains reasonable in-built protection for patent
applicants. The Chennai High Court accordingly dismissed the petitions by Novartis
AG and its Indian subsidiary.
CONCLUSION
The most practicable solution to the problem which at the same time allows
for TRIP compliance would be granting of dual licences. This would mean that the
patent would be partly product patent and after a reasonable time being given to
the inventor to make a reasonably large profit it would be converted to a process
pa te nt whereby the patented drug can be manufactured by compe ting
manufacturers using an alternative process. This would solve the problem of
excessive hike in prices and would render the drugs more accessible to the millions
suffering. Collaboration with the MNCs on various fronts such as research and
development, manufacturing and marketing will help Indian Pharma companies
make profitable breakthroughs.
Section 3(d) is one of the strongest aspects of our Patents Act. Complete
compliance with TRIPS agreement will prove to be prejudicial to our national
interests. It should be remembered that pharmaceutical industry owes a moral
290 290 Legal Aspect of Business • Module Eight
Questions
FOREIGN EXCHANGE
MANAGEMENT ACT, 1999
AND
THE PREVENTION OF MONEY
LAUNDERING ACT, 2002
Module Objectives
After reading this chapter, you should be able to:
Understand the important terms like Authorised person, Foreign
exchange and Foreign security
Know the regulation and management of Foreign exchange
Learn the contraventions and penalties under FEMA
Deliberate on the power and functions of Director of Enforcement
Know the meaning and objectives of Money laundering
List the stages and forms of Money laundering operations
Chart out the problems and solutions of Money laundering and Hawala
transactions.
294 294 Legal Aspect of Business • Module Nine
(6) Any person, other than an authorized person, who has acquired or
purchased foreign exchange for any purpose mentioned in the declaration
made by him to authorized person under sub-section (5) does not use it
for such purpose or does not surrender it to authorized person within
the specified period or uses the foreign exchange so acquired or purchased
for any other purpose for which purchase or acquisition of foreign
exchange is not permissible under the provisions of the Act or
Sub-section (1), such books, accounts and other documents in his custody or
power and to furnish any statement or information relating to the affairs of such
person, company or firm as the said officer may require within such time and in
such manner as the said officer may direct.
Penalties
Section 13 deals with the contravention as civil offences and the adjudicating
officers are empowered to impose penalties.
(1) If any person contravenes any provision of this Act, or contravenes any
rule, regulation, notification, direction or order issued in exercise of the powers
under this Act, or contravenes any condition subject to which an authorization is
issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty
upto thrice the sum involved in such contravention where such amount is
quantifiable, or upto two lakh where the amount is not quantifiable, and where
such contravention is a continuing one, further penalty which may extend to five
thousand for every day after the first day in which the contravention continues.
(2) Any Adjudicating Authority adjudging any contravention under Sub-section
(1), may, if he thinks fit in addition to any penalty which he may impose for such
contravention direct that any currency, security or any other money or property
in respect of which the contravention has taken place shall be confiscated to the
Central Government and further direct that the foreign exchange holdings, if any
of the persons committing the contraventions or any part thereof, shall be brought
back into India or shall be retained outside India in accordance with the directions
made in this behalf.
Explanation: For the purpose of this Sub-section, “Property” in respect of
which contravention has taken place, shall include—
(a) deposits in a bank, where the said property is converted into such
deposits;
(b) Indian currency, where the said property is converted into that currency,
and
(c) Any other property which has resulted out of the conversion of that
property.
to show cause why he should not be committed to the civil prison, and unless the
Adjudicating Authority, for reasons in writing is satisfied—
(a) that the defaulter, with the object or effect of obstructing the recovery of
penalty, has after the issue of notice by the Adjudicating Authority,
dishonestly transferred, concealed, or removed any part of his property,
or
(b) that the defaulter has, or has had since the issuing of notice by the
Adjudicating Authority, the means to pay the arrears or some substantial
part thereof refuses or neglects or has refused or neglected to pay the
same.
(3) Notwithstanding anything contained in Sub-section (1), a warrant for the
arrest of the defaulter may be issued by the Adjudicating Authority if the
Adjudicating Authority is satisfied, by affidavit or otherwise, that with the object
or effect of delaying the execution of the certificate the defaulter is likely to abscond
or leave the local limits of the jurisdiction of the Adjudicating Authority.
(4) Where appearance is not made pursuant to a notice issued and served under
Sub-section (1), the Adjudicating Authority may issue a warrant for the arrest of the
defaulter.
(5) A warrant of arrest issued by the Adjudicating Authority under Sub-section
(3) or Sub-section (4) may also be executed by any other Adjudicating Authority
within whose jurisdiction the defaulter may for the time being been found.
(6) Every person arrested in pursuance of a warrant of arrest under this
section shall be brought before the Adjudicating Authority issuing the warrant as
soon as practicable and in any event within twenty-four hours of his arrest
(exclusive of the time required for the journey).
Provided that, if the defaulter pays the amount entered in the warrant of
arrest as due and the costs of the arrest of the officer arresting him, such officer
shall at once release him.
Explanation: For the purposes of this Sub-section, where the defaulter is a
Hindu undivided family, the Karta thereof shall be deemed to be the defaulter.
(7) When a defaulter appears before the Adjudicating Authority pursuant to
a notice to show cause or is brought before the Adjudicating Authority under this
section, the Adjudicating Authority shall give the defaulter an opportunity showing
cause why he should not be committed to the civil prison.
(8) Pending the conclusion of the inquiry, the Adjudicating Authority may, in
his discretion, order the defaulter to be detained in the custody of such officer as
the Adjudicating Authority may think fit or release him on his furnishing the
security to the satisfaction of the Adjudicating Authority for his appearance as
and when required.
(9) Upon the conclusion of the inquiry, the Adjudicating Authority may make
an order for the detention of the defaulter in the civil prison and shall in that
event cause him to be arrested if he is not already under arrest:
Provided that in order to give a defaulter an opportunity of satisfying the
arrears, the Adjudicating Authority may, before making the order of detention,
leave the defaulter in the custody of the officer arresting him or of any other
officer for a specified period not exceeding fifteen days, or release him on his
furnishing security to the satisfaction of the Adjudicating Authority for his
appearance at the expiration of the specified period if the arrears are not satisfied.
304 304 Legal Aspect of Business • Module Nine
(10) When the Adjudicating Authority does not make an order of detention
under Sub-section (9), he shall, if the defaulter is under arrest, direct his release.
(11) Every person detained in the civil prison in execution of the certificate
may be so detained—
(a) where the certificate is for a demand of an amount exceeding rupees one
crore, up to three years, and
(b) in any other case, up to six months:
Provided that he shall be released from such detention on the amount
mentioned in the warrant for this detention being paid to the officer in charge of
the civil prison.
(12) A defaulter released from detention under this section shall not, merely
by reason of his release, be discharged from his liability for the arrears, but he
shall not be liable to be arrested under the certificate in execution of which he
was detained.
(5) The Special Director (Appeals) shall send a copy of every order made by
him to the parties to appeal and to the concerned Adjudicating Authority.
(6) The Special Director (Appeals) shall have the same powers of a civil court
which are conferred on the Appellate Tribunal under Sub-section (2) of Section
28 and —
(a) all proceedings before him shall be deemed to be judicial proceedings
within the meaning of Sections 193 and 228 of the Indian Penal Code
(45 of 1860);
(b) shall be deemed to be a civil court for the purposes of Sections 345 and
346 of the Code of Criminal Procedure, 1973 (2 of 1974).
Term of Office
The Chairperson and every other Member shall hold office as such for a term
of 5 years from the date on which he enters upon his office:
Provided that no Chairperson, or other member shall hold office as such
after he has attained —
(a) In the case of the Chairperson, the age of 65 years;
(b) In the case of any other Member, the age of 62 years.
(a) Summoning and enforcing the attendance of any person and examining
him on oath;
(b) Requiring the discovery and production of documents;
(c) Receiving evidence on affidavits;
(d) Subject to the provisions of Section 123 and 124 of the Indian Evidence
Act, 1872, requisitioning any public record or document or copy of such
record or document from any office;
(e) Issuing commissions for the examinations of witness or documents;
(f) Reviewing its decisions;
(g) Dismissing a representation of default or deciding it exparte;
(h) Setting aside any order of dismissal of any representation for default or
any order passed by it exparte; and
(i) Any other matter, which may be prescribed by the Central Government.
(3) An order made by the Appellate Tribunal and the Special Director (Appeals)
under this Act shall be executable by the Appellate Tribunal or the Special Director
(Appeals) as a decree of civil court and, for this purpose, the Appellate Tribunal
and the Special Director (Appeals) shall have all the powers of a civil court.
(4) Notwithstanding anything contained in the Sub-section (3), the Appellate
tribunal or the Special Director (Appeals) may transmit any order made by it to a
civil court having local jurisdiction and such civil court shall execute the order
as if it were a decree made by that court.
(5) All proceedings before the Appellate Tribunal and the Special Director
(Appeals) shall be deemed to be judicial proceedings within the meaning of Sections
193 and 228 of the Indian Penal Code (45 of 1860) and the Appellate Tribunal
shall be deemed to be a civil court for the purposes of Sections 345 and 346 of the
Code of Criminal Procedure, 1973 (2 of 1974).
Decision to be by Majority
Section 31 provides that the decision of the Appellate Tribunal shall be by
majority.
If the Members of a Bench consisting of two Members differ in opinion on any
point, they shall state the point or points on which they differ, and make a reference
to the Chairperson who shall either hear the point or points himself or refer the
case for hearing on such point or points by one or more of the other Members of
the Appellate Tribunal and such point or points shall be decided according to the
opinion of the majority of the Members of the Appellate Tribunal who have heard
the case, including those who first heard it.
310 310 Legal Aspect of Business • Module Nine
Contravention by Companies
Section 42 provides that where contravention of any of the provisions of this
enactment is committed by a company, the person responsible for the conduct of
its business shall be deemed to be guilty of the contravention.
(1) Where a person committing a contravention of any of the provisions of
this Act or of any rule, direction or order made thereunder is a company, every
person who, at the time the contravention was committed, was in charge of, and
was responsible to, the company for the conduct of the business of the company
312 312 Legal Aspect of Business • Module Nine
Introduction
Money laundering Money laundering refers to the practice of moving illegally acquired cash
refers to the prac-
tice of moving ille-
through financial and other systems so that it appears to be legally acquired.
gally acquired cash Financial institutions such as banks, insurers, and securities and futures firms
throu gh finan c ial are usually considered the frontline in the war against illicit money movements.
and other systems Money Laundering refers to the conversion or "Laundering" of money, which is
so that it appears to
be legally acquired. illegally obtained, so as to make it appear to originate from a legitimate source.
Money Laundering is being employed by launderers worldwide to conceal criminal
activity associated with it such as drug / arms trafficking, terrorism and extortion.
As per an estimate of the International Monetary Fund, the aggregate size of
money laundering in the world could be somewhere between two and five percent
Money Laundering of the worlds gross domestic product.
involv es financial Money Laundering involves financial transactions, to conceal the identity,
tran s ac tions , to
conceal the identity, source, and or destination of money. It is the main operation of underground
source, and/or des- economy. The Interpol General Secretariat Assembly in 1995 defines money
tination of money. It laundering as, any act or attempted act to conceal or disguise the identity of
is the main opera-
tion of underground illegally obtained proceeds, so that they appear to have originated from legitimate
economy. sources. The conversion of criminal incomes to forms that allows the offender
unfettered spending and investment has been an ongoing concern to the law
enforcement agencies.
Module Nine • Foreign Exchange Management Act, 1999 313
After the attack on the twin towers in the U.S., the world has focused its
attention on the entire concept of money laundering and has recognized it as a
source of funding of terrorist activities. This could be between $800 billion to $2
trillion each year. Thereby, all over the world, the need has been recognized to
control this form of illegal activity, which involves the misuse of financial systems
all around the world.
Money laundering is a process by which criminals give the color of legality Money laundering
is a proc es s by
and legitimacy to slush funds. Ignoring economic vandalism, most crime is whic h c rimi nals
economic crime. In Black's Law of Lexicon the term laundering is being referred giv e the colour of
to as investment or other transfer of money flowing from racketeering, drug legality and legiti-
mac y to s lus h
transactions and other sources (illegal sources) into legitimate channels so that funds.
its original source cannot be traced. Apart from the traditional activities of drugs,
racketeering, kidnapping, gambling, procuring women and children, smuggling
(alcohol, tobacco, medicines), armed robbery, counterfeiting and bogus invoicing,
tax evasion and misappropriation of public funds, new markets are also flowering.
These include smuggling, illegal labour and refugees, computer piracy, trafficking
in works of art and antiquities, in stolen cars and parks, in protected species and
human organs, forgery in arms, toxic and nuclear products etc.
Thus it has been seen that banks have become a chief end of Money
Laundering operations and monetary crime because they are endowed with a
range of services and instruments that can be used to cover up the source of
money. With their refined, coherent and beguiling behaviour, Money Launderers
attempt to make bankers relax their guard so as to accomplish their purpose.
There can be different sources of laundering and hiding the source of money.
Most countries require, transactions above a certain limit to be reported by the
banks or financial institutions or organizations. If a person earns money in small
change, but above the limit that needs to be reported, he can use a person already
involved in heavy cash transactions to deposit his amount and not get caught in
the process. Another method involves establishing a business whose cash inflow
cannot be monitored, and funneling the small change into this business and
paying taxes on it.
Basle Statement of Principles covers all aspects of laundering through the banking
system.
political declaration to adopt the national money laundering legislation and The Money Laun-
dering Act defines
programme in 1998 by the General Assembly of United Nation, India enacted the off enc e of
Prevention of Money Laundering Act, 2002. The Money Laundering Act defines money laundering
the offence of money laundering as any activity connected with the 'proceeds of as any activity con-
nec t ed with the
crime' which in turn is defined as any property or value of such property derived 'proceeds of crime'
as a result of criminal activity relating to a 'Scheduled offence.' The schedule to which in turn is de-
the Act is in two parts. Part A lists waging of war against the government of India fined as any pro-
(Sections 121 and 121A of Indian Penal Code) and several offences under the perty or v alu e of
suc h property de-
Narcotics Drugs and Psychotropic Substances Act, 1985. Offences listed in Part rived as a result of
B have now been subjected to a monetary limit of Rs. 3 million or more which was criminal activity re-
not there in the original Bill. latin g to
a'Sc heduled of-
There has been much concern about the terror funds coming into country. In fence.'
addition to that it is also widely believed that the stock market can also be potential
investment destination for terrorist groups. In absence of the adequate laws and
enforcement mechanism in place, it is difficult to trace the source of money coming
into the country and going outside from the country. Given the above context,
anti-money laundering laws and regulations assume utmost significance.
Prevention of Money Laundering (amendment) Bill, 2008 (PMLA) is yet another
milestone in the wide spectrum of anti-money laundering initiatives by government
of India. This Bill introduces new category of offences that have cross-border
implications for fighting terrorism. Insider trading and market manipulation will
be treated as a laundering offence and invite stricter punishment. Offences related
to human trafficking, smuggling of migrants, piracy and environmental crimes,
over invoicing and under invoicing under customs are also punishable under
PMLA. With the passing of Prevention of Money Laundering (Amendment) Act, all
casinos, payment gateways like Mastercard, Visa and Western Union and even
Credit Card deals will be monitored by law. These organizations will be required
to report details of all suspected transactions to the government.
The substantive law aspect of the act seems less well developed, compared to
the US Patriot Actor the EU Directives, the crimes included under the money
laundering are fewer. Significant omissions in the Schedule of Money Laundering
Act to the new law are lack of any references to offences relating to tax evasion,
smuggling, foreign trade law violations and foreign exchange manipulations on
account of these offences. Proceeds of crime relating to these offences, therefore,
will remain outside the scope of the Money Laundering Act. It will be the case also
with Schedule B offences if the amount involved in a case is less than Rs.3 million.
It is also somewhat incongruous that large-scale manipulations of foreign
exchange, let us say arising out of tax evasion or import/export violations, will be
mere civil offences under FEMA and will attract no penalty under the anti-money
laundering law, yet the same can lead to preventive detention under COFEPOSA.
Though the Money Laundering Act has been passed, but the rules to effect its
operations are yet to come.
In India, a number of Acts have existed which played the role of prevention of
money laundering, though these were not so named. However, in India, we have
certain statutes, as given below that incorporate measures which attempt to
address the problems of money laundering:
The Conservation of Foreign Exchange and Prevention of Smuggling Activities
Act, 1974; The Income Tax Act, 1961, The Benami Transactions (Prohibition) Act,
1988, The Indian Penal Code and Code of Criminal Procedure, 1973, The Narcotic
Drugs and Psychotropic Substances Act, 1985, The Prevention of Illicit Traffic in
Narcotic Drugs and Psychotropic Substances Act, 1988.
318 318 Legal Aspect of Business • Module Nine
The RBI's know your customer standards are important in the context of
controlling money laundering. As per these standards Banks must outline their
KYC policies slotting in the following four key fundamentals:
• Customer Acceptance Policy;
• Customer Identification Procedures;
• Monitoring of Transactions; and
• Risk management.
Thereby there is a need to not only effectively implement the anti-money laundering
operations, but also to ensure that there is a constant review of the anti-money
laundering (AML) programme and timely upgradation as well. Banks need to strictly
adhere to the Know Your Customer (KYC) Guidelines, setup by the RBI.
Offence of Money-laundering
Offence of money-laundering: Whosoever directly or indirectly attempts to
indulge or knowingly assists or knowingly is a party or is actually involved in any
process or activity connected with the proceeds of crime and projecting it as
untainted property shall be guilty of offence of money laundering.
Punishment for money-laundering: Whoever commits the offence of money-
laundering shall be punishable with rigorous imprisonment for a term which shall
not be less than three years but which may extend to seven years and shall also
be liable to fine which may extend to five lakh rupees: Provided that where the
proceeds of crime involved in money-laundering relates to any offence specified
under paragraph 2 of Part A of the Schedule, the provisions of this section shall
have effect as if for the words "which may extend to seven years", the words
"which may extend to ten years" had been substituted.
not exceeding ninety days from the date of the order, in the manner
provided in the Second Schedule to the Income-tax Act, 1961 (43 of
1961) and the Director or the other officer so authorised by him, as the
case may be, shall be deemed to be an officer under sub-rule (e) of rule
1 of that Schedule:
The Director, or any other officer not below the rank of Deputy Director,
shall, immediately after attachment under Sub-section (1), forward a copy of the
order, along with the material in his possession, referred to in that Sub-section,
to the Adjudicating Authority, in a sealed envelope, in the manner as may be
prescribed and such Adjudicating Authority shall keep such order and material
for such period as may be prescribed.
Every order of attachment made under Sub-section (1) shall cease to have
effect after the expiry of the period specified in that Sub-section or on the date of
an order made under Sub-section (2) of Section 8, whichever is earlier.
Nothing in this section shall prevent the person interested in the enjoyment
of the immovable property attached under Sub-section (1) from such enjoyment.
The Director or any other officer who provisionally attaches any property
under Sub-section (1) shall, within a period of thirty days from such attachment,
file a complaint stating the facts of such attachment before the Adjudicating
Authority.
kind of nexus between the export earnings of some technology companies and
money laundering transactions.
Many of these so-called software companies were known to be using the
Hawala route in order to show income from software exports. Getting the knowledge
about these transactions was not a big deal. It is provided to these companies by
the CA's, Lawyers and other professionals who knows the transactional loopholes.
When income-tax authorities busted a Delhi-based software company that
was doing business with a blue chip IT company, they found to their horror that
there were no computers in the office premises. The ones that were there were
still packed. The son of the software company owner told one investigator, "My
father does not even know what a mouse of a computer is, let alone the meaning
of software." Shell-shocked investigators realized that this Delhi-based company
had already transacted business worth Rs.500 crore with the blue chip company.
It was only later that they discovered no business had been transacted; only
money had been rolled over to improve valuation. When the income tax officials
took up the matter with finance ministry officials, they were told to keep quiet as
it could hurt India's image as an IT destination.
Questions
10 MODULE
INDIAN COMPANIES
ACT, 2013
Module Objectives
After reading this chapter, you should be able to:
Know the meaning of the terms company and types of company
Know all about Memorandum of Association and Articles of
Association
Understand the concept and process of Initial Public Offer (IPO),
book building
Distinguish between private and public company
Understand different kinds of meeting, agenda, quorum and
resolutions
Know the different methods of winding up of the companies
328 328 Legal Aspect of Business • Module Ten
Administration
The Companies Act is administered by the Central Government through
Department of Company Affairs and the Offices of Registrar of Companies,
Official Liquidators, Public Trustee, Company Law Board, Director of Inspection,
etc. The Registrar of Companies controls the task of incorporation of new
companies and the administration of running companies.
Characteristics of a Company
1. Separate Legal Entity: A company is a distinct legal entity, different
from its members or shareholders. The company may hold property,
make contracts, employ persons, sue or be sued in its own name.
2. Limited Liability of Members: The liability of the members of a
company is limited to the amount remaining unpaid on the shares
subscribed by them. Thus, in case of fully paid-up share, the members
cannot be asked to contribute any further if the company goes into
liquidation.
3. Perpetual Succession: In case of partnership firm, the partnership
comes to an end on the death, insolvency or retirement of any partner
or admission of new partner. The partners may agree to continue the
same business, but under a new partnership agreement. Whereas a
company enjoys continuous existence, members may come and go,
the shareholders may change on account of transfer or transmission
of shares, but the company survives, till wound up.
Module Ten • Indian Companies Act, 2013 329
Statutory Companies
Companies incorporated under the Special Act of Parliament or legislature
are called “Statutory Companies”. For example, The Reserve Bank of India,
The State Bank of India, Life Insurance Corporation, The Indian Airlines and
The State Trading Corporation of India. The activities of Statutory Companies A company not
are governed by the special act under which they are established. having any limit on
Registered Companies: Companies incorporated through registration with the liability of its
members is called
the Registrar of Companies under the provisions of the Companies Act, 1956 an unlimited com-
are called “Registered Companies.” They are also called ‘Incorporated pany.
Companies.’ Registered Companies are of the following types:
Based on the liability of the members, registered companies are:
1. Unlimited companies;
2. Companies limited by guarantee; and
3. Companies limited by shares.
330 330 Legal Aspect of Business • Module Ten
1. Unlimited Companies
A company not having any limit on the liability of its members is called an
unlimited company. The members of unlimited companies are like a sole
proprietor or partners of a firm, liable for its debts without any limit. The
concept of unlimited liability does not conform to corporate concept, which
necessarily postulates limited liability. Hence, unlimited companies are rare
but not extinct.
2. Companies Limited by Guarantee
Companies limited
by guarantee are Companies limited by guarantee are formed to promote art, culture,
formed to promote science, religion, trade and sports. A guarantee company may be formed with
art, culture, sci-
ence, religion,
or without share capital. Where the company is without share capital, it
trade and sports. A raises needed funds through entrance fees and subscriptions. Where the
guarantee com- company has share capital, the liability of members, in addition to the shares
pany may be held by them, is extended to certain additional amount guaranteed by them
formed with or with-
out share capital. to pay company’s debts in the event of winding up. The additional amount to
be paid is laid down in Memorandum or Articles of Association.
3. Companies Limited by Shares
In a limited company, the liability of the members is limited to the amount
of the shares held by them. In the event of its winding up, a shareholder can
be called upon to pay only the unpaid amount (if any) on shares held by him,
In a limited com-
and not even a paise more, whatever may be the debts of the company.
pany, the liability of The companies limited by shares and guarantees may be classified into
the members is li-
mited to the amount
two types:
of the shares held (a) Private limited companies.
by them.
(b) Public limited companies.
(a) Private Company
A company having a minimum paid-up share capital of one lakh rupees or
such higher paid-up share capital as may be prescribed, and which by its
articles, —
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in
a company jointly, they shall, for the purposes of this clause, be
treated as a single member:
Provided further that — (A) persons who are in the employment of
the company; and (B) persons who, having been formerly in the
employment of the company, were members of the company while in
that employment and have continued to be members after the
employment ceased, shall not be included in the number of members;
and
(iii) Prohibits any invitation to the public to subscribe for any securities of
the company.
Module Ten • Indian Companies Act, 2013 331
Explanation—
For the purposes of this clause, “significant influence” means control of
at least twenty per cent of total share capital, or of business decisions under
an agreement.
5. One-person Company
The 2013 Act introduces a new type of entity to the existing list, i.e.,
apart from forming a public or private limited company, the 2013 Act enables
the formation of a new entity, a ‘one-person company’ (OPC). An OPC means a
company with only one person as its member [Section 3(1) of 2013 Act].
6. Small Company
A small company has been defined as a company, other than a public
company.
(i) Paid-up share capital of which does not exceed 50 lakh INR or such
higher amount as may be prescribed which shall not be more than
five crore INR.
(ii) Turnover of which as per its last profit and loss account does not
exceed two crore INR or such higher amount as may be prescribed
which shall not be more than 20 crore INR.
As set out in the 2013 Act, this section will not be applicable to the
following:
1. A holding company or a subsidiary company
2. A company registered under section 8
3. A company or body corporate governed by any special Act [Section
2(85) of 2013 Act]
7. Dormant Company
The 2013 Act states that a company can be classified as dormant when it
is formed and registered under this 2013 Act for a future project or to hold an
asset or intellectual property and has no significant accounting transaction.
Such a company or an inactive one may apply to the ROC in such manner as
may be prescribed for obtaining the status of a dormant company [Section 455
of 2013 Act].
8. Banking Company
Banking company means a banking company as defined in clause (c) of
Section 5 of the Banking Regulation Act, 1949.
Distinction between a Private Company and a Public Company
Private Company Public Company
1. Requires minimum paid-up capital 1. Requires minimum paid-up capital of
of one lakh rupees five lakh rupees
2. Requires minimum two members 2. Requires minimum seven members
3. Maximum limit of 200 members 3. No maximum limit
4. Atleast two directors 4. Atleast three directors required
5. Consent of directors need not be 5. Consent of directors is to be filed
filed with the Registrar with the Registrar
Module Ten • Indian Companies Act, 2013 333
Conversion by Default
Private company imposes three characteristics restrictions, namely:
(a) restriction on transfer of shares;
(b) restrictions on public invitation to subscribe to its shares and
debentures and
(c) restriction on the maximum number of its members, which should
not exceed 200.
If default is made in complying with any of these restrictions, the company,
shall cease to be a private company and all provisions applicable to public
company shall apply to that company.
The company Law Board may, however, on an application grant relief in
committing the default, and from the date of such order, the company will
again be entitled to all the privileges and exemptions available to a private
company.
Companies, and finally getting the company registered with him. Once a
company is registered, it emerges as a legal entity.
From the point of view of ownership mainly two types of companies can be
formed — private company and public company. The promoters have to decide
whether it should be a private company or a public company considering the
nature of business to be carried on, capital requirements and the liability of
members. People who take all these steps are known as ‘promoters.’ They do
all necessary preliminary work incidental to the formation of a company.
Therefore, the term ‘promotion’ refers to a series of processes or stages
by which a company is brought into existence.
The stages of formation are:
1. Promotion stage
2. Selection of name
3. Incorporation stage
4. Raising of share capital stage
5. Commencement stage
We discuss each stage in detail:
1. Promotion Stage
This is the first stage in which the promoters conceive the idea of bringing
a company into being and take the necessary steps to constitute promotion
stage. This includes—
(a) Discovery of a business opportunity
(b) Detailed investigation
(c) Assembling
(d) Financing the proposition
Discovery of a Business Opportunity
Promoters should develop various business opportunities in a new field
which has not been commercially exploited or in some existing business lines
of manufacture or trade.
Detailed Investigation
The promoters need to make a detailed investigation of the different
business opportunities to find out whether it is worthwhile to enter the field
or not. Investigation should be in respect of the capital requirements, place of
location, size of the unit, market opportunities, threats, cost of production,
probable return on investment and the like. This will help the promoters to
know the profitability or otherwise of a particular opportunity.
Assembling
On satisfaction of the profitability of the proposed business, the promoters
take steps to assemble the necessary requirements of the proposed business,
i.e., arranging for purchase of plant and machinery, land and building, patents,
power supply, appointments, the required personnel, consent of other persons
willing to act as directors or founder members and preparing the necessary
documents for registration.
336 336 Legal Aspect of Business • Module Ten
Allotment of Shares
Allotment of shares means the distribution of securities in accordance
with or in proportion to applications from subscribers. The Board of Directors
at their meeting decide the basis of allotment and pass a formal resolution for
allotment. The letters of allotment are then sent to the subscribers and a
return of allotment is submitted to the Registrar of Companies.
5. Commencement Stage
A public company in order to commence its business has to obtain a
‘Certificate of Commence of Business’ from the Registrar of Companies by
submitting the following further statements:
1. A declaration that a copy of the prospectus is filed with him.
2. A declaration that minimum subscription has been received.
3. A declaration that the directors have taken up the qualification shares
and have paid for, like others.
4. A statutory declaration by the Secretary or one of the Directors that
the above requirements have been compiled with.
The Registrar of Companies will scrutinise all these documents and if
satisfied, he then issues a certificate to commence business.
Before a company commences its business, a team of people who can
manage the company must be constituted. Management is entrusted to
directors, who are collectively called ‘Board of Directors.’ The first directors
are appointed by the promoters. In its absence, signatories to the Memorandum
of Association, will act as directors. The first directors shall hold office till the
first general body meeting, at which the new directors are elected by
shareholders.
We have studied that in the process of formation of a company, the
promoters are required to prepare and file with the Registrar of Companies, a
number of documents. Of these the most important, which are considered to
be basic documents are Memorandum of Association, Articles of Association
and prospectus.
Duties of a Promoter
Promoters are neither agents nor trustees of the company they promote,
the reason being that no one can be an agent or trustee for a company, which
does not exist since a company comes into existence only on incorporation.
Module Ten • Indian Companies Act, 2013 339
Pre-incorporation Contracts
Pre-incorporation contracts are the contracts made by the promoters
purportedly on behalf of the company, before its incorporation, such as, for
acquisition of a property or a business, or for drafting and printing of
memorandum and articles, etc., though such contracts are vital for the very
birth of the company yet the company is not bound by such contracts, since
the company is non-existent before its incorporation and does not have the
capacity to contract. The company can neither sue nor be sued in respect of
such contracts. The company cannot even ratify or adopt such contracts after
incorporation. Thus, the promoters remain personally liable on such contracts.
In order to avoid the personal liability of the promoters, following clauses
may be included in pre-incorporation contracts.
(i) If the company, after its incorporation, adopts the contract, the liability
of the promoter shall cease with immediate effect;
(ii) If the company, after its incorporation, fails to adopt the contract,
within a certain time either party may rescind the contract.
Further, as soon as the company is incorporated, a fresh contract should
be made between the company and the third party, in terms of the old contract.
Change in Name
A company desiring to change its name may do so in accordance with the
provisions of Section 13 read with Section 4 of the Act by passing Special
Resolution and the name approved by the Ministry of Corporate Affairs (MCA)
on prescribed application. The power of the Central Government under Section
13(2) to approve change in name has been delegated to Registrar of Companies
(ROC).
However, if the change required is the addition thereto or deletion
therefrom, of the word “Private”, consequent upon conversion of a public
company into a private company or vice versa, no such approval of Central
Government is required.
Alteration of Authorized Capital
A company seeking to issue shares by way of Private Placement or Rights
Issue or by any other prescribed methods, has to check the Authorized Capital,
as the issue cannot exceed the amount of Authorized Capital. Thus, in the
view of the above, a company may alter its Authorized Capital, i.e., Capital
Clause by virtue of Section 13 read with Section 61 by passing an Ordinary
Resolution.
The Capital Clause will be altered by prescribed process as per the
applicable rules and payment of relevant stamp duty as may be applicable
and levied by concerned state in which the registered office of the company
is situated.
Change in Objects
A company may change its objects as enshrined in its MOA in accordance
with the provisions of Section 13 of the Act. Accordingly, any alteration of
MOA with respect to the objects of the company is permitted through Special
Resolution.
However, Section 13(8) restricts the change in object of a company which
has raised money from public through prospectus and still has any unutilised
amount out of the money so raised unless a special resolution is passed by
the company and the details of such resolution shall be published in one
vernacular language and one English language newspaper in circulation at
the place of registered office of the company as well as on the website of the
company indicating the justification for such change in the object.
Shift in Registered Office
As per Section 12 of the Act, every company shall have a registered office
at all times, to which all communications and notices may be addressed.
Every company within 30 days of its incorporation or any change in the
address of its registered office shall furnish a verification of registered office
in INC-22.
A company is permitted to change its registered office from its existing
location to another location—
• Within the local limits of the same city, town or village (e.g., Bandra,
Mumbai to Andheri, Mumbai)
342 342 Legal Aspect of Business • Module Ten
• Outside the local limits of the same city, town or village but:
within same state under jurisdiction of same ROC
under jurisdiction of another ROC within same state (e.g., Mumbai
to Pune)
Stamp Duty and Witness
The memorandum is to be stamped by affixing stamps of the prescribed
value. The memorandum should be signed and dated by all the subscribers
and witnessed by any one person.
Doctrine of Ultra Vires
The objects stated in the memorandum define the field of industry within
which the company must confine its activities. When a company acts beyond
its objects, it exceeds its legal capacity and its powers under the memorandum;
such an action is stated to be ultra vires the memorandum is void. The company
cannot even ratify such act by amending its memorandum.
The implications of ultra vires acts are:
1. Any member can get an injunction restraining the company from
acting ultra vires.
2. The directors become personally liable to the company and must make
good any loss incurred by the company under such Act.
3. The directors shall be personally liable to the third party for any loss
incurred by him, where such third party was incited by the directors
to contact with the company in a matter that was ultra vires.
Exceptions: The doctrine of Ultra Vires does not apply to-
(a) where an act is ultra vires the powers of the directors only, it can be
ratified by the shareholders.
(b) where an act is ultra vires the Articles of the company, the act can
be ratified by amending the articles.
(c) where company’s money has been spent ultra vires on purchasing
some property, the company’s right over that property are not affected.
Certificate of Incorporation
On the receipt of the necessary documents and on payment of the
necessary fees, the Registrar will issue the ‘Certificate of Incorporation’ if he
is satisfied that the requirements of the Companies Act have been complied
with. He will enter the company’s name in the Register. The company comes
into existence. A private limited company can commence its operations
immediately after incorporation. A public company, to do so, should raise the
required capital and obtain another certificate known as certificate of
commencement of business.
10.6 PROSPECTUS
A company may raise funds either by private placement with friends and
relatives or by making public issues. A company may raise funds by various
instruments, viz., shares, debentures, bonds or deposits. The procedure of
Module Ten • Indian Companies Act, 2013 345
Registration of Prospectus
A copy of the prospectus must be submitted to the Registrar for his
approval, before it is printed for mass circulation. Every person who is named
in the prospectus as a director or a proposed director, should consent and
sign the prospectus.
Within ninety days from the date on which a copy delivered for registration,
the prospectus will be issued by the company to the public.
Shelf Prospectus
“Shelf Prospectus” means a prospectus issued by any financial institution
or bank for one or more issues of the securities or class of securities specified
in that prospectus.
Module Ten • Indian Companies Act, 2013 347
Preference shares Preference shares are those, which have preferential right to the payment
are those, which of dividend during the life-time of the company, and a preferential right to the
have preferential return of capital when the company is wound up.
right to the pay-
ment of dividend Preference shares have the following characteristics:
during the life-time
of the company,
(i) The dividend on them is fixed by the Articles of the company;
and a preferential (ii) Preference shareholders get their fixed rate of dividend before any
right to the return of
capital when the
dividend is distributed among the other class of shareholders;
company is wound (iii) At the time of winding up of the company, the preference shareholders
up. must be paid back their capital before anything is paid to ordinary
shareholders.
Kinds of Preference Shares
1. Cumulative preference shares: The cumulative preference shares
are entitled to fixed dividends whether there are profits or no profits.
If profits are not sufficient to pay dividends in a particular year, the
dividends are accumulated and paid in the succeeding year as profits
become available for distribution.
2. Non-cumulative preference shares: Unlike the cumulative preference
shares, these shares cannot claim arrears of dividends of any year
out of the profits of subsequent years.
3. Participating preference shares: In the case of the participating
preference shares, shareholders receive a fixed rate of dividend in
priority to ordinary shares and, further, the right to participate in
the balance of profit in an agreed proportion together with ordinary
shareholders.
4. Non-participating preference shares: These shares are entitled to
only a fixed rate of dividend; they have no claim in the surplus profit,
which belongs to ordinary shareholders.
5. Redeemable preference shares: These are shares, which can be
purchased back by the company. The company reserves its right to
call back or purchase these shares at any time, subject to the
provisions of its Articles.
Module Ten • Indian Companies Act, 2013 349
equity any time the third and fifth year of issue. Since conversion to the
equity is compulsory, the CCP shares cannot be redeemed at any stage. The
CCP shareholders enjoy the same voting rights as the cumulative preference
shareholders. For calculation of debt equity ratio, CCP shares are treated as
part of equity. However, for calculation of preference-equity ratio, CCP shares
are totally excluded from both categories.
Rights Issue
When a company which has already issued shares wants to make a further
issue of shares, it is under a legal obligation to first offer the fresh issue to
the existing shareholders unless the company has resolved otherwise by a
special resolution. The right of existing shareholders to buy shares from the
company in this manner is transferable. If the market price of the shares is
Module Ten • Indian Companies Act, 2013 351
higher than the amount at which the company has offered new shares, the Right Issue
right to buy shares from the company will carry a price. Suppose a company When a company
offers to its equity shareholders the right to buy one equity share of Rs. l00 which has already
each at Rs. 120 for every equity of Rs. l00 each held. Suppose the market issued shares
wants to make a
value of one equity share is Rs. 180. Then the value of the right will be further issue of
calculated as follows: shares, it is under
Market value of 4 equity shares Rs. 180 × 4 = Rs. 720 a legal obligation to
first offer the fresh
Add: Issue price of 1 new equity share = Rs. 120 issue to the exist-
Total price of 5 shares = Rs. 840 ing shareholders
Value of one share = Rs.840/5 = Rs. 168 unless the com-
pany has resolved
The value of right = Rs.180 – Rs.168 = Rs. 12 otherwise by a
The whole process can be expressed in the form of the following formula also: special resolution.
New shares
Value of rights = × (cum right price × New issue price)
Total shares
It gives us the value of right attached to each share held. But in order to
buy the share from the company, a person will have to buy 4 such rights
because the company will issue one share against four shares held.
Debentures
The term debenture is defined as “a document under the company’s seal Debenture is de-
fined as a docu-
which provides for the payment of a principal sum and interest thereon at ment under the
regular intervals which is usually secured by a fixed or floating charge on the company’s seal
company’s property or undertaking which acknowledges a loan to the company.” which provides for
the payment of a
principal sum and
Kinds of Debentures
interest thereon at
1. Redeemable and Irredeemable: From the point of view of redemption, regular intervals
which is usually
debentures are classified into redeemable and irredeemable. Redeemable secured by a fixed
debentures are those that will be repaid by the company at the end of a or floating charge
specified period, or on demand; or by instalments. Irredeemable debentures on the company’s
are those that are not repayable during the life-time of the company. property or under-
taking which ac-
Irredeemable debentures are also called perpetual debentures. knowledges a loan
2. Mortgage and Simple: From the point of view of security, debentures to the company.
are classified into mortgage and simple or naked debentures. Mortgage
debentures, also called secured debentures, are those which are secured by
a charge on the assets or property of the company, whereas simple debentures
are those that are not secured by any charge on the assets of the company.
3. Registered and Bearer: From the point of view of records, debentures
may be classified into registered and bearer debentures. Registered debentures
are those in respect of which the names, addresses and particulars of the
holdings of debenture holders are entered in the Register of Debenture
holders. The transfer of registered debenture cannot be effected without the
execution of a regular transfer deed. As against this, the company keeps no
such records of bearer debenture holders. Bearer debentures are negotiable
by mere delivery of the document.
352 352 Legal Aspect of Business • Module Ten
(4) Where at any time the debenture trustee comes to a conclusion that
the assets of the company are insufficient or are likely to become insufficient
to discharge the principal amount as and when it becomes due, the debenture
trustee may file a petition before the Company Law Board and the Company
Law Board may, after hearing the company and any other person interested
in the matter, by an order, impose such restrictions on the incurring of any
further liabilities as the Company Law Board think necessary in the interests
of holders of the debentures.
Transfer of Shares
Shares are movable
Shares are movable property transferable by delivery and endorsement,
property transfer- in accordance with the articles of association. The instrument of transfer,
able by delivery and i.e., transfer deed is executed both by the transferor and the transferee, and
endorsement, in ac- the transferor endorses his signature on the back of the share certificate and
cordance with the
articles of associa- delivers it to the transferee. A company shall register transfer of shares only
tion. when a proper instrument of transfer duly stamped and executed, alongwith
the share certificate or (letter of allotment) is lodged with the company.
Thereafter, the transferee’s name is entered into the register of members,
Module Ten • Indian Companies Act, 2013 355
and the transferor’s name is either struck off or his holding is reduced by the
number of shares transferred.
Transmission of Shares
Transmission of shares means transfer of property or title in shares by Transmission of
law. Under this case the shares of the deceased member may be transferred shares means
to his legal representatives. In case of bankrupt member the shares may be transfer of property
transferred to his official Receiver, in case of lunatic member shares are or title in shares by
law.
transferred to his administrator (appointed by the Court).
There are two alternatives open to a legal representative (1) the legal
representative may himself become the member and/or (2) he may transfer
the shares to some other person.
If the legal representative does not opt for any alternative, the company
sends a notice for his decision. If no reply is received within 90 days, the
Directors may withhold the payment of dividend and bonus payable on these
shares. If the legal representative wants to become the member of the company,
he will have to request for the same with the company, in that case the share
certificates and the succession certificate have to be enclosed with the
application. On being satisfied with the documents, the company will delete
the name of the deceased member and in that place enter the name of the
legal representative in the Register of Members, then a new share certificate
will be issued to the legal representative in his name.
If the legal representative opt to transfer the shares he will have to follow
the usual procedures of transfer of shares. The one difference is that the
legal representative should attach one more document, i.e., the succession
certificate with the instrument of transfer.
Share Certificates
Share certificates are issued by a company to its shareholders, as an A share certificate
evidence of the title to the shares. A share certificate is a declaration that is a declaration that
the person whose
the person whose name is written on that certificate is legal owner of the name is written on
number of that certificate is le-
shares specified therein. A share certificate is transferable by delivery and gal owner of the
endorsement. number of shares
specified therein.
Share Warrant
A share warrant entitles the bearer to the shares specified in that warrant
and the shares may be transferred to him on delivery of the warrant. A public
company may issue share warrants with respect to its fully paid-up shares, if
authorised by its Articles and with prior approval of the Central Government.
Difference between Transfer and Transmission of Shares
Transfer of Shares Transmission of Shares
1. It is a voluntary one. 1. It happens according to the operations
of law.
2. A duly executed instrument of 2. There is no need to have such
transfer is essential. instrument of transfer, but a letter of
request with succession certificate
should be enclosed.
356 356 Legal Aspect of Business • Module Ten
Dividend on Shares
The shareholders get the return on their share investment in the company
in the form of dividend. Dividend can only be paid out of the profit and not out
of capital.
Normally, dividend is recommended by the Board of Directors on the
basis of the profits earned by the company and are paid to the shareholders
after it is declared at the Annual General Meeting. The shareholders have a
right to declare dividend or adopt as it is recommended by the directors but
they have no right to increase the dividend.
The Board of Directors may pay an interim dividend, if so authorised by
the Articles, if they feel satisfied that the current year’s profits are sufficient
for paying interim dividend.
The directors are The directors are the brain of the company, who generally control the
the brain of the company’s functions and management. The directors may be described as
company, who ge- agents and trustees of the company who act on behalf of the company.
nerally control the
company’s func- A private company must have a minimum of two directors. The maximum
tions and manage- number of directors is generally fixed by its articles.
ment.
Any individual who is not suffering from any disqualification mentioned
u/s 274 of the Act or under the articles can be appointed as a director of a
company.
Appointment
The first directors of a company are appointed by the subscribers to the
memorandum or the subscribers themselves, who are individuals, are deemed
as first directors of the company.
The subsequent directors are appointed by passing an ordinary resolution
at the general meeting of the company. The directors shall hold office in
accordance with the provisions of the articles. In the absence of any specific
provision in the articles, all the directors shall retire at the end of next
annual general meeting. A private company may appoint all permanent
directors, if the articles so provide.
Module Ten • Indian Companies Act, 2013 357
Qualifications
1. To hold the prescribed number of qualification shares within two
months of his appointment. The value of qualification shares cannot
exceed Rs.5,000 except the nominal value of one share exceeds that
amount.
2. To be free from following disqualifications:
(a) person certified to be of unsound mind,
(b) person being an undischarged insolvent,
(c) person against whom an insolvency petition is pending,
(d) person sentenced to imprisonment for not less than six months
for any offence involving moral turpitude and five years have not
elapsed from the expiry of the sentence,
(e) person whose calls are in arrears for six months,
(f) person guilty of offence for fraudulent promotion, formation,
management or winding up of a company.
(g) any other disqualification provided in the articles of a private
company.
Duties of Directors
1. To act honestly in good faith for the benefit of the company and not to
make secret profit.
2. To act within the powers conferred by Memorandum and Articles.
3. To attend personally to the business of the company with reasonable
care and diligence.
4. To attend Board meetings. If a director absents himself from three
consecutive meetings or from all meeting during 3 consecutive
months, without obtaining leave of absence from the Board, he shall
cease to be a director.
5. Not to delegate his functions unless and to the extent authorised by
the articles.
6. To disclose to the Board, his interest in any transaction with the
company.
Liabilities of Directors
(a) The directors are liable to pay on the shares held by them like any
other shareholder.
(b) If a director acts ultra vires the company, he will be liable to indemnity
the company for any loss or damage and also the third party for
breach of warranty of authority.
358 358 Legal Aspect of Business • Module Ten
Loans to Directors
‘Managing Director’ No company (except a private company which is not a subsidiary of a
is a director who, public company) can give loans, without the previous approval of the Central
by virtue of an Government, to any director, his partner or relative, any firm in which a
agreement with the
company or of a
director is a partner, any private company in which a director is a member,
resolution passed any body corporate in which a director or directors control 25 per cent of
by the company in voting power or any company under the same management.
a general meeting
or by its Board of
Directors or by vir- Remuneration to Directors
tue of its memoran-
dum or articles of Remuneration payable to directors is determined either by the Articles of
association, is en- the company or by a resolution of the company in general meeting. Besides,
trusted with sub-
stantial powers of
salary, bonus and commission, the remuneration may be paid by way of sitting
management, fees, rent free accommodation, perquisites made available from the company
which would not funds, expenditure incurred for any obligatory service, expenditure incurred
otherwise be exer- to insure life, to provide any gratuity or pension.
cisable by him.
In case of a public company and a ‘private company’, which is subsidiary of
a public company, the remuneration of directors is subject to the restrictions
laid down in Sections 198 and 309.
Managing Director
‘Managing Director’ is a director who, by virtue of an agreement with the
company or of a resolution passed by the company in a general meeting or by
its Board of Directors or by virtue of its memorandum or articles of association,
is entrusted with substantial powers of management, which would not
otherwise be exercisable by him.
Module Ten • Indian Companies Act, 2013 359
Board of Directors
All the directors of the company jointly constitute the ‘Board.’ The directors All the directors of
must act jointly and concurrently. For this purpose, it is essential that the company jointly
company’s decisions are taken jointly by the Board, at the Board Meeting. The constitute the
‘Board.’
decisions are generally taken by majority and sometimes under power of the
Chairman.
The Board of Directors must meet atleast once in every three months,
and atleast four such meetings to the provisions of the articles. The
proceedings of every meeting should be recorded in a ‘Minutes Book.’
Manager
‘Manager’ is an individual who, subject to the superintendence, control ‘Manager’ is an in-
and direction of the Board of Directors, has the responsibility for management dividual who, sub-
of the whole or substantially the whole of the affairs of a company. Manager ject to the superin-
may be one of the directors or any other person appointed under a contract of tendence, control
and direction of the
service. Board of Directors,
The provisions relating to the appointment, disqualifications term of has the responsibi-
lity for management
appointment and remuneration of a manager are similar to those for managing of the whole or
director. substantially the
whole of the affairs
of a company.
Secretary
A secretary is an officer of the company appointed to perform the duties
which may be performed by a Secretary under the Act and other managerial
or administrative duties. Thus, a firm or body corporate cannot be appointed
as a Secretary.
Every company having a paid-up share capital of Rs.25 lakhs or more
shall have a whole-time secretary. Where the paid-up capital of a company is
Rs.50 lakhs or more, the Secretary must be a qualified member of the Institute
of Company Secretaries of India.
360 360 Legal Aspect of Business • Module Ten
the floor price. Every public offer through the book-building process has a
Book Running Lead Manager (BRLM), a merchant banker, who manages the
issue. Further, an order book, in which the investors can state the quantity of
the stock they are willing to buy, at a price within the band, is built. Thus the
term 'book-building.' An issue through the book-building route remains open
for a period of 3 to 7 days and can be extended by another three days if the
issuer decides to revise the floor price and the band.
The two types of Initial Public Offer or Public Issue characteristics are
presented in the following table 10.1.
Table 10.1
ISSUE
OFFER PRICE DEMAND PAYMENT RESERVATIONS
TYPE
F ixed Price at which the securities Demand for the 100 % advance 50 % o f the shares
Price are offered and would be securities offered payment is requ ired offered are reserved fo r
Issues allotted is made known in is known only to be made by the applications below Rs.
advance to the investors after the closure of investo rs at the time 1 lakh and the
the issue of application. balance for higher
amount applications.
Book A 20 % price band is offered by Demand for the 10 % advance 50 % o f shares offered
Building the issuer within w hich securities offered , payment is requ ired are reserved for QIBs,
Issues investo rs are allowed to bid and and at various to be made by the 35 % for small
the final price is determined by prices, is available QIBs along with the investo rs and the
the issuer only after closure of on a real time application, while balance for all other
the bidding. basis on the BSE other categories of investo rs.
website during the investo rs have to
bidding period.. pay 100 % advance
along with the
application.
Benefits of IPOs
For businesses, stocks and shares are a fast way to raise revenue for
business expansion and growth. They also can take a business to the next
level. By becoming a publicly traded company a business can take advantage
of new, larger opportunities and can start working towards incorporation and
even worldwide expansion. IPO gives a company fast access to public capital.
Even though public offering can be costly and time consuming, the tradeoffs
are very appealing to companies. IPOs are also a relatively low risk for
businesses and have the potential for huge gains and for huge opportunities.
The more investors wish to invest in a company, the more the company stands
to or from IPOs and other stock offerings.
For the investor, IPOs are attractive mainly because they may be
undervalued. Initially, to make IPOs more attractive, many companies will
offer their initial public offering at a low rate. This helps to encourage investors,
and investors will often buy IPOs, thinking that the new company or the
newly public company will be the next big thing with a huge profit margin. As
prices grow and demand for the IPOs grows, early investors stand to make a
lot of profit — and very quickly.
1. No Cost of Capital
It does not need to pay interest on the capital raised from Public. Even it
doesn't need to repay the capital. Only in case of liquidation/bankruptcy it
needs to pay the residual amount after paying bank loans, debentures,
preferential shares etc.
2. Huge Amounts can be Raised
It can raise huge amount of capital by going to public which may not be
possible otherwise.
3. Brand Value
Company's brand value will get increased because people come to know
about the company very well.
4. Correct Valuation
Since the share price reflects the company's financial healthiness it would
become easy to arrive at a price in case of mergers and acquisitions.
1. Disclosure of Information
Once a company opens to public it has to disclose so much information to
public on regular intervals. This includes share holding pattern, quarterly
and annual financial statements, profiles of directors etc. Because of this
Module Ten • Indian Companies Act, 2013 365
Introduction
Corporates may raise capital in the primary market by way of an initial
public offer, rights issue or private placement. An Initial Public Offer (IPO) is
the selling of securities to the public in the primary market. This Initial
Public Offering can be made through the fixed price method, book building
method or a combination of both.
Book Building is essentially a process used by companies raising capital Book Building is
through Public Offerings — both Initial Public Offers (IPOs) and Follow-on essentially a pro-
cess used by com-
Public Offers (FPOs) to aid price and demand discovery. It is a mechanism panies raising capi-
where, during the period for which the book for the offer is open, the bids are tal through Public
collected from investors at various prices, which are within the price band Offerings — both
specified by the issuer. The process is directed towards both the institutional Initial Public Offers
(IPOs) and Follow-
as well as the retail investors. The issue price is determined after the bid on Public Offers
closure based on the demand generated in the process. (FPOs) to aid price
and demand dis-
Thus, Book Building is basically a capital issuance process used in Initial covery.
Public Offer (IPO) which aids price and demand discovery. It is a process used
for marketing a public offer of equity shares of a company. It is a mechanism
where, during the period for which the book for the IPO is open, bids are
collected from investors at various prices, which are above or equal to the
floor price. The process aims at tapping both wholesale and retail investors.
The offer/issue price is then determined after the bid closing date based on
certain evaluation criteria.
366 366 Legal Aspect of Business • Module Ten
• The book runner and the company conclude the final price at which
it is willing to issue the stock and allocation of securities.
• Generally, the number of shares are fixed, the issue size gets frozen
based on the price per share discovered through the book building
process.
• Allocation of securities is made to the successful bidders.
• Book Building is a good concept and represents a capital market
which is in the process of maturing.
Qualified Institutional Each of these categories is allocated a certain percentage of the total
Investors are Insti- issue. The total allotment to the RII category has to be at least 35% of the
tutional Investors
who possess the
total issue. RIIs also have an option of applying at the cut-off price. This option
expertise and the is not available to other classes of investors. NIIs are to be given at least 15%
financial muscle to of the total issue.
invest in the securi-
ties market. And the QIBs are to be issued not more than 50% of the total issue.
Allotment to RIIs and NIIs is made through a proportionate allotment system.
The allotment to the QIBs is at the discretion of the Book Running Lead
Manager (BRLM).
Lately there have been some complaints by the QIBs of Book Running
Lead Managers resorting to favouritism while allocating shares. The Securities
and Exchange Board of India (SEBI) is in the process of reviewing this
mechanism.
Cut-off Price
Once the issue period is over and the book has been built, the Book
The cut-off price is
Running Lead Manager (BRLM) along with the issuer arrives at a cut-off
the price discov-
ered by the market. price. The cut-off price is the price discovered by the market. It is the price at
It is the price at which the shares are issued to the investors.
which the shares
are issued to the Investors bidding at a price below the cut-off price are ignored. So those
investors. investors who apply at a price higher than the cut-off price have a higher
chance of getting the stock. So the question that arises is: How is the cut-off
price fixed?
The cut-off price is arrived at by the method of Dutch auction. In a Dutch
auction the price of an item is lowered, until it gets its first bid and then the
item is sold at that price.
Let us suppose, A Ltd., makes an offer for 200,000 shares. The issue is
oversubscribed that is there is demand for more shares than the issuer plans
to issue. Further, a minimum allotment of 100 shares is to be made for every
investor.
The cut-off price has been decided and now the allotments are to be
made. In the RII category, 1,500 applicants have applied for 100 shares each,
that there is a demand for 150,000 shares.
A Ltd., plans to issue 35% of the total issue to this category, that is
70,000 shares. In the NII category, 200 applicants have applied for 500 shares
each, that is 100,000 shares. A Ltd., plans to issue 15% of the total issue to
this category, that is 30,000 shares.
The cut-off price has already been decided, so adjusting the quantity
remains the only way of reaching the equilibrium. Applying the proportionate
allotment system each investor in the RII category will get 46.67 shares
[(70,000/ 150,000) x 100]. But the minimum allotment has to be 100 shares.
So through a lottery, 700 investors are chosen and allotted 100 shares
each, making a total of 70,000 shares. In the NII category every investor will
get 150 shares [(30,000/100,000) x 500]. And that is how equilibrium is reached.
the stock has not been satisfied and once it gets listed they tend to pick up
the stock from the secondary market.
Since the demand is greater than supply the prices tend to rise way
beyond what the fundamentals of the stock would justify. So in order to stabilise
the post-issue price of the stock, the issuer has to issue more shares in case
of oversubscription.
These shares are taken from the pre-issue shareholders or promoters
and are issued to the investors who have come in through the public offer on
a prorata basis. The green shoe option can be a maximum of 15% of the public
offer.
Meetings
A company functions through its directors, who hold meetings and decide
on matters concerning the company’s business. Besides, the shareholders
also meet annually to take important decisions giving policy guidelines to the
directors on various matters. Meetings are therefore, of great significance
with regard to decision-making on company affairs.
Company meetings are of four types — Board Meeting, Statutory Meeting,
Annual General Meeting and Extra Ordinary General Meeting.
Board Meetings
In order that the Board of Directors should meet at regular intervals, it is
essential that a Board Meeting be held atleast once in every three months
and atleast four times in a year.
Proper notice of the meeting should be given to every director.
The quorum for a Board Meeting is one-third of the total number of directors
on the Board, or two directors, whichever is higher. If the quorum is not
present, the board cannot transact any business and the meeting shall stand
adjourned for the same day in the next week, at the same time and place.
The Chairman of the Board presides over the meeting. If the Chairman is
not present, the directors present shall appoint one of themselves as the
Chairman, who shall then preside.
At ‘a Board meeting’, the matters generally taken up for consideration
include making calls on shares, issuing debentures or other borrowings,
investment of company’s funds and extending loans, delegation of certain
powers to a director or a committee of the Board, filling a casual vacancy in
Board, appointment of a managing director or manager, etc.
370 370 Legal Aspect of Business • Module Ten
Statutory Meeting
Statutory meeting is the first general meeting of the members of the
company. It is held by public limited companies within a period of not less
than one month and not more than 6 months, from the date it is entitled to
commence business. The meeting is held for discussing the matters relating
to the formation of the company and matters arising out of the statutory
report.
Annual General Meeting
Annual General Meeting (AGM) is the meeting of the members of a company.
It is to be held by every company — public or private.
The first AGM must be held within 18 months of the date of incorporation
of the company. One AGM must be held in every calendar year. The time gap
between two successive annual general meetings should not exceed 15 months
(which may be extended by the Registrar, as on application by another 3
months).
AGM must be held at the registered office of the company or at any other
place in the city where the registered office is situated and not elsewhere.
The meeting must be held during business hours and on a working day.
The company must give a notice of atleast 21 clear days to its members. A
shorter notice can be given if all the members agree to it unanimously.
The notice must specify the place, day and hour of the meeting and the
business to be transacted thereat. Besides, a copy of the balance sheet, profit
and loss account, auditors and documents attached thereto, shall be sent
alongwith the notice. It is also accompanied by an ‘explanatory statement’
setting out the material particulars regarding ‘special business’ to be transacted
at the meeting. ‘Special business’ means any business other than ‘ordinary
business.’ And ordinary business transacted at an AGM includes:
1. Consideration and adoption of accounts, report of directors and
auditors,
2. Declaration of dividend,
3. Appointment of directors in place of those retiring by rotation, and
4. Appointment of auditors and fixation of their remuneration.
Quorum
Minimum number of
Minimum number of members required to constitute a valid meeting and
members required to transact business is called quorum. If no quorum is present, there can be
to constitute a valid no meeting and no business can be transacted.
meeting and to
transact business Unless the Articles provide for a larger number, quorum for a public
is called quorum. company shall be five members present personally and for a private company
shall be two members present personally. Proxies are not counted for the
purpose of quorum.
If within half an hour from the time appointed for holding the meeting,
the quorum is not fulfilled, the meeting shall stand adjourned to the same
day of the next week at the same time and place, or such other day, time and
place as the Board may determine.
Minutes: A brief summary of the proceedings of the meeting, is to be
recorded in the Minutes Book.
Module Ten • Indian Companies Act, 2013 371
Account Books
The companies are required to keep proper books of accounts in respect of:
(a) all sums of money received and expended by the company;
(b) all sales and purchases of goods by the company;
(c) all assets and liabilities of the company; and
(d) in case of company engaged in production, manufacturing, processing
or mining activities, particulars relating utilisation of material or
labour or other items of cost as prescribed by the Central Government.
Thus, the usual books of account maintained by a company are cash book,
petty cash book, general ledger, sales book, purchases book, journal, bills
receivable ledger, bills payable ledger, bank book, etc. The ledger is sometimes
divided into Creditors’ Ledger, Debtors’ Ledger, Assets’ Ledger and Expenses
Ledger, etc.
The books of account must be kept either at the registered office of the
company or at any other place as the Board of Directors may decide. Account
books together with vouchers of previous 8 years should be preserved.
Accounts relating to a branch office should be maintained at the branch
itself and summarised accounts should be forwarded to the registered office
at an interval of three months.
The accounts must give a true and fair view of the state of company’s
affairs and must be kept on accrual basis (and not cash basis) and according
to double entry system of accounting and Indian Accounting Standards (IAS).
Statistical Books
A company often maintains certain statistical books, which facilitate the
working of the company such as:
(i) Share application and allotment book.
(ii) Share certificate book.
(iii) Register of share transfer.
(iv) Register of shareholders address.
(v) Dividend Register.
(vi) Director attendance book.
(vii) Seal book, etc.
Inspection
The books of account should be kept open for inspection by the Registrar
or by any authorised officer, during business hours. It is the duty of every
director, officer or employee of the company to give all assistance for inspection.
Besides, every director has the right to inspect the books of accounts
during business hours.
Audit
A company is required to get its accounts audited by a qualified Chartered
Accountant in practice or a firm of Chartered Accountants and obtain an
audit report.
No person should hold audit of more than 20 companies at a time.
Module Ten • Indian Companies Act, 2013 375
The first auditors of the company are appointed by the Board of Directors
of the Company, who hold office till the conclusion of the first annual general
meeting. Subsequent auditors are appointed by the shareholders at every
annual general meeting who hold office till the conclusion of the next annual
general. meeting.
The auditor is required to submit his report on the accounts of the company
to its shareholders. The auditor’s report should state:
(i) whether the accounts are kept in accordance with the provisions of
the Act,
(ii) whether the accounts give a true and fair view of the state of affairs
of the company,
(iii) whether he has obtained all the information and explanation
which to be best of his knowledge and belief were necessary for the
purpose of audit,
(iv) whether the company’s final accounts are in agreement with the
books of account and returns, and
(v) whether he has received report/returns on the accounts of any branch
office.
Besides, the auditor is also required to inquire into and report on matters
specified in Section 227(IA) and the MAOCAR Order, 1988.
Directors’ Report
The Board of Directors must every year lay before the members in annual
general meeting,
(i) Balance Sheet,
(ii) Profit and Loss Account, and
(iii) Report by the Company’s Board of Directors.
The directors report should give the following particulars:
(i) state of company affairs;
(ii) amount proposed to be carried to reserves;
(iii) dividend recommended;
(iv) material changes and commitments affecting the financial position
of the company;
(v) the conservation of energy, technology absorption, foreign exchange
earning and outgo.
(vi) names of company’s employees whose remuneration was not less
than Rs.3,00,000 per financial year or Rs.25,000 p.m. during the
year;
(vii) particulars of employees who have financial state in the company are
in receipt of remuneration in excess of that drawn by managerial
personnel; and
(viii) whether any employee mentioned in (vii), is a relative of any director
or manager of the company, and if so the name and other particulars
of such director, etc.
(ix) Corporate Governance Report and other compliance statements.
376 376 Legal Aspect of Business • Module Ten
Annual Returns
Three copies of the balance sheet, profit and loss account and other
documents to be attached therewith must be filed with the Registrar within
30 days of the annual general meeting.
A company should also file with the Registrar an annual return in the
form as given in Schedule V, within 60 days of the annual general meeting.
whose turnover hardly exceeds a few lakhs of rupees. Titan Paper Tubes
Co.(Pvt.) Ltd., Ankleshwar, for example had a turnover of just Rs.50 lakhs
during 1982-83. There are companies whose turnover exceeds a few hundred
crores of rupees. The Indian Oil Corporation (IOC), a Government company
registered a turnover of Rs.7,833 crores in 1982-83 and Tata Iron and Steel
Company had sales of Rs.781 crores in 1983-84.
Not only a company lends itself to different sizes it is adjustable to different
business also. A company is suitable for manufacturing, trading, banking,
insurance, transportation, healthcare, construction, consultancy, agency or
any other activity.
8. Financial Strength: A public company is in a better position to raise
funds. Its members are many and they all contribute to its capital. Financial
institutions willingly lend money to the compay because of its big size,
professional management and sure repayment. Financial strength stands
the company in a good stead.
9. Diffusion of Risk: Risk is shared by many but not by one or two
shareholders. Moreover, sharing of risk can be avoided if shareholders are
desirous to do so by transfering shares to others.
10. Discipline, the Company Law: Company is governed by the Companies
Act, 1956. The discipline of the company law, right from its incorproation till
its winding up, protects the interests of shareholders. A large number of
articles, a large number of sections of the Companies Act, prescribe discipline,
breach of any of which exposes the director to penal action under the law.
These disciplines are very healthy in the interests of the investors, financial
institutions, creditors, government and general public.
11. Best fit for developing Countries: Most developing countries are
known to possess rich and vast resources. They need enterprising business
persons to come forward to start business and exploit the available resources
for speedy development of the economies. The complexities of todays business
changing business environment; globalisation; crumbling trade barriers; global
flow of capital and technology; intensity of market competition make the
company form of ownership best fit for developing countries.
Limitations
The company form of ownership has certain limitations.
1. Government Restrictions: The company is subject to several
restrictions. Government has passed a number of legislations for regulating
companies. Some important legislations are:
The Companies Act, 1956.
The Industrial (Development and Regulation) Act, 1951 (IDR Act).
The Foreign Exchange Management Act, 1999 (FEMA).
The Monopolies and Restrictive Trade Practice Act, 1969 (MRTP).
The Competition Act, 2002.
These and other legislations will decide such important matters as:
Who should own what business?
Where the company should be located?
How much the company should produce or sell?
378 378 Legal Aspect of Business • Module Ten
GOVERNMENT UNDERTAKINGS
Definition
In simple terms a public sector enterprise is an industrial, commercial or
other economic activity owned and managed by the central or state government
or jointly by both. A comprehensive definition of a public sector unit is given by
experts at the International Centre for Public Enterprises (ICPE) Yugoslavia.
To quote the Centre:
− “A public enterprise is an organisation which is:
− owned by public authorities including central, state or local authorities
to the extent of 50 per cent or more;
− the right to appoint top management and to formulate critical policy
decisions are under the top management control; A public sector en-
− is established for the achievement of a defined set of public purposes, terprise is an indus-
which may be multi-dimensional in character; trial, commercial or
other economic ac-
− and is consequently placed under a system of public accountability; tivity owned and
managed by the
− is engaged in activities of a business character; central or state
− involves the basic idea of investment and returns; government or
jointly by both.
− and which markets its outputs in the shape of goods and services.”
of inflation triggered by cost escalation and its financing. The reasons for
delay are: delay in the acquisition of land, supply of critical equipment and
material, approval procedure of foreign aid agencies, law and order
disturbances, forest clearance and difficult geological conditions. Some of
these reasons together with problems of power supply delayed 11 central coal
projects.
4. Ineffective Management: The management of public sector units is
generally ineffective. This is because of the fact that bureaucrats, often with
neither leadership qualities nor business acumen, are the chief executives.
Added to this is the uncertainty of tenure faced by the top executives. This
problem is now solved as the tenure is made for five years to start with to be
renewed in the case of proven efficiency.
5. Bad Industrial Relations: The public sector units are over-manned.
Overstaffing had led to multiple trade unions resulting in inter and intra
union rivalry and at unions fighting against the management. Singareni Coal
Co. Ltd., is probably the ultimate in spoilt industrial relations. The company
maintained its track record in spoiled industrial relations. In 1990-91 there
were 445 strikes followed by heavy absenteeism. The company suffered a loss
of production of 3.12 million tonnes and 34.19 lakh man days were lost.
6. Unimaginative Production and Unfavourable Pricing Policies: The
products produced by many public sector units are unrelated to market
demand. Yet products are sold because their products enjoy virtual monopoly.
The pricing practice reveals a lot of variations from the suggested norms.
7. Nepotism and Corruption: Executives of many PSUs indulge in nepotism
and corruption. Nepotism is manifest, among others, through ancillarisation.
The kith and kin of the executives are encouraged to set up ancillary units
and favours are shown to them.
8. Delay in Appointment of Top Executives: Non-appointment or delay
in appointment of people to the top position in many undertakings is yet
another problem faced by PSUs. By end of March 1988 as many as 24 chief
executives’ positions and 52 directors posts were lying vacant for nearly one
year.
9. Underutilisation of Capacity: Underutilisation of capacity is another
problem faced by government undertakings. During 1990-91, 4 per cent of the
units recorded capacity utilisation less than 75 per cent. Only 54 per cent
registered capacity utilisation of more than 75 per cent. The loss due to
underutilisation of capacity in 1990-91 was Rs.14,496 crores which was Rs.175
crores above the previous year’s loss.
10. Others: Wrong choice of locations, uncertainty about financial
allocations, inefficient inventory control, and consumer discontentment due
to ever increasing prices of end products, and poor quality are the other
problems of public sector units.
Whatever the critics point out, the fact remains that public undertakings
have, as mentioned above, vastly contributed to India’s ranking as one of the
fast developing countries. Nor should anybody deny the fact that public sector
units are singularly responsible for laying a strong foundation for the further
development of our economy.
Module Ten • Indian Companies Act, 2013 387
Highlights
Companies Act, 2013 is an Act of the Parliament of India which regulates
incorporation of a company, responsibilities of a company, directors, dissolution
of a company. The 2013 Act is divided into 29 chapters containing 470 Sections
as against 658 Sections in the Companies Act, 1956 and has 7 Schedules.
The Act has replaced The Companies Act, 1956 (in a partial manner) after
receiving the assent of the President of India on 29 August 2013.
The Act comprises of 29 Chapters, 470 Clauses with 7 Schedules as against
658 Sections and 14 Schedules in the Companies Act, 1956.
13 Parts 29 Chapters
15 Schedules 7 Schedules
5. Sign and file various documents including MOA and AOA with the
Registrar of Companies electronically.
6. Payment of Requisite fee to Ministry of Corporate Affairs and also
Stamp Duty.
7. Scrutiny of documents at Registrar of Companies [ROC].
8. Receipt of Certificate of Registration/Incorporation from ROC.
2. Memorandum of Association
Content: The 2013 Act specifies the mandatory content for the
memorandum of association which is similar to the existing provisions of the
1956 Act and refers inter alia to the following:
• Name of the company with last word as limited or private limited as
the case may be
• State in which registered office of the company will be situated
• Liability of the members of the company
However, as against the existing requirement of the 1956 Act, the 2013
Act does not require the objects clause in the memorandum to be classified
as the following:
1. The main object of the company
2. Objects incidental or ancillary to the attainment of the main object
3. Other objects of the company [Section 4(1) of 2013 Act]
The basic purpose in the 1956 Act for such a classification as set out in
Section 149 of the 1956 Act, is to restrict a company from commencing any
business to pursue ‘other objects of the company’ not incidental or ancillary
to the main objects except on satisfaction of certain requirements as prescribed
in the 1956 Act like passing a special resolution, filing of declaration with the
ROC to the effect of resolution.
Reservation of Name: The 2013 Act incorporates the procedural aspects
for applying for the availability of a name for a new company or an existing
company in Sections 4(4) and 4(5) of 2013 Act.
3. Articles of Association
The 2013 Act introduces the entrenchment provisions in respect of the
articles of association of a company. An entrenchment provision enables a
company to follow a more restrictive procedure than passing a special resolution
for altering a specific clause of articles of association. A private company can
include entrenchment provisions only if agreed by all its members or, in case
of a public company, if a special resolution is passed [Section 5 of 2013 Act].
Alteration of Memorandum
The 2013 Act imposes additional restriction on the alteration of the object
clause of the memorandum for a company which had raised money from the
public for one or more objects mentioned in the prospectus and has any
unutilised money. The 2013 Act specifies that along with obtaining an approval
by way of a special resolution, a company would be required to ensure following
if it intends to alter its object clause:
Module Ten • Indian Companies Act, 2013 391
4. Incorporation of Company
The 2013 Act mandates inclusion of declaration to the effect that all
provisions of the 1956 Act have been complied with, which is in line with the
existing requirement of 1956 Act.
Additionally, an affidavit from the subscribers to the memorandum and
from the first directors has to be filed with the ROC, to the effect that they
are not convicted of any offence in connection with promoting, forming or
managing a company or have not been found guilty of any fraud or misfeasance,
etc., under the 2013 Act during the last five years along with the complete
details of name, address of the company, particulars of every subscriber and
the persons named as first directors.
The 2013 Act further prescribes that if a person furnishes false
information, he or she, along with the company will be subject to penal provisions
as applicable in respect of fraud, i.e., Section 447 of 2013 Act [Section 7(4) of
2013 Act; Also refer the chapter on other areas].
9. Small Company
What is a Small Company?: It means a company, other than a public
company, paid-up share capital of which does not exceed fifty lakh rupees or
such higher amount as may be prescribed which shall not be more than five
crore rupees; or turnover of which as per its last profit and loss account does
not exceed two crore rupees or such higher amount as may be prescribed
which shall not be more than twenty crore rupees. The 2013 Act provides
exemptions to Small Companies primarily from certain requirements relating
to board meeting, presentation of cash flow statement and certain merger
process.
Bare Act Language: According to Section 455 of the Companies Act 2013,
where a company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and “has no significant accounting
transaction”, such a company or an Inactive Company may make an application
to the Registrar in such manner as may be prescribed for obtaining the status
of a dormant company.
Before applying for Status of Dormant Company, following conditions are
required to be fulfilled: ü No inspection, inquiry or investigation has been
ordered or taken up or carried out against the company; ü The company is
neither having any public deposits which are outstanding nor is the company
in default in payment thereof or interest thereon; ü No prosecution has been
initiated or pending against the company under any law; ü The company has
not defaulted in the payment of workmen’s dues; ü The company does not
have any outstanding statutory taxes, dues, duties, etc. payable to the Central
Government or any State Government or local authorities etc.; ü The
application has not been made with an objective to deceive the creditors or to
defraud any other person; ü The securities of the company are not listed on
any stock exchange within or outside India; ü The company is not having any
outstanding loan, whether Secured and Unsecured – But if company has any
Outstanding Unsecured Loan, then the company may apply for status of
DORMANT only after obtaining NOC from the lender. Such NOC required to be
attached in the Form which require to file with ROC. ü There is no dispute in
the management or ownership of the company; A certificate in this regard
required to be taken from Management. Such Certificate required to be attached
in the Form which require to file with ROC.
How to Apply for a Dormant Company Status?
Step 1: The company must pass a special resolution in the general meeting
of the company or after issuing a notice to all the shareholders of the company
and obtaining consent of at least 3/4th shareholders (in value) for the purpose
of obtaining dormant company status.
Step 2: A company can get a status of dormant company by filing an
application before the MCA in Form MSC-1.
Step 3: If the registrar finds that application by the company fulfills all
the conditions, it can give company a certificate of Dormant Company.
It is important to note that the registrar has the power to strike off the
name of the company from the register if the Company remains dormant
for five consecutive years.
11. Prospectus
The 2013 Act has introduced a new section [Section 23] to explicitly provide
the ways in which a public company or private company may issue securities.
This section explains that a public company may issue securities in any of the
following manners:
• To public through prospectus
• Through private placement
• Through rights issue or a bonus issue.
For private companies, this section provides that it may issue securities
through private placement, by way of rights issue or bonus issue.
394 394 Legal Aspect of Business • Module Ten
their statutory auditors for more than 5/10 years, have to appoint another
auditor in their Annual General Meeting for year 2014.
Other specialized services which cannot be provided by Statutory
Auditors: The Statutory Auditor of the company cannot give following
specialized services directly or indirectly to the company—
• Accounting and book keeping services
• Internal audit
• Design and implementation of any financial information system
• Actuarial services
• Investment advisory services
• Investment banking services
• Rendering of outsourced financial services
• Management and/or any other services as may be prescribed
Rotation of Statutory Auditors:
Rotation of Statutory Auditor is required after transition period of 3 years
from applicability of Companies Act 2013. Following companies are under the
obligation to rotate the statutory auditors after 5 years or 10 years:
• All unlisted public companies having paid-up share capital of rupees
ten crore or more;
• All private limited companies having paid-up share capital of rupees
twenty crore or more;
• All companies having paid-up share capital of below threshold limit
mentioned in (i) and (ii) above, but having public borrowings from
financial institutions, banks or public deposits of rupees fifty crores
or more.
22. Dividend
Dividend is a payment made by a company to its shareholders out of
distributable profit.
Declaration of Dividend (Section 123):
A company shall declare dividend and pay it, only out of profit of the
company for the financial year or out of undistributed profit of any previous
financial year or out of both.
In case of any guarantee given by any Government (Central or State), the
company may declaare dividend out of money provided by that government for
payment of dividend.
402 402 Legal Aspect of Business • Module Ten
• While the threshold limit of net worth criteria and the turnover
criteria are kept higher, the net profit threshold limit of mere INR 5
crore will bring majority of companies under the CSR net.
Under the draft CSR rules, net profit is defined to mean ‘net profit before
tax’ as per books of accounts and shall not include profits arising from branches
outside India.
What Constitutes Eligible CSR?
Spend Activities which may be considered as eligible CSR spend are
provided in Schedule VII of the Act. The specified activities are as under:
• Environment sustainability
• Empowering women and promoting gender equality
• Education
• Poverty reduction and eradicating hunger
• Social business projects
• Reducing child mortality and improving maternal health
• Improvement of health
• Imparting of vocational skills
• Contribution towards Central and State Government funds for
socioeconomic development and relief
• Such other matters as may be prescribed
The companies shall give preference to the local area and area around it
where it operates for spending the amounts earmarked for CSR activities.
The draft CSR rules further provide following guidelines/manner in which
the company can undertake CSR activities and incur CSR spend:
• The company can setup a not-for-profit organization in the form of
trust, society or non-profit company to facilitate implementation of
its CSR activities. However, the contributing company shall specify
projects/programs to be undertaken by such an organization and the
company shall establish a monitoring mechanism to ensure that the
allocation to such organization is spent for intended purpose only.
• A company may also implement its CSR programs through not-for-
profit organizations that are not set up by the company itself.
• Such spends may be included as part of company’s prescribed CSR
spend only if such organizations have an established track record of
at least 3 years in carrying on activities in related areas.
• Companies may also collaborate or pool resources with other
companies to undertake CSR activities.
• Only CSR activities undertaken in India would be considered as eligible
CSR activities.
• CSR activities may generally be conducted as projects or programmes
(either new or ongoing), however, excluding activities undertaken in
pursuance of the normal course of business of a company.
• CSR projects/programs may also focus on integrating business models
with social and environmental priorities and processes in order to
create shared value.
Module Ten • Indian Companies Act, 2013 405
• CSR activities shall not include activities exclusively for the benefit
of employees and their family members.
12. INC-23 1AD, Application to Regional director for approval to shift the
24AAA registered office from one state to another state or from
jurisdiction of one registrar to another within the state
13. INC-24 1B Application for approval of Central Government for change of name
14. INC-27 1B, 62 Conversion of public company into private company or private
company into public company
15. INC-28 21 Notice of order of the Court or other authority
16. PAS-3 2 Return of allotment
17. SH-7 5 Notice to Registrar for alteration of share capital
18. SH-8 New form Letter of offer
19. SH-11 4C Return in respect of buy back of securities
20. CHG-1 8 Application for registration of creation, modification of charge
(other than those related to debentures) including particulars of
modification of charge by Asset Reconstruction Company in terms
of Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002 (SARFAESI)
21. CHG-4 17 Particulars for satisfaction of charge
22. CHG-6 15 Notice of appointment or cessation of receiver or manager
23. CHG-9 10 Application for registration of creation or modification of charge
for debentures or rectification of particulars filed in respect of
creation or modification of charge for debentures
24. MGT-6 22B Form of return to be filed with the Registrar
25. MGT-14 23 Filing of Resolutions and agreements to the Registrar under
section 117
26. DIR-3 DIN1 Application for allotment of Director Identification Number
27. DIR-6 DIN4 Intimation of change in particulars of Director to be given to the
Central Government
28. DIR-11 New form Notice of resignation of a director to the Registrar
29. DIR-12 32, 32AD Particulars of appointment of directors and the key managerial
personnel and the changes amongst them
30. MR-1 25C Return of appointment of managing director or whole time director
or manager
31. MR-2 25A Form of application to the Central Government for approval of
appointment or reappointment and remuneration or increase in
remuneration or waiver for excess or over payment to managing
director or whole time director or manager and commission or
remuneration to directors
32. URC-1 37, 39 Application by a company for registration under section 366
33. FC-1 44 Information to be filed by foreign company
34. FC-2 49, 52 Return of alteration in the documents filed for registration by
foreign company
35. FC-3 52 List of all principal places of business in India established by
foreign company
36. FC-4 PTII Annual Return
37. GNL-1 61 Form for filing an application with Registrar of Companies
38. GNL-2 62 Form for submission of documents with Registrar of Companies
39. GNL-3 1AA Particulars of person(s) or director(s) or charged or specified for
the purpose of section 2(60)
40. ADJ New form Memorandum of Appeal
41. MSC-1 New form Application to ROC for obtaining the status of dormant company
42. MSC-3 New form Return of dormant companies
408 408 Legal Aspect of Business • Module Ten
43. MSC-4 New form Application for seeking status of active company
44. RD-1 24A Form for filing application to Regional Director
45. RD-2 24AAA Form for filing petitions to Central Government (Regional Director)
46. CG-1 65 Form for filing application or documents with Central Government
47. – 66 Form for submission of compliance certificate with the Registrar
48. – 5INV Statement of unclaimed and unpaid amounts
49. – 14LLP Form for intimating to Registrar of Companies of conversion of
the company into limited liability partnership (LLP).
50. – 20B Form for filing annual return by a company having a share capital
with the Registrar
51. – 21A Particulars of annual return for the company not having share
capital
52. – 23AC Form for filing balance sheet and other documents with the
Registrar
53. – 23ACA Form for filing Profit and Loss account and other documents with
the Registrar
54. – 23ACA-XBRL Form for filing XBRL document in respect of Profit and Loss
account and other documents with the Registrar
55. – 23AC-XBRL Form for filing XBRL document in respect of balance sheet and
other documents with the Registrar
56. – 23C Form of application to the Central Government for appointment
of cost auditor
57. – 23D Form for Information by Cost Auditor to Central Government
58. – 35A Information to be furnished in relation to any offer of a scheme
or contract involving the transfer of shares or any class of shares
in the transferor company to the transferee company
59. – A-XBRL Form for filing XBRL document in respect of compliance report
and other documents with the Central Government
60. – FTE Application for striking off the name of company under the Fast
Track Exit (FTE) Mode
61. – I-XBRL Form for filing XBRL document in respect of cost audit report
and other documents with the Central Government
62. – Refund Application for requesting refund of fees paid
63. – Bank ACC Application for simplifying bank account opening process as user
shall not be required to submit any physical application form.
64. – Investor Form for filing complaint(s) against the company
Complaint
Form
65. – 67AD Clarification
Questions
Module Objectives
After reading this chapter, you should be able to:
Know the concepts — Gender Equality, harassment of women in
organisation, and types of workplace.
List the fundemental rights of Women in India.
Understand the nature of human rights, NHRC, UN Protocol on human
right.
Know job reservation issues in private sector
Understand the concepts of discrimination, whistle blowing, their merits
and demenrits plus Supreme Court judgement on protecting women’s
rights at workplace.
412 412 Legal Aspect of Business • Module Eleven
Women Legislation
The overall development in the country can be seen in the fact that women
form an integral and important part of the work place. They contribute heavily in
all areas towards the economic well-being of the nation. Unfortunately, for the
most part, their interests are not always safe-guarded. They must contend with
gender discrimination — and even more deplorable, sexual harassment. It is
alarming to note that sixty per cent of working women have faced sexual
harassment at some point of time in their careers. And, it must be remembered
that for every woman who raises an outcry, there are numerous others who grin
and bear their plight! If their positions become unbearable, they are even forced
to quit their jobs or ask for transfers.
However, now there is a marked trend for women to fight against such
harassment and assert their rights. Sadly, however, a great deal more awareness
must be generated so that women are not victimized in any way while they are
working to earn a livelihood.
Certain legislations that are already in place definitely underline the dignity
and protection that must be accorded to women in the work place. For instance,
the Maternity Benefit Act ensures that sufficient paid leave is given to the mother,
both before as well as soon after the birth of the child. The Act gives effect to the
constitutional requirement of making special provisions for the benefit of the
women.
However, sexual harassment often plagues women who work. Sexual
harassment can be defined as harassment in subtle as well as in blatant ways. It
may range from sexual innuendoes and inappropriate sexual gestures to pinching,
hugging, patting, brushing against and touching. Sexual harassment becomes
more heinous when sexual favours are expected in return for employment or
even advancement. Harassment often reaches such proportions that it interferes
with the individual's work performance and even creates an intimidating or hostile
work environment.
members of the human family is the foundation of freedom, justice and peace in
the world.'
Gender Equity has gained prominent importance in the recent past. The third
item of the Millennium Development Goals (MDGs) of United Nations describes
'promoting gender equality and empower woman.' Gender equity is giving boys
and girls, women and men equal opportunities in the utilization of personal
capabilities to realize full human rights.
The woman are still waiting to get the due respect and recognition in India. Gender equity is
giving boys and
Unlike ancient times, women face physical, mental harassment and violence in girls, women and
and outside the family throughout their lives. Police records are the mute evidence men equal opportu-
of the poor state of woman. A woman is molested in the country every 26 minutes nities in the utiliza-
tion of personal ca-
and raped every 34 minutes. Every 42 minutes, an incident of sexual harassment
pabilities to realize
takes place. Every 43 minutes, a woman is kidnapped. A woman is killed every full human rights.
93 minutes.
India, among few leading countries, had been a land where woman had been
given the right to vote. There is no question of any less efficiency, ability and
productivity in women than men. A country cannot realize its dream of becoming
super power by ignoring the better half of the humanity. Researches have proved
that a country where there are more employment opportunities for woman tend
to provide better and honest governance.
• manager;
• member of your board of directors;
• coworker;
• customer;
• patient;
• delivery person;
• person in the union.
Harassment can happen anywhere in the work place:
• in the lunchroom;
• in rest and washroom areas;
• in staff rooms;
• on the production line;
• in an office.
The worker might also be harassed outside of his or her work place. It can
happen at a party, on a business trip or at a meeting at someone's home.
Harassment is not always work place harassment. It depends on the situation,
and the relationship to the harasser. If a boss is in the worker's home and demands
that the worker has sex with him, it is still work place harassment. The worker's
boss has power over the worker. He could make things hard for the worker at
work if worker says no. If the same thing happens with a coworker who has no
power over the worker at work, it might not be work place harassment. However,
if the coworker harassed the worker at work later, it would be work place
harassment. The employer would be responsible for stopping it.
The employer is responsible for any form of harassment that affects the work
place, and the work.
This judgment was used with profit in the case of Apparel Export Promotion
Council v. A. K. Chopra in which disciplinary proceedings for sexual harassment
leading to dismissal from service were upheld by the Supreme Court. In this case
on the allegation of sexual harassment an employee was charge-sheeted and was
eventually dismissed from service. The Court observed that the behaviour of the
delinquent employee of sitting close to a female subordinate and touching her
amounted to molestation and not simply attempt to molest. In this judgment also
420 420 Legal Aspect of Business • Module Eleven
the Court has drawn strength from the International Labour Organisation
Seminar held in Manila in 1993 where sexual harassment was recognised as a
form of gender discrimination. The Court has also drawn on CEDAW, 1979 and
the subsequent Beijing Declaration. It has observed that "the courts were under
an obligation to give due regard to international conventions and norms for
considering domestic laws, more so, when there is no inconsistency between them
and there is a void in the domestic laws."
The Court laid down a scheme which provided that the machinery should be
in place in every organisation employing men and women so as to immediately
take care of any incidence of sexual harassment.
Is This Harassment?
There are many clear cut examples of harassment. Racist and homophobic
insults are harassment. When a boss demands that an employee have sex or lose
her job, it is clearly harassment, and it is against the law. But there are many
less obvious examples. Many people are not sure if what they are experiencing is
harassment.
Module Eleven • Women and Human Rights at Workplace 421
Law on Harassment
There is more than one definition of harassment under the law. Some forms
of harassment are clearer than others. More work has been done on sexual and
racial harassment than on other forms.
The courts have decided:
• when employers are responsible for workers being harassed ?
• what is and is not acceptable behaviour ?
• to recognize the seriousness of the effects of harassment on women.
In India, this problem is mainly in work places, i.e., related to Sexual
Harassment and Wage Payment and related to inheritance. Although, judiciary
decided in favour of the deceased, i.e., the suffered parties. There are many
landmark and famous cases of gender discrimination in work place like that of
Vishaka v. State of Rajasthan it was held that a woman was brutally gang raped
in the village of Rajasthan. The incident reveals the hazards to which a working
woman may be exposed and the depravity to which sexual harassment can
degenerate; and the urgency for safeguards by an alternative mechanism in the
absence of legislative measures. In the absence of legislative measures, the need
is to find an effective alternative mechanism to fulfil this felt and urgent social
need. So, a writ of Mandamus was filed in Supreme Court under Article 32 of the
Indian Constitution. Later the Supreme Court decided to direct that certain
guidelines and norms would be strictly observed in all work places for the
preservation and enforcement of the right to gender equality of the working women.
These directions would be binding and enforceable in law until suitable legislation
is enacted to occupy the field.
law for female worker's supervisor to promise her a raise or job perks in return
for sexual favours.
The law also says that she has the right to work in an environment that is not
"poisoned" by harassment. The worker cannot help but be affected by what is
happening in the work place. Her employer cannot expect her to work if people
around her are making sexual, racial or homophobic jokes or comments, or putting
graffiti and pinups on the wall. All of these things can make it hard to work. They
are bad for your mental wellbeing. They affect your work just as if the harassment
were directed at her.
The worker has the right to ask her employer, her union, or an outside agency
like the Human Rights Commission to take action against harassment.
• jokes;
• other unwanted comments or acts.
The Commission, consistent with its mandate, took up issues involving human
rights that are of significance, either suo motu, or when brought to its notice by
the civil society, the media, concerned citizens, or expert advisers. Its primary
focus is to strengthen the extension of human rights to all sections of society, in
particular, the vulnerable groups.
Functions of NHRC
The Protection of Human Rights Act mandates the National Human Rights
Commission to perform the following functions:
• Proactively or reactively inquire into violations of human rights or
negligence in the prevention of such violation by a public servant
• Intervene in any proceeding involving any allegation of violation of human
rights pending before a court
• Visit any jail or other institution under the control of the State
Government, where persons are detained or lodged for purposes of
treatment, reformation or protection, for the study of the living conditions
of the inmates and make recommendations
• Review the safeguards provided by or under the Constitution or any
law for the time being in force for the protection of human rights and
recommend measures for their effective implementation
• Review the factors, including acts of terrorism that inhibit the enjoyment
of human rights and recommend appropriate remedial measures
• Study treaties and other international instruments on human rights
and make recommendations for their effective implementation
• Undertake and promote research in the field of human rights
• Spread literacy among various sections of society and promote
awareness of the safeguards available for the protection of these rights
through publications, the media, seminars and other available means
• Encourage the efforts of NGOs and institutions working in the field of
human rights
• Such other function as it may consider it necessary for the protection
of human rights.
Controversy
A report concerning the manner of which the Shivani murder controversy
case was rejected, a case which involved high ranking officials being implicated
in the murder of a journalist, opened the organisation up to questioning over the
usefulness of human rights commissions setup by the government at the national
and state levels.
National Human Rights Commission moved the Supreme Court in Best Bakery
case. Transfer application also moved in respect of 4 other serious cases.
In response to repeated requests from representatives of the print and
electronic media regarding the action being taken by the Commission in the Best
Bakery case, the Commission would like to state the position which is as follows:
Deeply concerned about the damage to the credibility of the criminal justice
delivery system and negation of human rights of victims, the National Human
Rights Commission, on consideration of the report of its team which was sent to
Vadodara, has today filed a Special Leave Petition under Article 136 of the
Constitution of India in the Supreme Court with a prayer to set aside the impugned
judgement of the Trial Court in the Best Bakery case and sought directions for
further investigation by an independent agency and retrial of the case in a
competent court located outside the State of Gujarat.
The NHRC has, inter-alia, contended in the Special Leave Petition that, the
concept of fair trial is a constitutional 'imperative and is explicitly recognized as
such in the specific provisions of the Constitution including Articles 14, 19, 21,
22 and 39A of the Constitution as well as the various provisions of the Code of
Criminal Procedure 1973 (Cr.P.C).
The right to fair trial is also explicitly recognized as a human right in terms of
Article 14 of the International Covenant on Civil and Political Rights (ICCPR) which
has been ratified by India and which now forms part of the statutory legal regime
explicitly recognized as such under Section 2(1)(d) of the Protection of Human
Rights Act, 1993.
Violation of a right to fair trial is not only a violation of fundamental right
under our Constitution but also violative of the internationally recognized human
rights as spelt out in the ICCPR to which India is a party.
Module Eleven • Women and Human Rights at Workplace 429
Drafting
Adoption
The Universal Declaration was adopted by the General Assembly on 10
December 1948 by a vote of 48 in favor, 0 against, with 8 abstentions (all the
Soviet Bloc States, Byelorussia, Czechoslovakia, Poland, Ukraine, USSR, as well
as Yugoslavia, South Africa and Saudi Arabia).
The following countries voted in favour of the Declaration: Afghanistan,
Argentina, Australia, Belgium, Bolivia, Brazil, Burma, Canada, Chile, China,
Colombia, Costa Rica, Cuba, Denmark, the Dominican Republic, Ecuador, Egypt,
El Salvador, Ethiopia, France, Greece, Guatemala, Haiti, Iceland, India, Iran, Iraq,
Lebanon, Liberia, Luxembourg, Mexico, Netherlands, New Zealand, Nicaragua,
Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Thailand, Sweden, Syria,
Turkey, United Kingdom, United States, Uruguay and Venezuela.
Despite the central role played by Canadian John Humphrey, the Canadian
Government at first abstained from voting on the Declaration's draft, but later
voted in favour of the final draft in the General Assembly.
Structure
The underlying structure of the Universal Declaration was introduced in its
second draft which was prepared by Rene Cassin. Cassin worked from a first
draft prepared by John Peters Humphrey. The structure was influenced by the
Code Napoleon, including a preamble and introductory general principles. Cassin
compared the Declaration to the portico of a Greek temple, with a foundation,
steps, four columns and a pediment. Articles 1 and 2 are the foundation blocks,
with their principles of dignity, liberty, equality and brotherhood. The seven
paragraphs of the preamble, setting out the reasons for the Declaration, are
represented by the steps.
The main body of the Declaration forms the four columns. The first column
(articles 3-11) constitutes rights of the individual, such as the right to life and the
prohibition of slavery. The second column (articles 12-17) constitutes the rights
of the individual in civil and political society. The third column (articles 18-21) is
concerned with spiritual, public and political freedoms such as freedom of religion
and freedom of association. The fourth column (articles 22-27) sets out social,
economic and cultural rights.
In Cassin's model, the last three articles of the Declaration provide the
pediment which binds the structure together. These articles are concerned with
the duty of the individual to society and the prohibition of use of rights in
contravention of the purposes of the United Nations.[12] With regard to the
Communist block's abstentions, the December 9th Velodrome d'Hiver meeting of
20,000 Parisiens at the invitation of World Citizen Garry Davis and his "Conseil
de Solidarité" who had interrupted a General Assembly session on November 22
to call for a world government, provoked its abstention rather than voting against
Module Eleven • Women and Human Rights at Workplace 431
the human rights document. Eleanor Roosevelt in her column "My Day" wrote on
December 15 that "Garry Davis, the young man who in Paris as a citizen of the
world...has succeeded in getting the backing of a few intellectuals and even has
received a cablegram from Albert Einstein telling him, from Professor Einstein's
point of view, that the United Nations has not yet achieved peace. The United
Nations, of course, is not set up to achieve peace. That the governments are
supposed to do themselves. But it is expected to help preserve peace, and that
think, is it doing more effectively day by day. During a pleneary session in the
General Assembly, this young man tried to make a speech from the balcony on
the subject of how incompetent the United Nations is to deal with the questions
before it. How much better it would be if Mr. Davis would set up his own
governmental organization and start then and there a worldwide international
government. All who would join him would learn that they had no nationality
and, therefore, not being bothered by any special interest in any one country,
everyone would develop...a completely cooperative feeling among all peoples and
a willingness to accept any laws passes by this super government."
Article 1
All human beings are born free and equal in dignity and rights. They are
endowed with reason and conscience and should act towards one another in a
spirit of brotherhood.
Article 2
Everyone is entitled to all the rights and freedoms set forth in this Declaration,
without distinction of any kind, such as race, colour, sex, language, religion,
political or other opinion, national or social origin, property, birth or other status.
Furthermore, no distinction shall be made on the basis of the political,
jurisdictional or international status of the country or territory to which a person
belongs, whether it be independent, trust, non-self-governing or under any other
limitation of sovereignty.
Module Eleven • Women and Human Rights at Workplace 433
Article 3
Everyone has the right to life, liberty and security of person.
Article 4
No one shall be held in slavery or servitude; slavery and the slave trade shall
be prohibited in all their forms.
Article 5
No one shall be subjected to torture or to cruel, inhuman or degrading
treatment or punishment.
Article 6
Everyone has the right to recognition everywhere as a person before the law.
Article 7
All are equal before the law and are entitled without any discrimination to
equal protection of the law. All are entitled to equal protection against any
discrimination in violation of this Declaration and against any incitement to such
discrimination.
Article 8
Everyone has the right to an effective remedy by the competent national
tribunals for acts violating the fundamental rights granted him by the constitution
or by law.
Article 9
No one shall be subjected to arbitrary arrest, detention or exile.
Article 10
Everyone is entitled in full equality to a fair and public hearing by an
independent and impartial tribunal, in the determination of his rights and
obligations and of any criminal charge against him.
Article 11
1. Everyone charged with a penal offence has the right to be presumed
innocent until proved guilty according to law in a public trial at which he
has had all the guarantees necessary for his defence.
2. No one shall be held guilty of any penal offence on account of any act or
omission which did not constitute a penal offence, under national or
international law, at the time when it was committed. Nor shall a heavier
penalty be imposed than the one that was applicable at the time the
penal offence was committed.
Article 12
No one shall be subjected to arbitrary interference with his privacy, family,
home or correspondence, nor to attacks upon his honour and reputation. Everyone
has the right to the protection of the law against such interference or attacks.
434 434 Legal Aspect of Business • Module Eleven
Article 13
1. Everyone has the right to freedom of movement and residence within the
borders of each state.
2. Everyone has the right to leave any country, including their own, and to
return to their country.
Article 14
1. Everyone has the right to seek and to enjoy in other countries asylum
from persecution.
2. This right may not be invoked in the case of prosecutions genuinely
arising from non-political crimes or from acts contrary to the purposes
and principles of the United Nations.
Article 15
1. Everyone has the right to a nationality.
2. No one shall be arbitrarily deprived of his nationality nor denied the
right to change his nationality.
Article 16
1. Men and women of full age, without any limitation due to race, nationality
or religion, have the right to marry and to found a family. They are entitled
to equal rights as to marriage, during marriage and at its dissolution.
2. Marriage shall be entered into only with the free and full consent of the
intending spouses.
3. The family is the natural and fundamental group unit of society and is
entitled to protection by society and the State.
Article 17
1. Everyone has the right to own property alone as well as in association
with others.
2. No one shall be arbitrarily deprived of his property.
Article 18
Everyone has the right to freedom of thought, conscience and religion; this
right includes freedom to change his religion or belief, and freedom, either alone
or in community with others and in public or private, to manifest his religion or
belief in teaching, practice, worship and observance.
Article 19
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 and regardless of frontiers.
Article 20
1. Everyone has the right to freedom of peaceful assembly and association.
2. No one may be compelled to belong to an association.
Module Eleven • Women and Human Rights at Workplace 435
Article 21
1. Everyone has the right to take part in the government of their country,
directly or through freely chosen representatives.
2. Everyone has the right of equal access to public service in their country.
3. The will of the people shall be the basis of the authority of government;
this will shall be expressed in periodic and genuine elections which shall
be by universal and equal suffrage and shall be held by secret vote or by
equivalent free voting procedures.
Article 22
Everyone, as a member of society, has the right to social security and is
entitled to realization, through national effort and international co-operation and
in accordance with the organization and resources of each State, of the economic,
social and cultural rights indispensable for his dignity and the free development
of his personality.
Article 23
1. Everyone has the right to work, to free choice of employment, to just and
favourable conditions of work and to protection against unemployment.
2. Everyone, without any discrimination, has the right to equal pay for equal
work.
3. Everyone who works has the right to just and favourable remuneration
ensuring for himself and his family an existence worthy of human dignity,
and supplemented, if necessary, by other means of social protection.
4. Everyone has the right to form and to join trade unions for the protection
of his interests.
Article 24
Everyone has the right to rest and leisure, including reasonable limitation of
working hours and periodic holidays with pay.
Article 25
1. Everyone has the right to a standard of living adequate for the health
and well-being of himself and of his family, including food, clothing,
housing and medical care and necessary social services, and the right to
security in the event of unemployment, sickness, disability, widowhood,
old age or other lack of livelihood in circumstances beyond his control.
2. Motherhood and childhood are entitled to special care and assistance.
All children, whether born in or out of wedlock, shall enjoy the same
social protection.
Article 26
1. Everyone has the right to education. Education shall be free, at least in
the elementary and fundamental stages. Elementary education shall be
compulsory. Technical and professional education shall be made generally
available and higher education shall be equally accessible to all on the
basis of merit.
436 436 Legal Aspect of Business • Module Eleven
Article 27
1. Everyone has the right freely to participate in the cultural life of the
community, to enjoy the arts and to share in scientific advancement and
its benefits.
2. Everyone has the right to the protection of the moral and material
interests resulting from any scientific, literary or artistic production of
which he is the author.
Article 28
Everyone is entitled to a social and international order in which the rights
and freedoms set forth in this Declaration can be fully realized.
Article 29
The adoption of the
Universal Declara- 1. Everyone has duties to the community in which alone the free and full
tion is a significant development of his personality is possible.
international com-
m e m o r a t i o n 2. In the exercise of his rights and freedoms, everyone shall be subject only
marked each year to such limitations as are determined by law solely for the purpose of
on 10 December
and is known as
securing due recognition and respect for the rights and freedoms of others
Human Rights Day and of meeting the just requirements of morality, public order and the
or International Hu- general welfare in a democratic society.
man Rights Day.
3. These rights and freedoms may in no case be exercised contrary to the
purposes and principles of the United Nations.
Article 30
Nothing in this Declaration may be interpreted as implying for any State,
group or person any right to engage in any activity or to perform any act aimed at
the destruction of any of the rights and freedoms set forth herein.
accompanied by year long activities around the theme "Dignity and justice for all
of us".
Significance
In the preamble, governments commit themselves and their peoples to
measures to secure the universal and effective recognition and observance of the
human rights set out in the Declaration. Eleanor Roosevelt supported the adoption
the UDHR as a declaration, rather than as a treaty, because she believed that it
would have the same kind of influence on global society as the United States
Declaration of Independence had within the United States. In this she proved to
be correct. Even though not formally legally binding, the Declaration has been
adopted in or influenced most national constitutions since 1948. It also serves as
the foundation for a growing number of international treaties and national laws
and international, regional, national and sub-national institutions protecting and
promoting human rights.
Legal Effect
While not a treaty itself, the Declaration was explicitly adopted for the purpose
of defining the meaning of the words "fundamental freedoms" and "human rights"
appearing in the United Nations Charter, which is binding on all member states.
For this reason, the Universal Declaration is a fundamental constitutive document
of the United Nations. Many international lawyers, in addition, believe that the
Declaration forms part of customary international law and is a powerful tool in
applying diplomatic and moral pressure to governments that violate any of its
articles.
The 1968 United Nations International Conference on Human Rights advised
that it "constitutes an obligation for the members of the international community"
to all persons. The declaration has served as the foundation for two binding UN
human rights covenants, the International Covenant on Civil and Political Rights
and the International Covenant on Economic, Social and Cultural Rights and the
principles of the Declaration are elaborated in international treaties such as the
International Convention on the Elimination of All Forms of Racial Discrimination,
the International Convention on the Elimination of Discrimination Against Women,
the United Nations Convention on the Rights of the Child, the United Nations
Convention Against Torture and many more. The Declaration continues to be
widely cited by governments, academics, advocates and constitutional courts and
individual human beings who appeal to its principles for the protection of their
recognised human rights.
Reaction
Praise
The Universal Declaration has received praise from a number of notable
people. Charles Malik, Lebanese philosopher and diplomat, called it "an
international document of the first order of importance," while Eleanor Roosevelt,
first chairwoman of the Commission on Human Rights (CHR) that drafted the
Declaration, stated that it "may well become the international Magna Carta of all
438 438 Legal Aspect of Business • Module Eleven
Censorship
The Cuban government has been accused of ordering copies of the Universal
Declaration of Human Rights to be burned or otherwise destroyed.
Criticism
Islamic Criticism
Some Islamic countries have criticized the Universal Declaration of Human
Rights for its perceived failure to take into the account the cultural and religious
context of Islamic countries. In 1982, the Iranian representative to the United
Nations, Said Rajaie-Khorassani, articulated the position of his country regarding
the Universal Declaration of Human Rights, by saying that the UDHR was "a
secular understanding of the Judeo-Christian tradition", which could not be
implemented by Muslims without trespassing the Islamic law. On 30 June 2000,
Muslim nations that are members of the Organization of the Islamic Conference
officially resolved to support the Cairo Declaration on Human Rights in Islam, an
alternative document that says people have "freedom and right to a dignified life
in accordance with the Islamic Shari'ah."
Education
Some proponents of alternative education, particularly unschooling, take issue
with the right to compulsory education stated in Article 26.[25] In the philosophies
of John Holt and others, compulsory education itself violates the right of a person
to follow their own interests:
No human right, except the right to life itself, is more fundamental than this.
A person's freedom of learning is part of his freedom of thought, even more basic
than his freedom of speech. If we take from someone his right to decide what he
will be curious about, we destroy his freedom of thought. We say, in effect, you
must think not about what interests you and concerns you, but about what
interests and concerns us.
— John Holt, Escape from Childhood
Others, such as the European Students Union (ESU), suggest that access to
education is a human right and should be accessible to all free of any tuition
charge.
The UD's distinctive "rights" are incompatible with that doctrine [of natural
rights]. Enforcement of one person's economic, social, or cultural rights necessarily
involves forcing others to relinquish their property, or to use it in a way prescribed
by the enforcers. It would, therefore, constitute a clear violation of their natural
right to manage and dispose of their lawful possessions without coercive or
aggressive interference by others. It would also deny a person the right to improve
his condition by accepting work for what he (but perhaps no one else) considers
an adequate wage.
— Frank Van Dun, Human Dignity: Reason or Desire?
Bangkok Declaration
In the Bangkok Declaration adopted by Ministers of Asian states meeting in
1993 in the lead up to the World Conference on Human Rights, Asian governments
reaffirmed their commitment to the principles of the United Nations Charter and
the Universal Declaration of Human Rights. They stated their view of the
interdependence and indivisibility of human rights and stressed the need for
universality, objectivity and non-selectivity of human rights.
The Universal Declaration of Human Rights (UDHR) is a declaration adopted
by the United Nations General Assembly on December 10, 1948 at the Palais de
Chaillot in Paris. The Declaration has been translated into over 300 languages
and dialects, making it the most widely translated document in the world. The
Declaration arose directly from the experience of the Second World War and
represents the first global expression of rights to which all human beings are
entitled.
It consists of 30 articles which have been elaborated in subsequent
international treaties, regional human rights instruments, national constitutions
and laws. The International Bill of Human Rights consists of the Universal
Declaration of Human Rights, the International Covenant on Economic, Social
and Cultural Rights, and the International Covenant on Civil and Political Rights
and its two Optional Protocols. In 1966 the General Assembly adopted the two
detailed Covenants, which complete the International Bill of Human Rights.
440 440 Legal Aspect of Business • Module Eleven
Nationality
Article 9 of CEDAW requires that women have the same rights as men to
acquire, retain or change their nationality and the nationality of their children. It
provides that neither marriage to an alien nor a change of nationality by the
husband during marriage will automatically change the nationality of the wife,
make her stateless or force upon her the nationality of the husband. Article 9
also provides that women have the same rights as men regarding the nationality
of their children.
Employment
Article 11 of CEDAW requires parties to eliminate discrimination in
employment so as to ensure that women have the right to work, the right to the
same training and employment opportunities as men and the right to receive
equal pay for work of equal value. Women must also have access to the same
benefits, compensatory schemes, and allowances as men, especially in relation to
retirement and incapacity to work.
This Article further requires that parties prohibit discrimination in the
workplace on the basis of marriage, pregnancy and maternity, and introduce paid
maternity leave without loss of benefits or career opportunities, and encourage
provision of supporting social services to allow parents to combine family
obligations with work responsibilities.
Module Eleven • Women and Human Rights at Workplace 443
Health
Article 12 of CEDAW requires parties to take all appropriate measures to
eliminate discrimination against women in the field of health care to ensure women
and men have equal access to health services including family planning.
This Article further requires that parties provide appropriate health services
in relation to pregnancy and post-natal care, and to grant free services where
necessary.
Family Relations
Article 16 of CEDAW requires parties to ensure women and men have equal
rights to freely choose a spouse and enter into marriage; the same rights and
responsibilities as men within marriage and upon divorce, especially with regard
to choosing a family name, a profession, and the rights of ownership of property;
and equal rights in all matters relating to birth, adoption and raising of their
children.
Reservations
When signing or ratifying an international treaty, a country can make a
reservation to a particular provision or provisions of that treaty. This is a unilateral
statement which effectively excludes the country from any obligation in regards
to that provision. It is always open to any country to remove reservations to CEDAW
when it wishes to commit to those rights.
Australia has two reservations to CEDAW; the provision of paid maternity
leave or a 'comparable social benefit' and women's participation in direct, armed
combat.
Social linkages, including caste and family ties, matter a lot in a sector where
an overwhelming amount of businesses are family-run. There is no evidence yet
of merit being hereditary.
446 446 Legal Aspect of Business • Module Eleven
What the private sector in India needs to do is to take the cue from the
developed world. Companies such as Microsoft and Intel have called for affirmative
action in admissions to educational institutions as well as hiring in the US.
Rather than wait for the state to legislate, the industry should take the
initiative to seek diversity among its workforce. That is how the private sector
could play a role in creating a more democratic society in the country.
Protectionism, including that of private (read caste) interests, goes against
the spirit of democracy as well as capitalism.
Incidentally, the so-called experts who seldom supported for the job
reservations in the public sector for so long are also the ones who raised objections
to the same this time in the private sector. As a result, the UPA promise
(Reservations in Private Sector) has created many a controversy on the subject.
That in turn was responsible to raise certain pertinent questions. For instance,
whether dalits and downtrodden should be given some preference in the
employment sector? Whether this preference based on their mere birth in a
particular caste or community is justified? Why is this to be given to certain
people? These are some serious questions that deserve attention.
This concept of 'Reservations' aimed at ensuring the betterment of This concept of
underprivileged and deprived sections of society was sabotaged from 'within' in 'Reservations'
aimed at ensuring
the initial days. Thus, these reservations were being renewed decade after decade. the betterment of
Even though constitutional obligations are binding upon all the government underprivileged and
departments, not more than ten percent of reservations were ever implemented. deprived sections
of society was
It is only in the last few years, owing to the efforts of some dalit leaders and their sabotaged from
movements that there was some improvement in this direction. The fact that 'within' in the initial
several governments both at the centre and in states and public sector units were days. Thus, these
reservations were
found to be advertising, the 'backlog vacancies' in the name of special-drives, so being renewed de-
as to recruit members from these reserved categories vindicate the above cade after decade.
proposition.
Even then, none of the departments could ever claim that required vacancies
were filled up. More than the case of lack of availability of suitable candidates in
these communities for the prescribed positions, it is the employers' biased attitude
against such candidates that is largely responsible for the prevailing situation.
However, except in the top-level central services, the jobs in the other categories
are still unoccupied by the dalit candidates. Of course, some court cases in the
Supreme Court a couple of years ago, filed by the of All India Confederation SC &
ST Organizations, could help the community in securing some justice in terms of
revising the orders of promotion among other benefits.
This is long-awaited measure and of course welcomed by all sections of society.
Obviously, even a section of the business class is willing to implement it, how so
difficult it may appear to be as far as its feasibility is concerned. For, there are
certain apprehensions expressed by several persons cutting across all castes and
communities. Not just because the very security of private job is at the mercy of
the management, but also because the government does not have any role in
protecting the private employee. Since the government plays or intends to play
the role of best spectator in the operations of private sector, private job aspirants,
be they from general category or from others, have to merely dependent on none
other than themselves!
In any case, this concept of private reservation cannot be considered as In any case, this
charity, but a right from a government that exposed its hollowness. Further, it is concept of private
reservation cannot
a necessity as the government failed to create jobs to its qualified aspirants. In be considered as
other words, the nature of private job is such that there is hardly any guarantee charity, but a right
(in terms of pay and period) to that job! It is so insecure that one should continue from a government
that exposed its
searching for jobs as usual, of course till a government job is secured. Then, why hollowness.
should there be such hue and cry about the 'reservations in private sector'?
448 448 Legal Aspect of Business • Module Eleven
Origins of Term
The term whistleblower derives from the practice of English police officers,
who would blow their whistles when they noticed the commission of a crime. The
whistle would alert other law enforcement officers and the general public of danger.
One who reveals wrongdoing within an organization to the public or to those in
positions of authority.
Definition
Refers to the pro- The term `whistle blowing' is a relatively recent entry into the vocabulary of
cess by which insid-
ers `go public' with
public and corporate affairs, although the phenomenon itself is not new. It refers
their claims of mal- to the process by which insiders `go public' with their claims of malpractices by,
practices by, or or within, organisations - usually after failing to remedy the matters from the
within, organisa-
inside, and often at great personal risk to themselves. It is this willingness to
tions - usually after
failing to remedy stand up for a principle and court risk openly that distinguishes whistle blowing
the matters from from such related practices as in-house criticism, anonymous leaks, and the like.
the inside, and of- The whistleblower is considered a hero or a traitor, a do-gooder or a crank, a role
ten at great per-
sonal risk to them- model or a non-conformist troublemaker - depending on one's point of view. Whistle
selves. blowing is a universal phenomenon. India has also had its share of prominent
whistleblowers from V. P. Singh to Manoj Prabhakar to P. Dinakar.
It is true that under normal circumstances, an organisation is entitled to
total loyalty and confidentiality from its employees. But when there is serious
malpractice or when people's lives are at stake — as in corruption and fraud in
defence procurement; deaths in `encounter' of innocent persons; toxic leaks from
a chemical factory; non-adherence to flight safety standards by an airline; creative
accounting and false declarations by a company; cheating and plagiarism in
scientific research, for example - the overriding public interest may lie in protecting
the public's right to be told, and the whistleblower's right not to be punished for
doing so. Without whistleblowers, we may not get to learn about problems until it
is time to mourn the consequences.
No doubt, audit, ombudsman, vigilance commissions, regulating agencies,
the media, civil society, and courts all play a role in deterring government and
corporate transgressions to some extent. But however formidable their investigative
skills, that initial inside information provided by a whistleblower is crucial. Even
a powerful Freedom of Information Act, which discloses information without the
need for leaking, offers only a partial solution. As the journal Index on Censorship
(1995) put it: "Users would have to specify what they wanted to know. But where
there is no reason to suspect that something is amiss, no one may bother to ask."
was, in the best sense of the term, their ticket to the future, their only means to
fulfil their aspirations. And Satyendra Dubey seemed to be all that, a bright,
young man with a bright, young intelligence who went to the Indian Institute of
Technology and came out with idealism intact. All children carry their parents
hopes; the Satyendras of the world carry even more. So the early loss of a child,
which is terrible enough, is made even worse.
Then there is idealism factor. Why was Satyendra Dubey killed? Because
he did something all of us should do, but don't. Which is not to just be appalled
at the loot and villainy around us (all of us are upset by corruption), but do
something about it. Whistle blower isn't exactly a felicitous term, but all of us
understand what it means: someone who is an insider, wanting to expose the
rot within the system. It needs courage to do that because you are risking the
wrath of people you work with and much else. Like vindictiveness from the
system leading to possible victimisation; the loss of job, career and livelihood.
Or, as in the case of Satyendra Dubey, even the loss of one's own life.
The third factor which makes Dubey's death so tragically special is that it
exposes, once again, the callousness of our nation's administrative system.
It is now well established that Dubey's letter to the Prime Minister giving
details of the corruption in the Golden Quadrilateral highway project, was
routinely circulated. This in spite of the writer's earnest request that his name
should not be disclosed as he feared vengeful reaction from the people involved
in the scam. As it happens, Dubey's courage was not foolhardy: he anticipated
trouble and wrote a second letter, again requesting anonymity. That too was
ignored. Whether the Prime Minister's Office (PMO) did this deliberately or just
through the usual carelessness isn't established, but the net result was that
the whistle-blower's name fell into the hands of the very people against whom
the whistle was being blown. With what consequences we all know. The
callousness doesn't end there. We know that the Golden Quadrilateral is the
Prime Minister's own dream project, as important to him personally as Indo-
Pakistan relations. We also now know that Satyendra Dubey's killing has evoked
a huge response all over the country. Yet the PM has said not a word about it.
No condemnation of the killers, no promise of swift justice, no anger at
PMO officials, not even a letter of condolence to the Dubey family. The Dubey
killing to the Prime Minister and the Prime Minister's Office is just another
statistic, although it is anything but routine to the rest of the country.
This response, or rather the lack of it, is not an aberration. This is the way
of the government. And when that is said, it isn't aimed particularly at the
Bharatiya Janata Party (BJP) or the National Democratic Alliance (NDA), or for
that matter, any political party. That's because a government formed by any
political party will behave the same way, which is to ignore injustice and
corruption, look the other way and hope that public indignation will be short-
lived.
The obvious reason why all parties tacitly acquiesce in this convenient
blindness is that politicians across party lines have much to hide. Look at the
Telgi fake stamp paper scandal. It went on for years, crossed State boundaries,
deprived the government of hundereds of crores of rupees and would have
continued to do so hadn't it been for a whistle-blower (in the Pune police
department) and an activist with a conscience and a Gandhian approach (Anna
Hazare).
Module Eleven • Women and Human Rights at Workplace 451
This is precisely why governments of all idealogies rush through acts like
the Prevention of Terrorism Act (POTA), which gives the police powers of arbitrary
detention of "other people", while ignoring proposed legislation like the Public
Interest Disclosure (Protection of Informers) Bill (PIDB).
Significantly, both POTA and PIDB were drafted by the same man at the
same time. Former Supreme Court Justice B.P. Jeevan Reddy submitted both
drafts two years ago. The response to POTA was a rare joint session of Parliament;
the response to PIDB was the usual dusty shelf. If the Protection of Informers
Bill had been made into law, Satyendra Dubey might still have been alive today.
All governments rely on public memory being short. It generally is because we
move on to the next scandal and to yet another scam. Perhaps that's what the
PMO hopes will happen here too. But it ignores one vital difference.
Some newspapers have taken on the Dubey murder as a campaigning issue
to ensure that public interest does not die out. More than that, the medium of
the internet, with its instant access and its rapid multiplier effect, has come
into its own in this case, and the protest signatures have begun to mount in
very large numbers every day, and show no sign of abating.
Could this be the beginning of a new phase in our democracy? Our middle-
class has felt emasculated because the vote — democracy's most potent weapon
- has meant very little to it because of the weight of numbers. But the internet
gives it a chance to make its voice heard. Maybe, just maybe, this voice will now
get louder. Satyendra Dubey should not have died but in his death he may
have begun a revolution.
Merits
• An effectively communicated statement of responsibility.
• A clearly defined procedure for Reporting well-trained personnel to receive
and investigate reports.
452 452 Legal Aspect of Business • Module Eleven
Demerits
• Loss of jobs
• Damaging repercussions on profession, marriage, and family life
• Encroaches on traditional rights of organizations to run their business
• Persecution of whistle blowers has become a serious issue in many parts
of the world. Although whistle blowers are often protected under law
from employer retaliation, there have been many cases where punishment
for whistle blowing has occurred, such as termination, suspension,
demotion, wage garnishment, and/or harsh mistreatment by other
employees. Many whistle blowers report there exists a widespread "shoot
the messenger" mentality by corporations or government agencies
accused of misconduct and in some cases whistle blowers have been
subjected to criminal prosecution in reprisal for reporting wrongdoing.
(Example Sathyendra Dubey and Manjunath).
WHISTLE BLOWING
SATYENDRA DUBEY MURDER: THREE GET LIFE IMPRISONMENT
Three persons were sentenced to life
imprisonment by a special CBI court for murdering
NHAI engineer Satyendra Dubey, the young
whistleblower who had exposed corruption in the
Golden Quadrilateral highway project in Bihar, in
2003.
Special CBI court judge Raghvendra Singh found
Mantu Kumar, Udai Kumar, Pinku Ravidas guilty of
murdering the 31-year-old IIT-Kanpur alumni and awarded life term to them.
Dubey, a project engineer of the National Highway Authority of India (NHAI)
who had exposed several cases of large-scale flouting of rules and corrupt
practices in the construction project, was gunned down in the early hours of
November 27, 2003 in front of the Circuit House in Gaya when he was going to
his residence after alighting from train from Varanasi.
Mantu was convicted under sections for murder(Section 302 IPC), voluntary
causing hurt in committing robbery (Section 394 IPC) and the Arms Act for
possessing unlicensed weapon. The other two accused were convicted of murder
committed in furtherance of common intention (Section 302/34 IPC) and also
for voluntary causing hurt in committing robbery.
After the three were convicted on Saturday, Dhananjay Dubey, brother of
the victim, said he was “really disappointed” as those convicted were “purely
innocent” and claimed that the real culprits were still on the loose. Dubey had
Module Eleven • Women and Human Rights at Workplace 453
even written directly to the then Prime Minister Atal Bihari Vajpayee detailing
the financial and contractual irregularities in the construction project.
The murder had sparked protests across the country amidst calls for a
legislation to protect whistleblowers who expose corruption. The CBI, which
had taken over the investigation of the case from Bihar police on December 14,
2003, had filed a chargesheet in the case on September 3, 2004. During the
investigation, CBI arrested four persons, namely Mantu, Udai, Pinku and
Sharvan Kumar, all residents of Katari village in Gaya, Bihar, the investigating
agency said.
“They had all assembled near Circuit House, Gaya on the fateful intervening
night of November 26/27, 2003. Around 3.30 AM on November 27 when Dubey
was passing in front of Circuit House, Gaya in a cycle-rickshaw, the accused
persons robbed him of his belongings and during the ensuing scuffle, Mantu
shot him dead with a .315 country-made weapon,” it said in a statement in New
Delhi.
The CBI said a briefcase containing documents belonging to Dubey including
his Identity Card were recovered from an abandoned well and also the country-
made pistol were recovered during investigation. The agency said Sharvan
gave full and voluntary disclosure about the incident and was made an approver.
Source : Sunday Times, p1, March 28, 2010
The minister further assured the BJP legislator that the government would
positively consider his suggestions. A committee of MLAs would be set up to
look into the issues raised during the debate, he stated and at his request,
Mungantiwar withdrew the non-official Bill.
Source : Times of India, p19, March 27, 2010
Questions
ENVIRONMENT PROTECTION
ACT, 1986
Module Objectives
After reading this chapter, you should be able to:
Know the concepts of environment, environment pollution, environment
pollutants, hazardous substance.
Diagonise the different types of pollution.
Know the concept of global warming, causes for ozone layer depletion,
remedies to reduce ozone layer depletion and powers of the Central
Government protocol and promote environment in India.
456 456 Legal Aspect of Business • Module Twelve
12.1 DEFINITIONS
(1) Environment (Sect. 2(a)): It includes water, air and land and the inter
relationship which exists between water, air and land and human being,
other living creatures, plants, Micro organisms and property.
(2) Environmental Pollutant (Sect. 2(b)): It means any solid, liquid or
gaseous substance present in such concentration as be injurious to
environment. Now noise has also been accepted as an environmental
pollutant.
(3) Environment pollution (Sect. 2(c)): It means the presence in the
environment of any environmental pollutant. It includes all extraneous
(foreign) materials that are harmful to human, animal and plant life. The
common type of environmental pollution are air pollution, water pollution,
land pollution, solid waste pollution, noise pollution, oil pollution, market
pollution and thermal pollution.
(4) Hazardous Substance (Sect. 2(d)): It means any substance having
chemical or physico-chemical properties, that are liable to cause harm
to human being, other living creatures and plants or the environment.
(5) Occupier (Sect. 2(f)): It means a person who has control over the factory
and also includes the person who is in possession of the substance.
1. Air Pollution
Air pollution is the introduction of chemicals, particulate matter, or biological
materials that cause harm or discomfort to humans or other living organisms, or
damages the natural environment, into the atmosphere.
The atmosphere is a complex, dynamic natural gaseous system that is
essential to support life on planet Earth. Stratospheric ozone depletion due to air
pollution has long been recognized as a threat to human health as well as to the
Earth's ecosystems.
An air pollutant is known as a substance in the air that can cause harm to
humans and the environment. Pollutants can be in the form of solid particles,
liquid droplets, or gases. In addition, they may be natural or man-made.[1]
Module Twelve • Environment Protection Act, 1986 457
The major cause of pollution in urban areas are automobiles which inefficiently
burn petroleum, release 75% noise, 80% air pollutants. Concentration of industries
on area is another major cause, e.g., cotton dust in Ahmedabad, Surat and nearby
areas.
458 458 Legal Aspect of Business • Module Twelve
Some other examples of using energy and polluting the air are:
• Turning on a light
• Watching TV
• Listening to a stereo
• Washing or drying clothes
• Using a hair dryer
• Playing a video game
2. Water Pollution
By the release of waste products and contaminants into surface runoff into
river drainage systems, leaching into groundwater, liquid spills, waste water
discharges, eutrophication and littering.
• farms that use large amounts of pesticides and fertilizers which cause
the increase of nitrates and phosphates in the water.
• Run off from nearby farms also causes water to become cloudy which
blocks the sunlight from reaching the plants along the bottom of the
water system.
• When the plants do not receive enough sunlight they die which further
stresses the water systems by reducing the amount of oxygen in the
water.
Some other types of water pollution come from businesses.
3. Soil Contamination/Pollution
This occurs when chemicals are released by spill or underground leakage.
Among the most significant soil contaminants are hydrocarbons, heavy metals,
herbicides, pesticides and chlorinated hydrocarbons.
Soil pollution is caused by the presence of xenobiotic (man-made) chemicals
or other alteration in the natural soil environment. This type of contamination
typically arises from the rupture of underground storage tanks, application of
pesticides, percolation of contaminated surface water to subsurface strata, oil
and fuel dumping, leaching of wastes from landfills or direct discharge of industrial
wastes to the soil. The most common chemicals involved are petroleum
hydrocarbons, solvents, pesticides, lead and other heavy metals. This occurrence
of this phenomenon is correlated with the degree of industrializations and
intensities of chemical usage.
The concern over soil contamination stems primarily from health risks, from
direct contact with the contaminated soil, vapors from the contaminants, and
from secondary contamination of water supplies within and underlying the soil.
Mapping of contaminated soil sites and the resulting cleanup are time consuming
and expensive tasks, requiring extensive amounts of geology, hydrology, chemistry
and computer modeling skills.
Underground Tanks
• Underground storage tanks can be ruptured from improper safety guards
during construction projects or simple wear from time. Many times, these
tanks contain fuels or other fluids that damage the soil.
Runoff
• Runoff from farmland and agricultural fields causes soil pollution that
can damage animal and plant life. In addition, rainwater can wash the
chemicals used by farmers into water sources, which end up in soil far
away from the site.
460 460 Legal Aspect of Business • Module Twelve
Soil Amendments
• Soil amendments, byproducts from industry, can be used to amplify the
nutrients within soil. However, many times, these products stem from
industrial waste. Materials such as ash, lime and bio-solids can leave
the soil contaminated over the long-term.
Landfills
• Landfills contain products that can leak into the soil. Sulfates, nitrates,
heavy metals and other unnatural products pollute the ground.
4. NOISE POLLUTION
Noise pollution (or environmental noise) is displeasing human-, animal- or
machine-created sound that disrupts the activity or balance of human or animal
life. The word noise comes from the Latin word nausea meaning seasickness.
The source of most outdoor noise worldwide is transportation systems,
including motor vehicle noise, aircraft noise and rail noise. Poor urban planning
may give rise to noise pollution, since side-by-side industrial and residential
buildings can result in noise pollution in the residential area.
Other sources of indoor and outdoor noise pollution are car alarms, emergency
service sirens, office equipment, factory machinery, construction work, grounds
keeping equipment, barking dogs, appliances, power tools, lighting hum, audio
entertainment systems, loudspeakers, and noisy people.
Noise health effects are both health and behavioural in nature. The unwanted
sound is called noise. This unwanted sound can damage physiological and
psychological health. Noise pollution can cause annoyance and aggression,
hypertension, high stress levels, tinnitus, hearing loss, sleep disturbances, and
other harmful effects. Furthermore, stress and hypertension are the leading causes
to health problems, whereas tinnitus can lead to forgetfulness, severe depression
and at times panic attacks.
Chronic exposure to noise may cause noise-induced hearing loss. Older males
exposed to significant occupational noise demonstrate significantly reduced
hearing sensitivity than their non-exposed peers, though differences in hearing
sensitivity decrease with time and the two groups are indistinguishable by age
79. A comparison of Maaban tribesmen, who were insignificantly exposed to
transportation or industrial noise, to a typical U.S. population showed that chronic
exposure to moderately high levels of environmental noise contributes to hearing
loss.
High noise levels can contribute to cardiovascular effects and exposure to
moderately high levels during a single eight hour period causes a statistical rise
in blood pressure of five to ten points and an increase in stress and vasoconstriction
leading to the increased Noise Pollution Effects on Humans Noise pollution effects
on human health is a matter of great concern. The reason being the adverse
consequences that high noise levels have on human health. Noise pollution can
affect us in several ways, some of which are listed below:
Module Twelve • Environment Protection Act, 1986 461
Global warming and climate change are aspects of our environment that
cannot be easily or quickly discounted. Many factions still strongly feel that the
changes our Earth is seeing are the result of a natural climatic adjustment.
Regardless of one's perspective the effects of global warming are a quantifiable
set of environmental results that are in addition to any normal changes in climate.
That is why the effects of global warming have catastrophic potential. Global
warming may well be the straw that breaks the camel's back. It could turn out to
be the difference between a category three hurricane and a category four. Global
warming as caused by greenhouse gas emissions can lead us to a definite
imbalance of nature.
The premise of global warming as an issue of debate is that industrial growth
coupled with non-structured methods we as humans use to sustain ourselves
has created a situation where our planet is getting progressively hotter. We have
seemingly negatively effected our environment by a cycle of harmful processes
that now seem to be feeding upon themselves to exponentially increase the damage
to our ecosystem.
Greenhouse Effect
The greenhouse effect is when the temperature rises because the sun's heat The greenhouse ef-
fect is when the
and light is trapped in the earth's atmosphere. This is like when heat is trapped temperature rises
in a car. On a very hot day, the car gets hotter when it is out in the parking lot. because the sun's
This is because the heat and light from the sun can get into the car, by going heat and light is
trapped in the
through the windows, but it can't get back out. This is what the greenhouse earth's atmo-
effect does to the earth. The heat and light can get through the atmosphere, but sphere.
it can not get out. As a result, the temperature rises.
The greenhouse effect is the process by which absorption and emission of
infrared radiation by gases in the atmosphere warm a planet's lower atmosphere
and surface. It was discovered by Joseph Fourier in 1824 and was first investigated
quantitatively by Svante Arrhenius in 1896. Existence of the greenhouse effect as
such is not disputed, even by those who do not agree that the recent temperature
increase is attributable to human activity. The question is instead how the strength
of the greenhouse effect changes when human activity increases the concentrations
of greenhouse gases in the atmosphere.
Ozone
Ozone is a colourless gas found in the upper atmosphere of the Earth and
formed by the action of ultraviolet radiation on oxygen. Ozone forms a layer in the
stratosphere, which protects life on Earth from the harmful effects of ultraviolet
radiation.
Today, one of the most discussed and serious environmental issues is the
ozone layer depletion, the layer of gas that forms a protective covering in the
Earth's upper atmosphere. Ozone is formed when oxygen molecules absorb
ultraviolet photons and undergo a chemical reaction known as photo dissociation
or photolysis, where a single molecule of oxygen breaks down to two oxygen atoms.
The free oxygen atom (O), then combines with an oxygen molecule (O2) and forms
Ozone layer deple-
a molecule of ozone (O3). The ozone molecules, in turn absorb ultraviolet rays
tion first captured between 310 to 200 nm wavelength and thereby prevent these harmful radiations
the attention of the from entering the Earth's atmosphere. In the process, ozone molecules split up
whole world in the
into a molecule of oxygen and an oxygen atom. The oxygen atom (O) again combines
later half of 1970
and since then, with the oxygen molecule (O2) to regenerate an ozone (O3) molecule. Thus, the
many discussions total amount of ozone is maintained by this continuous process of destruction
and researches and regeneration.
have been carried
out to find out the Ozone layer depletion first captured the attention of the whole world in the
possible effects
and the causes of later half of 1970 and since then, many discussions and researches have been
ozone depletion. carried out to find out the possible effects and the causes of ozone depletion.
Many studies have also been directed to find out a possible solution.
Module Twelve • Environment Protection Act, 1986 465
OZONE LAYER
The ozone layer protects the Earth from the ultraviolet rays sent down by the The ozone layer
sun. If the ozone layer is depleted by human action, the effects on the planet protects the Earth
from the ultraviolet
could be catastrophic. rays sent down by
the sun. If the
Ozone is present in the stratosphere. The stratosphere reaches 30 miles ozone layer is de-
above the Earth, and at the very top it contains ozone. The suns rays are absorbed pleted by human
by the ozone in the stratosphere and thus do not reach the Earth. action, the effects
on the planet could
The Ozone Layer Over Time. Image Credit: Institute for Studies in be catastrophic.
Development, Environment, and Security.
The Ozone Layer Over Time. Image Credit: Institute for Studies in
Development, Environment, and Security.
Ozone is a bluish gas that is formed by three atoms of oxygen. The form of
oxygen that humans breathe in consists of two oxygen atoms, O 2. When found on
the surface of the planet, ozone is considered a dangerous pollutant and is one
substance responsible for producing the greenhouse effect.
The highest regions of the stratosphere contain about 90% of all ozone.
466 466 Legal Aspect of Business • Module Twelve
In recent years, the ozone layer has been the subject of much discussion.
And rightly so, because the ozone layer protects both plant and animal life on the
planet.
The fact that the ozone layer was being depleted was discovered in the mid-
1980s. The main cause of this is the release of CFCs, chlorofluorocarbons.
Antarctica was an early victim of ozone destruction. A massive hole in the
ozone layer right above Antarctica now threatens not only that continent, but
many others that could be the victims of Antarctica's melting icecaps. In the
future, the ozone problem will have to be solved so that the protective layer can
be conserved.
Ozone is converted to oxygen, leaving the chlorine atom free to repeat the
process up to 100,000 times, resulting in a reduced level of ozone. Bromine
compounds, or halons, can also destroy stratospheric ozone. Compounds
containing chlorine and bromine from man-made compounds are known as
industrial halocarbons.
Emissions of CFCs have accounted for roughly 80% of total stratospheric
ozone depletion. Thankfully, the developed world has phased out the use of CFCs
in response to international agreements to protect the ozone layer. However,
because CFCs remain in the atmosphere so long, the ozone layer will not fully
repair itself until at least the middle of the 21st century. Naturally occurring
chlorine has the same effect on the ozone layer, but has a shorter life span in the
atmosphere.
The ozone layer acts like a giant sunshade, protecting plants and animals
from much of the sun's harmful ultraviolet radiation.
Ozone (O3) forms a layer in the stratosphere, 15-40 km above earth surface.
If the ozone in the atmosphere from ground level to a height of 60 km could be
assembled at the earth's surface, it would comprise a layer of gas only about 3
mm thick.
Global stratospheric ozone levels have declined, which means that the ozone
layer is changing. Stratospheric ozone has large natural temporal and spatial
variations, up to 30 percent variation may be regarded as normal. However, we
now have evidence of a significant thinning of the ozone layer during spring and
summer. This is observed in both the northern and the southern hemispheres at
middle and high latitudes. During the last 10-15 years, the ozone layer above the
northern hemisphere has been reduced by 5-6 percent in spring per decade. The
latest tests (January-March 1995) have shown very large reductions, with a
maximum of more than 30 percent reduction compared to normal.
A depletion of the ozone layer will increase the UV-radiation at ground level.
Increasing doses of UV-B may cause skin cancer, eye cataracts, damage to the
468 468 Legal Aspect of Business • Module Twelve
immune system in animals as well as human beings, and have an adverse impact
on plant growth.
The maps show UV intensity at noon calculated from sun angle and satelitte
measurements of the ozone layer. The model assumes clear sky conditions at sea
level and average sun reflection. With increased altitude and reflection - for
instance snow conditions in mountain areas — the UV dose can be considerably
higher.
The UV index used in the maps above has been developed by Environment
Canada. It runs on a scale from 0 to 10, with 10 being a typical mid-summer,
sunny day in the tropics. A relative scale ranging from low to extreme is also
applied: In extreme conditions (UV Index higher than 9) light, sensitive and
untanned skin may burn in less than 15 minutes.
UV radiation will affect human health through for example sunburn, snow
blindness, other eye damage, early ageing of the skin and rising rates of skin
cancer. It may also cause suppression of the immune response system. It will
likewise affect the productivity of aquatic and terrestrial eco-systems. Single-
celled algae, chlorophyll and plant hormones are especially sensitive to UV
radiation.
On Land Plants
A high increase in UV radiation may disrupt many ecosystems on land. Rice
production may be drastically reduced by the effects of UV-B on the nitrogen
assimilating activities of micro-organisms. With a diminishing ozone layer, it is
likely that the supply of natural nitrogen to ecosystems, such as tropical rice
paddies, will be significantly reduced.
Module Twelve • Environment Protection Act, 1986 469
Most plants (and trees) grow more slowly and become smaller and more
stunted as adult plants when exposed to large amounts of UV-B. Increased UV-B
inhibits pollen germination.
air pollution
UV-B stimulates the formation of reactive radicals — molecules that react
rapidly with other chemicals, forming new substances. The hydroxyl radicals, for
example, stimulate the creation of tropospheric ozone and other harmful pollutants.
Smog formation creates other oxidized organic chemicals, such as formaldehydes.
These molecules can also produce reactive hydrogen radicals when they absorb
UV-B. In urban areas, a 10 percent reduction of the ozone layer is likely to result
in a 10-25 percent increase in tropospheric ozone.
More UV-B radiation seems likely to cause global increases in atmospheric
hydrogen peroxide. This is the principal chemical that oxidizes sulfur dioxide to
form sulfuric acid in cloud water, making it an important part of acid rain
formation.
Damage to Materials
UV-radiation causes many materials to degrade more rapidly. Plastic materials
used outdoors will have much shorter lifetimes with small increases of UV
radiation. PVC sidings, window and door frames, pipes, gutters, etc. used in
buildings degrade faster.
Ultraviolet Radiation
Ultraviolet radiation is divided into three types, according to wavelength.
UV-A radiation, emitted at wavelengths of 315-400 nm (1 nanometer is a
millionth of a millimeter, or 10 - 9m) is unaffected by ozone reduction, and is not
as harmful as UV-B.
UV-B radiation, emitted at 280-315 nm, is affected by decreases in
atmospheric ozone. It is UV-B that causes most of the damage to plants and
animals.
UV-B damage depends on the amount of atmospheric ozone that can act as a
filter, the angle of the sun in the sky, and cloud cover, which shields the surface
from some of the ultraviolet radiation. The ozone layer is usually thinnest at the
tropics and thickest towards the poles. As stratospheric ozone diminishes,
proportionately more of the ultraviolet radiation reaching the Earth's surface will
arrive in the shorter UV-B wavelengths.
UV-C radiation, which is lethal, is emitted at wavelengths of 200-280 nm.
Fortunately, UV-C is completely absorbed by atmospheric ozone and oxygen. Even
with severe ozone reduction, UV-C radiation would still be absorbed by the
remaining ozone.
Since the ozone layer absorbs UVB ultraviolet light from the Sun, ozone layer
depletion is expected to increase surface UVB levels, which could lead to damage,
including increases in skin cancer. This was the reason for the Montreal Protocol.
Although decreases in stratospheric ozone are well-tied to CFCs and there are
good theoretical reasons to believe that decreases in ozone will lead to increases
in surface UVB, there is no direct observational evidence linking ozone depletion
470 470 Legal Aspect of Business • Module Twelve
to higher incidence of skin cancer in human beings. This is partly due to the fact
that UVA, which has also been implicated in some forms of skin cancer, is not
absorbed by ozone, and it is nearly impossible to control statistics for lifestyle
changes in the populace.
Increased UV
Ozone, while a minority constituent in the Earth's atmosphere, is responsible
for most of the absorption of UVB radiation. The amount of UVB radiation that
penetrates through the ozone layer decreases exponentially with the slant-path
thickness/density of the layer. Correspondingly, a decrease in atmospheric ozone
is expected to give rise to significantly increased levels of UVB near the surface.
Increases in surface UVB due to the ozone hole can be partially inferred by
radiative transfer model calculations, but cannot be calculated from direct
measurements because of the lack of reliable historical (pre-ozone-hole) surface
UV data, although more recent surface UV observation measurement programmes
exist (e.g. at Lauder, New Zealand).
Because it is this same UV radiation that creates ozone in the ozone layer
from O2 (regular oxygen) in the first place, a reduction in stratospheric ozone
would actually tend to increase photochemical production of ozone at lower levels
(in the troposphere), although the overall observed trends in total column ozone
still show a decrease, largely because ozone produced lower down has a naturally
shorter photochemical lifetime, so it is destroyed before the concentrations could
reach a level which would compensate for the ozone reduction higher up.
Biological Effects
The main public concern regarding the ozone hole has been the effects of
increased surface UV and microwave radiation on human health. So far, ozone
depletion in most locations has been typically a few percent and, as noted above,
no direct evidence of health damage is available in most latitudes. Were the high
levels of depletion seen in the ozone hole ever to be common across the globe, the
effects could be substantially more dramatic. As the ozone hole over Antarctica
has in some instances grown so large as to reach southern parts of Australia and
New Zealand, environmentalists have been concerned that the increase in surface
UV could be significant.
Effects on Humans
UVB (the higher energy UV radiation absorbed by ozone) is generally accepted
to be a contributory factor to skin cancer. In addition, increased surface UV leads
to increased tropospheric ozone, which is a health risk to humans. The increased
surface UV also represents an increase in the vitamin D synthetic capacity of the
sunlight.
The cancer preventive effects of vitamin D represent a possible beneficial
effect of ozone depletion. In terms of health costs, the possible benefits of increased
UV irradiance may outweigh the burden.
1. Basal and Squamous Cell Carcinomas — The most common forms of skin
cancer in humans, basal and squamous cell carcinomas, have been strongly linked
to UVB exposure. The mechanism by which UVB induces these cancers is well
understood — absorption of UVB radiation causes the pyrimidine bases in the
Module Twelve • Environment Protection Act, 1986 471
DNA molecule to form dimers, resulting in transcription errors when the DNA
replicates. These cancers are relatively mild and rarely fatal, although the
treatment of squamous cell carcinoma sometimes requires extensive reconstructive
surgery. By combining epidemiological data with results of animal studies,
scientists have estimated that a one percent decrease in stratospheric ozone would
increase the incidence of these cancers by 2%.
2. Malignant Melanoma — Another form of skin cancer, malignant melanoma,
is much less common but far more dangerous, being lethal in about 15-20% of
the cases diagnosed. The relationship between malignant melanoma and ultraviolet
exposure is not yet well understood, but it appears that both UVB and UVA are
involved. Experiments on fish suggest that 90 to 95% of malignant melanomas
may be due to UVA and visible radiation whereas experiments on opossums suggest
a larger role for UVB. Because of this uncertainty, it is difficult to estimate the
impact of ozone depletion on melanoma incidence. One study showed that a 10%
increase in UVB radiation was associated with a 19% increase in melanomas for
men and 16% for women. A study of people in Punta Arenas, at the southern tip
of Chile, showed a 56% increase in melanoma and a 46% increase in nonmelanoma
skin cancer over a period of seven years, along with decreased ozone and increased
UVB levels.
3. Cortical Cataracts — Studies are suggestive of an association between
ocular cortical cataracts and UV-B exposure, using crude approximations of
exposure and various cataract assessment techniques. A detailed assessment of
ocular exposure to UV-B was carried out in a study on Chesapeake Bay Watermen,
where increases in average annual ocular exposure were associated with increasing
risk of cortical opacity. In this highly exposed group of predominantly white males,
the evidence linking cortical opacities to sunlight exposure was the strongest to
date. However, subsequent data from a population-based study in Beaver Dam,
WI suggested the risk may be confined to men. In the Beaver Dam study, the
exposures among women were lower than exposures among men, and no
association was seen. Moreover, there were no data linking sunlight exposure to
risk of cataract in African Americans, although other eye diseases have different
prevalences among the different racial groups, and cortical opacity appears to be
higher in African Americans compared with whites.
4. Increased Tropospheric Ozone — Increased surface UV leads to increased
tropospheric ozone. Ground-level ozone is generally recognized to be a health
risk, as ozone is toxic due to its strong oxidant properties. At this time, ozone at
ground level is produced mainly by the action of UV radiation on combustion
gases from vehicle exhausts.
• Many were worried that ozone holes might start to appear over other
areas of the globe but to date the only other large-scale depletion is a
smaller ozone "dimple" observed during the Arctic spring over the North
Pole. Ozone at middle latitudes has declined, but by a much smaller
extent (about 4-5% decrease).
• If the conditions became more severe (cooler stratospheric temperatures,
more stratospheric clouds, more active chlorine), then global ozone may
decrease at a much greater pace. Standard global warming theory
predicts that the stratosphere will cool.
• When the Antarctic ozone hole breaks up, the ozone-depleted air drifts
out into nearby areas. Decreases in the ozone level of up to 10% have
been reported in New Zealand in the month following the break-up of
the Antarctic ozone hole.
• Remedies to overcome global warming.
Means of Mitigation
Scientific consensus on global warming, together with the precautionary
principle and the fear of abrupt climate change is leading to increased effort to
develop new technologies and sciences and carefully manage others in an attempt
to mitigate global warming. Unfortunately most means of mitigation appear effective
only for preventing further warming, not at reversing existing warming.
The Stern Review identifies several ways of mitigating climate change. These
include reducing demand for emissions-intensive goods and services, increasing
efficiency gains, increasing use and development of low-carbon technologies, and
reducing non-fossil fuel emissions.
Module Twelve • Environment Protection Act, 1986 473
The energy policy of the European Union has set a target of limiting the
global temperature rise to 2 °C [3.6 °F] compared to preindustrial levels, of which
0.8 °C has already taken place and another 0.5 °C is already committed. The 2 °C
rise is typically associated in climate models with a carbon dioxide concentration
of 400-500 ppm by volume; the current level as of January 2007 is 383 ppm by
volume, and rising at 2 ppm annually. Hence, to avoid a very likely breach of the
2 °C target, CO2 levels would have to be stabilised very soon; this is generally
regarded as unlikely, based on current programs in place to date. The importance
of change is illustrated by the fact that world economic energy efficiency is presently
improving at only half the rate of world economic growth.
At the core of most proposals is the reduction of greenhouse gas emissions
through reducing energy use and switching to cleaner energy sources. Frequently
discussed energy conservation methods include increasing the fuel efficiency of
vehicles (often through hybrid, plug-in hybrid, and electric cars and improving
conventional automobiles), individual-lifestyle changes and changing business
practices.
Newly developed technologies and currently available technologies including
renewable energy (such as solar power, tidal and ocean energy, geothermal power,
and wind power) and more controversially nuclear power and the use of carbon
sinks, carbon credits, and taxation are aimed more precisely at countering
continued greenhouse gas emissions.
More radical proposals which may be grouped with mitigation include
biosequestration of atmospheric carbon dioxide and geoengineering techniques
ranging from carbon sequestration projects such as carbon dioxide air capture,
to solar radiation management schemes such as the creation of stratospheric
sulfur aerosols. The ever-increasing global population and the planned growth of
national GDPs based on current technologies are counter-productive to most of
these proposals.
The Energy Information Administration predicts world energy usage will rise
in the next few decades.
Reducing fuel use by improvements in efficiency provides environmental
benefits and as well as net cost savings to the energy user. Building insulation,
Module Twelve • Environment Protection Act, 1986 475
fluorescent lighting, and public transportation are some of the most effective means
of conserving energy, and by extension, the environment. However, Jevons paradox
poses a challenge to the goal of reducing overall energy use (and thus
environmental impact) by energy conservation methods. Improved efficiency lowers
cost, which in turn increases demand. To ensure that increases in efficiency
actually reduces energy use, a tax must be imposed to remove any cost savings
from improved efficiency.
Energy conservation is the practice of increasing the efficiency of use of energy
in order to achieve higher useful output for the same energy consumption. This
may result in increase of national security, personal security, financial capital,
human comfort and environmental value. Individuals and organizations that are
direct consumers of energy may want to conserve energy in order to reduce energy
costs and promote environmental values. Industrial and commercial users may
want to increase efficiency and maximize profit.
On a larger scale, energy conservation is an element of energy policy. The
need to increase the available supply of energy (for example, through the creation
of new power plants, or by the importation of more energy) is lessened if societal
demand for energy can be reduced, or if growth in demand can be slowed. This
makes energy conservation an important part of the debate over climate change
and the replacement of non-renewable resources with renewable energy.
Encouraging energy conservation among consumers is often advocated as a
cheaper or more environmentally sensitive alternative to increased energy
production.
Urban Planning
Urban planning also has an effect on energy use. Between 1982 and 1997,
the amount of land consumed for urban development in the United States increased
476 476 Legal Aspect of Business • Module Twelve
Building Design
New buildings can be constructed using passive solar building design, low-
energy building, or zero-energy building techniques, using renewable heat sources.
Existing buildings can be made more efficient through the use of insulation, high-
efficiency appliances (particularly hot water heaters and furnaces), double- or
triple-glazed gas-filled windows, external window shades, and building orientation
and siting. Renewable heat sources such as shallow geothermal and passive solar
energy reduce the amount of greenhouse gasses emitted. In addition to designing
buildings which are more energy efficient to heat, it is possible to design buildings
that are more energy efficient to cool by using lighter-coloured, more reflective
materials in the development of urban areas (e.g., by painting roofs white) and
planting trees. This saves energy because it cools buildings and reduces the urban
heat island effect thus reducing the use of air conditioning.
Transport
Modern energy efficient technologies, such as plug-in hybrid electric vehicles,
and development of new technologies, such as hydrogen cars, may reduce the
consumption of petroleum and emissions of carbon dioxide.
A shift from air transport and truck transport to electric rail transport would
reduce emissions significantly.
Increased use of biofuels (such as biodiesel and biobutanol, that can be used
in 100% concentration in today's diesel and gasoline engines) could also reduce
emissions if produced environmentally efficiently, especially in conjunction with
regular hybrids and plug-in hybrids.
For electric vehicles, the reduction of carbon emissions will improve further
if the way the required electricity is generated is low-carbon (from renewable
energy sources).
Module Twelve • Environment Protection Act, 1986 477
Enrichment
The bulk of CO 2 emission from nuclear power plants can be eliminated if
nuclear power plants themselves generate the electricity required during the
uranium enrichment process (already being done in France and to some extent
by the Tennessee Valley Authority's many nuclear units in the U.S.). In addition,
gas centrifuge technology has/will greatly reduced the energy required for
enrichment, thus reducing the LCA carbon emissions per kilowatt-hour.
Renewable Energy
This three-bladed wind turbine is the most common modern design because
it minimizes forces related to fatigue.
One means of reducing carbon emissions is the development of new
technologies such as renewable energy such as wind power. Most forms of
renewable energy generate no appreciable amounts of greenhouse gases except
for biofuels derived from biomass, as well as some biofuels derived from fossil
fuel sources.
Helioculture is a newly developed process which is claimed to be able to
produce 20,000 gallons of fuel per acre per year, and which removes carbon
dioxide from the air as a feedstock for the fuel.
Generally, emissions are a fraction of fossil fuel-based electricity generation.
In some cases, notably with hydroelectric dams — once thought to be one of the
cleanest forms of energy-there are unexpected results. One study shows that a
hydroelectric dam in the Amazon has 3.6 times larger greenhouse effect per kW·h
than electricity production from oil, due to large scale emission of methane from
decaying organic material.[32] This effect applies in particular to dams created
by simply flooding a large area, without first clearing it of vegetation. There are
however investigations into underwater turbines that do not require a dam.
Currently governments subsidize fossil fuels by an estimated $235 billion a
year. However, in some countries, government action has boosted the development
of renewable energy technologies-for example, a program to put solar panels on
the roofs of a million homes has made Japan a world leader in that technology,
and Denmark's support for wind power ensured its former leadership of that
sector. In 2005, Governor Arnold Schwarzenegger promised an initiative to install
a million solar roofs in California, which became the California Solar Initiative.
In June 2005, the chief executive of BT allegedly became the first head of a
British company to admit that climate change is already affecting his company,
and affecting its business, and announced plans to source much of its substantial
energy use from renewable sources. He noted that, "Since the beginning of the
year, the media has been showing us images of Greenland glaciers crashing into
the sea, Mount Kilimanjaro devoid of its ice cap and Scotland reeling from floods
and gales. All down to natural weather cycles?
CCS applied to a modern conventional power plant could reduce CO2 emissions
to the atmosphere by approximately 80-90% compared to a plant without CCS.
Storage of the CO2 is envisaged either in deep geological formations, deep
oceans, or in the form of mineral carbonates. Geological formations are currently
considered the most promising, and these are estimated to have a storage capacity
of at least 2000 Gt CO2. IPCC estimates that the economic potential of CCS could
be between 10% and 55% of the total carbon mitigation effort until year 2100
In October 2007, the Bureau of Economic Geology at The University of Texas
at Austin received a 10-year, $38 million subcontract to conduct the first
intensively monitored, long-term project in the United States studying the
feasibility of injecting a large volume of CO2 for underground storage. The project
is a research program of the Southeast Regional Carbon Sequestration Partnership
(SECARB), funded by the National Energy Technology Laboratory of the U.S.
Department of Energy (DOE). The SECARB partnership will demonstrate CO2
injection rate and storage capacity in the Tuscaloosa-Woodbine geologic system
that stretches from Texas to Florida. The region has the potential to store more
than 200 billion tons of CO2 from major point sources in the region, equal to
about 33 years of U.S. emissions overall at present rates. Beginning in fall 2007,
the project will inject CO2 at the rate of one million tons per year, for up to 1.5
years, into brine up to 10,000 feet (3,000 m) below the land surface near the
Cranfield oil field about 15 miles (24 km) east of Natchez, Mississippi. Experimental
equipment will measure the ability of the subsurface to accept and retain CO2.
Geo-engineering
Geoengineering is seen by some as an alternative to mitigation and adaptation,
but by others as an entirely separate response to climate change. Carbon
sequestration is a form of mitigation, but is not mitigation as defined by climate
activists. To them, the term is clearly defined as exclusively associated with
reduction of greenhouse gas emissions.
Chapter 28 of the National Academy of Sciences report Policy Implications of
Greenhouse Warming: Mitigation, Adaptation, and the Science Base (1992) defined
geoengineering as "options that would involve large-scale engineering of our
environment in order to combat or counteract the effects of changes in atmospheric
chemistry." They evaluated a range of options to try to give preliminary answers
to two questions: can these options work and could they be carried out with a
reasonable cost. They also sought to encourage discussion of a third question -
what adverse side effects might there be. The following types of option were
examined: reforestation, increasing ocean absorption of carbon dioxide (carbon
sequestration) and screening out some sunlight. NAS also argued "Engineered
countermeasures need to be evaluated but should not be implemented without
broad understanding of the direct effects and the potential side effects, the ethical
issues, and the risks."
Module Twelve • Environment Protection Act, 1986 481
Biochar
Charcoal, or biochar, created by pyrolysis of biomass can be buried to create
terra preta. The production of biochar may or may not involve energy recovery.
The intention is that the carbon in the biomass is removed from the atmosphere
for a longer period of time than would otherwise be the case.
may be uneconomic when compared to carbon capture and storage from major
sources - in particular, fossil fuel powered power stations, refineries, etc. In such
cases, costs of energy produced will grow significantly. However, captured CO2
can be used to force more crude oil out of oil fields, as Statoil and Shell have
made plans to do. CO2 can also be used in commercial greenhouses, giving an
opportunity to kick-start the technology. Some attempts have been made to use
algae to capture smokestack emissions, notably the GreenFuel Technologies
Corporation, who have now shut down operations. This technology has not reached
commercial level yet.
Societal Controls
Another method being examined is to make carbon a new currency by
introducing tradeable "Personal Carbon Credits." The idea being it will encourage
and motivate individuals to reduce their 'carbon footprint' by the way they live.
Each citizen will receive a free annual quota of carbon that they can use to travel,
buy food, and go about their business. It has been suggested that by using this
concept it could actually solve two problems; pollution and poverty, old age
pensioners will actually be better off because they fly less often, so they can cash
in their quota at the end of the year to pay heating bills, etc.
Module Twelve • Environment Protection Act, 1986 483
Earth Summit
The Earth Summit is the informal and best-known name for the United Nations
Conference on Environment and Development (UNCED).
The Earth Summit, held in Rio de Janeiro from June 3 to June 14, 1992, was
unprecedented for a United Nations conference, in terms of both its size and the
scope of its concerns. One hundred and seventy two governments participated
with 108 at level of heads of State or Government. Some 2,400 representatives of
non-governmental organizations (NGOs) attended, with 17,000 people at the
parallel NGO Forum.
The issues addressed included:
• systematic scrutiny of patterns of production — particularly the
production of toxic components, such as lead in gasoline, or poisonous
waste
• alternative sources of energy to replace the use of fossil fuels which are
linked to global climate change
• new reliance on public transportation systems in order to reduce vehicle
emissions, congestion in cities and the health problems caused by
polluted air and smog
• the growing scarcity of water
An important achievement was an agreement on the Climate Change
Convention which in turn led to the Kyoto Protocol. Another was agreement to
"not carry out any activities on the lands of indigenous peoples that would cause
environmental degradation or that would be culturally inappropriate." The
conference also reinforced the Convention on Biological Diversity, and made a
start towards redefinition of money supply measures that did not inherently
encourage destruction of natural eco-regions and so-called uneconomic growth.
The Earth Summit resulted in the following documents:
• Agenda 21
• Convention on Biological Diversity
• Forest Principles
• Framework Convention on Climate Change
• Rio Declaration on Environment and Development
Further development and implementation these issues was undertaken by
various entities within the UN:
• United Nations Development Programme
• United Nations Environment Programme
• United Nations Industrial Development Organization
• United Nations Conference on Trade and Development
At its close, Maurice Strong, the Conference Secretary-General, called the
Summit a "historic moment for humanity." Although Agenda 21 had been weakened
484 484 Legal Aspect of Business • Module Twelve
by compromise and negotiation, he said, it was still the most comprehensive and,
if implemented, effective programme of action ever sanctioned by the international
community.
The Earth Summit influenced all subsequent UN conferences, which have
examined the relationship between human rights, population, social development,
women and human settlements — and the need for environmentally sustainable
development. The World Conference on Human Rights, held in Vienna in 1993,
for example, underscored the right of people to a healthy environment and the
right to development, controversial demands that had met with resistance from
some Member States until Rio.
Critics, however, point out that many of the agreements made in Rio have
not been realized regarding such fundamental issues as fighting poverty and
cleaning up the environment. Moreover, they say business leaders have used the
Rio accords to greenwash their corporate image, giving the impression they have
improved their behaviour when in many cases this has not been the case.
Other criticisms were that the format of the Summit inhibited the discussion
of sustainable development by putting development and environment functions
in separate compartments, and uniting trade and development concerns, rather
than trade and environment concerns, as would be required if tax, tariff and
trade policy were actually to be changed to accommodate environmental concerns.
Kyoto Protocol
The main current international agreement on combating climate change is
the Kyoto Protocol, which came into force on 16 February 2005. The Kyoto Protocol
is an amendment to the United Nations Framework Convention on Climate Change
(UNFCCC). Countries that have ratified this protocol have committed to reduce
their emissions of carbon dioxide and five other greenhouse gases, or engage in
emissions trading if they maintain or increase emissions of these gases.
Copenhagen 2009
The first phase of the Kyoto Protocol expires in 2012. The United Nations
Climate Change Conference in Copenhagen in December 2009 was the next in an
annual series of UN meetings that followed the 1992 Earth Summit in Rio. In
486 486 Legal Aspect of Business • Module Twelve
1997 the talks led to the Kyoto Protocol, Copenhagen is the world's chance to
agree a successor to Kyoto that will bring about meaningful carbon cuts.
Resolutions in Copenhagen
The world witnessed for almost two weeks how the negotiations went on during
the UN global climate conference in the freezing cold Danish capital. The
conference, the biggest in the history of mankind for the cause of environment,
witnessed the participation of over 130 heads of government and states from
around the globe, where every one initially remarked that the summit must not
be failed.
But the latest series of negotiation and discussion proved that the division
between the developed and developing remained intact. The repeated opposition
and adjournment of the meetings delayed the acceptance of the resolutions. The
summit, which was supposed to get concluded by Friday night, continued till
Saturday evening.
Finally Obama initiated for a breakthrough of the conference, where he
convinced BASIC countries, namely, India, China, Brazil and South Africa to give
approval for an agreement.
An hour-long meeting if the US President with the Indian Prime Minister,
Chinese Premier Wen Jiabao, Brazilian President Lula Da Silva and South African
President Jacob Zuma had resulted in a US-BASIC deal, where all parties agreed
to take appropriate actions to prevent the global warming exceeding the level of 2
degree Celsius.
Moreover, all the government heads of BASIC and the US had ensued for $30
billion as aid to the poor and developing nations in the next three years. It has
also agreed to support the US proposed global fund of $100 billion a year by
2020.
Of course, not every one was happy with the deal. There were opposition
from various other developing nations, where they argued that they cannot 'accept
a text originally agreed by the United States, China, India, Brazil and South Africa
as the blueprint of a wider United Nations plan' to fight climate change.
It was opposed by Cuba, Sudan, Nicaragua, Bolivia, Venezuela, Tuvalu, Costa
Rica etc, whereas the host country also showed reservation to the deal. The Danish
Prime Minister and also COP15 president Lars Løkke Rasmussen said that he
was not in favour of the proposal.
However Japan, Norway, African nations and also the European Union nations
came out with support for the proposal.
The British Prime Minister Gordon Brown claimed the deal as a beginning
was acceptable to him. He admitted that 'it was not an easy task' and asserted
that the Copenhagen climate deal offers hope. German Chanellor Angela Merkel
also agreed on the proposal but said she 'expected more.'
The Indian Environment Minister Jairam Ramesh expressed happiness that
a good deal for the entire developing world was resolved in the Copenhagen summit.
Someway happy notes were aired by the UN Secretary General Ban Ki-moon
also when termed the exercise as an important beginning. He admitted that it
Module Twelve • Environment Protection Act, 1986 487
was not satisfactory to a number of delegates as the deal 'may not be everything
everyone had hoped for'. But he firmly commented that finally 'we have a deal in
Copenhagen', which has an immediate operational effect.
Carbon Tax
In 1991, Sweden introduced the world's first carbon tax. The UK has had a
Climate Change Levy on fossil-fuel-based electricity generation since 2001. Plans
for a carbon tax in New Zealand were abandoned after the 2005 elections.
In May 2008, the Bay Area Air Quality Management District, which covers
nine counties in the San Francisco Bay Area, passed a carbon tax of 4.4 cents per
ton.
Non-governmental Approaches
Legal Action
In some countries, those affected by climate change may be able to sue major
producers, in a parallel to the lawsuits against tobacco companies. Although
488 488 Legal Aspect of Business • Module Twelve
proving that particular weather events are due specifically to global warming may
never be possible, methodologies have been developed to show the increased risk
of such events caused by global warming.
For a legal action for negligence (or similar) to succeed, "Plaintiffs … must
show that, more probably than not, their individual injuries were caused by the
risk factor in question, as opposed to any other cause. This has sometimes been
translated to a requirement of a relative risk of at least two." Another route (though
with little legal bite) is the World Heritage Convention, if it can be shown that
climate change is affecting World Heritage Sites like Mount Everest.
Legal action has also been taken to try to force the U.S. Environmental
Protection Agency to regulate greenhouse gas emissions under the Clean Air Act,
and against the Export-Import Bank and OPIC for failing to assess environmental
impacts (including global warming impacts) under NEPA.
According to a 2004 study commissioned by Friends of the Earth, ExxonMobil
and its predecessors caused 4.7 to 5.3 percent of the world's man-made carbon
dioxide emissions between 1882 and 2002. The group suggested that such studies
could form the basis for eventual legal action.
Personal Choices
While many of the proposed methods of mitigating global warming require
governmental funding, legislation and regulatory action, individuals and
businesses can also play a part in the mitigation effort. Environmental groups
encourage individual action against global warming, often aimed at the consumer.
Common recommendations include lowering home heating and cooling usage,
burning less gasoline, supporting renewable energy sources, buying local products
to reduce transportation, turning off unused devices, and various others. A
geophysicist at Utrecht University has urged similar institutions to hold the
vanguard in voluntary mitigation, suggesting the use of communication
technologies such as videoconferencing to reduce their dependence on long-haul
flights.
per aircraft by the end of 2005, and pressed for the early inclusion of aviation in
the European Union's carbon emission trading scheme.
United States
Efforts to reduce greenhouse gas emissions by the United States include
their energy policies which encourage efficiency through programs like Energy
Star, Commercial Building Integration, and the Industrial Technologies Program.
On 12 November 1998, Vice President Al Gore symbolically signed the Kyoto
Protocol, but he indicated participation by the developing nations was necessary
prior its being submitted for ratification by the United States Senate.
methane emissions into the atmosphere by capturing the gas and using it for
growth enhancing clean energy generation. Critics have raised concerns that the
pact undermines the Kyoto Protocol.
However, none of these initiatives suggest a quantitative cap on the emissions
from developing countries. This is considered as a particularly difficult policy
proposal as the economic growth of developing countries are proportionally
reflected in the growth of greenhouse emissions. Critics of mitigation often argue
that, the developing countries' drive to attain a comparable living standard to the
developed countries would doom the attempt at mitigation of global warming.
Critics also argue that holding down emissions would shift the human cost of
global warming from a general one to one that was borne most heavily by the
poorest populations on the planet.
In an attempt to provide more opportunities for developing countries to adapt
clean technologies, UNEP and WTO urged the international community to reduce
trade barriers and to conclude the Doha trade round "which includes opening
trade in environmental goods and services."
Population Control
Various organizations promote population control as a means for mitigating
global warming. Proposed measures include improving access to family planning
and reproductive health care and information, reducing natalistic politics, public
education about the consequences of continued population growth, and improving
access of women to education and economic opportunities.
Population control efforts are impeded by there being somewhat of a taboo in
some countries against considering any such efforts. Also, various religions
discourage or prohibit some or all forms of birth control.
Population size has a different per capita effect on global warming in different
countries, since the per capita production of anthropogenic greenhouse gases
varies greatly by country.
Costs of Mitigation
The Stern Review proposes stabilising the concentration of greenhouse-gas
emissions in the atmosphere at a maximum of 550ppm CO2e by 2050. The Review
estimates that this would mean cutting total greenhouse-gas emissions to three
quarters of 2007 levels. The Review further estimates that the cost of these cuts
would be in the range -1.0 to +3.5% of GDP, with an average estimate of
approximately 1%. Stern has since revised his estimate to 2% of GDP. The Review
emphasises that these costs are contingent on steady reductions in the cost of
low-carbon technologies. Mitigation costs will also vary according to how and
when emissions are cut: early, well-planned action will minimise the costs.
One way of estimating the cost of reducing emissions is by considering the
likely costs of potential technological and output changes. Policy makers can
compare the marginal abatement costs of different methods to assess the cost
and amount of possible abatement over time. The marginal abatement costs of
the various measures will differ by country, by sector, and over time.
Module Twelve • Environment Protection Act, 1986 491
Limitations of Mitigation
Mitigation technologies aimed at reducing emissions, as opposed to enhancing
sinks, do not seek to remove greenhouse gases from the atmosphere. As such,
their efficacy at reversing global warming is limited.
examining and testing any equipment, industrial plant, record, register and
document and (3) to seize any such equipment if can be used as evidence in the
court of law for punishing the person responsible for environmental pollution.
If any person carrying on any industry or process (1) fails to help these
authority or (2) intentionally prevents him from doing their functions will be
punished under code of criminal procedure of (1973).
of atoms and molecules of matter. Noise is unwanted sound. The human ear is
capable of receiving sound waves and transmitting signals to the brain to create
the sensation of hearing. As per the ILO convention No. 148, “Noise” covers all
sounds which can result in hearing impairment or are harmful to health, or
otherwise dangerous. In objective terms, noise is random vibrations.
Types of Noise
Noise is classified as a continuous or steady-state and impulse type of noise.
(a) Impulse Noise: the noise consists of one or more bursts of sound energy,
each of a duration less than about one second. This type of noise is
transient, e.g., Gunshot. The impulse must be less than half a second
duration and have a magnitude of at least 40 dB within that time.
(b) Steady State or Continuous Noise: Industrial noise is often produced
because of impact between metal parts. If there are many impacts per
second as in riveting machine, fluctuations in the noise level are small,
and the noise produced is usually treated as normal, broad brand, steady
state or continuous type of noise.
NOISE MEASUREMENTS
Noise measurement gives us an objective method of comparing annoying
sounds under different conditions. Sound level meter is an instrument which
indicates sound pressure levels in the audible range. It consists of microphone
and electronic circuit, including an attenuator, an amplifier, weighing net works
and indication meter. It give the sound pressure level in dB (decibels).
Second type of instrument is impulse analyser. Frequency analysers or octave
band analysers, are the types most commonly used. They are connected to sound
level meters. The frequency range of each band is such that upper hand limit is
twice the lower.
Graphic record of sound level may be obtained by connecting a sound level
meter to graphic level recorder which plots the sound levels on paper chart.
Noise dosimeters are also available. The personal dosimeter is designed to be
attached to the worker for all parts of shift to monitor his exposure directly. The
instrument indicates the percent of allowable exposure.
Module Twelve • Environment Protection Act, 1986 495
EFFECTS OF NOISE
When dealing with the ill effects of noise, three important factors are
considered: its quality, the sensitivity of the individuals, and duration of exposure
of noise. The quality of noise is defined as its intensity, component frequencies
and vibratory pattern.
496 496 Legal Aspect of Business • Module Twelve
Auditory Effects
The chief effect of noise, is that the hearing cells in the inner ear are damaged
acutely due to a very severe impact noise of high sensitivity, such as explosion, or
due to exposure to high levels over a long period. A sudden rapture of an eardrum
on short exposure to high impact noise level, temporary threshold shift and noise
induced hearing loss are auditory effects.
Loss of hearing is either temporary or permanent in nature, depending on
the length and severity of noise exposure. A temporary hearing loss lasting few
seconds to a few days result due to high intensity noise for short duration. However,
this is reversible and normal hearing may be restored in a few days. Much more
serious regular and prolonged exposure to some kinds of noise of moderate
intensity maintained through successive working days over a period of years or
single short exposure of very high intensity noise may cause a loss of hearing
which is permanent and irreversible. This is called noise hearing loss.
Non-auditory Effects
The other effects of noise on different systems to persons who are in good
health are given below.
1. Annoyance: This make a person or worker tired soon and his quality
and efficiency may come down.
2. Interference with Communication: Any operation that requires oral
communication will suffer from a noise environment. Interference with
communication can create a misunderstanding in information is to be
transmitted from one person to another.
3. Difficulty in Hearing Safety Alarms: In a noisy environment a person
or worker may fail to hear a safety alarm due to the masking effect of
noise, this may cause delayed action in case of emergencies.
4. Other Effects:
(a) Higher incidence of circulatory problems.
(b) Peripheral blood flow disturbances.
(c) Interference with performance and irregularities in heart rate.
(d) Lack of concentration.
(e) Nausea, headache, insomnia loss of appetite, peptic ulcer, tumour.
(f) Effect on pregnant mother: (i) Birth defect, (ii) Still birth, (iii) Baby
with low weight.
(g) Noise of high intensity leads to constriction of smaller blood vessels
in fingers and eyes.
LEGISLATION ON NOISE
The 42nd Amendment of the Constitution passed in 1976, inserted Articles 48-
A and 51-A, to protect and improve the environment. Since, then, it has become
a constitutional obligation of the State to improve and protect the environment.
Module Twelve • Environment Protection Act, 1986 497
There is no law in India so far which deals exclusively with problems of excessive
noise and its control. However, a few States enacted Statutes, e.g., Rajasthan
Noises Control Act, 1963, Bihar control of use and play loudspeakers Act 1955,
Madhya Pradesh control of Music and Noises Act, 1951. The environmental
(Protection) Act, 1986, included noise a physical pollutant and empowered the
Central Government to prescribe the maximum allowance limits for different areas.
The International Labour Organisation (ILO) Convention No. 148 concerning
the protection of workers against occupational hazards in the working environment
due to air pollution, noise and vibration was adapted in 1977. According to Article
4, national laws should prescribe the measures to be taken for prevention and
control of and protection against, occupational hazards in the working environment
due to noise.
Section 87 of the Factories Act, 1948, following are the permissible noise limits:
glass and move light objects. For this reason many countries have not permitted
the operation of supersonic flight over their lands.
Questions
7. Briefly explain the penalties provision under the Air Act, 1981.
8. Explain the constitution and composition of Central Board under the Water Act, 1974.
9. What are the powers and functions of the Central Board under the Water Act, 1974.
10. Describe the functions of State Board under the Water Act, 1974.
11. Briefly discuss the penalty provisions under the Water Act, 1974.
12. Briefly discuss the Central and State Water Laboratory.
13. Briefly write a note on Legislation pertaining to noise.
14. List the causes for global warming.
15. Differentiate between global warming and global cooling.
16. State the causes for Ozone Layer depletion.
17. Name the five gases which are responsible for global warming.
E I
Earth Summit, 483, 484 ICM, 275
E-commerce, 34 Illegal contract, 119,152
Economic Principles, 20 Immoral, 154
E-form, 31 Implied Conditions, 202
E-Gazette, 40 Implied contract, 118
E-governance, 31 Implied proposal, 127
Elec tronic Governance, 37 Import, 295
E-mail and internet crimes, 51 Importance of Cyber Law, 30
E-mail bombing, 51 Increased UV, 470
E-mail spooling, 51 Indian Currency, 295
E-mail spoommry, 51 Information Memorandum, 347
Energy Landscape, 475 Information, 84
Enforceability, 115 Initial Public Offer (IPO), 360
Environment Pollutant, 456 Insolvent, 140
Environment Pollution, 456 Integrated services, 36
Environment, 456 Integration, 314
Equity, 7 Intellectual Capital, 274
E-Seva, 38 Intellectual Property, 275
Essence of IT, 30 Intellectual, 270
Estoppel, 215 Interception, 57
E-taileis, 34 International Agreements, 286
E-Transaction, 31 J
Executary contract, 120
Judicial Review, 16
Executed contract, 119
Judiciary, 15
Export, 294
Jurisdiction, 241
Express contract, 118
Express Terms, 207 K
F Key pair, 43
Federal Constitution, 12 - Kinds, 329
Foreign Currency, 294 Know-how, 276
Foreign Exchange, 294 Kyoto Protocol, 485
Foreign Security, 295 L
Forgery, 53 Landfills, 460
- Formation, 334, 378 Law merchant, 6
Fossil Fuel Production, 473 Law, 2
Fradulent, 153 Layering, 314
Fraud, 146 Lead, 464
Free consent, 116,140 Life Cycle, 477
Fundamental Right, 425 Liquidated damage, 178
Fundamental Rights, 19 Local Committee, 423
G Lower-risk Cycles, 478
Gender Discrimination, 414 M
Gender equality, 416 Malicious code, 51
General offer, 123 Mask Works, 276
Geo-Engineering, 480 Memorandam of Association, 340
Global warming, 461 Mental Acceptance, 126
Goods, 195 Mercantile Agent, 215
Government company, 331 Merchantable Quantity, 206
Government undertakings, 379 Minor, 135
Green house effect, 498 Minor’s Agreement, 136
Green Shoe Option, 368 Misrepresentation, ‘144,148
Grey Hat Hacker, 50 Mistake of fact, 149
H Mistake of law, 149
Hacking, 49 Mitigation, 472
Hawala Transaction, 323 Money Consideratin, 195
Hazardous Substance, 456 Money laundering, 312
Hire Purchase Agreement, 195 Money, 195
Holding of Foreign Exchange, 292 MRTP Act, 66
Human Right Day, 436 N
Human Rights, 413 National Commission, 240
National Human Rights, 426
Natality Inequality, 414
Index 503