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LEGAL ASPECTS OF

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

Prof. CHANDRAKANT KANAKATTE


M.Com., LL.M., PGDHR
Advocate
and
Visiting Faculty to B’ School
BANGALORE – 560 020.
E-mail: chandu934@gmail.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.

First Edition : 2010


Edition : 2012
Second Revised Edition : 2016

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
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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: 2 THE INFORMATION TECHNOLOGY ACT, 2000 29 — 60

MODULE: 3 THE COMPETITION ACT, 2002 61 — 76

MODULE: 4 THE RIGHT TO INFORMATION ACT, 2005 77 — 112

MODULE: 5 THE CONTRACT ACT, 1872 113 — 192

MODULE: 6 SALE OF GOODS ACT, 1930 193 — 236

MODULE: 7 THE CONSUMER PROTECTION ACT, 1986 237 — 268

MODULE: 8 INDIAN PATENT LAWS AND WTO PATENT RULES 269 — 292

MODULE: 9 FOREIGN EXCHANGE MANAGEMENT ACT, 1999, and


THE PREVENTION OF MONEY LAUNDERING ACT, 2002 293 — 326

MODULE: 10 INDIAN COMPANIES ACT, 2013 327 — 410

MODULE: 11 WOMEN AND HUMAN RIGHTS AT WORKPLACE 411 — 454

MODULE: 12 ENVIRONMENT PROTECTION ACT, 1986 455 — 500

INDEX 501 — 504


Detailed Contents
MODULE: 1 INTRODUCTION TO BUSINESS LAW 1 — 28
1.1 Introduction
1.2 The Nature of Law
1.3 Overview of Business Laws in India
1.4 Scope of Business Law
1.5 Sources of Law
1.6 Classification of Law
1.7 The Constitution of India
1.8 Major Kinds of Constitutions
1.9 Features of Indian Constitution
1.10 The Fundamental Rights
1.11 Constitution of India with Special Reference to Economic Principles
1.12 Directive Principles of State Policy
1.13 Distinction Between Fundamental Rights and Directive Principles
1.14 Relations between The Union and the States (Article 245 and 246)

MODULE: 2 THE INFORMATION TECHNOLOGY ACT, 2000 29 — 60


2.1 Cyberlaw in India — Introduction
2.2 Importance of Cyberlaw
2.3 Characteristics of Information Technology Act in India
2.4 Advantages of Cyber Laws
2.5 Salient Features of the IT Act, 2000 (Section-wise)
2.6 E-commerce
2.7 Significance of E-commerce
2.8 Electronic Governance
2.9 National E-governance Plan (NEGP)
2.10 Advantages of E-governance
2.11 Paperless Society
2.12 Important Terms in Information Technology Act
2.13 Digital Signatures
2.14 Secure Electronic Records and Secure Digital Signatures
2.15 Legal Recognition of Electronic Records
2.16 Certifying Authorities
2.17 Regulation of Certifying Authorities
2.18 Computer Resources
2.19 Cyber Crimes
2.20 Variants of Cyber Crimes
2.21 Offences and Penalties Under the IT Act
2.22 The Information Technology (Amendment) Act, 2008
MODULE: 3 THE COMPETITION ACT, 2002 61 — 76
3.1 Introduction to Competition Act, 2002
3.2 Objectives of Competition Act, 2002
3.3 Essentials / Features of Competition Act, 2002
3.4 Components of the Competition Act, 2002
3.5 Differences Between MRTP Act, 1969 and Competition Act 2002
3.6 Composition of Commission (CCI)
3.7 Competition Appellate Tribunal (CAT)
3.8 Offences and Penalties Under the Competition Act, 2002
3.9 Appeal to Appellate Tribunal [Section 53(b)]
3.10 Awarding Compensation (Section 53(n)
3.11 History of Competition Law & Policy Across the World

MODULE: 4 THE RIGHT TO INFORMATION ACT, 2005 77 — 112


4.1 Right to Information Act — Background
4.2 Objectives of the RTI Act
4.3 Scope of the RTI Act
4.4 Need for Right to Information
4.5 Salient Features of Right to Information Act, 2005
4.6 Important Terms in the RTI Act
4.7 Suo Motu (On his Own) Disclosure
4.8 Powers and Functions of Central Information Commission (CIC) and
State Information Commission (SIC)
4.9 Public Information Officers (PIOS)
4.10 Assistant Public Information Officers (APIOS)
4.11 Transparency
4.12 Greater Accountability
4.13 Public Authority
4.14 Citizens Seeking Information from Public Authority
4.15 Method of Seeking Information
4.16 Who is Eligible to Get Information Under RTI Act
4.17 Format of Application
4.18 Appeals
4.19 Success Stories Under this Campaign
4.20 Landmark Judgements
4.21 Problems Due to the Implementation of Right to Information Act, 2005
4.22 Impact of Right to Information on Development — A Perspective on India's Recent Experiences
4.23 Citizen-centric Approach to Development

MODULE: 5 THE CONTRACT ACT, 1872 113 — 192


5.1 Brief History of the Act
5.2 Scope of the Act
5.3 Objectives of the Act
5.4 Definition of Contract
5.5 Essentials of a Valid Contract
5.6 Classification of Contracts
5.7 Offer and Acceptance
5.8 Communication of Offer and Acceptance
5.9 Consideration
5.10 Capacity to Contract
5.11 Free Consent
5.12 Misrepresentation and Fraud Compared
5.13 Variations of Bilateral Mistakes
5.14 Legality of Object
5.15 Unlawful Agreements
5.16 Illegal Contracts
5.17 Void Agreements
5.18 Remedies for Breach of Contract
5.19 Quasi Contracts and Contingent Contracts
5.20 The Flip Side of the Indian Contract Act, 1872

MODULE: 6 SALE OF GOODS ACT, 1930 193 — 236


6.1 Sale of Goods Act, 1930
6.2 Formation of the Contract of Sale
6.3 Sale and Hire-purchase Agreement
6.4 Nature of a Bailment
6.5 Subject-matter of Contract of Sale
6.6 Conditions and Warranties
6.7 Nature of a Warranty
6.8 Express and Implied Warranties
6.9 Transfer of Property and Title
6.10 Performance of the Contract
6.11 Delivery
6.12 Rights and Duties of Buyer
6.13 Rights of Unpaid Seller Against the Goods
6.14 Suits for Breach of the Contract

MODULE: 7 THE CONSUMER PROTECTION ACT, 1986 237 — 268


7.1 Introduction
7.2 Consumer Protection Council
7.3 Consumer Redressal Agencies (Sections 9-27)
7.4 Leading Consumer Case Laws — India
7.5 Consumer Protection Leading Case Laws — United States of America
7.6 Consumer Protection Leading Case Laws — United Kingdom
7.7 Consumer Protection Leading Case Laws — Australia

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

MODULE: 10 INDIAN COMPANIES ACT, 2013 327 — 410


10.1 The Companies Act, 2013
10.2 Kinds of Companies
10.3 Formation of Companies
10.4 Memorandum of Association
10.5 Articles of Association
10.6 Prospectus
10.7 Powers of Securities and Exchange Board of India
10.8 Offer of Indian Depository Receipts
10.9 Kinds of Shares
10.10 Companies (Amendment) Act, 1988
10.11 Company Management
10.12 Initial Public OFFER (IPO)
10.13 Book Building
10.14 Meetings and Resolutions
10.15 Reconstruction and Amalgamation
10.16 Accounts, Audit and Returns
10.17 Evaluation of Company Form of Ownership

MODULE: 11 WOMEN AND HUMAN RIGHTS AT WORKPLACE 411 — 454


11.1 Introduction to Working Women
11.2 Introduction to Human Rights
11.3 Gender Discrimination
11.4 Gender Equality
11.5 Harassment of Women in Organisations
11.6 Types of Harassments
11.7 Fundamental Rights Relating to Women
11.8 Nature of Human Rights
11.9 National Human Rights Commission
11.10 Un Conventions on Human Rights
11.11 Job Reservations in Private Sector
11.12 Whitsle Blowing
MODULE: 12 ENVIRONMENT PROTECTION ACT, 1986 455 — 500
12.1 Definitions
12.2 Types of Pollution
12.3 Global Warming
12.4 Dangerous Chemicals
12.5 Energy Efficiency and Conservation
12.6 Governmental and Intergovernmental Action
12.7 Territorial Policies of Mitigation
12.8 Powers of the Central Government (Secs. 3 to 6)
12.9 Prevention, Control and Abatement (Make Less) Of Environmental Pollution (Sect.7 – 15)
12.10 Sound Pollution

INDEX 501 — 504


1
MODULE

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.

1.2 THE NATURE OF LAW


Law is the entire People often say, “You cant do that. It’s against the law!” Exactly what do
body of princ iples
that govern conduct
they mean when they use the word law? Many definitions of law have been
and c an be en- suggested. We define law as the entire body of principles that govern conduct and
forced in the courts. can be enforced in the courts.
Everyone in society is subject to a variety of rules. Not all of these rules are
laws. For example, many religions set rules of behaviour. Violating these rules,
however, does not mean that a person has violated the law. If a group of men gets
together one afternoon to play a game of baseball, certain rules govern the conduct
of the game. These rules are not laws. If four people sit down at a card table to
play bridge, an elaborate set of rules governs the players. These rules are not
laws. If a boy and girl go out on a date and their parents tell them to be in by mid-
night, the parents are enforcing rules but not laws. In all of these cases, the
rules are not laws and cannot be enforced in Court.
If a person does violate a law, in the event of a court finds him or her in
violation of the law, the court generally imposes some form of penalty, called a
sanction. Typically sanctions require a person to do or not to do something; to
pay money to someone else; or impose a prison sentence on someone. For example,
if a man agrees to purchase a guitar and takes possession of it, he may be used
for whatever amount of money he agreed to pay for the guitar. A court, if it finds
that the person agreed to pay Rs. 3000 for the guitar, may order the person to
pay the seller Rs. 3000. If a married couple splits up, and the wife has custody of
Module One • Introduction to Business Law 3

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.

1.3 OVERVIEW OF BUSINESS LAWS IN INDIA

What Business Law Regulates?


Business law, or commercial law as it is sometimes called, is the body of
rules that regulate and control the everyday activities of exchange. It is concerned
with procurement of raw materials, manufacturing and producing, the sale of
merchandise and commodities, brokerage, agency, shipping, bailment insurance,
commercial paper, and all sorts of arrangements for financing or banking business
deals.
Business law, also called merchantile law, is that branch of legal system,
which regulates business activities. The same meaning is revealed in the two
definitions given below:
Business law is that portion of the legal system which guarantees an Business law is that
portion of the legal
orderly conduct of business affairs and the settlement of legitimate disputes system which gua-
in a just manner. rantees an orderly
conduct of business
Business law establishes a set of rules and prescribes conduct that enables affa irs and the
us to avoid misunderstanding and injury in our business relationships. settlement of legiti-
mate disputes in a
just manner.
1.4 SCOPE OF BUSINESS LAW
The scope of business law is indeed vast. It usually deals with topics of
licences, large business houses, monopolies, issue of securities, contracts,
property, agency, negotiable instruments, foreign exchange and its management,
partnerships, companies, insurance, sales, bailment, guarantees, labour, surety-
ship, bankruptcy, consumer interest, business crimes, raising loans from financial
institutions, obtaining electricity, iron and steel, customs clearance, allotment of
materials, import of capital goods, pollution control and the like. These and the
other aspects are covered by legislations enacted by Central, State or local bodies.

1.5 SOURCES OF LAW


The important sources of Indian law are:
• Constitution
• Legislation/Statute
• Custom
• Case law/Common law
• Natural law
• English law
• Ordinances
• Administrative law
• Dharma
• Law Merchant and
• Equity
4 4 Legal Aspect of Business • Module One

The brief explnations of the above are:

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.”

Case Law/Common Law


Case law is a judge- A distinguishing feature of Anglo-American law is its reliance upon previously
ment of a superior
c ourt inc ludi ng a
decided cases as a primary source of law. Reliance or judicial decisions is known
point of law or prin- as Case law or Common law. The term, Common law, originated in England and
ciple and which ne- referred to a body of law that was common throughout England.
cessitates its adop-
tion and adherence Case law, popularly called “Precedent” by lawyers is a judgement of a superior
in a s ubs eq uent
court including a point of law or principle and which necessitates its adoption
case involving the
same point. and adherence in a subsequent case involving the same point. Case law is useful
in as much as it helps courts to render uniformity with regard to the interpretation
of statutes or formulation of principles.
Module One • Introduction to Business Law 5

In spite of prevalence of multiple laws, we still find vacuum on any given


matter. Such gaps are filled by case laws. The Contract Act, for example, is not
clear whether an agreement with a minor is voidable at his option or altogether
void. It was the judgement by the Judicial Committee of the privy council in
Moharibibi vs. Dharmodas Ghose (1903) that an agreement with a minor was
declared absolutely void. This decision has become precedent for subsequently
pronouncing all agreements with minors as void. In fact, the Indian Contract Act
has not been amended till now ever since it came into effect on the first day of
September, 1872. Not that the Act has been foolproof in all respects. But case
laws were ably filling the gaps in the Act.

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.

Merchant Leagues and the “Law Merchant”


After considerable isolation, medieval merchants in logical commercial centers
and coastal towns gradually began to reopen some of the old Roman trade routes.
The governments of Europe were unable to furnish much help, however, since
they remained weak, small, and isolated. Intent on combining private merchants
organised into trading firms and eventually into leagues of trading cities. Since
they could obtain little protection from local governments, these merchant
organisations hired their own guards and protective agents. Continuing to grow
and cooperate in these ventures, leagues of traders functioned in areas that today
make up parts of Germany, Italy, Spain, France, Belgium, Holland and England.
Module One • Introduction to Business Law 7

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.

1.6 CLASSIFICATION OF LAW

Substantive and Procedural Law


Subs tantiv e law Substantive Law includes the laws that create, define, and regulate rights
regulates rights and
duties.
and obligations. Substantive law regulates rights and duties. If a student agrees
to rent an apartment during the school year, the legal rights and obligations of
the student to the apartment are determined by the law that governs the
relationships between the owner of the apartment and the student. For example:
Procedu ral Law
IPL
specifies the meth-
ods of enfor c ing
Procedural Law specifies the methods of enforcing rights and obligations
rights and obliga- created by substantive law. If the student in the example above feels the apartment
tion s c reate d by owner has somehow violated the students rights, she may file suit in court. The
substantive law. laws that determine in which court the case should be filed. How the trial is
conducted and how a court judgement is enforced are all part of procedural law.
For the most part, this text deals with substantive law, although some procedural
law is discussed. For example: Civil Procedure Code, 1908, The Indian Evidence
Act, 1872, The Criminal Procedure Code, 1973.

Public Law and Private Law


Publ ic law d eals Public law deals with the rights and powers of the government. An example
with the rights and
of public law is criminal law. Suppose that the owner of an apartment and a
powers of the gov-
ernment and c iti- student get into an argument and the student hits the owner with a baseball bat.
zens. By engaging in such behaviour, the student probably has violated the criminal
laws of the state she is living in.
Private law is ad- Private law is administrated between private citizens. If the student fails to
mini s trated be-
pay her rent, the landlord may file suit to collect it. The case will be governed by
tween private citi-
zens. Private law, because the government is not involved. Figure 1.1 shows classification
of laws.

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.

Public Criminal Law


Law Administration Law
Substantive
Law
Private Contracts
Law Sales
Properties
Torts
Law

Procedural Law
Civil Procedure
Criminal Procedure

Fig. 1.1 Classification of Law

Civil case — a case brought by a private individual trying to enforce a private


right
Plaintiff — is a person who brings a lawsuit
Defendant — a person being sued
Criminal law establishes the duties people owe to society. If a person violates Criminal law es -
tablishes the duties
any of these duties, he or she has committed a wrong against society. Criminal people owe to soci-
cases are brought by the government (local, state or central) against the accused. ety. If a person vio-
The police, the prosecutor files the case on behalf of the government. To win the lates any of these
duties, he or s he
suit, the prosecutor must establish, beyond a reasonable doubt, that the defendant has c ommitt ed a
committed the crime which the prosecutor asserts he or she committed. In a wrong against soci-
criminal case, but not in a civil case, a judge/magistrate may impose fine and ety.
imprisonment term against an accused/criminal as punishment for violating the
law.
In some cases, if a person is found guilty of murder, he or she may be
executed (capital punishment). It should be noted that juveniles, defined by law
as people under the age of 16, are tried in a separate court called juvenile court,
for violations of criminal law. Table 1.3 distinguishes civil law from criminal law.

Table 1.3 Comparison of Civil and Criminal Law

Civil Law Criminal Law


Who files suit Private individual Government Prosecutes
(Plaintiff) sues
Burden of Proof Preponderance of Beyond a reasonable
the evidence doubt
Principal Action Monetory damages Death
Equitable remedies Imprisonment
Fines
10 10 Legal Aspect of Business • Module One

1.7 THE CONSTITUTION OF INDIA

Nature of Constitution and Constitutional Law


Constitution has been defined as the basic law of a State which outlines the
framework and procedure of government, defines its power and functions, provides
how constitutional changes may be made and in a democracy usually guarantees
the citizens certain protections against arbitrary governmental action.
Constitution is a collection of principles according to which the powers of the
government, the rights of the governed and the relation between the two are
adjusted.
By a Constitution is In the words of Wade and Philips, “By a Constitution is normally meant a
normally meant a
document having a
document having a special legal sanctity which sets out the framework and the
special legal sanc- principal functions of the organs of government or a State and declares the
tity which sets out principles governing the operation of those organs. Such a document is
the framework and
implemented by decisions of the particular organ normally the highest Court or
the principal func-
tions of the organs the State which has power to interpret its contents.”
of government or a
State and declares In short, Constitution is the collection of principles or body of fundamental
the principles gov- rules (written or unwritten) which usually provides for the establishment,
erning the opera- Constitution and organisation of the organs of government, their power and
tion of thos e or-
gans. functions, manner in which the said power and functions are to be exercised,
their inter-relationships, the relation between these organs of the government
and the people of the country.
“A constitution does not necessarily or usually contain the detailed rules
upon which depend the working of the institutions of government. Legal processes,
rules for elections, the mode of implementing services provided by the State, so
far as these are matters for enactment, are to be found, not in the Constitution,
but in ordinary statutes made by the legislature within the limits set by the
Constitution itself. Such statute can be altered by the same method as that which
they were originally enacted whereas changes in the constitution call for a more
elaborate process.”
Constitutional law has been defined as the rules which regulate the structure
of the principal organs of government and their relationship to each other and
determine their principal functions. These rules consist both of legal rules in the
strict sense and of usages, commonly called conventions, which without being
enacted are accepted as binding by all who are concerned in government. The
constitutional law, in short, is the basic law of a State which usually provides for
the Constitution and structure of the organs of government, their powers and
functions, their inter-relations and their relations with the people.
The Constitutional law may be in the form of a written document or unwritten
conventions. In U.K. there is no Constitution in the form of a written document or
code, however, there is a body of law which forms the Constitution partly statutory,
partly common law and partly conventional.

1.8 MAJOR KINDS OF CONSTITUTIONS


The major classification of constitutions across the globe are shown in
figure 1.3.
Module One • Introduction to Business Law 11

Kinds of
Constitution

Written and Rigid and Federal and


Unwritten Flexible Unitary
Constitution Constitution Constitution

Fig. 1.3 Kinds of Constitution

1. Written and Unwritten Constitutions


Constitutions may be classified as (a) written constitution and (b) unwritten The best example
of a n unwri tten
constitution. The Constitutions of most of the countries are written. The best Constitution is that
example of an unwritten Constitution is that of the U.K. Actually, all the of the U.K.
constitutions are a mixture of written and unwritten elements. The written
constitution contain some unwritten elements in the form of customs and
conventions and unwritten Constitutions contain written elements in the form of
statutes, judicial decisions, etc. Even the Constitution of U.K. which is regarded
as the best example of unwritten constitution contains many written elements in
the form of statutes, judicial decisions and charters. All Constitutions are in fact
a mixture of written law and unwritten custom. K.C. Wheare has rightly observed,
“We cannot agree that there is any country, least of all the United Kingdom, which
has a system of government embodied solely in written rules or solely in unwritten
rules. Consequently, the classification of constitution into written and unwritten
has lost its significance.”

2. Rigid and Flexible Constitutions


A Constitution is called rigid if, for the amendment or revision of its provisions, A Con s titutio n is
called rigid if, for the
a special procedure, is required to be followed and a constitution is called flexible
amendment or revi-
if its provisions can be amended or revised by the ordinary legislative process. s ion of its p rov i-
Thus, the distinction between rigid and flexible constitution is based on the sions, a special pro-
existence or non-existence of a special amending procedure. In the case of a cedure is required
to be followed and
flexible constitution, its provisions may be amended or modified by ordinary a c on s titutio n is
legislative process, but in the case of a rigid constitution, a special procedure is called flexible if its
required to be followed for the amendment or revision of its provisions. The provisions can be
amended or revised
constitution of U.K. may be mentioned as an example of flexible constitution. The by the ordinary le-
provisions of the Constitution of U.K. may be amended or revised by an Act of gislative process.
Parliament. The Constitution of U.S.A. may be mentioned as an example of rigid
constitution.
The rigid constitution possesses the quality of stability. Its provisions cannot The rigid constitu-
tion possesses the
be changed easily at the desire of the ruling party. The Constitution is regarded quality of stability. It
as a body of superior laws and commands much respect. Under such constitution cannot be changed
the rights of the people are more secure. However, the main defect of the rigid in accordance with
needs.
constitution is that it cannot be changed in accordance with needs. It places
obstacles in the required social changes. The merit of the flexible constitution is
that it can be changed according to the need of the society. Friedrich has rightly
observed, “The great and outstanding advantage of a flexible constitution is the
12 12 Legal Aspect of Business • Module One

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.”

3. Federal and Unitary Constitutions


Constitution which provides for a federal system of government is called a
federal constitution, while a constitution which provides for a system of Unitary
government is called a Unitary Constitution. Thus, Unitary Constitution establishes
a unitary government while the federal constitution establishes a federal
government. In the system of Unitary government the whole power of government
is conferred upon a single central organ or organs from which the local government
derive whatever authority or autonomy they possess. In the system of unitary
government the Central Government has exclusive power to determine the pattern
of relationship between central and local governments and also the manner of
distribution of powers among them.
In the unitary con- In the unitary constitution all the powers of government are given to the
stitution all the pow- Centre and the local governments enjoy the powers delegated to them by the
ers of government
are giv en to the Centre. Thus, in the unitary constitution the regional governments are totally
Centre. subordinate to the Centre. The constitution of U.K. may be mentioned as an
example of unitary constitution.
Federal constitution The federal constitution establishes a federal system of government. It
establishes a sys-
tem of double gov-
establishes a system of double government-Central Government (General
ernment– Central Government) and State Governments (Regional governments). A constitution will
Government (Gen- be a federal constitution, if it possesses the following characteristics:
eral G overnment)
and State Govern- (1) System of double government: A federal constitution always provides
ment s (Regi onal for double governments — Central government (general government) and
governments).
State gove rnments (re giona l gove rnments). A system of double
governments is, thus, an essential feature of a federal constitution.
(2) Distribution of powers: A federal constitution provides for the
distribution of the powers of State between Central government (general
government) and State governments (regional governments). Under the
federal constitution both the Central government and State or regional
governments are supreme in the spheres allotted to them and none of
them is subordinate to the other. Thus, under the federal constitution
the Central or general government and State Governments (or regional
governments) are coordinate and independent in their spheres and not
subordinate to one another. However, in practice such arrangement is
not possible. Even the American Constitution which is regarded as an
ideal federal constitution has not established such system of government.
The modern tendency has been to provide more powers to the Central
Government. In short, if the federal principle is predominant in the
constitution, it is regarded as federal constitution.
(3) Rigidity: The federal constitution provides for distribution of powers
between the Central Government and the State or regional governments
Module One • Introduction to Business Law 13

and such distribution of powers will be of no importance, if the


constitution can be amended at the desire of the Central Government,
because in such conditions the Central Government can take any power
by amending the Constitution. Consequently, rigid process of amendment
is an essential feature of the federal constitution. The process of
amendment will be rigid if it involves the participation of both, the Central
Government and State or regional governments. In the case of flexible
constitution its provisions can be amended or revised by the ordinary
legislative process but in the case of a rigid constitution a special
procedure is required to be followed for the amendment or revision of its
provisions.
(4) Written: The federal constitutions should be written. Actually, it is not
necessary for a federal constitution to be written but in practice it is
always found written. Its main reason is that on account of distribution
of powers between the Central Government and State or regional
governments an unwritten federal constitution will create much
confusion, conflict and uncertainty. Wheare has rightly said that the
written constitution is essential if federal government is to work well.
(5) Independent judiciary: The federal constitution provides for the division Independent judi-
ciary is required to
of powe rs be twe e n C e ntra l Gove rnme nt a nd Sta te or regiona l determine disputes
governments. On account of it, there may be disputes between the Central betw een Cen tral
Government and the State or regional governments. Independent judiciary and State govern-
ment.
is required to determine such disputes. The judiciary should not be under
the control of the Central government or State (regional) government
because if the judiciary will be under the control of Central Government
or State governments, the government having the control over the
judiciary may compel the judiciary to decide the issue or resolve the
dispute in its favour. To maintain the federal nature of the Constitution,
an independent judiciary is required.
(6) Supremacy of Constitution: Supremacy of the constitution is an Federal Cons titu-
tion the constitution
essential feature of the federal constitution. In the case of federal is regarded as the
constitution the constitution is regarded as the supreme law of the supreme law of the
country. The distribution of powers provided by the constitution will be country.
of no importance, if Central government or state (or regional) governments
can ignore it. Wheare has rightly said that supreme constitution is
essential, if Government is to be federal.

1.9 FEATURES OF INDIAN CONSTITUTION


The main feature of the Indian constitution are discussed under the following
headings:
Indian Constitution — Federal or Unitary
It is a controversial issue as to whether the Indian Constitution is a federal
constitution or unitary constitution. It is better to examine the federal and unitary
features of the Indian Constitution and then to make an attempt to derive
a conclusion as to its exact nature. A constitution is called a federal constitution
if —
14 14 Legal Aspect of Business • Module One

(a) It establishes double governments, Central (or general) Government and


State (or regional) governments;
(b) It provides for the distribution of powers of the state between Central
Government and State (or regional) governments;
(c) It is rigid and written;
(d) It establishes independent judiciary;
(e) It is the supreme law of the country.
Now we may examine as to how far the Indian Constitution possesses the
afore-said essential characteristics of the federal constitution.
1. System of Double Governments
A federal constitution always provides for double governments — Central or
general government and State or regional governments. The Indian Constitution
creates double governments — Central government and State governments.
2. Distribution of Powers
Under the federal A federal constitution provides for the distribution of powers of the State
c ons titution the
Central and State
between the Central (or general) government and State (or regional) governments.
gov e rnments are Under the federal constitution the Central and State governments are coordinate
independent in their and independent in their sphere and not subordinate to one another.
sphere and not sub-
ordinate to one an- The Indian Constitution also provides for the distribution of powers. The
other. distribution of powers provided under the Constitution of India may be explained
as follows:
Legislative: The subjects have been divided into three categories — Union
list, State list and Concurrent list. The subjects of all India importance (e.g.,
Defence of India, Naval, Military and Air forces, Foreign Affairs, War and Peace,
Railways, National Highways, Posts and Telegraphs, Currency, Coinage, Foreign
Exchange, Reserve Bank of India, Banking, etc.) have been placed in the Union
list. The subjects of local interest (public order, police, local government, public
health and sanitation, hospitals and dispensaries, libraries and museum,
agriculture, water supplies, irrigation, land etc.) have been placed in State list.
The subjects which are of local interest but require uniform treatment all over the
The Parliament has country (e.g., education, factories, newspaper, criminal law, criminal procedure,
exclusive power to contracts, etc.) have been placed in the concurrent list.
make laws with re-
spect to any of the The Parliament (i.e., the Central Legislature) has exclusive power to make
matters or subjects laws with respect to any of the matters or subjects enumerated in the Union list
enumerated in the
Union list and the
and the legislature of any state has power to make laws for such state or any part
legis lature of any thereof with respect to any of the matters or subjects enumerated in the State
state has power to list. Parliament and state legislature both have power to make laws with respect
make laws for such
s tate or any part
to any of the matters or subjects enumerated in the Concurrent list, but in case
there of with re- of conflict between a law made by the Parliament and a law made by the State
spect to any of the legislature with respect to such matter the law made by the Parliament (i.e., the
matters or subjects
Central legislature)will prevail and the laws made by the State legislature shall,
enumerated in the
State list. to the extent of the repugnancy, be void, unless the law made by the state
legislature has received the assent of the President. The residuary power vested
in the Parliament.
Module One • Introduction to Business Law 15

3. Rigid and Written Constitution


Actually it is not necessary for a federal constitution to be written but in
practice it is always found written, because due to distribution of powers between
the Central Government and State governments, an unwritten federal constitution
will create confusion and conflict. The Indian Constitution is a written constitution.
The federal constitution provides for distribution of powers between the The Federal Consti-
tution provides for
Central Government and the State Governments. Such distribution of powers will distribution of pow-
be of no importance, if the Constitution can be amended at the desire of the ers between the
Central Government because in such condition the Central Government can take Cent ral G ov ern-
ment and the State
any power by amending the Constitution. Thus rigid of amendment is an essential
Governments.
feature of the federal constitution. The process of amendment will be rigid if it
involves the participation of both, the Central Government and State Governments.
In a rigid constitution a special procedure is required to be followed for the
In a rigid constitu-
amendment of its provisions, even in this respect the Indian Constitution has tion a special pro-
adopted a middle course. Some of its provisions, e.g., Articles 4, 239A, 312 etc., cedure is required
may be amended by Parliament by simple majority, i.e., by ordinary legislative to be followed for
the amendment of
process, while some of its provisions, i.e., the provisions relating to Fundamental its provisions even
Rights, Directive Principle of State Policy, Emergency provisions, etc., may be in this respect the
amended by Parliament by special majority (i.e., the Bill for the amendment must Indian Constitution
has ado pted a
be passed by each House of Parliament by a majority of total membership of the
middle course.
House and by a majority of not less than two-thirds of the members present and
voting in the House), and some of the provisions (e.g., the provisions relating to
distribution of legislative powers, any of the lists in the 7 th Schedule, the
representation of States in Parliament, the Union Judiciary, the High Courts in
the States, Articles 368 etc.) can be amended only if the bill for amendment is
passed by each House of Parliament by a Majority of total membership of the
House and by a majority of not less than two-thirds of the members present and
voting in the House and this amendment is ratified by the legislatures of not less
than one-half of the States. Then the provisions relating to federal features the
ratification by not less than one-half of the State Legislature is required.
4. Independent Judiciary
The federal constitution provides for division of powers between general or Various provisions
have been incorpo-
Central Government and regional or State Governments. On account of it there rated in the Indian
may be disputes between the Central and the State governments. Independent Cons t itution with
judiciary is required to determine such dispute. The judiciary, thus, should not the object to estab-
be under the control of the Central Government or the State Governments, because, lish an independent
judiciary in India.
if the judiciary will be under the control of Central government or State
governments, the Government having the control over the judiciary may compel
it to divide the dispute in its favour. The independent judiciary is, thus necessary
to maintain the federal nature of the constitution. Various methods are adopted
to maintain the independence of judiciary, e.g., appointment of the judges by the
head of the executive or through independent commission, difficult procedure for
their removal, no variation in conditions of their services to their disadvantages
after their appointment, prohibition of any discussion with respect to the conduct
of any judge, etc. Various provisions have been incorporated in the Indian
Constitution with the object to establish an independent judiciary in India.
16 16 Legal Aspect of Business • Module One

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 CONSTITUTION OF INDIA


INTRODUCTORY
THE PREAMLBE
WE, the people of India, having solemnly resolved to constitute India into a
sovereign, socialist, secular, democratic republic and to secure to all its citizens
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith and worship;
EQUALITY of status and of opportunity;
and to promote among them all;
FRATERNITY, assuring the dignity of the individual and the unity and
integrity of the Nation.
In our Constituent Assembly, this twenty-sixth day of November, 1949, do
hereby ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION.
Preamble is an in-
trod uc tory p ara-
Meaning, Object and Importance of Preamble graph or part in a
s tat ute dee d or
The word “preamble” has been defined as an introductory paragraph or part
othe r doc um ent,
in a statute, deed or other document, setting forth the grounds and intention of s etti ng forth the
it. It is introduction of preliminary statement especially to a legal document setting grounds and inten-
tion of it.
18 18 Legal Aspect of Business • Module 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.

Meaning of Expression Occurring in the Preamble


The Preamble of the Indian Constitution says — we, the people of India,
having solemnly resolved to constitute India into a Sovereign, Socialist, Secular,
Democratic Republic and to secure to all its citizens; justice—social, economic
and political. Liberty of thought, expression, belief, faith and worship; equality of
status and opportunity, and to promote among them all; fraternity assuring the
dignity of the individual and the unity and integrity of the Nation.
The aforesaid provisions may be explained under the following headings:
We, the People of India: The words, “We, the People of India” indicates that
the people of India are the source of authority behind the Constitution. These
words indicate that the sovereignty is in the People of India. The people of India,
thus, Constitute the sovereign political body who hold the ultimate power and
who conduct the government of the country through their elected representatives.

Sovereign, Socialist, Secular & Democratic Republic


Sovereign: The word “sovereign” indicates that India is a sovereign nation
free from any external control.
Module One • Introduction to Business Law 19

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.

1.10 THE FUNDAMENTAL RIGHTS


The Constitution has eight Fundamental Rights as mentioned below:
1. Right to equality;
2. Right to six freedoms, viz.,
(a) freedom of speech and expression;
20 20 Legal Aspect of Business • Module One

(b) freedom to assemble peacefully and without arms;


(c) freedom to form associations or unions;
(d) freedom to move freely throughout the territory of India;
(e) freedom to reside and settle in any part of the territory of India; and
(f) freedom to practice any profession or to carry on any occupation,
trade or business.
3. Right to life and [personal property];
4. Right to freedom of religion;
5. Right to cultural and educational freedom;
6. Right against exploitation;
7. Right to private property; and
8. Right to Constitutional remedies.
The right to property has been repealed with effect from June 20,1979.

1.11 CONSTITUTION OF INDIA WITH SPECIAL REFERENCE TO ECONOMIC


PRINCIPLES
The right to equal- Some of the Fundamental Rights have economic significance. The right to
ity , prohibits dis -
crimination against
equality, for example, prohibits discrimination against any citizen on grounds of
any c it iz en on religion, race, caste, sex or place of birth. Implied in the right to equality is the
grounds of religion, concept of protective discrimination which assures protection to Scheduled Castes
race, caste, sex or
who have suffered discrimination for centuries. Special efforts are to be made for
place of birth.
the development of the socially and economically backward sections of society.
Right to freedom is an important and the most valuable fundamental right
guaranteed by the Constitution. As Nani Palkhivala has said, “The Constitution is
a part of the great heritage of every Indian. Its founding fathers wanted to ensure
that even while India remained poor in per capita income, it should be rich in
individual freedom.”
The right to practice Particularly, the right to practice any profession or to carry on any occupation,
any profession or to
carry on any occu-
trade or business has great economic significance. The Constitution guarantees
pati on, trad e or to citizens the fundamental right of freedom to take up any job or carry on any
business has great trade or business. The freedom of profession is however, exceptional in three
ec ono mic s ign ifi-
cance.
cases, viz., (a) public interest, (b) requiring technical or professional qualifications,
and (c) when a State itself decides to engage in any trade or occupation, the
individual freedom is restricted.
The fundamental right against exploitation prohibits the exploitation of the
weaker sections of society by individuals as well as by the State. Article 23 prohibits
traffic in human beings and forced labour. Article 23 reads thus: “Traffic in human
beings and other similar forms of forced labour are prohibited and any
contravention of this provision shall be an offence punishable in accordance with
the law.” Article 24 provides special protection to children. It reads thus: “ No
child below the age of fourteen years shall be employed to work in any factory,
mine or engaged in any other hazardous employment.”
Module One • Introduction to Business Law 21

Thus, the fundamental rights enshrined in the Constitution guarantee several


economic rights to the citizens, at the same time, the State is empowered to impose
reasonable restrictions on such economic rights in public interest. It is this power
that has enabled the government to impose a series of statutory controls over
business.

1.12 DIRECTIVE PRINCIPLES OF STATE POLICY


The Directive Principles of State Policy are a unique feature of our Constitution. The Directive Prin-
Speaking on the Directive Principles, Dr. Ambedkar observed: “The Directive ciples are the direc-
Principles are like the instruments of instructions which were issued to the tives to the various
gov ernments and
Governor-General and the Governors of colonies, and those of India by the British government agen-
Government under the 1935 Government of India Act. What is called “Directive cies and are funda-
Principles’ is merely another name for the instruments of instructions the only mental in the gover-
nance of the coun-
difference is that they are instructions to the legislature and the executive. Whoever try.
captures power will not be free to do what he likes with it. In the exercise of it, he
will have to respect these Instruments of Instructions which are called Directive
Principles. He cannot ignore them.
The Directive Principles are the directives to the various governments and
government agencies and are fundamental in the governance of the country. As
Pylee observed, “The Directive Principles enshrine the fundamentals for the
realisation of which the State in India stands. They guide the path which will lead
the people of India to achieve the noble ideals which the Preamble of the
Constitution proclaims: Justice—social, economic and political, liberty, equality
and fraternity.”
The Directive Principles may be classified, for convenience, under four heads
as shown below:
1. Provisions dealing with Welfare (Articles 38, 42, 45, 47).
2. Provisions dealing with Social Justice (Articles 39, 41, 43, 46).
3. Provisions promoting Democracy (Articles 40, 44, 45).
4. Miscellaneous Provisions (Articles 48, 49, 50, 51).
The first two categories of provisions have economic significance.
Article 38 (1) lays down that the State shall promote the welfare of the people
by securing a social order in which justice—social, economic and political—shall
inform all the institutions of national life. Justice and welfare are the twin objectives
of our Constitution.
Article 38 (2) lays down that the State shall strive to minimise the inequalities
in income, and eliminate inequalities in status, facilities and opportunities, not
only among individuals but also among groups of people.
Article 39 emphasises that the State shall direct its policy towards securing:
(a) adequate means of livelihood to all citizens; (b) a proper distribution of the
material resources of the community to the common good; (c) the prevention of
concentration of wealth to the common detriment; (d) equal pay for equal work for
both men and women; (e) the protection of the strength and health of workers
and avoiding circumstances which force citizens to enter avocation unsuited to
their age or strength; and (f) the protection of childhood and youth against
exploitation or moral and material abandonment.
22 22 Legal Aspect of Business • Module One

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.

1.13 DISTINCTION BETWEEN FUNDAMENTAL RIGHTS AND DIRECTIVE


PRINCIPLES
The Fundamental There is a difference between the Fundamental Rights and the Directive
Right s are ju s ti- Principles and it is useful to know the distinction. The Fundamental Rights are
ciable. If a funda-
mental right is vio- justiciable. If a fundamental right is violated, a legal remedy is provided for that.
lated, a legal rem- But the Directive Principles are non-justiciable and if they are violated, there is
edy is provided for no provision for legal remedy. Article 38 says that the ‘State shall strive’, it does
that. But the Direc-
tive Principles are not mean that the State must fulfil these principles. If, for example, the State
non-justiciable and does not make provisions for compulsory free education for children under the
if they are violated, age of 14 or if the judiciary is not separated from the executive, nobody can
there is no prov i-
sion for legal rem- challenge it in a court of law.
edy.
However, one thing should be kept in mind that the Directive Principles have
been declared as fundamental in the governance of the country. This means that
these principles are not to be lightly taken and the legislature and the government
must make sincere efforts to fulfil these principles. In the words of Dr. Ambedkar,
“the word ‘strive’ was purposely used because their intention was that, however
adverse the circumstances that stand in the way for a government in giving effect
to these principles and however unpropitious the time may be, they should always
strive for the fulfilment of the principles. Otherwise, it would be open to the
government to say that the circumstances were not good and the finances were
so bad that they could not implement them.”
The Directive Principles are subsidiary to the Fundamental Rights and in
case of conflict with Fundame ntal Rights, the former shall be de clared
Module One • Introduction to Business Law 23

unconstitutional. In the case of State of Madras Vs. Champakan Dorairajan, the


Supreme Court observed, “The Directive Principle of State Policy which are
expressly made unenforceable by a Court cannot override the provisions in Part
III which… are made enforceable by appropriate writs, orders or directions under
Article 32.” Thus, the Directive Principle must have to conform to run subsidiary
to the chapter on Fundamental Rights. The State can act in accordance with the
Directive Principles if that does not amount to the infringement of the Fundamental
Rights conferred by the Constitution. The legal superiority of the Fundamental
Rights over the Directive Principles has been established by the decisions of the
Supreme Court in India.
Another difference between the Fundamental Rights and the Directive
Principles is that the former are negative in character whereas, the latter are
positive. The Fundamental Rights are in the nature of injunctions requiring the
State not to do certain acts and are prohibitive in character. The Directive
Principles, on the other hand, are positive directions to the State to perform certain
things for the good of the citizens. They urge that it is the duty of the State to
implement the social and economic policy as embodied in the directives for the
attainment of economic democracy and social justice. In the words of Gledhill:
“Fundamental Rights are injections to prohibit the government from doing certain
things; the Directive Principles are affirmative instructions to the government to
do certain things.”

1.14 RELATIONS BETWEEN THE UNION AND THE STATES


(ARTICLE 245 AND 246)

Distribution of Legislative Powers


The Parliament may make laws for the whole or any part of the territory of
India, and the Legislature of a State may make laws for the whole or any part of
the State. No law made by Parliament shall be deemed to be invalid on the ground
that it would have extra-territorial operation (Article 245).
The Parliament has exclusive power to make laws with respect to any of the The Parliament has
matters enumerated in List I in the Seventh Schedule (Union List). The Parliament power to make laws
with respect to any
and the Legislature also have power to make laws with respect to any of the matter for any part
matters enumerated in List III in the Seventh Schedule (Concurrent list). The of the territory of
Legislature of any State has exclusive power to make laws for such State or any India not included in
list II notwithstand-
part thereof with respect to any of the matters enumerated in List II in the Seventh ing that such matter
Schedule (State List). The Parliament has power to make laws with respect to any is a matter.
matter for any part of the territory of India not included in list II notwithstanding
that such matter is a matter.

Article 246 read with Schedule 7 of Indian Constitution


(Business Related Matters Only)

(A) Union List — 7th Schedule (List – I)


• Currency, coinage and legal tender; foreign exchange (Item 36)
• Foreign loans (Item 37)
24 24 Legal Aspect of Business • Module One

• Post Office Savings Bank (Item -39)


• Lotteries organised by the Government of India or the Government of a
State (Item 40)
• Trade and commerce with foreign countries; import and export across
customs frontiers; definition of customs frontiers (Item 41)
• Inter-State trade and commerce (Item 42)
• Incorporation, regulation and winding up of trading corporations,
including banking, insurance and financial corporations, but not
including co-operative societies (Item 43)
• Incorporation, regulation and winding up of corporations, whether trading
or not, with objects not confined to one State, but not including
universities (Item 44)
• Banking (Item 45)
• Bills of exchange, cheques, promissory notes and other like instruments
(Item 46)
• Insurance (Item 47)
• Stock exchanges and futures markets (Item 48)
• Patents, inventions and designs; copyright; trade-marks and merchandise
marks (Item 49)
• Establishment of standards of weight and measure (Item 50)
• Establishment of standards of quality for goods to be exported out of
India or transported from one State to another (Item 51)
• Industries, the control of which by the Union is declared by Parliament
by law to be expedient in the public interest (Item 52)
• Regulation and development of oilfields and mineral oil resources;
petroleum and petroleum products; other liquids and substances declared
by Parliament by law to be dangerously inflammable (Item 53)
• Regulation of mines and mineral development to the extent to which
such regulation and development under the control of the Union is
declared by Parliament by law to be expedient in the public interest
(Item 54)
• Regulation of labour and safety in mines and oilfields (Item-55)
• Regulation and development of inter-State rivers and river valleys to the
extent to which such regulation and development under the control of
the Union is declared by Parliament by law to be expedient in the public
interest (Item 56)
• Fishing and fisheries beyond territorial waters (Item-57)
• Manufacture, supply and distribution of salt by Union agencies;
regulation and control of manufacture, supply and distribution of salt
by other agencies (Item 58)
• Cultivation, manufacture, and sale for export, of opium (Item 59)
Module One • Introduction to Business Law 25

• Sanctioning of cinematograph films for exhibition (Item 60)


• Industrial disputes concerning Union employees (Item 61)
• Taxes on income other than agricultural income (Item 82)
• Duties of customs including export duties (Item 83)
• Duties of excise on tobacco and other goods manufactured or produced
in India except —
(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narcotic drugs and narcotics, but
including medicinal and toilet preparations containing alcohol or
any substa nce included in sub-pa ra graph (b) of this entry
(Item 84)
• Corporation tax (Item 85)
• Taxes on the capital value of the assets, exclusive of agricultural land, of
individuals and companies; taxes on the capital of companies (Item 86)
• Estate duty in respect of property other than agricultural land (Item 87)
• Terminal taxes on goods or passengers, carried by railway, sea or air;
taxes on railway fares and freights (Item 89)
• Taxes other than stamp duties on transactions in stock exchanges and
futures markets (Item 90)
• Rates of stamp duty in respect of bills of exchange, cheques, promissory
notes, bills of lading, letters of credit, policies of insurance, transfer of
shares, debentures, proxies and receipts (Item 91)
• Taxes on the sale or purchase of newspapers and on advertisements
published therein (Item 92)
• Taxes on the sale or purchase of goods other than newspapers, where
such sale or purchase takes place in the course of inter-State trade or
commerce (Item 92A)
• Taxes on the consignments of goods (whether the consignment is to the
person making it or to any other person), where such consignment takes
place in the course of inter-State trade or commerce (Item 92B)

(B) STATE LIST – 7 TH SCHEDULE (LIST –II)


• Trade and commerce within the State subject to the provisions of entry
33 of List III (Item 26)
• Production, supply and distribution of goods subject to the provisions of
entry 33 of List III (Item 27)
• Markets and fairs (Item 28)
• Money-lending and money-lenders; relief of agricultural indebtedness
(Item 30)
26 26 Legal Aspect of Business • Module One

• Incorporation, regulation and winding up of corporations, other than


those specified in List I, and universities; unincorporated trading, literary,
scientific, religious and other societies and associations; co-operative
societies (Item 32).
• Betting and gambling (Item 34)
• Taxes on agricultural income (Item 46)
• Duties in respect of succession to agricultural land (Item 47)
• Estate duty in respect of agricultural land (Item 48)
• Duties of excise on the following goods manufactured or produced in the
State and countervailing duties at the same or lower rates on similar
goods manufactured or produced elsewhere in India:
(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narcotic drugs and narcotics, but
not including medicinal and toilet preparations containing alcohol
or any substance included in sub-paragraph (b) of this entry
(Item 51)
• Taxes on the entry of goods into a local area for consumption, use or
sale therein (Item 52)
• Taxes on the consumption or sale of electricity (Item 53)
• Taxes on the sale or purchase of goods other than newspapers, subject
to the provisions of entry 92A of List I (Item 54)
• Taxes on advertisements other than advertisements published in the
newspapers and advertisements broadcast by radio or television (Item
55)
• Taxes on goods and passengers carried by road or on inland waterways
(Item 56)
• Taxes on vehicles, whether mechanically propelled or not, suitable for
use on roads, including tramcars subject to the provisions of entry 35 of
List III (Item 57)
• Taxes on animals and boats (Item 58)
• Tolls (Item 59)
• Taxes on professions, trades, callings and employments (Item 60)
• Capitation taxes (Item 61)
• Taxes on luxuries, including taxes on entertainments, amusements,
betting and gambling (Item 62)
• Rates of stamp duty in respect of documents other than those specified
in the provisions of List I with regard to rates of stamp duty (Item 63)

C) Concurrent List — (LIST-III)


• Contracts, including partnership, agency, contracts of carriage, and other
special forms of contracts, but not including contracts relating to
agricultural land (Item -7)
Module One • Introduction to Business Law 27

• Bankruptcy and insolvency (Item 9)


• Trust and Trustees (Item 10)
• Adulteration of foodstuffs and other goods (Item -18)
• Economic and social planning (Item 20)
• Commercial and industrial monopolies, combines and trusts (Item 21)
• Trade unions; industrial and labour disputes (Item 22)
• Legal, medical and other professions (Item 26)
• Trade and commerce in, and the production, supply and distribution
of —
a) the products of any industry where the control of such industry by
the Union is declared by Parliament by law to be expedient in the
public interest, and imported goods of the same kind as such
products;
b) foodstuffs, including edible oilseeds and oils;
c) cattle fodder, including oilcakes and other concentrates;
d) raw cotton, whether ginned or unginned, and cotton seed; and
e) raw jute (Item 33)
• Weights and measures except establishment of standards (Item -33A)
• Price control (Item -34)
The above items contained in the union, state and concurrent list have
economic significance. They influence the business in one way or the other.

Questions

Section — A: Objective Type


1. What is business law?
2. Name the sources of business law.
3. What is common law?
4. What is equity?
5. What is Law Merchant?
6. What is an Ordinance?
7. What is Administrative Law?
8. What is Substantive Law?
9. What is Procedural Law?
10. What is Public Law?
11. What is Private Law?
12. What is Civil Law?
13. What is Criminal Law?
14. Name the nobel ideals as given in Indian Constitution.
15. What is secularism?
16. What is fratenity?
17. What is Federal Constitution?
18. What is Uniter Constitution?
28 28 Legal Aspect of Business • Module One

19. What is rule of law?


20. What is judicial law?
21. What is democratic republic?
22. What is Article 14 of Indian Constitution?
23. What is Article 19 of Indian Constitution?
24. What is Article 21 of Indian Constitution?
25. What is Article 245 of Indian Constitution?
26. What is Article 246 of Indian Constitution?
27. What is schedule VII of Indian Constitution?
28. What is List -1 of Schedule VII ?
29. What is List -2 of Schedule VII ?
30. What is List -3 of Schedule VII ?
31. What is concurrent list ?
32. How many matters are included in Union List ?
33. How many matters are included in State List ?
34. How many matters are included in Concurrent List ?
35. Name any two business related matters in Union List.
36. Name any two business related matters in State List.
37. Name any two business related matters in Concurrent List.

Section — B: Analytical Type


1. Explain the scope of business law.
2. Explain common law and dharma as sources of business law.
3. Distinguish between civil law and criminal law.
4. Differentiate between federal and unitery consitution.
5. Distinguish between written and unwritten consitution.
6. Distinguish between rigid and flexible constitution.
7. Explain the features of Indian Constitution.
8. Explain the rule of law.
9. Explain the juducial review process.
10. How Articles 14, 19, 21 of Indian Constitiution are related to business.
11. Distinguish between Fundamental Rights and Directive Principles of State Policy.
12. List the business related matters of union list.
13. List the business related matters of State list.
14. List the business related matters of concurrent list.

Section — C: Essay Type


1. Define business law and thus bring out the sources and scope of business law.
2. Explain the different kinds of constitution.
3. Bring out the nobel ideals as enunciatied in the Indian Constitution.
4. Explain substantive, procedural, criminal, civil, public and private laws.
5. Explain the features of Indian Constitution in the context of Federal and Unitary
System.
6. Bring out the articles of Indian Constitution which have economic significance.
7. Discuss the business related matters incorporated in Schedule –VII read with Article
246 of Indian Constitution.


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

INFORMATION TECHNOLOGY ACT, 2000


(The first cyber law of India with latest amendments)

2.1 CYBERLAW IN INDIA — INTRODUCTION


When internet was developed, the founding fathers of Internet hardly had
any inclination that internet could transform itself into an all pervading revolution
which could be misused for criminal activities and which required regulation.
Today, there are many disturbing things happening in cyberspace. Due to the
anonymous nature of the Internet, it is possible to engage into a variety of criminal
activities with impunity and people with intelligence, have been grossly misusing
this aspect of the internet to perpetuate criminal activities in cyberspace. Hence
the need for Cyber laws in India.
Cy ber l aws are Cyber laws are meant to set the definite pattern, some rules and guidelines
mean t to s et the
defin ite patt ern,
that defined certain business activities going on through internet-legal and certain
s ome ru les and illegal and hence punishable. The IT Act 2000, the cyber law of India, gives the
guidelines that de- legal framework so that information is not denied legal effect, validity or
fined certain busi- enforceability, solely on the ground that it is in the form of electronic records.
ness activities go-
ing on through One cannot regard government as complete failure in shielding numerous e-
internet-legal and
certain illegal and commerce activities on the firm basis of which this industry has got to its skies,
hence punishable. but then the law cannot be regarded as free from ambiguities.
MMS porn case in which the CEO of bazee.com(an Ebay Company) was
arrested for allegedly selling the MMS clips involving school children on its website
is the most apt example in this reference. Other cases where the law becomes
hazy in its stand includes the case where the newspaper Mid-Day published the
pictures of the Indian actress kissing her boyfriend at the Bombay nightspot and
the arrest of Krishan Kumar for illegally using the internet account of Col. (Retd.)
J.S. Bajwa.

Essence of the IT Act


Information Technology Act 2000 addressed the following issues:
1. Legal Recognition of Electronic Documents
2. Legal Recognition of Digital Signatures
3. Offenses and Contraventions
4. Justice Dispensation System for Cyber crimes
ITA 2008 as the new version of Information Technology Act 2000 is often
referred has provided additional focus on Information Security. It has added several
new sections on offences including Cyber Terrorism and Data Protection.

2.2 IMPORTANCE OF CYBERLAW


Cyber law is important because it touches almost all aspects of transactions
and activities on and concerning the internet, the world wide web and cyberspace.
Module Two • Information Technology Act, 2000 31

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.

2.3 CHARACTERISTICS OF INFORMATION TECHNOLOGY ACT IN INDIA


The IT Act 2000 attempts to change outdated laws and provides ways to deal
with cyber crimes. Let's have an overview of the law where it takes a firm stand
and has got successful in the reason for which it was framed.
• E-Transactions: The E-commerce industry carries out its business via
transactions and communications done through electronic records. It
thus becomes essential that such transactions be made legal. Keeping
this point in the consideration, the IT Act 2000 empowers the government
departments to accept filing, creating and retention of official documents
in the digital format. The Act also puts forward the proposal for setting
up the legal framework essential for the authentication and origin of
electronic records / communications through digital signature.
• Legalising E-mail Message: The Act legalizes the e-mail and gives it the
status of being valid form of carrying out communication in India. This
implies that e-mails can be duly produced and approved in a court of
law, thus can be regarded as substantial document to carry out legal
proceedings.
• Digital Signature and Digital Relooks: The Act also talks about digital
signatures and digital records. These have been also awarded the status
of being legal and valid means that can form strong basis for launching
litigation in a court of law. It invites the corporate companies in the
business of being Certifying Authorities for issuing secure Digital
Signatures Certificates.
• E-governance: The Act now allows Government to issue notification on
the web thus heralding e-governance.
• Filling E-Form: It eases the task of companies of the filing any form,
application or document by laying down the guidelines to be submitted
at any appropriate office, authority, body or agency owned or controlled
by the government. This will help in saving costs, time and manpower
for the corporates.
• Statutory Remedy for Cyber Crimes: The Act also provides statutory
remedy to the coporates in case the crime against the accused for breaking
into their computer systems or network and damaging and copying the
data is proven. The remedy provided by the Act is in the form of monetary
damages, not exceeding Rs. 1 crore ($200,000).
32 32 Legal Aspect of Business • Module Two

• 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.

2.4 ADVANTAGES OF CYBER LAWS


We need Cy ber The IT Act 2000 attempts to change outdated laws and provides ways to deal
Laws so that people
c an perform pur-
with cyber crimes. We need such laws so that people can perform purchase
chase transactions transactions over the Net through credit cards without fear of misuse. The Act
ov er t he Net offers the much-needed legal framework so that information is not denied legal
through credit cards effect, validity or enforceability, solely on the ground that it is in the form of
without fear of mis-
use. electronic records.
In view of the growth in transactions and communications carried out through
electronic records, the Act seeks to empower government departments to accept
filing, creating and retention of official documents in the digital format. The Act
has also proposed a legal framework for the authentication and origin of electronic
records / communications through digital signature.
From the perspective of e-commerce in India, the IT Act 2000 and its provisions
contain many positive aspects.
• The implications of these provisions for the e-businesses would be that
e-mail would now be a valid and legal form of communication in our
country that can be duly produced and approved in a court of law.
• Companies shall now be able to carry out electronic commerce using the
legal infrastructure provided by the Act.
• Digital signatures have been given legal validity and sanction in the Act.
• The Act throws open the doors for the entry of corporate companies in
the business of being Certifying Authorities for issuing Digital Signatures
Certificates.
• The Act now allows Government to issue notification on the web thus
heralding e-governance.
• The Act enables the companies to file any form, application or any other
document with any office, authority, body or agency owned or controlled
by the appropriate Government in electronic form by means of such
electronic form as may be prescribed by the appropriate Government.
• The IT Act also addresses the important issues of security, which are so
critical to the success of electronic transactions. The Act has given a
legal definition to the concept of secure digital signatures that would be
required to have been passed through a system of a security procedure,
as stipulated by the Government at a later date.
• Under the IT Act, 2000, it shall now be possible for corporates to have a
statutory remedy in case if anyone breaks into their computer systems
or network and causes damages or copies data. The remedy provided by
the Act is in the form of monetary damages, not exceeding Rs. one crore.
Module Two • Information Technology Act, 2000 33

2.5 SALIENT FEATURES OF THE IT ACT, 2000 (Section-wise)


Information Technology Act 2000 consisted of 94 sections segregated into 13
chapters. Four schedules form part of the Act.
The salient features of the Information Technology Act, 2000 are as follows:
• Extends to the whole of India (Section 1)
• Authentication of electronic records (Section 3)
• Legal Framework for affixing Digital signature by use of asymmetric
crypto system and hash function (Section 3)
• Legal recognition of electronic records (Section 4)
• Legal recognition of digital signatures (Section 5)
• Retention of electronic record (Section 7)
• Publication of Official Gazette in electronic form (Section 8)
• Security procedure for electronic records and digital signature (Sections
14, 15, 16)
• Licensing and Regulation of Certifying authorities for issuing digital
signature certificates (Sections 17-42)
• Functions of Controller (Section 18)
• Appointment of Certifying Authorities and Controller of Certifying
Authorities, including recognition of foreign Certifying Authorities
(Section 19)
• Controller to act as repository of all digital signature certificates (Section
20)
• Data Protection (Sections 43 & 66)
• Various types of computer crimes defined and stringent penalties
provided under the Act (Section 43 and Sections 66, 67, 72)
• Appointment of Adjudicating officer for holding inquiries under the Act
(Sections 46 & 47)
• Establishment of Cyber Appellate Tribunal under the Act (Sections 48-
56)
• Appeal from order of Adjudicating Officer to Cyber Appellate Tribunal
and not to any Civil Court (Section 57)
• Appeal from order of Cyber Appellate Tribunal to High Court (Section
62)
• Interception of information from computer to computer (Section 69)
• Protection System (Section 70)
• Act to apply for offences or contraventions committed outside India
(Section 75)
• Investigation of computer crimes to be investigated by officer at the DSP
(Deputy Superintendent of Police) level
34 34 Legal Aspect of Business • Module Two

• Network service providers not to be liable in certain cases (Section 79)


• Power of police officers and other officers to enter into any public place
and search and arrest without warrant (Section 80)
• Offences by the Companies (Section 85)
• Constitution of Cyber Regulations Advisory Committee who will advice
the Central Government and Controller (Section 88)

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.

Early Development of E-Commerce


The meaning of electronic commerce has changed over the last 30 years.
Originally, electronic commerce meant the facilitation of commercial transactions
electronically, using technology such as Electronic Data Interchange (EDI) and
Electronic Funds Transfer (EFT). These were both introduced in the late 1970s,
allowing businesses to send commercial documents like purchase orders or
invoices electronically. The growth and acceptance of credit cards, automated
teller machines (ATM) and telephone banking in the 1980s were also form of
Module Two • Information Technology Act, 2000 35

electronic commerce. Another form of e-commerce was the airline reservation


system typified by the Indian Airlines and Kingfisher.
During the 1980s, online shopping was also used extensively in the UK by
auto manufacturers such as Ford, Peugeot-Talbot, General Motors and Nissan.
From the 1990s onwards, electronic commerce would additionally include
enterprise resource planning systems (ERP), data mining and data warehousing.
An early example of many-to-many electronic commerce in physical goods
was the Boston Computer Exchange, a marketplace for used computers launched
in 1982. An early online information marketplace, including online consulting,
was the American Information Exchange, another pre-internet online system
introduced in 1991.
In 1990 Tim Berners-Lee invented the World Wide Web and transformed an In 1990 Tim
Bern ers -Lee in-
academic telecommunication network into a worldwide everyman everyday
v ented the World
communication system called internet/www. Commercial enterprise on the Wide W eb and
Internet was strictly prohibited until 1991. Although the internet became popular trans fo rmed an
worldwide around 1994 when the first internet online shopping started, it took academic telecom-
munication network
about five years to introduce security protocols and DSL allowing continual into a world wide
connection to the internet. By the end of 2000, many European and American everyman everyday
business companies offered their services through the World Wide Web. Since c ommunication
s y s tem c alled
then people began to associate a word "e-commerce" with the ability of purchasing internet/www.
various goods through the internet using secure protocols and electronic payment
services. In India also e-commerce is slowly gaining momentum.

2.7 SIGNIFICANCE OF E-COMMERCE

Faster and Easy Access


Electronic commerce or e-commerce can be said as set of well-defined
commercial process related to internet for easy online business transactions. E-
commerce is a novel concept used worldwide for making best use of technologies
related to electronic data exchange that can be done electronically for faster and
easy access.

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.

Direct Links to Customer


In difficult times of global economic recession more and more companies are
experimenting with e-commerce for promotion of their products/services. Here
they also get the opportunity to directly get linked to the customers.
36 36 Legal Aspect of Business • Module Two

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.

Showcasing the Products and Services


Keeping in consideration the present market situation e-commerce solutions
has proved to be a boon for many sinking businesses giving them ideal place to
showcase their range of products/services and explore new markets spread
worldwide.

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.

Exploring New Global Markets


Many small scale as well as big companies have realized the potential of
ecommerce solutions and have started exploring newer global markets through
it. It is one of the cheapest medium for online business conduction and its further
expansion. Customers just by a click of the mouse experience enhanced technology
and get virtual exposure to various types and forms of products.

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

2.8 ELECTRONIC GOVERNANCE

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

• Web-based Economy: Biggest benefit of e-governance is its potential to


give birth to an entire web-based economy in private as well as public
organizations.

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.

2.9 NATIONAL E-GOVERNANCE PLAN (NEGP)


All Government services accessible to the common Citizen in his or her
locality, throughout his or her life through a One-stop-shop (integrated service
delivery) ensuring efficiency, transparency and reliability at affordable costs to
meet the basic needs of the common citizen. This is possible through NeGP.
National E-Governance Action Plan approved for implementation 10 components
and 25 Mission Mode Projects ambitious outlay of over Rs. 12,000 crores involving
public and private investments to provide components and framework of
proliferation of e-Governance in India.
This includes core policies, core projects, core infrastructure, integrated
services, projects support infrastructure, human resource, development/training,
technical assistance, awareness & assessment, organizational structures, R&D,
Income Tax, passport, visa and immigration project, insurance, national citizen
database, central excise, pensions, banking.
NeGP: Central Mission Mode Projects
Mission Mode Projects (MMP) is identified on the basis of high citizen or
business interface, land records, road transport, property registration,
agriculture, treasuries, municipalities.
NeGP: State Mission Mode Projects
It is ide ntifie d on the basis of high citizen or busine ss inte rfa ce
grampanchayats, commercial taxes policy, employment exchange, EDI (E-
Module Two • Information Technology Act, 2000 39

Commerce), E-Biz, common service centers, Indian portal, EG Gateway, E-


Courts, E-Procurement.
NeGP: Integrated Mission Mode Projects
MMPs identified on the basis of high citizen or business interface, focus on
public service delivery and outcomes, radically change the way Government
delivers services process re-engineering and change management are critical
integrated service delivery through common services centres.

2.10 ADVANTAGES OF E-GOVERNANCE


E-Governance sees the people in government, business and citizens working
together for the benefit of all. If properly implemented, the benefits of e-Governance
are enormous. Some of its obvious benefits are:

(a) Integrated Information


E-Governance targets to use a government-wide electronic information
infrastructure to simplify service delivery, reduce duplication, and improve the
level and speed of service to clients at a lower cost. It recommends creating,
managing, and prudently sharing information electronically among the various
government departments and the different services offered by them. That is,
information will be captured once, as close to the source as possible, then shared
and re-used by all authorized users. This will avoid manual transcription and re-
entering of the same information repeatedly whenever a citizen goes to a new
government department for some services.

(b) Integrated Services


The integrated information approach automatically lends itself to offering
integrated services. Different types of services offered by different government
departments like collecting taxes, granting licences, administering regulations,
paying grants and benefits, can be availed at one place. This greatly facilitates
the citizens by allowing them to perceive the government as a single body to
interact with instead of a number of unrelated entities, operating at different
locations in different government buildings.

(c) Anywhere Services


Provision of fully interactive on-line services by e-Governance gives public
access to government services with quicker responses at convenient times. This
on-line accessibility of stored information from remote locations allows government
officials to serve any citizen from a government office located in any part of the
state or country.

(d) Anywhere, Anytime Information


Delivery of services may require interaction between government officials and
citizens, but delivery of public-domain information to citizens can be done without
any such interaction. Citizens can obtain information related to government
processes and procedures through an on-line system without interacting with
any government official. In fact, e-Governance can give the average citizen quick,
interactive access to a vast array of information, through computers at home or
work or through kiosks in convenient public locations, because this access to
40 40 Legal Aspect of Business • Module Two

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) Improved Overall Productivity


E-Governance will significantly contribute to improved overall productivity
of both the government officials and the citizens, as it ensures faster interaction
among them by electronic mail instead of moving paper files and letters, and in
streamlining the workflow of internal government administrative processes such
as procurement, recruitment, evaluation, budgeting, planning. On the other hand,
improved productivity of citizens results because of the facility of anytime,
anywhere services and information.

(f) Better Decision Making and Planning


The integrated information base of e-Governance helps planners and decision
makers to perform extensive analysis of stored data to provide answers to the
queries of the administrative cadre. This facilitates taking well informed policy
decisions for citizen facilitation and accessing their impact over the intended
section of the population. This in turn helps them to formulate more effective
strategies and policies for citizen facilitation.

(g) Better Security and Protection of Information


E-Governance uses the integrated information approach for keeping all
information at one place in electronic form. Thus, keeping the information secure
against theft or leakage. Proper backup mechanisms also help in protecting the
valuable information from getting lost due to natural calamities such as fires,
earthquakes, and floods.

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

2.11 PAPERLESS SOCIETY

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.

Paperless Society — An Overview


The advent of the computer age and electronic documents is second in
importance only to Johann Gutenberg's invention of the printing press in the
1450s. Once computers were firmly entrenched in the world's offices in the early
1980s, it did not take long for business people to start wondering whether electronic
documents could become the primary means of communication. Futurists were
quick to dream about the day when books would be presented strictly online as
electronic documents, available to all and at much lower prices. Others saw
electronic documents putting paper companies and many printers out of business.
While the reality of the electronic document revolution has panned out The broad accep-
tance of electronic
differently than the futurists predicted, the computer has brought extraordinary
doc uments in ev -
changes to communication. For example, the broad acceptance of electronic eryday business life
documents in everyday and business life has prompted the development of style has prompted the
guides and resources for citing electronic documents as references. Another sign dev elop ment of
style guides and re-
of the impact of electronic documents is the arrival of the electronic reading room sources for citing
which citizens can visit online to read about items of national interest. Likewise, elec tronic d oc u-
physicians are more and more frequently getting away from thick patient files ment s as re fer-
ences.
and instead relying on electronic charts. This move to electronic documents reduces
the chances of losing vital information and also dramatically cuts down the chance
of prescription errors.

Advantages of Paperless Society


Today, electronic documents are increasingly becoming the norm for handling
personal business. More and more people each year do their banking and bill
paying via electronic documents. It saves time, effort and postage. Plus, many
contend that it is actually more secure than mailing a check from your mailbox
and risking it being stolen.
Today what is classified as an electronic document has expanded to include
a wide range of items such as e-mails, photographs, letters, depositions, x-rays,
42 42 Legal Aspect of Business • Module Two

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.

2.12 IMPORTANT TERMS IN INFORMATION TECHNOLOGY ACT


Access, means gaining entry into, instructing or communicating with the
logical, arithmetical or memory function resources of a computer, computer system
or computer network.
Addressee means a person who is intended by the originator to receive the
electronic record but does not include any intermediary.
Affixing Digital Signature means adoption of any methodology or procedure
by a person for the purpose of authenticating an electronic record by means of
digital signature.
Asymmetric Crypto System means a system of a secure key pair consisting
of a private key for creating a digital signature and a public key to verify the
digital signature.
Certifying Authority means a person who has been granted a licence to
issue a Digital Signature Certificate under section 24.
Computer means electronic, magnetic, optical or other high-speed data
processing device or system which performs logical, arithmetic and memory
functions by manipulations of electronic, magnetic or optical impulses, and
include s a ll input, output, proce ssing, stora ge , compute r softwa re or
communication facilities which are connected or relates to the computer in a
computer system or computer network.
Computer Network means the inter-connection of one or more computers
through (i) the use of satellite, microwave, terrestrial lime or other communication
media; and (ii) terminals or a complex consisting of two or more interconnected
computers whether or not the interconnection is continuously maintained.
Computer Resources means computer, computer system, computer network,
data, computer database or software.
Computer System means a device or collection of devices, including input
and output support devices and excluding calculators which are not programmable
Module Two • Information Technology Act, 2000 43

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;

(d) adhere to generally accepted security procedures.


Verify, in relation to a digital signature, electronic record or public key, with
its grammatical variations and cognate expressions, means to determine whether—
(a) the initial electronic record was affixed with the digital signature by the
use of private key corresponding to the public key of the subscriber;
44 44 Legal Aspect of Business • Module Two

(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.

2.13 DIGITAL SIGNATURES


Digit al Signa ture Digital Signature means authentication of any electronic record by a
means authentica-
tion of any e lec -
subscriber by means of an electronic method or procedure in accordance with
tronic record by a the provisions of section 3 of IT Act, 2000.
s ubs c ri ber by
means of an elec- Subject to the provisions of the Information Technology Act, 2000, any
tron ic metho d or subscriber may authenticate an electronic record by affixing his digital signature.
procedure in accor-
The authentication of the electronic record shall be effected by the use of
dance with the pro-
visions of section 3 asymmetric crypto system and hash function which envelop and transform the
of IT Act, 2000. initial electronic record into another electronic record.
For the purposes of this Act "hash function" means an algorithm mapping or
translation of one sequence of bits into another, generally smaller, set known as
"hash result" such that an electronic record yields the same hash result every
time the algorithm is executed with the same electronic record as its input making
it computationally infeasible—
• To derive or reconstruct the original electronic record from the hash
result produced by the algorithm.
• That two electronic records can produce the same hash result using the
"Has h func t ion" algorithm.
means an algorithm
mapping or transla- • Any person by the use of a public key of the subscriber can verify the
tion of one s e- electronic record.
quence of bits into
another • The private key and the public key are unique to the subscriber and
constitute a functioning key pair.

2.14 SECURE ELECTRONIC RECORDS AND SECURE DIGITAL SIGNATURES


Where any security procedure has been applied to an electronic record at a
specific point of time, then such record shall be deemed to be a secure electronic
record from such point of time to the time of verification.

Secure Electronic Record


If by application of a security procedure agreed to by the parties concerned,
it can be verified that a digital signature, at the time it was affixed, was—
(a) unique to the subscriber affixing it;
(b) capable of identifying such subscriber;
(c) created in a manner or using a means under the exclusive control of the
subscriber and is linked to the electronic record to which it relates in such a
manner that if the electronic record was altered the digital signature would be
Module Two • Information Technology Act, 2000 45

invalidated, then such digital signature shall be deemed to be a secure digital


signature.

Security Procedure for Commercial Purposes


The Central Government prescribes the security procedure for commercial
circumstances prevailing at the time when the procedure is used, including—
• the nature of the transaction;
• the level of sophistication of the parties with reference to their
technological capacity;
• the volume of similar transactions engaged in by other parties;
• the availability of alternatives offered to but rejected by any party;
• the cost of alternative procedures; and
• the procedures in general use for similar types of transactions or
communications.

2.15 LEGAL RECOGNITION OF ELECTRONIC RECORDS


Legal recognition of digital signatures and authentication of electronic records:
In the Information Technology Act, signed with reference to a person, mean In the Information
affixing of his hand written signature or any mark on any document and the Tec h nology Ac t,
signed with refer-
expression "signature" shall be construed accordingly. ence to a person,
mean affixing of his
Where any law provides that documents, records or information shall be hand written signa-
retained for any specific period, then, that requirement shall be deemed to have ture or any mark on
been satisfied if such documents, records or information are retained in the any document and
the expression "sig-
electronic form, if— natu re" s hal l be
construed accord-
• the information contained therein remains accessible so as to be usable
ingly.
for a subsequent reference;
• the electronic record is retained in the format in which it was originally
generated, sent or received or in a format which can be demonstrated to
represent accurately the information originally generated, sent or
received; Retention of electronic records, Use of electronic records and
digital signatures in Government and its agencies.
• the details which will facilitate the identification of the origin, destination,
date and time of despatch or receipt of such electronic record are available
in the electronic record.
Nothing in this section shall apply to any law that expressly provides for the
retention of documents, records or information in the form of electronic records.

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

2.17 REGULATION OF CERTIFYING AUTHORITIES


The Central Government may, by notification in the Official Gazette, appoint
a Controller of Certifying Authorities for the purposes of this Act and may also by
the same or subsequent notification appoint such number of Deputy Controllers
and Assistant Controllers as it deems fit. The Controller shall discharge his
functions under this Act subject to the general control and directions of the Central
Government. The Deputy Controllers and Assistant Controllers shall perform the
functions assigned to them by the Controller Secure digital signature (Section
17).

Duties of Certifying Authority


• Make use of hardware, software and procedures that are secure from
intrusion and misuse; provide a reasonable level or reliability in its
services which are reasonably suited to the performance of intended
functions;
• Adhere to security procedures to ensure that the secrecy and privacy of
the digital signatures are assured; and
• Observe such other standards as may be specified by regulations, (Section
30).
Every Certifying Authority shall ensure that every person employed or
otherwise engaged by it complies, in the course of his employment or engagement,
with the provisions of this Act, rules, regulations and orders made thereunder
(Section 31).
Every Certifying Authority shall display its licence at a conspicuous place of
the premises in which it carries on its business. Power to investigate contraventions
(Section 32).
Every Certifying Authority whose licence is suspended or revoked shall
immediately after such suspension or revocation, surrender the licence to the
Controller. Where any Certifying Authority fails to surrender a licence under sub-
section (1), the person in whose favour a licence is issued, shall be guilty of an
offence and shall be punished with imprisonment which may extend up to six
months or a fine which may extend up to ten thousand rupees or with both (Section
33).
Every Certifying Authority shall disclose in the manner specified by
regulations—
— its Digital Signature Certificate which conta ins the public key
corresponding to the private key used by
— that Certifying Authority to digitally sign another Digital Signature
Certificate;
— any certification practice statement relevant thereto;
— notice of the revocation or suspension of its Certifying Authority
Certificate, if any; and
— any other fact that materially and adversely affects either the reliability
of a Digital Signature Certificate, which that Authority has issued, or
the Authority's ability to perform its services.
Module Two • Information Technology Act, 2000 47

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.

Functions of Controller Towards Certifying Authority


The Controller may perform all or any of the following functions, namely:
• exercising supervision over the activities of the Certifying Authorities;
• certifying public keys of the Certifying Authorities;
• laying down the standards to be maintained by the Certifying Authorities;
• specifying the qualifications and experience which
• employees of the Certifying Authorities should possess;
• specifying the conditions subject to which the Certifying authorities shall
conduct their business;
• specifying the contents of written, printed or visual materials and
advertisements that may be distributed or used in respect of a Digital
Signature Certificate and the public key;
• specifying the form and content of a Digital Signature Certificate and
the key;
• specifying the form and manner in which accounts shall be maintained
by the Certifying Authorities;
• specifying the terms and conditions subject to which auditors may be
appointed and the remuneration to be paid to them;
• facilitating the establishment of any electronic system by a Certifying
Authority either solely or jointly with other Certifying Authorities and
regulation of such systems;
• specifying the manner in which the Certifying Authorities shall conduct
their dealings with the subscribers;
• resolving any conflict of interests between the Certifying Authorities and
the subscribers.
Controller duties towards the Certifying Authorities and Digital Signature
Certificates:
• The controller shall maintain a data base containing the disclosure record
of every Certifying Authority containing such particulars as may be
specified by regulations, which shall be accessible to public (Section
18).
• Subject to such conditions and restrictions as may be specified by
regulations, the Controller may with the previous approval of the Central
48 48 Legal Aspect of Business • Module Two

Government, and by notification in the Official Gazette, recognise any


foreign Certifying Authority as a Certifying Authority for the purposes of
this Act (Section 19).
• Where any Certifying Authority is recognised, the Digital Signature
Certificate issued by such Certifying Authority shall be valid for the
purposes of this Act.
• The Controller may, if he is satisfied that any Certifying Authority has
contravened any of the conditions and restrictions subject to which it
was granted recognition under sub-section (1) he may, for reasons to be
recorded in writing, by notification in the Official Gazette, revoke such
recognition.
• The Controller shall be the repository of all Digital Signature Certificates
issued under this Act. The Controller shall—
— make use of hardware, software and procedures that are secure
from intrusion and misuse;
— observe such other standards as may be prescribed by the Central
Government; to ensure that the secrecy and security of the digital
signatures are assured.
• The Controller shall maintain a computerised data base of all public
keys in such a manner that such data base and the public keys are
available to any member of the public.
• Subject to the provisions of sub-section (2), any person may make an
application, to the Controller, for a licence to issue Digital Signature
Certificates.
• No licence shall be issued under sub-section (1), unless the applicant
fulfills such requirements with respect to qualification, expertise,
manpower, financial resources and other infrastructure facilities, which
are necessary to issue Recognition of foreign Certifying Authorities.

2.18 COMPUTER RESOURCES


Computer resource Computer resource means computer, computer system, computer network,
means c omputer,
computer sy stem,
data, computer database or software.
computer network,
data, computer da-
Section 69 empowers the Central Government/State Government/ its
tabase or software. authorized agency to intercept, monitor or decrypt any information generated,
transmitted, received or stored in any computer resource if it is necessary or
expedient so to do in the interest of the sovereignty or integrity of India, defence
of India, security of the State, friendly relations with foreign States or public
order or for preventing incitement to the commission of any cognizable offence or
for investigation of any offence.
Module Two • Information Technology Act, 2000 49

2.19 CYBER CRIMES


Cyber crime is unlawful act wherein the computer is either a tool or a target
or both. Cyber crimes can involve criminal activities that are traditional in nature,
such as theft, fraud, forgery, defamation and mischief, all of which are subject to
the Indian Penal Code. The abuse of computers has also given birth to a gamut of
new age crimes that are addressed by the Information Technology Act, 2000.

Category of Cyber Crimes


The cyber crime is committed with the help of computers. The computers
are used in two ways. They are computer as a target, and computer as a weapon.
1) The Computer as a Target : Using a computer to attack other computers.
For example, Hacking, Virus/Worm attacks, distributed Denial of Service (DOS)
attack and the like.
2) The Computer as a Weapon: Using a computer to commit real world
crimes, for example, Cyber Terrorism, Intellectual Property Rights violations, Credit
card frauds, Electronic Fund Transfer frauds, Pornography and the like. The
Cyber Crimes are regulated by Cyber Laws or Internet Laws.

2.20 VARIANTS OF CYBER CRIMES


From the above two types of broad classification of cyber crimes on the basis
of the usage of computers as a target and as a weapon, the following variants are
explained in great detail.

(1) UNAUTHORIZED ACCESS


Access means gaining entry into, instructing or communicating with the Ac c es s means
gaining entry into,
logical, arithmetical, or memory function resources of a computer, computer system instructing or com-
or computer network. municating with the
logic al, arithmeti-
Unauthorized access would therefore mean any kind of access without the c al, or memory
permission of either the rightful owner or the person in charge of a computer, function resources
of a computer, com-
computer system or computer network.
pute r s y s te m or
computer network.
(2) HACKING
Every act committed towards breaking into a computer and/or network is
Every act commit-
hacking. Hackers write or use ready-made computer programs to attack the target
ted towards break-
computer. They possess the desire to destruct and they get the kick out of such ing into a computer
destruction. Some hackers hack for personal monetary gains, such as to stealing and/or network is
the credit card information, transferring money from various bank accounts to hacking.

their own account followed by withdrawal of money.

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

Black and White Hat Hackers


A black hat is a per- A black hat is a person who compromises the security of a computer system
s on who c ompro-
without permission from an authorized party, typically with malicious intent. The
mises the security
of a computer sys- term white hat is used for a person who is ethically opposed to the abuse of
tem without permis- computer systems, but is frequently no less skilled. The term cracker was coined
sion from an autho- by Richard Stallman to provide an alternative to using the existing word hacker
rized party, typically
with malic ious in- for this meaning. The somewhat similar activity of defeating copy prevention devices
tent. in software which may or may not be legal in a country's laws is actually software
cracking.
A white hat hacker, also rendered as ethical hacker, is, in the realm of
information technology, a person who is ethically opposed to the abuse of computer
systems. Realization that the Internet now represents human voices from around
the world has made the defense of its integrity an important pastime for many. A
white hat generally focuses on securing IT systems, whereas a black hat (the
opposite) would like to break into them.
The term white hat
is used for a person The term white hat hacker is also often used to describe those who attempt
who is ethically op-
posed to the abuse to break into systems or networks in order to help the owners of the system by
of c omputer s y s - making them aware of security flaws, or to perform some other altruistic activity.
tems , but is fre- Many such people are employed by computer security companies; these
quen tly no les s
skilled.
professionals are sometimes called sneakers. Groups of these people are often
called tiger teams.

Difference between White and Black Hackers


The primary difference between white and black hat hackers is that a white
hat hacker claims to observe ethical principles. Like black hats, white hats are
often intimately familiar with the internal details of security systems, and can
delve into obscure machine code when needed to find a solution to a tricky
problem.

Grey Hat Hackers


A Grey Hat in the Some use the term grey hat and fewer use brown hat to describe someone's
computer security
activities that cross between black and white. A Grey Hat in the computer security
community, refers
to a skilled hacker community, refers to a skilled hacker who sometimes acts legally, sometimes in
who s om etimes good will, and sometimes not. They are a hybrid between white and black hat
acts legally, some- hackers. They usually do not hack for personal gain or have malicious intentions,
times in good will,
and sometimes not. but may or may not occasionally commit crimes during the course of their
technological exploits.
A person who breaks into a computer system and simply puts their name
there while doing no damage can also be classified as a grey hat.

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.

(3) TROJAN ATTACK


The program that acts like something useful but do the things that are quite Trojan attack referst
to the program that
damping. The programs of this kind are called as Trojans. The name Trojan Horse act like something
is popular. Trojans come in two parts, a Client part and a Server part. When the us eful but do the
victim (unknowingly) runs the server on its machine, the attacker will then use things that are quite
the Client to connect to the Server and start using the trojan. damping.

(4) VIRUS AND WORM ATTACK


A program that has capability to infect other programs and make copies of
itself and spread into other programs is called virus. Programs that multiply like
viruses but spread from computer to computer are called as worms.

(5) E-MAIL AND INTERNET RELATED CRIMES

(a) Email spoofing


E-mail spoofing refers to e-mail that appears to have been originated from
one source when it was actually sent from another source.

(b) Email Spamming


E-mail "spamming" refers to sending e-mail to thousands and thousands
of users - similar to a chain letter.

(c) Sending malicious codes through e-mail


E-mails are used to send viruses, Trojans etc., through e-mails as an
attachment or by sending a link of website which on visiting downloads malicious
code.
52 52 Legal Aspect of Business • Module Two

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.

6. DENIAL OF SERVICE ATTACKS (DOS)


Floo ding a c om- Flooding a computer resource with more requests than it can handle. This
puter resource with
more requests than
causes the resource to crash thereby denying access of service to authorized
it can handle. This users. The examples include:
c aus es the re-
s our c e to c ras h • Attempts to "flood" a network, thereby preventing legitimate network
thereby denying ac- traffic
cess of service to
authorized users. • Attempts to disrupt connections between two machines, thereby
preventing access to a service
• Attempts to prevent a particular individual from accessing a service
• Attempts to disrupt service to a specific system or person.

Distributed Denial of Service (DOS)


A distributed denial of service (DoS) attack is accomplished by using the
internet to break into computers and using them to attack a network.
Hundreds or thousands of computer systems across the Internet can be turned
into "zombies" and used to attack another system or website.

There are three basic types of attack


• Consumption of scarce, limited, or non-renewable resources like NW
bandwith, RAM, CPU time. Even power, cool air, or water can affect.
• Destruction or Alteration of Configuration Information.
• Physical Destruction or Alteration of Network Components.

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.

9. INTELLECTUAL PROPERTY RIGHTS VIOLATIONS


These include software piracy, copyright infringement, trademarks violations,
theft of computer source code, patent violations and the like.
Cyber Squatting — Domain names are also trademarks and protected by
ICANN's domain dispute resolution policy and also under trademark laws. Cyber
Squatters registers domain name identical to popular service provider's domain
so as to attract their users and get benefit from it.

2.21 OFFENCES AND PENALTIES UNDER THE IT ACT


Whoever knowingly or intentionally conceals, destroys or alters or intentionally
or knowingly causes another to conceal, destroy or alter any computer source
code used for a computer, computer programme, computer system or computer
network, when the computer source code is required to be kept or maintained by
law for the time being in force, shall be punishable with imprisonment up to three
years, or with fine which may extend up to two lakh rupees, or with both.
If any person without permission of the owner or any other person who is
incharge of a computer, computer system or computer network,
• accesses or secures access to such computer, computer system or
computer network;
• downloads, copies or extracts any data, computer data base or information
from such computer, computer system or computer network including
information or data held or stored in any removable storage medium;
• introduces or causes to be introduced any computer contaminant or
computer virus into any computer, computer system or computer
network;
54 54 Legal Aspect of Business • Module Two

• damages or causes to be damaged any computer, computer system or


computer network, data, computer data base or any other programmes
residing in such computer, computer system or computer network;
• disrupts or causes disruption of any computer, computer system or
computer network;
• denies or causes the denial of access to any person authorised to access
any computer, computer system or computer network by any means;
• provides any assistance to any person to facilitate access to a computer,
computer system or computer network in contravention of the provisions
of this Act, rules or regulations made thereunder;
• charges the services availed of by a person to the account of another
person by tampering with or manipulating any computer, computer
system, or computer network, Penalty for damage to computer, computer
system, etc. he shall be liable to pay damages by way of compensation
not exceeding one crore rupees to the person so affected (Section 43).
If any person who is required under this Act or any rules or regulations made
thereunder to—
(a) furnish any document, return or report to the Controller or the Certifying
Authority fails to furnish the same, he shall be liable to a penalty not exceeding
one lakh and fifty thousand rupees for each such failure;
(b) file any return or furnish any information, books or other documents
within the time specified therefore in the regulations fails to file return or furnish
the same within the time specified therefore in the regulations, he shall be liable
to a penalty not exceeding five thousand rupees for every day during which such
failure continues;
(c) maintain books of account or records, fails to maintain the same, he shall
be liable to a penalty not exceeding ten thousand rupees for every day during
which the failure continues (Section 44).

Penalty for Failure to Furnish Information Return and the Like


Whoever contravenes any rules or regulations made under this, for the
contravention of which no penalty has been separately provided, shall be liable to
pay a compensation not exceeding twenty-five thousand rupees to the person
affected by such contravention or a penalty not exceeding twenty-five thousand
Rupees (Section 45).
Recovery of penalty. Tampering with computer source documents. Hacking
with computer system.
Whoever commits hacking shall be punished with imprisonment up to three
years, or with fine which may extend upto two lakh rupees, or with both (Section
66). Now it has been amended and hacking is not an offence to make it cyber
friendly.
Whoever publishes or transmits or causes to be published in the electronic
form, any material which is lascivious or appeals to the prurient interest or if its
effect is such as to tend to deprave and corrupt persons who are likely, having
Module Two • Information Technology Act, 2000 55

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.

Penalty for Breach of Confidentiality and Privacy


Penalty for publishing Digital Signature Certificate false in certain particulars
may extend to two years, or with fine which may extend to one lakh rupees, or
with both.
Whoever knowingly creates, publishes or otherwise makes available a Digital
Signature Certificate for any fraudulent or unlawful purpose shall be punished
with imprisonment for a term which may extend to two years, or with fine which
may extend to one lakh rupees, or with both. (Section 73).
Any computer, computer system, floppies, compact disks, tape drives or any
other accessories related thereto, in respect of which any provision of this Act,
rules, orders or regulations made thereunder has been or is being contravened,
shall be liable to confiscation.
56 56 Legal Aspect of Business • Module Two

2.22 THE INFORMATION TECHNOLOGY (AMENDMENT) ACT, 2008


The Government of India has brought major amendments to Information
Technology Act 2000 in form of the Information Technology Amendment Act,
2008.

New Provisions Added Through Amendments


• New Section to address technology neutrality from Section 3A its present
"technology specific" form (i.e., Digital Signature to Electronic Signature)
• New Section to address promotion of e-Governance Section 6A & other
IT application
— Delivery of Service
— Outsourcing
— Public Private Partnership
• New Section to address electronic contract Section 10A
• New Section to address data protection and privacy Section 43
• Body corporate to implement best security practices Sections 43A &
72A
• Multimember Appellate Tribunal Sections 49-52
• New Section to address new forms of computer misuse
— Impersonation Section 419A
— Identity theft and E-commerce frauds Section 417A like publishing
— Video voyeurism Section 502A
— Offensive messages and Spam Section 66A
— Pornography Section 67A
• Preservation and Retention of Data/Information Section 67C
• Revision of existing Section 69 to empower Central Section 69,
Government to designate agencies and issue direction for interception
and safeguards for monitoring and decryption
• Blocking of Information for public access Section 69A, monitoring of
Traffic Data and Information for Section 69B

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

• New Section for Examiner of Digital Evidence Section 79A


• New Section for power to prescribe modes of Encryption Section 84A
• Punishment for most of offences were reduced from three years to two
years

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.

IT ACT AMENDMENTS AND CORPORATES


— Huge ramifications of the new amendments on corporate India
— Law has begun to flex its muscles
— The clock is slowly churning.

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

Highlights of the 2008 Amendments


— Hacking no longer an offence hacking as an offence has been deleted
from the law book.
— existing Section 66 of the IT Act, 2000
• the said section has been substituted by new language
• existing language of the offence of hacking does not find mention in the
current manner and the friendly cyber crime legislation amendments
seek to make Indian cyberlaw friendly cyber crime legislation:
• a legislation that goes extremely soft on cyber criminals, with a soft
heart cyber crime friendly
— a legislation that chooses to encourage cyber criminals by lessening
the quantum of punishment accorded to them in the existing laws
— cyber crimes are bailable
— distinct absence of logic and rationale in reducing of the quantum of
punishments for various offences
— now cyber crimes to be investigated not by a DSP but by an inspector

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

Section — A Objective Type


1. What is cyber law?
2. State the essence of the IT Act, 2000.
3. State any two characteristics of IT Act, 2000.
4. What is E-Gazette?
5. What is Digital Signature?
6. What is a private key?
7. What is a public key?
8. What is cyber security?
9. What is cyber terrorism?
10. What is E-Commerce ?
11. What is E-Governance?
12. What is paperless society ?
13. What is Cyber Crime ?
14. Who is a black hat hacker ?
15. Who is a white hat hacker ?
16. Who is a grey hat hacker ?
17. Who is a Sneaker ?
18. Who is a Cracker ?

Section — B Analytical Type


1. Explain the objectives of E-Commerce
2. State the Advantages of E-Commerce
3. State the Demerits of E-Commerce
4. Briefly explain the advantages and disadvantages of E-governance
5. Explain the advantages of paperless society
6. Distinguish between White hat hacker, and black hat hacker
7. Explain the importance of cyber law.
8. Analyse the characteristics of IT Act.
9. State the advantages of Cyber Law.
10. Explain the functions of controller towards certifying authority.
60 60 Legal Aspect of Business • Module Two

Section — C Essay Type


1. Discuss in great detail the merits and demerits of E-commerce.
2. Discuss the practical applications of information technology in Karnataka, Gujarat,
and Andhra Pradesh.
3. "Paperless society is a myth." Do you agree ? Comment.
4. Explain the salient features of the IT Act, 2000.
5. Discuss the offences and penalties under the IT Act, 2000.


3
MODULE

THE COMPETITION ACT, 2002

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

COMPETITION ACT, 2002

3.1 INTRODUCTION TO COMPETITION ACT, 2002


Since attaining Independence in 1947, India, for the better part of half a
century thereafter, adopted and followed policies comprising what are known as
co mma nd- a nd -co ntro l l a ws , r ule s, re g ula tio ns a nd e xe cut ive or de r s.
The competition law of India, namely, the Monopolies and Restrictive Trade
Practices Act, 1969 (MRTP Act, for brief) was one such. It was in 1991 that
widespread economic reforms were undertaken and consequently the march from
command-a nd-control e conomy ba sed more on fre e ma rke t principle s
commenced its stride. As is true of many countries, economic liberalization has
taken root in India and the need for an effective competition regime has also been
recognized.
In the context of new economic policy paradigm, India has chosen to enact a
new competition law called the competition Act, 2002. The MRTP Act has
metamorphosed into the new law, competition Act, 2002. The new law is designed
to repeat the extent MRTP Act. As of now, only a few provisions of the new law
have been brought into force and the process of constituting the regulatory
authority, namely, the competition commission of India under the new act, is on.
The remaining provisions of the new law will be brought into force in a phased
manner.
For the present, the outgoing law, MRTP Act, 1969 and the new law
Competition act, 2002 are concurrently in force though as mentioned above, only
some provisions of the new law have been brought into force. Competition Law
for India was triggered by Articles 38 and 39 of the constitution of India. These
Articles are a part of the Directive Principles of State Policy.
Pegging on the Directive Principles, the first Indian Competition Law was
e na cte d in 1969 a nd wa s christe ned the Monopolie s a nd Re strictive
Trade Practices Act, 1969 (MRTP Act). Articles 38 and 39 of the Constitution of
India mandate, inter alia, that the state shall strive to promote the welfare
of the people by securing and protecting as effectively, as it may, a social order in
which justice, social, economic and political shall inform all the institutions of
the national life, and the state shall, in particular, direct its policy towards
securing—
1) That the ownership and control of material resources of the community
are so distributed as best to sub-serve the common good; and
2) That the operation of the economic system does not result in the
concentration of wealth and means of production to the common
detriment.
In October 1999, the Government of India appointed a High Level Committee
on Competition Policy and competition law to advise a modern competition law
for the country in line with international developments and to suggest a legislative
framework, which may entail a new law or appropriate amendments to the MRTP
Module Three • The Competition Act, 2002 63

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.

3.2 OBJECTIVES OF COMPETITION ACT, 2002


The Competition Act, 2002 was enacted in January 2003. Its main objectives
are to :
(1) Ensure fair competition in India, by prohibiting trade practices that have
an adverse effect on competition
(2) Promote and sustain competition
(3) Protect the interests of consumers; ad
(4) Ensure freedom of trade for other participants in incidental and connected
markets

3.3 ESSENTIALS / FEATURES OF COMPETITION ACT, 2002


The main features of the Competition Act are :
• Prohibition of anti-competitive agreements
• Prohibition of abuse of dominant position
• Regulation of combinations
• Establishment of the competition commission of India
• Penalties for contravention and non-compliance
• Competition advocacy and
• Constitution of the competition fund.

3.4 COMPONENTS OF THE COMPETITION ACT, 2002


The rubric of the new law, Competition Act, 2002 (Act, for brief) has essentially
four compartments.
• Anti-competition agreements
• Abuse of dominance
• Combinations regulation (Mergers, amalgamations, acquisitions and
takeovers)
• Competition advocacy (fostering competition).
Let us discuss each of the above component in great detail.
64 64 Legal Aspect of Business • Module Three

(1) ANTI-COMPETITION AGREEMENT


Firms enter into agreements, which may have the potential of restricting
Firm s enter into
agreements, which competition. A scan of the competition laws in the world will show that they
may have the po- made a distinction between horizontal and vertical agreements between firms.
tential of restricting The former, namely the horizontal agreements are those among competitors and
competition.
the latter, namely the vertical agreements are those relating to an actual or
potential relationship of purchasing or selling to each other. A particularly
pernicious type of horizontal agreements is the cartel.
Vertical agreements are pernicious, if they are between firms in a position of
dominance. Most competition laws view vertical agreements generally more
leniently than horizontal agreements, as prima-facie, horizontal agreements are
more likely to reduce competition than agreements between firms in a purchaser,
seller relationship. An obvious example that comes to mind is an agreement
between enterprises dealing in the same product or products, such horizontal
agreements, which include membership of cartels, are presumed to lead to
unreasonable restrictions of competition and are therefore presumed to have an
appreciable adverse effect on competition. In other words, they are per se illegal.
The underlying principle in such presumption of illegality is that the agreements
in question have an appreciable anti-competitive effect. Barring the aforesaid for
type of agreements, all the others will be subject to the rule of reason test in the
Act.

(2) ABUSE OF DOMINANCE


Dominant position has been appropriately defined in the Act. In terms of the
position of strength enjoyed by an enterprise, in the relevant market, in India,
which enables it to (i) operate independently of competitive forces prevailing in
the relevant market; or (ii) affects its competitors or consumers or the relevant
market in its favour.
Dominant position Section 4 of the Competition Act, no enterprise shall abuse its dominant
is the pos ition of position. Dominant position is the position of strength enjoyed by an enterprise
strength enjoyed by
an enterprise in the
in the relevant market which enables it to operate independently of competitive
rele v ant ma rk et forces prevailing in the market affects its competitors or consumers or the relevant
which enables it to market in its favour. Dominant position that is abused when an enterprise imposes
oper ate inde pen-
dently of competi-
unfair or discriminatory conditions in purchase or sale of goods or services. Again,
tive forces prevail- the philosophy of Competition Act is reflected in this provision, where it is clarified
ing in the mark et that a situation of monopoly per se is not against public policy but, rather, the
affects its competi- use of the monopoly status such that it operates to the detriment (loss) of potential
tors or consumers
or the relevant mar- and actual competitors.
ket in its favour.
Abuse of dominance arises if an enterprise
• Imposes unfair/ discriminatory purchase or sale prices (including
predatory prices)
• Limits production, markets or technical development
• Denies market access
Module Three • The Competition Act, 2002 65

• Concludes contracts subject to obligations having no connection with


the subject of the contracts
• Uses dominance to move into or protect other markets
Relevant market = Relevant product market + Relevant
geographic market
At this point it is worth mentioning that the Act does not prohibit or restrict
enterprises from coming into dominance. There is no control whatsoever to prevent
enterprises from coming into or acquiring position of dominance. All that the Act
prohibits is the abuse of that dominant position. The Act therefore, targets the
abuse of dominance and not dominance per se. This is indeed a welcome stop, a
step towards a truly global and liberal economy.

(3) THE COMPETITION ACT ON COMBINATIONS REGULATION


The competition law also is designed to regulate the operation and activities Comb ination s , a
term , whic h c on-
of combinations, a term, which contemplate s acquisitions, merge rs or templates acquisi-
amalgamations. Thus, the operation of the competition Act is not confined to tions , mergers or
transactions strictly within the boundaries of India but also such transactions amalgamations.
involving entities existing and / or established overseas.
Herein again lies the key to understanding the Competition Law. The intent
of legislation is not to prevent the existence of a monopoly across the board.
There is a realization in policy making circles that in certain industries, the nature
of their operations and economies of scale indeed indicate the creation of a
monopoly in order to be able to operate and remain viable and profitable. This is
insignificant contrast to the philosophy, which propelled the operation and
application of the MRTP Act, the trigger for which was the existence or impending
creation of monopoly situation in a sector of industry.
The competition law has made the pre-notification of combinations voluntary
for the parties concerned. However, if the parties to the combination choose not
to notify the competition commission of India (CCI), as it is not mandatory to
notify, they run the risk of a post-combination action by the CCI, if it is discovered
subsequently, that the combination has an appreciable adverse effect on
competition. There is a rider that the CCI shall not initiate an inquiry into a
combination after the expiry of one year from the date on which the combination
has taken effect.

(4) COMPETITION ADVOCACY


In line with the high level committee's recommendation, the Competition Act
extends the mandate of competition commission of India beyond merely enforcing Competition Advo-
the law (High Level Committee, 2000). Competition advocacy creates a culture of cacy is nothing but
competition. There are many possible valuable roles for competition advocacy, Competition c om-
mission of India ad-
depending on a country's legal and economic circumstances. vising Central Gov-
ernment on coun-
The Regulatory Authority under the Act, namely, competition commission of try’s economic poli-
India, in terms of the advocacy provisions in the Act, is enabled to participate in cies and review of
the formulation of the country's economic policies and to participate in the laws relating to
competition in India.
reviewing of laws related to competition at the instance of the Central Government.
The Central Government can make a reference to the CCI for its opinion on the
possible effect of a policy under formulation or of an existing law related to
66 66 Legal Aspect of Business • Module Three

competition. The commission will therefore be assuming the role of competition


advocate, acting pro-actively to bring about Government policies that lower barriers
to entry, that promote deregulation and trade liberalization and that promote
competition in the market place.
Perhaps one of the most crucial components of the Competition Act is
contained in a single section under the chapter entitled competition advocacy.

3.5 DIFFERENCES BETWEEN MRTP ACT, 1969 AND COMPETITION ACT


2002
In view of the policy shift from curbing monopolies to promoting competition
there was a need to repeal the Monopolies and Restrictive Trade Practices Act.
Hence, the competition law aims at doing away with the rigidly structured MRTP
Act. The Competition Law is flexible and behaviour oriented. After the Act was
passed and came into the public domain, a question often asked is whether it is
not still the old law in substance although not in form. A clear answer to this
question is in the title of this sub-section the act is a new wine in a new bottle.
The differences between the old law (namely, the MRTP Act, 1969) and the new
law (the Competition Act, 2002) may perhaps be best captured in the form of
Table 3.1 displayed below.
Table 3.1 MRTP Act and Competition Act — Distinguished

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.

6. COMPETITION COMMISSION OF INDIA (CCI)


The Competition Act, 2002 provides for the establishment of the Competition
Commission of India, which like its predecessor — the MRTP Commission is a
quasi-judicial body. The CCI, inter alia has the power to :
1) Issue cease and desist orders
2) Grant interim relief
3) Award compensation
4) Impose fines and
5) Order the division of dominant undertakings
In its first year, the CCI engaged in competition advocacy. In the second
year, it tackled cases related to anti-competitive practices other than Mergers
and Acquisitions, which was dealt from the third year.
The functioning of the CCI has been affected by a writ petition filed in the
Supreme Court, which challenged the appointment of a non-judicial person as its
Chairman, asserting the doctrine of the separation of the powers of the executive
and the Judiciary.
In response, the Government of India has suggested that the Act will be
modified and the CCI will be split into two bodies: one the regulatory body to be
headed by an expert, and an appellate body to be headed by a judge. The
amendment bill is yet to be finalized and approved by the parliament.
India is likely to emerge as the second largest market in the world in the not
so distant future. In this scenario, the CCI will be expected to play a balanced
role, protecting both consumer interests and those of the Indian businesses. The
CCI will also have an important task of collaborating with the various sectoral
regulators and herein competition advocacy will play a vital role.
68 68 Legal Aspect of Business • Module Three

3.6 COMPOSITION OF COMMISSION (CCI)


The Commission shall consist of a Chairperson and not less than two and
not more than six members to be appointed by the Central Government (Sec. 8).
The Chairperson and every other member shall be a person of ability, integrity
and standing and who has special knowledge of, and professional experience of
not less than fifteen years in, international trade, economics, business, commerce,
law, finance, accountancy, management, industry, public affairs, which in the
opinion of the Central Government, may be useful to the commission. The
chairperson and other members shall be whole — time members.

Selection Committee for Chairperson and Members


The Chairperson and other members of the commission shall be appointed
by the Central Government from a panel of names recommended by a selection
committee consisting of —
(a) The chief justice of India or his nominee Chairperson
(b) The Secretary in the Ministry of Company Affairs Member
(c) The Secretary in the Ministry of Law Member
The term of the office of chairperson or other member shall be for five years.
They shall not hold office as such after they have attained the age of sixty five
years. The chairperson shall have the powers of general superintendence, direction
and control in respect of all administrative matters of the Commission.

Appointment of Director General and other Directors


The Central Government may, by notification, appoint a Director General for
the purposes of assisting the commission in conducting inquiry into contravention
of any of the provisions of this Act and for performing such other functions as are,
or may be, provided by or under this Act.
The number of other additional, joint, deputy or assistant directors General
of such officers or other employees in the office of Director General and the manner
of appointment of such additional, joint, deputy or Assistant Director General or
such officers or other employees shall be such as may be prescribed.
Appointment of Secretary, Experts, Professionals and Officers and other
Employees of Commission.
The commission may appoint a secretary and such officers and other
employees as it considers necessary for the efficient performance of its functions
under this Act.
The salaries and allowances payable to and other terms and conditions of
services of the secretary and officers and other employees of the commission and
the number of such officers and other employees shall be such as may be
prescribed.
The commission may engage in accordance with the procedure specified by
regulations such number of experts and professionals of integrity and outstanding
ability, who have special knowledge of, and experience in, economics, law, business
or such other disciplines related to competition, as it deems necessary to assist
the commission in the discharge of its function under this Act.
Module Three • The Competition Act, 2002 69

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.

Procedure for Inquiry of Offences Under the Act


(1) On receipt of a reference from the Central Government or a State
Government or a statutory authority or on its own knowledge or
information received under section 19, if the commission is of the opinion
that there exists a prima-facie case, it shall direct the Director General
to cause an investigation to be made into the matter.
(2) Where on receipt of a reference from the Central Government or a State
government or a statutory authority or information received under section
19, the Commission is of the opinion that there exists no prima facie
case, it shall close the matter forthwith and pass such orders as it deems
fit and send a copy of its order to the Central Government or the State
government or the statutory authority or the parties concerned, as the
case may be.
(3) The Director General shall, on receipt of direction under sub-section (1)
submit a report on his findings within such period as may be specified
by the commission.
(4) The commission may forward a copy of the report referred to in sub-
section (3) to the parties concerned.
Provided that in case the investigation is caused to be made based on
reference received from the Central Government or the State Government
or the statutory authority, the commission shall forward a copy of the
report referred to in sub-section (3) to the Central Government or the
State Government or the statutory authority, as the case may be.
(5) If the report of the Director General referred to in sub-section (3)
recommends that there is no contravention of the provisions of this Act,
the commission shall invite objections or suggestions from the Central
Government or the State Government or the Statutory authority or the
parties concerned, as the case may be, on such report of the Director
General.
(6) If, after consideration of the objections and suggestions referred to in
sub-section (5), if any the commission agrees with the recommendation
of the Director Genera, it shall close the matter both with and pass such
orders as it deems fit and communicate its order to the Central
70 70 Legal Aspect of Business • Module Three

Government or the State Government or the Statutory authority or the


parties concerned, as the case may be.
(7) If, after consideration of the objections or suggestions referred to in sub
section (5), if any, the commission is of the opinion that further
investigations are called for, it may direct further investigations in the
matter by the Director General or cause further inquiries to be made by
in the matter or itself proceed with further inquiry in the matter in
accordance with the provisions of this Act.
(8) If the report of the Director General referred to in sub-section (3)
recommends that there is contravention of any of the provisions of this
act, and the commission is of the opinion that further inquiry is called
for it shall inquire into such contravention in accordance with the
provisions of this Act.

Power of Commission to Regulate its Own Procedures


1) In the discharge of its functions, the commission shall be guided by the
principles of natural justice and subject to the other provisions of this Act and of
any rules made by the Central Government, the commission shall have the powers
to regulate its on procedure.
2) The commission shall have, for the purposes of discharging its functions
under the Act, the same powers as are vested in a Civil Court under the code of
Civil Procedure, 1908, while trying a suit, in respect of the following matters,
namely:
• summoning and enforcing the attendance of any person and examining
him on oath;
• requiring the discovery and production of documents;
• receiving evidence on affidavits;
• issuing commissions for the examination of witnesses or documents;
• subject to the provisions of sections 123 and 124 of the Indian Evidence
Act, 1872 (1 of 1872), any public record or document or copy of such of
record or document from any office.
(3) The commission may call upon such experts, from the field of economics,
commerce, accountancy, international trade or from any other discipline as it
deems necessary, to assist the commission in the conduct of any inquiry by it.
(4) The Commission may direct any person—
(a) to produce before the Director General or the Registrar or an officer
authorised by it, such books, accounts or other documents in the custody
or under the control of such person so directed as may be specified or
described in the direction, being documents relating to any trade, the
examination of which may be required for the purposes of this Act;
(b) to furnish to the Director General or the Registrar or any officer authorised
by it, as respect the trade or such other information as may be in his
possession in relation to the trade carried on by such person, as may be
required for the purposes of this Act.
Module Three • The Competition Act, 2002 71

3.7 COMPETITION APPELLATE TRIBUNAL (CAT)


The Central Government through notification is proposed to establish an
Appellate Tribunal to be known as Competition Appellate Tribunal. This is to
hear and dispose of appeals against any direction issued or decision made or
passed by the CCI. Further to adjudicate on claim for compensation that may
arise from the findings of the CCI and pass orders for the recovery of compensation.

Composition of Appellate Tribunal


The Appellate Tribunal shall consist of a Chairperson and not more than two
other members to be appointed by the Central Government.
Qualifications for appointment of Chairperson and member of Appellate
Tribunal:
The Chairperson of the Appellate Tribunal shall be a person, who is, or has
between, a judge of the Supreme Court or the Chief Justice of a High Court.
A member of the Appellate Tribunal shall be a person of ability, integrity and
standing having special knowledge of, and professional experienced of not less
than twenty-five years in, competition, international trade, economics, business,
commerce, law, finance, accountancy, management, industry, public affairs,
administration or in any other matters which in the opinion of the Central
Government, may be useful to the Appellate Tribunal.

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.

Term of Office of Chairperson and Members of Appellate Tribunal


The chairperson or a member of the Appellate Tribunal shall hold office as
such for a term of five years from the date on which he enters upon his office,
and shall be eligible for re-appointment.
Provided, that no chairperson or other member of the Appellate Tribunal
shall hold office as such after he has attained —
(a) in the case of the Chairperson, the age of sixty-eight years
(b) in the case of any other member of the Appellate Tribunal, the age of
sixty-five years.

3.8 OFFENCES AND PENALTIES UNDER THE COMPETITION ACT, 2002


Any person or company or body-corporate or firms which deals in anti-
competition agreements, abuse by way of dominance, or resort to corporate crimes
through mergers, amalgamations, acquisitions and hostile takeovers which are
detrimental to the general public causing downfall of competition, the central
government or a state government or a local authority or the associations may
72 72 Legal Aspect of Business • Module Three

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.

3.9 APPEAL TO APPELLATE TRIBUNAL [SECTION 53(B)]


(1) The central government or the state government or a local authority or
enterprise or any person, aggrieved by any direction, decision or order
referred to in clause (a) of Section 53A may prefer an appeal to the
Appellate Tribunal.
Module Three • The Competition Act, 2002 73

(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.

3.10 AWARDING COMPENSATION (SECTION 53(N)


(1) Without prejudice to any other provisions continued in this Act, the
Central Government or a State Government or a local authority or any enterprise
any person may make an application to the Appellate Tribunal to adjudicate on
claim for compensation that may arise from the findings of the commission and to
pass an order for the recovery of compensation from any enterprise for any loss
or damage shown to have been suffered, by such person as a result of any
contravention of the provisions under the Act, having been committed by
enterprise.
(2) Every application made under sub-section (1) shall be accompanied by
the findings of the commission, if any, and also be accompanied with such fees as
may be prescribed.
(3) The Appellate Tribunal may, after an inquiry made into the allegations
mentioned in the application made under sub-section (i) pass an order directing
the enterprise to make payment to the applicant, of the amount determined by it
as realizable from the enterprise as compensation for the loss or damage caused
to the applicant as a result of any contravention of the provisions under the Act
having been committed by such enterprise.
Provided that in a case no decision or order has been made or direction
issued on the contravention alleged on the application by the commission, the
Appellate Tribunal may obtain the recommendations of the commission before
passing an order of compensation.

Contravention of Orders of Appellate Tribunal (Section 53 Q)


Without prejudice to the provisions of this Act, if any person contravenes,
without any reasonable ground, any order of the Appellate Tribunal, he shall be
74 74 Legal Aspect of Business • Module Three

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.

3.11 HISTORY OF COMPETITION LAW & POLICY ACROSS THE WORLD


— About 90 countries have competition laws.
— Canada and United states enacted competition legislation towards the
end of the 10th century (in 1889 and 1890 respectively).

COMPETITION LAW of USA


Federal Government of USA enacted Sherman Anti-Trust Act, 1890, Clayton
Act, 1914, and Fair Trade Commission Act, 1914. Subsequently, Robinson-
Patman Act, 1946 and the Celler-Kefauver Act, 1950 were enacted.

Focus Areas for Competition Laws


Three areas of enforcement provide the focus for most competition laws around
the world—
• Agreements among enterprises
• Abuse of Dominance
• Mergers, or more generally, combinations among enterprises.
• Body of competition law of USA constitutes those statutes judicial
interpretations and the priorities and interpretations of enforcement
agencies—
— Articles 81 and 82 of 1957 Treaty of Rome Serves as Principal
competition law of EC (Former constitutes "Agreements between
firms" and latter "abuse of dominance")
— Most recent enactment is the UK Law— Competition Act, 1998 came
into force w.e.f. 1st March, 2000.
• More closely in line with EC Law.
• Major difference being mergers which are compulsorily required to be
notified under EC law, are not so in UK law.

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.

Competition Policy and WTO Regime


• A Central function of WTO is to ensure e quality of competitive
opportunities for members of WTO in the World Trading System.
Module Three • The Competition Act, 2002 75

• Agreements of Uruguay Round Final Act notified at Marrakesh relate to


competition policy issues in one way or another, although not explicitly.
• Number of WTO agreements allow member to take or maintain measures
that affect competition within and outside their domestic markets.

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

Section — A Objective Type


1. State any two objectives of Competition Act, 2002.
2. Mention any two salient features of Competition Act, 2002.
3. Which Act is the predecessor of Competition Act, 2002 ?
4. What is Article 38 of India Constitution ?
5. State the intent of Article 39 of Indian Constitution.
6. Name the components of Competition Act, 2002.
7. What are anti-competition agreements ?
8. State any two horizontal restraints under anti-competition agreements.
9. State any two vertical restraints under anti-competition agreement.
76 76 Legal Aspect of Business • Module Three

10. What do you mean by abuse of dominance ?


11. State when abuse of dominance arises.
12. State any two pejorative effects of amalgamation.
13. What is competition advocacy ?
14. Expand CCI and CAT.
15. State any two difference between MRTP Act, 1969 and Competition Act 2002.
16. State any two powers of CCI.
17. What should be the qualification to become the Chairperson of CCI ?
18. What should be the qualification to become the Chairperson of CAT ?
19. State the important officials under the Competition Act, 2002.
20. Mention the composition of CCI.
21. Mention the composition of CAT.
22. State the focus area of competition laws.

Section — B Analytical Type


1. Mention the objectives and salient features of the Competition Act, 2002 ?
2. Briefly explain (j) Anti-competition agreements and (ii) abuse of dominance ?
3. Analyze the mergers and the amalgamations, regulation under Competition Act, 2002?
4. Briefly explain competition advocacy as per the Competition Act, 2002 ?
5. Bring out any five differences between the MRTP Act, 1969 and the Competition Act,
2002 ?
6. State the powers of CCI.
7. Write about the meetings of the CCI.
8. Explain the procedure for enquiry of offences under the Compensation Act, 2002.
Explain the power of CCI to regulate its own procedure.

Section — C Essay Type


1. Explain in great detail the various components of the Competition Act, 2002.
2. Bring out in great detail the differences between the MRTP Act, 1969 and the
Competition Act, 2002.
3. Give an account of (i) CCI and (ii) CAT.
4. Discuss the offences and penalties under the Competition Act , 2002.
5. Give an account of competition law and policy across the world.
6. "Is competition laws a boon or bane in the Indian Context ? " Comment.


4
MODULE

THE RIGHT TO INFORMATION


ACT, 2005

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

THE RIGHT TO INFORMATION ACT, 2005


(With Latest Amendments)

4.1 Right To Information Act — Background


Right To Informa- Right To Information Act, 2005 (RTI) empowers a citizen to access the
tion Act, 2005 (RTI)
information for disclosure from the public authority and bring transparency.
empowers a citizen
to access the infor- Awareness of the people about the Act has increased after the slow start. The
mation for dis clo- national campaign for people's right to information was initiated by social activists,
sure from the pub- journalists, lawyers, professionals, retired civil servants and academics, in 1996
lic a uthority and
bring transparency. with the objectives of a national law facilitating the exercise of the fundamental
Right To Information. The "Right to Information Act, 2005" was came into force
from 12th October 2005.
Right to Information Right to Information Act, 2005 is an Act to provide for setting out the practical
Act, 2005 is an Act
regime of right to information for citizens to secure access to information under
to provide for set-
ting out the practi- the control of public authorities, in order to promote transparency and
cal regime of right accountability in the working of every public Authority. As per the Act, Information
to information for means, material in the form of documents, memos, e-mails, press release, circulars,
citiz ens to s ecure
access to informa- orders, contracts, reports, data materials.
tion under the con-
trol of publi c au- The Act covers central, state and local governments, and all bodies owned,
thorities, in order to controlled or substantially financed by the Government or any non-government
promote transpar- organization substantially financed, directly or indirectly by the appropriate
ency and account-
ability in the work- Government. The information, which affect the sovereignty and integrity of India
ing of every public are not to be disclosed. Information, which relates to personal information the
Authority. disclosure of which has no relationship to any public activity or interest, or which,
would cause unwarranted invasion of the privacy of the individual is also not
supposed to be disclosed.
The objective of the Act is to hold government and their instrumentalities
accountable to the governed and to contain corruption. With potential application
in meeting government's obligations to provide information on request and
proactively, e-governance is a viable option for public authorities to address the
information needs of RTI Act.
The objective of the
Act is to hold gov- Similar to RTI Act, 2005 of our country, it also exists in other countries. In
ernment and their
instrumentalities other countries the implementation of such Act has taken more than one year
accountable to the (Table 4.2). However, In India the RTI Act, 2005 is implemented in just four months
gov e rned an d to (Table 4.2). This fast implementation encourages to know the problems (if any)
contain corruption.
faced by the organization due to the implementation of RTI Act.
Module Four • The Right to Information Act, 2005 79

Table 4.2 Global Implementation of RTI Act

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.

Information is the ultimate ammunition in democracies, where citizens


empowered with it, they will take governance back from oppressors. Social workers
in education, health care, legal aid and other basic rights and services are admired
by civil society and gleefully encouraged by the government. They deliver today
what governments must. In a perfect society, where transparency reigns and
corruption ceases, social workers would be redundant.

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.

The right to information is implicitly guaranteed by the Constitution. However,


with a view to set out a practical regime for securing information, the Indian
Parliament enacted the Right to Information Act, 2005 and thus gave a powerful
tool to the citizens to get information from the Government as a matter of right.
This law is very comprehensive and covers almost all matters of governance and
has the widest possible reach, being applicable to Government at all levels —
Union, State and Local as well as recipients of government grants.

4.2 OBJECTIVES OF THE RTI ACT


Evidently, the major objectives of the Act are:
1. Greater Transparency in functioning of public authorities.

2. Improvement in accountability and performance of the Government.

3. Promotion of partnership between citizens and the Government in


decision making process; and

4. Reduction in corruption in the Government departments.

All these parameters are critical elements of good governance. An attempt is


therefore made below to examine the extent to which the RTI has been successful
in influencing the above factors in desirable direction.
Thus, basic object of the Right to Information Act is to empower the citizens,
promote transparency and accountability in the working of the Government,
contain corruption, and make our democracy work for the people in real sense. It
goes without saying that an informed citizen is better equipped to keep necessary
vigil on the instruments of governance and make the government more accountable
to the governed. The Act is a big step towards making the citizens informed about
the activities of the Government.

4.3 SCOPE OF THE RTI ACT


The Act covers the whole of India except Jammu and Kashmir. It is applicable
to all constitutional authorities, including the executive, legislature and judiciary;
any institution or body established or constituted by an act of Parliament or a
state legislature. It is also defined in the Act that bodies or authorities established
Module Four • The Right to Information Act, 2005 81

or constituted by order or notification of appropriate government including bodies


"owned, controlled or substantially financed" by government, or non-Government
organizations "substantially financed, directly or indirectly by funds" provided by
the government are also covered in it.

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.

4.4 NEED FOR RIGHT TO INFORMATION


1. Translating Right into Reality: The Right to Information has already
received judicial recognition as a part of the fundamental right to free speech and
expression. An Act is needed to provide a statutory framework for this right. This
law will lay down the procedure for translating this right into reality.
2. People Kept Informed about Current Affairs and Broad Issues:
Information is indispensable for the functioning of a true democracy. People have
to be kept informed about current affairs and broad issues - political, social and
economic. Free exchange of ideas and free debate are essentially desirable for the
Government of a free country.

3. Information and Economic Development: In this Age of Information, its


value as a critical factor in socio-cultural, economic and political development is
being increasingly felt. In a fast developing country like India, availability of
information needs to be assured in the fastest and simplest form possible. This is
important because every developmental process depends on the availability of
information.

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."

4.5 SALIENT FEATURES OF RIGHT TO INFORMATION ACT, 2005


Right to information (RTI) is inherent in democratic functioning and a
precondition to good governance and realization of all other human rights,
including education and health care that have intense and pervasive impact on
all the human activities.
Specifically, the main objectives of the law on RTI are:

• To operationalise the fundamental right to information;


• To set up systems and mechanisms that facilitate people's easy access
to information;

• To promote transparency and accountability in governance;


• To minimize corruption and inefficiency in public offices and to ensure
people's participation in governance and decision making.
RTI is based on the key concepts:

• 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 duty of the Government to proactively provide certain key


information even in absence of a request.

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

3. Procedure for Securing Information: The procedure of securing


information as provided in section 6 of the Act, prescribes a procedure, which is
very simple. A citizen has to merely make a request to the concerned Public
Information Officer (PIO) specifying the information sought by him. The fee payable
is reasonable and information is to be provided free of cost to citizens living below
the poverty line.
4. Speedy Delivery of Information: To assure that the information sought
is provided quickly, section 7 of the Act, makes it mandatory for the PIO to provide
the information within 30 days. If the information requested concerns the life or
liberty of a person, it has been made mandatory to provide it within 48 hours of
the receipt of the request. The Act provides for penalties in case of failure to
provide information in time, or for refusing to accept application for information,
or for giving incorrect, incomplete or misleading information, or destroying
information and so on. In addition, the Information Commission has also been
empowered to recommend disciplinary action against the government servants.

5. Two-Tier Mechanisms for Appeal: The Act establishes a two-tier


mechanism for appeal. The first appeal lies to an officer within the organization
who is senior in rank to PIO. The second appeal lies in the Information Commission.
The jurisdiction of the lower court is barred under section 20 of the Act. The
categories of information exempted from disclosure in this Act are kept to a bare
minimum. Even the exemptions are not absolute if disclosure of the information
outweighs the harm to the public authorities.

6. No Exemption for Human Right Violations and Corruption: Even in the


case of security and intelligence agencies and organizations, which are exempted
from the provisions of this Act, if there were cases of allegation of corruption and
human rights violation, such exemption would not be available. In cases of
allegations of violation of human rights, information would be made available
after the approval of the Information Commission. This Act, thus, paves the way
for an empowered citizen, as well as an alert, efficient, responsive, transparent
and accountable government.

7. State Information Commission Powers of Court: The Central/State


Information Commission has a major role in enforcing the implementation of the
provisions of the Act as well as for educating the parties, mainly information
seekers and providers. The Commission is vested with the power of a Court. Under
Section 20, the Commission may impose penalty on the concerned officials for
denial of information and recommend disciplinary action against the errant
officials, who do not comply with the requirements of the Act. Moreover, under
Section 25(5) of the Act, the Commission may also advise the appropriate
Government in the matters of maintenance and preservation of records and the
84 84 Legal Aspect of Business • Module Four

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.

The Act specifies that citizens have a right to:

• Request any information (as defined).

• Take copies of documents.


• Inspect documents, works and records.

• Take certified samples of materials of work.


• Obtain information in the form of printouts, diskettes, floppies, tapes,
video cassettes 'or in any other electronic mode' or through printouts.

4.6 IMPORTANT TERMS IN THE RTI ACT


Information means C entral Informa tion Commission me ans the C e ntra l Information
any material in any
form including
Commission constituted under sub-section (1) of section 12 — [Section 2(b)]
• Records
Central Public Information Officer means the Central Public Information
• Documents
Officer designated under sub-section (1) and includes a Central Assistant Public
• Memos
• E-mails
Information Officer designated as such under sub-section (2) of section 5 [Sec.
• Opinions 2(c)]
• Advices
Chief Information Commissioner and Information Commissioner mean the
• Press Releases
• Circulars Chief Information Commissioner and Information Commissioner appointed under
• Orders subsection (Section 2(d)
• Log Books
Information means any material in any form, including records, documents,
• Contracts
• Reports memos, e-mails, opinions, advices, press releases, circulars, orders, logbooks,
• Samples contracts, reports, papers, samples, models, data material held in any electronic
• Models form and information relating to any private body which can be accessed by a
• Data material in public authority under any other law for the time being in force [Section 2(f)]
any ele c tronic
Form, etc.
Public Authority means any authority or body or institution of self-
government established or constituted—

• by or under the Constitution;

• by any other law made by Parliament;


• by any other law made by State Legislature;

• by notification issued or order made by the appropriate

Government, and includes any—


• body owned, controlled or substantially financed;

• non-Government organization substantially financed;


Module Four • The Right to Information Act, 2005 85

• directly or indirectly by funds provided by the appropriate Government;


Section 2(h)
Record includes—
• any document, manuscript and file;

• any microfilm, microfiche and facsimile copy of a document;


• any reproduction of image or images embodied in such microfilm (whether
enlarged or not); and

• any other material produced by a computer or any other device; [section


2(i)]
Right To Information means the right to information accessible under this
Act which is held by or under the control of any public authority and includes the
right to—

• inspection of work, documents, records;


• taking notes, extracts or certified copies of documents or records;

• taking certified samples of material;

• obtaining information in the form of diskettes, floppies, tapes, video


cassettes or in any other electronic mode or through printouts where
such information is stored in a computer or in any other device; [Section
2(j)]

State Information Commission means the State Information Commission


constituted under sub-section (1) of section 15; [Section 2(k)]

Sta te C hi e f Inf orma t ion C o mmissi one r a nd St a te In forma t ion


Commissioner mean the State Chief Information Commissioner and the State
Information Commissioner appointed under sub-section (3) of section 15; [Section
2(l)]

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)]

4.7 SUO MOTU (ON HIS OWN) DISCLOSURE


Every public authority should provide as much information suo motu to the
public through various means of communications so that the public have minimum
need to use the Act to obtain information. Internet being one of the most effective
means of communications, the information may be posted on the website.
86 86 Legal Aspect of Business • Module Four

Public Authorities to Disclose 16 Categories of Information


Section 4(1)(b) of the Act, in particular, requires every public authority to
publish following sixteen categories of information:
1. the particulars of its organisation, functions and duties;
2. the powers and duties of its officers and employees;
3. the procedure followed in the decision making process, including
channels of supervision and accountability;
4. the norms set by it for the discharge of its functions;
5. the rules, regulations, instructions, manuals and records, held by it or
under its control or used by its employees for discharging its functions;
6. a statement of the categories of documents that are held by it or under
its control;
7. the particulars of any arrangement that exists for consultation with, or
representation by, the members of the public in relation to the
formulation of its policy or implementation thereof;
8. a statement of the boards, councils, committees and other bodies
consisting of two or more persons constituted as its part or for the
purpose of its advice, and as to whether meetings of those boards,
councils, committees and other bodies are open to the public, or the
minutes of such meetings are accessible for public;
9. directory of its officers and employees;
10. the monthly remuneration received by each of its officers and employees,
including the system of compensation as provided in its regulations;
11. the budget allocated to each of its agency, indicating the particulars of
all plans, proposed expenditures and reports on disbursements made;
12. the manner of execution of subsidy programmes, including the amounts
allocated and the details of beneficiaries of such programmes;
13. particulars of recipients of concessions, permits or authorisations
granted by it;
14. details in respect of the information, available to or held by it, reduced
in an electronic form;
15. the particulars of facilities available to citizens for obtaining information,
including the working hours of a library or reading room, if maintained
for public use;
16. the names, designations and other particulars of the Public Information
Officers.
Besides the categories of information enumerated above, the Government
may prescribe other categories of information to be published by any public
authority. It needs to be stressed that publication of the information as referred
to above is not optional. It is a statutory requirement which every public authority
is bound to meet.
Module Four • The Right to Information Act, 2005 87

Another important point to note is that it is not sufficient to publish the


above information once. The public authority is obliged to update such information
every year. It is advisable that, as far as possible, the information should be
updated as and when any development takes place. Particularly, in case of
publication.
Information Exempted From Disclosure
The following is exempt from disclosure [S.8)]:
1. information, disclosure of which would prejudicially affect the
sovereignty and integrity of India, the security, strategic, scientific or
economic" interests of the State, relation with foreign State or lead to
incitement of an offence;
2. information which has been expressly forbidden to be published by any
court of law or tribunal or the disclosure of which may constitute
contempt of court;
3. information, the disclosure of which would cause a breach of privilege
of Parliament or the State Legislature;
4. informa tion including comme rcia l confidence , trade secrets or
intellectual property, the disclosure of which would harm the competitive
position of a third party, unless the competent authority is satisfied
that larger public interest warrants the disclosure of such information;
5. information available to a person in his fiduciary relationship, unless
the competent authority is satisfied that the larger public interest
warrants the disclosure of such information;
6. information received in confidence from foreign Government;
7. information, the disclosure of which would endanger the life or physical
safety of any person or identify the source of information or assistance
given in confidence for law enforcement or security purposes;
8. information which would impede the process of investigation or
apprehension or prosecution of offenders;
9. cabinet papers including records of deliberations of the Council of
Ministers, Secretaries and other officers;
10. information which relates to personal information the disclosure of which
has no relationship to any public activity or interest, or which would
cause unwarranted invasion of the privacy of the individual (but it is
also provided that the information which cannot be denied to the
Parliament or a State Legislature shall not be denied by this exemption);
11. Notwithstanding any of the exemptions listed above, a public authority
may allow access to information, if public interest in disclosure
outweighs the harm to the protected interests. (Note: This provision is
qualified by the proviso to sub-section 11(1) of the Act which exempts
disclosure of "trade or commercial secrets protected by law" under this
clause when read along with 8(1)(d)))
88 88 Legal Aspect of Business • Module Four

4.8 POWERS AND FUNCTIONS OF CENTRAL INFORMATION COMMISSION


(CIC) AND STATE INFORMATION COMMISSION (SIC)
(1) The Central Information Commission/State Information Commission has
a duty to receive complaints from any person —
(a) who has been refused information that was requested;
(b) who has received no response to his/her information request within the
specified time limits ;
(c) who thinks the fees charged are unreasonable ;
(d) who thinks information given is incomplete or false or misleading;
(e) any other matter relating to obtaining information under this law.
(2) Power to order inquiry if there are reasonable grounds.
(3) CIC/SIC will have powers of Civil Court such as —
(a) summoning and enforcing attendance of persons, compelling them to
give oral or written evidence on oath and to produce documents or things
(b) requiring the discovery and inspection of documents;
(c) receiving evidence on affidavit ;
(d) requisitioning public records or copies from any court or office;
(e) issuing summons for examination of witnesses or documents;
(f) any other matter which may be prescribed.
(4) All records covered by this law (including those covered by exemptions)
must be given to CIC/SIC during inquiry for examination.
(5) Power to secure compliance of its decisions from the Public Authority
includes—
(a) providing access to information in a particular form;
(b) directing the public authority to appoint a PIO/APIO where none exists;
(c) publishing information or categories of information;
(d) making necessary changes to the practices relating to management,
maintenance and destruction of records ;
(e) enhancing training provision for officials on RTI;
(f) seeking an annual report from the public authority on compliance with
this law;
(g) require it to compensate for any loss or other detriment suffered by the
applicant ;
(h) impose penalties under this law; or
(i) reject the application. (S.18 and S.19)
Module Four • The Right to Information Act, 2005 89

4.9 PUBLIC INFORMATION OFFICERS (PIOs)


Public Information Officers (PIOs) are officers designated by the public Public Information
Officers (PIOs) are
authorities in all administrative units or offices under it to provide information to officers designated
the citizens requesting for information under the Act. Any officer, whose assistance by the public au-
has been sought by the Public Information Officer for the proper discharge of his thorities in all ad-
ministrative units or
or her duties, shall render all assistance and for the purpose of contraventions of
offices under it to
the provisions of this Act, such other officer shall be treated as a Public Information provide information
Officers. to the citizens re-
questing for infor-
mati on under the
Duties of a Public Information Officer Act.
Public information officer shall deal with requests from persons seeking
information and where the request cannot be made in writing, to render reasonable
assistance to the person to reduce the same in writing.
1. If the information requested for is held by or its subject matter is closely
connected with the function of another public authority, the PIO shall
transfer, within 5 days, the request to that other public authority and
inform the applicant immediately.
2. PIO may seek the assistance of any other officer for the proper discharge
of his/her duties.
3. PIO, on receipt of a request, shall as expeditiously as possible, and in
any case within 30 days of the receipt of the request, either provide the
information on payment of such fee as may be prescribed or reject the
request for any of the reasons specified in S.8 or S.9.
4. Where the information requested for concerns the life or liberty of a
person, the same shall be provided within forty-eight hours of the receipt
of the request.
5. If the PIO fails to give decision on the request within the period specified,
he shall be deemed to have refused the request.
6. Where a request has been rejected, the PIO shall communicate to the
requester —
(i) the reasons for such rejection,
(ii) the period within which an appeal against such rejection may be
preferred, and
(iii) the particulars of the Appellate Authority.
7. PIO shall provide information in the form in which it is sought unless it
would disproportionately divert the resources of the Public Authority or
would be detrimental to the safety or preservation of the record in
question.
8. If allowing partial access, the PIO shall give a notice to the applicant,
informing
(a) that only part of the record requested, after severance of the record
containing information which is exempt from disclosure, is being
provided;
90 90 Legal Aspect of Business • Module Four

(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.

4.10 ASSISTANT PUBLIC INFORMATION OFFICERS (APIOs)


These are the officers at sub-divisional level to whom a person can give his
RTI application or appeal. These officers send the application or appeal to the
Public Information Officer of the public authority or the concerned appellate
authority. An Assistant Public Information Officer is not responsible to supply
the information.
The Assistant Public Information Officers appointed by the Department of
Posts in various post offices are working as Assistant Public Information Officers
for all the public authorities under the Government of India.

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

• inspection of work, documents, records;


• taking notes, extracts or certified copies of the documents or records;
• taking certified sample of material; and
• obtaining information in electronic form, if available.
Thus, all the public authorities have duly placed the information in public
domain and that a citizen has the right to observe as to what is going on inside
the organization. In the cases where the information sought for are not provided
within the stipulated period of 30 days or the information furnished are incomplete,
misleading or incorrect, a requester is free to file a complaint or appeal before the
Information Commission (IC), for necessary directions to the parties as per the
provisions of the Act.
The Commission has the mandate, inter-alia, to impose penalty and/or to
recommend disciplinary action against the information providers, if held
responsible for obstructing the free flow of information. Accordingly, information
seekers and the NGOs have put pressure on the public authorities for promoting
the culture of openness in functioning of the Government.
A large number of PIOs have already been fined for violation of the provisions RTI applic at ions
hav e annually in-
of the Act, which has, in effect, created conditions for providing information to a creased by 8 to 10
requester. Due to perceived benefits of transparency and accountability, RTI times. There is thus
applications have annually increased by 8 to 10 times. There is thus massive use massive use of the
of the right to know. Of the millions of applications for information, less than 5 right to know. Of the
millions of applica-
percent have been denied information under various exemption categories. In tions for informa-
effect, thus, there is greater transparency than before in the working of the public tion, les s th an 5
bodies. percent have been
denied information
Checking Corrupt Practices in Government under various ex-
emption categories.
In a large number of cases, the Commission has ordered for providing the
details of the decision-making processes, which include file notings, cabinet
papers, records of recruitment, selection and promotion of staff, documents
pertaining to tender processes and procurement procedure, the lists of
beneficiaries of the Government's subsidized schemes, such as, food grains
supplied through ration shops, water and electricity, domestic gas, educational
and health facilities, shelter for poor, muster rolls under employment guarantee
schemes, etc. The disclosure of vital information, such as above, has thus
resulted in checking corrupt practices in delivery of services and ensuring the
reach of entitlements to the poor. The disclosure of information relating to use
of funds allocated to rural employment guarantee scheme, MLA/MP local area The RTI provides
funds, etc. have contributed to advocacy in favour or against the policies and/ peop le with the
or political leaderships. mechanism to ac-
c es s information,
which they can use
to hold the govern-
4.12 GREATER ACCOUNTABILITY ment to account or
to seek explanation
1. Accessing Information: The RTI provides people with the mechanism to as to why decisions
access information, which they can use to hold the government to account or to have been taken, by
seek explanation as to why decisions have been taken, by whom and with what whom an d with
wha t c on s e-
consequences or outcomes. In addition, every public authority is required 'to quen c es or out-
provide reasons for its administrative or quasi-judicial decisions to the affected comes.
persons' u/s 4(1)(d) of the Act.
92 92 Legal Aspect of Business • Module Four

2. Darkness in Policy Planning is Over: Until the implementation of the


RTI Act, it was not possible for an ordinary persons to seek the details of a decision
making process, which was found most often, as ineffective in terms of its outcome.
It was, therefore, not possible to hold a free and frank discussion on issues of
common concern of people or to fix the responsibility for any action. Such an era
of darkness in policy planning is over.
3. Better Understanding of How the Government Works: The information
regime has, in effect, created conducive conditions for every one to have a better
understanding of how the government works or how a particular decision was
reached. Such a chance given to people empowers them to make appropriate
choice of leadership and the policies that affect them. This has begun to happen
with salutary effects on delivery of socio-economic services, particularly for the
poor. For instance, being full aware that the records pertaining to the decision
making process, including file notings, are required to be put in public domain,
the concerned officials at all levels objectively record the reasons for the
observations made by them. Attempts are also made to effectively implement the
programmes as the relevant details are proactively disclosed.
4. Quality Decision-making and Delivery of Services: In effect, thus, the
quality of decision making and delivery of services have duly improved. Also, due
to effective implementation of the flagship programmes for alleviation of wide-
spread poverty, the mis-match between the planned targets and actual realization
has been minimized. Specific mention may be made about the following schemes,
which have been provided necessary financial resources as well as administrative
support by the Centre and the States for effective implementation of the
programmes.
• National Rural Employment Guarantee Scheme (Assured jobs)
• Sarva Shiksha Abhiyan (Education for all)
• Mid-day Meal Scheme
• Drinking Water Mission
• Integrated Child Development Services
• National Rural Health Mission
• Bharat Nirman (Rural Infrastructure, mainly road, electricity, drinking
water, sanitation etc.)
• Indira Awas Yojana (Shelter for poor)
All these programmes and several other similar schemes covered under the
MP/MLA Local Area Development Fund aim at providing the basic human needs
for maintaining a decent standard of living. These schemes, moreover, enable
them to build their strengths and abilities to realize their socio-economic objectives.
Even before the enactment of the right to information, similar programmes
were implemented but the achievements were always below the general
expectations. Reason? Lack of legal right to know and to scrutinize the public
action and to question the authority. With empowered citizens and free flow of
information, there is significant quantitative and qualitative improvement in the
delivery of services and realization of benefits of the programmes designed and
implemented for the poor.
Module Four • The Right to Information Act, 2005 93

Interesting Revealations and Transformation


For instance, disclosure of information relating to:
• attendance of staff in schools has helped in checking teachers'
absenteeism and students' drop out;
• attendance of doctors and nurses at primary health centres has led to
improvement in health care facilities in rural areas;
• the details of supplies and distribution of food grains through ration
shops has assured the reach of entitlements to the beneficiaries;
• the supply and demand for petroleum products, such as, domestic gas
has reduced black marketing;
• muster rolls and beneficiary of employment guarantee schemes has
exposed corruption and ensured effective delivery of services to the
poor; and
• allotment of retail outlets (petrol pumps) and agencies for distribution
of LPG gas has ensured fair play and objective decisions, as reflected
from substantial reduction in litigation cases in the matter.
As a result of increased Government's accountability in delivery of services,
rural to urban migration has, of late, decelerated, as widely reported in the media.
This is also corroborated by the findings of a national level survey, jointly
conducted by the Transparency International and the Centre for Media Studies.
The survey has revealed that in the opinions of 40 per cent of respondent
(all below the poverty line), corruption and malpractices in implementation of
poverty alleviation programmes have declined due to RTI induced accountability
of the Government and its functionaries at various levels. RTI route has generally
been followed by a large number of people for resolving disputes between the
parties on the issues pertaining to the decisions on administrative and commercial
matters.
Disclosure of information regarding the process of decision making or the Disclosure of infor-
mati on regar ding
grounds for action taken has helped resolve disputes on such issues as claim of
the process of deci-
refund of taxes paid by the individuals/companies, settlement of insurance claims, sion making or the
payment of dues of contractors, process of sanction and recovery of loans, etc. grounds for action
Since a reply is to be given within thirty days, disputes have been resolved faster. taken has helped
resolve disputes on
A large number of grievances pertaining to service matters, mainly promotion s uc h is s ues as
and pension benefits have also been redressed due to openness and promptness claim of refund of
in taking action on requests made under the RTI. taxes paid by the
individuals/compa-
As a result, filing of appeals in the Courts has substantially declined, as nies, settlement of
ins urance claims ,
reported, for instance, by the Oil Companies, which grant dealerships for payment of dues of
distribution of petroleum products. The Courts have also advised the petitioners c ontr ac tors , pro-
to obtain information under the RTI before filing the cases before the Courts. It c es s of s anc tion
and rec ov er y of
thus shows a strong and positive impact of RTI on transparency and accountability loans, etc.
of the Government.
94 94 Legal Aspect of Business • Module Four

4.13 PUBLIC AUTHORITY


A "public authority" is any authority or body or institution of self-government
established or constituted by or under the Constitution; or by any other law made
by the Parliament or a State Legislature; or by notification issued or order made
by the Central Government or a State Government. The bodies owned, controlled
or substantially financed by the Central Government or a State Government and
non-Government organisations substantially financed by the Central Government
or a State Government also fall within the definition of public authority. The
financing of the body or the NGO by the Government may be direct or indirect.
Public authorities are the repository of information which the citizens have a
right to have under the Right to Information Act, 2005. The Act casts important
obligations on public authorities so as to facilitate the citizens of the country to
access the information held under their control. The obligations of a public
authority are basically the obligations of the head of the authority, who should
ensure that these are met in right earnest. Reference made to public authority in
this document is, in fact, a reference to the head of the public authority.

Obligations of Public Authority

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

(xiii) particulars of recipients of concessions, permits or authorizations


granted by it;
(xiv) details of the information available to, or held by it, reduced in an
electronic form;
(xv) the particulars of facilities available to citizens for obtaining information,
including the working hours of a library or reading room, if maintained
for public use;
(xvi) the names, designations and other particulars of the Public Information
Officers.[S.4(1)(b)]

4.14 CITIZENS SEEKING INFORMATION FROM PUBLIC AUTHORITY


A citizen has a right to seek such information from a public authority which A citizen has a right
to seek such infor-
is held by the public authority or which is held under its control. This right includes mation from a pub-
inspection of work, documents and records; taking notes, extracts or certified lic authority which
copies of documents or records; and taking certified samples of material held by is held by the pub-
lic authorit y or
the public authority or held under the control of the public authority. It is important
which is held under
to note that only such information can be supplied under the Act which already its control. This right
exists and is held by the public authority or held under the control of the public includes inspection
authority. The Public Information Officer is not supposed to create information; of work, documents
and records; taking
or to interpret information; or to solve the problems raised by the applicants; or notes, extracts or
to furnish replies to hypothetical questions. certified copies of
doc ume nts or
The Act gives the citizens a right to information at par with the Members of records; and taking
Parliament and the Members of State Legislatures. According to the Act, the certified samples of
material held by the
information which cannot be denied to the Parliament or a State Legislature, public authority or
shall not be denied to any person. held under the con-
trol of the p ublic
A citizen has a right to obtain information from a public authority in the form authority.
of diskettes, floppies, tapes, video cassettes or in any other electronic mode or
through print-outs provided such information is already stored in a computer or
in any other device from which the information may be e-mailed or transferred to
diskettes etc.
The information to the applicant should ordinarily be provided in the form in
which it is sought. However, if the supply of information sought in a particular
form would disproportionately divert the resources of the public authority or by
cause harm to the safety or preservation of the records, supply of information in
that form may be denied.

Guidelines to Stakeholders Seeking Information Under Right to


Information Act, 2005
In some cases, the applicants expect the Public Information Officer to give
information in some particular proforma devised by them on the plea that they
have a right to get information in the form in which it is sought. It needs to be
noted that the provision in the Act simply means that if the information is
sought in the form of photocopy, it shall be provided in the form of photocopy,
or if it is sought in the form of a floppy, it shall be provided in that form subject
to the conditions given in the Act. It does not mean that the PIO shall re-shape
the information. This is substantiated by the definition of the term 'right to
96 96 Legal Aspect of Business • Module Four

information' as given in the Act, according to which, it includes right to obtaining


information in the form of diskettes, floppies, tapes, video cassettes or in any
other electronic mode or through print-outs provided such information is already
stored in a computer or in any other device. Everywhere in the Act, the word
'form' has been used to represent this meaning.
Some Information Seekers request the Public Information Officers to cull
out information from some document(s) and give such extracted information to
them. A citizen has a right to get 'material' from a public authority which is
held by or under the control of that public authority. The Act, however, does
not require the Public Information Officer to deduce some conclusion from the
'material' and supply the 'conclusion' so deduced to the applicant. It means
that the Public Information Officer is required to supply the 'material' in the
form as held by the public authority, but not to do research on behalf of the
citizen to deduce anything from the material and then supply it to him.

4.15 METHOD OF SEEKING INFORMATION


It is the PIO's obli- Under the Act, all authorities covered must appoint their Public Information
gation to provide in-
Officer (PIO). Any person may submit a request to the PIO for information in
forma tion to c iti-
zens of India who writing. It is the PIO's obligation to provide information to citizens of India who
request information request information under the Act. If the request pertains to another public
under the Act. authority (in whole or part) it is the PIO's responsibility to transfer/forward the
concerned portions of the request to a PIO of the other within 5 days. In addition,
every public authority is required to designate Assistant Public Information Officers
(APIOs) to receive RTI requests and appeals for forwarding to the PIOs of their
public authority. The citizen making the request is not obliged to disclose any
information except his name and contact particulars.

Time Limit for Replying to the Request


The Act specifies time limits for replying to the request.
1. If the request has been made to the PIO, the reply is to be given within
30 days of receipt.
2. If the request has been made to an APIO, the reply is to be given within
35 days of receipt.
3. If the PIO transfers the request to another public authority (better
concerned with the information requested), the time allowed to reply is
30 days but computed from the day after it is received by the PIO of the
transferee authority.
4. Information concerning corruption and Human Rights violations by
scheduled Security agencies (those listed in the Second Schedule to the
Act) is to be provided within 45 days but with the prior approval of the
Central Information Commission.
5. However, if life or liberty of any person is involved, the PIO is expected to
reply within 48 hours.
Module Four • The Right to Information Act, 2005 97

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.

4.16 WHO IS ELIGIBLE TO GET INFORMATION UNDER RTI ACT


The Act gives the right to information only to the citizens of India. It does not The Act gives the
right to information
make provision for giving information to Corporations, Associations, Companies only to the citizens
etc. which are legal entities/persons, but not citizens. However, if an application of India.
is made by an employee or office-bearer of any Corporation, Association, Company,
NGO etc. indicating his name and such employee/office bearer is a citizen of
India, information may be supplied to him/her. In such cases, it would be
presumed that a citizen has sought information at the address of the Corporation
etc.
A person who de-
Fee for Seeking Information sires to seek some
information from a
A person who desires to seek some information from a public authority is public authority is
required to s end,
required to send, along with the application, a demand draft or a banker's cheque
along with the appli-
or an Indian Postal Order of Rs. 10/- (Rupees ten), payable to the Accounts Officer c ation, a demand
of the public authority as fee prescribed for seeking information. The payment of draft or a banker's
fee can also be made by way of cash to the Accounts Officer of the public authority cheque or an Indian
Pos t al O rde r of
or to the Assistant Public Information Officer against proper receipt. Rs . 10/- (Rupees
ten), payable to the
The applicant may also be required to pay further fee towards the cost of Accounts Officer of
providing the information, details of which shall be intimated to the applicant by the public authority
the PIO as prescribed by the Right to Information (Regulation of Fee and Cost) as fee pres cribed
for seeking informa-
Rules, 2005. tion.
98 98 Legal Aspect of Business • Module Four

Rates of fee as prescribed in the Rules of RTI


• Rupees two (Rs. 2/-) for each page ( in A-4 or A-3 size paper) created or
copied;
• Actual charge or cost price of a copy in larger size paper;
• Actual cost or price for samples or models;
• For information provided in diskette or floppy, rupees fifty (Rs. 50/-)
per diskette or floppy; and
• For information provided in printed form, at the price fixed for such
publication or rupees two per page of photocopy for extracts from the
publication.
As already pointed out, a citizen has a right to inspect the records of a
public authority. For inspection of records, the public authority shall charge no
fee for the first hour. But a fee of rupees five (Rs. 5/-) for each subsequent hour
(or fraction thereof) shall be charged.
If the applicant belongs to below poverty line (BPL) category, he is not
required to pay any fee. However, he should submit a proof in support of his
claim to belong to the below poverty line. The application not accompanied by
the prescribed fee of Rs. 10/- or proof of the applicant's belonging to below
poverty line, as the case may be, shall not be a valid application under the Act.
It may be pointed out that there is no bar on the public authority to supply
information in response to such applications. However, provisions of Act would
not apply to such cases.

Process of Information Gathering


In order to get the information as per the RTI Act, 2005 the information
seeker has to send the request for information with the requisite fee to the Public
Information Officer (PIO). Then the PIO gathers the information from the concerned
department. The PIO is facing difficulties in gathering the information where
medium or low level of information technology is used. However, the PIO is not
finding any difficulties in gathering and disseminating the information where high
level of information technology is used. The process of information gathering is
shown in figure 4.1.
Module Four • The Right to Information Act, 2005 99

PEOPLESEEKING
PEOPLE SEEKING FOR
FORINFORMATION
INFORMATION

REQUEST
REQUESTFOR
FORINFORMATION TOPIO
INFORMATION TO PIO

INFORMATION GATHERINGBY
INFORMATION GATHERING BY PIO
PIO

DISSEMINATION OF INFORMATION TO THE


DISSEMINATION OF INFORMATION TO THE
INFORMATION SEEKER
INFORMATION SEEKER

Figure 4.1 Process of Information Gathering

4.17 FORMAT OF APPLICATION


There is no prescribed format of application for seeking information. The
application can be made on plain paper. The application should, however, have
the name and complete postal address of the applicant. Even in cases where the
information is sought electronically, the application should contain name and
postal address of the applicant. The information seeker is not required to give
reasons for seeking information.
The proforma of RTI application on a certain case is exhibited herein below
for simple understanding (see Box 4.1).

Application to the Concerned Public Authority


The applicant should make application to the concerned public authority. It
is advised that he should make all efforts to ascertain as to which is the public
authority concerned with the information and should send application to the Public
Information Officer of that public authority.
It is observed that some applicants seek information in respect of many
subjects by way of one application. It creates problem for the Public Information
Officer as well as the applicant. The applicant should, therefore, see to it that by
way of one application, he seeks information in respect of one subject only. In normal cours e,
informati on to an
applic ant shall be
Time Period for Supply of Information supplied within 30
days from the re-
In normal course, information to an applicant shall be supplied within 30 ceipt of application
days from the receipt of application by the public authority. If information sought by the public au-
concerns the life or liberty of a person, it shall be supplied within 48 hours. In thority. If informa-
case the application is sent through the Assistant Public Information Officer or it tion s ought c on-
cerns the life or lib-
is sent to a wrong public authority, five days shall be added to the period of thirty erty of a person, it
days or 48 hours, as the case may be. s hall be s upplied
within 48 hours.
100 100 Legal Aspect of Business • Module Four

Box 4.1

Application form to be filed by Pub lic to get the information

FORM A
(Section 6(1) and 7(1) of the Right to Information Act, 2005)

(1) Full Name of the Applicant : CHANDRAKANT

(2) Address : 45/1, 1 st Floor, 2 nd Main,


Sheshadripuram , Bangalore
Ph: 9341824976, 9481454655
(3) Details of the document /
Inspection / Samples required :

(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?

(4) Year to which the above pertains : 2009

(5) Designation and address of the public


information officer from whom
the information is required : The Managing Director
KSRTC, Shanthinagar,
Bangalore

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.

Disposal of Appeals and Complaints by the CIC


The Central Information Commission decides the appeals and complaints
and conveys its decision to the appellant/complainant and first appellate
authority/ Public Information Officer. The Commission may decide an appeal/
complaint after hearing the parties to the appeal/complaint or by inspection of
documents produced by the appellant/complainant and Public Information Officer
or such senior officer of the public authority who decided the first appeal. If the
Commission chooses to hear the parties before deciding the appeal or the
complaint, the Commission will inform the date of hearing to the appellant or the
complainant at least seven clear days before the date of hearing. The appellant/
complainant has the discretion to be present in person or through his authorized
representative at the time of hearing or not to be present.
102 102 Legal Aspect of Business • Module Four

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.

4.19 SUCCESS STORIES UNDER THIS CAMPAIGN


This section provides RTI success stories from rural and urban areas.
SUCCESS STORY — 1
ATTENDANCE OF THE VILLAGE SCHOOL TEACHER
In a Pre-Middle School in Panchampur village, situated 70 kilometers away
from the District Headquarters of Banda, a teacher was appointed for the school.
However, the teacher was absent for most of the times. The workers and
volunteers from the Delhi based organisations like Kabir and Parivartan, along
with the local workers from the Chingari Sangathan under the 'Action Research
Villages' Campaign, propagated the use of the Right to Information.
Finally, the villagers witnessed a ray of hope when they learned that they
could question the Government and ask for information related to the attendance
records, leave records and medical records of the absconding village school
teacher. Fifteen villagers drafted an application regarding the same and filed a
number of applications with the Primary Education Officer at the Banda District
Head Quarters. They asked for the records of the teacher but also questioned
the Prima ry Education Departme nt a bout the Departme nt's role a nd
responsibilities in such situations. Immediate action was taken on the issue by
the Department.
The Primary Education Officer summoned the teacher the very next day
and asked for an explanation. Living up to his accountability and responsibility,
the officer appointed a new school teacher for the village school. The school
was opened On the next day itself and regular teaching began in the school. An
Module Four • The Right to Information Act, 2005 103

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

a team of about 25 committed volunteers. Based on the research it was


found out that fictitious companies were shown as suppliers of luxury
items in the name of procurement of medical supplies.
Next, the volunteers cross checked the rates at which the medicines had
been supplied only to find that the retail outlets sold the same items a lot
cheaper. These details were published in local magazine popular in the coal
mining belt of Madhya Pradesh and Chhattisgarh. Thereafter, the Vigilance
unit instituted a formal investigation and action against the concerned officials
was initiated.
Source: http://cic.gov.in/bestpractices.htm

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.

4.20 LANDMARK JUDGEMENTS


The need for Right to Information has been widely felt in all sectors of the
country and this has also received judicial recognition through some landmark
judgements of Indian courts.
A Supreme Court judgement delivered by Mr. Justice Mathew is considered The people of this
country have a right
a landmark. In his judgement in the State of UP vs. Raj Narain (1975) case, Justice to know every pub-
Mathew rules: In a government of responsibility like ours, where all the agents of lic act, everything
the public must be responsible for their conduct, there can be but few secrets. that is done in a
The people of this country have a right to know every public act, everything that public way by their
public functionaries.
is done in a public way by their public functionaries. They are entitled to know They are entitled to
the particulars of every public transaction in all its bearing. Their right to know, k now the particu-
which is derived from the concept of freedom of speech, though not absolute, is a lars of every public
transaction in all its
factor which should make one wary when secrecy is claimed for transactions bearing.
which can at any rate have no repercussion on public security. But the legislative
wing of the State did not respond to it by enacting suitable legislation for protecting
the right of the people.
According to Attorney General Soli Sorabjee - It was in 1982 that the right to
know matured to the status of a constitutional right in the celebrated case of S.P.
Gupta vs. Union of India (AIR) 1982 SC (149), popularly known as Judges case.
Here again the claim for privilege was laid before the court by the Government of
India in respect of the disclosure of certain documents. The Supreme Court by a
generous interpretation of the guarantee of freedom of speech and expression
106 106 Legal Aspect of Business • Module Four

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.

4.21 PROBLEMS DUE TO THE IMPLEMENTATION OF RIGHT TO


INFORMATION ACT, 2005
Seeing the increasing trend of request for the information in the different
organizations and the implementation of the RTI Act, 2005 in just four months,
personal interview of the Public Information Officers (PIO) of different organizations
were conducted with the objective to identify the problems (if any) faced by them
due to the implementation of RTI Act, 2005 and the suggested solution. It was
found that three types of organizations exist on the basis of use of information
technology.
1. Low use of Information Technology: In these organizations most of
the records are maintained manually (paper work) and computer is not
used to store information.
2. Medium use of Information Technology: In these organizations
moderate level of information technology is used. Some of the records
are maintained in computer and some are maintained manually.
3. High use of information Technology: In Such type of organizations
high level of information technology is used and the computerized records
are stored at central place.
It was found that the organizations with low or medium use of information
technology are facing problems due to the implementation of RTI Act, 2005. The
organizations with high use of information technology are not facing difficulties
due to the implementation of RTI Act, 2005 (see Table 4.3).

4.22 IMPACT OF RIGHT TO INFORMATION ON DEVELOPMENT — A


PERSPECTIVE ON INDIA'S RECENT EXPERIENCES
Until 2005, an ordinary citizen had no access to information held by a public
authority. Even in matters affecting legal entitlements for such subsidized services
as food for work, wage employment, basic education and health care, it was not
Module Four • The Right to Information Act, 2005 107

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

Organization Use of IT Problems due to RTI Act Suggested Solution

1. Low • Access to information • Integration of different department through IT


• Time constraint • Fully dedicated executive as PIO
•Lack of fully dedicated executive
as PIO

2. Low • Access to information • Integration of different department through IT


• Time constraint • Fully dedicated executive as PIO
• Lack of co-ordination from the
other department.
• Lack of fully dedicated
executive as PIO

3. Low • Access to information • Integration of different department through IT


• Time constraint • Fully dedicated executive as PIO
• Lack of fully dedicated
executive as PIO

4. Medium • Access to information • Integration of different department through IT


• Time constraint • Fully dedicated executive as PIO

5. Medium • Access to information • Integration of different department through IT


• Time constraint
• Difficulties in doing routine
work

6. Medium • Access to information • Integration of different department through IT


• Time constraint
• Difficulties in doing routine
work

7. High Nil -

8. High Nil -

9. High Nil -

10. High Nil -


108 108 Legal Aspect of Business • Module Four

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.

RTI: A Response to Paradigm Shift in Development Approach


Of the major forces which have, of late, led to a re-thinking on issues that
affect economic development, at least three of them are most important.
These are:
• Sharing of knowledge and communication strategies for dissemination
of information;
• Involvement of NGOs in designing of policies and implementation of
schemes; and
• Adoption of citizen centric approach to development.
We may briefly outline the significance of these factors, particularly in the
context of the emerging development scenario.

Democratization of Information and Knowledge


In the knowledge Information and knowledge are critical for realizing all the human aspirations,
society, in which we
live today, acquisi-
such as, improvement in quality of life. In the knowledge society, in which we live
tion of information today, acquisition of information and knowledge and its application have intense
and knowledge and and pervasive impact on productivity gains. People who have access to information
its application have
and who understand how to make use of the acquired information in the processes
intense and perva-
sive impact on pro- of exercising their political, economic and legal rights become empowered, which,
ductivity gains. in turn, enable them to build their strengths and assets.
In view of this, almost every society has made endeavors for democratizing
knowledge resources by way of putting in place the mechanisms for free flow of
information and ideas so that people can access them without asking for it. They
are thus empowered to make proper choices for participation in development
process. The efforts made thus far to disseminate information and knowledge
through the use of communication technologies such as radio and television,
Module Four • The Right to Information Act, 2005 109

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.

Increasing Demand by NGOs for Participation in Development Activities


In the backdrop of inefficient implementation of development programmes,
the NGOs/self-help groups have demanded at various fora, for creating conditions
for democratic governance. It has been alleged, and that not without a basis, that
the implementing agencies have frequently indulged in corrupt practices leading
to diversion of resources from public use to private purposes. And, that the
entitlements of the poor have not been assured, mainly in respects of food grains, It has been alleged,
and that not without
jobs, health care facilities, basic education, etc. Poverty of all forms has thus a bas is , that the
been perpetuated, which is a major drag on the overall development of the country. implementing
agencies have fre-
There are umpteen numbers of cases which demonstrate that the role of quently indulged in
NGOs in exposing corruption and in providing necessary feedback for designing c orru pt prac t ic es
policies and effective implementation of the programmes has been commendable. leading to diversion
of resources from
For instance, NGOs have exposed the inclusion of fictitious names in the list of public use to pri-
beneficiaries, under the schemes like subsidized food grains, employment vate purposes.
guarantee scheme for poor, domestic gas (LPG), medicines, reservation of seats
in private schools for the children from the poor families, etc. There are umpteen
numb er of c as es
Prior to the implementation of RTI Act 2005, at least eight Indian States had which demonstrate
enacted the laws on freedom of information since 1997. People, in these states that the rol e of
took recourse to the various provisions of transparency norms to obtain information NGOs in exposing
c orruption and in
held by the public bodies. The NGOs also conducted social audits of the schemes, prov iding n ec e-
particularly the poverty alleviation programmes, the outcomes of which have ssary feedback for
resulted in appropriate reforms in governance of the projects. This forms the des igning polic ies
and effective imple-
basis for replicating these experiences throughout the country. ment ation of the
program mes has
In view of commendable contributions of NGOs in carrying out the programmes been c o mmend-
in partnership with the public bodies, the RTI Act has envisaged for providing a able.
framework for promoting interface between the citizens and the Government, such
that informed decisions could be taken at all levels by the functionaries of the
governments. And, the projects should be executed under the sunshine to allow
for reasonable scrutiny by the citizens.

4.23 CITIZEN-CENTRIC APPROACH TO DEVELOPMENT


An equally important concern of the development planners has been to evolve
Citizen Centric Approach to development, as people live in diverse socioeconomic
and geographic conditions. The approach to fit for all sizes, particularly in respect
of poverty alleviation programmes, has failed. Without obtaining necessary
110 110 Legal Aspect of Business • Module Four

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

Section — A Objective Type


1. State any two objectives of RTI Act, 2005.
2. State two advantages of RTI Act.
3. What is transparency as per RTI Act?
4. Who is a Information Officer as per RTI Act?
5. What are the rights of the citizens under RTI Act?
6. What are the information that are exempted from RTI Act?
7. Who is a public authority as per the RTI Act?

Section — B Analytical Type


1. Briefly explain the information that can be secured under RTI Act.
2. Explain the information that is not obtainable under the RTI Act.
3. List the powers of Public Information Officer.
4. List the functions of Public Information Officer.
5. Briefly explain the functions of Central Information Commissioner.
6. List the offences under RTI Act.
7. List the penalties under the RTI Act.

Section — C Essay Type


1. Discuss the salient features of RTI Act.
2. Discuss the important cases of RTI Act.
3. Discuss the powers and functions of Public Information Officer.
4. Explain the powers and functions of CIC.
5. Discuss the offences and penalties under RTI Act.


112 112 Legal Aspect of Business • Module Four
5
MODULE

INDIAN CONTRACT ACT, 1872

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

THE INDIAN CONTRACT ACT, 1872


The Indian Contract Act, 1872, is the most important piece of legislation
affecting business. This and the next four sub-chapters are devoted to a brief
description of the general principles of the law of contract.

5.1 BRIEF HISTORY OF THE ACT


The Indian Contract The Indian Contract Act came into force on the first day of September 1872.
Act came into force
Prior to this there was an English Common Law which was applied to Indians
on the first day of
Sep tembe r 18 72. indiscriminately. This led to many inconveniences. To obviate this, statutes were
Prior to this there enacted to regulate contracts where parties were Mohammedans and Hindus. If
was an Engl is h both parties were Hindus, they were regulated by the Hindu Law and in the case
Com mon Law
which was applied of Monammedans, by the laws and usage’s of Mohammedans. The effect of these
to Indi ans indi s - sta tutes was to supe rsede English Law so far as it regards Hindu and
criminately. Mohammedans in the case of contracts and other matters enumerated in the
status and to declare the right of Hindus and Mohammedans to their own laws
and usages. The result was that in a suit on contract, for instance, between Hindus,
Hindu Law of contract was applied, and the Mohammedan Law in the case of a
contract between Mohammedans, and this continued upto the enactment of the
Indian Contract Act.

5.2 SCOPE OF THE ACT


The Act applies to the whole of India except the state of Jammu and Kashmir.
The Act does not profess to be complete code dealing with the law relating to
contracts. It deals with the general principles of law of contracts and contains
special contracts only. Sections 1 to 75 of Act deal with different stages in the
formation of a contract, its essential features, its performance or breach, and the
remedies for breach of contract* Sections 124 to 238 cover some of the special
contracts, viz., indemnity and guarantee, bailment and pledge and agency. Sale
of goods, forming and functioning of partnership, insurances, transfer of property
and negotiable instruments are not covered by the Act, though they are also
contracts. The Act defines and amends only certain parts of the law relating to
contracts. A particular usage or custom is allowed to prevail and remain unaffected.
However usages and customs shall not be inconsistent with the provisions of the
Act. Where the Contract Law is silent on any matter, Hindu and Mohammedan
Law relating to contracts shall apply. The Act is, therefore, not a complete code
and is not exhaustive.
The main objective It should be emphasized that wherever promises are made, Contract Act
of the Contract Act comes into picture. Promises may or may not be related to business.
is to ensure that the
rights and obliga-
tions are honoured, 5.3 OBJECTIVES OF THE ACT
that the ex pec ta-
tions created by the The main objective of the Contract Act is to ensure that the rights and
promises of parties obligations are honoured, that the expectations created by the promises of parties
to an agr eeme nt
are fulfilled. to an agreement are fulfilled and that legal remedies are available to an aggrieved
party against the party failing to honour his part of agreement.

* 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

With regard to business transactions, the Contract Act lends definiteness.


Naturally, the Act is of great importance to businessmen as it enables them to
plan ahead with the knowledge that what has been promised to them will be
performed by the promisors failing which they will be made to pay compensation
for the loss suffered.

5.4 DEFINITION OF CONTRACT


Sir Federic Pollock defines a contract as “Every agreement and promise Ev e ry ag reem ent
enforceable at law.” It is this definition which formed the basis for defining the an d pr omi s e e n-
forceable at law is
term contract in the Indian Contract Act. According to Section 2(h) of the Act, contract.
Contract is an agreement enforceable at law. This crisp definition has two important
components which constitute the bases for a contract. They are:
(1) The existence of an agreement, and (2) its enforceability at law. These two
need elaboration.
An agreement is defined as every promise and every set of promises forming An agreement is de-
fined as every prom-
consideration for each other (Sec.2(e)). A Promise is defined thus: “when the person ise and every set of
to whom the proposal is made signifies his assent thereto, the proposal is said to promis es forming
be accepted. A proposal, when accepted, becomes a promise (Sec.2(b)). To sum c onsideration for
each other.
up, it may be stated that an agreement is an accepted proposal. There must be
one party to offer a proposal and another to accept the proposal. An agreement
then comes into existence. Thus, agreement = Offer + Acceptance.

Offer + Acceptance = Contract

Enforceability of an agreement is another requisite of a contract. An agreement An agreement be-


comes enforceable
becomes enforceable when it gives rise to legal obligation. Obligation is a restraint
when it gives rise to
which one party exercises over another. It is by virtue of this obligation that one legal obligation.
party can compel the other to do something or to refrain from doing something.
What is important is that the obligation must be legal and not social or religious.
The main distinction between legal obligation and a social or religious obligation
is that the former involves money value but the latter does not. It should also be
remembered that obligations arise even without agreements, as in torts or civil The main distinc -
wrongs, Quasi contracts, judgement of courts, etc. In order to constitute a contract tion between legal
an agreement must create legal obligation. It is this argument which has given obligation and a so-
cial or religious ob-
rise to the popular saying: All contracts are agreements but all agreements need ligation is that the
not be contracts. fo rmer in v olv es
mo ney v al ue b ut
Case Laws the latter does not.

The following illustrations are useful to a ppreciate the nature of


obligation:
1. X agrees to sell his motorcycle to Y for Rs. 15,000. The agreement gives
rise to a legal obligation on the part of X to deliver the vehicle to Y and
on the part of Y to pay Rs. 15,000 to X. Failure of X to deliver the
vehicle or Y to make the payment entitles the aggrieved to sue against
the offender.
2. X invites for dinner in a restaurant. Y having accepted the invitation,
goes to the restaurant on the stipulated date and time. X is either not
there at the restaurant or even if present refuses to entertain Y. In
either case, Y has no remedy against X.
116 116 Legal Aspect of Business • Module Five

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.

5.5 ESSENTIALS OF A VALID CONTRACT


A c ont rac t mu s t As was pointed out earlier, a contract must have two components, viz., (a)
hav e two c ompo- existence of an agreement, and (b) its enforceability. These are not the only
nents: (i) Existence
of an agr eeme nt requirements of a valid contract. There are few more essentials of a valid contract
(ii) Its enforceability. which are laid down in Sec. 10 of the Act.
According to Sec. 10, all agreements are contracts if they are made by the
free consent of the parties who are competent to contract, for a lawful consideration
and with a lawful object, and are not hereby expressly declared to be void. In
order to become a valid contract, an agreement must have the following essential
qualities (see Fig. 5.1):

Ess enti als of


Valid Contract

Fig. 5.1 Essentials of a Valid Contract


An offer to do or not (i) Offer and Acceptance: An agreement is the result of offer or proposal
to do a definite act
or acts is made by and acceptance. An offer to do or not to do a definite act or acts is made
one person who is by one person who is called the offeror. The proposal is accepted by the
called the offeror. other party who is called the offeree. Thus, there are two parties to a
The proposal is ac-
cepted by the other
contract.
party who is called (ii) Free Consent: An agreement, to be made enforceable, must be based
the offeree.
on free consent. Free consent is said to exist when both the offerer and
the offeree are of the same mind and upon the same subject. Free consent
does not exist when it is obtained by coercion, undue influence, fraud,
mistake or misrepresentation.
(iii) Contractual Capacity: The parties who enter into contract must be
competent to do so. A person is said to be competent when he is (a) of
the age of maturity, (b) is of sound mind, (c) and is not disqualified from
entering into contract by any law to which he is subject. Incapacity
arises from minority, lunacy, idiocy, drunkenness, and similar other
factors. If one of the parties to the contract suffers from any incapacity
the contract cannot be enforced by law.
Module Five • Indian Contract Act, 1872 117

(iv) Lawful Consideration: An agreement to become enforceable must be


supported by consideration. Consideration means something given or
taken for something in return. If an agreement is not supported by
consideration it becomes nudum pactum, i.e., bare or naked agreement
not enforceable by law, subject to certain exceptions specified in the
Act.
(v) Lawful Object: The object of the agreement must be lawful. It is unlawful
if the object is forbidden by law, immoral or opposed to public policy.
Any agreement with an unlawful object cannot be enforced by law.
(vi) Not Expressly Declared Void: The agreement must not have been
expressly declared to be void under any law. Void agreements cannot be
enforced by law. Examples of void agreements are such as those in
restraint of trade, in restraint of marriage, in restraint of legal proceedings
and wagering agreement.
(vii) Possibility of Performance: The act contemplated in the agreement
should be capable of performance. Agreement to perform an impossible
act cannot be enforced. For example, A promises to share with B, 50 per
cent of the treasure, provided the treasure is created by magic. Such an
agreement cannot be enforced because of impossibility of performance.
(viii) Certainty of Terms: The terms of the agreement must be certain. Vague
or uncertain terms make the agreement unforceable. For example, A
company agreed with V that on the expiration of V’s existing contract,
the company would favourably consider a request of V for renewal of the
contract. It was held that the company had no obligation to renew the
contract as the agreement did not bind the company to do so. (Monstreal
Gas Company v. Vasey (1900) A.C. 595).
(ix) Intention to Create Legal Relationship: When two parties enter into
an agreement, their intention must be to create legal relationship between
them. In the absence of such an intention the agreement cannot be
enforced.

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

5.6 CLASSIFICATION OF CONTRACTS


Contracts may be classified on the basis of their (a) enforceability, (b) validity,
or (c) performance (see Fig. 5.2).
Contracts

A. Formation B. Validity C. Performance


— Express contracts — Valid contracts — Executed contracts
— Implied contracts — Void contracts — Executory contracts
— Quasi contracts — Void agreements OR
— Voidable contracts — Unilateral contracts
— Illegal contracts — Bilateral contracts
— Unforceable contracts

Fig. 5.2 Classification of Contracts

A. Classification According to Formation

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.

5.7 OFFER AND ACCEPTANCE


In the previous chapter it was pointed out that offer and acceptance are
essential to make a valid contract. In this sub-chapter it is proposed to discuss
the two concepts, viz., offer and acceptance in greater detail.

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


The definition of offer given in Sec.2(1) is crisp. Further elaboration is
necessary to make the nature of offer clear. The following are essentials of valid
offer (see Fig. 5.3):
Module Five • Indian Contract Act, 1872 121

Essentials of a
Valid Offer

Fig. 5.3 Essentials of a Valid Offer

1. Intention to Create Legal Relationship: An offer must be such that


when accepted it must create a valid contract. An offer with social or
religious connotation, as was pointed out in the previous chapter, does
not constitute a valid offer. A case to prove the validity of an offer is the
Kalai Haldar v. Sheikh (23 W.R. 217). A invited B for dinner. On B’s
failure, A filed a suit against B for the price of the non-consumed food.
A’s suit was dismissed on the ground that his invitation for dinner did
not create legal relationship between himself and B.
2. Terms Must be Definite and Certain: The terms of offer must be definite
and certain. Vague and ambiguous terms make the offer invalid. For
example, an offer to take a house on lease for three years at 285 per
annum if the house was “put into through repair and drawing rooms
thoroughly decorated according to the present style” is too vague to result
in a legal obligation. Tayler v. Portington, (1855).
3. Statement of Intention and Invitation to Offer: A mere statement of
intention does not constitute a binding promise even though a person to
whom it is made acts upon it. For example, in Re ficus (1900). A father
wrote to his would be son-in-law that his daughter would have a share
of whatever he had left. Held that it was merely a statement of intention
and not a valid offer.
Similarly, an invitation to offer does not constitute a valid offer. Price-lists,
catalogues, advertisements, window displays, tenders, invitations by a company
to public to subscribe to its shares and the like are merely statements of intention
and hence do not constitute valid offers.

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).

Lalman Shukla V/s. Gauri Dutt Case


It so happened that the defendant’s nephew absconded from home. He
sent his servant in search of the boy, when the servant had left the defendant,
by handbills, offered to pay Rs. 501 to anybody discovering the boy. The servant
came to know of this offer only when he had already traced the missing child.
He however brought an action to recover the reward. But his action failed.
Module Five • Indian Contract Act, 1872 123

Elaborating the principal, Bannerji J. said: “ In my opinion a suit like the


present one can only be founded on a contract. In order to constitute a contract,
there must be an acceptance unless there is knowledge of the offer.”

Normally, an individual cannot accept an offer that was directed to someone


else. You may want to sell your personal coin collection to a close friend. If you
make an offer by letter to this individual, it cannot be accepted by another collector
who happens to see your offer on your friend’s desk. If the law were otherwise,
people would find that they had made contracts with individuals that they never
intended to deal with. The offeror should never be forced to accept an agreement
with someone he or she does not want to do business with.
So the law takes the position that an offer has not actually been made until
brought directly to the attention of the offeree. Until the offer has been
communicated, the offeree does not even know that an offer was even in existence
and consequently cannot accept it.
5. An Offer can be Specific or General: Earlier it was suggested (Weeks
v. Tybold) that an offer must be specific. In other words it must be
addressed to a specific person. But the modern position is that the offer
can be made to the world at large. It can, therefore, be general offer. But
the contract is not made with all the world. Contract is made only with that
person who comes forward and performs the conditions of the proposal.
The principle of general offer was underlined in the famous case.

Carlill v. Carbolic Smoke Ball Co. (1893)


Details of the case are: A company offered by advertisement, to pay £1000 to
anyone “who contracts the increasing epidemic influenza, colds or any disease
caused by taking cold, after having used the ball according to printed directions.”
It was added that “£1,000 is deposited with the Alliance Bank showing out sincerity
in the matter.” The plaintiff used the smoke balls according to the directions but
she nevertheless subsequently suffered from influenza. She was held entitled to
recover the promised reward.
The defendants contended that (a) there was no intention to enter into legal
relations as it was simply a puffing advertisement; (b) that the offer was to
made to any particular individual, and (c) that the plaintiff had not communicated
her intention to accept.
The first argument was turned down by Bowen, L.J., by saying :”was it intended
that £100 should, if the conditions were fulfilled, be paid? The advertisement
says that £1,000 is lodged at the bank for the purpose. Therefore, it cannot be
said that the statement that £100 would be paid was intended to be a mere puff.”
Rejecting the second argument that an offer could not be made to the world at
large his Lordship observed thus: “why should not an offer be made to all the
world which is ripen into contract with anybody who comes forward and performs
the condition? It is an offer to become liable to any one who before it is retracted,
performs the conditions, and although the offer is made to the world, the contract
is made with that limited portion of the public who came forward and perform
the condition on the faith of the advertisement.”
His Lordship also pointed out that in cases like this communication of acceptance
is not necessary.
6. Offer with Special Conditions: If there are special terms or conditions
in an offer, these must be brought to the notice of the offeree at the time
124 124 Legal Aspect of Business • Module Five

of making a proposal. A conditional offer lapses when the condition is


not accepted by the offeree.
7. Cross Offers and Counter Offers: When the parties make identical offers to
each other, in ignorance of each other’s offer, the offers are said to be cross
offers. In such a case, the court will not construe one offer as the offer and the
other as the acceptance and as such there can be no concluded contract.
A counter offer is a rejection of original offer. It is new offer which needs acceptance
by the original promisor before a contract is made. This point was made clear in the
following case:
Hyde. V. Wrench (1840)
In this case an offer to sell a form for £1,000 was rejected by the plaintiff, who
offered £950 for it. This was turned by the offerer and then the plaintiff agreed to
pay £1,000. Holding that the defendant was not bound by any such acceptance,
the court said: “The defendant offered to sell it for £1,000, and if that had been at
once unconditionally accepted, there would undoubtedly be a perfect binding
contract, instead of that, the plaintiff made an offer of his own to purchase the
property for £950 and thereby rejected the offer previously made to the defendant.
It was not afterwards competent for him to revive the proposal of the defendant by
rendering an acceptance of it, and that, therefore, there exists no obligation of any
sort between the parties.

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.”

Essentials of Valid Acceptance


The essentials of valid acceptance are : (i) communication, (ii) absolute and
unqualified, (iii) express or implied, (iv) definite person, (v) mode of acceptance, (vi) not
mere mental acceptance, (vii) when the offer is in force, and (viii) preceded by offer (see
Fig. 5.4):

Fig. 5.4 Essentials of Valid Acceptance


Module Five • Indian Contract Act, 1872 125

1. Acceptance Must be Communicated: The definition of acceptance clearly


requires that the assent must be signified. To signify means to
communicate. If the acceptance is not communicated to the offerer, no
contract is created. A case to prove this principle is the Brogden vs.
Metropolitan Railway Co. (1877). A draft relating to the supply of coal
was sent to the manager of a Railway Company for his acceptance. The
Manager wrote the word ‘approved’ on the agreement but, oversight the
document remained in the drawer. It was held that there was no contract.
2. Acceptance Must be Absolute and Unqualified: Acceptance of a proposal
with conditions, variations and reservations is no acceptance at all.
Acceptance with variations is a counter-proposal and as was pointed out
earlier, there is no contact unless this counter proposal is accepted by
the original proposer. In Neele vs. Meritt (1930) Meritt offered land to
Neele at $ 280. Neele replied accepting and enclosing $ 30 and promising
to pay the balance by monthly installments of $ 50 each. As Neele
accepted the proposal subject to making payment in installments, it was
held that there was no contract as the acceptance was qualified.
3. Acceptance Can be Express or Implied: Acceptance is express when it
is communicated by words, spoken or written. If the proposer prescribes
any mode of acceptance, the offeree must follow the same mode. Thus, if
the proposer prescribes a method of delivery of goods at a particular
place, he is not bound to accept delivery at any other place.
Acceptance is implied when it is to be gathered from the surrounding
circumstances or the conduct of the parties. For example, in an auction sale if
the highest bidder strikes a hammer on the table, it is treated as an implied
acceptance.
4. Acceptance by a Definite Person: Where an offer is made to a particular
person, he alone must accept the proposal. Acceptance by anybody else
invalidates the offer. We quote the Boulton vs. Jones (1857) case in
support of this principle. The plaintiff had taken over the business of
one Brocklehurst. The defendant used to deal with Brocklehurst and
not knowing of the change sent him an order of certain goods. The
defendant came to know of the change only when he received an invoice
and by that time he had already consumed the goods. The defendant
had a set off against Brocklehurst and, therefore refused to pay the price.
The plaintiff sued him. It was held that the offer was made to Brocklehurst
and it was not in the power of Boulton to step into the shoes of
Brocklehurst and accept the offer. The observation made by Pollock,
C.B. one of the judges, is worth quoting: “Now” said he, “the rule of law
is clear, that if you propose to make a contract with A, then B cannot
substitute himself for A without your consent and to your disadvantage,
securing to himself all the benefit of the contract.” The defendant was
not held liable.
If the offer is made to world at large, one person must accept the offer. It is
only then that the contract is made. The general offer is closed as soon as it is
accepted by a definite person.
5. Acceptance Must be Through Prescribed or Reasonable Mode: If the
acceptance is not according to the mode prescribed, or some usual and
reasonable mode (where no mode is prescribed) the offerer may intimate to
the offeree, within reasonable time, that the acceptance is not according to
the mode prescribed and may insist that the acceptance must be in the
126 126 Legal Aspect of Business • Module Five

prescribed mode only. If the proposer fails to do he is said to have accepted


the acceptance. For example, if the proposer says, “wire reply” and the
reply is sent by telephone, there is valid acceptance if the proposer does
not raise objection. If he objects, there is no valid acceptance.
6. Mere Mental Acceptance in no Acceptance: No contract is formed if the
offeree remains silent and does nothing to show that he has accepted the offer.
A mere mental determination to accept unaccompanied by an external
indication will not be sufficient. In the words of Shah J. (afterward C.J.): “An
agreement does not result from a mere state of mind: intend to accept an offer
or even a mental resolve to accept an offer does not give rise to a contract.
There must be … some external manifestation of the intent by speech, writing
or other act.” (Bhagavandas vs. Giridharilal (1966).
7. Acceptance when Offer is in Force: Acceptance must be made before the
offer lapses. If any time limit is prescribed, the offer must be accepted before
the expiry of the time. If no time is prescribed, the offer must be accepted
within reasonable time. M offered to take shares in a company on 8th June and
received acceptance on 23rd November. M refused to take the shares. As the
reasoable period of acceptance had elapsed, he was entitled to refuse to take
the shares [Ramagate Victoria Hotel Com., vs. Moantetoire (1886)].
8. Acceptance Must be Preceded by offer: Offer must precede acceptance.
Acceptance without offer is no acceptance. Allotment of shares previous
to the application, for example, is not valid.

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.

Fig. 5.5 Revocation of Offer

(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

(iv) Death or Insanity of Offeror: An offer lapses on the death or insanity of


the offeror, provided that the fact comes to the knowledge of the offeree
before he makes his acceptance.

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.

5.8 COMMUNICATION OF OFFER AND ACCEPTANCE


In the previous sub-chapter, it was pointed out that an offer must be
communicated to the offeree for his acceptance. There can be no valid proposal
unless it is communicated to the proposee. Similarly, the proposee must
communicate the acceptance to the proposal to the promisor. Acceptance cannot
be valid unless it is communicated to the offerer. Again where proposal or
acceptance is revoked, the same should be communicated to the concerned party.
Thus, communication constitutes an important aspect of a contract. It is, therefore,
proposed to discuss in detail of communication in effecting an agreement.

How Communication is Effected?


The communication of proposal or its revocation and the communication or
acceptance or its revocation are deemed to be made by (a) any act; or (b) omission;
of the party proposing, accepting or revoking, by which he intends to communicate
such proposal, acceptance or revocation, or which has the effect of communicating
it (Section 3).
Communication is effected on any of the following methods:
(i) By any Act: Act includes by conduct, by words, written or oral.
Communication can, therefore, be by a letter, telegram, telex, etc. it can
also be by telephone. Any act by a person by which he intends to
communicate or which has the effect of communication will constitute
communication, for example entering into a bus or any public vehicle is
communication of acceptance by act or conduct.
(ii) By Omission: Omission includes conduct or forbearance. An abstinence
or forbearance on the part of one person which has the effect of
communicating will constitute communication.
A prop os a l c o n-
veyed by conduct is
Implied Proposal and Acceptance called implied offer,
and the one which
A proposal conveyed by conduct is called implied offer, and the one which is is ex p res s ed by
expressed by words, written or spoken, is called an “express offer.’ Similarly, words , writte n or
spoken, is called an
acceptance conveyed through conduct is said to be an ‘implied’ acceptance and “express offer.’
128 128 Legal Aspect of Business • Module Five

the one communicated, otherwise than through conduct, is called ‘express’


acceptance.

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.

Revocation of Offer Through Communication


A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not afterwards. Therefore, in
case of postings of a letter of acceptance the same can be revoked by a telegram
which shall reach earlier to the letter. In case both letter of acceptance and
revocation by telegram arrive simultaneously, both cancel each other, and as
such, there would be no valid contract. Revocation is effective only when it comes
to the knowledge of the person to whom the offer 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.”

When Communication is not Necessary?


In two cases communication of acceptance is not necessary, viz.:
1. When there is prescribed mode of acceptance and the offeree follows it.
2. When the offerer has acquiesced in a certain conduct on the part of the
offeree as equivalent to acceptance.

Revocation of Acceptance Through Communication


When can acceptance be revoked? An acceptance may be revoked at any Consideration may
time before the communication of the acceptance is complete as against the be unders tood as
accepter, but not afterwards (Section 5). Thus, the communication of revocation some value given in
ex c hang e fo r a
should reach earlier than the acceptance itself. What will be the result if they promise.
reach together? The answer is that the acceptance stands revoked.

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

Section 2(d) of the Indian Contract Act defines consideration as follows:


“When, at the de- “When, at the desire of the promisor, the promisee or any other person has
sire of the promisor,
the promisee or any
done or abstained from doing, or does or abstains from doing, or promises to do
other pers on has or to abstain from doing something, such act or abstinence or promise is called
done or abstained consideration for the promise.”
from doing, or does
or abs tain s fr om An analysis of the definition given in Section 2(d) reveals three important
doing, or promises components of consideration:
to do or to abstain
from doing s ome- (i) The act or abstinence should be done at the desire of the promisor.
thing, such act or
abs tine nc e or
(ii) The act or abstinence should be done by the promisee or any other person,
promis e is c alled and
c on s ide rati on f or
the promise.”
(iii) The act, or abstinence has been already done or remains to be done.

Legal Rules as to Consideration


The nature of consideration can be made more clear by analyzing the rules
or essentials of lawful consideration. The rules are analyzed in the paragraphs
that follow (See Fig. 5.6).

Fig. 5.6 Rules of Consideration

1. Desire of the Promisor: The act or abstinence must be done at the


desire of the promisor. If is done at the instance of a third party or without
the desire of the promisor, it is no consideration. The definition of
consideration in Section 2(d) clearly emphasizes that an act or abstinence
which is to be a consideration for the promise must be done or promised
to be done in accordance with the desire of the promisor. In Durga Prasad
vs. Baldeo (1880): the plaintiff, on the order of the collector of a town,
built at his own expense, certain shops in a bazaar. The shops came to
be occupied by the defendants who, in consideration of the plaintiff
having spent money in the construction, promised to pay him a
commission on articles sold through their agency in the bazaar. The
plaintiff sued for recovery of commission. Rejecting the action Oldfield,
J. said : “The only ground for the making of the promise is the expense
incurred by the plaintiff in establishing the Ganj; but it is clear that
anything done in that way was not ‘at the desire’ of the defendants so as
Module Five • Indian Contract Act, 1872 131

to constitute consideration.” The act was the result of the collector’s


order but not of the promise.
However, consideration need not to be to the benefit of the promisor. Even if
an act done at the promisor’s desire is of no personal significance or benefit to
him, yet it will form a valid consideration. The decision of the Calcutta High Court
in Kedar Nath vs. Gorie Mohammed (1886) is highly relevant in this connection.
It was thought advisable to erect a town hall at Howrah provided sufficient
subscription could be mobilized for the purpose. To this end the Commissioner of
Howrah municipality set out to work to obtain necessary funds by public
subscription. The defendant was a subscriber to this fund for Rs. 100. He had
signed for this amount in the subscription book. The plaintiff had, on the faith of
the promise of the defendant, entered into a contract with a contractor for building
the town hall. The defendant failed to pay the amount and contended that there
was no consideration for his promise. The defendant was held liable to pay the
amount as the act of the plaintiff in entering into contract with the contractors
was done at the desire of the defendant (the promisor) so as to constitute
consideration within the meaning of Section 2(d).
In the above case liability of the defendant arose because the promisee (the
plaintiff) did something, i.e., entered into a contract. If follows, therefore, that
where the promisee has done nothing, there is no consideration. This principle
was underlined in Abdul Aziz vs. Masum Ali (1914). The defendant had promised
to the secretary of a Mosque Committee to subscribe Rs. 500 to rebuild a mosque.
The Committee had done nothing to repair and reconstruct the mosque. In a suit
by the secretary of the Committee it was held that the defendant was not liable
since, “the secretary of the committee to whom the promise was made suffered to
determinent in getting the promise from the subscriber.”
2. Consideration May Move from the Promisee or any Other Person:
Consideration need not be furnished by the promisee only according to
the Indian Contract Act, though the English Law consideration must
move from promisee and promisee only. According to the Indian Contract
Act, a promise is enforceable if there is some consideration or any other
person. But the stranger to the consideration will be held to sue only if
he is a party to the contract. The leading authority here is the decision of
the Madras High Court in Chinnaya vs. Ramaya 1882.
An old lady, by deed of gift, made over certain landed property to the
defendant, her daughter. By the terms of the deed, which was registered, it was
stipulated that an annuity of Rs. 635 should be paid every year to the plaintiff,
who was the sister of the old woman. The defendant on the same day executed in
plaintiff’s favour an agreement promising to give effect to the stipulation. The
annuity was, however, not paid and the plaintiff sued to recover it. The reason
advanced by the defendant for refusing to pay the annuity was that the promisee
(the plaintiff) had not furnished any consideration. It was held the defendant was
liable to pay the amount since the consideration was furnished by the old lady to
her daughter. Consideration paid by a third party is a consideration, nevertheless.
But according to English Law, as pointed out above, consideration must come
from promisee only. Dunlop Pneumatic Tyre Co. Ltd., vs. Selffridge & Co. Ltd.
(1915) is the popular case to prove this principle. The defendants bought tyres
from the plaintiffs on the condition that they (defendants) will not sell below
company’s sale price failing which the defendants will pay damages. The
132 132 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

Income-Tax (1940). Here the agreement is invalidated not because of inadequacy


of consideration but because of fraud or some other vitiating element. Otherwise,
an agreement is held valid once a court is satisfied that a person has entered into
a contract freely and with full knowledge of its purpose, not withstanding
inadequate of consideration.
6. Consideration Must be Real and Not Illusory: Consideration must be
real and be of some value in the eyes of law although it need not be
adequate. It is not real when consideration is uncertain, illusory, or when
it is physically or legally impossible to perform. The observation made
by the Madras High Court is worth quoting in this context. In Kulasekra
Perumal vs. Pathakutty (1961), it was observed that “though the Indian
Contract Act does not provide that consideration must be good or valuable
to sustain a contract it has always been understood that consideration
means something which is of some value in the eyes of law. It must be
real and not illusory, whether ade quate or not…so long as the
consideration is not unreal it is sufficient if it be of slight value only.”
7. Discharging of a Pre-existing Obligation is no Consideration:
Consideration must be something more than what the promisee is already
bound to do. A person may be bound to do something by law or by
contract. Performance of a legal obligation is no consideration for a
promise. This principle has been underlined in the popular case Collins
vs. Godefroy(1831). X promised to pay, Y, who had received summons
to appear at a trial in a civil suit, a certain sum being a compensation for
the loss of time during his attendance. It was held that the promise was
without consideration, for Y was under an obligation imposed by law to
appear and give evidence.
This principle of English Law was adopted by the Madras High Court in R.
Sashannah Chetti vs. V.P. Ramaswami Chetti (1968) even before the Indian
Contract Act came into force, although the Act does not contain any provision on
the point. The facts of the case are that the plaintiff had been served with summons
requiring him to give evidence before a court of law. The defendant, who was a
party to the case, gave him a promisory not promising to pay a sum of money for
his trouble. The note was held to be void for want of consideration.
Another interesting case to prove the same point is Ramachandra Chintaman
vs. Kalu Raju (1877). K agreed to pay an additional sum to R if the latter succeeds
in winning the case. K failed to pay the additional sum. R filed suit to recover the
money. It was held that K was not liable to pay because R was already under an
obligation to render his best services as a pleader.
8. Consideration should not be Illegal or Immoral: Consideration must
not be illegal or immoral. Illegal or immoral consideration makes the
agreement void.

Exceptions to the Rule “No Consideration No Contract”


To the general rule than an agreement without consideration is void. Section
25 lays down certain exceptions. Following are the exceptions and in all these
case agreements without considerations are valid (see Fig. 5.7).
134 134 Legal Aspect of Business • Module Five

Fig. 5.7 Exceptions to Consideration

(i) An Agreement Made on Account of Natural Love and Affection: A


written and registered agreement based on natural love and affection
among near relatives is valid even without consideration. This is the
essence of Section 25(1). To quote the relevant provision: “An agreement
made without consideration is void unless it is expressed in writing and
registered under the law for the time being in force for the registration of
the documents and is made on account of natural love and affection
between the parties standing in near relation to each other.”
In Rajlukhy Dabee vs. Bootnath Mookerji (1900), the defendant promised
to pay his wife a fixed sum of money every month for her separate residence and
maintenance. The agreement was contained in a registered document which
mentioned certain quarrels and disagreements between the two. The suit by the
plaintiff was rejected by the Calcutta High Court which held the view that the
quarrels made the couple separate. There was, thus, no love or affection, between
the parties.
Contrast this with another example where A writes to B, his son, wherein he
promises to pay Rs. 10,000 to the latter without any consideration, but out of
love. A is liable to pay to B Rs. 10,000.
(ii) Past voluntary Service: A promised to compensate wholly, or in part, a
person who has already, voluntarily done something for the promisor is
binding. In other words, a promise to pay for a past voluntary service is
enforceable. For example, A writes to B, “at the risk of your life, you
saved me from a serious motor accident. I promise to pay you Rs. 1,000.”
The agreement is valid.
In order to come under this exception, service should have been rendered
voluntarily and also for the promisor. Thus, where services were rendered for a
company not then in existence, a subsequent promise to pay for them will not
make the contract valid [Ahmedabad Jubilee S. & M.Co. vs Chotalal Chaganlal
(1908)]. But a promise made after attaining majority to pay for goods supplied to
the promisor during minority is held valid [Karan Chand vs. Basant Kaur (1911)].
Module Five • Indian Contract Act, 1872 135

(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.

5.10 CAPACITY TO CONTRACT

Legal Capacity to Contract


The term legal capacity refers to the status or attributes necessary for a
person to have his or her acts legally allowed and recognised. Every individual is
presumed to have legal capacity to make a contract until the contrary is proved.
Among the classes, who may not have legal capacity to contract are minors, insane
persons, convicts persons who are intoxicated or on drugs or aliens.
As was pointed in an earlier sub-chapter, one of the essentials of a valid “E v ery per s on is
competent to con-
contract is that the parties to the contract must be competent to contract. tract who is of the
Competence has been defined in Section 11 thus: “Every person is competent to age of majority ac-
contract who is of the age of majority according to the law to which he is subject, cording to the law to
which he is subject,
and who is of sound mind, and is not disqualified from contracting by any law to and who is of sound
which he is subject.” mind, and is not dis-
qualified from con-
Going by the above definition the persons who are incompetent to contract tracting by any law
are: (i) minors, (ii) persons of unsound mind, and (iii) persons disqualified by law to which he is sub-
to which they are subject. ject.”

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.

Nature of Minor’s Agreement


Section 10 requires that the parties to a contract must be competent and
Section 11 declares that a minor is not competent. But neither section makes it
clear whether, if a minor enters into an agreement, it would be voidable at his
option or altogether void. These provisions had, therefore, quite naturally given
rise to a controversy about the nature of a minor’s agreement. The controversy
136 136 Legal Aspect of Business • Module Five

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.

Effects of Minor’s Agreements


The position of a minor as regards his agreements may be outlined as follows:
(see Fig. 5.8).

Fig. 5.8 Effects of Minor’s Agreements

(i) No Estoppel Against Minor: Suppose that a minor, by misrepresenting


his age, includes another to enter into an agreement with him, will he be
prevented from disclosing his true age in a litigation resulting from the
contract? In other words, will there be any estoppel against him? The
answer is that there is no such estoppel against the minor. The reason is
Module Five • Indian Contract Act, 1872 137

very simple. There can be no estoppel against a statute. One of the


principles of the Law of Contract to protect persons below a statute. One
of the principles of the Law of Contract to protect persons below age
from contractual liability and naturally the doctrine of estoppel cannot
be use to defeat the principle. The Bombay High Court overruled its
earlier decisions, and held in Gadigeppa Bhimappa Meti vs. Balangoxda
Bhimangowda (1931) that “where an infant represents frequently or
otherwise that he is of age and thereby induces another to enter into a
contract with him, in an action found in the contract, the infant is not
estopped from setting up infancy.”
(ii) No Liability in Contract or in Tort Arising out of Contract: As pointed
out earlier, a minor’s agreement is void. This was simply made clear in
the popular case Moharibibi vs. Dharmodas Ghose. In this case, a minor
mortgaged his house in favour of a moneylender to secure a loan of Rs.
20,000 out of which the mortgage (the money lender) paid the minor a
sum of Rs. 8,000. Subsequently, the minor sued for setting aside the
mortgage stating that he was still under-age when he executed the
mortgage. It was held that the mortgage was void and, therefore, it was
cancelled. Further, the moneylender’s request for repayment of the sum
advanced to the minor as part of the consideration for the mortgage was
also not accepted.
With regard to a tort the position is: where the tort is directly connected with
the contract and is the means of effecting it, the minor is not liable in tort. But
where the tort is independent of the contract, the minor cannot escape his liability.
Thus, where an infant borrowed a mare for riding only, he was held liable when
he lent her to one of his friends who jumped and killed her. (Burnard vs. Haggis
(1863)).
(iii) Doctrine of Restitution: If an infant acquires property or goods by
misrepresenting his age, he can be compelled to restore it, but so long
as the same is traceable in his possession. This is known as the equitable
doctrine of restitution. Where the infant has sold the goods or converted
them, he cannot be made to pay the value of the goods because that
would amount to enforcing the void contract. Again, the doctrine of
restitution is not applied where the infant has obtained cash instead of
goods.
(iv) Ratification: As a minor’s agreement is void there can be no question of
its being ratified. Ratification refers to validation of an agreement
previously entered into by a minor after his attainment of age of majority.
As is well-known, minor’s agreement is void ab initio, there can be no
question of ratification of a void agreement. Of course, a fresh contract
can be made on attaining majority. And a new contract will also require
a fresh consideration.
(v) Beneficial Contracts: Agreements entered into by a minor for his or her
benefit are valid and enforceable. Such contracts are: (a) contracts of
marriage, and (b) contracts of apprenticeship.
(a) Contracts of Marriage: A contract for the marriage of a minor is
prima facie for his or her benefit. It is customary amongst most of
the communities in India for parents to arrange marriages between
their minor children and the law has to adopt itself to the habits
138 138 Legal Aspect of Business • Module Five

and customs of the people. It has, therefore, become well established


that the contract of marriage can be enforced against the other
contracting party at the instance of the minor, but the same cannot
be enforced against the minor.
(b) Contracts of Apprenticeship: Contract of apprenticeship are also
for the benefit of minors. The Indian Apprenticeship Act, 1850
provides for contracts in the nature of contracts for service which
are binding on minors. But the act requires that the contracts be
made by guardians on behalf of minors.
In English Law contracts of service and apprenticeship are treated as similar
to contracts for necessaries. The popular case in this context is Roberts vs. Gray
(1913). The defendant, an infant, entered into a contract with the plaintiff, a
famous billiard player, to go on a world tour with him. The plaintiff spent time
and money in making arrangements for billiards matches but the defendant
repudiated the contract before the tour began. The plaintiff succeeded in recovering
damages to the tune of £1,500 for the breach of the contract. It was observed by
the court that “to play in company with a noted billiard player like the plaintiff
was instruction of the most valuable kind for an infant who wished to make billiard
playing his occupation.” Here the contract was held to be for necessaries as it
was the infant’s “good teaching or instruction whereby he may profit afterwards.”
(vi) Liability for Necessaries: A minor is liable for necessaries supplied to
him or his minor dependent by another person. This implies that a minor
can make valid contract for necessaries. The law has provided the
exception intentionally because if it were no so, it would be almost
impossible for minors to live and feed their dependents, if any.
What is necessary for a minor? It depends on the fortune of the particular
minor. Thus, article that may be considered necessaries for one may be mere
conveniences for matters of taste for others. Whether an article is a necessary or
not also depends upon the circumstances in which it is brought and the use for
which it is put. For instance, articles purchased by a minor for his wedding may
be deemed necessary, while under ordinary circumstances the same articles may
not be considered so. Again, debt incurred for performing funeral obsequies of
the father of a minor is necessary. So also expenses incurred on the defense of
minor’s property or liberty. Such expenses are considered necessaries which can
be recovered from the minor’s estate.
In order to render a minor’s estate liable for necessaries two conditions must
be satisfied: (1) the contract must be for goods reasonably necessary for his support
in his station in life, and (2) he must not have already a sufficient supply of these
necessaries.
(vii) Minor as an Agent: Although a minor is not entitled to employ an agent,
he can be an agent himself for someone else. As an agent, he can
represent the principal, and bind him for his acts done in the course of
agency. But the minor is not responsible to the principal for his acts.
(viii) Minor as a Partner: According to the Partnership Act, 1932, a minor
cannot make a contract of partnership though he may be admitted to its
benefits with the consent of all the partners. A minor partner cannot be
made personally liable for any obligation of the firm, but his share in the
firm’s property can be made liable.
(ix) Minor as a Shareholder: Since membership of a company arise on the
Module Five • Indian Contract Act, 1872 139

basis of a contract, a minor cannot be a member of a company. However,


he is not expressly forbidden by any law in force in India from holding
shares in a company provided he is properly represented by a guardian
who should act on his behalf. Even then, the minor does not incur any
liability to pay the call money and he can always repudiate the contract
even if he had fraudulently overestimated his age at the time of becoming
a member, or his name appears inadvertently in the register of members.
(x) Insolvency: A minor cannot be declared insolvent as he is capable of
entering into a valid contract.

Persons of Unsound Mind


An agreement with a person of unsound mind is like that of minor, is absolutely “a person is said to
have a sound mind
void. According to Section 12 “a person is said to have a sound mind for the
for the purpose of
purpose of making a contract if, at the time when he makes it, he is capable of making a contract
understanding it and of forming a rational judgement as to its effects upon his if, at the time when
interests.” However, a person who is usually of unsound mind may make a contract he makes it, he is
capable of under-
when he is of sound mind. But a person who is usually of sound mind cannot standing it and of
make a contract when he is of unsound mind. For example, a patient in a lunatic forming a rational
asylum, who is at intervals of sound mind, may contract during those intervals. judgement as to its
effects upon his in-
Another example is that a sane man, who is delirious from fever, or who is so terests.”
drunk that he cannot understand the terms of a contract or form a rational judgement
as to its effect on his interests, cannot contract whilst such delirium or drunkenness
lasts. A drunken person is treated in same category as a person of unsound mind.
Law relating to contractual capacity of persons of unsound mind in our country
contrasts from English Law. The difference between the two is revealed in Table
5.1.
Table 5.1 Difference between Indian Law and English Law relating to
Persons of Unsound Mind.

Indian Law English Law


1. A person with unsound mind 1. A person with unsound mind
cannot enter into contract is competent to contract
2. A contract with a person of 2. Contract with a person of unsound
unsound mind is absolutely void mind is voidable at his option

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.

5.11 FREE CONSENT


Free consent, as was pointed out earlier, is one of essentials of a valid contract.
This sub-chapter is devoted to a detailed discussion of free consent.
Consent is said to exist when two or more persons agree upon the same
Consent is said to thing in the same sense. To quote Section 13 “Two or more persons are said to
be free when it is consent when they agree upon the same thing in the same sense.”
not caused by coer-
c ion, undue influ- When the consent is obtained without coercion, undue influence, fraud,
enc e, fraud, mis - misrepresentation or mistake, it becomes free consent. To quote Section 14 consent
representation and is said to be free when it is not caused by:
mistake.
1. Coercion, as defined in Section 15, or
2. Undue influence, as defined in Section 16, or
3. Fraud, as defined in Section 17, or
4. Misrepresentation, as defined in Section 18, or
5. Mistake, subject to the provisions of Sections 20, 21 and 22.
Where consent to an agreement is caused by coercion, undue influence, fraud,
or misrepresentation, the agreement is a contract voidable at the option of the
party whose consent was so caused. Where consent is caused by mistake, the
agreement is void (see Fig. 5.9).
Module Five • Indian Contract Act, 1872 141

Fig. 5.9 Circumstances when Consent is not Free

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.

Distinction between Coercion and Undue Influence


The law draws distinction between coercion and undue influence. The
distinction is shown in Table 5.2.
Table 5.2 Distinction between Coercion and Undue Influence

Coercion Undue Influence


1. Consent is obatined under the 1. Consent is obtained by the dominant
theat of an offence. The person will of another. Consent is given in
is forced to give his consent. good belief, but under moral influence.
Confidence is reposed, but betrayed.
2. Coercion is mainly of physical 2. Undue influence is mainly moral in
character. It involves use of character. It involves use of moral
physical or violent force. force or mental pressure.
3. Coercion attracts the provisions of 3. There is no criminal liability in the
of the Indian Penal Code. As such, case of undue influence.
the party exercising coercion
exposes himself to criminal liability,
besides an action on contract.

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

by misleading another to his prejudice; or to the prejudice of any one


claiming under him;
(iii) causing, however innocently, a party to an agreement, to make a mistake
as to the substance of the thing which is the subject of the agreement.”
To cut short, misrepresentation refers to misstatement of a fact material to a Misrepresentation
contract. As was pointed out in the beginning of this chapter, a contract the refers to misstate-
ment of a fact ma-
consent to which is induced by misrepresentation is voidable at the option of the terial to a contract.
deceived party.
Continuing with Sec. 18, the following are the types of misrepresentation
according to the section.

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

3. Inducing Mistake about Subject-matter


If the party to an agreement induces the other party, although innocently, to
commit a mistake as to the nature or quality of the subject-matter of the agreement,
he becomes guilty of misrepresentation. The subject-matter of every agreement is
supposed by the parties to possess certain value or quality. If one of the parties leads
the other, however innocently, to make a mistake as to the nature or quality of the
subject-matter, there is misrepresentation, Jonson vs. Crowe (1874) is a case in
the context. The defendant agreed to sell and deliver a boiler to the plaintiff at Rajghat.
At the time of entering into the contract, the plaintiff made the representation that
there was a road all the way to carry the boiler. The representation was innocent. In
fact there was a suspension bridge on the way but the bridge was not strong enough
to bear the weight of the boiler. When the defendant came to know of the fact, he
abstained from delivering the boiler. In a suit by the plaintiff, it was held that the
agreement was voidable at the option of the defendant.
Misrepresentation may also arise from suppression of vital facts. Suppression
of a fact may amount to breach of duty or inducing the other party to commit a
mistake about the subject-matter of the contract. For instance, the prospectus of
a company, in R.V. Kylsant (1932) stated that the company was paying dividends
regularly implying that it was making profits continuously. But the truth was
that the company was in red for several years and dividends were paid out of war
times accumulated profits. Concealment of this information was as clear as
misrepresentation.
Fraud means and Fraud is intentional or deliberate misrepresentation of facts. According to
includes any of the
Section 17, “Frauds means and includes any of the following acts done with “intend
following acts done
with “intend to de- to deceive” or to induce a person to enter into a contract.”
ceive” or to induce 1. The suggestions that a fact is true when it is not true and the person
a pers on to enter
into a contract. making the suggestion does not believe it to be true;
2. Active concealment of a fact by a person who has knowledge or belief of
the fact;
3. Promise made without any intention of performing it;
4. Any other act fitted any intention of performing it;
5. Any such act or commission as the law specifically declares to be
fraudulent.

Essential Elements of Fraud


An act becomes a fraud when it has the following components: (See Fig. 5.10).

Fig. 5.10 Characteristics of Fraud


Module Five • Indian Contract Act, 1872 147

(i) There must be a representation or assertion and it must be false.


(ii) The representation must relate to a fact.
(iii) There must be active concealment of a fact of which the party has the
knowledge and duty to disclose.
(iv) There must be a promise without any intention of performing it.
(v) Any act or omission which the law refers it to be fraudulent or fitted to
deceive which is done with obvious intention to commit fraud.
(vi) The other party must have acted upon the false representation, and must
have been deceived and must have suffered loss or damage.
The contract, the consent for which has been obtained by fraud, is voidable
at the option of the party whose consent was so caused.
A leading case in this context is Derry vs. Peek (1889). In this case, the
company’s prospectus contained a representation that the company has been
authorized by a special Act of parliament to run trams by steam or mechanical
power. The authority to use stream was, in fact subject to the approval of the
Board of Trade, but no mention was made of this. The board refused consented
consequently the company was wound up. The plaintiff, having bought some
shares, sued the directors for the fraud. But the directors were not held liable as
they were not held guilty of fraud. They honestly believed that once the parliament
had authorized the steam the consent of the Board would automatically come
forward. There was a false representation but was done believing it to be true. If
representation was made deliberately, it would have amounted to fraud.
Another interesting case is the Reese River Silver Mining Co. vs. Smith
(1869). In this, a company issued prospectus giving false information about the
unbounded wealth of Nevada. A shareholder, who has taken shares on the faith
of the prospectus, wanted to avoid the contract. It was held that the shareholder
could do it as the false representation in the prospectus amounted to fraud.

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

in possession of all material facts affecting the risk covered. Failure to


do so amounts to a fraud, notwithstanding the certificate issued by the
medical officer of the insurance corporation to the effect that the health
of assured is good (P. Sarojam vs. LIC, 1986). It is for this reason that
the contract of insurance is called the contract of absolute good faith.
2. Silence amounts to fraud when there is a change of circumstances.
Sometimes a representation is true when made, but may become false
when acted upon by the other party, this may happen because of changed
circumstances. In such cases, it is the duty of the person who made the
representation to communicate the change of circumstances. In
Rajagopala Iyer vs. The South Indian Rubber Works (1942), a
company’s prospectus represented that certain persons would be
directors of the company. This was true. But before the allotment took
place, there were changes in the board, some directors having retired.
The allotee was allowed to avoid the allotment as the change was not
communicated to him in time.
3. Finally, silence amounts to fraud when a person voluntarily makes
a statement but stops half way through. In other words, the person
has disclosed only half truth. Having committed himself to disclose, he
has a duty to speak out the remaining truth. Failure to do so amounts to
fraud. As is wellknown, “half truth is not better than a down right
falsehood.”

5.12 MISREPRESENTATION AND FRAUD COMPARED


There are similarities and differences between misrepresentation and fraud.
They are shown in Table. 5.3.

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

3. Contract is voidable at the option 3. Voidable and gives rise to an


of the party whose consent was independent action in tort for
caused by misrepresentation. damages.
4. Aggrieved party cannot avoid the 4. Except in fraud by silence, the
contract if he had the means to contract is voidable even though the
discover the truth with ordinary aggrieved party had the means of
diligence. discovering the truth with ordinary
diligence.

Fig. 5.11 Classification of Mistakes

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.

5.13 VARIATIONS OF BILATERAL MISTAKES


The various cases of bilateral mistakes are explained below:
Bilateral mistake is one where both the parties to an agreement are under a
mistake relating to the subject-matter, the contract is void (Galloway vs. Galloway).
Mistake relating to the subject-matter may be about (i) its non-existence,
(ii) identity, (iii) title, (iv) quantity, (v) quality, (vi) price, or (vii) performance. The
following examples underline the principles:
150 150 Legal Aspect of Business • Module Five

(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.

5.14 LEGALITY OF OBJECT


A contract the ob-
Legality of object is yet another requirement of a valid agreement. A contract ject of which is op-
the object of which is opposed to the law of the land may be either unlawful or posed to the law of
simply void, depending upon the provision of the law to which it is opposed. the land may be ei-
th er u nlaw ful or
Unlawful agreements are discussed here. The discussion of void agreements follows s i mply v oi d, d e-
in the latter section in third sub-chapter. pending upon the
provision of the law
to which it is op-
5.15 UNLAWFUL AGREEMENTS posed.

According to Section 23 certain considerations and objects are declared


unlawful. The consideration or object of an agreement is lawful, unless:
152 152 Legal Aspect of Business • Module Five

— 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.

5.16 ILLEGAL CONTRACTS

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

Fig. 5.12 Unlawful Objects of Consideration

(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.

2. Defeat any Law


Sometimes the consideration for an agreement may not be directly forbidden
by law, but if permitted, it might defeat the provisions of any law. Such agreement
is also void. A popular case in this context is the Fateh Singh vs. Sanwal Singh
(1878). An accused is required under the Criminal Procedure Code to furnish a
surety in the sum of five thousand rupees for his good behaviour. He deposits the
sum with the defendant and persuades him to become surety. After the period of
suretyship is over the accused sues the defendant for the amount. The Allahabad
High Court held the agreement to be void and the amount irrecoverable.
Similarly, in Chandra Sreenivasa Rao vs K.R.R. Mohan Rao (1952), the
Madras High Court held the view that the amount advanced under a promissory
note for the purpose of celebrating a marriage contrary to the provisions of the
Child Marriage Restraint Act, 1929, could not be recovered since the purpose of
borrowing was of such a nature that, if permitted, would defeat the provisions of
the Child Marriage Restraint Act.

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

The agreement between A and B is void, as it implies fraud by concealment by A,


on his principal.

4. Injurious to Person or Property


An agreement between two persons to injure the person or property of another
is unlawful and therefore void. In the same way, if the object of an agreement is
such that is involves or implies injury to the person or property of another, the
agreement is void. Agreements relating to bonded labour have also been held to
be injurious to person and hence are void.
In Ram Sarup vs. Bansi Mandir (1915), a debtor who owed Rs. 100
executed a bond by which he was required to put forth manual labour until the
amount was repaid and in case of default, he had to pay exorbitant interest. The
agreement was declared void.

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

(v) Maintenance and champerty — agreements that tend to promote


speculative litigation’s.
(vi) Stifling prosecution — an agreement not to prosecute an offender.
(vii) Sale of seats in a public institution, e.g., a medical college (N.V.P. Pandian
vs. M.M. Roy (1979).
(viii) Consideration for the contract in the marriage expenses of minor girl.

5.17 VOID AGREEMENTS


An agreement not enforceable by law is said to be a void agreement. It is
useful to make distinction between unlawful and void agreements. An unlawful
or illegal agreement is one which is actually forbidden by law. A void agreement
on the other hand, is not forbidden by law as in the case of a contract with a
minor. But both illegal and void agreements are not enforceable. Thus, an illegal
agreement is both unenforceable and forbidden but a void agreement is only
unenforceable but not illegal.
The following is said to be void agreements (see Fig 5.13).

Fig. 5.13 Void Agreement

The other void agreements are those made by incompetent persons,


agreements made under bilateral mistake of fact, and agreements of which
consideration or object is unlawful. These were already explained in the earlier
sub-chapter in this book. It is proposed to discuss here only those unenforceable
agreements which are shown in Fig. 5.13.

1. Agreements in which a part of the consideration or Object is


Unlawful (Section 24)
If any part of a single consideration for one or more objects or any one or any
part of anyone of several considerations for a single object, is unlawful, the
agreement is void. In other words, when a part of the consideration for an object
or more than one object of an agreement is unlawful, the agreement is void. The
whole of the agreement would be void unless unlawful portion can be separated
without damaging the lawful portion.
In Gopalrao vs. Kallappa (1901), a licence was granted to a person for sale
of opium and ganja with a rider that he would not take any partner in the ganja
business without the permission of the collector. Without such permission he
admitted a partner into the whole business on receiving from him a fixed sum as
his share of capital. Differences arose between them subsequently. The new entrant
filed a case for dissolution and refund of his money. His claim was not allowed as
it was impossible to separate the contract or to determine how much capital was
advanced for the opium and how much for the ganja.
But if the legal part of an agreement is severable from illegal, the former
would be valid. In Poonoo Bibi vs. Fyaz Buksh (1874), a Muslim husband agreed,
by a registered deed, to handover to his wife the totality of his earnings and not to
156 156 Legal Aspect of Business • Module Five

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.

2. Agreements without Consideration (Section 25)


An agreement without consideration is void. This rule is subject to certain
exceptions which were considered in earlier sub-chapter in this book.

3. Agreements in Restraint of Marriage (Section 26)


An agreement in restraint of marriage of any person, other than a minor, is
void. It is the policy of law to discourage agreements which restraint freedom of
marriage. Hence, this provision. In Lowe vs. Peers (1768), P promised L only and
none else and to pay a definite sum if he married someone else. P married X. It
was held that L could not recover the sum as the agreement was in restrain of
marriage and therefore not enforceable.

4. Agreements in Restraint of Trade (Section 27)


Ev e ry ag reem ent Every agreement by which anyone is restrained from exercising a lawful
by which anyone is
restrained from ex-
profession, trade or business of any kind, is to that extent void. This provision
erc is in g a lawf ul has been incorporated in the Contract Act because carrying a lawful business of
profession, trade or one’s choice is a Fundamental Right guaranteed by the constitution to the citizens
bu s ine s s of a ny of India. Courts in our country have been zealously guarding this right as a
kind, is to that ex-
tent void. principle of common law. The principle of law is “public policy requires that every
man shall be at liberty to work for himself, and shall not be at liberty to deprive
himself or the state of his labour, skill or talent, by any contract that he enters
into.”
In Madhub Chander vs. Rajcoomar (1874), the plaintiff and the defendant
were rival shopkeepers in a locality in Calcutta. The defendant agreed to pay a
sum of money to the plaintiff if he would close his business in that locality. The
plaintiff did close the shop but the defendant refused to pay. It was held that the
agreement was void.
Similarly, in Nordenfelt vs. Maxim Nordenfelt Gun Co. (1894), the appellant,
Thorston Nordenfelt, a manufacturer and inventor of guns and ammunition had
established a valuable business in England and Sweden. In 1886, he sold his
business to the respondent company for £2,87,500 and entered into an agreement
according to which he would not, (1) for 25 years, engage except on behalf of the
company, either directly or indirectly in the trade or business of manufacture of
quick firing guns, (2) or in any business competing or liable to compete in any
way with that carried on by the company. He afterwards entered into an agreement
with another manufacturer of guns and ammunition and the company brought
an action to restrain him.
It was held that the first part of the agreement was valid being reasonably
necessary for the protection of buyer’s interest. But the second part of the covenant
by which he was prohibited from competing with the company in any business
that the company might carry on was held as unreasonable and therefore void.
Lord Macnaghten laid down: The public have an interest in every person’s carrying
on his trade freely. So has the individual. All interference with individual liberty
of action in trading, and all restraint of trade of themselves, if there is nothing
Module Five • Indian Contract Act, 1872 157

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

But an agreement to restrain an employee from competing with his employer


after the termination of employment is void. In Brahamaputra Tea Company vs.
Scarth (1885), it was held that an agreement restraining an employee from taking
service or engaging in any similar business for a period of five years after
termination of his services was void.

5. Restraint of Legal Proceedings (Section 28)


An agreement which prohibits a person from taking judicial proceedings, in An agr eeme nt
whic h prohibits a
respect of any right arising from a contract, is void. Similarly, any time limitation
person from taking
within which he may enforce his rights is also void. jud ic ia l pr oc ee d-
ings, in respect of
There are two exceptions to the rule laid down in Section 28. They are:
any rig ht a ris i ng
(a) a contract between two or more persons to refer to arbitration any dispute from a contract, is
void.
that may arise between them and to recover only the amount awarded in
such arbitration in respect of the dispute so referred, and
(b) an agreement to refer to arbitration any question which has already
arisen.
Agreement in restraint of legal proceedings is void.
Sec. 28 provides that any agreement which absolutely restricts a party to it
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.
This section recognizes well-known rule of English Law which prohibits an
agreement ousting jurisdiction of the courts. Art. 32 of the Constitution guarantees
that rights to move Supreme Court by appropriate proceedings for enforcement of
rights conferred by
Part III — Fundamental Rights is guaranteed.
1. Restriction on Jurisdiction of Courts: Parties to an agreement may
restrict the right of either party to sue in a particular court only. A mere
selection of one of the two competent tribunals for disposal of disputes
between the parties is not invalid. Thus is a contract between A & B of
Mumbai and Bangalore respectively, it may be provided that all disputes
between them should be decided by a court of Mumbai. Therefore in
case B files a suit in Bangalore, A may successfully object to the
jurisdiction of courts in Bangalore
2. Restrictions on Time Limitation: Though a term in an agreement
absolutely restricting the time within which legal rights are to be enforced
is not valid to that extent, law does not prohibit an agreement which
does not absolutely limit the time for enforcing any rights, but only
provides that failure to enforce them within a stipulated time shall operate
as a release or forfeiture of such rights are outside the scope of the
section and are therefore binding between the parties, Baroda Spinning
v/s Satynarayana 1914, 38 Bombay 344.
3. Agreement to Refer a Dispute to Arbitration: Exception to Section 28
relates to a provision in an agreement to refer a dispute that may arise
to arbitration. Such an “Arbitration Clause” is not affected. Similarly
(Exception 2) where parties to a contract have agreed to refer a dispute
that has already arisen to arbitration is not affected by any provision of
160 160 Legal Aspect of Business • Module Five

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.

6. Unmeaning of Uncertain Agreements (Section 29)


According to Section 29 all agreements, the meaning of which is not certain,
or capable of being made certain, are void.
The reason is without certainty it is not possible for courts to give practical
meaning to a contract. If the terms of the contract are not clear there is nothing
that could been enforced. For example, in Guthyng vs. Lynn (1831), a horse was
bought for a certain price coupled with a promise to give 5 pound more if the
Module Five • Indian Contract Act, 1872 161

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.

7. Wagering Agreements (Section 30)


Section 30 of the Act lays down that agreements by way of wager are void,
and no suit shall be brought for recovering anything alleged to be won on any
wager, or entrusted to any person to abide by the result of any game or other
uncertain event on which any wager is made.
A wager is an agreement between two parties by which one party has to pay A w ager is an
agreement between
money to another party on the happening or not happening of a future uncertain two par ties by
event. Besides uncertainty of event, a wager possesses other features. An which one party has
agreement becomes a wager when it has the following features: to pay mo ney to
another party on
(a) Uncertain Event: As stated above, an agreement becomes a wager when the happenin g or
it is based on the happening or not happening of a future event. A wager not happening of a
generally contemplates a future event, but it may relate to an event which fu ture unc erta in
event.
has already happened in the past, but the parties are not aware of its
result or the time of its happening.
(b) Mutual Chances of Gain or Loss: The second essential feature is that upon
the happening of the contemplated event each party should stand to win or
loose. If there are no such mutual chances of gain or loss, there is no wager.
(c) Neither Party to have Control Over the Event: The third essential
feature is that neither party should have control over the happening of
the event one way or the other. If one of the parties has the event in his
own hands, the transactions lacks an essential ingredient of a wager.
(d) No Other Interest in the Event: Finally, neither party should have any
interest in the happening of the event other than the sum of stake he
will win or lose. If neither of the parties has any proprietary interest in
the subject-matter of the agreement, the same ceases to be a wagering
agreement, but becomes enforceable as a contract. It is on this basis
that a wagering agreement is distinguished from a contract of insurance.
Every contract of insurance requires, for its validity, the existence of
insurable interest. An insurance effected without insurable interest is
no more than a wagering agreement, and therefore, void. Insurable
interest means the risk of loss to which the assured is likely to be exposed
by the happening of the event assured against. In a wager, on the other
hand, neither party is running any risk of loss out of the distinction
between the two more clearly.
162 162 Legal Aspect of Business • Module Five

Table 5.4 Wagering and Insurance Contracts Distinguished

Insurance Agreements Wagering Agreements


1. There is insurable interest. 1. There is no insurable interest.
2. Both parties have interest in the 2. Neither party has any interest in
subject-matter. the happening or non-happening of
an event.
3. These are valid contracts. 3. These are void agreements as they
are opposed to public policy.
4. These are contracts of indemnity 4. These are conditional contracts.
except life insurance contracts
which are contingent contracts.
5. A contract is based on scientific 5. A wagering agreement is just a
and actuarial calculation of risks. gamble.

Effects of Wagering Transactions


Coming to the wagering agreements, as stated above, these agreements are
void. For example, in Badridas Kothari vs Megharaj Kothari (1967), two persons
entered into wagering transactions in shares and one became indebted to another.
A promissory note was executed for the payment of the debt. The note was held to
be enforceable.

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

8. Agreements to do Impossible Acts (Section 56)


Section 56 of the Act lays down an agreement to do an act impossible in itself
is void. For example, if A agrees with B to discover treasure by magic, the agreement
is void. Similarly, if A agrees with B to put life into a dead man, the agreement is
void.
Sometimes the performance of a contract is quite possible when it is first
entered into by parties. But some event susequently happens which renders its
performance impossible or unlawful. In either case the contract becomes void.
For example after making a contract of marriage one of the parties goes mad, or
where a contract is made for the import of goods and the import is thereafter
forbidden by a Government order or where the singer contracts to sing and becomes
too ill to do so, the agreement in each case becomes void.

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.

Fig. 5.14 Discharge of a Contract

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.

Rules Relating to Performance


Rules relating to performance of promises are summarized below (see Fig.
5.15):

Fig. 5.15 Rules Relating to Performance

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

B. Party to Perform Contract


According to Section 40, if it appears from the nature of the case that it was
the intention of the parties to any contract that any promise contained therein
should be performed by the promisor himself, such promise must be performed
by the promisor. This happens in cases where the use of the personal skill of the
promisor is involved, for instance, the contract to paint, sing or marry, and contract
of technical nature. In such cases the death of the promisor puts an end to the
contract. The promise can neither be enforced against the leagel representatives,
nor can they enforce the promise.
If the intention of the parties to a contract is not particular that the promisor
alone should perform the promise, the promisor or his representatives may employ
a competent person to perform the promise.

C. Time and Place of Performance


With regard to time and place of performance the rules are as follows:
(i) Time for Performance of Promise — no Application is to be Made
and no Time is Specified: If a promisor has to perform his promise
without application by the promisee, and no time for performance is
specified, the engagement must be performed within a reasonable time
(Section 46). What is reasonable time is, in each particular case, a
question of fact. Unreasonably long delay cannot be regarded as
reasonable. For example, where a person undertook to discharge the
debt of another but no time for payment was fixed, it was held that the
offer of payment after three years was too late.
(ii) Time and Place for Performance of Promise, where Time is Specified
and no Application to be Made: When a promise is to be performed on
a certain day, and the promisor has undertaken to perform it without
application by the promisee, the promisor may perform it at any time
during the usual hours of business on such day and at the place at
which the promise ought to be performed (Section 47). In a promise, for
example, to deliver goods at the buyer’s warehouse, the tender of
performance must be made at that place. The promisor must bring gods
at that place during the usual business hours. If he brings the goods
after the business hours and they are not received, it cannot be said
that the promise has been performed. Where the day fixed for performance
happens to be a public holiday, then under the Negotiable Instruments
Act, the performance must be offered a day before. But in other cases
much depends upon the usage of the particular trade. If the usage permits
performance on the succeeding day, it will be reasonable to offer the
performance on that day.
(iii) Application for performance on Certain Day to be at Proper Time
and Place: When a promise is to be performed on a certain day, and the
promisor has not undertaken to perform it without application from the
promisee, it is the duty of the promisee to apply for performance at a
proper place and within the usual hours of business (Section 48). The
question what is proper place and time in each particular case, is the
question of fact.
(iv) Place for Performance, where no Application to be Made and no Place
Fixed for Performance: When a promise is to be performed without
166 166 Legal Aspect of Business • Module Five

application by the promisee, and no place is fixed for the performance of


it, it is the duty of the promisor to apply to the promisee to appoint a
reasonable place for the performance of the promise, and to perform it
at such place (Section 49). For example, A undertakes to deliver a
thousand maunds of jute to B on a fixed day. A must apply to B to
appoint a reasonable place for purpose of receiving it, and must deliver
it to him to such place.
(v) Performance in Manner or at Time Prescribed or Sanctioned by
Promise: the performance of any promise may be in any manner, or at
any time which the promisee prescribes or sanctions (Section 50).
For example, B owes A Rs. 2,000. A desires B to pay the amount to A’s account
in a bank. B who has an account in the same Bank, orders the Bank to transfer
the amount from his account to the credit of A. This was done by the bank. Before
A comes to know of this the bank fails. Even so B is discharged from his liability.

D. Performance of Reciprocal Promises


Wh en a c o ntra c t When a contract consists of an exchange of promises, they are called reciprocal
consists of an ex-
c h ange of pro m- promises. When such promises have to be performed simultaneously, the promisor
ises, they are called is not bound to perform unless the promisee is ready and willing to perform his
re c ipr oc al pro m- promise (Section 51).
ises.
For example, A and B contract that A shall deliver goods to B to be paid for by
B on delivery. A need not deliver the goods, unless B is ready and willing to pay
for the goods on delivery. B need not pay for the goods unless A is ready and
willing to deliver them on payment.
What is the Order of Performing Reciprocal Promises? Section 52 lays down
rules in this regard. According to the section, where an order for performing
reciprocal promises is fixed expressly, the performance must be in that order.
Where the order is not expressly fixed, the performance of promises must be in
that order which the nature of the transactions requires. In Hashman vs. Lucknow
Improvement Trust (1927), the defendant took a lease of land from a town
municipality on condition that he pays Rs. 630 for leveling charges and possession
was to be delivered after leveling. The question arose whether the sum was to be
paid before or after leveling. The agreement was silent on the point. The court
held that : in the ordinary course of business work is not usually paid for before
it is done. It is the custom in some cases for payment to be made in installments
as the work progresses but the person for whom a work is done is not expected to
pay the entire cost in advance without an express agreement to that effect.
What if One Party Prevents the Other from Performing His Promises? Section
53 provides answer to this question. The section lays down the principle that
where one of the parties to reciprocal promises prevents the other from performing
his promise, the contract becomes voidable at the option of the party so prevented,
and he is entitled for compensation from the other party for any loss which he
may sustain in consequence of the non-performance of the contract. For example,
A and B contract that B shall execute certain work for A for a thousand rupees. B
is ready and willing to execute the work accordingly, but A prevents him from
doing so. The contract is voidable at the option of B; and if he elects to rescind it,
he is entitled to recover from A compensation for any loss incurred as a result of
non-performance.
What happens when a promise which must be first performed is not
performed? Section 54 has answer to this question. The section lays down that
Module Five • Indian Contract Act, 1872 167

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.

E. Time for Performance


Sometimes the parties to a contract specify the time for its performance.
Ordinarily it is expected that either party shall perform his obligation at the
stipulated time. But if one of them fails to do so, the question arises what is the
effect upon the contract. Section 55 provides the answer.
According to this section if the intention of the parties was that time should
be the essence of the contract, then a failure to perform at the agreed time
renders the contract voidable at the option of the opposite party. Time is generally
considered to be of the essence of contract in the following cases:
1. Where the parties have expressly agreed to treat it as the essence of the
contract.
2. Where delay operates as an injury.
3. Where the nature and necessity of the contract requires it to be so
construed, for example, where a party asks for extension of time for
performance.
Where time is not of the essence of the contract, failure on the part of the
promisor to perform his obligation within the fixed time does not make the contract
voidable, but the promise is entitled to compensation for any loss caused to him
by such failure. Example of an agreement where time is not of essence is the one
for the sale of immovable property.

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.

Contracts which Need not be Performed


Sections 62 to 67 of the Act state the following circumstances under which
contracts need not be performed:
1. If the parties to a contract agree to substitute a new contract for it, or to
rescind, or alter it, the original contract need not be performed (Section
62).
2. If parties to a contract agree to dispense with or remit performance of
promise, technically called a remission, either wholly or in part, the
original contract stands discharged (Section 63).
3. When a person at whose option a contract is voidable rescinds it, the
other party thereto need not perform his promise (Section 64).
4. If any promisee neglects or refuses to afford the promisor reasonable
facilities for the performance of his promise the promisor is executed by
Module Five • Indian Contract Act, 1872 169

such neglect or refusal as to any non-performance caused thereby


(Section 67). For example, A contracts with B to repair B’s house. B
neglects or refuses to point out to A the places in which his house requires
repair. A is excused for the non-performance of the contract, if is caused
by such neglect or refusal.

2. Impossibility of Performance and Frustration


According to Section 56 an agreement to do an act impossible in itself is void. An agreement to do
an act impossible in
For example, A agrees with B to discover treasure by Magic. The agreement is
itself is void.
void. Even subsequent impossibility renders a contract void. Sometimes the
performance of a contract is quite possible when it is made by the parties. But
some event subsequently happens which renders its performance impossible or
unlawful. In either case, the contract becomes void. Where, for example, after
making a contract of marriage, one of the parties goes mad, or where a contract is
made for the import of goods and the import thereafter forbidden by the
Government order, or where a singer contracts to sing and becomes too ill to do
so, the contract in each case becomes void. The principle of subsequent
impossibility is popularly called the ‘doctrine of frustration.’

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).

Fig. 5.16 Heads of Frustration

(i) Destruction of subject-matter: The doctrine of frustration applies with


full force where the actual and specific subject-matter of the contract
has ceased to exist. A leading case in this context is the Taylor vs.
Caldwell (1863). In this case the defendant had agreed to let the plaintiffs,
170 170 Legal Aspect of Business • Module Five

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

(vi) Intervention of war: As soon as a war breaks out, it becomes impossible


to perform a contract. During the continuance of war, therefore, the
contracts are suspended and may be resumed after the war is over. If
continued for a longer-period the inordinate delay makes the contract
void. A contract with an alien enemy is void.

Exceptions to Doctrine of Frustration


Supervening impossibility or doctrine of frustration will not discharge a
contract in the following cases:
(a) Difficulty of performance: Unexpected difficulty does not excuse
performance. In Karl Ettlinger vs. Chagandas & Co. (1915) X promised
to send certain goods from Bombay to Antwerp in September. In August,
war broke out and shipping space was available at very high rates. It
was held that the increase of freight rates did not excuse performance.
(b) Commercial Impossibility: A contract is not discharged merely because
expectation of higher profits is not realized, or the rates of materials
have gone up because of outbreak of war, or there is a sudden
depreciation of currency.
(c) Default of a third party: Where performance of contract is not possible When the parties to
because of the default by a third party, the contract is not discharged. In a contract agree to
substitute the exist-
Harnandrai Fulchand vs. Pragdas (1923), A a wholesaler, entered into
ing contract with a
a contract with B for the sale of a certain type of cloth to be produced by new one, it is called
C, a manufacturer of the cloth. It was held that A was liable to B for novation.
damages.
(d) Strikes, Lockouts and civil disturbances: A strike by workers, or a
lockout by an employer does not excuse performance unless there is a
clause in the contract providing that in such cases that contract is not
to be performed or that the time of performance is to be extended. Same
logic applies to a civil disturbance too.
(e) Failure on one of the objects: When there are several purposes for
which a contract is entered into, failure of one of them does not discharge
the contract.

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

Waiver means the


de libe rate aba n-
don ment of the
rights by the parties
to a contract.

Fig. 5.17 Discharge of Agreement

(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.

5. Discharge by Operation of Law


A contract is discharged by the operation of other laws. There are three ways of
intervention of law: (i) death, (ii) insolvency, and (iii) unauthorized alteration.
Module Five • Indian Contract Act, 1872 173

(i) Death: Death of the promisor results in termination of the contract in


cases involving personal skills or ability.
(ii) Insolvency: On a person being adjudicated insolvent, he is released
from all his debts and liabilities. The rights and liabilities are transferred
to an Official Assignee or an Official Receiver under the Presidency Towns
Insolvency Act or Provincial Insolvency Act, as the case may be. The
order of discharge gives a new lease of life to the insolvent, but not to his
earlier debts and obligations.
(iii) Unauthorized Alteration: Where one of the parties to a contract alters
any of its terms without seeking the consent of the other party to it, the
contract stands discharged.

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.

5.18 REMEDIES FOR BREACH OF CONTRACT

Breach and its Remedies


When all provisions of a contract have been complied with, the contract is
said to have been discharged. In effect, the contract no longer exists. Sometime,
however, the contract may never reach this stage, since one party may simply
refuse to perform or may handle the agreement in an unsatisfactory manner. on
occasion, this failure to perform may arise from changed conditions that make
performance impossible, but at other times there may be no real justification.
A breach of contract is the failure, without legal excuse, to perform any
promise that comprises the whole or part of a contract.

Major and Minor Breach


The courts say that whether the breach of a contract is major or relatively
minor makes a significant legal difference. But the courts do not lay down hard
174 174 Legal Aspect of Business • Module Five

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.

Options of Injured Party


When a major breach of contract occurs, the injured party to the agreement
will usually have several options:
Filing suit for monetary damages:
Asking the court for specific performance by the other party.

Fig. 5.18 Remedies for Breach of Contract

Instituting rescission (cancellation) and restitution.


Seeking money damages in a lawsuit not based on contract law, but rather
based on tort or quasi-contract (unjust enrichment) principles.
Of these possible remedies, a request for specific performance seeks to enforce
the contract, whereas the remedy of rescission requests a cancellation of the
contract.
As was pointed out in the previous sub-chapter breach of a contract occurs
when one of the parties to the contract refuses to perform it. When the breach
occurs, the aggrieved party is entitled to the following remedies: (See Fig. 5.18).
Module Five • Indian Contract Act, 1872 175

1. Sue for rescission of the contract.


2. Sue for damages.
3. Sue for injunction.
4. Sue upon quantum meruit.
5. Sue for specific performance.
A discussion of each remedy follows.

1. Rescission of the Contract


When a contract is broken by one party, the other party may sue for rescission
and refuse further performance. In such a case, he (the aggrieved) is absolved of
all his obligations under the contract.
The court may grant rescission in the following two cases:
(a) Where the contract is voidable at the option of the plaintiff the court
grants rescission to the plaintiff. For example, A sells a field to B. There
is a right of passage over the field of which A has direct personal
knowledge, but which he conceals from B. B is entitled to have the
contract rescinded.
(b) Where the contract is unlawful for causes not apparent on its face and
the defendant is more to blame than the plaintiff, the court may grant
rescission. For example, A, an attorney, induces his client B, a Hindu
widow, to transfer property to him for the purpose of defrauding B’s
creditors. Here the parties are not equally in fault and B is entitled to
have the instrument to transfer rescinded.
The court may, on the other hand, refuse to grant rescission in the following
cases:
(a) Where the plaintiff has expressly or impliedly ratified the contract;
(b) Where owing to the change of circumstances since the making of the
contract, the parties cannot be restored to their original positions;
(c) Where third parties having, during the subsistence of the contract
acquired rights in good faith and for value; or
(d) Where only a part of the contract is sought to be rescinded and such
part is severable from the rest of the contract.
Where the party treats the contract as rescinded, he makes himself liable to
restore any benefits he has received under the contract to the party from whom
such benefits were received. But if the person rescinds a contract he is entitled to
compensation for any damage which he has sustained through non-fulfillment of
the contract by the other party.

2. Suit for Damages


The party who has aggrieved by the breach of contract may bring an action ‘Da mage s ’ m ean
for damages. ‘Damages’ mean compensation payable in terms of money for the compensation pay-
ab le i n te rms of
loss suffered by the aggrieved or injured party. Rules regarding damages are: money for the loss
(i) the principle of “remoteness of damage”, (ii) compensation and not penal suffered by the ag-
damages, (iii) nominal damages, (iv) mental pain and suffering, (v) duty to mitigate, grieved or injured
party.
(vi) liquidated damages and penalty, (vii) statutory damages, (viii) interest by way
of damages, and (ix) difficulty of assessment (see Fig. 5.19).
176 176 Legal Aspect of Business • Module Five

Fig. 5.19 Rules as to Damages

A brief explanation of each rule follows:


Remoteness of Damages: Every breach of contract upsets many a settled
expectation on the injured party. He may feel the consequences for a long time
and in a variety of ways. A person, for example, agrees to supply to a shop-keeper
pure mustered oil but supplies impure stuff instead. This is a breach, prosecuted
and convicted. He suffers the loss of oil, the loss of profit, the loss of his personal
prestige, and the prestige of his business. Besides of course the loss of time,
money and energy wasted on defense and the mental agony and torture of the
prosecution.
Thus, the consequence of a breach may be endless, but there must be an
end to liability. The defendant cannot be held liable for all that follows from his
breach. There must be a limit to liability and beyond this damage is said to be too
remote and, therefore, not recoverable. The problem is to decide the limit. The
historic judgement in Hadley v. Baxendale (1854) provides answer to the problem.
The facts of the case are:
The plaintiff were engaged in milling business at Gloucester. The mill was
stopped owing to the breakage of crankshaft, which was the only one they had.
They ordered a replacement from a firm by name Joyce & Co., engineers at
Greenwich, who asked for the defective shaft to be sent to them as a pattern. The
shaft was accordingly sent to the defendants who were a firm of common carriers,
for the purpose of carrying it to Greenwich. At the time of delivery to the carriers,
the plaintiff’s clerk told them that the mill was stopped owing to the breakage of
the shaft and hence, it must be sent immediately.
Nevertheless there was delay in delivery due to negligence on the part of the
carriers, and the consequence was that the plaintiffs did not receive the new
shaft for several days. During the interval, the mill remained idle and the plaintiffs,
as a result, lost profit which they otherwise would have earned. Estimating the
loss of profit at £300, the plaintiff sought to recover the amount from the
defendants.
Alderson B. observed thus: “Where two parties have made a contract which
one of them has broken, the damages which the other ought to receive in respect
of such breach of contract should be such as may fairly and reasonably be
Module Five • Indian Contract Act, 1872 177

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

Difficulty of Assessment: Any difficulty in assessing damages shall not


prevent the injured party from recovering them. The court must do its best to
determine the amount of damages. In Chaplin v. Hicks (1911), the readers of a
certain newspaper had to select 50 ladies for a beauty contest organized by the
defendant. Out of the 50 selected, the defendant had to choose 12 for a theatrical
job. The plaintiff was one among the 50 selected by the readers. She was not,
however, given reasonable opportunity to appear at the final selection because of
negligence by the defendant. Although the value of a chance of getting selected in
a competition is difficult to assess, the breach by the defendant resulted in the
loss of that chance to the plaintiff. Accordingly, in a suit by her against the
defendant, she was awarded £100 as damages.

3. Sue for Injunction


An injunction is as order of the court directing a person to do or refrain from
doing some act, which is the subject-matter of the contract and which a party
undertakes to do or not to do. On breach of contract, court can restrain a party,
by an order of injunction, from committing the breach. The power of the court to
grant injunction is discretionary and may be granted for a temporary or an
indefinite period. An injunction is, therefore, used as means of enforcing a promise
or forbidding the party from committing a breach.

4. Sue upon Quantum Meruit


Quantum meruit is another remedy available for a party to a contract on its
breach. Often it so happens that one party to the contract has performed part of
the promise and fails to perform the remaining part because the other party has
committed a breach. The first must, therefore, be compensated for the part he
has performed. This is called the doctrine of quantum meruit which means ‘as
much as merited’ or ‘as much as earned or deserved.’
For example, where the author had prepared a considerable manuscript for
the publisher’s library but subsequently the publishers had discontinued the
library, the author was held entitled to compensation for the trouble he had taken
(Plinche v. Colburn, 1931). So also in Clay v. Yates (1856). The painter painted
most of the picture but refused to complete it because the work was libelous,
was held entitled to recover on quantum meruit.
Recovery on quantum meruit is allowed when a person has rendered services
under a supposed contract which turns out to be a nullity. In Craven Ellis v.
Canons. Ltd. (1936), the plaintiff was appointed managing director of a company.
The appointment was made by the other directors who were disqualified by reason
of having not taken their qualification shares. The plaintiff also did not take his
qualification shares. But he continued to act as managing director and sued the
company for his agreed remuneration or for a reasonable remuneration on the
basis of quantum meruit. His action for agreed remuneration was rejected as the
appointment was void but the court allowed reasonable remuneration on the basis
of quantum meruit.
Specific Performance: As pointed out, earlier the party injured by a breach
of contract may file a lawsuit asking for money damages. Or the injured party can
ask for specific performance. That is, the injured party may ask the court to
compel the defaulting (breaching) party to actually carry out what should have
been done under the terms of the agreement. Normally, all courts recognizes that
the aggrieved party can demand compensatory damages, but specific performance
180 180 Legal Aspect of Business • Module Five

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.

5. Sue for Specific Performance


Sue for specific performance is the last remedy available to the aggrieved
party. When damage is not an adequate remedy, the court may at its discretion,
grant the specific performance of the contract, compel the party in breach to do
what he promised to do. But unlike damages, specific performance cannot be
claimed as a matter of right. It is a discretionary remedy allowed in limited cases.

5.19 QUASI CONTRACTS AND CONTINGENT CONTRACTS

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.

Kinds of Quasi Contracts


Sections 68 to 72 provide for five kinds of quasi contractual obligations,
namely, (a) supply of necessaries, (b) payment by an interested person, (c) liability
to pay for non-gratuitous acts, (d) finder of goods, and (e) mistake (see Fig. 5.20).
A brief explanation of each follows:

Fig. 5.20 Types of Quasi Contract

A. Supply of Necessaries (Sec. 68)


Where necessaries are supplied to a person who is incompetent to contract
(for example, a minor) or to someone whom he is legally bound to support, the
supplier to recover the price from the property of the incompetent person.
182 182 Legal Aspect of Business • Module Five

To quote the section: “If a person, incapable of entering into a contract or


anyone whom he is legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person.”
For example, A supplies B, a lunatic, with necessaries suitable to his condition
in life. A is entitled to be reimbursed from B’s property.
Similarly, A supplies the wife and children of B, a lunatic, with necessaries
suitable to their condition in life. A is entitled to be reimbursed from B’s property.

B. Payment by an Interested Person (Sec. 69)


According to Sec. 69 “a person who is interested in the payment of money
which another is bound by law to pay, and who therefore, pays it, is entitled to be
reimbursed by the other.”
For example, B holds land in Bengal, on a lease granted by A, the Zamindar.
The revenue payable by A to the Government in arrears, his land is advertised for
sale by the Government. Under the revenue law the consequences of such sale
will be annulment of B’s lease. B to provide the sale and consequent annulment
of B’s lease. His own lease, pays to the Government the sum due from A. A is
bound to make good to B the amount so paid.
However, in a suit under this section, the following conditions must be fulfilled:
(a) The plaintiff must be interested in making the payment. The interest
which the plaintiff seeks to protect must be bonafide.
(b) It is necessary that the plaintiff should not be bound to pay. He should
only be interested in making the payment in order to protect his own
interest.
(c) The defendant should have been bound by law to pay the money.

C. Liability to Pay for Non-Gratuitous Acts (Sec. 70)


Section 70 says, “Where a person lawfully does anything for another person,
or delivers anything to him, not intending to do so gratuitously and such other
person enjoys the benefit thereof, the latter is bound to make compensation to
the former in respect of or to restore, the thing so done or delivered.”
For example, A, a tradesman, leaves goods at B’s house by mistake. B treats
the goods as his own. He is bound to pay A for them.
Similarly, A saves B’s property from fire. A is not entitled to compensation
from B if the circumstance show that he intended to act gratuitously.
In State of West Bengal vs. B.K.Mondal & Sons (1962), Gajendragadkar
stated three conditions on which the liability under Section 70 arises:
(i) “ a person should lawfully do something for another person or deliver
something to him;
(ii) in doing the said thing or delivering the said thing he must not be
intended to act gratuitously; and
(iii) the other person for whom something is done or to whom something is
delivered must enjoy the benefit thereof.”
Module Five • Indian Contract Act, 1872 183

D. Finder of Goods (Section 71)


Section 71 lays down the responsibility of a finder of goods. The section reads “A per s on who
finds goods belong-
thus: “A person who finds goods belonging to another and takes them into his ing to another and
custody, is subject to the same responsibility as a bailee.” His responsibilities takes them into his
are: custody, is subject
to the same respon-
(i) to take care of the goods, as a man of ordinary prudence would take care sibility as a bailee.”
of his own goods;
(ii) must, with reasonable diligence, trace the true owner;
(iii) not to make any unauthorized use of goods; and
(iv) to return the goods, along with accretion to them if any, to the true
owner.
For example, F picks up a diamond on the floor of S’s shop. He hands it over
to S to keep it till the true owner is found. No one appears to claim the diamond
from S who refuses to return. S is bound to return the diamond to F who is
entitled to retain the diamond against the whole world except the true owner.

E. Mistake (Section 72)


According to this section “ a person to whom money has been paid, or anything
delivered by mistake or under coercion, must pay or return it.”
For example, A and B jointly owes Rs. 100 to C. A alone pays the amount to
A contract is said to
C, and B not knowing this fact, pays Rs. 100 over again to C. C is bound to repay be contingent when
the amount to B. its performance is
mad e to dep end
Similarly, a railway company refuses to deliver certain goods to the consignee, upon the happening
except upon the payment of an illegal charge for carriage. The consignee pays a or not happening of
sum charged in order to obtain the goods. He is entitled to recover so much of the a future event which
is collateral to the
charge as was illegally excessive. contract.
Money paid under mistake is recoverable whether the mistake may be of fact
or of law. About mistake of law there was a controversy earlier. If a person, for
example, by an error paid sales-tax, should he be earlier permitted to file a suit
for its return? In Sri, Sir Shiba Prasad Singh vs. Maharaja Srish Chandra Nandi
(1949), the judicial committee of the Privy Council declared that under Section
72 it was immaterial whether it was a mistake of fact or law. What was not legally
due could be recovered as mistakenly paid.
The Supreme Court, in its decision in Sales Tax Officer, Banaras vs.
Kanhaiya Lal Mukund Lal Saraaf (1959), has accepted his interpretation of
Section 72. In this case a certain amount of sales tax was paid by the firm under
the U.P. Sales Tax Law on its forward transactions and subsequently the
Allahabad High Court ruled the levy of sales tax on forward transactions to be
ultra vires. The firm sought to recover back the tax. Allowing the recovery, the
Supreme Court observed that “section does not make any distinction between a
mistake of law or a mistake of fact. The term ‘mistake’ has been used without any
qualification or limitation whatsoever….”

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.

Rules Regarding Contingent Contracts


The following rules relate to contingent contracts (see Fig. 5.21).

Fig. 5.21 Rules of Contingent Contracts

1. Happening of a Future Event (Section 32): The future uncertain event


must happen if the contingent contracts were to be enforced. If the events become
impossible, the contingent contracts become void.
For example, A makes a contract with B to buy B’s house if A survives C. This
contract cannot be enforced by law unless and until C dies in A’s life-time.
Similarly, A contracts to pay B a sum of money when B marries C. C dies
without being married to B. The contract becomes void.
2. Not happening of a future event: Section 33 lays down that “contingent
contracts to do or not to do anything if an uncertain future event does not happen can
be enforced when the happening of that event becomes impossible, and not before.”
For example, A agrees to pay B a sum of money if a certain ship does not
return. Th ship is sunk. The contract can be enforced when the ship sinks.
3. Conduct of person at an unspecified time (Section 34): According to
Section 34 “if the future event on which a contract is contingent is the way in
which a person will act at an unspecified time, the event shall be considered to
become impossible when such person does anything which renders it impossible
that he should so act within any definite time, or otherwise than under future
contingencies.”
For example, A agrees to pay B a sum of money if B marries C. C married D.
The marriage of B to C must now be considered impossible although it is possible
that D may die and that C may afterwards marry B.
Module Five • Indian Contract Act, 1872 185

4. Specified Uncertain Event Happening within a Fixed Time (Section


35 (1)): According to Section 35 (1) “contingent contracts to do or not to do anything
if a specified uncertain event happens within a fixed time become void if, at the
expiration of the time fixed, such event has not happened, or if, before the time
fixed such event becomes impossible.”
For example, A promises to pay B a sum of money if a certain ship returns
within a year. The contract may be enforced if the ship returns within the year
and becomes void if the ship is burnt within the year.
5. Specified Uncertain Event not Happening Within a Fixed Time:
(Section 35 (2)): Section 35 (2) lays down that “contingent contract to do or not to
do anything, if a specified uncertain event does not happen within a fixed time
may be enforced by law when the time fixed has expired and such event has not
happened or, before the time fixed has expired, if it becomes certain that such
event will not happen.”
For example, A promises to pay B a sum of money if a certain ship does not
return within a year. The contract may be enforced if the ship does not return
within a year, or is burnt within the year.
6. Agreements Contingent on Impossible Events are Void (Section 36):
To quote Section 36 “contingent agreements to do or not to do anything if an
impossible event happens, are void, whether the impossibility of the event is known
or not to the parties to the agreement at the time when it is made.”
For example, A agrees to pay B Rs. 1000 if two straight lines should enclose
a space. The agreement is void.
Again, A agrees to pay B Rs. 1000 if B will marry A’s daughter C. C was dead
at the time of the agreement. The agreement is void.
Contingent Contracts vs. Wagering Contracts
Since a wagering contract resembles a contingent contract it is useful to
distinguish the two. Table 5.5 reveals the difference.
Table 5.5 Contingent and Wagering Contracts Distinguished

Contingent Contract Wagering Contract


1. A contingent contract is a 1. A wagering contract is an agreement
contract to do or not to do some- between two parties to the effect
thing if some event colateral to such that if a given event is determined
contract does or does not happen. one way, one of them shall pay a
sum of money to the other, and in
the contrary event, the latter shall
pay to the former.
2. It is not necessary that there 2. There is mutual promises, each of them
should be mutual promises. conditional on the happening or not
happening of an unknown event.
3. Parties are interested in 3. Neither party is interested in the
performing respective promises. performance of promises, but only
to pay or receive the difference.
4. These are valid agreements. 4. These are void.
5. The parties are interested in the 5. The parties are not interested in the
occurrence or non-occurrence occurrence or non-occurrence of the
of the event. event.
186 186 Legal Aspect of Business • Module Five

6. The future event is merely 6. The future event is the sole


collateral or incidental to the determining factor of the contract.
contract.
7. All contingent contracts are 7. All wagers are contingent.
wagers, insurance and
contracts of indemnity
and guarantee, for example.

5.20 THE FLIP SIDE OF THE INDIAN CONTRACT ACT, 1872


Is it possible for anyone to be acknowledgeable about laws which are almost
countless? The answer is it is not possible. In fact, it is a waste of time even for
lawyers, to be fully knowledgeable and to memorize all the legal rules. The reasons
are obvious:
(i) There are simply too many rules.
(ii) The same rules are not applied all over the country.
(iii) Rules are constantly modified by legislators, judges, and to a limited
extent by other officials.
(iv) Most rules are not simple and categorical.
But for the Contract Act, ignorance of law is no excuse.
Secondly, the contract Act is not comprehensive. It does not cover the whole
of contract. In fact, the preamble to the Act in using the phrase “to define and
amend certain parts of the law relating to contracts”, makes it clear that it does
not profess to be a complete code on contracts. Besides laying down the general
principles of law of contracts such as indemnity and guarantee, bailment and
pledge, and agency. It is not, however, cover such areas as partnership, sale of
goods and negotiable instruments which are also contracts.
Thirdly, the Act does not override usage or custom of trace. Section 1 of the
Act lays down that “nothing herein contained shall affect the provision of any
statue, act or regulation not hereby expressly repealed, nor usage or custom of
trade, nor any incident of any contract not inconsistent with the provisions of this
Act.” Accordingly, the Act does not supersede any custom of trade though it is
inconsistent with the provisions of the Act.
Fourthly, contract of marriage of a minor is treated as beneficial contract
according to the Contract Act. A minor can enforce a contract that is beneficial to
him. The argument behind this provision is that it is customary amongst most of
the communities in India for parents to arrange marriages among their minor
children and the law has to adopt itself to the habits and customs of the people.
But the customs in our country is gradually changing and the marriage below
18 (girls) and 25 (boys) years of age is discouraged and is even made an offence.
Under the present circumstances it would be difficult to understand why the
provisions is still retained in the Act.
True, preamble to the Contract Act says that no section in the Act shall affect
the provisions of any statute, act or regulations in force in the country. But a
premier legislation like the Contract Act allowing minor’s marriage is inconceivable
to say the least.
Finally, the Act, as was mentioned in the beginning, came into force in 1872
and since then it has not been amended till today. Not that the act has been
Module Five • Indian Contract Act, 1872 187

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

44. What is the basic rule in the assignment of contracts?


45. State remedies available on breach of contract.
46. State the circumstances when court can refuse rescission.
47. What do you mean by remoteness of damages?
48. What are special damages?
49. What do you understand by duty to mitigate?
50. What do you understand by quantum meruit?
51. What is a quasi contract?
52. What is a contingent contract?
53. State the various quasi contracts.
54. State the rules regarding contingent contracts.

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

7. What do you understand by competence of parties? State the position of a minor in


detail.
8. State briefly the law relating to competence of parties to a contract.
9. What are necessaries? When is a minor liable on a contract for necessaries?
10. Write, in your own words, summary of this sub-chapter.
11. Write, in your own words, a summary of this sub-chapter.
12. What is free consent? When is consent not free? Explain with illustrations.
13. What is coercion? Undue influence? Their impact on contracts.
14. What is fraud? Mistake? Their effect on contracts?
15. What is an unlawful agreement? State and explain the various unlawful agreements.
16. What is a void agreement? State and explain the various void agreement.
17. Write, in your own words, a summary of this sub-chapter.
18. What are the various ways in which a contract may be discharged? Explain.
19. Should notice of an assignment be promptly given? Why?
20. Explain, with illustration, what is meant by frustration of contact ?
21. Write, in your own words, a summary of this chapter.
22. Explain the various remedies available to an aggrieved party on the breach of a contract.
23. Explain the principles on which damages are awarded on the breach of a contract.
24. What is a quasi contract? Explain the different types of quasi contracts.
25. What is a contingent contract? Explain the rules regarding contingent contracts.


192 192 Legal Aspect of Business • Module Five
6
MODULE

SALE OF GOODS ACT, 1930

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

6.1 SALE OF GOODS ACT, 1930


Contracts relating to sale of goods are governed by the Sale of Goods Act,
1930. This Act codifies, in a separate enactment, the law relating to sale of goods
which was contained in Sec. 76 to 123 of the Indian Contract Act, 1872. These
sections have been repealed from the Contract Act and are embodied in the Sale
of Goods Act. The Sale of Goods Act is based on the principle of English Sale of
Goods Act, 1893.

Scope of the Act


Sale of Goods Act
The Act applies to the whole of India except the state of Jammu and Kashmir.
applies only to mov- It applies only to movable property other than actionable claims and money and
able property other not to immovable which are governed by the Transfer of Property Act, 1882.
than ac tion able
claims and money The Act deals with rights and duties of parties to a contract of sale. The
and not to immov- parties to the contract have unfettered freedom to agree to any terms they like
able which are gov-
erned by the Trans-
relating to delivery of goods and payment of price for them. The act does not seek
fer of Property Act, to fetter this freedom. Rather it seeks to balance these rights and duties of sellers
1882. and buyers of goods.

6.2 FORMATION OF THE CONTRACT OF SALE


A contract of sale, according to Sec. 4 of the Act, is “a contract whereby the
A contract of sale seller transfers or agrees to transfer the property in goods to the buyer for a price.”
“a contract whereby
the seller transfer or
This definition emphasises the following essential features of a sale (see Fig.
agrees to transfer 6.1).
the propert y in
goods to the buyer
for a price.”

Fig: 6.1 Essentials of a Contract of Sale

(i) Bilateral Contract: The contract of sale must essentially be a bilateral


contract because the property in goods should transfer from one party
to another.
The two parties are seller and buyer and these must be different persons.
The two must be different because a person cannot buy his own goods.
In the State of Gujarat v. Ramanlal S. & Co. (1965) a partnership firm was
Module Six • Sale of Goods Act, 1930 195

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

Table 6.1 Sale Distinguished from Agreement to Sell

Sale Agreement to Sell


1. Property or ownership of goods is 1. Ownership is to be transferred at a
transferred immediately to the future time or subject to certain
buyer. conditions to be fulfilled.
2. A sale makes the buyer owner of 2. An agreement to sell does not
goods. He can exercise all the entitle the buyer to sue for recovery
proprietary rights in respect of of goods, it only entitles him to sue
them, such as an action for for damages for breach and not for
conversion or detenue. If the seller recovery of goods. Buyer’s right is
refuses to deliver the goods, the buyer against the seller and against goods.
may sue for recovery of the goods.
3. If the buyer fails to pay for the 3. If the buyer fails to accept and pays
goods, the seller may sue for the for the goods, the seller can only sue
price. for damages and not for price.
4. If the goods are destroyed, the loss 4. If the goods are destroyed, the loss
falls upon the buyer (unless other- falls on the seller, unless otherwise
wise agreed) even though the goods agreed.
have never come into his possession.
5. The seller (in possession of goods 5. The seller can resell the goods because
after sale) cannot resell goods because their ownership continues to stay with him.
the property on goods vests with the The first buyer can only sue the seller for
buyer, if the seller sells, the second damage, the second buyer gets a goods
buyer cannot acquire a better title to the title to the goods even if he is aware of the
goods if he is aware of the previous sale. previous agreement to sell.
6. When seller is declared insolvent, 6. Buyer has to prove the amount he has
buyer is entitled to receive the goods paid to seller. He is entitled to receive
from the Official Assignee or Receiver. a ratable dividend, he cannot compel
the Official Assignee or Receiver to
deliver the goods.
7. If the buyer becomes insolvent 7. If the buyer becomes insolvent and
before he pays for the goods, the has not yet paid the price, the seller
seller, in the absence of a lien over need not part with the goods until
the goods, must return them to the paid for.
Official Receiver or Assignee. He can
only claim a ratable dividend for the
price of the goods.
8. A sale is an executed contract. 8. An agreement to sell is an executory A hi re-purc has e
contract. agreement is a con-
trac t whereby the
seller of the goods
6.3 SALE AND HIRE-PURCHASE AGREEMENT agrees to transfer
the property in the
A hire-purchase agreement is a contract whereby the seller of the goods agrees goods to the hire-
to transfer the property in the goods to the hire-purchaser after a fixed number of purc has er after a
instalments of price are paid by the buyer. If the hirer fails to pay any particular fix e d numbe r of
instalments of price
instalment, the seller has every right to terminate the contract and take away the are paid by the
goods. The instalments paid so far are assumed to be hire charges paid by the hirer buyer.
for use of goods. The following Table brings out the distinction more clearly:
198 198 Legal Aspect of Business • Module Six

Table 6.2 Sale distinguished from Hire-Purchase

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.

6.4 NATURE OF A BAILMENT


Personal property may not always remain under the owner’s care and control.
A variety of legal rights and claims may come into play when personal property is
loaned, sent for repairs, stored, or otherwise placed in the custody of someone
other than the owner — a type of transaction known as a bailment.

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.

Basic Requirements for a Bailment


The courts sometimes list three requirements for a bailment:
Title to personal property is not transferred.
Temporary possession and control is given to and accepted by the bailee.
Possession eventually reverts back to the bailor or to someone designated by
the bailor.

Sale and Bailment


While in a sale, the property to the goods is transferred from seller to buyer While in a sale, the
prop erty to the
for a price, in a bailment only the possession of goods is transferred from one goods is transferred
person (bailor) to another (bailee). The bailee is expected to return the goods to from seller to buyer
the bailor or dispose of as directed, after the purpose for which the goods were for a price, in a bail-
bailed, is served. The differences between sale and bailment are outlined in the ment only the pos-
session of goods is
Table 6.3. tran s ferred from
one person (bailor)
to another (bailee).
6.5 SUBJECT-MATTER OF CONTRACT OF SALE
As was pointed earlier, goods constitute the subject-matter of contract of
sale. Since goods are an important element, it is proposed to discuss in detail the
types of goods and the effect of destruction of goods.
Table 6.3 Sale Distinguished from Bailment

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.

Effect of Destruction of Goods


In a contract for sale of specific goods may perish before sale is gone through.
Future goods repre-
s ent goods to be Such a contingency may arise in any of the following two stages:
manu fac ture d or A. Goods Persisting Before Forming Contract (Sec.27): Where there is a contract
ac qu ired by the
seller after forming for the sale of specific goods, the contract is void if the goods without the knowledge
a contract. of the seller have, at the time when the contract is made, perished or so damaged
as no longer to answer to their description in the contract.
In order that the contract may be valid the following conditions must be
complied with:
(a) The goods must be specific goods. This action does not apply to
unascertained goods.
(b) The goods must have perished or so damaged as no longer to answer to
their description in the contract.
(c) The goods must have been so damaged or finished without the knowledge
of the seller.
(d) The goods must have been so damaged or finished before forming the
contract.
In Barrow Lane & Ballard V Phillips (1929): There was a contract for the sale
of a parcel of 700 bags of Chinese groundnuts. Unknown to the seller, 10 bags
had been stolen at the time of the contract. The seller delivered the remaining
591 bags and, on the buyer’s refusal to take them, bought-an action for the price.
It was held that the buyers were not liable to take or pay for the goods. The
buyers had contracted to buy a specific quantity and to ask them to take less
would be to compel them to do what they had not contracted to do. The contract
had accordingly become void by reason of the loss of goods.
B. Goods Perishing After Agreement to Sell (Sec.8): Where there is an agreement
to sell specific goods, and subsequently the goods without any fault on the part of
either seller or buyer perish or become so damaged as no longer to answer to
their description in the agreement before the risk passes to the buyer, the
agreement becomes void.
Module Six • Sale of Goods Act, 1930 201

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.

6.6 CONDITIONS AND WARRANTIES


A contract contains some stipulations or terms some of these terms may be May seem to upset
the v ery basis of
essential to the contract and others are incidental or collateral to it. The former
the contract. They
are hard core of the contract and their non-fulfillment may seem to upset the very may be so vital to
basis of the contract. They may be so vital to the contract that their breach may the c ontrac t that
seem to be breach of the contract itself. Such terms are known as conditions of thei r breac h may
seem to be breach
the contract and their breach entitles the innocent party to repudiate the contract. of the contract itself.
A stipulation which is collateral to the contract is called a warranty. Its breach Suc h te rms are
does not lead to repudiation, but only to damages for the breach. This distinction k now n as c o ndi-
tions of the c on-
between a condition and a warranty is not universal. Whether a stipulation is a tract.
condition or a warranty depends on the construction of each contract. A stipulation A stipulation which
may be a condition though called a warranty to the contract. To quote the relevant is collateral to the
sections of the Act, “a condition is a stipulation essential to the main purpose of contract is called a
warranty.
contract, the breach of which gives rise to a right to treat the contract as
A c on dition is a
repudiated” (Sec. 12(2)). stipulation essential
“A warranty is a stipulation collateral to the main purpose of the contract, to the main purpose
of c ontrac t, the
the breach of which gives rise to a claim for deranges but not to a right to reject brea c h of w hic h
the goods and treat the contract as repudiated” (Sec.12(3)). gives rise to a right
to treat the contract
as repudiated.
6.7 NATURE OF A WARRANTY

Legal Definitions of Warranty


In legal terminology, a guarantee made by a seller is called a warranty may
be defined as “Any affirmation of fact or promise made by the seller to the buyer
which relates to the goods and becomes part of the basis of the bargain.... That
the goods shall conform to the affirmation or promise.”
In slightly different language, the courts frequently define a warranty as: An
assurance by one party to a contract of the existence of a fact upon which the
other party may rely and amounts to a promise to indemnify [repay] the promisee
for any loss if the fact warranted proves untrue.
Generally when there is a breach of warranty, the buyer can go back on the
seller in a lawsuit. The ability to hold the seller to the warranty is a distinct legal
right, separate from the right to sue for breach of contract.
202 202 Legal Aspect of Business • Module Six

Condition and Warranty Distinguished


The difference between a condition and a warranty is shown in Table.
Table 6.4 Distinction between a Condition and a Warranty

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.

When can Breach of Condition be treated as a Breach of Warranty?


Sec. 13 of the Act entitles the buyer to treat breach of condition as breach of
warranty though the former enables him to repudiate the contract. In the following
three cases breach of condition may be treated as breach of warranty:
(i) Where the buyer elects to treat breach of condition as breach of warranty,
i.e., he prefers to claim damages instead of repudiating the contract;
(ii) Where the buyer waives the condition. Once the buyer has waived his
right, he cannot, afterwards insist on its fulfillment. Waiver may be
express or implied; and
(iii) Unless there is an express or implied contract to the contrary —
(a) Where a contract of sale is not severable and the buyer has accepted
the goods or part thereof; or
(b) Where contract is for specific goods, the property in which has passed
to the buyer.

Express or Implied Conditions and Warranties


Conditions and warranties may be expressly stated or implied from the
circumstances. It is open to the parties to a contract to include any number of
express conditions and warranties. But in addition to what the contract may
provide the law implies into every sale of goods a number of conditions and
warranties. They are read into every contract of sale unless excluded and are
known as implied conditions and warranties. Sections 14 to 17 contain implied
conditions and warranties.

Implied Conditions
Implied conditions (see Fig. 6.2) are explained the paragraphs that follow:
Module Six • Sale of Goods Act, 1930 203

Fig. 6.2 Implied Conditions

1. Conditions as to Title: Sec. 14 declare that in contract of sale, unless the


circumstances of the contract are such as to show a different intention there is:
(a) an implied condition on the part of the seller that, in the case of a sale,
he has a right to sell the goods; and
(b) that in the case of an agreement to sell, he will have a right to sell the
goods at the time when the property is to pass.
‘Right to sell’ means that the seller has lawful ownership of goods he wants ‘Right to sell’ means
that the seller has
to sell. If his title to goods is defective he cannot transfer property to buyer. And
lawful ownership of
transfer of property is the essence of contract of sale. That is why the law reads goods he wants to
into every sale the implied conditions that the seller has the right to sell. sell.

In Rowland V. Divall (1923), R bought a secondhand car from D and used it


for some months. It was subsequently seized by the police as a stolen car. Here
there was a breach of implied conditions regarding the title, R was entitled to
recover full price from the seller.
‘Right to sell’ means not mere possession of defect-free title to goods. It also
means that the seller should not infringe on trade mark of other seller. This
principle was underlined in Niblett V. Confectioners Materials Co. (1921), it so
happened that the defendant sold to the plaintiff 3,000 tins of condensed milk.
On their arrival in England from New York it was found that 1,000 tins were
labelled ‘Nissy Brand.’ Another manufacturer of the condensed milk under the
brand name of ‘Nestle’ claimed that this was an infringement of his trade-mark.
The plaintiff had to remove all the labels in order to obtain the goods and
subsequently sold them at a reduced value. He sued the sellers for the breach of
the conditions as to title. It was held that the plaintiff had the right to reject the
goods or to recover as damages the loss caused by the sale at a reduced price. “Where there is a
contract of sale of
2. Sale by Description (Sec. 15): This section lays down that “where there goods by descrip-
is a contract of sale of goods by description, there is an implied condition that the tion, there is an im-
goods shall correspond with description.” plied condition that
the goods shall cor-
The sale by description is a condition which goes to the root of the contract res p ond with de-
and the breach of it entitles the buyer to reject the goods. However, the buyer can scription.”
204 204 Legal Aspect of Business • Module Six

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

my factory.” A sends the machine according to order. There is no implied condition


or warranty on the part of A that the machine is fit for the particular purpose of
cleaning the cotton at B’s factory.
The dea ler who (ii) Merchantable Quality (Sec. 16(2): The second exception to the doctrine
sells goods by de-
scription is bound to
of caveat emptor is that the dealer who sells goods by description is bound to
deli v er good s of deliver goods of merchantable quality. Merchantable quality means:
merchantable qua-
lity.
(a) goods must be marketable under the description by which they are known
in the market at their full value.
(b) goods are not merchantable when they possess some defects rendering
them unfit to serve their intended purposes.
(c) goods must be such that their sale does not violate any statute in force
in the country. For example, a boiler must satisfy the requirements of
the Boilers Act.
(d) packing of goods is also an important consideration in judging the
merchantability of goods.
A few cases may be cited wherein implied condition as to merchantability
was breached and the seller was held liable.
In Godley V. Perry (1960), a toy dealer displayed in his shop window some
plastic toy catapults. A child of six was attracted by them and bought one. While
he was using it, the catapult broke off and entered his left eye which had to be
removed. The seller was held liable.
In Jones V. Just (1868), a firm of Liverpool merchants contracted to buy from
a London merchant a number of bales of Manilla hemp to arrive from Singapore.
The hemp arrived wetted by sea water and it was so much damaged that it would
not pass in the market as Manilla hemp. Consequently it had to be sold at about
five per cent of original price. It was held that the goods were not of merchantable
quality and the seller was bound to make good the loss caused by selling at the
reduced price.
In Priest V. Last (1903), the plaintiff bought a hot water bottle which is
ordinarily used for application of heat to human body. The bottle burst scalding
the plaintiff’s wife, the seller was held liable.
In Morelli V. Pitch and Gibbons (1928), the plaintiff bought a bottle of Stone’s
Ginger Wine. When he attempted to draw its cork with a corkscrew and with due
care, the neck of the bottle broke off, the bottle fell to the ground cutting the
plaintiff’s hand. The seller was held responsible for damages.
In Jackson V. Rota Motor and Cycle Co. (1920), the sellers who were
manufacturers of motor horns, sold 600 horns to the defendant. Of these, 364
were defective as they were dented, badly polished and were of faulty manufacture.
The buyer rejected these and accepted the remaining. Rejecting the seller’s suit
for the price, the court observed that ‘there was here a substantial failure on the
part of the seller to deliver goods of merchantable quality and the buyers were
entitled to treat this as one contract and to reject the goods. They were not bound
to go picking and choosing. The seller cannot say pick out the various portions
which are good and pay for those.

Examination by the Buyer


Implied conditions as to merchantability, is however, subject to a provision.
According to this provision, if the buyer has examined the goods, there shall be
Module Six • Sale of Goods Act, 1930 207

no implied conditions as regards defects which such examination ought to have


revealed. Thus, in Thrnett and Fehr V. Beers and Sons (1919), a buyer contracted
to buy a quantity of glue. The goods were contained in casks which were lying in
the seller’s godown. The seller took the buyer to the godown and offered to show
him the glue. But being pressed for time, the buyer did not ask that any of the
casks should be opened. He contended himself with looking at the casks. The
glue turned to be defective and not of merchantable quality. The seller was not
held responsible. The buyer’s contention that he did not examine the goods was
dismissed by the court.
(iii) Conditions implied by Trade Usage (Sec. 16(3)): An implied condition Conditi ons im-
plied by Trade Us-
or warranty as to quality or fitness for a particular purpose may be annexed by age (Sec. 16(3)): If
the usage of trade. Where the trade usage makes the purpose of the article explicit, a buy er mak es
the buyer need not tell the seller the purpose for which he buys the goods. For clear for which he
needed the goods,
example, in Dr. Baretto V. T.R. Price (1939), A bought a set of false teeth from a the s eller s h ould
dentist. The set did not fit into A’s mouth. It was held that A could reject the set s ell the goods of
as the purpose for which anybody would buy it was known to the seller, the s uc h quality and
dentist. Similarly, a watch that will not keep time, a pen that will not write, and a quantity to fit the
purpos e of the
tobacco that will not smoke do not satisfy the implied condition as to trade usage. buyer.
However, a custom should not be unreasonable. An unreasonable custom
will not affect the parties’ contract. Similarly, the custom should not be inconsistent
with the express terms of the contract.
(iv) Express Terms (Sec. 16(4)): The parties to a contract have liberty to
include any express condition(s) and/or warranty(s) in their contract. But an
express warranty or condition does not contradict a warranty or a condition implied
by the Act unless the express terms are inconsistent with the implied conditions.
Except in the above cases, doctrine of caveat emptor shall apply and the
seller will not be held liable for any penalty if the goods purchased turn out to be
unfit. The buyer may, however, protect himself by express warranty or condition.
5. Sale by Sample (Sec. 17): A sale by sample is a contract for sale by In a sale by sample
the bulk shall corre-
sample where there is a term in the contract, express or implied, to that effect s pond w ith the
(Sec. 17(1)). In the case of a contract for sale by sample, there is an implied sample in quality.
condition:
(a) that the bulk shall correspond with the sample in quality.
(b) that the buyer shall have a reasonable opportunity of comparing the
bulk with the sample.
(c) tha t the goods shall be fre e from a ny de fect, re nde ring the m
unmerchantable, which would not be apparent on a reasonable
examination of the sample (Sec. 17(2)).
Breach of any of these implied conditions will entitle the buyer to reject the
goods unless he has accepted them, or, in the case of a contract relating to specific
goods, the property in the goods has passed to him. In these cases, the buyer is
entitled to damages only.
6. Implied Condition as to Wholesomeness: In the case of eatables and W holesomenes s
means without any
provisions, in addition to the implied conditions as to merchantability, there is defects.
another implied condition — the goods must be wholesome. For example, P bought
milk from D. The milk contained typhoid germs. P’s wife took the milk and got
infection as a result of which she died. P was entitled to recover the damages
(Frost v. Aylesbury Dairy Co. Ltd. (1905)).
208 208 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)).

6.8 EXPRESS AND IMPLIED WARRANTIES


Warranties are of two kinds, either express or implied. An express warranty
An e x pres s war- is a statement made in express, or specific words by the seller. An express warranty
ranty is a statement may be either written or oral, so long as the seller writes or orally describes some
made in express, or
specific fact, quality, or feature of the thing being sold. A printed newspaper
spec ific words by
the seller. advertisement is, of course, an express warranty.
When an express warranty is given by a salesperson in a store, a subsequent
dispute could come down to the word of the consumer (buyer) against the word of
the salesperson. To the protected, the buyer may want to obtain a brief written
warranty from the sales clerk. This need not be lengthy or greatly detailed. For
example, the clerk could be asked to write across the fact of the sales ticket: “This
sweater is 100% wool.”
In some instances a warranty may be implied from the seller’s failure to deny
certain facts when specifically questioned about the quality or properties of
merchandise.
If the seller has made an express warranty of items being offered for sale,
almost all courts agree that the buyer is not under the necessity of making an
inspection as to hidden or latent defects that may later come to light. The warranty
relieves the buyer of the burden of making the inspection and the buyer does not
assume the risk of defects that an examination might reveal.
If the buyer knows of defects at the time the purchase is made, the courts
differ about whether the buyer must accept known defects.

“Opinion” or “Sales Talk”


Generally, the courts hold that a warranty must relate to or be a statement of
fact and not one of opinion. As stated in the following:
An affirmation merely of the value of the goods or a statement purporting to
be merely the seller’s opinion or commendation of the goods does not create a
warranty.
The courts usually distinguish mere words of description.
From a warranty, if a merchant agrees to sell a housewife some green window
curtains, the contract would not be met by delivering tan curtains or a green sofa
cover. The buyer is under no obligation to take either, since she would not be
getting that for which she bargained. Legally, the furnishing of tan curtains would
be a breach of contract, permitting the buyer to back out of the purchase. Many
courts, however, allow the buyer in a situation of this kind to treat the improper
delivery as a breach of an express warranty. Under either interpretation the buyer
would be protected.
The courts have always given the seller considerable leeway in “puffing” of
goods in an attempt to sell them. Expressions of opinion and words of praise are
consistently regarded as mere sales talk. The legal definition of “mere sales talk”
is never easily drawn. Courts often differ in their interpretations among cases.
To illustrate these differences, a statement that “this sweater in cashmere” is
a warranty. So, too, is a salesman’s claim that “these suits are 100% wool.”
Module Six • Sale of Goods Act, 1930 209

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

Exclusion of Implied Terms (Sec. 62)


Implied terms to a contract of sale (discussed till now) may be negative or
varied by (a) express agreement between the parties, (b) the course of dealing
between the parties, or (c) the custom or usage of trade. Sec. 62 lays down that
“where any right, duty or liability would arise under a contract of sale by implication
of law, it may be negatived or varied by express agreement or by the course of
dealing between the parties, or by usage, if the usage is such as to bind both
parties to the contract.”

6.9 TRANSFER OF PROPERTY AND TITLE

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.

Property Passes when Intended to Pass (Sec.19)


The intention of the parties is significant to determine the transfer of property.
In fact, the question of property transfer centers around the intention of the parties
to the effect.
Sec.19 provides that “where there is a contract for the sale of specific or
ascertained goods the property in them is transferred to the buyer at such time
as the parties to the contract intend it to be transferred.”
For the purpose of ascertaining the intention of the parties regard shall be
had to (i) the terms of the contract, (ii) the conduct of the parties, and (iii) the
circumstances of the case.
Where the intention of the parties is not apparent from their contract, the
intention will be ascertained according to the rules laid down in Secs. 18 and 20
to 24. These sections deal with three types of situations: (a) sale of specific goods,
(b) sale of goods on approval, and ( c ) sale of unascertained goods (see Fig.)
Module Six • Sale of Goods Act, 1930 211

A. Sale of Specific Goods (Sec. 20-22)


Rules regarding sale of specific goods are summarised as follows:
(i) Passing of Property at the Time of Contract: According to Sec. 20 “where
there is an unconditional contract for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract is made,
and it is immaterial whether the time of payment of the price of the delivery of the
goods, or both, is postponed.”

Fig. 6.4 Rules Regarding Transfer of Title

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.

B. Sale on Approval (Sec. 24)


The question of transfer of property in goods sent on approval or on ‘sale or
return’ basis is answered by Sec. 24. According to the section property in such
goods passes to the buyer “(a) when he signifies his approval or acceptance to the
seller or does any other act adopting the transaction; (b) if he does not signify his
approval or acceptance to the seller but retains the goods without rejection, then,
if a time has been fixed for the return of the goods on the expiration of such time,
and, if no time has been fixed, on the expiration of a reasonable time.”
The essence of the section is that the property passes either by acceptance
or failure to return. Rules regarding these two situations are summarised below:
When go ods are (i) Acceptance (Sec. 24(i)): When goods are sent on approval, sale or return,
sent on approv al,
sale or return, or on
or on trial, the transaction is merely an agreement to sell, and the property and
trial, the transaction the risk remain in the seller until the buyer gives his acceptance. The acceptance
is merely an agree- may be express or implied from conduct. An implied acceptance takes place when
ment to s ell, and the buyer deprives himself of the power of return of the goods. Thus, if goods are
the property and
the risk remain in sent on sale or return and the buyer pledges them to a third person, he has
the seller until the adopted the transaction and the property passes to him. This principle is
buyer gives his ac- underlined in Kirkham v. Attenborough (1897). The plaintiff delivered some jewellery
ceptance.
to one Winter on “sale or return.” Winter pledged the Jewellery with the defendant,
Atten Borough, a pawnbroker. Winter failed to pay the price. The plaintiff sued
the pawnbroker for the price. It was held that the plaintiff should have sued
Winter for the price and not the defendant, who had acquired a good title from
Winter. Winter, by pledging the goods, had adopted the transaction and the
property did pass to him.
(ii) Failure to Return (Sec. 24(2)): Failure on the part of the buyer to return
the goods send to him on approval, may take place after expiration of specified
Module Six • Sale of Goods Act, 1930 213

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.

C. Sale of Unascertained Goods (Sec. 18 and 23)


Rules regarding passing of property in unascertained goods are summarised
as follows:
(i) Goods Must be Ascertained (Sec.18): According to this section “where “where there is a
contract for the sale
there is a contract for the sale of unascertained goods, no property in them is of u nas c erta ined
transferred to the buyer unless and until the goods are ascertained.” goods, no property
in th em is tr ans -
In Commissioner of Sales Tax, Nagpur v. Adamji & Co.(1959), A entered into a ferred to the buyer
contract with B for the supply of sawar logs during 1947-48 season. The goods to unless and until the
be supplied under contract were to be dispatched by A from railway stations in goods are as c er-
tained.”
the Central Provinces. They were to be measured under supervision of B’s/factory
manager on arrival of goods at the factory. The price of the logs to be supplied
were specified as “F.O.R. Ambernath.” It was held that the contract was for sale of
unascertained goods and consequently property in them could not, under Sec.
18, pass unless and until goods were ascertained.
(ii) Goods Must be Appropriated (Sec.23): Mere ascertainment is not enough “Where there is a
- the goods must be appropriated. Sec. 23 contains provision to this effect. To contract for the sale
of unascertained or
quote the section: “Where there is a contract for the sale of unascertained or future goods by de-
future goods by description and goods of that description and in a deliverable scription and goods
state are unconditionally appropriated to the contract, either by the seller with of that description
and in a deliverable
the assent of the buyer or by the buyer with the assent of the seller, the property state are uncondi-
in the goods thereupon passes to the buyer.” tionally appropriated
to the contract.”
The distinction between ‘ascertainment’ and ‘appropriation’ is interesting.
Ascertainment means identification of the goods to be delivered under the contract.
Appropriation, on the other hand, refers to the intention of both the parties to use
the goods in performance of the contract. Another distinction is that ascertainment
can be unilateral act. The seller along may set apart the goods. But appropriation
involves consensus of both the seller and the buyer.
In Rhode v. Thwaites (1827), there was a sale of 20 hogheads of sugar out of
larger quantity. Four hogheads were filled and taken away by the buyer.
214 214 Legal Aspect of Business • Module Six

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.

Reservation of Right of Disposal (Sec. 25)


The property in goods does not pass if the seller reserves right to disposal,
even if the goods are appropriated or delivered to the buyer, to a carrier or to a
bailee for transmission to the buyer.
Apart from an express reservation of the right of disposal, the seller is deemed
to reserve the right where —
(a) the goods are shipped or delivered to a railway for carriage, and by the bill
of lading or railway receipt they are deliverable to the order of the seller or his
agent.
(b) the seller sends to the buyer a bill of exchange for the price together with
the bill of lading or railway receipt. The property does not pass to the buyer until
the buyer accepts the bill of exchange. The buyer must return the bill of lading or
railway receipt if he does not accept the bill of exchange. If he wrongfully retains
the bill of lading or railway receipt, the property in the goods does not pass to
him.

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.

Fig: 6.5 Exceptions to Nemo Dat Quod – Non Habet

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.

6.10 PERFORMANCE OF THE CONTRACT


In the contract of sale performance means the delivery of goods by the seller Performance
and acceptance and payment for the same by the buyer. Both these duties are to means the delivery
of g oods by the
be performed in accordance with the terms of the contract of sale. According to s eller and acc ep-
Sec.31 “it is the duty of the seller to deliver the goods and of the buyer to accept tance and payment
and pay for them in accordance with the terms of the contract of sale.” for the same by the
buyer.
Delivery of the goods and payment of the price are concurrent conditions.
Concurrent conditions mean that they must be performed simultaneously, that
is to say, the seller must be ready and willing to give delivery in exchange for the
price, and the buyer must be ready and willing to pay the price in exchange for
218 218 Legal Aspect of Business • Module Six

possession of the goods. The principle of simultaneous performance is underlined


in Sec.32. To quote the section, “unless otherwise agreed, delivery of the goods
and payment of the price are concurrent conditions, that is to say, the seller shall
be ready and willing to give possession of the goods to the buyer in exchange for
the price, and the buyer shall be ready and willing to pay the price in exchange
for possession of the goods.”

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.

Following are the Modes or Delivery


Actu al deli very (a) Actual Delivery: This is the most common method of delivery. Actual
takes plac e when delivery takes place when the seller transfers the physical possession of the goods
the seller transfers
the phy s ical pos - to the buyer or to a person authorised to hold them on his behalf.
s es s ion of the (b) Symbolic Delivery: Sec.33 recognises even symbolic delivery when it says
goods to the buyer.
“anything which the parties agree shall be treated as delivery.” Symbolic delivery
Symb olic De liv-
ery: “any t hing takes place when, for example, the seller hands over to the buyer the key of the
whic h the parties godown where the goods are stored. Symbolic delivery is accepted when the goods
agree s hall be are ponderous, bulky and heavy.
treated as delivery.”
(c) Constructive Delivery: This happens when the goods are in the custody
of a third person who, in accordance with the seller’s order, acknowledges to hold
them on the buyer’s behalf and the buyer has assented to it, or accepts rents for
the goods from the buyer.

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

Fig.: 6.6 Rules Regarding Delivery of Goods

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.

6.12 RIGHTS AND DUTIES OF BUYER


The rights and duties of buyer are as follows:

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 and Duties of Seller


The rights and duties of the seller are summarised below:
Module Six • Sale of Goods Act, 1930 223

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.

6.13 RIGHTS OF UNPAID SELLER AGAINST THE GOODS

Who is an Unpaid Seller?


The seller of goods is deemed to be an ‘unpaid seller’ when (i) the whole of the
price has not been paid or tendered, (ii) when a bill of exchange or other negotiable
instrument has been received as conditional payment, and the condition on which
it was received has not been fulfilled by reason of the dishonour of the instrument
or otherwise (Sec.45(1), (iii) when even a part of the price has not been paid.
The seller in this context is any person who is in the position of a seller, as,
for instance, an agent of the seller to whom the bill of lading has been endorsed
or a consignor or agent who has himself paid or is directly responsible for the
price (Sec.45(2)).
Explanation of the term ‘seller’ is important because the Act offers protection
to any person who is in the position of seller and who is unpaid either full or part
of price.

Rights of an Unpaid Seller


Unpaid seller has rights both against the goods as well as against the buyer.
Rights against the goods are discussed in this chapter. The next chapter deals
with the rights against the buyer.
224 224 Legal Aspect of Business • Module Six

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:

Fig: 6.7 Rights of an Unpaid Seller Against Goods

Where the Property in Goods has Passed to the Buyer


Right of lien means 1. Right of Lien (Sec.47): Right of lien means right to retain the possession
right to retain the
pos s es s ion of of goods until certain charges due in respect of them are paid. The unpaid seller
goods until certain has the right to retain the goods until tender or payment of the price. Sec.47
charges due in re- provides lien to the unpaid seller in the following cases, namely:
spect of them are
paid. (a) Where the goods have been sold without any stipulation as to credit;
(b) Where the goads have been sold on credit, but the term of credit has
expired;
(c) Where the buyer becomes insolvent.
Rules regarding lien are as follows:
(i) The right of lien is linked with possession not with title. It is not affected
even if the documents of title to the goods are transferred to the buyer.
Module Six • Sale of Goods Act, 1930 225

(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

To exercise the right of stoppage in transit four conditions must be satisfied,


namely:
(i) the seller must be unpaid,
(ii) the buyer must be insolvent,
(iii) the seller must have parted with the possession of the goods, and
(iv) the buyer must not have acquired possession of the goods, in other words,
the goods must be in transit.
When the transit of goods begins and ends is made clear in Sec.51.

Duration of Transit (Sec.51)


(i) Goods are deemed to be in course of transit from the time they are
delivered to a carrier or other bailee for the purpose of transmission to
the buyer, until the buyer or his agent takes delivery of them from the
carrier or bailee.
For example, B, living at Chennai, orders goods of A, at Patna, and directs
that they shall be sent to Chennai. The goods are sent to Kolkata, and
there delivered to C, a wharfinger to be forwarded to Chennai. The goods,
while in possession of C, are in transit.
(ii) The transit of goods comes to an end if the buyer not his agent obtains
delivery of the goods before their arrival at the appointed destination. It
may be wrongfully for the carrier to deliver the goods to the buyer before
their arrival at the appointed destination and the carrier may be held
liable in damages for depriving the seller of his opportunity, but the
transit, nevertheless, comes to an end.
(iii) When the goods have arrived at their appointed destination and the carrier
acknowledges to the buyer or his agent that he is now holding the goods
on his behalf, the transit comes to an end, and it is immaterial that the
goods are still with the carrier or that the buyer has indicated a further
destination. It requires a very clear acknowledgement to put an end to
the original contract of carriage.
(iv) The transit comes to an end when the goods are rejected by the buyer
and the carrier continues in possession of them. This is so even if the
seller has refused to take the goods back.
(v) Where the goods are delivered to a ship chartered by the buyer, it is a
question depending on the circumstances of the particular case, whether
the carrier is acting independently or as agent of the buyer. If the
circumstances show that the carrier is acting as agent of the buyer, the
transit comes to an end as soon as the goods are loaded on board the
ship. For example, B a merchant of London, orders 100 bales of cotton
of A, a merchant at Mumbai. B sends his own ship to Mumbai for the
cotton. The transit is at an end when the cotton is delivered on board the
ship.
(vi) Where the carrier of other bailee wrongly refuses to deliver the goods to
the buyer or his agent, the transit is deemed to be at an end. But if the
carrier or bailee rightfully refuses to deliver the goods, the transit is not
at an end.
Module Six • Sale of Goods Act, 1930 227

(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.

How Stoppage is Effected? (Sec.52)


The unpaid seller may exercise his right of stoppage in transit either – The unpaid s eller
may ex erc is e his
(a) by taking actual possession of the goods, or right of stoppage in
transit either –
(b) by giving notice of his claim to the carrier or other bailee in whose
(a) by taking actual
possession the goods are. Such notice may be given either to the person pos session of the
in actual possession of the goods or to his principal. goods, or
When notice of stoppage in transit is given by the seller to the carrier or other (b) by giving notice
of his claim to the
bailee in possession of goods, he shall redeliver the goods to the seller. If he carrier or other bai-
refuses to do so, he is guilty of conversion. The expenses of redelivery shall be lee in whose pos-
borne by the seller. session the goods
are. Suc h no tic e
may be given either
Distinction between Right of Lien and Right of Stoppage in Transit to the person in ac-
tual possession of
Below Table brings out the distinction between right of lien and right of the goods or to his
principal.
stoppage.
Table 6.4 Right of Lien and Right of Stoppage Distinguished

Right of Lien Right of Stoppage


1. Right of lien arises on default of the 1. Right of stoppage arises when the
buyer whether he is solvent or buyer is only insolvent.
insolvent.
2. Lien is exercisable as long as the 2. Right of stoppage is execisable when
seller is in possession of goods. the goods are in transit.
3. Lien ends where right of stoppage 3. Right of stoppage commences where
commences. lien ends.
4. Lien is the right to retain 4. Right of transit is to regain possession.
possession.

Transfer by Buyer and Seller (Sec.53)


Suppose the buyer, without paying the whole of the price, sells the goods or
pledges them to another person. Does the sub-sale or pledge affect the seller’s
right of lien or right of transit? If yes, to what extent? Sec.53 provides answers to
these questions.
According to Sec.53(i) the unpaid seller’s right of lien or stoppage in transit
is not affected by any sale or other disposition of the goods which the buyer may
have made. For example in Mordaunt Brothers v. British Oil and Cake Mills (1910),
an oil merchant sold a quantity of oil to B, without appropriating any particular
oil to the contract, B sold some of it to C and gave him a delivery order. C lodged
the delivery order with the merchant requesting him “to await his orders.”
Meanwhile B failed to pay the merchant, who therefore, became unpaid seller.
And his right of lien on the goods was upheld.
But in two circumstances the unpaid seller’s right is defeated (a) where seller
has given consent to the buyer’s sale or disposition of goods, and (b) where the
228 228 Legal Aspect of Business • Module Six

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 Goods has not Passed to the Buyer?


1. Right to Withhold: where the property in the goods has not passed to the
buyer, an unpaid seller has, in addition to his other remedies, a right of withholding
delivery similar to and co-extensive with his right of lien and stoppage in transit
where the property has passed to the buyer (Sec.46(2)).
Module Six • Sale of Goods Act, 1930 229

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).

6.14 SUITS FOR BREACH OF THE CONTRACT


As was pointed out in the previous chapter the unpaid seller enjoys remedies
against the buyer besides exercising his rights against the goods. Sections 55,
56, 60 and 61, provide for the unpaid sellers’ remedies against the buyer (see
Fig.) The rights are explained in the paragraphs that follow.
1. Suit for Price ( Sec. 55): Where under a contract of sale the property in
the goods has passed to the buyer and the goods have actually come into his For breach of con-
possession, the seller is entitled to sue for the price, if the buyer wrongfully neglects tract, the seller may
or refuses to pay for the goods. sue for price, Dam-
ages as to non-ac-
Even if the property in the goods has not passed to the buyer, the seller may c eptanc e, Dam-
maintain an action for the price if the price is payable on a certain day irrespective ages for repudiation
s ue for s pe c ial
of delivery. damages.
2. Damages for Non-Acceptance (Sec. 56 ): This section lays down that if
the buyer wrongfully neglects or refuses to accept and pay for the goods, the
If the buyer wrong-
seller may sue him for damages for non-acceptance. Damages are assessed in fully neglects or re-
accordance with the principles laid down in Sections 73 and 74 of the Contract fuses to accept and
Act. Where there is a ready market for the goods in question, the principle pay for the goods,
the seller may sue
applicable is that the buyer has to pay the loss that the seller has sustained on him for damages for
reselling the goods on the day of breach. If the seller does not resell, the difference non-acceptance.
between the market price and the contract price on the day of breach is adopted
as the measure of damages. If the contract price and the market price are same,
the seller can recover only nominal damages.

Fig. 6.8 Rights of the unpaid seller against the buyer

In WL Thompson v. Robinson (Gunmakers) Ltd. (1955), the plaintiff, who were


car dealers, contracted to sell a motor car to the defendants. On the defendants’
refusal to take delivery of the car, the plaintiffs returned the car to the
manufacturers and claimed damages from the defendants for the loss of profit on
sale. Their claim was upheld.
230 230 Legal Aspect of Business • Module Six

In Charter v. Sullivan (1957), the plaintiff agreed to sell to the defendant, a


Hillman Minx motor car for $ 773-15-0, the retail price fixed by the manufacturers.
On the defendant’s failure to pay the price, the plaintiff, resold the car to a third
party and claimed damages of $ 95-15-0 which was the loss of profit he would
have made had he sold the car to the defendant and a similar car to the third
party. The plaintiff was allowed to claim damages of 40 sh. only as he failed to
prove the loss of profit.
Contrast the above two cases with Lazenby Garages Ltd. v. Wright (1976).
Here, the plaintiffs bought a second hand car for $ 1,325 and agreed to sell the
same to the defendant for $ 1,670. On the defendant’s refusal to take delivery of
car, it was sold to a third party for $ 1,770. The plaintiffs sought an action against
the defendant to recover $ 345 as damages, being the difference between the
purchase price and the resale price to the defendant. The action was rejected
since the plaintiffs suffered no loss because of the defendant’s refusal to take
delivery of the car.
Where the goods are deliverable by instalments, and the buyer refuses to
accept one or all the instalments, the difference in prices is to be reckoned on the
day that a particular instalment was to be delivered. In the Union of India v. Kesar
Singh (1978), when the military authorities refused to accept further supplies of
cots in breach of their contract, the J & K. High Court allowed Rs. 4 per cot to
supplier as damages being the profit which the supplier would have earned under
his contract of supply.
3. Damages for Repudiation (Sec. 60): Where the buyer repudiates the
contract before the date of delivery, the seller may either treat the contract as
subsisting and wait till the date of delivery, or he may treat the contract as
rescinded and sue for damages for the breach.
This is called the principle of anticipatory breach of contract laid down in
Sec. 39 of the Contract Act.
4. Suit for Interest and Special Damages: Sec. 61 of the Act entitles the
seller to recover from the buyer, special damages and interest from the date on
which the amount become payable.

Buyer’s Remedies Against Seller


Just as the seller has remedies against the buyer, the latter also enjoys certain
rights against the seller. The buyer’s remedies in case of breach of contract are
explained below (see Fig. 6.9).

Fig. 6.9 Buyer’s Remedies


Module Six • Sale of Goods Act, 1930 231

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

sale by implication of law, it may be negatived or varied by an express agreement.”


This provision may give rise to peculiar problems. For example, you go to a retail
shop dealing in sports goods to buy a throw-ball. You are not knowledgeable
about sports and are not, therefore, in a position to differentiate between a throw-
ball and a soccer-ball. The shopkeeper gives you a soccer-ball and you accept it
out of ignorance. Next day you go to the shop to exchange it for a throw-ball. But
the shop-keeper refuses to oblige you invoking the statement “goods sold cannot
be taken back or exchanged” prominently printed at the bottom of the receipt.
One of the implied True, one of the implied conditions of the Act is that the goods must fit buyer’s
c ondi tions of the
Ac t is that the
purpose (Sec. 16(i)) This implied right of the buyer may be negatived by an express
goods m us t fit statement as the one mentioned above. The result is that you must keep the
buyer’s purpose. soccer ball with you though it may not serve your purpose. In the alternative you
must seek redressal under the Consumer Protection Act, 1986.
Secondly, the most obnoxious provision of the Sale of Goods Act is Sec.16.
According to this section there is no implied warranty or condition as to the quality
or fitness for any particular purpose of goods under a contract of sale.
This is a statement of the principle of Caveat Emptor: “Under the general
doctrine of caveat emptor, he (seller) is not ordinarily bound to disclose every
defect of which he may be cognisant, although his silence may operate virtually
to deceive the vendee” (Ward v. Hobbs).
The principle of ca- The principle of caveat emptor is totally outdated and unacceptable nowa-
veat emptor is to-
tally outdated and
days. True, Sec. 16 of the Act provides for several exceptions which have become
unacceptable now- more prominent than the rule. But unfortunately each exception is subject to so
adays. True, Sec. 16 many ‘ifs’ and ‘buts’ and one is not sure when an exception really operates. It is
of the Act provides
for several excep-
time that Sec. 16 is withdrawn from the Act.
tion s whic h hav e Thirdly, the Act has given scope for certain contradicting interpretations. For
bec ome m ore
prominent than the
example, providing food in a restaurant is considered to be a sale for the purpose
rule. of the Act according to the judgement in Locket v A.M. Charles Ltd. (1938). But in
Northern 1ndia Caterers (India) Ltd v. Ltd. Governor of Delhi (1978), service of food
in restaurants is treated as service and not a transaction of sale.
Finally, extending the demand for repeal of Sec. 16 of the Act, it may be
suggested that the entire Act may be merged with the Consumer Protection Act,
the Consumer Protection Act is consumer-oriented, unlike the Sale of Goods Act
which is more seller-oriented. We have too many legislations in our country. By
merging the Sale of Goods Act with the Consumer Protection Act, the problem of
multiple legislations can be solved to some extent.

QUESTIONS

Section — A. Objective Type


1. What do you understand by the term ‘goods’?
2. What do you mean by actionable claim?
3. What are specific goods?
4. What are generic goods?
5. What is the legal position if goods perish before forming a contract?
6. What is a condition? What is the legal consequence of its breach?
7. What is a warranty? What is the legal consequence of its breach?
8. State the circumstances when a condition becomes a warranty.
Module Six • Sale of Goods Act, 1930 233

9. What is sale by description?


10. What is sale by sample?
11. What is merchantable quality?
12. What is the essence of Sec. 19 of the Act?
13. What is the essence of Sec. 20 of the Act?
14. State exceptions to the rule “Nemo dat quod non habet.”
15. Who is a mercantile agent?
16. What do you mean by performance of the contract of sale of goods?
17. What do you mean by delivery of goods?
18. What do you understand by symbolic delivery of goods?
19. What is constructive delivery of goods?
20. Who is unpaid seller?
21. What is the right of lien?
22. When can the right of stoppage in transit be exercised?
23. How can the stoppage effected?
24. Why is the right of resale so-called?
25. State the rights of the unpaid seller against the buyer.
26. State the remedies of buyer against the seller.
27. When can the unpaid seller sue the buyer for price?

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

5. What do you understand by the transfer of property in goods? Why it is important?


Explain the rules regarding transfer of property in (a) specific goods, and
(b) unascertained goods.
6. What is delivery of goods? Explain the rules regarding delivery of goods.
7. What are the rights and duties of buyer? Of seller?
8. Who is an unpaid seller? What are his rights against goods?
9. What do you understand by stoppage in transit? In what circumstances has the unpaid
seller the right to sell and the right to recover the damages for loss?
10. Explain the rights of an unpaid seller against buyer and of the buyer’s remedies
against the seller.
236 236 Legal Aspect of Business • Module Six
7
MODULE

CONSUMER PROTECTION ACT,


1986

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

THE CONSUMER PROTECTION ACT, 1986

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.

Objects of the Act


The main objects of the act (are briefly given below):
1. To protect the interest of the consumer.
2. To protect the rights of the consumers regarding
(a) Marketing of goods or services
(b) Quality of goods and
(c) Price of the goods and services.
3. To protect the consumer against unfair trade practices.
4. To set up consumer protection council at the centre and state level.
5. To provide speedy and simple redressal to consumer disputes by
(a) giving reliefs and
(b) compensation to consumers.

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.

7.2 CONSUMER PROTECTION COUNCIL


There are two consumer protection council one at central level (called control
council) another at state level (called state council).
I. Central Consumer Protection Council (Section 4 to 8)
Constitution: The central government by notification may form a council,
known as central consumer protection council (i.e., central council).
Composition: It shall have 150 members namely:
1. The central Minister in charge of consumer affairs shall be the chairman.
2. The Minister of state in the department of civil supplies (without
independent charge) shall be vice chairman.
3. 8 MPs (5 from Lok Sabha and 3 from Rajya Sabha).
4. The commissioner for SC and ST.
5. 20 Representative of the central government departments concerned with
consumer interest.
6. At least 20 representative of the consumer(s)(organisation).
7. At least 10 representatives of women.
8. 20 Representatives of farmers, trade and industries.
9. 15 members capable of representing consumer interest.
10. The Secretary in the Department of civil supplies shall be also the
secretary of the central council.
240 240 Legal Aspect of Business • Module Seven

Meeting of the Central Council (Section 5)


The council shall meet at least once in every year. The place and time of
meeting may be decided by the chairman.
Objects (Sect. 6)
The central councils object shall be to promote and protect the different
consumer rights. Such rights are:
1. The right against marketing of hazardous goods and services.
2. The right against unfair trade practices.
3. The right to get various goods and services at competitive prices.
4. The right to be heard to ensure that the consumer’s interest receives
due consideration at different forums.
5. The right to be redressed against unfair trade practices.
II. The State Consumer Protection Council (Section 7-8)
Constitution: The state government may also set up by notification a council
known as state consumer protection council (ie., state council).
Composition: It will have the state minister in charge of consumer affairs as
the chairman and members nominated by the state government.
Meeting: It shall meet at least twice in every year. The time and place of the
meeting is decided by the chairman.
Objects: The object of the state council is to promote and protect the consumer
rights (under Sect.6) within the state.

7.3 CONSUMER REDRESSAL AGENCIES (Section 9-27)


Section 9: Under the act 3 consumer dispute redressal agencies can be set
up. One at District level, one at State level and one at National level. They are:
1. A District Forum: (set up by the state government in each district by
notification).
2. A State Commission: (set up by the state government) and
3. A National Commission: (set up by the central government, by notification).

CONSUMER DISTRICT REDRESSAL FORUM


(The District Forum) (Section 10-15)
Constitution: It is set up by the state government one at each district.
Composition: It shall have a president and 2 members, one of whom must
be a woman.
A p p o i n t m e n t : Th e y a r e a p p oi nt e d by s ta t e go ve r nm e n t o n th e
recommendation of a selection committee, of 3 persons.
This selection committee has a chairman and 2 members. The chairman is
the president of the state commission. One member is the secretary in the law
department of the state and another member is the secretary of consumer affairs
of the state.
Qualification: The president of a District Forum must be a qualified district
judge and the other 2 members must have the ability and integrity and have
enough knowledge, and experience in economics, commerce, accountancy, law,
industry and public affair.
Module Seven • Consumer Protection Act, 1986 241

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.

Treatment of Complaint (Section 13)


(A) Complaint Regarding the Goods: When the district forum receives a When the dis tric t
complaint about any goods, it will send a copy of complaint to the opposite party foru m rec eiv es a
c omp laint a bout
mentioned in the complaint. The opposite party must give reply within 30 days. It any goods, it will
may be extended by another 15 days. send a copy of com-
plaint to the oppo-
When the complaint alleges a defect in the goods (if it can’t be decided without s ite party men-
Lab test) the District Forum will receive a sample and fix lab charges from the tioned in the com-
complainant and seal it. Then the sample so sealed may be sent to Laboratory for plaint. The opposite
party must give re-
a test along with the charges. The laboratory must submit its report of the test ply within 30 days.
within 45 days from the date of receiving the complaint. It may be extended
by another 15 days.
After receiving the report from the laboratory the District forum shall send a
copy of the report to the opposite party. If the opposite party disputes over the
correctness of the report, he must give in writing his objection to the District Forum.
Issuing order: The district forum shall issue an appropriate order after giving
a reasonable opportunity of hearing to both the parties, (i.e., the complainant
and the opposite party) and considering laboratory report and objection to it.
(B) Complaint Regarding the Services: When the District Forum receives a
complaint about any services, it will send a copy of the complaint to the opposite The dis tric t forum
shall issue an ap-
party and he shall give his reply within 30 days (may be extended by another 15 propriate order after
days). giving a reasonable
opportunity of hear-
It will examine the evidences given by both parties in support of their claim. ing to both the par-
And after giving an opportunity of hearing to both parties, it shall pass an ties, (i.e., the com-
appropriate order. plai nant and the
opposite party) and
Powers: The order given by the District Forum shall be the final. It shall have the considering labora-
power of a civil court under the code of civil procedure 1908. The proceedings of the tory report and ob-
District Forum is equal to a judicial proceeding under Sect.193 and 228 of IPC. jection to it.

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.

NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION


(National Commission) (Section 20-23)
Constitution: It is set up by the Central Government by notification.
Composition (Section 20): It shall have a president and 4 members, one of
whom must be a woman.
Appointment: The president is appointed in consultation with the Chief
Justice of India and the other members are appointed by the recommendation of
a selection committee.
Module Seven • Consumer Protection Act, 1986 243

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.

Prevention of Action taken in Good Faith (Section 28)


The actions taken in good faith by the 3 members of the District Forum, the
state commission or the national commission cannot be challenged in any court
of law. And also the actions of the officers who acted under their direction.
Power to remove difficulties (Section 29): If any difficulties arise in
implementing the provisions of the Act, the central can remove such difficulties
by an order in the official Gazette within 2 years from the commencement of this
act.
Power to make rules (Section 30): Under the act both the central government
and the state government can make necessary rules for implementing the
provisions of this act by Notification.

7.4 LEADING CONSUMER CASE LAWS — INDIA The consumer fo-


rum cannot absolve
Case – 1 its r es pons ib ility
Chambers Co-operative Housing Society Ltd. (CCI) Vs. and refer to Civ il
Court just because
Development Credit Bank Ltd. 2003. the case requires
scrutiny of volumi-
The Consumer Forum cannot absolve its responsibility and refer to Civil nous rec ords and
Court just because the case requires scrutiny of voluminous records and examination of wit-
examination of witnesses. The leading case in this regard was Chambers Co- nesses.
operative Housing Society Ltd. (CCI) Vs. Development Credit Bank Ltd. 2003. The
244 244 Legal Aspect of Business • Module Seven

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.

in an accident, in which a bus of the Calcutta Tramway Corporation dashed


with the motor cycle driven by the deceased. The deceased was brought to the
Ruby General Hospital, Kolkata, which was close the place of accident. The
treatment, discontinued after 45 minutes due to failure on part of persons who
brought him to hospital to deposit Rs. 15,000/- which resulted in denial of
treatment and consequential death of young boy.
It was contended by the hospital, since no consideration was paid by the
deceased or complainant,
It was held by the National Commission that persons belonging to "poor
class" who are provided services free of charge are beneficiaries of services
which is hired or availed of by "paying class" and status of "emergency or
critically ill patient" would be same as "persons belonging to poor class", since
both are not in position to pay further it was held that free services would also
be services and recipient would be consumer under the Act.
In this case it was proved by expert evidence that discontinuance of
treatment hastened the death of patient which itself deficiency in service and
it was decided that there was serious negligence and laxity on part of hospital
by refusing admission and treatment facility to youth who almost in dying
condition, defying all medical ethics and gross violation of Clinical Establishment
Rules and Act of 1950 as amended in 1998, obvious reason is recovery of fee
can wait but not the death nor the treatment for trying to save the life.
Compensation of Rs. 10 lakhs awarded for mental pain and agony to the
parents of the deceased.

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

On the issue of compensation, the commission observed that there was


gross negligence on the part of the hospital and doctors. Hence, the compensation
must not only served to recompense the individual, but also aim at bringing
about the qualitative change in the attitude of the service provider. Accordingly
he Hospital and the doctors were directed to pay Rs. 10 lakh to the complainant.
This judgement is a milestone. Hospitals will no longer be able to turn
away accident patients and will be severely penalized if they do so.

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

The judicial pronouncements meticulously discussed in the above instances


ranging from Housing, Health, Education, Fast Moving Consumer Goods,
Consumer Durables, Insurance, Air Travel to a host of services, highlight one
thing in common that is defects in goods or deficiency in the services rendered.
The legal remedy for these laxes was met in one of the Consumer Dispute
Redressal Forums either in the original jurisdiction or in the First and Second
Appeal. The landmark judgments given by National Commission and the
Supreme Court of India have changed the entire paradigms in respect of
Consumer Protection and safeguarding their interests and rights in our country.
The judiciary is fully active in this regard through its activism doctrine.

7.5 CONSUMER PROTECTION LEADING CASE LAWS


— UNITED STATES OF AMERICA

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

of successive bankruptcy cases by certain repeat filers, automatic stay will


terminate "with respect to the debtor," had to be interpreted as providing for
automatic termination of stay with respect to actions against the debtor or
against property of the debtor, but not with respect to actions taken against
property of the estate. So ordered.

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

7.6 CONSUMER PROTECTION LEADING CASE LAWS — UNITED KINGDOM

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

to health as to be irrational and the applicants had no legitimate expectation


that the Secretary of State would not change his policy notwithstanding the
government's previous encouragement to the applicants to set up a factory,
since the Secretary of state could not fetter a discretion conferred on him by
statute and provided he acted rationally and fairly he was entitled to change
his policy, and given that the change in policy resulting in the banning or oral
snuff had been made in the public interest, his discretion could not be fettered
by any moral obligation owned to the applicants.
However, the secretary of State's duty to consult affected parties under
sec. 11(5)(a) required him to show a high degree of fairness and candor to the
applicants because, as the sole manufacturers and packagers of oral snuff in
the United Kingdoms, they were the only persons affected by the ban, in those
circumstances the Secretary of State had acted unfairly in concealing from the
applicants the scientific advice given to him in 1986 which directly let to the
ban and an order to certiorari would issue to quash the regulations.

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.

7.7 CONSUMER PROTECTION LEADING CASE LAWS — AUSTRALIA

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

Section — A Objective Type


1. State the objectives of consumer protection Act, 1986.
2. Define “consumer” as per CPA, 1986.
3. Define “consumer dispute” as per CPA, 1986.
4. What is the difference between “defect” and “deficiency”?
5. Who shall give complaint against unfair trade practices in consumer court?

Section — B Analytical Type


1. State the rights of consumer as per CPA, 1986.
2. Write a note on control consumer protection council as per CPA, 1986.

Section — C Essay Type


1. Explain the District Forum State Commission and National Commission as consumer
disputes redressal agencies.
2. Narrate any two case studies of consumer disputes.
3. Bring out any five decided cases under Consumer Protection Act, 1986.


8
MODULE

INDIAN PATENT LAWS AND


WTO PATENT RULES

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

8.1 What is intellectual property?

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.’

What is Intellectual Property Law?


The intelligent and logical reader may regard this question as superfluous
once the phrase ‘intellectual property’ has been defined in legal terms. Can he
not safely conclude that intellectual property law is the aggregate of rights and
duties which pertain to the control of intellectual property? This assumption would
be incorrect, because the demands of practical reality have supplanted the strict
rules of logic. On reading this book, our logical reader will reference to rules and
remedies that appear to have no relevance whatsoever to ownership or control of
the product of the human intellect. For example, intellectual property law as
widely understood by its devotees includes such topics as whether the London
and Provincial Law Assurance Society could stop the London and Provincial Joint
Stock Life Assurance Company from trading under that name, whether a
manufacturer of wine in the Champagne region of France could stop a British
manufacturer of a non-vinous substance from advertising it as ‘Babycham’, the
genuine ‘Champagne Perry’ or whether a mild roundsman employed by a dairy
could be prevented from soliciting his employer’s customers prior to his leaving
the dairy’s employment.
There are two explanations as to why such apparently irrelevant or extraneous
legal material is traditionally included within the corpus of intellectual property The traditi onal
law. The first is that the traditional manner of protecting the owner of intellectual manner of protect-
property against encroachment by others is the grant by the state of an ing the owner of in-
tellectual property
exclusionary, and in some cases exclusive, right to the exploitation, for a limited against encroach-
duration, of the creative output of the intellect. The owner of such rights naturally ment by others is
seeks to derive the greatest benefit from them. One effective means of doing this the grant by the
state of an exclu-
is by finding other legal means of extending the limited duration of his rights. s ion ary , an d in
Thus as inventor normally has a maximum legal monopoly of just twenty some cases exclu-
sive, right to the ex-
years of the right to stop others making a product protected as a patented invention; ploitation, for a lim-
but if he can find an attractive name for that product people may continue to buy ited duration, of the
it from him, even though others can compete with him in the manufacture and creative output of
the intellect.
sale of it after his patent has expired. Accordingly the law of marks and names as
applied to goods and services and to the companies that market them is of great
importance to the person who wishes to exploit his intellectual produce; the overall
legal control of monopolies (whether generated by statute or not) will be important
Inv entor normally
when it is considered whether the intellectual owner can sustain his market has a maximum le-
dominance even once his patent or copyright has expired. gal monopoly of just
twenty years of the
Second, whether a person enjoys a monopoly over his intellectual property right to stop others
or not, he knows that his exploitation of it will be free from the terrors of unwanted mak ing a produc t
competition if he can persuade his likeliest competitors not to compete against protected as a pat-
ented invention.
him, or if he can persuade his employees, most intimately acquainted with his
trade secrets and practices, not to leave him and work instead for a competitor.
Both of these aims are capable of being achieved by means of the law of contract.
272 272 Legal Aspect of Business • Module Eight

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.

Is Intellectual Property Law an Important Subject?


Devotees of intellectual property law can take comfort in the fact that their
Univ ers ities and subject is no longer perceived as a niche, an arcane professional craft of no genuine
c olle ges v ie with
significance. While the topic was scarcely known as late as the beginning of the
each other for the
privilege of offering 1980s, it has finally assumed its position as the jewel in the crown of legal practice.
the most attractive Universities and colleges vie with each other for the privilege of offering the most
IP prog rammes , attractive IP programmes, which exist in ample supply for both graduates and
which exist in ample
s upp ly for both undergraduates. Advertisements in lawyer’s magazines and on the Internet
graduates and un- proclaim the many rewards bestowed even relatively junior specialists in the art.
dergraduates. Ad- No fewer than three professions—lawyer, patent agent and trade mark attorney—
v ert is ement s in
lawyer’s magazines exist to serve the burgeoning and lucrative demands of clients. Intellectual property
and on the Internet is a benign patent; it feeds the hungry, occupies the idle and neglects the needs
proclaim the many of none of its children.
rewards bestowed
even relatively jun- The reason for this is not hard to find. Intellectual property is the currency of
ior specialists in the our time. The production of commodities was replaced by the supply of services
art.
as the dynamo that propels the engine of the economy, now the supply of services
has itself been superseded by the provision of information. This is the age of
satellite and cable transmission, of broadcast, of interactive media, of computers
This is the age of
satellite and cable
and the internet, of data creation and transfer, of entertainment and education,
tran s mis s ion , of fact and fancy; all of this is intellectual property. While a minority of the UK’s
broadcast, of inter- population consists of home-owners, virtually everyone owns some intellectual
ac ti v e media , of property. Traders pick their way warily through the myriad trade mark monopolies
computers and the
inter net, of data that govern the import and sale of goods and the supply of services in this land.
creation and trans- Literally hundreds of millions of copyright works are created daily; many are
fer, of enter tain- infringed. Our feet may be planted on the ground but our heads are in cyberspace.
ment and ed uc a-
tion, fact and fancy; Even if one chooses to dismiss as insignificant a claim for greater teaching of
all of this is intellec- intellectual property law which is based on practical professional expediency,
tual property.
one should not treat so lightly the claim that intellectual property law plays a
vital part in the physical well-being of the individual and in the commercial vitality
An important func- of the economy. For it is an important function of intellectual property law that it
tion of intellectual encourages (if such is possible) the creation of ideas and inventions, their disclosure
property law that it
encourages (if such
for the benefit of all, not to mention their commercial exploitation so as to facilitate
is possible) the cre- the greatest potential exploitation of their practical or concrete embodiments.
ation of ideas and The positive, as well as potential negative, effects of intellectual property on global
inv en tions , t heir
disc los ure for the
well-being appear to be recognized in Art 16.5 of the Convention on Biological
benefit of all, not to Diversity, which states:
mention their com-
mercial exploitation
‘The Contracting Parties, recognizing that patents and other intellectual
so as to facilitate property rights may have an influence on the implementation of this
the greatest poten- Convention, shall cooperate in this regard subject to national legislation
tial exploitation of and international law in order ensure that such rights are supportive of
their prac tic al or
c onc rete embodi- and do not run counter to its objectives.’
ments. Where land is purchased, the purchaser can often derive immense financial
advantage without actually doing anything to, with or under the land he buys. In
contrast, a person who acquires an intellectual property right can derive no
financial benefits from it except by using it commercially. If he secures, for example,
a patent for a new product, he will gain advantage only by making that product
Module Eight • Indian Patent Laws & WTO Patent Rules 273

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 and Moral Rights


Apart from its practical and economic aspects, intellectual property law fulfils
functions which have a purely moral content; for it is ideally capable of providing
(i) that no one other than the inventor, author or other intellectual creator
is falsely described as being such;
(ii) that the creator of a work may make legal objection to the distortion of
his work by others; and
(iii) that the author who has changed his mind about the validity of his
intellectual product can retract it prior to the embarrassment he incurs
by reason of its publication by any other person.
The rights described above are sometimes referred to as moral rights, since
they protect the creator’s moral rather than his pecuniary interest in his work. In
those countries which share with the UK a common law heritage these rights are
often vestigial or non-existent, but the intellectual property laws of many other
countries (notably those influenced by civil law principles) accord them a good
deal of jurisprudential content. In principle, moral rights are the author’s non-
transferability is wise if one considers that their function is to protect the creator’s
integrity as a human being, which is not an appropriate subject of sale. It is only
necessary to reflect upon the plot of The Phantom of the Opera appreciate the
benefits which can accrue from such rights, and the distress resulting from their
absence.

Intellectual Property Means and Ends


The Universal Declaration of Human Rights would appear to depend upon
intellectual property law for the realization of at least some of its objects. For
example, no one is to be subject to arbitrary interference with his or her privacy,
and everyone has a right to own property and to make a living. Professor C. G.
Weeramantry, however, in The Slumbering Sentinels, lists’ intellectual property
in scientific knowledge’ as a source of possible denigration of the right to share in
scientific advancement and its benefit. Whether on takes this assertion seriously
or not (and intellectual property rights are characteristically circumscribed by
rules relating to the protection of the public interest), it does indicate that
intellectual property rights — in common with all other legal rights — are capable
274 274 Legal Aspect of Business • Module Eight

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.

8.2 INTELLECTUAL CAPITAL


— Comprises the sum total of all knowledge in an enterprise
— It is what every one in a firm knows, and what therefore gives the firm
its competitive advantage
IC – includes
— the knowledge and skills of employees;
— the processes, ideas, designs, inventions, and technologies utilised by
the Firm
— the relationships it has developed with both customers and suppliers
— Software, business methods, manuals, reports, publications, and
databases
— patents, trademarks, copyrights, Internet domain names, and the like

Intellectual capital is the sum total of all knowledge in an enterprise, as it


resides in the minds of its employees, which can be leveraged to create wealth.

Intellectual capital is what is left of an enterprise after it has been stripped of


all its tangible assets, such as land, buildings, machinery, inventory and cash
IC — enterprise value — value of all hard assets
Module Eight • Indian Patent Laws & WTO Patent Rules 275

IC — cannot exist outside the context of a particular Enterprise or


independent of its strategy
IC — clea rly de fine d stra te gy can separate useful knowledge from
informational noise and disparate facts

Like a magnet attracts iron filings, strategy and purpose create the
discernable Informational patterns that we call knowledge
Purpose  strategy  information knowledge

IC — is the cornerstone of the modern business enterprise


— much of it (IC) is tacit knowledge that reside in the minds of its employees
— when an employee leaves the organization so does the IC that resides in
the employee — his knowledge, experience, skills creativity and relations
with others
IC — is what walks out the door at the end of the day
— obviously, there is a risk that it won’t walk back in tomorrow
Moreover,
— even while an employee is working for an organization, his or her
knowledge cannot be most effectively utilized unless it is identified,
documented, and shared with others.
The Principal Objectives of Intellectual Capital Management (ICM)
— To identify, capture and document IC
— To make it accessible to others in the organization

Intellectual Capital that has been so captured, preserved, catalogued, and


made available for sharing is known as Intellectual Assets

In the best of the enterprise, it should encourage its employees to disclose


and record this Intellectual capital
Intellectual capital Management process Flow:
Search outIdentifyCaptureDocumentIndexStoreAugmentReplicate
Intellectual Property (IP)
Intellectual Assets legally protected under applicable laws are called
Intellectual Property. A typical example of Intellectual property is a patent that is
protected by the patent law.

Figure 8.1 OVERLAPPING INTELLECTUAL PROPERTY

Intellectual capital

Intellectual Assets

Intellectual Property
276 276 Legal Aspect of Business • Module Eight

— IPs form a more valuable subset of IC


— IP forms an even more valuable subset of IAs
The goal of Management is to produce Intellectual Property (see Figure 4.1)
Segments of Intellectual Property (IP)
I. According to well-defined “classical” or statutory assets
— patents, trademarks, and copyrights (the trinity)
— mask works and registered designs
Mask Works
— stencils used for semiconductor chip manufacturing
— semiconductor chips, the heart and soul of the electronic age, are
produced by a chemical etching process that utilizes a stencil known as
mask work
(these chips, which may be very costly to develop, are surprisingly
inexpensive to fabricate. This situation positively cries out for copying —
known as piracy to chip developers and free enterprise to chip copiers)
Current pace of technological advancement is such that chips are often
obsolute
II. According to the less definite contractual or “common low assets” (IP)
— Trade secrets
— know-how
— non-competition Agreements
— Confidential Disclosure Agreements (Industrial espionage)

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

— Deporting employees deplete a firm’s stock of intellectual capital worse,


they may convey a firm’s IC to a competitor
A non-competition Agreement is a contractive undertaking b/w an employee
and his or her employer. The agreement limits the right of the employee,
upon departure, to accept employment with a competitor of his or her former
employer.

Confidential Disclosure Agreements


An agre e me nt tha t the re cipie nt of spe cifie d information will use
tha t informa tion only for a spe cifie d purpose a nd will ma inta in it in
confidence.
These agreements are designed to protect the Intellectual capital of the
employer.

8.3 INTELLECTUAL PROPERTY

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

Table 8.1 IP Protection and Length of Protection

What is Protected? Examples Length of


Protection
Patent Machines, compositions, Digital camera; chemical 17 years* from the date the
plants, processes, articles fertilizer; Luther Burbank’s patent is issued, for utility
of manufacture, hybrid peach: process of and plant patents filed
ornamental designs manipulating genetic traits before June 8, 1995; 20
in mice (and the resulting years from the date of filing,
mice); ironing board; for utility and plant patents
design of Bo Diddley’s filed after June 7, 1995; 14
box-shaped guitar years for design patents

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

Table 8.2 Comparative Table of Intellectual Properties

Utility Design Trademark/ Copyright Trade Mask Registered


Patent Patent Service mark Secret Work Design

Protects Products Industrial Words, Expressions Condifential Mask work Industrial


devices, design phrases, or of creative information stencils designs
processes, symbols that works, such that is used for
business identify the as pictures, maintained semi-
methods source of novels, music secret conductor
goods or performance chip
service advertising manu-
copy, etc. facturing
Term (in 20 14 Perpetual, 70 minimum Perpetual, 10 10
years) so long as as long as
used secret is
maintained
Registration Yes Yes No No No Yes Yes
required
Examined Yes Yes Yes No N/A No No
Cost to High Medium Low Low Low Low Low
Obtain and
Maintain
280 280 Legal Aspect of Business • Module Eight

Table 8.3 Intellectual Property Protection Table

Utility Design Trademark/ Copyright Trade Mask Registered


Patent Patent Service mark Secret Work Design
Article of
Manufacture Yes Yes Possibly Yes
Manufacturing
Process Yes Possibly
Computer
Software Yes Yes Possibly
Business
Method Yes Possibly
Brand
Name Yes
Product
Manual Yes
Training
Manual Yes Yes
Semi-
conductor
Chip Yes
Corporate
Logo Yes
Chemical
Compound Yes Possibly
Fabric Print
Pattern Yes Yes
Photograph Yes
Novel Yes
Movie Script Yes
Musical
Performance Yes
Series of
Movements in
Sports Yes
Web page Yes Yes Yes
Internet Possibly
Domian

8.4 PATENT ACT, 1970


Introduction: Patent is an official document giving an exclusive right to the
inventor of a new thing or new manufacturing process for a fixed no. of years to
use or sell his invention. After the fixed period is over, it become” “Public Juris”
(public right), i.e., any person can manufacture the article. On which patent is
granted by the Govt.
The law relating to patents in India is governed by Patents Act 1970. It is
based on the English Patents Act 1949. This Act is applied to the whole of India.

Objects of the Act (Also consider it as Advantages)


The main object of the act is to strengthen and amend the law relating to
patents.
Module Eight • Indian Patent Laws & WTO Patent Rules 281

The Other Advantages of Patents


It gives the exclusive right to the patentee to use his invention.
It helps the patentee to sue the persons who wrongly use (infringe) his patent.
It helps the patentee to sell his patent or give licence to others to use it and
thereby earn money. (when he could not use (work) the patent himself).
It helps the patentee to get “Patent of Addition” when he makes improvement
or modification in the main invention.

Invention. (Sect. 2 [j])


Patent is granted to an invention. Invention means any new and a set of
useful:
(a) art, process method of manufacture.
(b) a machine, instruments or other articles.
(c) substance produced by manufacture.
It also includes new improvements in any of the above items. Hence the 3
basic requirements of an invention are:
(1) Method of Manufactures. (2) Novelty and (3) Utility.

When patent rights are not given (Sect. 3)


For certain works patent right may not be given in the public interest. Hence
certain items are not inventions:
They are
(1) invention which is against matural law. (Tripling invention)
(2) invention which are for unlawful use or harmful to public health.
(3) discovery of a scientific principle.
(4) a simple discovery of any new property or new use for a old substance.
(5) a substance obtained by a mere Admixture (mixing something).
(6) mere arrangement or re-arrangement or duplication of known devices.
(7) a method for increasing efficiency.
(8) a method of Agriculture or horticulture.
(9) any medical, surgical or other treatments of human beings or any other
methods used for similar treatment of animal or plants.
Note: For any invention relating to atomic energy patent right shall not be given.

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

(4) Filing of Specification (Sect. 9): A complete specification shall be


filled with a fee of Rs. 50/- within 12 months from the date of filing of
application. It may be extended by another 3 months.
Note: In provisional and complete specification.
Provisional specification gives the same particulars about the nature of
invention without drawings and statement of claim. But complete specification
gives all the details about the invention with drawings. Until the complete
specification is filed, a provisional specification may be filed with fees.
Examination of application (Sect. 12): The application along with
specification, will be referred (sent) to the examiner by the controller of patent to
find out whether the application is submitted according to the requirements of
the act.
Report of the Examiner: The examiner will make a report of the examination
and return the application to the controller along with the report.
Refusal of the application (Sect. 15): When the application submitted does
not comply with the requirement of the act, the controller may either refuse the
application or ask the applicant to amend the details in the application.
Acceptance of application (Sect. 22): When the submitted application along
with complete specification filed has satisfied the requirement of the act (in
satisfying the conditions imposed by under Sect. 21 of the act by the controller)
the controller may accept the application and complete specification.

Advertising the acceptance of complete specification (Sect. 23):


The fact that the complete specification has been accepted must be advertised
in the official Gazette. Then the application and complete specification with
drawings shall be kept open to the public inspection.
Opposition to Grant of Patent (Sect. 25): Within 4 months from the date of
advertisement (of acceptance of a complete specification) only person may give
notice of opposition to the grant of patent to the controller. This period of 4 months
may be extended by the controller by another 1 month.

The Grant of the Patent may be opposed by anyone on the following


grounds
(a) When the applicant for the patent wrongly obtained the patent.
(b) When the alleged invention claimed by the applicant has been
previously published in India before any specification filed.
(c) When the so-called invention claimed by the applicant was publicly
used in India.
(d) When the so-called invention claimed by the applicant does not involve
any inventive step.
(e) When the subject given in the complete specification is not really an
invention as per the act.
(f) When the complete specification does not clearly describe the invention
or the method of its performance.
Opportunity of hearing: After the notice of opposition is duly given, both
the parties shall be given opportunity to be heard before deciding the case.
Module Eight • Indian Patent Laws & WTO Patent Rules 283

Grant and Sealing of Patent


After the application for a patent along with a complete specification has
been accepted or after the opposition has been decided finally in favour of the
applicant, the controller shall grant the patent to applicant and the patent will be
sealed with the seal of the patent office and the date on which it is sealed, shall
be entered in the register. It is only after the patent is sealed the patentee can
sue infringers for infringement.
Note on patent of Addition: When patentee makes any improvement or
modification to the main patent (or to his earlier invention), he will be issued a
special type of patent called “Patent of Addition.”

Restoration of Lapsed Patent


Application for Restoration: When the patent fails to pay any renewal fee
within the prescribed time (or extend period the patent may not have the effect
(ceased to have the effect).
Then the patentee or his legal rep. may apply for the restoration of the patent,
within one year from the date on which the patent ceased to have effect.
The patentee must give the reasons for not having paid the prescribed fee in
the prescribed manner.
If the controller prima facie is satisfied that (1) the failure to pay the renewal
fee unintentional and (2) no undue delay was caused in applying for restoration
then he shall advertise the application in the prescribed manner.
Any person (interested) may give notice opposition (to the application) to the
controller disproving the above said 2 reasons within the prescribed time. The
controller shall send the notice of opposition to the applicant. Then he gives
opportunity to both parties to be heard before deciding the case.
If no notice of opposition is received by the controller, then he may decide it
in favor of the applicant (i.e., he shall restore that patent which has lost the
effect) after the payment of any unpaid renewal fees.
Note: The patentee can’t sue any infringer for infringement of patent between
the date on which the patent ceased to have effect and the date of
advertisement of the application for restoration of lapsed patent.

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.

PATENTS (AMENDMENT) ACT, 2005: MAIN PATENT PROVISIONS


 Exclusive Marketing Rights (EMRs) to be granted for 5 years for pharma
and agro-chemical products.
 A Mail Box will be kept in which all applications for pharmaceutical
and agro-chemical products will be kept.
 Three conditions for grant of EMRs : the new chemical entity should be
filed after January 1, 1995, the product should not have been marketed
earlier in India and compulsory licensing, wherein the government could
reserve the right to allow to four companies to licence and manufacture
the same product in case of a major demand-supply shortage.
 Restrictions on application for patents abroad, for inventions made in
India, removed.
 The government can sell or distribute products for which EMRs have
been granted for non-commercial use, in the public interest.
 Government to have discretion in determining the price of the product
for which EMR has been granted in the public interest and for reasons
to be stated.
 Exclusive right to sell or distribute will not be granted to articles based
on Indian system of medicine which is already in public domain.
Module Eight • Indian Patent Laws & WTO Patent Rules 285

WTO and Patent Act


As per WTO agreement, Indian Patent Act, needs to be amended to have
product patent for 20 years, the Patent Act (2005) is designed to address the
issues of patent rights in India.

8.5 INTERNATIONAL INTELLECTUAL PROPERTY ORGANIZATIONS


Intellectual property refers to creations of the mind: inventions, literary and Intellectual property
refers to creations
artistic works, and symbols, names, images and designs used in commerce. of the mind: inven-
Intellectual property is divided into two categories: Industrial property, which tions , literary and
artistic works, and
includes inventions (patents), trademarks, industrial designs, and geographic s y mb ols , na mes ,
indications of source; and Copyright, which includes, literary and artistic works images and de-
such as novels, poems and plays, films, musical works, artistic works such as signs used in com-
merce.
drawings, paintings, photographs and sculptures, and architectural designs.
Rights re lated to copyright include those of pe rforming artists in their
performances, producers or phonograms in their recordings, and those of
broadcasters in their radio and television programs.
WIPO: The World Intellectual Property Organization (WIPO) is an international
organization dedicated to promoting the used and protection of works of the human
spirit. These words, — intellectual property — are expanding the bounds of science
and technology and enriching the world of the arts. Through its work, WIPO plays
an important role in enhancing the quality and enjoyment of life, as well as creating
real wealth for nations.
With headquarters in Geneva, Switzerland, WIPO is one of the 16 specialized
agencies of the United Nations system of organizations. It administers 23
international treaties dealing with different aspects of intellectual property
protection. The organization counts 182 nations as member states.

Activities and Services


WIPO carries out a wide variety of activities and services in its work. These The World Intellec-
includes establishing international standards for intellectual property laws and tual Property Orga-
nization (WIPO) is
practices and providing registration services that allow patents, trademarks and an international or-
designs to be protected in many countries. WIPO also extends various technical gani z ation d edi-
and legal assistance to developing countries, facilitates resolution of intellectual cated to promoting
the used and pro-
property disputes, and explores new issues arising in the global intellectual tection of works of
property arena. In all these activities, the latest information technologies are the human spirit.
employed to promote efficiency and facilitate the electronic exchange of information
on intellectual property.

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

WIPO administers four treaties establishing international classifications,


the texts of which are also available:
 the Strasbourg Agreement Concerning the International Patent
Classification (IPC);
 the Nice Agreement Concerning the International Classification of Goods
and Services for the Purposes of the Registration of Marks;
 the Locarno Agreement Establishing the international Classification for
Industrial Designs;
 the Vienna Agreement Establishing the International Classification of
the Figurative Elements of Marks.

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.

The Parties Choose the Arbitrator(s)


Under the WIPO Rules, the parties can select a sole arbitrator together, if
they choose to have a three-member arbitral tribunal, each party appoints one of
the arbitrators; those two persons then agree on the presiding arbitrator.
Alternatively the Center can suggest potential arbitrators with relevant expertise
or directly appoint members of the arbitral tribunal. The Center maintains an
extensive roster of arbitrators ranging from seasoned dispute resolution generalists
to highly specialized practitioners and experts covering the entire legal and
technical spectrum of intellectual property.
Module Eight • Indian Patent Laws & WTO Patent Rules 287

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.

Arbitration is a Confidential Procedure


The WIPO Arbitration Rules specifically protect the confidentially of the
existence of the arbitration, any disclosures made during that procedure, and the
award in certain circumstances, the WIPO Rules allow a party to restrict access
to trade secrets or other confidential information that is submitted to the arbitral
tribunal or to a confidentiality advisor to the tribunal.

The decision of the arbitral tribunal is final and easy to enforce


Under the WIPO Rules, the parties agree to carry out the decision of the
arbitral tribunal without delay, International awards are enforced by national
courts under the New York Convention, which permits them to be set aside only
in very limited circumstances. More than 130 States are party to this Convention.
The following table explains the common features of intellectual properties
disputes, court litigation and arbitration procedure.

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

8.5 DECIDED CASE ON BASMATI RICE, TURMERIC, AND PHARMA


PRODUCTS

(A) BASMATI RICE PATENT ISSUE


In September 1997, a Texas company called RiceTec won a patent (U.S. Patent
No. 5,663,484) on "basmati rice lines and grains." The patent secures lines of
basmati and basmati-like rice and ways of analyzing that rice. RiceTec, owned by
Prince Hans-Adam of Liechtenstein, faced international outrage over allegations
288 288 Legal Aspect of Business • Module Eight

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.

(B) DECIDED CASES ON TURMERIC


The turmeric patent is a landmark case in the area of Intellectual property
rights. This was the first time a patent based on the Traditional Knowledge of a
developing country was challenged successfully and Unite States Patent and
Trademark Office (USPTO) revoked the patent.
In 1995, two non-resident Indians, Suman K. Das and Hari Har P. Cohly,
associated with the University of Mississippi Medical Centre, Jackson, USA
obtained patent for Use of turmeric in wound healing. As turmeric has been used
by all Indian families as a traditional wound healer in India for thousands of
years for healing wounds and rashes.
Indian Council of Scientific and Industrial Research (CSIR) were entrusted
with the responsibility of challenging the patent. CSIR challenged the patent on
the ground that it lacked novelty. CSIR could locate 32 references (some of them
being more than one hundred years old, in Sanskrit, Urdu and Hindi), which
showed that this finding was well-known in India prior to filing of this patent. The
formal request for re-examination of the patent was filled by CSIR at USPTO on
28 October 1996. The first re-examination result rejected all the six claims based
on the references submitted by CSIR on the ground of 'anticipated references'
University of Mississippi Medical Centre, decided not to pursue the case and
transferred the rights to the inventors. Inventors Mr. Suman K. Das and Mr. Hari
Har P. Cohly decided to file Objections to the re-examination results. The inventors
argued that the powder and paste form of Turmeric had different physical
properties which helps wound healing, i.e., bio-availability and absorbability, and
therefore, one of the ordinary skills in the art would not expect, with any reasonable
degree of certainty, that a powdered material would be useful in the same
application as a paste of the same material. The inventors, further, mentioned
that oral administration was available only with honey and honey itself was
considered to have wound healing properties.
In the second re-examination it was observed that the paste and the powder
forms were equivalent for healing wounds in view of the cited material by CSIR.
the examiner rejected all the claims once again and upheld the contentions raised
by CSIR. Turmeric patent case is the fist successful case in the area of intellectual
property violation.

(C) DECIDED CASES ON PHARMA PRODUCTS


Novartis AG vs. Union of India (The Glivec Case)
Novartis, a Swiss pharmaceutical MNC filed an application for a patent on
the beta crystalline form of Imatinib Mesylate, marketed by the company under
the brand name of Glivec/ Gleevec in several countries. Glivec is a drug used to
treat chronic myeloid leukaemia. The Chennai patents office rejected the
application on the grounds that the drug was a new form of an old drug and
Module Eight • Indian Patent Laws & WTO Patent Rules 289

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.

Implications of the Case


Over 30000 cases of chronic myeloid leukaemia (CML), a form of cancer of
the blood cells are reported in India every year. Novartis introduced Glivec in
2001 in India. It proved to be a really useful drug producing remission in over 90
percent of cases. Glivec has to be taken lifelong and the treatment for the Novartis
version costs Rs 1.2 lakh a month. On the other hand, nine Indian Companies
were making and marketing it at a price of about Rs.8000 per month.
If patent would have been granted to Novartis, it would have prevented generic
competition as domestic companies cannot produce the drug. Treatment cost
would make the drug unaffordable and inaccessible for those who need it the
most. Thus a patent enabled drug monopoly would have proved harmful for the
majority.
Fulfilling public interest requires a regular stream of safe, effective and
innovative medicines for all those who need them. This requires a balance between
protecting intelle ctual property rights a nd sa fe gua rding public hea lth.
Internationally agreed safeguards like the Doha Declaration are in place to ensure
this balance but these safeguards will serve their true purpose only when they
are respected and uphold.

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

responsibility towards society. The monopoly granted by patents to the Drug


companies should not be exercised without responsibilities.
As far as Indian pharmaceutical industry is concerned, various options are
possible in the WTO regime. But ultimately, the path currently being followed by
international standards for patent protection moves inevitably toward a clash
between public health and intellectual property. Despite the Doha Declarations
affirmation of public health as the paramount concern, it is not clear how such
an objective would be achieved, because generic substitution is so instrumental
in the effort to improve drug accessibility. Stringent intellectual property protection
for pharmaceuticals would only retard public health initiatives in the coming
years. Given the rapid evolution of the AIDS crisis throughout the world, with
more than 35 million cases alone in India , a twenty-year term of market exclusivity
for new treatments is not reasonable if we expect to make real progress in
containing the disease. It might well be appropriate for a governing body to clearly
define a list of essential medicines, such as antiretroviral (ARV) agents, that would
be subject to somewhat more relaxed patent protection compared to other drugs.

INDIA BEATS US BID TO PATENT ASHWAGANDHA


A wonder herb, it has been used in traditional medicines for ages.
India has foiled a major bio-piracy bid on the use of Ashwagandha
India’s wonder plant in the treatment of a range of illnesses including
depression, diabetes, insomnia, convulsions and gastritis.
On March 25,the European Patent Office (EPO) decided to
withdraw American multinational company Natreon Incs patent
applications on the plants medicinal properties after India submitted
documented proof confirming how medicinal formulations using Ashwagandha
were being used in India as far back as in the 12th century. Called the Indian
ginseng, Ashwagandha is used extensively in Ayurveda, Siddha and Unani Indias
traditional systems of medicine. But Natreon on July 27,2006 filed patent
applications in the EPO on Ashwagandhas (Withania somnifera) ability to treat
anxiety induced stress, depression, insomnia, gastric ulcers and convulsions.
Shocked, head of India’s Traditional Knowledge Digital Library (TKDL) Dr V K
Gupta shot off a letter to EPO on July 6,2009 submitting evidence to confirm
that Ashwagandhas medicinal properties against the mentioned conditions were
long known.
Interestingly, India’s protest letter also contained 15 pieces of evidence
and documents dating back to the 12th century. Excerpts from age-old texts of
Ayurveda, Unani and Siddha where such formulations were mentioned were
also attached.
Council of Scientific and Industrial Researchs letter to EPO in 2009 said,
the patent application number EP 1906980 titled method of treatment or
management of stress may kindly be referred to wherein treatment of anxiety
induced stress, depression induced stress, sleep deprivation induced stress,
thermic change induced stress and gastric ulcer induced stress with Withania
somnifera has been claimed to be as novel.
The letter added, but in TKDL, several references are there, wherein
Withania somnifera is used for treatment of depression, insomnia, gastritis,
gastric ulcer and convulsions since long. Hence, there does not seem to be any
novelty or inventive step involved in the claims made in the above patent
Module Eight • Indian Patent Laws & WTO Patent Rules 291

application. As a result of this third party submission, a notice was issued to


the American company concerning the patentability of the invention and was
directed to comment on it.
Source : Times of India, p19, March 27, 2010

Questions

Section — A Objective Type


1. What is Intellectual Property?
2. What is Intellectual Property Law?
3. What Intellectual Property comprises of?
4. What are the principal objectives of Intellectual Capital Management?
5. What is Intellectual Capital?
6. Name the segments of Intellectual Property.
7. What are Mask works?
8. What are Trade Secrets?
9. What is know-how?
10. What is a patent?
11. What is utility patent?
12. What is design patent?
13. What is plant patent?
14. What is copyright?
15. What is Trademark?
16. Differentiate between Licensce and Assignment.
17. What is Voluntary Licensce?
18. What is Compulsory Licensce?
19. Name the remedies available for Infringement of copyright.
20. What are the objectives of Trade and Merchandise Mark Act, 1958?
21. Name any two features of a trademark.
22. What is deceptively similar trademark?
23. What is certification of trademark?
24. Who is a registered user of a trademark?
25. Name the two advantages of obtaining patent.
26. What is Invention as per Patent Act?
27. What is Infringement of Patent?
28. Expand WIPO.
29. What is Arbitration?
30. What is passing off under Trademarks Act?

Section — B Analytical Type


1. What is Intellectual Property Law?
2. Is Intellectual Property Law an important subject?
3. Write a note on Intellectual Property and Moral Rights.
4. Briefly explain the Intellectural Capital Management Process flow.
5. Explain different kinds of Patents.
6. Distinguish between Licensce and Assignment.
7. Briefly explain the remedies of Infringement for copyright.
8. Distinguish between Trademark and Copyright.
9. Distinguish between Deception and Confusion.
10. Write a note on Infringement of Trademark.
292 292 Legal Aspect of Business • Module Eight

11. List the advantages of obtaining a patent.


12. What are inventions? And What are not inventions as per the Patent Act, 1970?
13. What is the procedure for grant of patent?
14. When the grant of patent may be opposed? List the grounds.
15. When patent lapses? How to restore it?
16. What is surrender of Patent? Narrate the procedure.
17. Explain the salient features of Patent Amendment Act, 2005.
18. Write a note on Infringement of patent.
19. Write a note on WIPO.
20. Name the Major International Agreements on Intellectual Property.

Section — C Essay Type


1. Write a note on Intellectual Property, Intellectual Assets and Intellectual Capital.
2. What is patent? Explain the procedure to obtain patent.
3. Briefly explain the salient features of Copyright Act, 1957.
4. Explain the salient features of Trade and Merchandise Mark Act, 1958.
5. Write a note on Patent Act, 1970 including Amendment Act, 2005.
6. Discuss in great detail the Basmati Rice Case as IPR.
7. Explain the facts of the case in relation to turmeric as Patent Right.
8. Bring out the decided cases of Pharma Products in India as WTO-TRIPS paradigm.
9
MODULE

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

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1999

FEMA is an Act to 9.1 OBJECTS OF THE FEMA


c ons olidate and
amend the law re- This is an Act to consolidate and amend the law relating to foreign exchange
lating to foreign ex- with the objectives of facilitating external trade and payments and for promoting
change with the ob-
jectives of facilitat-
the orderly development and maintenance of foreign exchange market in India.
ing ex ternal trade This Act extends to the whole of India and applies to all branches, offices and
and payments and
for promoting the
agencies outside India owned or controlled by a person resident in India and also
orde rly dev e lop- to any contravention thereunder committed outside India by any person to whom
ment and mainte- this Act applies.
nanc e of for eign
exchange market in
India. Important Terms
The Act defines certain important terms, which are as follows:
Authorised person: means an authorized dealer, money changer, offshore
Authorised person banking unit or any other person for the time being authorized under Section 10
mean s an au tho-
rized dealer, money
(1) to deal in foreign exchange or foreign securities.
changer, offshore Capital account transactions: means a transactions which alters the assets
banking unit or any
other person for the
or liabilities, including contingent liabilities, outside India of persons resident in
time being autho- India or assets or liabilities in India of persons resident outside India, and includes
rized under Section transactions referred to in Section 6 (3).
10 (1) to deal in for-
eign ex change or Currency: includes all currency notes, postal notes, postal orders, cheques,
foreign securities. drafts, travellers cheques, letter of credit, bill of exchange and promissory notes,
credit cards or such other similar instruments, as may be notified by the Reserve
Bank.
Currency notes: means and includes cash in the form of coins and bank
notes.
Current account transactions: means a transaction other than capital
account transaction and without prejudice to the generality of the foregoing such
transactions include:
1. payments due in connection with foreign trade, other current business,
services, and short-term banking and credit facilities in the ordinary
course of business.
2. payments due as interest on loans and as net income from investments.
3. remittances for living expenses or patents, spouse and children residing
abroad, and
4. expenses in connection with foreign travel education and medical care
of parents, spouse and children.
Export: means—
1. the taking out of India to a place outside India any goods
2. provision of services from India to any person outside India
Foreign Currency: means any currency other than Indian currency.
Foreign Exchange: means foreign currency and includes—
Module Nine • Foreign Exchange Management Act, 1999 295

1. deposits, credits and balances payable in any foreign currency.


2. drafts, travelers cheques, letter of credit or bills of exchange, expressed
or drawn in Indian currency but payable in any foreign currency.
3. drafts, travelers cheques, letter of credit or bills of exchange drawn by
banks, institutions or persons outside India, but payable in Indian
currency.
Foreign Security: means any security, in the form of shares, stocks, bonds,
debentures or any other instrument denominated or expressed in foreign currency
and includes securities expressed in foreign currency, but where redemption or
any form of return such as interest or dividends is payable in Indian currency.
Import: with its grammatical variations and cognate expressions means
bringing into India any goods or services.
Indian currency: means currency which is expressed or drawn in Indian
rupees but does not include special bank notes and special one rupee notes issued
under Section 28 A of the RBI Act, 1934.
Person: Includes
1. an individual
2. a Hindu undivided family
3. a company
4. a firm
5. an association of persons or body of individuals, whether incorporated
or not.
6. every artificial juridical person, not falling within any of the preceding
sub-clauses, and
7. any agency, office or branch owned or controlled by such person.
Person — resident in India: means—
1. a person residing in India, for more than 182 days during the course of
the preceding financial year but does not include—
(A) a person who has gone out of India or who stays outside India; in
either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vacation outside
India, or
(c) for any other purpose, in such circumstances as would indicate
his intention to stay in India for an uncertain period.
(B) a person who has come to or stays in India, in either case, other-
wise than—
(a) for or on taking employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate
his intention to stay in India for an uncertain period.
2. any person or body corporate registered or incorporated in India
3. an office, branch or agency in India owned or controlled by a person
resident outside India.
296 296 Legal Aspect of Business • Module Nine

4. an office, branch or agency outside India owned or controlled by a person


resident in India.
Person Resident Outside India: means a person who is not resident in India.
Repatriate to India: means bringing into India the realized foreign exchange
and —
(i) the selling of such foreign exchange to an authorized person in India in
exchange for rupees; or
(ii) the holdings of realized amount in an account with an authorized person
in India to the extent notified by the Reserve Bank.
And includes use of the realized amount for discharge of a debt or liability
denominated in foreign exchange and the expression “repatriation” shall be
construed accordingly.
Security: means shares, stocks, bonds and debentures, Government
securities as defined in the Public Debt Act, 1944, saving certificates to which the
Government Savings Certificates Act, 1959, applies deposit receipts in respect of
securities and units of the Unit Trust of India established under Section 3 (1) of
the UTI Act, 1963 or of any mutual fund and includes certificates of title to
securities, but does not include bills of exchange or promissory notes other than
Government promissory notes or any other instruments which may be notified by
the Reserve Bank as security for the purposes of this Act.
Service: means service of any description which is made available to potential
users and includes the provisions of facilities in connection with banking,
financing, insurance, medical assistance, legal assistance, chit fund, real estate
transport, processing, supply of electrical or other energy, boarding or lodging or
both, entertainment, amusement or the purveying of news or other information,
but does not include the rendering of any service free of charge or under a contract
of personal service.
Transfer: includes sale, purchase, exchange, mortgage, pledge, gift, loan or
any other form of transfer of right, title, possession or lien.

9.2 REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE

Dealings in Foreign Exchange


As per Act, no person shall—
(a) Deal in or transfer any foreign exchange or foreign security to any person
not being an authorized person.
(b) Make any payment to or for the credit of any person resident outside
India in any manner.
(c) Receive otherwise through an authorized person, any payment by order
or on behalf of any person resident outside India in any manner.
(d) Enter into any financial transaction in India as consideration for or in
association with acquisition or creation or transfer of a right to acquire,
any asset outside India by any person.
Section 3 seeks to prohibit dealings in foreign exchange except through an
authorized person.
Module Nine • Foreign Exchange Management Act, 1999 297

Holdings of Foreign Exchange


Section 4 describes the provisions in relation to acquisition, holding etc., of
foreign exchange, foreign security or immovable property situated outside India.
As per this section, no person resident in India shall acquire, hold, own,
possess or transfer any foreign exchange, foreign security or any immovable
property situated outside India.

Current Account Transactions


Section 5 stipulates that sale or drawal for all current account transactions
shall qualify for drawal of foreign exchange from authorized persons. It also
empowers the Central Government to prescribe, in public interest and in
consultation with the Reserve Bank, the restrictions for such transactions as
may be considered reasonable.
Any person may sell or draw foreign exchange to or form an authorized person
if such sale or drawal is a current account transaction.
Provided that the Central Government may, in public interest and in
consultation with the Reserve Bank, impose such reasonable restrictions for
current account transactions as may be prescribed.

Capital Account Transactions


Sub-section (1) of Section 6 provides that subject to certain conditions and
limitations any person may sell or draw foreign exchange to or from any authorized
person for capital account transaction. Sub-section (2) thereof enables the Reserve
Bank, in consultation with the Central Government; to specify the permissible
class of such transactions and the limits up to which foreign exchange shall be
admissible for such transactions. Sub-section (3) further enables the Reserve
Bank to prohibit, restrict or regulate the specific transactions, mentioned therein
by regulations framed under the Act. Sub-sections (4) and (5) incorporate the
existing policy with respect to the person resident in India acquiring, etc. foreign
assets outside India and a non-resident acquiring etc., assets in India while he
was resident in India. Sub-section (6) empowers the Reserve Bank to regulate the
setting up of branches or office in India by foreign firms.
(1) Subject to the provisions of Sub-section (2) of Section 6, any person may
sell or draw foreign exchange to or from an authorized person for a capital
account transaction.
(2) The Reserve Bank may, in consultation with the Central Government,
specify—
(a) Any class or classes of capital account transactions which are
permissible;
(b) The limit up to which foreign exchange shall be admissible for such
transactions.
Provided that the Reserve Bank shall not impose any restriction on the drawal
of foreign exchange for payments due on account of amortization of loans of for
depreciation of direct investments in the ordinary course of business.
(3) Without prejudice to the generality of the provisions of sub section (2),
the Reserve Bank may, by regulations prohibit, restrict or regulate the
following:
298 298 Legal Aspect of Business • Module Nine

(a) transfer or issue of any foreign security by a person resident in


India;
(b) transfer or issue of any security by a person resident in India;
(c) transfer or issue of any security or foreign security by any branch,
office or agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or
by whatever name called is required;
(e) any borrowing or lending in rupees in whatever form of by whatever
name called between a person resident in India and a person resident
outside India;
(f) deposits between persons resident in India and persons resident
outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not
exceeding five years, by a person resident in India;
(i) acquisition on transfer of immovable property in India, other than a
lease not exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or
other liability incurred—
(i) by a person resident in India and owed to a person resident
outside India; or
(ii) by a person resident outside India.
(4) A person resident in India may hold, own, transfer or invest in foreign
currency, foreign security or any immovable property situated outside
India if such currency, security or property was acquired, held or owned
by such person when he was resident outside India or inherited from a
person who was resident outside India.
(5) A person resident outside India may hold, own transfer or invest in Indian
currency, security or any immovable property situated in India if such
currency, security or property was acquired, held or owned by such
person when he was residing in India or inherited from a person who
was resident in India.
(6) Without prejudice to the provisions of this section, the Reserve Bank
may, by regulation, prohibit, restrict, or regulate establishment in India
of a branch, office or other place of business by a person resident out-
side India, for carrying on any activity relating to such branch, office or
other place of business.

Export of Goods and Services


Section 7 provides for control over repatriation of sale proceeds of exported
goods. The section preserves the Reserve Bank’s existing powers to direct an
exporter to comply with the requirements as deemed fit for the purpose of ensuring
that the export value of the goods is received without any delay.
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(1) Every exporter of goods shall—


(a) Furnish to the Reserve Bank or to such other authority a declaration
in such form and in such manners as may be specified, containing
true and correct material particulars, including the amount
representing the full export value or, if the full export value of the
goods is not ascertained at the time of export, the value which the
exporter, having regard to the prevailing market conditions, expects
to receive on the sale of the goods in a market outside India.
(b) Furnish to the Reserve Bank such other information as may be
required by the Reserve Bank for the purpose of ensuring the
realization of the export proceeds by such exporter.
(2) The Reserve Bank may, for the purpose of ensuring that the full export
value of the goods or such reduced value of the goods as the Reserve
Bank determines, having regard to the prevailing market conditions, is
received without any delay, direct any exporter to comply with such
requirements as it deems fit.
(3) Every exporter of services shall furnish to the Reserve Bank or to such
other authorities a declaration in such form and in such manner as may
be specified, containing the true and correct material particulars in
relation to payment for such services.

Realization and Repatriation of Foreign Exchange


Section 8 casts certain obligations on persons resident in India having any
amount of foreign exchange due or acquired in his favour. Save as otherwise
provided in this Act, where any amount of foreign exchange is due or has accrued
to any person resident in India, such person shall take all reasonable steps to
realize and repatriate to India such foreign exchange within such period in such
manner as may be specified by the Reserve Bank.

Exemption from Realization and Repatriating in Certain Cases


Section 9 seeks to provide for exemptions in respect of realization and
repatriation is the case specified therein. Most of the transactions specified therein
are present in terms of various notifications of the Reserve Bank.
The provisions of Section 4 and 8 shall not apply to the following, namely:
(a) possession of foreign currency or foreign coins by any person up to such
limit as the Reserve Bank may specify;
(b) foreign currency account held or operated by such person or class of
persons and the limit up to which the Reserve Bank may specify;
(c) foreign exchange acquired or received before the 8 th day of July, 1947,
or any income arising or accruing thereon which is held outside India by
any person in pursuance of general or special permission granted by the
Reserve Bank;
(d) foreign exchange held by a person resident in India upto such limit as
the Reserve Bank may specify, if such foreign exchange was acquired by
way of gifts or inheritance from a person referred to in clause (c), including
any income arising therefrom;
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(e) foreign exchange acquired from employment, business, trade, vocation,


services, honorarium, gifts, inheritance or any other legitimate means
upto such limit as the Reserve Bank may specify; and
(f) such other receipts in foreign exchange as the Reserve Bank may specify;

9.3 AUTHORISED PERSON


Section 10 empowers the Reserve Bank to authorize persons to deal in foreign
exchange or in foreign securities. The authorization can also be granted for dealing
in foreign securities besides foreign exchange. The Reserve Bank may specify the
conditions in the authorization and may also revoke the same in the public interest
in the case of any contravention of the provisions of the Act or failure to comply
with the conditions in the authorization.
The rules relating to ‘Authorised person’ are as follows:
(1) The Reserve Bank may, on an application made to it in this behalf,
authorize any person to be known as authorized person to deal in foreign
exchange or in foreign securities, as an authorized dealer, money changer
or offshore banking unit or in any other manner as it deems fit.
(2) An authorization under this section shall be writing and shall be subject
to the conditions laid down therein.
(3) An authorization granted under sub-section (1) may be revoked by the
Reserve Bank at any time if the Reserve Bank is satisfied that—
(a) it is in public interest so to do; or
(b) the authorized person has failed to comply with the condition subject
to which the authorization was granted or has contravened any of
the provisions of the act or any rule, regulation, notification, direction
or order made thereunder: provided that no such authorization shall
be revoked on any ground referred to in clause (b) unless the
authorized person has been given a reasonable opportunity of making
a representation in the matter.
(4) An authorized person shall, in all his dealings in foreign exchange or
foreign security, comply with such general or special directions or orders
as the Reserve Bank may, from time to time, think fit to give, and except
with the previous permission of the Reserve Bank, an authorized person
shall not engage in any transaction involving any foreign exchange or
foreign security which is not in conformity with the terms of his
authorization under this section.
(5) An authorized person shall, before undertaking any transaction in foreign
exchange on behalf of any person, require that person to make such
declaration and to give such information as well reasonably satisfy him
that that transaction will not insolve, and is not designed for the purpose
of any contravention or evasion of the provisions of this Act or of any
rule, regulation, notification, direction or order made thereunder, and
where the said person refuses to comply with any such requirement or
makes only unsatisfactory compliance therewith, the authorized person
shall refuse in writing to undertake the transaction and shall, if he has
reason to believe that any such contravention or evasion as aforesaid is
contemplated by the person, report the matter to the Reserve Bank.
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(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

Reserve Bank’s Powers to Issue Directions to Authorized Person


Section II empowers Reserve Bank to issue directions to authorized persons
and impose penalty if the direction given by the Reserve Bank is contravened by
any authorized person.
(1) The Reserve Bank may, for the purpose of securing compliance with the
provisions of this Act, and of any rules, regulations, notifications or
directions made thereunder, give to the authorized persons any direction
in regard to making of payment or the doing or desist from doing act
relating to foreign exchange or foreign security.
(2) The Reserve Bank may, for the purpose of ensuring the compliance with
the provisions of this Act of any rule, regulation, notification, direction
or order made there under, direct any authorized person to furnish such
information in such manner, as it deems fit.
(3) Where any authorized person contravenes any direction given by the
Reserve Bank under this Act or fails to file any return as directed by the
Reserve Bank, the Reserve Bank may, after giving reasonable opportunity
of being heard, impose on the authorized person a penalty which may
extended to ten thousand rupees and in the case of continuing
contravention with an additional penalty which may extend to two
thousand rupees for every day during which such contravention
continues.

Power of Reserve Bank to Inspect Authorized Person


Section 12 empowers the Reserve Bank to inspect the authorized person who
shall have to produce such books, accounts, and other person who shall have to
produce such books, accounts and other documents etc., as may be required by
the other person making the inspection.
(1) The Reserve Bank may, at any time, cause an inspection to be made, by
any officer of the Reserve Bank specially authorized in writing by the Reserve
Bank in this behalf, of the business of any authorized person as may appear to it
to be necessary or expedient for the purpose of—
(a) verifying the correctness of any statement, information or particulars
furnished to the Reserve Bank;
(b) obtaining any information or particulars which such authorized person
has failed to furnish on being called upon to do so;
(c) securing compliance with the provisions of this Act or of any rules,
regulations, directions or orders, made thereunder.
(2) It shall be the duty of every authorized person, and where such person is
a company or a firm, every director, partner or other officer of such company or
firm, as the case may be, to produce to any officer making an inspection under
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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.

9.4 CONTRAVENTION AND PENALTIES

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.

Enforcement of the Orders of Adjudicating Authority


Section 14 lays down the procedure for payment of penalty and the
consequences of civil imprisonment for failure to make full payment of the penalty
within the specified period. It provides that the detention order shall be executed
like a warrant of arrest.
(1) Subject to the provisions of Sub-section (2) of Section 19, if any person
fails to make full payment of the penalty imposed on him under Section 13 within
a period of ninety days from the date on which the notice for payment of such
penalty is served on him, he shall be liable to civil imprisonment under this section.
(2) No order for the arrest and detention in civil prison a defaulter shall be
made unless the Adjudicating Authority has issued and served a notice upon the
defaulter calling him to appear before him on the date specified in the notice and
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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.
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(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.

Power to Compound Contravention


Section 15 seeks to vest in the Directorate of Enforcement the powers to
compound offences. This power is to be exercised in accordance with the provisions
of the rules framed by the Central Government.
(1) Any contravention under Section 13 may, on an application made by the
person committing such contravention, be compounded within one hundred and
eighty days from the date of receipt of application by the Director of Enforcement
or such other officers of the Directorate of Enforcement and officers of the Reserve
Bank as may be authorized in this behalf by the Central Government in such
manner as may be prescribed.
(2) Where a contravention has been compounded under Sub-section (1), no
proceeding or further proceeding, as the case may be, shall be initiated or
continued, as the case may be, against the person committing such contravention
under that section, in respect of the contravention so compounded.

9.5 ADJUDICATION AND APPEAL


Section 16 provides for appointment of Central Government officers as
Adjudicating Authorities for holding an inquiry for the purpose of imposing any
penalty. It also provides for the procedure for taking cognizance by the Adjudicating
Authority and confer powers of a civil court on the said Authority.
(1) For the purpose of adjudication under Section 13, the Central Government
may, by an order published in the official Gazette, appoint as many officers of the
Central Government as it may think fit, as the Adjudicating Authority for holding
an inquiry in the manner prescribed after giving the person alleged to have
committed contravention under Section 13, against whom a complaint has been
made under sub-section (2) (herein after in this section referred to as the said
person) a reasonable opportunity of being heard for the purpose of imposing any
penalty:
Provided that where the Adjudicating Authority is of opinion that the said
person is likely to abscond or is likely to evade in any manner, the payment of
penalty; if levied, it may direct the said person to furnish a bond or guarantee for
such amount and subject to such conditions as it may deem fit.
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(2) The Central Government shall, while appointing the Adjudicating


Authorities under Sub-section (1), also specifies in the order published in the
official Gazette, their respective jurisdictions.
(3) No Adjudicating Authority shall hold an enquiry under Sub-section (1)
except upon a complaint in writing made by an officer authorized by a general or
special order by the Central Government.
(4) The said person may appear either in person or take the assistance of a
legal practitioner or a chartered accountant of his choice for presenting his case
before the Adjudicating Authority.
(5) Every Adjudicating Authority 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 it 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).
(6) Every Adjudicating Authority shall deal with the complaint under Sub-
section (2) as expeditiously as possible and endeavour shall be made to dispose
of the complaint finally within one year from the date of receipt of the complaint:
Provided that where the complaint cannot be disposed of within the said
period the Adjudicating Authority shall record periodically the reasons in writing
for not disposing of the complaint within the said period.

Appeals of Special Director (Appeals)


Section 17 provides for appeals to the Special Director (Appeals) from the
orders made by the Adjudicating Authority being an Assistant Director of
Enforcement or Deputy Director of Enforcement.
(1) The Central Government shall, by notification, appoint one or more Special
Directors (Appeals) to hear appeals against the orders of the Adjudicating
Authorities under this section and shall also specify in the said notification the
matter and places in relation to which the Special Director (Appeals) may exercise
jurisdiction.
(2) Any person aggrieved by an order made by the Adjudicating Authority,
being an Assistant Director of Enforcement or a Deputy Director of Enforcement,
may prefer an appeal to the Special Director (Appeals).
(3) Every appeal under Sub-section (1) shall be filed within 45 days from the
date on which the copy of the order made by the Adjudicating Authority is received
by the aggrieved person and it shall be such form, verified in such manner and be
accompanied by such fee as may be prescribed.
Provided that the Special Director (Appeals) may entertain an appeal after
the expiry of the said period of 45 days, if he satisfied that there was sufficient
cause for not filing it within that period.
(4) On receipt on an appeal under Sub-section (1), the Special Director
(Appeals) may after giving the parties to the appeal an opportunity of being heard,
pass such order thereon as he thinks fit confirming, modifying or setting aside
the order appealed against.
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(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).

Establishment of Appellate Tribunal


Section 18 provides for establishing of an Appellate Tribunal and appointment
of Special Director (Appeals) to hear appeals against the orders of the Adjudicating
Authority.
The Central Government shall, by notification, establish an Appellate Tribunal
to be known as the Appellate Tribunal for Foreign Exchange to hear appeals against
the orders of the Adjudicating Authorities and the Special Director (Appeals) under
this Act.

Appeal to Appellate Tribunal


Section 19 provides for preferring or appeal before the Appellate Tribunal
against the order made by the Adjudicating Authority and the Special Director
(Appeals), period for filing the appeal, conditions of delay for sufficient cause and
the period for disposal of appeal.
(1) Save as provided in Sub-section (2), the Central Government or any person
aggrieved by an order made by an Adjudicating Authority other than those referred
to in Sub-section (1), of Section 17, or the Special Directors (Appeals), may prefer
an appeal to the Appellate Tribunal:
Provided that any person appealing against the order of the Adjudicating
Authority or the Special Director (Appeals) levying any penalty, shall while filing
the appeal, deposit the amount of such penalty with such authority as may be
notified by the Central Government.
Provided further that where in any particular case, the Appellate tribunal is
of the opinion that the deposit of such penalty would cause undue hardship to
such person, the Appellate Tribunal may dispense with such deposit subject to
such conditions as it may deem fit to impose so as to safeguard the realization of
penalty.
(2) Every appeal under Sub-section (1) shall be filed within a period of 45
days from the date on which a copy of the order made by the Adjudicating Authority
or the Special Director (Appeals) is received by the aggrieved person or by the
Central Government and it shall be in such form verified in such manner 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 45 days if it is satisfied that there was sufficient cause for not
filing it within that period.
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(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
order appealed against.
(4) The Appellate Tribunal shall send a copy of every order made by it to the
parties to the appeal and to the concerned Adjudicating Authority or the Special
Director (Appeals), as the case may be.
(5) The appeal filed before the Appellate Tribunal under Sub-section (1), shall
be dealt with by it as expeditiously as possible and endeavour shall be made by it
to dispose of the appeal finally within one hundred and eighty days from the date
of receipt of the appeal.
Provided that where any appeal could not be disposed of within the said
period of one hundred and eighty days, the Appellate Tribunal shall record its
reason in writing for not disposing of the Appeal within the said period.
(6) The Appellate Tribunal may, for the purpose of examining the legality,
propriety or correctness of any order made by the Adjudicating Authority under
Section 16 in relation to any proceeding, on its own motion or otherwise, call for
the records of such proceedings and make such order in the case as it thinks fit.

Composition of Appellate Tribunal


Section 20 to 23 provide for the composition of the Appellate Tribunal, the
qualifications for appointment of the Chairperson, other Members of the Appellate
Tribunal and the Special Director (Appeals), the term of office of the Chairperson
and other Members and the Special Director (Appeals) and their salary allowances
and other conditions of service.

Composition of Appellate Tribunal (Sec. 20)


1. The Appellate Tribunal shall consist of a Chairperson and such number of
Members as the Central Government may deem fit.
2. Subject to the provisions of this Act—
(a) The jurisdiction of the Appellate Tribunal may be exercised by Benches
thereof;
(b) A Bench may be constituted by the Chairperson with one or more
Members as the Chairperson may deem fit;
(c) The Benches of the Appellate Tribunal shall ordinarily sit at New Delhi
and at such other places as the Central Government may, in consultation
with the chairperson, notify;
(d) The Central Government shall notify the areas, in relation to which each
Bench of the Appellate Tribunal may exercise jurisdiction.
(3) Notwithstanding anything contained in Sub-section (2), the Chairperson
may transfer a Member from one Bench to another Bench.
(4) If at any stage of the hearing of any case or matter it appears to the
Chairperson or a Member that the case or matter is of such a nature that it ought
to be heard by a Bench consisting of two Members, the case or matter may be,
referred to him for transfer, to such Bench as the Chairperson may deem fit.
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Qualifications for Appointment of Chairperson, Member and Special


Director (Appeals) (Section 21)
(1) A person shall not be qualified for appointment as the Chairperson or
member unless he —
(a) In the case of Chairperson, is or has been, or is qualified, to be a Judge
of a High Court; and
(b) In the case of a Member, is or has been, or is qualified to be, a District
Judge.
(2) A person shall not be qualified for appointment as a Special Director
(Appeals) unless he —
(a) Has been Member of the Indian Legal Service and has held a post in
Grade I of the Service; or
(b) Has been a Member of the Indian Revenue Service and has held a post
equivalent to a Joint Secretary to the Government of India.

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.

Terms and Conditions of Service


The salary and allowances payable to and the other terms and conditions of
service of the Chairperson, other Members and the Special Director (Appeals)
shall be such as may be prescribed:
Provided that neither the salary and allowances nor the other terms and
conditions of service of the Chairperson or a Member shall be varied to his
disadvantages after appointment.

Procedures and Powers of Appellate Tribunal and Special Director (Appeals)


Section 28 enables the Appellate Tribunal and the Special Director (Appeals)
to adopt its own procedure. The proceedings of the Appellate Tribunal and the
Special Director (Appeals) shall be deemed to be judicial proceedings.
(1) The Appellate Tribunal and the Special Director (Appeals) shall not be
bound by the procedure laid down by the Code of Civil Procedure, 1908 (5 of
1908), but shall be guided by the principles of natural justice and, subject to the
other provisions of this Act, the Appellate Tribunal and the Special Director
(Appeals) shall have powers to regulate its own procedure.
(2) The Appellate Tribunal and the Special Director (Appeals) shall have, for
the purpose of discharging its functions under this Act, the same powers as are
vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1980) while
trying a suit in respect of the following matters, namely:
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(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).

Distribution of Business Amongst Benches


Section 29 provides for distribution of business of the Appellate Tribunal
amongst the benches.
Where Benches are constituted, the Chairperson may, from time to time, by
notification, make provisions as to the distribution of the business of the Appellate
Tribunal amongst the Benches and also provide for the matters, which may be
dealt with by each Bench.

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.
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Right of Appellant to the assistance of legal practitioner or Chartered


Accountant and of Government, to appoint presenting officers.
Section 32 provides that the appellant may take the assistance of a legal
practitioner or a chartered accountant to present his case before the Appellate
Tribunal and the Special Director (Appeals).

Civil court not to have jurisdiction


Section 34 bars the jurisdiction of the civil court in respect of matters to be
dealt with by Adjudicating Authority or by the Appellate Tribunal or the Special
Director (Appeals).

Appeal to High Court


Section 35 provides for filing an appeal to the High Court against the decision
or order of the Appellate Tribunal on a question of law arising out of such decision
or order.
Any person aggrieved by any decision or order of the Appellate Tribunal may
file an appeal to the High Court within 60 days from the date of communication of
the decision or order of the Appellate Tribunal to him on any question of law
arising out of such order:
Provided that the High Court may, if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal within the said period, allow
it to be filed within a further period not exceeding 60 days.
Explanation: in this section “High Court” means —
(a) The High Court within the jurisdiction of which the aggrieved party
ordinarily resides or carries on business or personally works for gain;
and
(b) Where the Central Government is the aggrieved party, the High Court
within the jurisdiction of which the respondent, or in a case where there
are more than one respondent, any of the respondents, ordinarily resides
or carries on business or personally works for gain.

9.6 DIRECTOR OF ENFORCEMENT

Directorate of Enforcement (Sec. 36)


1. The Central Government shall establish a Directorate of Enforcement with
a Director and such other officers or class of officers as it thinks fit, who shall be
called officers of Enforcement, for the purposes of this Act.
2. Without prejudice to provisions of Sub-sections (1), the Central Government
may authorize the Director of Enforcement or an Additional Director of Enforcement
or a Special Director of Enforcement or a Deputy Director of Enforcement to appoint
officers of Enforcement below the rank of an Assistant Director of Enforcement.
3. Subject to such conditions and limitations as the Central Government
may impose, an officer of Enforcement may exercise the powers and discharge
the duties conferred or imposed on him under this Act.
Module Nine • Foreign Exchange Management Act, 1999 311

Appointment of Officers of Enforcement


The Central Government has established the Directorate of Enforcement,
vide Notification No. S.O.534 (E) dt. 1.6.2000, comprising the following officers
as ‘Officers of Enforcement’, namely—
(a) Director of Enforcement,
(b) Special Director of Enforcement,
(c) Additional Director of Enforcement,
(d) Deputy Director of Enforcement,
(e) Deputy Legal Advisor,
(f) Assistant Director of Enforcement, and
(g) Assistant Legal Advisor.
Further, the Director of Enforcement has been empowered to appoint Chief
Enforcement Officer, Enforcement Officer and Assistant Enforcement Officer,
vide Notification No. S.O.536 (E), dt.1.6.2000.

Power of Search, Seizure etc. (Sec. 37)


1. The Director of Enforcement and other officers of Enforcement, not below
the rank of an Assistant Director, shall take up for investigation the contravention
referred to in Section 13.
2. Without prejudice to the provisions of sub-section (1), the Central
Government may also, by notification, authorize any officer or class of officers in
the Central Government, State Government or the Reserve Bank, not below the
rank of an Under Secretary to the Government of India to investigate any
contravention referred to in Section 13.
3. The officers referred to in sub-section (1) shall exercise the like powers
which are conferred on Income-tax authorities under the Income Tax Act, 1961
(43 of 1961) and shall exercise such powers, subject to such limitations laid down
under the Act.
Sections 36 to 38 provide for establishment of a Directorate of Enforcement,
powers to be exercised by the officers of the Directorate of Enforcement and other
officer authorized by the Central Government in respect of search, seizure, etc.
Sub-section (1) of Section 40 empowers the Central Government in the public
interest and by notification to suspend or relax the provisions of the Act in certain
circumstances. Sub-section (3) Provides that notification issued for suspension
of relaxation shall be laid before each House of Parliament.

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

as well as the company, shall be deemed to be guilty of the contravention and


shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this Sub-section shall render any such
person liable to punishment if he proves that the contravention took place without
his knowledge or that he exercised all due diligence to prevent such contravention.
(2) Notwithstanding anything contained in Sub-section (1), where a
contravention of any of the provisions of this Act or of any rule, direction or order
made there under has been committed by a company and it is proved that the
contravention has taken place with the consent or connivance or, is attributable
to any neglect on the part of, any director, manager, secretary or other officer of
the company, such director, manager, secretary or other officer shall also be
deemed to be guilty of the contravention and shall be liable to be proceeded against
and punished accordingly.
Explanation: For the purpose of this section—
(1) “Company” means any body corporate and includes a firm or other
association of individuals; and
(2) “Director”, in relation to a firm, means a partner in the firm.

Bar of Legal Proceedings


Section 44, bars the prosecution or legal proceedings against the officers of
the Central Government or the Reserve Bank or any other person exercising any
powers or discharging any functions or performing any duties under the provision
of this enactment for anything done in good faith.

9.7 MONEY LAUNDERING WITH DECIDED CASES

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.

Money Laundering as a Part of Organized Crime


The characteristics of organized crime are quite evident in money laundering Criminals involved
in money launder-
as it is a group activity which is long-term and continuing; a criminal activity ing c ommit t hree
which is carried out often by more than one person; an activity which is carried bas ic t y pes of
out irrespective of national boundaries at large scale; and generates proceeds, crimes i.e. Crimes
of passion or honor;
which are often made available for illicit use. Criminals involved in money
Crimes of violence
laundering commit three basic types of crimes, i.e., Crimes of passion or honour; or vandalism; and
Crimes of violence or vandalism; and Economic crimes — crime committed to Economic crimes.
make money. Most often crimes are committed for two reasons; for kicks (to prove
that they can get away with it and for unscrupulous greed for quick money (they
think that they can make more money from the crime than they can from the
same amount of legitimate endeavours).

Money Laundering: Basic Concept


Money laundering is the process, by which, large amounts of illegally obtained
money is given the facade of having a legitimate source. Earlier the concept of
money laundering was associated with organized crime alone. However, in recent
times, the ambit of money laundering operations has dramatically increased.
The concept of money laundering originated in the U.S.A. It started with the The c on c ept of
money laundering
attempt to disguise the ill-gotten wealth, obtained from trading in alcoholic origi nated in the
beverages. American mobster Meyer Lansky transferred funds from small casinos U.S.A . It s ta rted
to overseas accounts, especially Swiss banks, the term used for such activity is, with the attempt to
'capital flight'. The first reference to the term, 'Money Laundering' itself appeared disguise the ill-got-
ten wealth, ob-
during the Watergate scandal. Here illegal funds obtained for the president re- tained from trading
election were moved to Mexico and then brought back through a company to in alcoholic beve-
Miami. In this context the British newspaper coined the term 'Laundering.' rages.

Negative Economic Effects of Money Laundering


The negative economic effects of money laundering on economic development
are difficult to quantify, yet it is clear that such activity damages the financial
314 314 Legal Aspect of Business • Module Nine

sector institutions that are critical to economic growth, reduces productivity in


the economy's real sector by diverting resources and encouraging crime and
corruption, which slow down economic growth, and can distort the economy's
external sector — international trade and capital flows — to the detriment of
long-term economic development. Developing countries' strategies to establish
offshore financial centers (OFCs) as vehicles for economic development are also
impaired by significant money-laundering activity through OFC channels. Effective
anti-money-laundering policies, on the other hand, reinforce a variety of other
good governance policies that help sustain economic development, particularly
through the strengthening of the financial sector.

OBJECTIVES OF MONEY LAUNDERING


The most important objective of Money Laundering activities are covering up
of the factual ownership of illegitimately procured money and placement, layering
and integration of such funds. Through money laundering, the launderer
transforms the monetary proceeds derived from criminal activity into funds with
an apparently legal source.

Objectives of Money Laundering and Rules for Bankers


The major objectives of Money Laundering activities are:
1. Concealing the true ownership of illegally-obtained money and
2. Placement, layering and integration of such funds
3. Two cardinal rules that are to be invariably observed by bank officials
for steering clear of the Money Laundering Trap, are:
4. Know your customer (KYC) and,
5. Know your employee.
Money Laundering can be traced back to the Hawala Mechanism, which
facilitated the conversion of money from black into white.

Stages in Money Laundering


There are three independent steps or stages in Money Laundering as shown
below:
(1) Placement: It refers to the physical disposal of bulk cash proceeds derived
from illegal activity.
(2) Layering: This term refers to the separation of illicit proceeds from their
source by creating complex layers of financial transactions. Layering
conceals the audit trail and provides anonymity.
(3) Integration: It refers to the re-injection of the laundered proceeds back
into the economy in such a way that they re-enter the financial system
as normal business funds.
Money laundering is thus a substantial effort and obscures the illegal source
of money. Launderers for starters, find a bank in a foreign country which does
not have very strict banking laws. They strike deals with such banks and then
obtain some property discreetly. Later on, the funds are re-routed back to the
country as legal money. Nowadays wire transfer systems are being used to make
risk free transfers of money from one country to the other. Such money is basically
used to prop up illegal activities such as smuggling, terrorist activities etc.
Module Nine • Foreign Exchange Management Act, 1999 315

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.

FORMS OF MONEY LAUNDERING OPERATIONS


The different methods which can be termed suspicious and indicative of
money laundering operations include:
1. Crooked / Doubtful Transactions related to Money Laundering —
Customers depositing cash through a large number of cash deposit
slips into the similar account or customers having plentiful accounts
into which large cash deposits are made. Each deposit is such that the
quantity thereof is not noteworthy but the collective of all credits is
ample. This is known as "smurfing."
2. A considerable boost in earnings in a sleeping account or large cash
withdrawals from a formerly sleeping or immobile account, or from an
account that has received an unforeseen large credit from abroad
3. Receipt or payment of big sums of cash, which have no clear rationale
or connection to the account holder and / or his business
4. Disinclination to offer standard information when opening an account
or providing negligible or untrue information
5. Depositing high value third party cheques authorized in favour of the
customer or other transactions on behalf of non-account holders
6. Abrupt amplification in cash deposits of an entity with no explanation
7. Employees leading sumptuous ways of life that do not match their known
sources of income
Money Laundering today, poses a major challenge to countries all over the
world and thereby there have been international attempts to curb this problem
of money laundering.

International Attempts to Curb Money Laundering


Keeping in mind the gravity of the problem, the Committee on Banking
Regulations and Supervisory Practices was formulated at a meeting in Basle in
Switzerland, in December 1988. It evolved a set of principles to address the dangers
posed by Money Launderers. These principles deal with the prevention of criminal
use of the banking system for the purpose of Money Laundering. Recommendations
for banks and other financial institutions have been set out in the Basle Principles
so that these institutions can protect themselves against Money Laundering. The
316 316 Legal Aspect of Business • Module Nine

Basle Statement of Principles covers all aspects of laundering through the banking
system.

Policies and Procedures to Curb Money Laundering


The Basle Principles suggest policies and procedures in four areas to curb
Money Laundering as shown below:
• Customer Identification: This re-emphasizes the wise saying 'Know Your
Customer'(KYC). KYC necessitates that banks should make sensible
pains to settle on the customers true identity, and must set up successful
measures for verifying the bona fides of new customers.
• Compliance with Laws: The rules and regulations pertaining to financial
transactions as performed in different Banking related statutes, must
be experimented. Banks should not tender services or make available
dynamic aid in case of transactions where they have superior reason
to assume that these are linked with Money Laundering activities.
• Cooperation with Law Enforcement agencies: Banks should combine
forces fully with national law enforcement authorities to the degree
permitted by precise local regulations regarding Customer privacy.
• Adherence to the Statement: Holding fast to the Statement entails that
banks need to adopt policies that are unswerving with the Statement
and guarantee that all staff members are well-versed of the bank's policy
in this regard. Some chief factors in supporting loyalty to the Statement
of Principles are staff training and putting into practice definite
procedures for customer identification and keeping hold of in-house
records of transactions.
The Basle Principles set out an effective guideline for what banks and
financial institutions should do to cope with Money Laundering.

Money Laundering in India: The Problem and Solutions


(a) Money Laundering and Drug Trafficking: In India, money laundering is
largely connected with drug trafficking. The alternate remittance systems such
as the Hawala transactions are used effectively for this very purpose. Offenders
ensure that money does not reach the banking systems at all, so that they can
escape being caught or discovered. The easy route here is usually the underground
banking system which leaves no paper trial. These systems are based on trust
and the fear of retribution. Such systems are based on family and gang alliances
and have been found to be difficult to penetrate. People here deposit money in
one country and are given a 'chit' or a 'seal.' On production of this 'chit' or 'seal'
money is remitted to the person concerned.
(b) Liberalisation of Indian Economy: Moreover now with the liberalization
of the Indian economy and the dismantling of various regulations, increasingly
the risk of money laundering via banks has increased tremendously. The impact
of money laundering in India is substantial, the Union Revenue Department
recently unearthed 900 bank accounts, with a pooled deposit of nearly Rs. 1,000
crore being run with fabricated names of companies and persons in two dozen
banks of Delhi alone. According to a KPMG study money laundered in India is
approximately 2% to 3% of the country's GDP.
(c) Political Declaration and Global Programmes: While adopting the political
declaration and global programme of action of the Resolution S-17.2 of 1990 and
Module Nine • Foreign Exchange Management Act, 1999 317

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

RBI Role in Curbing Money Laundering


The RBI too has played an important role in curbing the menace of money
laundering. The RBI issued the Know-Your-Customers (KYC) Guidelines — Anti
Money Laundering Standards on 16th August 2005. The Government has also
established a Financial Intelligence Unit-India (FIU-IND), in rank with FATF
recommendations. The FIU would be given the Suspicious Activity Reports from
all FIs and would study them before passing them to the Enforcement Directorate
for investigation and prosecution. The RBI has asked all the banks to put the
policy with the sanction of their boards, within the next three months. The RBI
has stressed that banks can successfully control and decrease their risks only if
they have an understanding of the normal and practical activity of the customer
so that they have the means of spotting transactions that fall outside the standard
model of activity.
In the context of internet banking, there is always a danger that being
extremely mobile, these transactions shall remain undetected. Thereby such banks
have been asked to open accounts only after proper physical introduction and
substantiation of the customer. The online banking systems are also required to
keep a record of all the transactions or series of transactions taking place within
a month, the character and worth of which may be set by the Central Government.
This will sufficiently guard in opposition to any abuse of the Internet banking
services for the intention of money laundering.

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.

Despite the various measures that have been undertaken it has to be


understood that India's anti-money laundering regime is still in its early stages
and banks need to put in place, better systems to ensure they do not fall prey to
misuse. Banks can effectively reduce the risks of banking transactions if they
identify transactions that fall outside the regular pattern of consumer's activities.
Banks need to have an effective anti-money laundering technology system. These
have yet to be effectively implemented in the country.

Money Laundering and Global Financial System


Money laundering is a serious threat to global financial system and good
governance. It is also boosting international crimes and terrorist activities.
Governments in various countries today have come up with different legislations
to deal with this menace. However more needs to be done in this regard. Black
money in India, it is estimated accounts for around 40% of India's GDP. Moreover
it is politicians in India, who are high risk customers who indulge in this activity.
In times of globalization, Indian financial institutions and banks would like
to become important players in the financial setup. This could be achieved only
by ensuring that proper prevention of money laundering norms are in place and
have been setup effectively. In the absence of these norms it is likely that the
indigenous institutions and banks shall be black listed by the foreign countries.
Module Nine • Foreign Exchange Management Act, 1999 319

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.

Anti-Money Laundering and Combating Terrorist Financing

Need for Money Laundering Low


Every year, huge amounts of funds are generated from illegal activities. These
funds are mostly in the form of cash. The criminals who generate these funds
need to bring them into the legitimate financial system. Over $1.5 trillion of illegal
funds are laundered each year.

Consequences of Money Laundering


Finances Terrorism: Money laundering provides terrorists with funds to
carry out their activities.
Undermines rule of law and governance: Rule of Law is a precondition
for economic development — Clear and certain rules applicable for all.
Affects macro economy: Money launderers put money into unproductive
assets to avoid detection.
Affects the integrity of the financial system: Financial system advancing
criminal purposes undermines the function and integrity of the financial system.
Reduces Revenue and Control: Money laundering diminishes government
tax revenue and weakens government control over the economy.

The Prevention of Money Laundering Act, 2002


Money Laundering Act is an endorsement of various international conventions
to which India is a party, and it seeks to declare laundering of monies carried
through serious crimes a criminal offence. The Act also lists modalities of disclosure
by financial institutions regarding reportable transactions, confiscation of the
proceeds of crime, declaring money laundering as an extraditable offence and
promoting international cooperation in investigation of money laundering.
The Act allows for confiscation of property derived from or involved in money
laundering. Co-operative banks, non-banking financial companies, chit funds and
housing financial institutions come under its ambit.
The Act also makes it mandatory for banking companies, financial institutions
and intermediaries to maintain a record of all transactions of a prescribed value
and to furnish information whenever sought within a prescribed time period. Thus,
these entities are required to maintain the record of the transactions for 10 years.
The minimum threshold limit for certain categories of offences under the
Indian Penal Code and other legislations has been fixed at Rs.30 lakh in the Bill.
This limit is further likely to be reduced to Rs.10 lakh.

Objective of the Act


An Act to prevent money laundering and to provide for confiscation of property
derived from, or involved in, money laundering and for matters connected therewith
or incidental thereto.
320 320 Legal Aspect of Business • Module Nine

Important Terms in the Act


Attachment means prohibition of transfer, conversion, disposition or
movement of property by an order issued under Chapter III;
Proceeds of Crime means any property derived or obtained, directly or
indirectly, by any person as a result of criminal activity relating to a scheduled
offence or the value of any such property;
Property means any property or assets of every description, whether
corporeal or incorporeal, movable or immovable, tangible or intangible and
includes deeds and instruments evidencing title to, or interest in, such property
or assets, wherever located;
scheduled Offence means—
• the offences specified under Part A of the Schedule; or
• the offences specified under Part B of the Schedule if the total value
involved in such offences is thirty lakh rupees or more;
Transfer includes sale, purchase, mortgage, pledge, gift, loan or any other
form of transfer of right, title, possession or lien;
Value means the fair market value of any property on the date of its
acquisition by any person, or if such date cannot be determined, the date on
which such property is possessed by such person.

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.

9.8 ATTACHMENT, ADJUDICATION AND CONFISCATION


Attachment of property involved in money-laundering, where the Director, or
any other officer not below the rank of Deputy Director authorised by him for the
purposes of this section, has reason to believe (the reason for such belief to be
recorded in writing), on the basis of material in his possession, that
• any person is in possession of any proceeds of crime;
• such person has been charged of having committed a scheduled offence;
and
• such proceeds of crime are likely to be concealed, transferred or dealt
with in any manner which may result in frustrating any proceedings
relating to confiscation of such proceeds of crime under this Chapter, he
may, by order in writing, provisionally attach such property for a period
Module Nine • Foreign Exchange Management Act, 1999 321

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.

Adjudicating Authorities, Composition, Powers, etc.


The Central Government shall, by notification, appoint one or more
Adjudicating Authorities to exercise jurisdiction, powers and authority conferred
by or under this Act.
An Adjudicating Authority shall consist of a Chairperson and two other
Members: Provided that one Member each shall be a person having experience in
the field of law, administration, finance or accountancy. A person shall, however,
not be qualified for appointment as Member of an Adjudicating Authority,—
(a) in the field of law, unless he
• is qualified for appointment as District Judge; or
• has been a member of the Indian Legal Service and has held a post in
Grade I of that service;
• in the field of finance, accountancy or administration unless he possesses
such qualifications, as may be prescribed.
(4) The Central Government shall appoint a Member to be the Chairperson of
the Adjudicating Authority.
(5) Subject to the provisions of this Act,—
• the jurisdiction of the Adjudicating Authority may be exercised by Benches
thereof;
• a Bench may be constituted by the Chairperson of the Adjudicating
Authority with one or two Members as the Chairperson of the Adjudicating
Authority may deem fit;
• the Benches of the Adjudicating Authority shall ordinarily sit at New
Delhi and at such other places as the Central Government may, in
consultation with the Chairperson, by notification, specify;
322 322 Legal Aspect of Business • Module Nine

• the Central Government shall, by notification, specify the areas in relation


to which each Bench of the Adjudicating Authority may exercise
jurisdiction.
Notwithstanding anything contained in Sub-section (5), the Chairperson may
transfer a Member from one Bench to another Bench.
If at any stage of the hearing of any case or matter it appears to the
Chairperson or a Member that the case or matter is of such a nature that it ought
to be heard by a Bench consisting of two Members, the case or matter may be
transferred by the Chairperson or, as the case may be, referred to him for transfer,
to such Bench as the Chairperson may deem fit.
The Chairperson and every Member shall hold office as such for a term of five
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 the
age of sixty-two years.

9.9 OBLIGATIONS OF BANKING COMPANIES, FINANCIAL INSTITUTIONS


AND INTERMEDIARIES
Banking companies, financial institutions and intermediaries to maintain
records.
Every banking company, financial institution and intermediary shall—
• Maintain a record of all transactions, the nature and value of which may
be prescribed, whether such transactions comprise of a single transaction
or a series of transactions integrally connected to each other, and where
such series of transactions take place within a month;
• Furnish information of transactions referred to in clause (a) to the Director
within such time as may be prescribed;
• Verify and maintain the records of the identity of all its clients, in such
manner as may be prescribed.
Provided that where the principal officer of a banking company or financial
institution or intermediary, as the case may be, has reason to believe that a
single transaction or series of transactions integrally connected to each other
have been valued below the prescribed value so as to defeat the provisions of this
section, such officer shall furnish information in respect of such transactions to
the Director within the prescribed time.
The records referred to in sub-section (1) shall be maintained for a period of
ten years from the date of cessation of the transactions between the clients and
the banking company or financial institution or intermediary, as the case may
be.
No civil proceeding against banking companies, financial institutions, etc.,
in certain cases — Save as otherwise provided in Section 13, the banking
companies, financial institutions, intermediaries and their officers shall not be
liable to any civil proceedings against them for furnishing information under clause
(b) of Sub-section (1) of Section 12.
Module Nine • Foreign Exchange Management Act, 1999 323

9.10 SUMMONS, SEARCHES AND SEIZURES, ETC.


Search and seizure — (1) Where the Director, on the basis of information in
his possession, has reason to believe (the reason for such belief to be recorded in
writing) that any person —
• has committed any act which constitutes money-laundering, or
• is in possession of any proceeds of crime involved in money-laundering,
or
• is in possession of any records relating to money-laundering, then, subject
to the rules made in this behalf, he may authorise any officer subordinate
to him to
— enter and search any building, place, vessel, vehicle or aircraft where
he has reason to suspect that such records or proceeds of crime are
kept;
— break open the lock of any door, box, locker, safe, almirah or other
receptacle for exercising the powers conferred by clause (a) where
the keys thereof are not available;
— seize any record or property found as a result of such search;
— place marks of identification on such record or make or cause to be
made extracts or copies therefrom;
— make a note or an inventory of such record or property;
— examine on oath any person, who is found to be in possession or
control of any record or property, in respect of all matters relevant
for the purposes of any investigation under this Act.

9.11 HAWALA TRANSACTIONS


"Hawala" is an Arabic word meaning the transfer of money or information " Haw ala" is an
between two persons using a third person. The system dates to the Arabic traders Arabic word mean-
ing the transfer of
as a means of avoiding robbery. It predates western banking by several centuries. money or informa-
The Hawala Mechanism left virtually no paper trail, which would attract tion bet ween two
investigations. The profits generated from Hawala were surreptitiously invested pers ons us i ng a
third person.
in real estate, gilt edged securities etc., to launder them.
A Hawala transaction simply means that you pay rupees over here in India
and in return get dollars abroad. For instance, if you want to do a hawala
transaction from Mumbai to Dubai, then by paying Rs.1 lac in Mumbai, you A hawala transac-
tion is an il legal
can transfer 8000 dirhams in Dubai. transaction, which
The Uses: A hawala transaction is an illegal transaction, which is carried out is c a rried ou t by
businessmen,
by businessmen, people who want to show bogus exports and even importers. people who want to
Importers indulge in such hawala transactions by sending a part of the money s how bo gus ex -
abroad through this route and thus bringing the goods into the country at much ports and even im-
porters. Importers
lower rates. By showing lower rates for the goods they are able to save on the indu lge in s uc h
import duty. Also, individuals who have surplus black money indulge in such hawala transactions
transactions by paying cash over here and getting dollars from abroad. These are by sending a part of
the money abroad
also shown as gifts received by some relatives living abroad. Exporters benefit through this route
greatly by this route since the export income is 100 per cent tax-free and can and thus bringing
help them to convert their black money into official income. The Benefits Profits the goods into the
c oun try at muc h
derived from export of software (including some of the infotech-enabled services)
lower rates.
are exempt from Income Tax under Section 80HHE of the Income Tax Act.
324 324 Legal Aspect of Business • Module Nine

An Interesting Case of Hawala Transaction


An Example: Let us take a simple example to prove our case. Assume
there is an existing BSE-listed company, which is closed and is not trading at
all. Today, there are over 7000 companies listed on the BSE, of which more
than 4500 companies are in the B2B category and are hardly traded. Many of
these companies may have even closed down and are mostly based in places
like Ahmedabad, Chennai and Hyderabad. It can happen that two or three
people get together and take over such a company changing its name to an
infotech company. It is even possible that the existing promoters of the company
simply change the name of their company to a software company. By installing
a few computers, modems, data transmission lines and other equipment, a
software company is born.
Some computer literate staff is also hired to show some kind of activity
present in the office. Such companies do not even be having the requisite
infrastructure or the requisite personnel required for running a software
company forget aside any export orders. The next step is to set up a subsidiary
abroad by renting a place or just even employing a person to conduct the
operations. Most of the exports are done to duty free ports such as Hong Kong,
Singapore or Dubai where the money can be remitted back. After that, the
promoters conduct hawala transactions by paying cash over here and getting
dollars from abroad through the subsidiary. The same dollars transferred from
abroad are shown as software exports in the company's books. In this way the
company is able to report decent sales figures in its balance sheet by the way of
export income.
The next step is to catch a flamboyant market operator through whom
rumours about the company can be floated in the market. The operator then
spreads stories such as the company has got big software orders or tie-ups and
is going to report excellent profits. Naturally, the bogus export income drives
up the net profit reflecting a healthy Earnings Per Share for the company. Since,
the P/E of the company appears to be quite low in comparison with the industry
standards; the stock appears to be an excellent buy.
The market operators start providing liquidity in the counter and
consequently the volumes in the counter start rising. Many of the deals take
place between two or three operators itself who start creating a demand for the
stock. The stock price of the company is jacked up touching three to five upper
circuits in succession. The promoters taking advantage of this situation start
dumping their own stock to the small investors who in turn enter to buy. In the
end we have the small investors who are left holding the stock which they have
purchased at the high prices.
Thus the promoters are able to benefit in two ways. Firstly they are able to
get a good price for the dead stocks of their company, which were not being
traded at all and secondly are able to convert their cash into official export
income at a low premium without paying any income tax.
However, the question which authority is responsible to check whether the
companies are actually engaged in and whether their exports are genuine or
not? If no one is then somebody or authority has to be appointed who can
monitor the activities of these companies. This is necessary so that the investors
can be more enlightened about such companies before putting their hard-earned
money into them. This is the magic of technology !
Module Nine • Foreign Exchange Management Act, 1999 325

How Hawala Works


An initial transaction can be a remittance from a customer (CA) from country
A, or a payment arising from some prior obligation, to another customer (CB) in
country B. A hawaladar from country A (HA) receives funds in one currency from
CA and, in return, gives CA a code for authentication purposes. He then instructs
his country B correspondent (HB) to deliver an equivalent amount in the local
currency to a designated beneficiary (CB), who needs to disclose the code to receive
the funds. HA can be remunerated by charging a fee or through an exchange rate
spread. After the remittance, HA has a liability to HB, and the settlement of their
positions is made by various means, either financial or goods and services. Their
positions can also be transferred to other intermediaries, who can assume and
consolidate the initial positions and settle at wholesale or multilateral levels.
The settlement of the liability position of HA vis-a-vis HB that was created by A revers e hawala
transaction is often
the initial transaction can be done through imports of goods or "reverse hawala." used for investment
A reverse hawala transaction is often used for investment purposes or to cover purpos e s or to
travel, medical, or education expenses from a developing country. In a country cover travel, medi-
c al, or educ a tion
subject to foreign exchange and capital controls, a customer (XB) interested in ex pe ns es fr om a
transferring funds abroad for, in this case, university tuition fees, provides local developing country.
currency to HB and requests that the equivalent amount be made available to the
customer's son (XA) in another country (A). Customers are not aware if the
transaction they initiate is a hawala or a reverse hawala transaction. HB may use
HA directly if funds are needed by XB in country A or indirectly by asking him to
use another correspondent in another country, where funds are expected to be
delivered. A reverse hawala transaction does not necessarily imply that the
settlement transaction has to involve the same hawaladars; it could involve other
hawaladars and be tied to a different transaction. Therefore, it can be simple or
complex. Furthermore, the settlement can also take place through import
transactions. For instance, HA would settle his debt by financing exports to country
B, where HB could be the importer or an intermediary.
The 'Hawala' mechanism is amongst the original sources of money laundering. Hawala is an effec-
tive, efficient sys-
'Hawala' is an Arabic word connoting the transfer of money or information involving tem of remit ting
two persons using a third person. Hawala is an effective, efficient system of money . It implies
remitting money. It implies more profit to the parties involved. A hawala transaction more profit to the
parties involved. A
can be completed within a day or two and is free of bureaucratic control and hawala transaction
other hassles. Essentially the system is based on trust, and proper links and can be c ompleted
connections between people. The third party in this transaction has to be trusted within a day or two
in order to make such transactions a success. The Hawala system offers better and is free of bu-
reauc ratic control
opportunities for placement, integration and layering of illegally earned money and other hassles.
and hence is usually considered to be a better system of money laundering. It
has been usually found that such a system is impossible to trace.

Hawala Transactions with Decided Cases


Even today after the big burst of the Dotcom bubble almost "EVERY" investor
dreams of owning stocks of technology companies looking at their high growth
potential and fantastic returns they provide. Since, many of the infotech stocks
are out of reach of the small investor considering their phenomenal prices; they
rush for the smaller and the relatively cheap infotech stocks. But every company
is not TCS or Infosys. Some of them are the shell companies which have the only
business of laundering the money. Many techies have started investing in the
shares and they look for the attractive growth prospects. How do such companies
operate and show decent earnings is the main question? There seems to be a
326 326 Legal Aspect of Business • Module Nine

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

Section — A Objective Type


1. State the objects of the FEMA.
2. Define currency as per FEMA.
3. What is Current account Transaction?
4. What are Capital Account Transactions?
5. Who is an Authorised person as per FEMA?
6. What is Foreign Exchange?
7. What is Foreign Security as per FEMA?
8. Expand – NRI and PIO.
9. Name the composition of Directorate of Enforcement.
10. Name the composition of Appellate Tribunal as per FEMA.
11. What is money laundering?
12. What is Hawala Transaction?

Section — B Analytical Type


1. What are the objectives of FEMA?
2. What are the powers of Appellate Tribunal and Special Director (Appeals) as per FEMA?
3. Discuss the contravention and penal provisions of FEMA.
4. Write a note on Directorate of Enforcement under FEMA.
5. Briefly explain the different forms of money laundering.
6. Explain the different modes of Hawala transactions.

Section — C Essay Type


1. Discuss in brief the Salient features of FEMA.
2. Discuss the decided cases on money laundering in India.
3. Bring out the leading decided cases of Hawala transactions applicable to India.


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

10.1 THE COMPANIES ACT, 2013


Any person desirous of running a large business needs huge funds and
resources, which generally he is not able to contribute himself. He, therefore,
wants some others to join him either in partnership or in a company. A
partnership firm is generally suitable for small to medium size businesses,
but for a large enterprise, company is often preferred. We shall study the
nature, advantages and procedure of forming a company.

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.

Meaning and Definition of a Company


“Company” means a company formed and registered under this Act or
an existing company as defined in the Act.
“Existing Company” means a company formed and registered under any
of the previous companies law (i.e., Act of 1866, 1882 and 1913).
Company is a voluntary association of persons formed for the purpose of
doing business, having a distinct name and limited liability. It is juristic
person having a separate legal entity distinct from the members who constitute
it, capable of rights and duties of its own and endowed with the potential of
perpetual succession.
The Indian Companies Act, 1956 defines joint stock company as “a company
limited by shares having a permanent paid up or nominal share capital of fixed amount
divided into shares also of fixed amount, held and transferable as stock and formed
on the principle of having in its members only the holders of those shares or stocks
and no other persons.”

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

4. Common Seal: A company has a common seal, which is the signature


of that company. The company’s seal is affixed on all documents
executed for and on its behalf.
5. Separate Property Ownership: A company may own and dispose of
its property in its own name. The property of the company is not the
property of its shareholders. Shareholders are not co-owners of the
assets of a company.
6. Transferable Shares: Shares held in a company are movable property
and are freely transferable. Shareholders may transfer their shares
to another person and this does not affect the funds of the company,
its capital remains intact. A private company may impose certain
restrictions on the transfer of its shares.
7. Capacity of sue and being sued: A company is capable of entering
into contracts and enforcing its rights under the contracts. It can
sue and be sued in its own name.

10.2 KINDS OF COMPANIES


We can classify companies broadly into three types based on the mode of
incorporation. They are:
1. Chartered Companies,
2. Statutory Companies, and
3. Registered Companies.
Chartered Companies: Companies incorporated under a special Royal
charter issued by the King or Queen are called “Chartered Companies.” They
are regulated by the provisions of that charter. Such companies were generally
started in the 17th and 18th centuries. The East India Company, Bank of England
are some examples of chartered companies. In India Chartered Companies
are not in existence now, because there is no monarchy.

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

(b) Public Company


Public company means a company which—
(a) is not a private company;
(b) Has a minimum paid-up share capital of five lakh rupees or such
higher paid-up capital, as may be prescribed:
Provided that a company which is a subsidiary of a company, not being a
private company, shall be deemed to be public company for the purposes of
this Act even where such subsidiary company continues to be a private company
in articles.
The other forms of company ownership are:
1. Government Companies
2. Foreign Companies
3. Holding and Subsidiary Companies.
1. Government Companies
Section 617 of Companies Act, defines a Government Company as one in
which not less than fifty one percent of the paid up capital is held by the
Central Government, or by any State Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a
company which is a subsidiary of a Government Company.
2. Foreign Companies
Companies falling under the following two classes are called foreign
companies, namely:
(a) Companies incorporated outside India which, after the commencement
of this Act, establish a place of business within India; and
(b) Companies incorporated outside India, which have, before the
commencement of this Act, established a place of business within
India and continue to have an established place of business within
India at the commencement of this Act.
In brief, a foreign company is one, which is registered outside India but
has a place/s of business in India. The operations of these companies (in the
territory of India) are governed by the regulations laid down by the Indian
Companies Act.
3. Holding and Subsidiary Companies
A holding company is one which holds more than 50 percent of the nominal
value of the equity share capital of another company or which controls the
composition of the Board of Directors of another company. Such other company
is known as subsidiary company. In other words, a subsidiary company is one
whose majority of shares is over 50 percent are held by the holding company.
4. Associate Company
Associate company, in relation to another company, means a company in
which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a
joint venture company.
332 332 Legal Aspect of Business • Module Ten

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

6. Raises capital by private 6. Raises capital by inviting public


arrangement, public subscription subscription or by private
is not allowed arrangement
7. Shares not transferable except for 7. Shares are freely transferable, and
provisions in the Articles may be even quoted on Stock Exchange
8. No restriction on managerial 8. Restrictions on total managerial
remuneration remuneration
9. The words ‘Private Limited’ are 9. The word ‘Limited’ is added to the
added to the company’s name company’s name

Conversion of a Private Company into Public Company


A private limited company is converted into public limited company, by
any of the three modes, namely, by default, by operation of law and by an act
of violation.

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.

Conversion by Operation of Law


A Private company is deemed to be a public company, in following cases:
(a) when 25% or more of its paid up share capital is held by one or more
bodies corporate;
(b) when its average annual turnover (during the last 3 years) exceeds
Rs.10 crores;
(c) when it holds 25% or more of the paid up share capital of a public
company; or
(d) when it accepts or renews deposits from the public after making an
invitation by an advertisement.
Within 3 months after any of the above contingency arises, the fact should
be notified to the Registrar.
The Registrar then makes necessary amendments in records and
documents of the company, the word ‘private’ is deleted from the name of the
company, a new certificate of incorporation is issued, the company makes
necessary amendments in its memorandum and articles, and the company is
deemed to be a public company.
334 334 Legal Aspect of Business • Module Ten

Conversion by an Act of Violation


A private company may get itself voluntarily converted into a public
company by following the procedure given below:
1. Convene a Board Meeting and decide the time, place and agenda for
convening a General Meeting to alter the name and Articles of
Association or to adopt a new set of Articles applicable to a public
company.
2. Send notice for the General Meeting proposing the Special Resolutions
along with Explanatory Statement.
3. Ensure that the quorum is fulfilled at the General Meeting and the
Special Resolutions are passed to the following effect:
(i) to delete the articles applicable to a private company only and
insert new articles that shall be necessary for a public company.
(ii) To delete the word ‘private’ from the name of the company.
(iii) To permit raising of capital from public.
4. Prepare and file a Prospectus/Statement in lieu of Prospectus, in the
prescribed form, within 30 days of passing the above resolutions.
5. File the Special Resolutions passed and the Explanatory Statement,
in the prescribed form along with prescribed fee, within 30 days of
their passing.
6. Apply to the Registrar, for issue of a fresh certificate of incorporation,
after deleting the word ‘private’ from its name.
7. The number of directors should be raised to a minimum of three, if
necessary.

Conversion of a Public Company into Private Company


The procedure for conversion of a public company into private company is
similar to that for voluntary conversion of a private company into public
company, except for the following:
(i) The articles shall be suitably amended to include the three basic
restrictions applicable on a private company, and other provisions
necessary thereto.
(ii) The name of the company shall be amended to include the word
‘private’ on all documents.
It may be noted that no resolution amending the articles, which has the
effect of converting a public company into a private company, shall be effective
unless it has been approved by the Central Government.
After such alteration has been approved, a printed copy of the Articles as
altered shall be filed with the Registrar within one month of the date of
receipt of the order of approval.

10.3 FORMATION OF COMPANIES


The formal steps involve in the formation of a company include finding a
suitable name for the company, determining the location of the registered
office of the company, drawing up the Memorandum of Association and Articles
of Association, submitting the necessary documents to the Registrar of
Module Ten • Indian Companies Act, 2013 335

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

Financing the Proposition


After assembling the requirements, the promoters prepare financial
schemes for securing the finance required for the business. The financial
schemes include the type of securities, such as shares and debentures to be
issued to the public for raising the required finance, entering into contracts
with underwriters for the subscription of shares and debentures, and
preparation of the project reports for getting loan from the financial institutions.
2. Selection Stage
Every company should have a name by which it will be identified for legal
and business purposes. The name selected should not be similar to or identical
with the name of an existing company. For this purpose the promoters submit
an application containing a few names to the company law administration,
Government of India, through the Registrar of Companies for approval. The
promoters can then adopt any name from the list of approved names. The
name of the company should end with the word ‘Limited’ in case of public
companies and ‘Private Limited’ in case of private companies. If a company is
formed to promote science or culture, the Central Government may permit
the company to drop the word ‘limited.’
3. Incorporation Stage
A company is said to be incorporated when it fulfills the formalities of
registration and obtains the certificate of incorporation from the Registrar of
Companies in the concerned state where the registered office is situated.
The following documents, duly signed by a minimum of seven members in
case of a public company and a minimum of two members in case of a private
company are to be filed with the Registrar of Companies for incorporation of
company.
1. Memorandum of Association.
2. Articles of Association.
3. Written consent of all the directors to act as directors duly signed by
each director along with a written undertaking to take the prescribed
qualification shares.
4. A list of persons who have agreed to become directors of the company
with their names, addresses and occupations.
5. A statutory declaration by an advocate or an attorney or a chartered
accountant practicing in India, or by a person named as director,
manager or secretary of the company, stating that all the legal
requirements with respect to incorporation have been duly complied
with.
6. The address of the registered office of the company should be filed
within 30 days of incorporation.
The Memorandum of Association and the Articles of Association must
bear stamp duty as per the Indian Stamp Act.
On receipt of the above documents and the required registration fee, the
Registrar examines these documents and if in order, he issues the Certificate
of Incorporation. The Certificate of Incorporation is a conclusive evidence that
the company has come into being.
Module Ten • Indian Companies Act, 2013 337

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 a certificate to commence the
business.
4. Raising of Capital Stage
Next stage in the formation of a company is to raise capital. A public
company raises its capital by inviting public to subscribe for its capital. The
steps involved in raising capital are:
(a) Entering into agreement with the underwriters.
(b) Applying to the stock exchange for listing of shares.
(c) Issue of prospectus inviting public to subscribe for share capital.
(d) Allotting shares.
After receiving the applications for shares towards the share capital, a
public company can proceed with the work allotment provided the following
conditions are fulfilled:
1. Minimum subscription as stated in the prospectus has been collected
along with applications.
2. Not less than 5% of the nominal value of share has been received as
application money.
3. The application money received has been deposited in a scheduled
bank.
4. If prospectus has not been issued, statement is lieu of prospectus is
made and delivered to the Registrar atleast three days before the
first allotment.
5. Listing of shares in a stock exchange if stated in the prospectus and
Articles of Association.
If the minimum subscription is not received from the public within 120
days from the date of issue of prospectus, allotment should not be made.
Application money should be returned to the applicants within 130 days from
the date of issue of prospectus, if not, the directors of the company will be
jointly and severally liable to return the application money along with interest
at 6% per annum.
Minimum Subscription
The minimum subscription is the minimum amount of capital, which is
required to commence business. The prospectus and articles of association
generally mention the amount of minimum subscription. If the amount is not
so mentioned, the whole of the capital issued will be considered as minimum
subscription. The amount of minimum subscription is fixed taking the following
factors into consideration:
1. Purchase price of any property bought or to be bought;
2. Preliminary expense including underwriters, commission payable;
3. Repayment of any money borrowed for the above purposes;
4. Working capital; and
5. Any other expenditure.
338 338 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.

Who can Promote a Company?


The promotion of a company comprises the preparatory steps leading to
its incorporation. A promoter brings together the persons interested in setting
up an enterprise, procures the subscribers and sets in motion the machinery
which leads to the formation itself. A promoter forms a company with reference
to a given project and takes necessary steps to accomplish that purpose.
Any person capable of entering into a contract can be a promoter. Minor,
undischarged insolvent, a non-resident without the general or special
permission of the Reserve Bank of India, partnership firm, HUF persons working
in professional capacity, cannot be a promoter.

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

Yet, the promoter’s role in the formation of a company is the one of


considerable skill, energy and ingenuity. The promoters have a duty to ensure—
(i) that the acquisition of any property or business for the proposed
company is on justifiable terms;
(ii) that the capital base and the financial structure of the proposed
company is appropriate;
(iii) that the proposed directors and other executive officers are persons
of integrity, competence and eminence;
(iv) that the memorandum and articles of association are properly framed;
and
(v) that necessary assistance from banks or financial institutions has
been obtained.

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.

Objects of the Company


The promoters have to decide the main, incidental and other objects of
the company. A company can be incorporated for a lawful purpose only. Thus,
the objects of the company must not be forbidden by law or opposed to public
policy.

Registered Office of the Company


The promoters have to take yet another important decision as to the
place of registered office of the proposed company. The state wherein the
registered office shall be situate is to be specified in the application for
availability of name in Form 1A and in the Memorandum. Besides, the
documents of registration shall be filed with the Registrar of Companies,
having territorial jurisdiction over the state.
The exact location of the registered office is to be informed to the Registrar
within 30 days of the incorporation.
340 340 Legal Aspect of Business • Module Ten

Application for Availability of Name


A company is known by its name. The promoters may select any suitable
name, but it must not be identical with or resembling to the name of another
registered company. The name may suggest the main objects of the proposed
company.
The promoters should select three to five different names, and apply in
prescribed form to the Registrar of Companies having Jurisdiction, along with
a filing fee.
If the Registrar is satisfied and finds no objection to the proposed name,
he informs the promoters of the name approved for incorporation of the company.
The promoters should then complete all other formalities and get the company
registered within 6 months from the date of approval of name by the Registrar.

10.4 MEMORANDUM OF ASSOCIATION


The Memorandum of Association is the fundamental document of the
company containing the basic conditions on which the company is incorporated.
It lays down the objects of the company and specifies the limit within which
the company can operate.
Format and Content: A memorandum for a company limited by shares,
should be in the format given in Table B of Schedule I to the Act, or as near
thereto as circumstances admit.
A memorandum contains the following clauses:
(a) Name Clause: Containing the name as approved by the Registrar,
The Memorandum
of Association is along with the words ‘private limited’ or ‘limited’ as the case may be.
the fundamental (b) Registered office clause: Specifying the state wherein the registered
document of the
company contain- office of the company shall situate.
ing the basic con- (c) Object clause: Specifying the activities which the company proposes
ditions on which the
company is incor-
to and is authorised to undertake. It contains the three sub-clauses:
porated. It lays (i) Main objects, which are pursued by the company immediately
down the objects of
the company and
after its incorporation.
specifies the limit (ii) Objects incidental or ancillary to the attainment of main objects,
within which the
company can oper-
which are carried out only to the extent necessary for the
ate. attainment of the main objects.
(d) Liability clause: Stating that the liability of the members is limited
to the extent of the unpaid amount with reference to the shares held
by them (or to the extent of the amount undertaken to be contributed
in the event of winding up, in case of a company limited by guarantee).
(e) Capital clause: Stating the authorized capital up to which the company
can issue its shares.
(f) Association clause: Is the subscriber’s declaration that they desire
of being formed into company and agree to take the specified number
of shares in the company’s capital.

Alteration of Memorandum of Association of a Company


As per Section 2(3) of the Companies Act, 2013 (the Act) “alter” and
“alteration” shall include the making of additions, omissions and substitutions.
Module Ten • Indian Companies Act, 2013 341

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.

Articles of Associa- 10.5 ARTICLES OF ASSOCIATION


tion is the second
constitutional docu- Articles of Association is the second constitutional document, which lays
ment, which lays down the rules and regulations for the conduct of internal affairs of the
down the rules and company. The Articles constitute a contract between the company and its
regulations for the
conduct of internal
members and between the members themselves. The Articles are subordinate
affairs of the com- to the Memorandum, and should not therefore; contain any regulation, which
pany. The Articles is contrary to the Memorandum.
constitute a con-
tract between the Articles may be drafted in one of the forms given in Tables F, G, H, I or J
company and its of Schedule I to the Act, as may be applicable or in a form as near thereto as
members and be- the circumstances admit.
tween the mem-
bers themselves. The articles of private company having share capital must:
(a) restrict the right to transfer its shares;
(b) limit the maximum number of members to 200; and
(c) prohibit invitation to public to subscribe for any of its shares or
debentures.
Module Ten • Indian Companies Act, 2013 343

Articles usually provide for the following matters:


(i) Exclusion wholly or in part of Table F.
(ii) Common seal, its use and safe custody.
(iii) Alteration of capital — how and to what extent.
(iv) Borrowings — the mode and the limit.
(v) General Meetings — notice required, resolutions, voting rights, proxies
etc.
(vi) Directors – their appointment, qualification, remuneration, powers,
duties and removal, names of first directors, minimum and maximum
number of directors.
(vii) Dividend and reserve funds.
(viii) Accounts and audit.
(ix) Manager or Secretary — appointment and remuneration.
(x) Adoption of contracts entered into by the promoters.
(xi) Remuneration to promoters.
(xii) Special provision for amalgamation, etc.
(xiii) Winding up.

Stamp Duty and Witness


The Articles are to be signed by all the subscribers, duly stamped and
witnessed, as in case of Memorandum.

Doctrine of Constructive Notice


Any person, who enters into a contract with a company, is expected to
have knowledge of the power and position of the company and its directors,
and is presumed to have gone through its memorandum and articles. This is
popularly called the ‘doctrine of constructive notice.’ Thus, no person who
binds himself to the company can later plead that he had no knowledge of the
contents of its Memorandum and Articles.

Doctrine of Indoor Management


Though an outsider is bound to have constructive notice of the contents
of Memorandum and articles of the company, he cannot be expected to know
the internal affairs of the company or to inquire into the regularity of its
internal proceedings. He is entitled to presume that the internal management
of the company is regular. This is known as, ‘Doctrine of Indoor Management’
or Turguand’s Rule. For example, where the directors have the authorities to
bind the company for certain debts, but prior consent of the shareholders is
required to be obtained by special resolution, before that power is exercised.
The person extending the credit is not entitled to presume that the directors
are acting lawfully.
Exceptions: The rule of indoor management does not apply in following
cases:
(i) where the affected has the knowledge of the irregularity;
(ii) where the circumstances surrounding the contract are suspicious
and therefore invite inquiry;
344 344 Legal Aspect of Business • Module Ten

(iii) in the case of forgery;


(iv) where the affected party does not have, in fact, knowledge of the
existence of the power of delegation, he cannot rely upon its suggested
exercise;
(v) where the act of a director/other officer of the company is such that
it would ordinarily be beyond powers of such an officer.

Distinction between Memorandum and Articles of Association


The distinction between the two is as follows:
1. The Memorandum is the charger of the company setting out its
Constitution, Status and the relationship of the company with the
outside world. Articles on the other hand, contain the rules and
regulations of the company for the conduct of its internal
administration. They define the rights, duties and powers of directors,
shareholders and officers.
2. The Memorandum states the objects and purpose for which the
company is established, whereas the Articles prescribe the regulations
for the establishment of these objectives.
3. A company prepare and file a Memorandum for incorporation with
the Registrar of companies, whereas the preparation of Articles is
not compulsory for a public company — it can adopt Table ‘A’ of the
Companies Act, 1956 which contains model rules and regulations.
4. Any alteration to Memorandum requires consent of the Company Law
Board. Whereas, members themselves can make alterations to the
Articles of Association.
5. Acts of the company outside the scope of Memorandum is void and
incapable of ratification. However, acts which are ultra vires the articles,
i.e., beyond the scope of articles, but intra vires (within) the
Memorandum are not void and can be ratified by the company by a
special resolution.
6. The Memorandum of Association is governed by the Companies Act,
1956. But the Articles of Association are governed by the
Memorandum of Association and the Companies Act.

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

raising share capital is being discussed in the following paragraphs. The


procedure for other instruments is also the same.
‘Prospectus’ is the basic document for raising funds from the public. A prospectus is a
Prospectus means any document described or issued as a prospectus inviting general invitation to
deposits from the public or inviting offers from the public for the subscription the public to sub-
or purchase of any shares in, or debentures of the company. Thus, a prospectus scribe to the capi-
tal of the company
is a general invitation to the public to subscribe to the capital of the company on the conditions
on the conditions specified in the application form. specified in the ap-
plication form.
Private companies are prohibited from inviting any public subscription in
shares or debentures and as such they cannot issue any prospectus.
Every public company having share capital is required to issue on its
formation a prospectus, or to file with the Registrar a statement in lieu of
prospectus, where the company does not invite public subscription.

Essential Contents of Prospectus


Every prospectus shall state the matters specified in Schedule II of the
Act, viz., —
(i) Date of prospectus which is generally the date of its publication.
(ii) Name and registered office of the company.
(iii) Consent of the Central Government for the present issue / compliance
with SEBI Guidelines.
(iv) Names of stock exchange where application made for listing of present
issue.
(v) Punishment for fictitious applications.
(vi) Refund of the issue if minimum subscription of 90% is not received
within 90 days from issue closure.
(vii) Issue of allotment letters/refunds within a period of 10 weeks and
interest on delayed funds.
(viii) Date of opening and closing and the earliest closing date.
(ix) Name and address of auditors and lead managers.
(x) Name and address of trustee under debenture trust deed.
(xi) Credit rating from CRISIL (The Credit Rating Information Services of
India Limited) or other rating agency for the proposed debenture/
preference shares issue.
(xii) Terms of underwriting.
(xiii) Capital structure of the company, size of present issue, paid up capital
after present issue or after conversion of debentures.
(xiv) Terms and particulars of the issue.
(xv) Main objects of the company, promoters, names, addresses and
occupation of manager, managing director and other directors, details
of the project, its implementation and prospects.
(xvi) Stock market data for shares/debentures, high/low price in the last
three years and monthly high/low during the last six months.
(xvii) Particulars of any previous issue by the company and other companies
under the same management.
(xviii) Management perception of risk factors.
346 346 Legal Aspect of Business • Module Ten

(xix) General information as to consent of directors, auditors, solicitors,


managers, to the issue, Registrar of issue, bankers to the company,
bankers to the issue, names and addresses of the company secretary,
legal adviser, lead managers, auditors, co-managers etc.
(xx) Financial information of the company.
(xxi) Minimum subscription expenses of the issue, underwriting,
commission and brokerage.
(xxii) Rights of members as to voting, dividend, lien on shares, forfeiture of
shares, etc.
(xxiii) Restriction on transfer and transmission of shares/debentures.
(xxiv) Material contracts and inspection of documents, etc.

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.

Statement in Lieu of Prospectus


A public company not raising its share capital from general public, need
not issue a prospectus. However, it should file a ‘statement in lieu of prospectus’
(which contain almost the same particulars) with the Registrar.

SEBI Guidelines for Public Issues


The Securities and Exchange Board of India (SEBI) has issued elaborate
guidelines on public issues, including first public issue to be made by an
existing private or closely held company after its conversion into a public
company.

10.7 POWERS OF SECURITIES AND EXCHANGE BOARD OF INDIA


The matters relating to issue and transfer of securities and non-payment
of dividend by listed public companies and those public companies which intend
to get their securities listed on any recognized Stock Exchange in India will
be administered by the Securities and Exchange Board of India and all powers
relating to all other matter including the matters relating to prospectus,
statement in lieu of prospectus, return of allotment, issue of shares and
redemption of irredeemable preference shares will be exercised by the Central
Government, Company Law Board or the Registrar of Companies, as the case
may be.

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

As per the Act— “Shelf Prospectus”


(1) Any public financial institution, public sector bank or scheduled bank means a prospec-
tus issued by any
whose main object is financing shall file a shelf prospectus. financial institution
(2) A company filing a shelf prospectus with the Registrar shall not be or bank for one or
more issues of the
required to file prospectus at every stage of offer of securities by it securities or class
within a period of validity of such shelf prospectus. of securities speci-
fied in that prospec-
(3) A company filing a shelf prospectus shall be required to file an tus.
information memorandum on all material facts relating to new charges
created, changes in the financial position as have occurred between
the first offer of securities, previous offer of securities and the
succeeding offer of securities within such time as may be prescribed
by the Central Government, prior to making of a second or subsequent
offer of securities under the shelf prospectus.
(4) An information memorandum shall be issued to the public along with
shelf prospectus filed at the stage of the first offer of securities and
such prospectus shall be valid for a period of one year from the date
of opening of the first issue of securities under that prospectus:
Provided that where an update of information memorandum is filed every
time an offer of securities is made, such memorandum together with the
shelf prospectus shall constitute the prospectus.
Here “financing” means making loans to or subscribing in the capital of a
private industrial enterprise engaged in infrastructural financing or, such
other company as the Central Government may notify in this behalf.

CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS


If a prospectus in-
If a prospectus includes any untrue statement, every person who authorized cludes any untrue
the issue of prospectus is punishable with imprisonment for a term which statement, every
may extend to two years, or with fine which may extend to fifty thousand person who autho-
rized the issue of
rupees, or with both unless he proves either that the statement was immaterial prospectus is pu-
or that he had reasonable ground to believe, and did, up to the time of the nishable with im-
issue of the prospectus believe, that the statement was true. prisonment for a
term which may ex-
tend to two years,
Initial offer of securities to be in dematerialized form in certain cases or with fine which
may extend to fifty
Every listed company, making initial public offer of any security for a sum thousand rupees,
of rupees ten crore or more, should issue the same only in dematerialised or with both.
form by complying with the requisite provisions of the Depositories Act, 1996
and the regulations made thereunder.

10.8 OFFER OF INDIAN DEPOSITORY RECEIPTS


Notwithstanding anything contained in any other law for the time being
in force, the Central Government may make rules applicable for—
(a) the offer of Indian Depository Receipts;
(b) the requirement of disclosures in prospectus or letter of offer issued
in connection with Indian Depository Receipts;
(c) the manner in which the Indian Depository Receipts shall be dealt in
a depository mode and by custodian and underwriters;
(d) the manner of sale, transfer or transmission of Indian Depository
Receipts.
348 348 Legal Aspect of Business • Module Ten

[by a company incorporated, or to be incorporated outside India, whether


the company has or has not been established or, will or will not establish any
place of business in India.]

10.9 KINDS OF SHARES


Share capital of a company is divided into certain indivisible units of a
Share capital of a
company is divided
fixed amount. These units are called shares. ‘Share’ means share in the
into certain indivi- capital of a company. The person owning a share or shares of a company is
sible units of a fixed called a shareholder. He is a part owner and risk bearer of the company. He
amount. These
gets income on his investment in shares in the form of dividends from the
units are called
shares. ‘Share’ company. Dividend is that part of the profits of the company, which is
means share in the distributed among the shareholders for the shares held by them.
capital of a com-
pany. A public joint stock company can issue two classes of shares, they are:
(a) Preference shares, and
(b) Equity shares.
Preference Shares

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

6. Irredeemable preference shares: These are shares that cannot be


purchased back by the company.
Equity Shares
All shares, which are not preference shares are equity shares, also called
ordinary shares. Unlike the preference share, equity shares do not have a
fixed rate of dividend. Equity shareholders are entitled to dividends only after
the dividend claims of the preference shareholders have been met. Similarly,
at the time of the winding up of the company, equity shareholders get back
their capital only after the capital of the preference shareholders has been
paid back. Equity shares are always irredeemable and their holders have
normal voting rights.
New Issues of Share Capital to be only of two kinds
The share capital of a company limited by shares shall hereafter be of two
kinds only, namely:
(a) Equity share capital
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in
accordance with such rules and subject to such conditions as may be
prescribed.
(b) Preference share capital.
Sweat Equity
“Sweat equity shares” means equity shares issued by the company to “Sweat equity
employees or directors at a discount or for consideration other than cash for shares” means eq-
providing know-how or making available rights in the nature of intellectual uity shares issued
by the company to
property rights or value additions, by whatever name called. employees or di-
A company may issue sweat equity shares of a class of shares already rectors at a dis-
count or for consid-
issued if the following conditions are fulfilled, namely: eration other than
(a) the issue of sweat equity shares is authorised by a special resolution cash for providing
know-how or mak-
passed by the company in the general meeting; ing available rights
(b) the resolution specifies the number of shares, current market price, in the nature of in-
consideration, if any, and the class or classes of directors or employees tellectual property
rights or value ad-
to whom such equity shares are to be issued; ditions, by what-
(c) not less than one year has, at the date of the issue, elapsed since ever name called.
the date on, which the company was entitled to commence business;
(d) the sweat equity share of a company, whose equity shares are listed
on a recognised stock exchange, are issued in accordance with the
regulations made by the Securities and Exchange Board of India in
this behalf.
Provided that the case of a company whose equity shares are not listed
on any recognised stock exchange, the sweat equity shares are issued in
accordance with the guidelines as may be prescribed.
Recent Developments
Convertible cumulative preference shares: In 1985, Government of India
introduced a new type of preference share, namely, convertible cumulative
preference (CCP) share. The entire issue of CCP shares shall be converted to
350 350 Legal Aspect of Business • Module Ten

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.

10.10 COMPANIES (AMENDMENT) ACT, 1988


The above Act inserted a new sub-section, 80A, to the Companies Act,
1956. According to this sub-section:
(a) Irredeemable preference shares issues before the commencement of
this Amendment Act shall be redeemed by the company within a
period of five years from the commencement of this Amendment.
(b) Preference shares which are not redeemable before expiry of 10 years
from the date of issue and which had not been redeemed before the
commencement of this Amendment Act, shall be redeemed on the
due date or within a period of 10 years from the commencement of
the Amendment, whichever is earlier.
Where a company is not in a position to redeem any such share within
the period aforesaid and to pay the dividend, if any, due thereon, it may, with
the consent of the Company Law Board (CLB) issue further redeemable
preference shares equal to the amounts due (including the dividend) in respect
of the unredeemed preference shares, and on the issue of such further
redeemable preference shares, the unredeemed shares shall be deemed to
have been redeemed.

Issue of Bonus Shares


Bonus shares are Bonus shares are the shares allotted to existing equity shareholders
the shares allotted without any consideration being received from them, in cash or in kind. They
to existing equity
shareholders with- are issued to capitalise profits of the company. Bonus shares can be issued
out any conside- only if Articles of Association permit such an issue. For such an issue, sanction
ration being re- of SEBI is also required. The Central Government has prescribed certain
ceived from them,
in cash or in kind.
guidelines for the issue of bonus shares. The sanction of SEBI can be obtained
They are issued to only if these guidelines have been followed. For example, the issue can be
capitalise profits of made only out of free reserves built out of the genuine profits and share
the company. premium collected in cash, reserves created by revaluation of assets cannot
be used for the purpose. Development Rebate Reserve and Investment
Allowance Reserve cannot be used for issue of bonus shares. The residual
reserves remaining after the issue of the bonus shares should be atleast
40% of the paid-up capital after the bonus shares. On issue of bonus shares,
reserves used for such an issue are debited and Bonus to equity shareholders
Account is credited with the amount for which bonus shares are issued.

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

Thus, if we apply the formula in the above-mentioned example, we will get


Value of right = 1/5 × (180–120)
= Rs.1/5 × 60
= Rs.12

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. Convertible and unconvertible: In case of convertible debentures, the


holders have the option to convert their debenture holdings into equity shares
of the company at a specified rate after a specified period.
Debenture Trust Deed
(1) A trust deed for securing any issue of debentures shall be in such
form and shall be executed within such period as may be prescribed.
(2) A copy of the trust deed shall be open to inspection to any member or
debenture holder of the company and he shall also be entitled to
obtain copies of such trust deed on payment of such sum as may be
prescribed.
(3) If a copy of the trust deed is not made available for inspection or is
not given to any member or debenture holder, the company and every
officer of the company who is in a default, shall be punishable, for
each offence, with fine, which may extend to five hundred rupees for
every day during which the offence continues.
Appointment of debenture trustees and duties of debenture trustees
(1) No company shall issue a prospectus or a letter of offer to the public
for subscription of its debentures, unless the company has, before such issue,
appointed one or more debenture trustees for such debentures and the
company has, on the face of the prospectus or the letter of offer, stated that
the debenture trustee or trustees have given their consent to the company to
be so appointed:
Provided that no person shall be appointed as a debenture trustee, if he —
(a) beneficially holds shares in the company;
(b) is beneficially entitled to moneys which are to be paid by the company
to the debenture trustee;
(c) has entered into any guarantee in respect of principal debts secured
by the debentures or interest thereon.
(2) Subject to the provisions of this Act, the functions of the debenture
trustees shall generally be to protect the interest of holders of debentures
(including the creation of securities within the stipulated time) and to redress
the grievances of holders of debentures effectively.
(3) In particular, and without prejudice to the generality of the foregoing
functions, a debenture trustee may take such other steps as he may deem fit —
(a) to ensure that the asset of the company issuing debentures and
each of the guarantors are sufficient to discharge the principal amount
at all times;
(b) to satisfy himself that the prospectus or for letter of offer does not
contain any matter which is inconsistent with the terms of the
debentures or with the trust deed;
(c) to ensure that the company does not commit any breach of covenants
and provisions of the trust deed;
(d) to take such reasonable steps to remedy any branch of the covenants
of the trust deed or the terms of issue of debentures;
(e) to take steps to call a meeting of holders of breach as and when such
meeting is required to be held.
Module Ten • Indian Companies Act, 2013 353

(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.

Liability of Company to Create Security and Debenture Redemption


Reserve
(1) Where a company issues debentures after the commencement of
this Act, it shall create a debenture redemption reserve for the
redemption of such debentures, to which adequate amounts shall be
credited, from out of its profits every year until such debentures are
redeemed.
(2) The amounts credited to the debenture redemption reserve shall not
be utilised by the company except for the purpose aforesaid.
(3) The company shall pay interest and redeem the debentures in
accordance with the terms and conditions of their issue.
(4) Where a company fails to redeem the debentures on the date of
maturity, the Company Law Board may, on the application of any or
all the holders of debenture shall, after hearing the parties concerned,
direct, by order, the company to redeem the debentures forthwith by
the payment of principal and interest due thereon.
(5) If default is made in complying with the order of the Company Law
Board, every officer of the company who is in default, shall be
punishable with imprisonment which may extend to three years and
shall also be liable to a fine of not less than five hundred rupees for
everyday during which such default continues.

Distinction between Debentures and Shares


The following are the points of distinction between debentures and shares:
1. Creditorship security v/s Ownership security: Whereas a debenture
is a creditorship security, a share is an ownership security. It means
that a debenture holder is a creditor of the company, while a
shareholder is a part-owner of the company. It is the fundamental
distinction between a debenture and a share.
2. Certainty of return: A debenture holder is certain of return on his
investment. The company has to pay interest on debentures at the
fixed rate agreed upon at the time of issue even if it suffers heavy
losses. A shareholder cannot get dividends if the company does not
earn profits. As a matter of fact, even when a company earns a profit,
its Directors may decide to plough back the profits and not declare a
dividend. Thus, there is no certainty of return on investment in
shares.
3. Order of repayment on winding up: In case of winding up of a
company, the amount of debentures will be repaid before any amount
is paid to shareholders to return share capital.
354 354 Legal Aspect of Business • Module Ten

4. Restrictions on issue at a discount: There are no restrictions on


issue of debentures at a discount, but there are legal conditions
which have to be fulfilled to issue shares at a discount.
5. Mortgage: There can be mortgage debentures. It means that assets
of the company can be mortgaged in favour of debenture holders by
way of security. But there can be no mortgage shares.
6. Convertibility: Debentures which can be converted into shares at
the option of debenture holders can be issued. But shares convertible
into debentures cannot be issued.
Share Capital
Share capital means the capital raised by a company by the issue of
shares. In this connection the meaning of the following terms should be
understood:
(i) Nominal or authorised capital: This is the nominal or face value of
the shares which the company is authorised to issue by its
Memorandum of Association. This is the maximum capital, which a
company can have without altering the capital clause of the
Memorandum of Association for an increase in its Authorised Capital.
(ii) Issued capital: It is the nominal value of shares, which are offered
to the public for subscription. It cannot be more than the authorised
capital.
(iii) Subscribed capital: It is the nominal value of the shares taken up by
the public. If all the shares offered to the public are taken up by the
public, subscribed capital will be equal to issued capital. But sometimes,
all the shares, which are offered to the public for subscription are
not taken up by public. In such a case, only that part of the issued
capital, which is taken up by the public, will be called subscribed
capital.
(iv) Called up capital: This is that part of the subscribed capital which
has been called up. If the Board of Directors has called up the total
amount payable in the shares, the called up capital will be equal to
subscribed capital.
(v) Paid-up capital: This is that part of the called up capital which has
been paid up by the shareholders or which is credited by the company
as paid-up on the shares. If all the called up capital has been received,
paid-up capital will be equal to called up capital. That part of the
called up capital which has not yet been received is called “calls in
Arrear” thus, called up capital – calls in Arrear = paid up capital.

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

3. Consideration is essential. 3. No consideration is essential.


4. Shares are transferred irrespective 4. It happens only on the happening of
of the happening of events like events like death, bankruptcy or
death, bankruptcy or lunacy lunacy of a member.
of a member.
5. Stamp duty is necessary. 5. Stamp duty is not necessary.

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.

10.11 COMPANY MANAGEMENT


A company is, though a legal person, but has no body or mind of its own. It
carries out its functions and manages its affairs through some managerial
personnel, which are basically of following types:
1. Directors, Managing Director, Chairman and Board of Directors,
2. Manager, and
3. Secretary.
Directors

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.

Maximum Number of Directorship


A person cannot be a director of more than 20 companies at the same
time. This will include appointments held as Managing Director. This rule
applies to public companies and a private company, which is a subsidiary of a
public 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

(c) If a director acts dishonestly, he will be liable to the company for


breach of trust or misfeasance.
(d) A director shall be liable to the company for negligence in the exercise
of his powers and duties.
(e) A director is liable for statutory penalties for non-compliance with
certain requirements, viz:
(i) Failure to inform the Registrar when a private company becomes
a public, the fine imposable is upto Rs.500 for every day of default.
(ii) Failure to deposit share application money in a separate bank
account, fine imposable upto Rs.5,000.
(iii) Failure to submit annual return, fine imposable upto Rs. 50 per
day.
(iv) For accepting directorship in more than 20 companies, fine
imposable upto Rs. 5,000 in respect of each excess directorship.
(f) Besides, a director may incur criminal liability with respect to certain
duties such as, concealing name of creditor, default in distributing
dividend, non-maintenance of proper books of account, failure to
supply balance sheet at the annual general meeting, or an information
to the auditor, supplying wrong information to the Government,
improper grant of loan to directors, fraudulently obtaining credit for
the company, etc.

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

Every public company or a private company which is a subsidiary of a


public company having paid-up share capital of Rs.5 crore or more, must have
a Managing Director or whole-time director or a manager. In such companies
the managing director can be appointed for a maximum term of five years at a
time.
A person may be appointed managing director of any number of private
companies, none of which is a subsidiary of a public company. However, a
person cannot be appointed managing director in more than two companies, if
anyone company is a public company or a private company, which is subsidiary
of a public company.
For qualifications, duties, liabilities, remuneration of and loans to a
managing director, refer under ‘Directors.’ ‘Chairman’ is the
head of the
Chairman company’s Board
of Directors and
‘Chairman’ is the head of the company’s Board of Directors and supervises supervises and
controls the work of
and controls the work of all directors and managing director. The company all directors and
may, however, appoint the same person as its Chairman and the Managing managing director.
Director.

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

Where the Board of Directors comprises of only two directors, neither of


them shall be the Secretary of the company unless he is qualified company
Secretary.
The primary duties of a Secretary are:
1. To superintend, direct and control his department.
A secretary is an 2. To sign documents and proceedings requiring authentication by the
officer of the com-
pany appointed to company.
perform the duties 3. To do all such acts as are authorised by the Board of Directors.
which may be per-
formed by a Secre- 4. To carry out all the functions of the company as required under the
tary under the Act Act or Rules, or as directed by the Central Government, Company
and other manage-
rial or administra-
Law Board, Registrar or the Court.
tive duties. Thus, a 5. To ensure proper filing of documents with the Registrar and the
firm or body corpo-
rate cannot be ap-
Central Government.
pointed as a Sec- 6. To attend all the meetings and to ensure that all requirements as to
retary. holding of meetings are carried out.

10.12 INITIAL PUBLIC OFFER (IPO)

DEFINITIONS OF INITIAL PUBLIC OFFERING


• A corporation's first offer to sell stock to the public.
• Initial public offering (IPO), also referred to simply as a "public offering"
or "flotation," is when a company issues common stock or shares to
the general public.
• When a privately held company-owned, for example, by its founders
and its venture capital investors-offers shares of its stock to the
public.
• A process of taking a private company to public by offering the shares
of the company to the public market via a stock exchange.
• The first public issuance of stock from a company that has not been
publicly traded before.
• The first sale of a company's securities to the general public.
• A company's first sale of stock to the public. Companies making an
IPO are seeking outside equity capital and a public market for their
stock.
• Is the initial offering to the public of a company ís securities. After
the initial offering, the securities are said to trade in the secondary
market.
• The process of going public through an offering of securities by a
corporation to the public and filing and seeking effectiveness of a
stock.
• The first issue of shares by an existing or a newly-formed firm to
the general public.
• The sale or distribution of a stock of a portfolio company to the public
for the first time.
Module Ten • Indian Companies Act, 2013 361

• The first fund-raising from the general public. It generally results


in a listing on a stock exchange.
• The "flotation" of a company through the open sale of its shares in a
stock market — the conventional exit route for early investors such
as à business angle and a venture capital funds
• The initial sale of stock in a public corporation. The dot-com boom of
the late 1990s coincided with the mainstreaming of open source
software, leading to some over-rated IPO's for open source companies.

Thus an Initial Public Stock Offering (IPO) referred to simply as an "offering"


or "flotation," is when a company, called the issuer, issues common stock or
shares to the public for the first time. They are often issued by smaller,
younger companies seeking capital to expand, but can also be done by large
privately-owned companies looking to become publicly traded.
Corporate may raise capital in the primary market by way of an initial An Initial Public
public offer, rights issue or private placement. An Initial Public Offer (IPO) is Stock Offering
the selling of securities to the public in the primary market. This Initial (IPO) referred to
simply as an "offer-
Public Offering can be made through the fixed price method, book building ing" or "flotation," is
method or a combination of both. when a company,
called the issuer,
A company that is planning an IPO appoints lead managers to help it issues common
decide on an appropriate price at which the shares should be issued. There stock or shares to
are two ways in which the price of an IPO can be determined: either the the public for the
company, with the help of its lead managers, fixes a price or the price is first time.
arrived at through the process of book building.
In case the issuer chooses to issue securities through the book building
route then as per SEBI guidelines, an issuer company can issue securities in
the following manner:
(a) 100% of the net offer to the public through the book building route.
(b) 75% of the net offer to the public through the book building process
and 25% through the fixed price portion.
(c) Under the 90% scheme, this percentage would be 90 and 10
respectively.

TYPES OF INITIAL PUBLIC OFFER / PUBLIC ISSUE


Public issue of common shares is essentially carried out in two ways:
• Fixed price method, and
• Book-building method.
Fixed price issues are issues in which the issuer is allowed to price the
shares as he wishes. The basis for the price is explained in an offer document
through qualitative and quantitative statements. This offer document is filed
with the stock exchanges and the registrar of companies.
Book-building is a process of price discovery used in public offers. The
issuer sets a base price and a band within which the investor is allowed to bid
for shares. Take the recent, Yes Bank IPO, the floor price was Rs. 38 and the
band was from Rs. 38 to Rs. 45.
The investor had to bid for a quantity of shares he wished to subscribe to
within this band. The upper price of the band can be a maximum of 1.2 times
362 362 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.

METHODS OF IPO SALE


The sale (that is, the allocation and pricing) of shares in an IPO may take
several forms. Common methods include:
• Best efforts contract
• Firm commitment contract
• All-or-none contract
• Bought deal
• Dutch auction
• Self distribution of stock
A large IPO is usually underwritten by a "syndicate" of investment banks
led by one or more major investment banks (lead underwriter). Upon selling
the shares, the underwriters keep a commission based on a percentage of the
value of the shares sold (called the gross spread). Usually, the lead
underwriters, that is the underwriters selling the largest proportions of the
IPO, take the highest commissions — up to 8 percent in some cases.
Multinational IPOs may have as many as three syndicates to deal with
differing legal requirements in both the issuer's domestic market and other
regions. For example, an issuer based in the E.U. may be represented by the
main selling syndicate in its domestic market, Europe, in addition to separate
syndicates or selling groups for US/Canada and for Asia. Usually, the lead
underwriter in the main selling group is also the lead bank in the other
selling groups.
Module Ten • Indian Companies Act, 2013 363

Because of the wide array of legal requirements, IPOs typically involve


one or more law firms with major practices in securities law, such as the
Magic Circle firms of London and the white shoe firms of New York City.
Usually, the offering will include the issuance of new shares, intended to
raise new capital, as well the secondary sale of existing shares. However,
certain regulatory restrictions and restrictions imposed by the lead underwriter
are often placed on the sale of existing shares.
Public offerings are primarily sold to institutional investors, but some
shares are also allocated to the underwriters' retail investors. A broker selling
shares of a public offering to his clients is paid through a sales credit instead
of a commission. The client pays no commission to purchase the shares of a
public offering; the purchase price simply includes the built-in sales credit.
The issuer usually allows the underwriters an option to increase the size
of the offering by up to 15 percent under certain circumstance known as the
greenshoe or over allotment option.

PROCEDURE TO INVEST IN IPO


An initial public offering (IPO) occurs when a company first sells common
shares to investors in the public. Generally, the company offers primary shares
this way, although sometimes secondary shares are also sold as IPOs. For a
company to offer IPOs, they need to hire a corporate lawyer as well as an
investment banker to underwrite the offer. The actual sale of the shares is
generally offered by stock exchange or by regulators. When the company starts
to offer IPOs, they are usually required to reveal financial information about
the company so that investors know whether the company is a good investment
or not.

Reasons for Issuing IPOs


In general, companies offer IPOs in order to raise money that they need
for business expansion and new business opportunities. By offering shares to
investors, a company stands to bring in a lot of money. They can then use this
money to grow their business. The more their business grows, in turn, the
higher the share prices grow and the more money is generated by investors
purchasing shares. Unlike business loans, which need to be repaid with
interest, IPOs do not have this disadvantage. It is investors who take the risk
— although also a potential gain — buying shares. If the company loses money
and they will not have to repay their investors, although investors in general
demand high accountability from a company they are buying stocks from.
Many companies simply see offering IPOs as the next stage in business
growth. Since public companies often enjoy larger profits and can draw on a
larger capital base than private businesses, IPOs seem like the logical way to
grow a company for many CEOs.

PARTIES IN INITIAL PUBLIC OFFER


Public investors can purchase IPOs through their regular investment
channels, although they will need to act fast to take advantage of the initial
low IPO costs. Businesses can take advantage of IPOs simply by offering public
shares on the market. To do this, they require a corporate lawyer, transparent
business and financial practices, and an investment banker. They also need
364 364 Legal Aspect of Business • Module Ten

a medium — usually a stock exchange -- to actually sell the shares. Most


businesses additionally hire marketers or someone who can advertise or
market the stock.

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.

ADVANTAGES OF INITIAL PUBLIC OFFER

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.

DISADVANTAGES OF INITIAL PUBLIC OFFER

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

restriction companies will always be under pressure to perform and show


profits in every quarter. This, some times, doesn't allow the management to
take bold steps which may yield long-term benefits but less profits in short-
term.
We have seen some companies in recent times going bankrupt because
the share prices fell down as the investors' scrutiny increased a lot. Some of
them would have come out of this situation if they weren't public limited
companies.
2. Decisions take Time
Implementation of any key decision is subjected to the approval by the
board of directors elected by share holders. This process may take more time.
Cost of IPO
The cost of the process is very high, though it is one-time expenditure.
The investment banker/underwriter charges heavily for doing this activity.
NO. OF COMPANIES WHICH HAVE ISSUED IPO IN THE LAST 5 YEARS IN
INDIA
• YES Bank IPO through book building
• Industrial & Commercial Bank of China $21.6B in 2006
• NTT Mobile Communications $18.4B in 1998
• Visa Inc. $17.9B in 2008
• AT&T Wireless $10.6B in 2000
• Rosneft $10.4B in 2006

10.13 BOOK BUILDING

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

Book building is a technique used for marketing a public offer of equity


shares of a company. In broad terms, the process is as follows:
• Decision is taken by the company on the quantum of funds to be
raised from the market, by way of equity shares, and the likely timing;
• Merchant banker is associated, and a draft prospectus, excepting
issue price, is prepared and placed with SEBI;
• The draft placed with SEBI also indicates that the issue price is to be
decided through the book-building process;
• Bids are invited from prospective investors (which is indicative of
price range) as to the likely number of shares that they would be
ready to subscribe and `the price' at which they will take up
subscription;
• A time-period is determined during which the bids will be received;
• After expiration of time period, these bids are evaluated and a price
is determined;
• The issue price is then decided and SEBI kept informed;
• Twenty-five per cent of the total issue is offered to the public (an
element of reservation is also possible);
• The balance 75 per cent can be covered by accepting the bids received
at the evaluated price.
The book-building process allows for price and demand discovery. Also,
the costs of the public could be kept at minimum, and the time taken for
completing the process is relatively shorter than a normal public issue. In a
normal public offering, the demand for shares, that is, how many shares will
be subscribed for, would not be known in advance.
The likely demand for shares (as also the likely price) can be estimated
more realistically under book-building, and if there were to be no bids, the
issue can even be deferred.
The Process of Book Building
• The Issuer who is planning an IPO nominates a lead merchant banker
as a 'book runner.'
• The Issuer specifies the number of securities to be issued and the
price band for orders.
• The Issuer also appoints syndicate members with whom orders can
be placed by the investors.
• Investors place their order with a syndicate member who inputs the
orders into the 'electronic book.' This process is called 'bidding' and is
similar to open auction.
• A Book should remain open for a minimum of 5 days.
• Bids cannot be entered less than the floor price.
• Bids can be revised by the bidder before the issue closes.
• On the close of the book building period the 'book runner evaluates
the bids on the basis of the evaluation criteria which may include —
— Price Aggression
— Investor quality
— Earliness of bids, etc.
Module Ten • Indian Companies Act, 2013 367

• 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.

Guidelines for Book Building


Rules governing Book building are covered in Chapter XI of the Securities
and Exchange Board of India (Disclosure and Investor Protection) Guidelines
2000.

BSE's Book Building System


• BSE offers a book building platform through the Book Building software
that runs on the BSE Private network.
• This system is one of the largest electronic book building networks in
the world, spanning over 350 Indian cities through over 7000 Trader
Work Stations via leased lines, VSATs and Campus LANS.
• The software is operated by book-runners of the issue and by the
syndicate members, for electronically placing the bids on line real- Retail Individual In-
time for the entire bidding period. vestor is an inves-
tor who applies for
• In order to provide transparency, the system provides visual graphs stocks for a value
displaying price versus quantity on the BSE website as well as all of not more than
Rs.1,00,000.
BSE terminals.

TYPES OF INVESTOR IN BOOK BUILDING ISSUE


There are three kinds of investors in a book-building issue. The Retail
Individual Investor (RII), the Non-Institutional Investor (NII) and the Qualified
Institutional Buyers (QIBs).
Retail Individual Investor (RII)
Retail Individual Investor is an investor who applies for stocks for a value
of not more than Rs.1,00,000. Any bid exceeding this amount is considered in
the NII category.
Non-Institutional Investors (NIIs)
Non-Institutional Investors are commonly referred to as High Net-Worth
Individuals.
Qualified Institutional Buyers (QIBs)
Qualified Institutional Investors are Institutional Investors who possess
the expertise and the financial muscle to invest in the securities market.
Mutual funds, financial institutions, Scheduled Commercial Banks, insurance
companies, provident funds, State Industrial Development Corporations and
the like fall under the definition of being a QIB.
368 368 Legal Aspect of Business • Module Ten

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.

Green shoe option


In case, the issue has been oversubscribed, as was the case with A Ltd.,
the company has to exercise a green shoe option to stabilize the post-listing
price. When a particular issue is oversubscribed the appetite of investors for
Module Ten • Indian Companies Act, 2013 369

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.

ADVANTAGES AND DISADVANTAGES AND EXAMPLES


• This process will help to discover the demand and the price of the
shares.
• The costs of public issue are much reduced.
• The time taken for completion of the entire process is much less
than in the normal public issue.

10.14 MEETINGS AND RESOLUTIONS

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

Extraordinary General Meeting


A general meeting other than the annual general meeting is called an
extraordinary general meeting (EGM). An EGM is convened when some special
and urgent business is to be transacted and which must be transacted before
the next annual general meeting. Besides, members holding 1/ l0th of paid-
up capital carrying voting rights may also require the Board of Directors to
convene an EGM.
The requirements of notice, quorum, minutes etc., shall be the same as
mentioned with regard to AGM.
Voting
Voting is a means of determining the sense or opinion of a meeting, i.e., Voting is a means
whether the meeting approves or disapproves of the proposals placed before it. of determining the
A proposal is also known as a motion. After discussion the motion is put to sense or opinion of
vote, and if it is favoured by the requisite majority, it is adopted as a resolution. a meeting, i.e.,
whether the meet-
Voting may be conducted either by show of hands or by poll. On a show of ing approves or
hands, one member has one vote, the number of members who raise their disapproves of the
proposals placed
hands in favour and those against the motion, are counted and the motion is before it.
declared carried or lost, as the case maybe. Proxy votes are not counted on a
show of hands unless the Articles provide otherwise.
Proxy
Any member entitled to attend and vote at a general meeting may appoint
another person, whether a member or not, to attend and vote as his proxy. A
proxy has no right to speak at the meeting or vote on a show of hands. He can
vote only on poll, unless the articles provide otherwise.
Resolutions
At a general meeting, all decisions are taken in the form of resolutions.
Resolutions may be ordinary or special.
An ordinary resolution is one which requires a simple majority, i.e., more
than 50 per cent of the votes cast in person or by proxy in favour of the
resolution.
A resolution is said to be ‘special resolution’, where:
1. The intention to propose the resolution as special resolution is
specified in the notice of the general meeting.
2 It requires atleast 75 per cent of the votes cast, either by show of
hands or on poll in person or proxy, in favour of the resolution.
A special resolution shall be required in matters such as, altering the Any member en-
objects clause in the memorandum, changing the registered office from one titled to attend and
state to another, changing the name of the company, alteration of the Articles, vote at a general
meeting may ap-
paying interest out of capital, reduction in share capital, determining the point another per-
remuneration of any director or managing director. voluntary winding up of son, whether a
the company, commencement of new business, further issue of shares to member or not, to
attend and vote as
persons other than the existing shareholder, etc. his proxy.
Certain resolutions can be considered at a general meeting only when a
‘Special Notice’ is given by the proposer. The proposer must give a notice to the
company, signifying his intention to move the resolution, atleast 14 days
before the date of the meeting. After receipt of notice, the company shall give
372 372 Legal Aspect of Business • Module Ten

atleast 7 days’ notice to all its members, either by advertisement or by any


other mode. Special Notice is required for resolutions for appointment of a
director other than a retiring director, or for appointment of an auditor other
than the retiring auditor, or for removal of an auditor.

Passing of Resolution by Postal Ballot (Sec. 192)


(1) Notwithstanding anything contained in the foregoing provisions of this
Act, a listed public company may, and in the case of resolutions relating to
such business as the Central Government may, by notification, declare to be
conducted only by postal ballot, shall, get any resolution passed by means of a
postal ballot, instead of transacting the business in general meeting of the
company.
(2) Where a company decides to pass any resolution by resorting to postal
ballot, it shall send a notice to all the shareholders, along with a draft
resolution explaining the reasons therefore, and requesting them to send
their assent or dissent in writing on a postal ballot within a period of thirty
days from the date of posting of the letter.
(3) The notice shall be sent by registered post acknowledgement due, or
by any other method as may be prescribed by the Central Government in this
behalf, and shall include with the notice, a postage pre-paid envelope for
facilitating the communication of the dissent of the shareholder to the
resolution within the said period.
(4) If a resolution is assented to by a requisite majority of the shareholders
by means of postal ballot, it shall be deemed to have been duly passed at a
general meeting convened in that behalf.
(5) If a shareholder sends under Sub-section (2) his assent or dissent in
writing on a postal ballot and thereafter any person fraudulently defaces or
destroys the ballot paper or declaration of identity of the sharheolder, such
person shall be punishable with imprisonment for a term which may extend
to six months or with fine or with both.
(6) If a default is made in complying with Sub-sections (1) to (4), the
company and every officer of the company, who is in default shall be punishable
with fine which may extend to fifty thousand rupees in respect of each such
default.
Explanation: For the purposes of this section, “postal ballot” includes voting
by electronic mode.

10.15 RECONSTRUCTION AND AMALGAMATION


In the case of reconstruction of a company, the company’s business and
undertaking are transferred to another company formed for that purpose so
that substantially same business is carried on and the same persons are
interested in it as in the case of the old company. A reconstruction may be
done to effectuate material alterations of the rights of a class of shareholders
or creditors.
On the other hand, amalgamation occurs when two or more companies
are joined to form a new entity. The effect is to wipe out the amalgamating
companies and to fuse them into a new one. The new amalgamated company
comes into existence with all the propriety rights and powers and subject to
all the duties and obligations, of both or all the constituent companies.
Module Ten • Indian Companies Act, 2013 373

Conditions prohibiting reconstruction or amalgamation of company


Where any provision in the memorandum or articles of a company, or in
any resolution passed in general meeting by, or by the Board of Directors of
the company, or in an agreement between the company and any other person,
whether made before or after the commencement of this Act, prohibits the
reconstruction of the company or its amalgamation with any body corporate or
bodies corporate, either absolutely or except on the condition that the managing
director or manager of the company is appointed or reappointed as managing
director or manager of the reconstructed company or of the body resulting
from amalgamation, as the case may be, shall become void with effect from
the commencement of this Act, or be void, as the case may be.

10.16 ACCOUNTS, AUDIT AND RETURNS

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).

Balance Sheet and Profit and Loss Account


The Balance Sheet and Profit and Loss Account should be drawn at the
end of every financial year, and presented in the form laid down in Part I and
Part II of Schedule VI of the Act.

Statutory Books and Registers


Besides the usual accounts, a company is statutorily required to maintain
following books and registers:
1. Register of Investments in shares or securities not held on company’s
name.
374 374 Legal Aspect of Business • Module Ten

2. Copy of every instrument creating any charge on assets.


3. Register of charges.
4. Register of members.
5. Index of members where their number is more than 50.
6. Register of debenture-holders.
7. Index to debenture-holders where their number is more than 50.
8. Foreign register of members and debenture-holders.
9. Copies of annual returns.
10. Minute book of Board Meetings.
11. Minute book of General Meetings.
12. Register of contracts, companies and firms in which the directors
are interested.
13. Register of directors, managing director, manager and secretary.
14. Register of director’s shareholders.
15. Register of loans made to companies under the same management.
16. Register of investments in shares and debentures.
17. Register of particulars of contracts.
18. Register of fixed assets.
19. Register of deposits.

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.

10.17 EVALUATION OF COMPANY FORM OF OWNERSHIP


After examining the meaning and nature, different types of companies
and their formation, it is desirable to discuss the merits and demerits of
company form of ownership. Advantages and limitations of a private company
were already examined. The following are additional points distinct to company,
including private company form of ownership.
Advantages
1. Limited Liability of the Shareholders: A member buys only a specified
amount of ownership by subscribing to a definite number of shares of the total
share capital. Therefore a shareholder’s liability extends only to the amount
he or she has paid for that shares. If the company fails, owners lose only the
amount they have invested. They are not required to pay any of the company’s
debts.
2. Greater Size: As there is no restrictions on membership, many members
may furnish capital for the company. On account of this, company form of
organisation can usually become larger than the proprietorship or the
partnership. Not only can companies grow large because of their access to
capital, but they can also hire large number of employees.
3. Perpetual Existence: A company being a legal entity, its life does not
depend on the lives of its members. Unlike in sole proprietorship and
partnership, life of the company is not affected by death, retirement, or
insolvency of members. Likewise, the death or retirement of Board of Directors
or officers does not affect the life of a company. The life of a company is also
not affected by the transfer of ownership. The company has an existence
apart from its owners and enjoys perpetual existence.
4. Ease of Expansion: Company form of ownership attracts a large number
of potential investors, because of the limited liability feature. If a company
needs additional capital to expand its operations, diversify its activities, it can
issue more shares to secure the required capital (subject to a maximum
number specified in its Memorandum).
5. Managerial Efficiency: Separation of ownership from management
gives ample scope for division of labour and specialisation in the company
management. Most large companies have professional managers like production
engineer, sales manager, financial manager, personnel manager, chief
accountant and the like. This helps the company form of ownership to face
formidable challenges of today’s business.
6. Transferability of Ownership: Shares of a company are easily
transferable. A shareholder can easily sell or transfer his shares/stock to
others through a stock broker. And stock brokers are many.
7. Adaptable to Large and Small Firms: The word company sounds big.
But not always. There are companies, specially private limited companies,
Module Ten • Indian Companies Act, 2013 377

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

At what price goods should be sold?


What should happen to profits earned?
Because of too many legislations and several restrictions, in forming and
running a company is too frustrating to its owners and managers.
2. Difficulty and Expense of Formation: Forming a company can be a
relatively complex and costly process. The use of services of an attorney,
chartered accountant, financial expert, management consultant to complete
the legal formalities, appointment of Bankers for the Issue, Underwriter
commission. Further cost of incorporation, cost of preparation of documents
to be filed can amount to thousands of rupees. The company is subject to
several restrictions, in contrast to a proprietory or partnership firm.
3. Lack of Secrecy: Companies are required to submit financial reports
to shareholders, government and the public. They cannot keep their operations
confidential. This is more relevant to a public company.
4. Lack of Personal Interest: Often the shareholders of a company have
little personal interest in its management. it is managed by directors. Their
only interest may be a return on their investment. Day-to-day management
is looked after by the salaried executives who do not have any personal interest
in the company. Such a situation can lower the employee’s morale and
motivation.
5. Unethical Practices: Companies are known to indulge in unethical
practices like pollution, under weight, brand imitations, price-cuts to eliminate
marginal competitors, stock-cornering and failure to deliver the product within
a specified date though advance payment is accepted long before and abuse of
advertisement. Some of these are practised by other forms of ownership also.
But companies are worst culprits.
6. Reckless Speculation: Successful companies are centres of attraction
for speculators. What is unfortunate is that several non-speculators become
speculators because they believe that there is scope for making big money in
speculation in shares.
7. Delay in Decision Making: All important decisions are taken by either
the Board of Directors or shareholders in their meetings. These meetings
must be properly convened as per the provisions of the Companies Act and the
articles of the company concerned. This process is time consuming. Delay in
decision making may result in loss of business opportunities.
8. Neglect of Minority Interest: Majority group of shareholders rules the
company through their elected representatives. The minority shareholders
will have no voice and their interest is often neglected.
9. Formation of Bogus Companies: Chance of bogus companies being
formed are more which can go against the interest of the investors, economy
of the country, the government and the general public.
10. Fraudulent Management: The directors and chief executives may
manage the company in their own selfish interests. They may misuse company
resources and bring losses to the company.
Module Ten • Indian Companies Act, 2013 379

GOVERNMENT UNDERTAKINGS

Nature of Government Undertakings


Public sector, born as the outcome of the conscious policy of the government
to speed up the industrialisation of the country with a view to give added
impetus to economic growth as well as to achieve certain socio-economic
goals as enunciated in Industrial Policy Resolutions of the Government. These
undertakings today cover a wide spectrum of activities in basic and strategic
industries like steel, coal, minerals and metals, petroleum, heavy engineering,
chemicals, pharmaceuticals and fertilizers, on the one hand and consumer Government under-
goods, trading and marketing activities, transportation services, contract and takings are also
consultancy service, tourist services, financial services and development of called State Enter-
prises or Govern-
small scale industries on the other. While some of these enterprises are ment Enterprises or
operative under monopoly/near-monopoly conditions, there are others working Public Sector Un-
under competitive conditions. There in is yet another segment of public dertakings (PSUs).
enterprises, viz., sick units taken over from the private sector in order to
protect employment.

Meaning and Definition


Government undertakings are also called State Enterprises or Government
Enterprise or Public Sector Undertakings (PSUs). These constitute a major
segment of industrial activity in our country.

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.”

Objectives of Government Undertakings


The following are the objectives of public enterprises:
(i) Help in the rapid economic growth and industrialisation of the country
and create the necessary infrastructure for economic development;
380 380 Legal Aspect of Business • Module Ten

(ii) Earn returns on investments and thus generate resources for


development;
(iii) Promote redistribution of income and wealth;
(iv) Create employment opportunities;
(v) Promote balanced regional development;
(vi) Assist the development of small-scale and ancillary industries;
(vii) Promote import substitution, save and earn foreign exchange for the
economy;
(viii) Act as a countervailing force and put up an effective competition to
undertakings in the private sector; and
(ix) Gain control over the commanding heights of the economy.

Origin of Government Undertakings


Though public sector was started with greater vigour only after 1947,
their origin may be traced back to the period of Chola Kings (11th and 12th
centuries). In South India great dams and anicuts were built across the river
Cauvery by the Chola Kings. They are magnificent testimonials to the wisdom
and foresight of the Cholas. There was a good deal of such economic
development by the state, directed towards sustaining the life of the
community. And these dams and anicuts which were set up by the great
Chola Kings. Public sector went through periods of steady expansion. After
1947, Public Sector became inevitable as the Government realised that rapid
economic development could be achieved only through state intervention in
economic activities. The Industrial Policy Resolution of 1948 and 1956 clearly
reflect the need for expanding public sector.

Ownership Pattern of Public Enterprises


Though owned by the government, public sector units are organised
differently for purposes of management and control. They include:
1. Ministry
2. Departmental Undertakings
3. Statutory Corporation
4. Central Boards
5. Companies.
1. Ministry: These are undertakings which are managed by a whole
ministry of the Government, which is accountable to parliament. The ministry
has its own budget which is debated and approved by parliament. Indian railways
are an example. The management is vested with the Board added by a
Chairman. The Board has three members and a financial commissioner. These
five persons enjoy the status of Secretary to the Government of India.
2. Departmental Undertakings: These undertakings are directly
subordinate to a ministry. Yet these units are self-contained, and each has
management responsible for its activities. The need for secrecy, strategic
importance and similar conditions make the departmental form the most
suitable organisation in certain areas, defence being one example.
Chittaranjan Locomotive Works, Integral Coach Factory, Post and Telegraphs
and Defence production units are run as departmental undertakings.
Module Ten • Indian Companies Act, 2013 381

Characteristics of Departmental Undertakings


The following are the main features of departmental undertakings:
1. A departmental undertaking is managed and administered by a
separate government department, attached to the concerned ministry.
2. The affairs of a departmental undertakings are managed and is under
the direct control of the officials and the minister of the concerned
ministry.
3. Yet these units are self-contained and each has management
responsible for its activities.
4. A departmental undertaking is financed by annual budget allotments
made and approved by the parliament.
5. The revenues of a departmental undertaking is required to be paid
into the government treasury.
6. The activities of departmental undertakings are subject to strict
Government regulations and control, such as accounting and audit
controls.

Advantages of Departmental Undertakings


1. The departmental undertakings are managed and fully controlled by
the government. This enables the government to realise its socio-
economic objectives.
2. Departmental undertakings provide essential services at a reasonable
price.
3. The activities of departmental undertakings are subject to budgetary,
accounting and audit control. This ensures the proper use of public
funds. The risk of misuse is comparatively less.
4. Departmental undertakings have greater accountability to the
parliament.

Limitations of Departmental Undertakings


1. Departmental undertakings are subject to political interference.
Ministers, political leaders and chief government officers come in
the way of effective functioning of government undertakings.
2. Departmental undertakings are managed by ministers and
government officials. These have neither leadership qualities nor
business acumen. Obviously the management of public sector units
is generally ineffective.
3. The paid officials who are incharge of the departmental undertakings
have no personal interest in their affairs and they do not care for the
consumer’s needs.
4. Officials of departmental undertakings have to work according to the
laid down procedures. This may cause undue delay in making and
implementing important decisions.
5. There is lack of flexibility of operations as the officials cannot adopt
and adjust plans and programmes to the changing circumstances.
6. Departmental undertakings suffer from running losses which are
not taken seriously and no corrective measures initiated.
382 382 Legal Aspect of Business • Module Ten

7. Departmental undertakings lack continuity of policies, because of


frequent change of government officials including the ministry itself.
3. Statutory Corporations: The Life Insurance Corporation, Air India,
Industrial Finance Corporation, Reserve Bank of India, Employees’ State
Insurance Corporation, Oil and Natural Gas Commission and National Textile
Corporation are examples of statutory corporations, also called public
corporations.
A corporation is a body corporate created by a separate law, independently
financed and vested with autonomy in managing its affairs. The corporation is
answerable to parliament which has created it (the corporation).

Characteristics of Statutory or Public Corporation


The main characteristics of a public corporation are:
1. It is a body corporate. It has a separate legal entity.
2. Its powers, duties and privileges are defined by the special act.
3. It is created by a special Act of parliament or state legislature.
4. It can sue and be sued in its own name.
5. Its share capital is wholly contributed by either the central
government or the concerned state government.
6. In addition the share capital contributed by the government, it can
borrow funds from the public.
7. Unlike departmental undertakings, public corporations can retain its
revenues and use them for running the corporations.
8. The management of public corporations is vested in the hands of
Board of Directors nominated by the government.
9. The employees of the public corporations are not government
employees. Their employment conditions are in accordance with the
service conditions of the corporation.
10. The prime objective of public corporation is to render service to general
public.

Merits of Public Corporations


Public corporations have the following merits to their credit:
1. Public corporations are autonomous institutions. They have freedom
in administrative matters. Power, duties and privileges of corporation
are defined by the special act, under which they come into existence.
2. Interference by ministers, political leaders and Government officials
is comparatively less.
3. If they have free hand in administrative matters, they can take quick
decisions and prompt actions.
4. Public corporations enjoy flexibility of operations. They can change
their policies and practices according to the circumstances.
5. They are accountable to the parliament.
Module Ten • Indian Companies Act, 2013 383

Demerits of Public Corporations


1. Public corporations, though said to be autonomous in principle
practically they are subject to interference by the ministers, political
leaders and top government officials. Political interference come in
the way of smooth functioning of public corporations.
2. Public corporations lack flexibility of operations. Any change in
administrative policies, power and functions require an amendment
to the act under which they are incorporated. But the act can be
amended only by the parliament. Amendment is a lengthy procedure
and time consuming.
3. The formation of public corporations takes a long time, as they require
the passing of a special act in the parliament or legislature.
4. They are not suitable for small and medium size industries.
4. Central Boards: These are common in river valley projects which involve
huge capital investment. Set-up jointly by the central government and
concerned State governments, the Central Boards are charged with the
responsibility of executing big projects. Such boards were set up for Bhakra
Nangal, Hirakud and Nagarjuna Sagar. A similar board is now being set up to
clean the river Ganga.
5. Government Companies: Companies are more common and particularly
preferable for commercial and industrial activities.
The Companies Act, 1956, defines a government company as “any company
in which not less than 51 per cent of the share capital is held by the central
government or by any state government or partly by central government and
partly by one or more state governments and includes a company which is a
subsidiary of a government company as thus defined.”
An enterprise becomes a government company when it has the following
characteristics:
(a) It is created under the provisions of the Companies Act, 1956.
(b) It has most of the features of a private limited company.
(c) Major portion of the capital (more than 51%) is held by central
government.
(d) All the directors or a majority of them are appointed by the government.
(e) Funds are obtained from the government and in some cases, from private
shareholders and through revenues derived from the sale of goods or
services.

Advantages of Government Companies


The main advantages of a government company are:
1. Government companies can be easily formed, with minimum legal
formalities being followed.
2. Government companies enjoy a greater operational flexibility when
compared to departmental undertakings.
3. Prompt decisions and quick actions could be made as they enjoy
operational flexibilities and formalities are limited.
384 384 Legal Aspect of Business • Module Ten

4. The working of government companies are subject to discussion in


the parliament or legislature. This makes the officials to be alert,
active and efficient.

Disadvantages of Government Companies


1. The directors and other officials of government companies are mere
paid officials. They do not have any stake in the business. They may
not take active interest in the management of the company.
2. The directors of government companies are not answerable to the
parliament or legislature. Directors and executives may misuse their
powers and indulge in activities which may go against public interest.
3. Government companies are also not free from political interference.

Advantages and Limitations of Government Undertakings


Government undertakings (of all types) have, over the years, proliferated
in terms of numbers, turnover, number of people employed, investment involved
and areas of activities covered. They have the following advantages:
1. Balanced Regional Development: Public sector units have a vital role to
play removing regional disparities. While deciding the location of PSUs, due
considerations are given to the backwardness of various regions, subject to the
overriding consideration of techno-economic feasibility. They have greatly reduced
imbalances in regional development and have laid a strong base for the rapid
development of our economy. The number of enterprises rose from five in 1951 to
246 in 1992.
2. Transformation of the Country’s Economy: Government undertakings
have greatly contributed to the transformation of our so called poor and
traditional economy into a fast developing and fairly industrialised (we now
rank among the top 20 industrialised countries in the world) country. It is
worth noting that some of our government undertakings have earned
reputation for excellence at the international level. Some names to be quoted
in this context are HMT, HMT International, ONGC and Air India. And some
giant among public sector units, i.e., Indian Oil Corporation, Steel Authority
of India and Oil and Natural Gas Commission figure in Fortune International’s
500 large companies outside the United States.
3. Employment Generation and Employee Satisfaction: Public
enterprises have done remarkably well in acting as a model employer.
According to the study conducted by the Centre for Monitoring Indian Economy,
public sector units in the country accounted for 71 per cent of the total
employment generated in the country in 1989. There are over two million
employees in government undertakings and the average emoluments per
annum amount to more than Rs.40,000. PSUs assure job security, good working
conditions, attractive incentive schemes, participative management, high
degree of safety and adequate training facilities.
4. Contribution to the Exchequer: An enterprise’s contribution to national
exchequer comprises dividend payments, tax payments and payments of others
such as customs and excise duties. These contributions will help finance country’s
economic developmental activities. During 1990-91, such contributions amounted
to Rs.19,446 crores as against Rs.18,264 crores during 1989-90, Rs.49,186 crore
in 2002-03.
Module Ten • Indian Companies Act, 2013 385

5. Export Earnings: PSUs have greatly contributed to the export earnings


of our country, thus easing the balance of payment position. During 1990-91,
export earnings of public enterprises amounted to Rs.7,095-81 crores as
against Rs.6,365.84 crores during 1989-90, recording an annual increase of
11.47 per cent over the previous year.
6. Contribution to the Country’s Economy: Public sector has come to
occupy a key position in the nation’s economy in several sectors, specially in
the production of fuel, basic metal industries, non-ferrous metal industries
and fertilisers. Percentage of public enterprises’ contribution to National
Production in respect of the above items during 2001-02 was more than 76
per cent.
7. Industrialisation and Economic Development: Industrialisation, as
is well known, is a sine qua non for economic development. The role of public
enterprises in achieving industrialisation is considerable. Our country has
attained several break- throughs through the public sector enterprises. The
Fertiliser Corporation of India, for instance, is one of the few organisations in
the world to develop and produce a complete range of fertiliser catalysts.
Similarly, the quality control laboratories of Hindustan Antibiotics are equipped
with full-fledged units for all chemical, pharmacological and toxicity tests.
Discoveries of new antibiotics in the laboratories have attracted international
interest.
8. Encouragement to Ancillary Industries: The role of public enterprises
in promoting ancillary industries is noteworthy. The Bureau of Public
Enterprises has been monitoring the progress of ancillary development in the
central Public enterprises to find proper direction to the ancillary growth and
the needed thrust. The bureau, initially in 1971 and later in 1974 and 1978
issued guidelines on the public enterprises on the growth of ancillaries. As a
result of those efforts, there has been a significant progress both in terms of
numbers as well as services rendered by the ancillary sector to the public
sector enterprises. Small scale and ancillary units encouraged and assisted
by the SAIL, alone numbered about 700 which provide employment to about
6,300 persons. The value of purchases made annually was of the order of
Rs.21 crores. Similarly, ITI, Bangalore has more than 1,000 ancillary units
providing employment to thousands of employees.
9. Equitable distribution of National Income: PSUs contribute to more
equitable distribution of national income and greater diffusion of wealth.
Limitations: In spite of their phenomenal growth and dynamic role, PSUs
have the following shortcomings:
1. Recurring Losses: Nearly 50 per cent of public sector units are
incurring losses. According to latest reports, as many as 44 PSUs have been
referred to the BIFR. The public enterprises survey for 1991-92 shows that as
many as 61 enterprises have shown negative net worth for two successive
years, latest reports indicate that 102 units are in the sick list.
2. Political Interference: Political interference is a problem faced by
PSUs. Interference by political leaders is coming in the way of effective
functioning of Government undertakings.
3. High Cost of Delay: No public sector unit (except Kudremukh) is
completed as per schedule. The consequences of delay are the costs of output
and employment foregone during the period of delay, the cost of inter-sector
imbalances which strained production and investment, above all, the impact
386 386 Legal Aspect of Business • Module Ten

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

COMPANIES AMENDMENT ACT 2013


(WITH HIGHLIGHT AND SALIENT FEATURES)

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.

Need for the New Law


The changing national and international economic environment
• Exponential growth of the Indian economy
• Changes in the stakeholders’ expectations
• Manifold increase in number of companies
Year No. of Companies
1956 30,000 approx.
2013 11,00,000 approx.

STRUCTURAL COMPARISON WITH COMPANIES ACT 1956 TO


COMPANIES ACT 2013

Companies Act 1956 Companies Act 2013

13 Parts 29 Chapters

658 Sections 470 Sections

15 Schedules 7 Schedules

1. Immediate Changes in letterhead, bills or other official


communications, as if full name, address of its registered office, Corporate
Identity Number (21 digit number allotted by Government), telephone number,
fax number, email ID, website address, if any.
2. One Person Company (OPC): It’s a Private Company having only one
Member and at least One Director. No compulsion to hold AGM. Conversion of
existing private companies with paid-up capital up to Rs. 50 lakhs and turnover
up to Rs. 2 crores into OPC is permitted.
388 388 Legal Aspect of Business • Module Ten

3. Woman Director: Every Listed Company/Public Company with paid-up


capital of Rs. 100 crores or more/Public Company with turnover of Rs. 300
crores or more shall have at least one Woman Director.
4. Resident Director: Every company must have a director who stayed in
India for a total period of 182 days or more in previous calendar year.
5. Accounting Year: Every company shall follow uniform accounting year,
i.e., 1st April to 31st March.
6. Loans to Director: The company cannot advance any kind of loan/
guarantee/security to any director, Director of holding company, his partner,
his relative, firm in which he or his relative is partner, private limited in
which he is director or member or any bodies corporate whose 25% or more of
total voting power or Board of Directors is controlled by him.
7. Articles of Association: In the next General Meeting, it is desirable to
adopt Table F as standard set of Articles of Association of the company with
relevant changes to suit the requirements of the company. Further, every
copy of Memorandum and Articles issued to members should contain a copy of
all resolutions/agreements that are required to be filed with the Registrar.
8. Disqualification of Director: All existing directors must have Directors
Identification Number (DIN) allotted by Central Government. Directors who
already have DIN need not take any action. Directors not having DIN should
initiate the process of getting DIN allotted to him and inform companies. The
company, in turn, has to inform registrar.
9. Financial Year: Under the new Act, all companies have to follow a
uniform Financial Year, i.e., from 1st April to 31st March. Those companies
which follow a different financial year have to align their accounting year to
1st April to 31st March within 2 years. It is desirable to do the same as early
as possible since most the compliances are on financial year basis under the
new Companies Act.
10. Appointment of Statutory Auditors: Every listed company can appoint
an individual auditor for 5 years and a firm of auditors for 10 years. This
period of 5/10 years commences from the date of their appointment. Therefore,
those companies have reappointed their statutory auditors for more than
5/10 years, have to appoint another auditor in Annual General Meeting for
year 2014.

SALIENT FEATURES OF COMPANIES ACT, 2013

1. 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 ‘one person company’ (OPC). An OPC means a
company with only one person as its member [Section 3(1) of 2013 Act]. The
draft rules state that only a natural person who is an Indian citizen and
resident in India can incorporate an OPC or be a nominee for the sole member
of an OPC.
Module Ten • Indian Companies Act, 2013 389

Features of One Person Company (OPC)

1. Only One Shareholder:


Only a natural person, who is an Indian citizen and resident in India shall
be eligible to incorporate a One Person Company. Explanation: The term
“Resident in India” means a person who has stayed in India for a period of not
less than 182 days during the immediately preceding one calendar year.
2. Nominee for the Shareholder:
The shareholder shall nominate another person who shall become the
shareholders in case of death/incapacity of the original shareholder. Such
nominee shall give his/her consent and such consent for being appointed as
the nominee for the sole shareholder. Only a natural person, who is an Indian
citizen and resident in India shall be a nominee for the sole member of a One
Person Company.
3. Director:
Must have a minimum of One Director, the Sole Shareholder can himself
be the Sole Director. The company may have a maximum number of
15 directors.

Terms and Restrictions of OPC


• A person shall not be eligible to incorporate more than a One Person
Company or become nominee in more than one such company.
• Minor cannot shall become member or nominee of the One Person
Company or can hold share with beneficial interest.
• An OPC cannot be incorporated or converted into a company under
Section 8 of the Act [Company Not for Profit].
• An OPC cannot carry out Non-Banking Financial Investment activities
including investment in securities of any body corporate.
• An OPC cannot convert voluntarily into any kind of company unless
two years have expired from the date of incorporation of One Person
Company, except threshold limit (paid-up share capital) is increased
beyond Rs. 50 lakhs or its average annual turnover during the relevant
period exceeds Rs. 2 crores, i.e., if the paid-up capital of the company
crosses Rs. 50 lakhs or the average annual turnover during the relevant
period exceeds Rs. 2 crores, then the OPC has to invariably file forms
with the ROC for conversion into a Private or Public Company, within
a period of six months on breaching the above threshold limits.

Steps to Incorporate One Person Company (OPC)


1. Obtain Digital Signature Certificate [DSC] for the proposed director(s).
2. Obtain Director Identification Number [DIN] for the proposed
director(s).
3. Select suitable Company Name, and make an application to the
Ministry of Corporate Office for availability of name.
4. Draft Memorandum of Association and Articles of Association [MOA
and AOA].
390 390 Legal Aspect of Business • Module Ten

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

• Publishing the notice of the aforesaid resolution stating the


justification of variation in two newspapers
• Exit option can be given to dissenting shareholders by the promoters
and shareholders having control in accordance with the regulations
to be specified by the Securities and Exchange Board of India (SEBI)
[Section 13 of 2013 Act].

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].

5. Formation of a Company with Charitable Objects


An OPC with charitable objects may be incorporated in accordance with
the provisions of the 2013 Act. New objects like environment protection,
education, research, social welfare, etc. have been added to the existing
object for which a charitable company could be incorporated.
As against the existing provisions under which a company’s licence could
be revoked, the 2013 Act provides that the licence can be revoked not only
where the company contravenes any of the requirements of the section but
also where the affairs of the company are conducted fraudulently or in a
manner violative of the objects of the company or prejudicial to public interest.
The 2013 Act, thus, provides for more stringent provisions for companies
incorporated with charitable objects [Section 8 of 2013 Act].

6. Commencement of Business, etc.


The existing provisions of the 1956 Act as set out in Section 149 which
provide for requirement with respect to the commencement of business for
public companies that have a share capital would now be applicable to all
companies.
The 2013 Act empowers the ROC to initiate action for removal of the
name of a company in case the company’s directors have not filed the
declaration related to the payment of the value of shares agreed to be taken
by the subscribers to the memorandum and that the paid-up share capital of
the company is not less than the prescribed limits as per the 2013 Act, within
180 days of its incorporation and if the ROC has reasonable cause to believe
that the company is not carrying on business or operations [Section 11 of
2013 Act].
392 392 Legal Aspect of Business • Module Ten

7. Registered Office of Company


Where a company has changed its name in the last two years, the company
is required to paint, affix or print its former names along with the new name
of the company on business letters, bill heads, etc. However, the 2013 Act is
silent on the time limit for which the former name needs to be kept [Section
12 of 2013 Act].

8. Subsidiary Company Not to Hold Shares in its Holding Company


The existing provision of Section 42 of the 1956 Act which prohibits a
subsidiary company to hold shares in its holding company continues to get
acknowledged in the 2013 Act. Thus, the earlier concern that if a subsidiary is
a body corporate, it may hold shares in another body corporate which is the
subsidiary’s holding company continues to apply [Section 19 of 2013 Act].

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.

10. Dormant Company


Section 455 of Companies Act, 2013 talks about a New Provision Calls
“DORMANT COMPANY”. This concept was not there in Companies Act, 1956.
A Dormant Company offers excellent advantage to the promoters who
want to hold an asset or intellectual property under the corporate shield for
its usage at a later stage. For instance: if a promoter wants to buy lands now
for its future project at a comparatively lesser price, he may do the same
through dormant company so that he can use the land for its future
project. Thus, dormant company status is a new phenomenon in the Companies
Act 2013 and is an excellent tool for keeping assets in the company for its
future usage. A dormant company may be either a public company or a private
company or a one person company.
Certain companies, due to the nature of their business, may not be able
to start any business, for a long time from the date of incorporation as for
instance any business for creation of intellectual property or for a future
project and has no significant accounting transaction. Such a company may
be an “Inactive company”. Construction Companies/Real Estates Companies/
Incorporate New Companies to Hold Land/ Properties for future projects. This
concept is beneficial for them. By this concept, they can Incorporate Company
and Purchase Property/Land in that company and get status of Dormant
Company. If a company get status of dormant company, there are less
compliance in dormant company in comparison of active company. It will help
to save cost of compliances for inactive companies.
Module Ten • Indian Companies Act, 2013 393

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

Section 23 also provides that compliance with provisions of Part I of Chapter


III is required for the issue of securities to public through prospectus. For
private placement, compliance with the provisions of Part II of Chapter III are
required.
The 2013 Act also introduces certain changes with respect to prospectus
and public offers aimed at enhancing disclosure requirements as well as
streamlining the process of issuance of securities.
1. Issue of Prospectus
Currently, the matters and reports to be included in the prospectus are
specified in Parts I and II of Schedule II of the 1956 Act. In the 2013 Act, the
information to be included in the prospectus is specified in Section 26 of 2013
Act. The 2013 Act mandates certain additional disclosures:
• Any litigation or legal action pending or taken by a government
department or a statutory body during the last five years immediately
preceding the year of the issue of prospectus against the promoter of
the company
• Sources of promoter’s contribution
The 2013 Act has also relaxed the disclosure requirements in some areas.
Examples of certain disclosures not included in the 2013 Act are as follows.
Particulars regarding the company and other listed companies under the
same management, which made any capital issues during the last three
years
• Export possibilities and export obligations
• Details regarding collaboration
The 2013 Act states that the report by the auditors on the assets and
liabilities of business shall not be earlier than 180 days before the issue of
the prospectus [Section 26(1)(b)(iii) of 2013 Act]. The 1956 Act currently
requires that the report will not be earlier than 120 days before the issue of
the prospectus.
2. Variation in Terms of Contract or Objects
The 2013 Act states that a special resolution is required to vary the
terms of a contract referred to in the prospectus or objects for which the
prospectus was issued [Section 27(1) of 2013 Act]. The 1956 Act currently
requires approval in a general meeting by way of an ordinary resolution. The
2013 Act also requires that dissenting shareholders shall be given an exit
offer by promoters or controlling shareholders [Section 27(2) of 2013 Act].
3. Offer of Sale of Shares by Certain Members of the Company
The 2013 Act includes a new section under which members of a company,
in consultation with the board of directors, may offer a part of their holding of
shares to the public. The document by which the offer of sale to the public is
made will be treated as the prospectus issued by the company. The members
shall reimburse the company all expenses incurred by it [Section 28 of 2013
Act].
4. Shelf Prospectus
The 2013 Act extends the facility of shelf prospectus by enabling SEBI to
prescribe the classes of companies that may file a shelf prospectus. The 1956
Module Ten • Indian Companies Act, 2013 395

Act currently limits the facility of shelf prospectus to public financial


institutions, public sector banks or scheduled banks [Section 31(1) of 2013
Act].
5. Global Depository Receipts (GDRs)
The 2013 Act includes a new section to enable the issue of depository
receipts in any foreign country subject to prescribed conditions [Section 41 of
2013 Act]. Currently, the provisions of Section 81 of the 1956 Act relating to
further issue of shares are being used in conjunction with the requirements
mandated by SEBI for the issuance of depository receipts. In several aspects
across the 2013 Act, it appears that the 2013 Act supplements the powers of
SEBI by incorporating requirements already mandated by SEBI.
6. Private Placement
The 2013 Act requires that certain specified conditions are complied
with in order to make an offer or invitation of offer by way of private placement
or through the issue of a prospectus.
• The offer of securities or invitation to subscribe securities in a financial
year shall be made to such number of persons not exceeding 50 or
such higher number as may be prescribed [excluding qualified
institutional buyers, and employees of the company being offered
securities under a scheme of employees stock option in a financial
year and on such conditions (including the form and manner of private
placement) as may be prescribed]. This provision of the 2013 Act is in
line with the existing provision of the 1956 Act.
• The allotments with respect to any earlier offer or invitation may
have been completed.
• All the money payable towards the subscription of securities shall be
paid through cheque, demand draft or any other banking channels
but not by cash.
• The offers shall be made only to such persons whose names are
recorded by the company prior to the invitation to subscribe, and that
such persons shall receive the offer by name.
• The company offering securities shall not release any advertisements
or utilize any media, marketing or distribution channels or agents to
inform the public at large about such an offer [Section 42 of 2013
Act].
12. Shares and Share Capital

Shares, Debentures and Deposits


• Shares, other than sweat equity, cannot be issued at a discount.
• Reduction of share capital is subject to the approval of Tribunal.
• A company may issue preference shares redeemable after 20 years
for infrastructure projects as may be specified and redeemed as may
be prescribed on an annual basis at the option of such preference
shareholders.
• Buyback provisions eased. Companies can buy back its shares even
if it has defaulted in repayment of deposit or interest payable thereon,
396 396 Legal Aspect of Business • Module Ten

redemption of debentures or preference shares or payment of dividend


to any shareholder or repayment of any term loan or interest payable
thereon to any financial institution or bank, provided that such default
has been remedied and three years have lapsed after such default
ceased to subsist. This was not the case in the Companies Act, 1956.
• Debenture trustee to be appointed only when a company issues
prospectus or makes an offer or invitation to the public or to its
members exceeding five hundred for subscription to its debentures.
Acceptance of Deposit by Companies:
• NBFCs not to be covered by the provisions relating to acceptance of
deposits. They will be governed by the Reserve Bank of India rules
on acceptance of deposits.
• Deposit insurance is required to be provided as prescribed.
• Deposits can be secured and unsecured.
• The concept of small depositors is dispensed with.
• The Tribunal may allow further time taking into consideration the
financial condition of the company to issue directions for repayment
of the deposits or interest thereon in case of default in such
repayments.

13. Directors of Company

Appointment and Variations regarding Directors and Key Managerial


Personnel:
• Appointment
Certain companies, as may be prescribed, to mandatorily appoint
company secretary.
Appointment of at least one women director on the board of prescribed
classes of companies has been made mandatory.
Appointment of at least one director resident in India, i.e., a director
who has stayed in India for at least 182 days in the previous calendar
year, is made mandatory for all companies.
• Key Managerial Personnel
Company Secretary included within the definition of Key Managerial
Personnel.
No company can have both Managing Director and Manager at the
same time.
Every company belonging to such class or description of companies
as may be prescribed, to have managing director, or chief executive
officer or manager and in their absence, a whole-time director,
company secretary and chief financial officer.
Individual limits for remuneration enhanced in the Act
• Status of Independent Director
Nominee director cannot be regarded as Independent Director.
Maximum term of Independent Director has been restricted to five
years at once subject to a maximum of two such terms.
Module Ten • Indian Companies Act, 2013 397

The independent director is not entitled to stock option and may


receive remuneration by way of fee and profit related commission as
approved by members.
Role or functions of independent directors is expanded.
• Directorships
Maximum number of directors has been increased from twelve (12)
to fifteen (15) directors. Further no Central Government approval is
required to increase the maximum number of directors beyond fifteen
(15). Shareholders of companies may do so by passing a special
resolution.
A person can hold directorship of up to 20 companies, of which not
more than 10 can be public companies.
Eligibility Age to Become Managing Director or Whole-time Director:
The eligibility criteria for the age limit has been revised to 21 years as against
the existing requirement of 25 years.
Number of Directorships Held by an Individual: Section 165 provides
that a person cannot have directorships (including alternate directorships) in
more than 20 (twenty) companies, including ten (ten) public companies. It
provides a transition period of one year from 1 April 2014 to comply with this
requirement
All Existing Directors must have Directors Identification Number (DIN)
allotted by Central Government. Directors who already have DIN need not
take any action. However, Directors not having DIN should initiate the process
of getting DIN allotted to him and inform the respective companies on which
he is a director. The company, in turn, has to inform the registrar of companies
(ROC).
Independent Directors: The 2013 Act defines the term “Independent
Director”. In case of listed companies, one-third of the board of directors
should be independent directors. There is a transition period of 1 (one) year
from 01 April 2014 to comply with this requirement. The 2013 Act also provides
additional qualifications/restrictions for independent directors as compared
to the 1956 Act.
Section 150 enables manner of selection of independent directors and
maintenance of databank of independent directors and enables their selection
out of data bank maintained by a prescribed body
Resident Director: Every company must have atleast one director who
has stayed in India for a total period of 182 days or more in previous calendar
year. For existing companies, the compliance need to be made before 31st
March 2015.
Loans to Director: The company cannot advance any kind of loan/
guarantee/security to any director, director of holding company, his/her
partner/s, his/ her relative/s, firm in which he or his relative is partner,
private limited in which he is director or member or any bodies corporate
whose 25% or more of total voting power or Board of Directors is controlled by
him.
398 398 Legal Aspect of Business • Module Ten

14. Woman Director


The following class of companies shall appoint at least one woman
director—
• Every listed company;
• Every other public company having paid-up share capital of one hundred
crore rupees or more; or turnover of three hundred crore rupees or
more.
• Listed companies and certain other public companies shall be required
to appoint atleast 1 (one) woman director on its board.
• Companies incorporated under Companies Act 2013 shall be required
to comply with this provision within 6 (six) months from date of
incorporation. In case of companies incorporated under Companies
Act 1956, companies are required to comply with the provision within
a period of 1 (one) year from the commencement of the Act.
While the mandatory requirement for appointment of women directors is
expected to bring diversity on to the boards, companies may find it difficult to
be in compliance with Companies Act 2013 unless they have already identified
or internally groomed women candidates that are qualified to be appointed to
the board.

15. Appointment of Managing Director, Whole-time Director or Manager


Section 196 of 2013 Act]
The reappointment of a managerial person cannot be made earlier than
one year before the expiry of the term instead of two years as per the existing
provision of Section 317 of the 1956 Act. However, the term for which
managerial personnel can be appointed remains as five years. Further, the
2013 Act lifts the upper bar for age limit and thus an individual above the age
of 70 years can be appointed as key managerial personnel by passing a special
resolution.

16. Key Managerial Personnel (KMP)


The provisions relating to appointment of KMP includes: (i) the Chief
Executive Officer (CEO) or the Managing Director (MD) or the manager, (ii)
the Company Secretary (iii) the Whole-time Director; (iv) the Chief Financial
Officer (CFO); and (v) such other officer as may be prescribed is applicable
only for Public Limited Companies having paid-up capital more than Rs. 10
crores and Private Limited Companies are exempted from appointment of KMPs.
Attending Board Meetings: As per Section 167 of the Act, a Director
shall vacate his/her office if he/she absents himself from all the meetings of
the Board of Directors held during a period of 12 (twelve months) with or
without seeking leave of absence of the Board. Simply speaking, attending at
least one Board Meeting by a director in a year is a must else he has to vacate
his/her office.
Module Ten • Indian Companies Act, 2013 399

17. Secretarial Audit


• All listed companies to annex secretarial audit report obtained from
a Practicing Company Secretary to the Board’s report.
• Board to respond to qualifications, made by the Secretary, in the
Board’s report.

18. Meetings of Company


Meetings:
(a) One Person Company is not required to hold any Annual General
Meeting
(b) Notice of general meeting need to be sent to all the directors of the
Company
(c) For special business to be transacted in the General Meeting,
explanatory statement should comprise of specified information
(d) Company should follow that secretarial standards are filed while
making minutes
Meeting of Board and its Powers:
• A notice of not less than 7 days in writing is required to call a board
meeting. The notice of meeting to be given to all directors, whether
he is in India or outside India by hand delivery post or electronic
means.
• Certain powers which earlier can be exercised by the Board with the
approval of general meeting by way of ordinary resolution under
section 293 of the Companies Act 1956, shall now to be passed by
special resolution.
• Every Listed Company and such other company as may be prescribed
shall have an Audit Committee.
• The Central Government permission under Section 295 and Section
372A of Companies Act, 1956 is dispensed with.
• Following committees of the Board made mandatory for listed and
prescribed classes of companies:
Audit Committee
Stakeholder Relationship Committee
Nomination and Remuneration Committee
Corporate Social Responsibility Committee
Board Meetings: At least 7 days notice to be given for Board Meeting. The
Board need to meet at least 4 times within a year. There should not be a gap
of more than 120 days between two consecutive meetings.

19. Accounts and Audit


• Books of accounts can be kept in electronic form also.
• The term balance sheet and profit and loss accounts are collectively
termed as financial statement.
• The Act provides for reopening or recasting of Books of Accounts at
the instance of regulatory authorities. The financial statements can
be revised at specified situations.
400 400 Legal Aspect of Business • Module Ten

• No listed companies shall appoint an individual as auditor for more


than one term of five consecutive years, and an audit firm as auditor
for more than two terms of five consecutive years.
• Shareholders are at liberty to decide by passing resolution that audit
partner and the audit team, be rotated every year.
• Auditor shall not provide directly or indirectly the specified services
to the company, its holding and subsidiary companies.
• No approval of Central Government is required for appointment of
cost auditor.
• Financial year will be uniform for all companies, i.e., April to March.
Related Party Transactions:
• Scope of related party transactions has been widened and definition
of relatives has also been enlarged and replaced with definition of
“related party”.
• Clause 188 of the Act which carries provisions regarding related
party transactions, combines existing Sections 297 and 314.
• Central Government Approval has been done away with. Every related
party transaction to be disclosed in Board’s report along with the
justification.
• Approval in the Board is mandatory and also require prior shareholders
‘approval for specified share capital and prescribed amounts.
Inspection and Investigation:
• The provision for establishment of Serious Fraud Investigation Office
(SFIO) by the Central Government is another significant feature of
the Act.
• SFIO is empowered to arrest in respect of certain offence involving
fraud.
Annual Documents:
(a) Requirement of compliance certificate done away with and in its
place scope of annual return has been enlarged.
(b) The annual return, filed by a listed company or, by a company having
such paid-up capital and turnover as may be prescribed, shall be
certified by a company secretary in practice in the prescribed form,
stating that the annual return discloses the facts correctly and
adequately and that the company has complied with all the provisions
of this Act.
(c) Director’s responsibility statement shall include additional statement
related to compliance to all applicable laws and in case of listed
companies, it shall include statement related to internal financial
control.
(d) Benefit of private companies to file their balance sheet and profit
and loss account separately has been withdrawn.

20. Appointment of Statutory Auditors


Every listed company can appoint an individual auditor for 5 years and a
firm of auditors for 10 years. This period of 5/10 years commences from the
date of their appointment. Therefore, those companies who have reappointed
Module Ten • Indian Companies Act, 2013 401

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.

21. Financial Year


The Companies Act 1956 Act provided companies to elect financial year.
The Companies Act 2013 Act eliminates the existing flexibility in having a
financial year different than 31 March. The 2013 Act provides that the financial
year for all companies should end on 31 March, with certain exceptions approved
by the National Company Law Tribunal. Companies should align the financial
year to 31 March within two years from 01 April 2014.

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

Before declaration of dividend, a company may transfer a portion from


the profit to the reserves of the company. The company is free to decide the
percentage for such transfer to the reserve.
Where a company has no adequate profit or any profit in a financial year
or any accumulated profit to distribute as dividend, it may declare dividend
out of reserves in accordance with the rules made by the government. The
company may pay dividend only from free reserves, not from any other reserves.
For the purpose of calculation of distributable profit, depreciation shall be
calculated as per Schedule II.
Interim Dividend:
The Board of Directors may declare interim dividend during financial
year out of surplus in profit and loss account. In case, a company is incurring
loss as per financials of latest quarter, interim dividend shall not be higher
than average dividend declared by the company during last three financial
years.
Dividend Account in Bank:
The amount of dividend and interim dividend shall be deposited in a
separate account in a Scheduled Bank within five days from the date of
declaration of such dividend.
The dividend shall be paid to shareholder or to his banker in cash not
otherwise. However, issue of bonus shares out of distributable profit or free
reserve is permitted and not be deemed to be a violation of this rule. Making a
partly paid share, fully paid through payment from distributable profit and
free reserve is permitted.
Any dividend payable in cash may be paid by cheque or warrant or in any
electronic mode to the shareholder.
Prohibition on Dividend:
A company which has default under Section 73 and 74 related to deposit
and repayment of deposit or interest thereon may not declare dividend.

23. National Company Law Tribunal (NCLT)


• NCLT replaces the High Court, CLB. The same shall consists of
Judicial and Technical members, as Central Government may deem
necessary, to exercise and discharge the powers and functions
conferred including approval of merger, corporate reorganization,
capital reduction, extension of financial year, etc.
• Every proceeding presented before the Tribunal shall be dealt with
and disposed of within 3 months from the date of commencement of
proceeding before the tribunal.
The National Company Law Tribunal (NCLT), which would replace the
Company Law Board, is likely to be operational by April next year, with the
principal bench based in the national capital.
The tribunal is to be set up under the Companies Act, 2013. The legislation
is being implemented by the Corporate Affairs Ministry.
The plan is to have about 12 to 13 NCLT benches in different parts of the
country but a final decision is yet to be taken, according to a source.
Module Ten • Indian Companies Act, 2013 403

To begin with, the existing benches of Company Law Board would be


converted into NCLT ones. Then, in due course, new benches would be created.
The tribunal would have a President, judicial and technical members.
The President should be a person who is or has been a High Court judge for at
least five years.
To become a judicial member at NCLT, an individual is or should have
been a High Court judge or district judge for at least five years or with a
minimum of ten years experience as an advocate of a court.
Meanwhile, among others, chartered accountants or cost accountants or
company secretaries having at least 15 years of experience are eligible to be
technical members.
The appeals against NCLT orders would be heard by the proposed National
Company Law Appellate Tribunal, which would have a chairperson, judicial
and technical members.

24. Corporate Social Responsibility (CSR)


• Formation of CSR Committee has been made mandatory for a company
having net worth of Rs. 500 crore or more, or turnover of Rs. 1,000
crore or more or net profit of Rs. 5 crore or more during any financial
year.
• Such company shall spend, in every financial year, at least 2 per
cent of the average net profits of the company made during three
immediately preceding financial years, in pursuance of its Corporate
Social Responsibility Policy (CSRP).
Corporate Social Responsibility (CSR) – The company has to constitute a
CSR committee of the Board and 2 per cent of the average net profits of the
last three financial years are to be mandatorily spent on CSR activities by an
Indian company if any of the following criteria is met:
• Net worth of Rs. 500 crores or
• Turnover of Rs. 1000 crores or more or
• Net profit of Rs. 5 crores or more
Contributing to Incubators, which has been notified by the Government of
India, is eligible for spending under CSR. This is a prosperous time for incubators
and entrepreneurs and can really change the entrepreneurial ecosystem in
India.
As per Section 135 of the Act, companies with a specified net worth or
turnover or net profit are required to mandatorily spend 2 per cent of its
average net profit towards specified CSR activities.
• Every company having net worth of INR 500 crore or more, or turnover
of INR 1000 crore or more or net profit of INR 5 crore or more during
any financial year will have to comply with the CSR provisions as laid
down under the Act.
• If any of the above financial strength criteria is met, the qualifying
company is mandatorily required to spend at least 2 per cent of the
average net profit of past three financial years on specified CSR
activities.
404 404 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.

25. E-Governance under New Companies Act


Forms and Certification:
• E-Governance proposed for various company processes like
maintenance and inspection of documents in electronic form, option
of keeping of books of accounts in electronic form, financial statements
to be placed on company’s website, holding of board meetings through
video conferencing/other electronic mode; voting through electronic
means.
• For all the companies (except one person companies and small
companies) with prescribed paid-up capital and turnover, whether
private or public, listed or unlisted, annual return has to be signed
by a company secretary in practice.
In this age of well-developed information technology and
telecommunications, the Electronic Governance of all business-related
activities, administrative activities, and managerial functions of the corporate
world, can certainly be very convenient, efficient, transparent, and fully
accountable and responsible. Therefore, undoubtedly, e-governance in the
corporate sector is an imperative and highly prudent requirement in every
country of the world, inevitably including India. As India is one of the major,
fast-progressing, and highly influential economies of the world. Thus, e-
governance is absolutely essential and beneficial to Indian corporate world,
especially in present-day world of cut-throat corporate competition, and ever-
increasing need for greater transparency and accountability in the corporate
sector. Considering these highly significant facts and business scenarios, the
Government of India has rightly promulgated the provisions for e-governance
in the corporate sector of the country, in its latest Companies Act of 2013.
E-Governance or Electronic Governance is basically proper and efficient
utilization of the technologies of the information technology and
telecommunications, for performing various functions and activities by an
organization. Such use of Information and Communication Technologies [ICTs]
can preferably be made at all levels of a business corporation also, in order to
obtain faster and more efficient business activities, greater customer
satisfaction, more accountable and transparent corporate administration and
management, better profits and satisfaction of the shareholders, and the best
possible progress and growth of the corporation.

MAJOR E-GOVERNANCE PROVISIONS UNDER COMPANIES ACT 2013

(A) Maintenance, Security, and Inspection of Books and Records in


Electronic Form
Regarding the account keeping and maintenance of records and books
related with the business activities of a company, and the well-rounded security
and efficient and transparent inspection of these documents, the new
Companies Act of India has proper provisions, suggestions, and
recommendations. These prudent provisions and recommendations are
provided in the Section 120 of the Indian Companies Act of 2013, and the
406 406 Legal Aspect of Business • Module Ten

Companies (Management and Administration) Rules of 2014. The Section 120


facilitates that a company must keep a safe account of all business and
management related documents, records, registers, minutes, etc., preferably
in the electronic forms, in such a manner that these could easily be inspected
or reproduced whenever necessary. Again, the Rules ranging from Rule 27 to
Rule 29 of the Indian Companies (Management and Administration) Rules of
2014, further clarify things in this context, as follows:
• As per Rule 27, every listed company, or any other company with
1000 or more shareholders and security holders, must maintain its
all such secretarial records and documents preferably [but not
necessarily or mandatorily] in the electronic form. The Ministry of
Corporate Affairs [MCA] vide its Notification dated 24th July, 2014,
has substituted the word ‘shall’ by the word ‘may’ in Rule 27 of
Companies (Management and Administration) Rules of 2014, and
thereby, the task of maintaining such records strictly in the electronic
form has been made optional, for time being. However, it will be wise
to convert these data and records to the electronic form [from the
physical form] as quickly as possible.
• The Rule 28 dictates that the MD, CS, or any other Director or Officer
of the company shall be made responsible for proper and safe keeping
of all records and documents of the company in electronic or physical
form.
• While the Rule 29 provides provision for inspection of all electronic
records and reproduction of these as per requirements, the charge
for any such reproduction shall not be more than ten rupees per
page.

MAPPING OF E-FORMS PRESCRIBED UNDER THE COMPANIES ACT, 2013


WITH E-FORMS PRESCRIBED UNDER COMPANIES ACT, 1956
S. e-Form Correspon- Purpose of Form as per Companies Act, 2013
No. (Compa- ding e-Form
nies Act, (Companies
2013) Act, 1956)
1. INC-1 1A Application for reservation of name
2. INC-2 New form Form for Incorporation and nomination (One Person Company)
3. INC-3 New form Form for consent of nominee of One Person Company
4. INC-4 New form Form for change in member/nominee of One Person Company
5. INC-5 New form Form for intimation of exceeding threshold of One Person
Company
6. INC-6 New form Application for Conversion
7. INC-7 1 Application for Incorporation of Company (Other than One Person
Company)
8. INC-18 New form Application to Regional Director for conversion of Section 8
company into any other kind of company
9. INC-20 New form Intimation to Registrar of revocation or surrender of license issued
under section 8
10. INC-21 19 Declaration prior to the commencement of business
11. INC-22 18 Notice of situation or change of situation of registered office and
verification
Module Ten • Indian Companies Act, 2013 407

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

Section — A Objective Type


1. What is a joint stock company?
2. Define joint stock company.
3. What are registered companies?
4. What do you understand by companies limited by guarantee?
5. What are unlimited companies?
6. Give the meaning of companies limited by shares.
Module Ten • Indian Companies Act, 2013 409

7. Define a government company.


8. What do you understand by foreign companies?
9. What is a holding company?
10. Give the meaning of subsidiary company.
11. Define a public company.
12. Define a private company.
13. What is prospectus?
14. What is Memorandum of Association of a company?
15. What do you understand by Articles of Association?
16. State the stages in the formation of a company.
17. What is certificate of incorporation?
18. Who is a promoter?
19. What is minimum subscription?
20. What is allotment of shares?
21. What is statement in lieu of prospectus?
22. What is compulsory winding up?
23. What is voluntary winding up?
24. What is winding up subject to court’s supervision?
25. What are public sector enterprises?
26. Mention any two objectives of government undertakings.
27. State the ownership pattern of public enterprises.
28. What is a departmental undertaking?
29. What is a government company?
30. What are statutory corporations?
31. What are central boards?
32. What is Initial Public Offer (IPO) ?
33. What is Book Building ?
34. What is floor price ?
35. Name the two advantages of issuing IPO.
36. List the companies that issued IPO recently.

Section — B Analytical Type


1. State the features of a joint stock company.
2. Distinguish between Memorandum of Association and Article of Association.
3. Briefly explain the promotion stage.
4. State the contents of a prospectus and what purpose does it serve?
5. What are Articles of Association? Mention its content.
6. What is minimum subscription? Bring out its importance.
7. What are the conditions of allotment?
8. What is compulsory liquidation? Under what circumstances compulsory liquidation
shall take place?
9. Differentiate between compulsory liquidation and voluntary liquidation.
10. Explain the nature of government undertakings.
11. What are the objectives of government undertakings?
12. State the features of state enterprises.
13. Explain the origin of government undertakings.
14. State the features of departmental undertakings.
15. State the features of public corporation.
16. State the features of government company.
17. State the suitability of state enterprises.
18. Explain the merits of issuing IPO.
19. Explain the demerits of issuing IPO.
410 410 Legal Aspect of Business • Module Ten

Section — C Essay Type


1. Define a joint stock company. What are its characteristics? Explain briefly.
2. What are the stages in the formation of a limited company?
3. What is prospectus? State contents.
4. Discuss the contents of the Articles of Association.
5. Distinguish between a private company and a public company.
6. Distinguish between a partnership firm and a joint stock company.
7. Explain the restrictions imposed on a private company.
8. State the advantages and disadvantages of a joint stock company.
9. State the advantages and disadvantages of private company.
10. Explain the different kinds of companies.
11. How can a private limited company be converted into a public limited company?
12. Explain the various types of liquidating a joint stock company.
13. Explain the ownership pattern of public enterprises.
14. Explain the advantages and limitations of government undertakings.
15. Explain the working of departmental undertakings. Also explain their advantages
and limitations.
16. What are statutory corporations? Explain their merits and limitations.
17. What are government companies? What are their advantages and limitations?
18. Discuss the merits and demerits of issuing IPO.
11 MODULE

WOMEN AND HUMAN RIGHTS


AT WORKPLACE

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 AND HUMAN RIGHTS AT WORK PLACE

11.1 INTRODUCTION TO WORKING WOMEN


The status of women in India has been subject to many great changes over
the past few millennia. From a largely unknown status in ancient times through
the low points of the medieval period, to the promotion of equal rights by many
reformers, the history of women in India has been eventful.
Contrary to the common perception, a large percent of women in India work.
The National data collection agencies accept the fact that there is a serious under-
estimation of women's contribution as workers. However, there are far fewer women
in the paid workforce than there are men. In urban India Women have impressive
number in the workforce. As an example at software industry 30% of the workforce
is female. They are at par with their male counterparts in terms of wages, position
at the work place.
India has the • India has the world's largest number of professionally qualified women.
world's largest
number of profes- • India has more female doctors, surgeons, scientists and professors than
sionally qualified
women.
the United States.
India has more fe- • India has more working women than any other country in the world.
male doctors, sur-
geons, scientists
This includes female workers at all levels of skill — from the surgeon
and professors than and the airline pilot to bus conductors and menial laborers.
the United States.

Women Legislation

Laws Related to Working Women in Formal Sector


India has witnessed many social changes post independence. Today, women
have come out of homes and established an identity of their own in different
areas of work. Though most Indian adult women make an economic contribution
in one form or another (including housework, working in family land etc.), much
of their work is not documented. This is because majority of women workforce is
employed in the unorganized sector and working for family is considered as
responsibility which should not be counted. The Economic survey data for 2008-
09 reveals that the overall percentage share of female participation in work was
comparatively low as compared to that of male.
Owing to cultural restrictions and family responsibility, women participation
in the formal economy is limited. Some other concerns that affect working women
relate to gender discrimination, quantum of payment, safety at work place, working
hours and conditions of employment that are sensitive to cultural and religious
bondages as well as family responsibilities. Indian legislature has been active on
this front. Its main focus is on reducing inequality of any sort, and thereby
promoting a fair, non-discriminatory and safe work environment.
Indian political and administrative structure is multi-layered. At the apex is
the central government, under which there are states and local self bodies.
Responsibilities for legislation are also divided accordingly, so that autonomy of
states is protected. In labour legislation, both center and states have powers to
enact suitable legislations.
Module Eleven • Women and Human Rights at Workplace 413

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.

11.2 INTRODUCTION TO HUMAN RIGHTS


Human rights define the value and worth of each person and their relationship Human rights de-
to government and society. They identify standards regarding the quality of life fine the value and
worth of each per-
that each of us can expect to enjoy. son and their rela-
tionship to govern-
ment and society.
Human Rights have the following Qualities:
• Human rights are inherent: human rights do not have to be given to us
by a government to exist. They are our birthright and belong to us simply
because we exist as human beings.
• Human rights are inalienable: human rights cannot be given away or
taken away.
• Human rights are universal: human rights belong to everyone,
irrespective of their sex, race, colour, religion, national or social origin
or other status.
The United Nations (UN) has enshrined many human rights in international
human rights instruments. The Universal Declaration of Human Rights, adopted
in 1948, forms the basis of these documents. Its Preamble says, in part, that the
'recognition of the inherent dignity and of the equal and inalienable rights of all
414 414 Legal Aspect of Business • Module Eleven

members of the human family is the foundation of freedom, justice and peace in
the world.'

Women's Rights are Human Rights


Due to some social structures, traditions, stereotypes and attitudes about
women and their role in society, women do not always have the opportunity and
ability to access and enforce their rights on the same basis as men.
The UN Convention on the Elimination of All Forms of Discrimination Against
Women (CEDAW) is the key international human rights document that seeks to
ensure the enforcement of the human rights of women on an equal basis with
men. CEDAW deals with rights including the right to vote and stand for election,
equal rights to education, protection from discrimination in the work place and
equality before the law.

11.3 GENDER DISCRIMINATION


Gender Inequalities Gender Inequalities refer to the obvious or hidden disparities among
refers to the obvi-
ous or hidden dis-
individuals based on the performance of gender. This problem in simple term is
parities among indi- known as Gender Bias which in simple terms means the gender stratification or
viduals based on making difference between a girl and a boy that is a male or a female. In making
the performance of
gender.
biasness among the gender India has 10th rank out of 128 countries all over the
world which is shameful for us. But this problem is increasing although government
has banned the pre-natal sex examination. In India (in the older times) this problem
is mainly seen in the rural areas because many rural people think that the girl
child is burden on them. But now this is also being seen in the urban areas, i.e.,
in offices, institutions, schools and in society. The afflicted world in which we
live is characterized by deeply unequal sharing of the burden of adversities
between women and men. Gender Inequality exists in most part of the world,
from Japan to Morocco, or from Uzbekistan to United States of America (as stated
earlier).
The UN Convention on the Elimination of all Forms of Discrimination Against
Women (CEDAW) is the key international human rights document that seeks to
ensure the enforcement of the human rights of women on an equal basis with
men. This package focuses on women's rights as human rights in the context of
CEDAW. It focuses on the reality of women's lives and the experiences they have
specifically because of their gender. CEDAW deals with rights including the right
to vote and stand for election, equal rights to education, protection from
discrimination in the work place and equality before the law.

Types of Gender Inequalities


There are many kinds of gender inequality or gender disparity which are as
follows:
1. Natality inequality: In this type of inequality a preference is given for
boys over girls that many male-dominated societies have, gender inequality can
manifest itself in the form of the parents wanting the newborn to be a boy rather
than a girl. There was a time when this could be no more than a wish (a daydream
or a nightmare, depending on one's perspective), but with the availability of modern
techniques to determine the gender of the foetus, sex-selective abortion has become
Module Eleven • Women and Human Rights at Workplace 415

common in many countries. It is particularly prevalent in East Asia, in China and


South Korea in particular, but also in Singapore and Taiwan, and it is beginning
to emerge as a statistically significant phenomenon in India and South Asia as
well.
2. Professional or Employment inequality: In terms of employment as
well as promotion in work and occupation, women often face greater handicap
than men. A country like Japan and India may be quite egalitarian in matters of
demography or basic facilities, and even, to a great extent, in higher education,
and yet progress to elevated levels of employment and occupation seems to be
much more problematic for women than for men. The example of employment
inequality can be explained by saying that men get priority in seeking job than
women.
3. Ownership inequality: In many societies the ownership of property can
also be very unequal. Even basic assets such as homes and land may be very
asymmetrically shared. The absence of claims to property can not only reduce
the voice of women, but also make it harder for women to enter and flourish in
commercial, economic and even some social activities. This type of inequality has
existed in most parts of the world, though there are also local variations. For
example, even though traditional property rights have favoured men in the bulk
of India.
4. Household inequality: There are often enough, basic inequalities in
gender relations within the family or the household, which can take many different
forms. Even in cases in which there are no overt signs of anti-female bias in, say,
survival or son-preference or education, or even in promotion to higher executive
positions, the family arrangements can be quite unequal in terms of sharing the
burden of housework and child care. It is, for example, quite common in many
societies to take it for granted that while men will naturally work outside the
home, women could do it if and only if they could combine it with various
inescapable and unequally shared household duties. This is sometimes called
"division of labour," though women could be forgiven for seeing it as "accumulation
of labour." The reach of this inequality includes not only unequal relations within
the family, but also derivative inequalities in employment and recognition in the
outside world. Also, the established fixity of this type of "division" or "accumulation"
of labour can also have far-reaching effects on the knowledge and understanding
of different types of work in professional circles.
5. Special opportunity inequality: Even when there is relatively little
difference in basic facilities including schooling, the opportunities of higher
education may be far fewer for young women than for young men. Indeed, gender
bias in higher education and professional training can be observed even in some
of the richest countries in the world, in India too. Sometimes this type of division
has been based on the superficially innocuous idea that the respective "provinces"
of men and women are just different.
Discrimination against women regardless of their religion is a matter of grave
concern. The days of patriarchy are at an end. Today women are taking their
rightful place in all walks of life. After the Second World War, we made a transition
to a world of human rights. The United Nations Charter proclaims that all human
beings are born free and equal. Contrast this with the American constitution,
which proclaimed that all men are born free and equal. The Beijing Declaration
also proclaims women's rights as human rights.
416 416 Legal Aspect of Business • Module Eleven

Women's Rights and Wrongs


The All India Muslim Personal Law Board proclaims that triple talaq is a
social evil, but it is equally assertive that this social evil should not be removed
by legislative reform. There is no question of banning the practice. The Muslim
Personal Laws are based on divine inspiration and triple talaq comes from the
same inspiration, that is, Shariat. The Muslims have no powers to amend or abolish
it. So the triple talaq is irrevocable. It is difficult to understand how what is divine
can at the same time be evil.
Among Hindus, polygamy too was rampant. Yet it was abolished first in
Bombay State by the Bombay Prevention of Hindu Bigamous Marriages Act, 1946.
Later, the Hindu Marriage Act, 1955, put an end to polygamy throughout the
country. Marriage among Hindus had been held to be sacrosanct, something that
could not be dissolved — yet the Hindu Marriage Act, 1955, provides for dissolution
of marriage both by husband and wife on the grounds stated in the Hindu Marriage
Act. The Indian Divorce Act has also been recently amended to do away with
inequality between women and men in matters of divorce among Christians.
Untouchability, yet another social evil, was outlawed by Article 17 of our
Constitution.
Social and legal reforms must move together to ensure that all social evils
are banished. It is often said that personal laws are outside the purview of challenge
under Article 13 of the Constitution of India. But this has no constitutional or
legal basis. The fact is that what is inhuman is both unconstitutional and illegal.
A very interesting answer to the argument of the Muslim Personal Law Board lies
in the fact that in several Muslim countries triple talaq has been banned or
restricted. There are several countries where there is a uniform law of divorce, for
all citizens irrespective of their religion. The power to legislate on marriage and
divorce is specifically conferred in entry 5, List III, Schedule VII of our Constitution.

11.4 GENDER EQUALITY


Man and woman are both equal and both plays a vital role in the creation
and development of their families in particular and the society in general. Indeed,
the struggle for legal equality has been one of the major concerns of the women's
movement all over the world. In India, since long back, women were considered
as an oppressed section of the society and they were neglected for centuries.
Gender equality
During the national struggle for independence, Gandhi gave a call of emancipation
also known as gen- of women. He wrote “I am uncompromising in the matter of women's rights. The
der equity, gender difference in sex and physical form denotes no difference in status. Woman is the
egalitarianism, or
sexual equality is
complement of man, and not inferior.” Thus, the first task in post-independent
the goal of the India was to provide a constitution to the people, which would not make any
equality of the gen- distinctions on the basis of sex. The preamble of constitution promises to secure
ders or the sexes,
to all its citizens: “Justice- economical, social, and political.”
stemming from a
belief in the injus-
Gender equality also known as gender equity, gender egalitarianism, or sexual
tice of myriad forms
of gender inequa- equality is the goal of the equality of the genders or the sexes, stemming from a
lity. belief in the injustice of myriad forms of gender inequality.
World bodies have defined gender equality as related to human rights,
especially women's rights, and economic development. UNICEF defines gender
equality as "levelling the playing field for girls and women by ensuring that all
children have equal opportunity to develop their talents."
Module Eleven • Women and Human Rights at Workplace 417

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.

Causes of Poor Social and Economic Condition of Women


The biased mindset of men and, surprisingly enough, women is mainly
The women are the
accountable for the prevailing condition of gender equity in India. The boy child one who eat the
has always been given preference over the girl child. But the sex ratio was least and at the last
maintained even after this step behaviour by the society. The advent of ultrasound in families particu-
larly in rural India.
technology worsened. To contain the declining sex ratio and for curbing the evil Their health and
practice of female feticide, the Government brought into force the Pre-Natal nutrition is not
Diagnostic Techniques (Regulation and Prevention of Misuse) Act on September taken care of that
20, 1994. A survey of ultrasound centers was undertaken during 2004-05 in subsequently re-
sults in the poor
those states where the number of centers registered under the Act is more and health of the new
decline in child sex ratio is also significant to know the number of untrained born babies.
doctors, both allopathic and non-allopathic disciplines, using ultrasound machines
and the purpose for using the same.

Health and Nutrition


The women are the one who eat the least and at the last in families particularly
in rural India. Their health and nutrition is not taken care of that subsequently
results in the poor health of the new born babies. Though the life expectancy rate
of woman is better than their male counterparts, the maternal mortality ratio
seems to be another foul player for the low female-male ratio.
Women and children are more vulnerable to ill health and diseases. Ill health
of women is mainly due to poor nutrition due to gender discrimination, low age at
marriage, risk factors during pregnancy, unsafe, unplanned and multiple
deliveries, limited access to family planning methods and unsafe abortion services.

From Wide to Wider


The sex ratio is one of the key indicators of the status of women in a society. The sex ratio is one
of the key indicators
The child sex ratio for the age group of 0-6years has shown a continuous decline of the status of
over the decades. It has come down significantly from 976 in 1961 to 927 in women in a society.
2001. During the decade 1991-2001, more than 50 points decline has been
observed in the States / UTs of Punjab, Haryana, Chandigarh, Himachal Pradesh.
Declining trend in the child sex ratio has been a matter of concern for all. Some of
the reasons commonly put forward to explain the consistently low levels of sex
ratio are: son preference; neglect of the girl child resulting in higher mortality at
younger age; female infanticide; female foeticide; maternal mortality; and male
bias in enumeration of population.
418 418 Legal Aspect of Business • Module Eleven

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.

11.5 HARASSMENT OF WOMEN IN ORGANISATIONS

Sexual Harassment at Work Defined


Supreme Court defines sexual harassment as and includes such unwelcome
sexually determined behaviour such as —
• Physical contact
• A demand or request for sexual favours
• Sexually coloured remarks
• Showing pornography
• Any other unwelcome physical, verbal or non-verbal conduct of a sexual
nature that is Leering, dirty jokes, sexual remark about a person's body
and the like.
The Supreme Court directive has provided a legitimate space for surfacing of
hidden realities of sexual harassment at work place in which earlier only victim-
blaming, witch-hunting and black-mailing flourished.
No woman em- No woman employee at a work place shall be subjected to sexual harassment
ployee at a work
place shall be sub-
including unwelcome sexually determined behaviour, physical contact, advances,
jected to sexual ha- sexually coloured remarks, showing pornography, sexual demand, request for
rassment including sexual favours or any other unwelcome conduct of sexual nature whether verbal,
unwelcome sexu-
ally determined
textual, physical, graphic or electronic or by any other actions, which may include—
behaviour, physical
• implied or overt promise of preferential treatment in employment; or
contact, advances.
• implied or overt threat of detrimental treatment in employment; or
• implied or overt threat about the present or future employment status;
• conduct which interferes with work or creates an intimidating or offensive
or hostile work environment; or
• humiliating conduct constituting health and safety problems.

Work Place Harassment Defined


Work place harass- Work place harassment is when someone harasses a worker while he or she
ment is when some-
one harasses a
is doing his or her job, or on his or her way to or from work. A harasser can be
worker while he or anyone the worker come in contact with because of his or her work. That person
she is doing his or might be a:
her job, or on his or
her way to or from • boss;
work.
• supervisor;
Module Eleven • Women and Human Rights at Workplace 419

• 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.

I saw one of the instructors at our school fondle a female instructor at a


Christmas party. He grabbed her on the buttocks and pinched her breasts. She
clearly did not want him to do this. I considered it sexual harassment. I urged
the woman to complain. She did not. Two other women and I reported what we
saw. The man was in a position of responsibility and trust, and the school
considered that the incident showed that he was not fit to carry out his duties.
He was demoted.
— Anonymous, USA

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.

Noteworthy complaints of Sexual Harassment at Work place in India


• IAS officer in Chandigarh Rupan Deo Bajaj against the Super Cop K.P.S.
Gill
• An activist of All India Democratic Women's Association against
Environment Minister in Dehradun
• An airhostess against her colleague Mahesh Kumar Lala in Mumbai
• An IAS officer in Thiruvanathpuram against the state minister

Before 1997, women experiencing sexual harassment at work place (SHW)


had to lodge complaint under the Indian Penal Code Section 354 that deals with
'criminal assault of women to outrage women's modesty' and Section 509 that
punishes an individual/individuals for using 'word, gesture or act intended to
insult the modesty of a woman.' These sections left interpretation of 'outraging
women's modesty' to the discretion of the police officer.
In 1997 the Supreme Court passed the landmark judgment in the Vishakha
case laying down guidelines to be followed by establishments in dealing with
complaints of sexual harassment. The Court stated that these guidelines were to
be implemented until legislation is passed to deal with the issue.
Pursuant to this, the Government of India requested the National Commission
of Women (NCW) to draft the legislation. A number of issues were raised regarding
the NCW draft produced, and ultimately a Drafting Committee was set up to make
a fresh draft. A number of women's organisations are part of this Committee,
including, from Mumbai, Majlis. Majlis was asked to make the draft. Some women's
organisations and women lawyers associated with Trade Unions in Mumbai have
collectively worked on the draft with Majlis. Particular concerns while drafting
have been to include the unorganized sector and to incorporate provisions of
labour law.

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

Here are some examples of work place behaviour:


• a man puts his arm around a woman at work.;
• someone tells an offensive joke;
• someone says "You look great," or "Your hair looks terrific," or "Did you
get any last night?"
These may or may not be examples of harassment. It depends on the situation.
Where two people are friends, a comment like "your hair looks terrific" could be a
compliment. If the same comment is made by a stranger on the street, it feels
very different. If female worker's boss leans over her desk and whispers the
comment in her ear while she is working, it feels different again. The important
questions are: does she feel comfortable with this person making this comment?
and does he has any reason for believing that his comments are acceptable and
welcome?

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.

Right to a Safe Work Environment


The worker has the right to work in an environment that is free from
harassment. Employers are responsible for providing this to all workers. The worker
has the right to expect the employer to take her concerns seriously. It is against
the law for anyone she come in contact with on the job to harass. It is against the
422 422 Legal Aspect of Business • Module Eleven

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.

Is Work Place Harassment Against the Law?


Sometimes it is. If someone's behaviour is making the female worker
uncomfortable, she should not keep it to herself, she may not choose to do anything
else, but tell someone about it.
At some time in one's lives, everyone has to put up with people he or she
does not like very much. Some bosses are not very good at managing staff. They
can make the work place unpleasant or even miserable. That does not always
mean their behaviour is against the law.

Effects of Sexual Harassment on Organizations


• Decreased productivity and increased team conflict
• Decrease in success at meeting financial goals (because of team conflict)
• Decreased job satisfaction
• Loss of staff and expertise from resignations to avoid harassment or
resignations/firings of alleged harassers; loss of students who leave
school to avoid harassment
• Decreased productivity and/or increased absenteeism by staff or
students experiencing harassment
• Increased health care costs and sick pay costs because of the health
consequences of harassment
• The knowledge that harassment is permitted can undermine ethical
standards and discipline in the organization in general, as staff and/or
students lose respect for, and trust in, their seniors who indulge in, or
turn a blind eye to, sexual harassment
• A company's or school's image can suffer Legal costs if the problem is
ignored and complainants take the issue to court.(Boland 1990)
Module Eleven • Women and Human Rights at Workplace 423

THE PROTECTION OF WOMEN AGAINST SEXUAL HARASSEMENT AT WORK


PLACE ACT, 2007

Objective of the Act


To provide for prevention and redressal of sexual harassment of women at
work place and for matters connected therewith or incidental thereto.

Important Terms in the Act


Aggrieved woman means any woman employee against whom any act of
sexual harassment is alleged to have been committed;
Employee means a person employed at a workplace for any work on regular,
temporary, ad-hoc or daily wage basis, either directly or by or through an agent,
including a contractor, with or without the knowledge of the principal employer,
whether for remuneration or not, or working on a voluntary basis or otherwise,
whether the terms of employment are express or implied and includes a domestic
worker, a co-worker, a contract worker, probationer, trainee, apprentice or by
any other name called;
Employer means (i) in relation to any department, organisation, undertaking,
establishment, enterprise, institution, office, branch or unit of the appropriate
Government or a local authority, the head of that department, organisation,
undertaking, establishment, enterprise, institution, office, branch or unit or such
other officer as the appropriate Government or the local authority, as the case
may be, may by an order specify in this behalf; (ii) in any work place not covered
under clause (i), any person responsible for the management, supervision and
control of the work place;
Local Committee means the Local Complaints Committee constituted under
section 6;
Work Place Means,
• any department, organisation, undertaking, establishment, enterprise,
institution, office, branch or unit which is established, owned, controlled
or wholly or substantially financed by funds provided directly or
indirectly by the appropriate Government or the local authority or a
Government company or a corporation or a co-operative society;
• any private sector organisation or a private venture, undertaking,
enterprise, institution, establishment, society, unit or service provider
carrying on commercial, professional, vocational, educational, industrial
or financial activities including production, supply, sale, distribution
or service;
• a house or dwelling place;
• and includes any place visited by the employee arising out of, or during
and in the course of, employment;
• "Unorganized Sector" which shall come within the meaning of
"workplace", means all private unincorporated enterprises including own
account enterprises engaged in any agriculture, industry, trade and/or
business and includes sectors as mentioned in the schedule, being
illustrative.
424 424 Legal Aspect of Business • Module Eleven

SALIENT FEATURES OF THE PROTECTION OF WOMEN AGAINST SEXUAL


HARASSEMENT AT WORKPLACE ACT
Chapter 1 : It extends to the whole of India. Short title, extent and
commencement.
Chapter 02 : Constitution of Committees, Internal Complaint Committee,
Chapter 03 : Complaint of sexual harassment, conciliation,
Chapter 04 : Enquiry into complaint, action during pendency of enquiry,
enquiry report, Punishment for false or malicious complaint and false evidence,
Determination of compensation, Appeal.
Chapter 05: Duties of the employer,
Chapter 06: Miscellaneous, Committee to submit annual report, Employer to
include information in annual report,

GENDER INEQUALITY IN THE WORK PLACE


Women are, and have been, entering the work place in rapid numbers.
Although some women may face work place discrimination, evidence shows that
middle- and upper-class women are prospering.
When talking about women in the work place, often the term "glass ceiling" is
used. It refers to the imaginary career barrier that seemingly impedes a woman's
ability to rise to the top ranks of her profession, while men effortlessly continue
up in the ranks.

11.6 TYPES OF HARASSMENTS


Sexual harassment is any unwanted attention of a sexual nature, like remarks
about one’s looks or personal life. Sometimes these comments sound like
compliments, but they make you feel uneasy. Sexual harassment can include:
• degrading words or pictures (like graffiti, photos, or posters);
• physical contact of any kind;
• sexual demands.
Sexual harassment includes such unwelcome sexually determined behaviour
as physical contacts and advances, sexually coloured remarks, showing
pornography and sexual demands, whether by words or actions. Such conduct
can be humiliating and may constitute a health and safety problem; it is
discriminatory when the woman has reasonable grounds to believe that her
objection would disadvantage her in connection with her employment, including
recruiting or promotion, or when it creates a hostile working environment. Effective
complaints, procedures and remedies, including compensation, should be
provided.
Racial harassment is any action that expresses or promotes racial hatred
and stereotypes. It can be obvious or subtle. It can include:
• spoken or written putdowns;
• gestures;
Module Eleven • Women and Human Rights at Workplace 425

• jokes;
• other unwanted comments or acts.

THE PROTECTION OF WOMEN AGAINST SEXUAL HARASSEMENT AT WORK


PLACE ACT, 2007

11.7 FUNDAMENTAL RIGHTS RELATING TO WOMEN


Sexual harassment in India is termed "Eve teasing" and is described as:
unwelcome sexual gesture or behaviour whether directly or indirectly as sexually
coloured remarks; physical contact and advances; showing pornography; a demand
or request for sexual favours; any other unwelcome physical, verbal/non-verbal
conduct being sexual in nature. The critical factor is the unwelcomeness of the
behaviour, thereby making the impact of such actions on the recipient more
relevant rather than intent of the perpetrator. According to India's constitution,
sexual harassment infringes the fundamental right of a woman to gender equality
under Article 14 of the Constitution of India and her right to life and live with
dignity under Article 21 of the Constitution. Although there is no specific law
against sexual harassment at work place in India but many provisions in other
legislations protect against sexual harassment at workplace, such as Section 354,
IPC deals with assault or criminal force to a woman with the intent to outrage her
modesty, and Section 509, IPC deals with word, gesture or act intended to insult
the modesty of a woman.

Constitutional Provisions for Indian Women


• Equality before the law. Article 14
• No discrimination by the State on the grounds only of religion, race,
caste, sex, place of birth or any of these. Article 15(1)
• Special provisions to be made by the State in favour of women and
children. Article 15(3)
• Equality of opportunity for all citizens in matters relating to employment
or appointment to any office under the State. Article 16
• State policy to be directed to securing for men and women equally, the
right to an adequate means of livelihood. Article 39(a)
• Equal pay for equal work for both men and women. Article 39(d)
• Provisions to be made by the State for securing just and humane
conditions of work and for maternity relief. Article 42
"Human Rights"
• To promote harmony and to renounce practices derogatory to the dignity means the rights
relating to life, li-
of women. Article 51(A) (e) berty, equality and
dignity of the indi-
vidual guaranteed
11.8 NATURE OF HUMAN RIGHTS by the Constitution
or embodied in the
According to the Protection of Human Right Act, 1993 "human rights" means International Co-
the rights relating to life, liberty, equality and dignity of the individual guaranteed venants and en-
forceable by courts
by the Constitution or embodied in the International Covenants and enforceable
in India.
by courts in India. It is necessary and expedient for employers in work places as
426 426 Legal Aspect of Business • Module Eleven

well as other responsible persons or institutions to observe certain guidelines to


ensure the prevention of sexual harassment of women as to live with dignity is a
human right guaranteed by our constitution.
It has been laid down by the Supreme Court that it is the duty of the employer
or other responsible persons in work places or other institutions to prevent or
deter the Commission of acts of sexual harassment and to provide the procedure
for the resolution, settlement or prosecution of acts of sexual harassment by
taking all steps required.

11.9 NATIONAL HUMAN RIGHTS COMMISSION


The National Human Rights Commission (NHRC) of India is an autonomous
statutory body established on October 12, 1993, under the provisions of The
Protection of Human Rights Act, 1993 (TPHRA). The Commission is in conformity
with the Paris Principles — a broad set of principles agreed upon by a number of
nations for the promotion and protection of human rights, in Paris in October
1991.
Over the past eleven years the Commission has endeavoured to give a positive
meaning and a content to the objectives set out in the Protection of Human Rights
Act, 1993. It has moved vigorously and effectively to use the opportunities provided
to it by the Act to promote and protect human rights in the country. While
undertaking the tasks set out in the Protection of Human Rights Act, 1993, the
Commission has noticed several lacunae in the Act over the years. This has been
mentioned in earlier reports and it is emphasized, once again, that there is a
need to review and amend the Act for the proper and effective functioning of the
Commission.
The Universal Declaration of Human Rights adopted by the General Assembly
on 10th December, 1948, was followed by two Covenants — International
Convention on Economic, Social and Cultural Rights (ICESCR) and International
Convention on Civil and Political Rights (ICCPR) in 1966. India signed both these
International Conventions in 1979.
The UN Committee on Economic, Social and Cultural Rights (CESCR) is taking
a robust attitude towards the practical implementation of these rights under the
ICESCR. This was recognized by the United Nations in 1986 when it acknowledged
the right to development as a human right. The right to development as formulated
in the 1986 U.N. Declaration is a synthesis of the two sets of rights.
In democratic societies fundamental human rights and freedoms are put under
the guarantee of law and therefore, their protection becomes an obligation of
those who are entrusted with the task of their protection. These rights are broadly
classified into civil and political rights on the one hand and economic, social and
cultural rights on the other. While the former are more in the nature of injunction
against the authority of the State from encroaching upon the inalienable freedoms
of an individual, the latter are demands on the State to provide positive conditions
to capacitate the individual to exercise the former. The object of both sets of
rights is, to make an individual an effective participant in the affairs of the society.
Unless both sets of rights are available, neither full development of the human
personality can be achieved nor true democracy can be said to exist.
Module Eleven • Women and Human Rights at Workplace 427

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.

Composition and Appointment


Sections 3 and 4 of The Protection of Human Rights Act lay down the rules
for appointment to The National Human Rights Commission. The Chairperson
and members of the national human rights commission are appointed by the
President of India, on the recommendation of a committee comprising of—
• The Prime Minister: Chairperson
• The Speaker of the House of the People: Member
• The Minister-in-charge of the Ministry of Home Affairs in the Government
of India: Member
428 428 Legal Aspect of Business • Module Eleven

• The Leader of the Opposition in the House of the People: Member


• The Leader of the Opposition in the Council of States: Member
• The Deputy Chairman of the Council of States: Member
The National Human Rights Commission consists of:
• A Chairperson who has been a Chief Justice of the Supreme Court of
India
• One Member who is, or has been, a Judge of the Supreme Court of India
• One Member who is, or has been, the Chief Justice of a High Court
• Two Members to be appointed from among persons having knowledge of,
or practical experience in, matters relating to 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

Whenever a criminal goes unpunished, it is the society at large which suffers


because the victims become demoralized and criminals encouraged. It therefore,
becomes duty of the Court to use all its powers to unearth the truth and render
justice so that the crime is punished.
It is, therefore, imperative in the interests of justice for the Hon'ble Supreme Article 142 of the
Court, in exercise of its powers under Article 142 of the Constitution, to lay down Constitution, to lay
down guidelines
guidelines and directions in relation to protection of witnesses and victims of and directions in
crime in criminal trials which can be adhered to both by the prosecuting and law relation to protec-
enforcement agencies as well as the subordinate judiciary. This is essential in tion of witnesses
and victims of crime
order to enhance the efficacy of the criminal justice delivery system. in criminal trials
which can be ad-
The Commission has also filed a separate application under Section 406 hered to both by the
Cr.P.C. before the Supreme Court for transfer of four other serious cases, namely, prosecuting and law
the Godhra incident, Chamanpura (Gulburga society) incident, Naroda Patiya enforcement agen-
cies as well as the
incident and the Sadarpura case in Mehsana district, for their trial outside the subordinate judi-
State of Gujarat. ciary.

11.10 UN CONVENTIONS ON HUMAN RIGHTS


The morals and values of human rights can be traced through the history of
religious beliefs and cultures around the world. European philosophers of the
Age of Enlightenment developed theories of natural law that influenced the adoption
of documents such as the Bill of Rights of England, the Bill of Rights in the United
States, and the Declaration of the Rights of Man and of the Citizen in France.
National and International pressure for an international bill of rights had
been building throughout World War II, In his 1941 State of the Union address
US president Franklin Roosevelt called for the protection of what he termed the
"essential" Four Freedoms: freedom of speech, freedom of conscience, freedom
from fear and freedom from want, as its basic war aims. This has been seen as
part of a movement of the 1940s that sought to make human rights part of the
conditions for peace at the end of the war. The United Nations Charter "reaffirmed
faith in fundamental human rights, and dignity and worth of the human person"
and committed all member states to promote "universal respect for, and observance
of, human rights and fundamental freedoms for all without distinction as to race,
sex, language or religion."
The morals and va-
When the atrocities committed by Nazi Germany became public knowledge lues of human
around the world after World War II, the consensus within the world community rights can be traced
was that the United Nations Charter did not sufficiently define the rights it through the history
of religious beliefs
referenced. A universal declaration that specified the rights of individuals was and cultures around
necessary to give effect to the Charter's provisions on human rights.[6] the world.

Drafting

Drafting of the Universal Declaration of Human Rights


Canadian John Peters Humphrey was called upon by the United Nations
Secretary-General to work on the project and became the Declaration's principal
drafter. At the time Humphrey was newly appointed as Director of the Division of
Human Rights within the United Nations Secretariat. The Commission on Human
Rights, a standing body of the United Nations, was constituted to undertake the
430 430 Legal Aspect of Business • Module Eleven

work of preparing what was initially conceived as an International Bill of Rights.


The membership of the Commission was designed to be broadly representative of
the global community with representatives of the following countries serving:
Australia, Belgium, Byelorussian Soviet Socialist Republic, Chile, China, Cuba,
Egypt, France, India, Iran, Lebanon, Panama, Philippines, United Kingdom, United
States, Soviet Union, Uruguay and Yugoslavia.

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."

Preamble of the Universal Declaration on Human Rights


The Universal Declaration begins with a preamble consisting of seven
paragraphs followed by a statement "proclaiming" the Declaration.
Each paragraph of the preamble sets out a reason for the adoption of the
Declaration. The first paragraph asserts that the recognition of human dignity of
all people is the foundation of justice and peace in the world. The second paragraph
observes that disregard and contempt for human rights have resulted in barbarous
acts which have outraged the conscience of mankind and that the four freedoms:
freedom of speech, belief, freedom from want, and freedom from fear — which is
"proclaimed as the highest aspiration" of the people. The third paragraph states
that so that people are not compelled to rebellion against tyranny, human rights
should be protected by rule of law. The fourth paragraph relates human rights to
the development of friendly relations between nations. The fifth paragraph links
the Declaration back to the United Nations Charter which reaffirms faith in
fundamental human rights and dignity and worth of the human person. The sixth
paragraph notes that all members of the United Nations have pledged themselves
to achieve, in cooperation with the United Nations, the promotion of universal
respect for and observance of human rights and fundamental freedoms. The
seventh paragraph observes that "a common understanding" of rights and freedoms
is of "the greatest importance" for the full realization of that pledge.
These paragraphs are followed by the "proclamation" of the Declaration as a
"common standard of achievement" for "all peoples and all nations", so that "all
individuals" and "all organs of society" should by teaching and education, promote
respect for these rights and freedoms and by progressive measures, national and
international, secure their universal and effective recognition and observance.

The Preamble is:


• Whereas recognition of the inherent dignity and of the equal and
inalienable rights of all members of the human family is the foundation
of freedom, justice and peace in the world,
• Whereas disregard and contempt for human rights have resulted in
barbarous acts which have outraged the conscience of mankind, and
432 432 Legal Aspect of Business • Module Eleven

the advent of a world in which human beings shall enjoy freedom of


speech and belief and freedom from fear and want has been proclaimed
as the highest aspiration of the common people,
• Whereas it is essential, if man is not to be compelled to have recourse,
as a last resort, to rebellion against tyranny and oppression, that human
rights should be protected by the rule of law,
• Whereas it is essential to promote the development of friendly relations
between nations,
• Whereas the peoples of the United Nations have in the Charter reaffirmed
their faith in fundamental human rights, in the dignity and worth of
the human person and in the equal rights of men and women and have
determined to promote social progress and better standards of life in
larger freedom,
• Whereas Member States have pledged themselves to achieve, in co-
operation with the United Nations, the promotion of universal respect
for and observance of human rights and fundamental freedoms,
• Whereas a common understanding of these rights and freedoms is of
the greatest importance for the full realization of this pledge,
• Now, Therefore THE GENERAL ASSEMBLY proclaims THIS UNIVERSAL
DECLARATION OF HUMAN RIGHTS as a common standard of
achievement for all peoples and all nations, to the end that every
individual and every organ of society, keeping this Declaration constantly
in mind, shall strive by teaching and education to promote respect for
these rights and freedoms and by progressive measures, national and
international, to secure their universal and effective recognition and
observance, both among the peoples of Member States themselves and
among the peoples of territories under their jurisdiction.

Human Rights set out in the Declaration


The following reproduces the articles of the Declaration which set out the
specific human rights that are recognized in the Declaration.

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

2. Education shall be directed to the full development of the human


personality and to the strengthening of respect for human rights and
fundamental freedoms. It shall promote understanding, tolerance and
friendship among all nations, racial or religious groups, and shall further
the activities of the United Nations for the maintenance of peace.
3. Parents have a prior right to choose the kind of education that shall be
given to their children.

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.

Commemoration: International Human Rights Day

Human Rights Day


The adoption of the Universal Declaration is a significant international
commemoration marked each year on 10 December and is known as Human
Rights Day or International Human Rights Day. The commemoration is observed
by individuals, community and religious groups, human rights organisations,
parliaments, governments and the United Nations. Decadal commemorations are
often accompanied by campaigns to promote awareness of the Declaration and
human rights. 2008 marked the 60th anniversary of the Declaration and was
Module Eleven • Women and Human Rights at Workplace 437

accompanied by year long activities around the theme "Dignity and justice for all
of us".

Significance and Legal Effect of Human Rights

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

men everywhere." 10 December 1948. In a speech on 5 October 1995, Pope John


Paul II called the UDHR “one of the highest expressions of the human conscience
of our time.” And in a statement on 10 December 2003 on behalf of the European
Union, Marcello Spatafora said that "it placed human rights at the centre of the
framework of principles and obligations shaping relations within the international
community.

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.

Property Rights Criticism


Some Libertarians have criticized the Declaration for its inclusion of positive
rights that they believe must be provided by other’s through forceful extraction
(for example taxation) thereby negating others rights. Libertarian natural law
theorist Frank Van Dun said of the document:
Module Eleven • Women and Human Rights at Workplace 439

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?

The Right to Refuse to Kill


Groups such as Amnesty International and War Resisters International have
advocated for "The Right to Refuse to Kill" to be added to the UDHR. War Resisters
International has stated that the right to conscientious objection to military service
is primarily derived from, but not yet explicit in, Article 18 of the UDHR: the right
to freedom of thought, conscience and religion.
Steps have been taken within the UN to make this right more explicit (see
Conscientious Objector); but those steps have been limited to secondary, more
"marginal" UN documents. That is why Amnesty International would like to have
this right brought "out of the margins" and explicitly into the primary document,
namely, the UDHR itself.
To the rights enshrined in the Universal Declaration of Human Rights one
more might, with relevance, be added. It is "The Right to Refuse to Kill."
— Assistant Secretary General of the United Nations, and Nobel
Peace Laureate, Sean MacBride, 1974 Nobel Lecture

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

What is an International Human Rights Treaty?


An international hu- An International Human Rights Treaty (sometimes called a 'convention') is a
man rights treaty
(sometimes called
collection of human rights standards that has been put into the form of an
a 'convention') is a agreement between different countries.
collection of human
rights standards To be bound by a treaty, a government must take formal steps to become a
that has been put 'party' to it. This will generally either be a two-step process (comprising signature,
into the form of an
followed by ratification), or a single-step process, called 'accession'. Both processes
agreement between
different countries. ultimately make the country 'a party' to the treaty, and bind the government to
the treaty's terms.
Governments agree to ensure that all people living within their jurisdiction
are able to access and enforce the rights outlined in the treaty. This often involves
becoming subject to UN scrutiny. Scrutiny might be by special committees set up
under the treaty, other governments, the community sector, or individuals who
also monitor a government's actions and pressure them to protect the rights
outlined in the treaty.
Australia's signing a human rights treaty does not automatically make the
human rights it contains part of our domestic law. Further legislative steps must
be taken to give a treaty legal force in Australia, including the enactment, prior to
ratification or accession, of any domestic legislation necessary to implement the
treaty.
The Australian Government is responsible for becoming party to treaties and
participating in UN processes. Australian, State and Territory governments do
not participate directly in these processes, however, they are often instrumental
in giving effect to the human rights contained in treaties to which Australia is a
party.

Implementing Human Rights


Even though human rights exist as a birthright, to be effective they need to
be supported by law and able to be used in practice. This happens in many ways:
through the UN, through our governments, the police, our employers, our families,
our friends and through us as individuals. Our own awareness and support for
human rights is one of the most important ways to enforce them. Governments
however remain accountable for ensuring the implementation of convention
obligations within their countries.
Governments can implement an international human rights treaty in a range
of ways. Creating new laws, while critical, does not always lead directly to change
in the social practices and attitudes which underpin human behaviour and lead
to human rights violations. Governments aim to reduce violations in the following
ways:
• creating laws that make human rights violations illegal under Australian
law
• adopting policies and programs to ensure people have access to their
human rights
• ensuring that human rights are properly enforced, including providing
resources and assistance, access to courts and appropriate punishment
for violations
• providing education and awareness raising programs about human rights.
Module Eleven • Women and Human Rights at Workplace 441

Convention on the Elimination of All Forms of Discrimination Against


Women (CEDAW)
Ultimately we have to be judged not by our highest ambitions and
achievements, but by our ability to raise from the lowest level those whose needs
that are greatest. That is the way I would like Australia, and every other country,
to be judged in the United Nations. [Australia's Justice Elizabeth Evatt — Member
of the CEDAW Committee 1984-92, Chair of the CEDAW Committee 1989-90 —
highlighting the importance of CEDAW to developed countries.]
The Convention on the Elimination of All Forms of Discrimination Against
Women (CEDAW) was adopted in 1979 by the UN General Assembly and entered
into force on 3 September 1981. Australia has been a party to CEDAW since 17
August 1983.
CEDAW has often been described as an 'international bill of rights' for women.
Enshrined within its preamble and 30 Articles are key principles of equality and
an agenda for national action to end discrimination against women. It is based on
the belief that basic human rights include the true equality of men and women.
As of November 2008, 185 countries are parties to CEDAW.
The rights enshrined in CEDAW broadly cover many aspects of women's lives.
Rights include political participation, health, education, employment, marriage,
family relations and equality before the law.

Rights contained in CEDAW


CEDAW defines discrimination against women as:
any distinction, exclusion or restriction made on the basis of sex which
has the effect or purpose of impairing or nullifying the recognition, enjoyment
or exercise by women, irrespective of their marital status, on a basis of equality
of men and women, of human rights and fundamental freedoms in the political,
economic, social, cultural, civil or any other field. (Article 1)
In becoming party to CEDAW, Australia committed itself to being a society
that promotes policies, laws, organisations, structures and attitudes that ensure
women are given the same rights as men. CEDAW facilitates this by promoting
non-discriminatory practices in the following areas:

Law, Policy and Prejudices


Article 2 of CEDAW urges parties to CEDAW to work towards eradicating
discrimination against women, including by introducing new laws or policies,
changing existing discriminatory laws and providing sanctions for discrimination
where appropriate.
Article 3 of CEDAW requires parties to promote actively women's full
development and advancement, so they can enjoy human rights and fundamental
freedoms on the same basis as men.
Article 4 of CEDAW allows temporary special measures that favour women,
on the basis that they are designed to speed up achievement of equality.
Article 5 of CEDAW requires parties to address and change social and cultural
patterns that reinforce the stereotyping of women and traditional gender roles, or
that promote the relative superiority or inferiority of either of the sexes.
442 442 Legal Aspect of Business • Module Eleven

Trafficking and Exploitation of Prostitution


Article 6 of CEDAW requires parties to take all appropriate measures to
suppress all forms of trafficking of women and exploitation of prostitution of women.
It does not intend to prohibit prostitution but to address problems of exploitation
of women through prostitution.

Politics and Public Life


Article 7 of CEDAW sets out women's right to vote, to stand for election, to be
involved in formulating government policy and to actively participate in non-
government organisations (NGOs) and other bodies concerned with the public
and political life of the country, such as political parties and lobby groups.
Article 8 of CEDAW states that women should have the same opportunities
as men to represent their countries internationally and be involved in the work of
international organisations.

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.

Education and Training


Article 10 of CEDAW urges parties to ensure that women have the same
opportunities as men in all aspects of education and training — from kindergarten
to tertiary education. Women and girls should have access to the same curricula,
professional staff and programs, especially those aimed at reducing any existing
gender gaps within education, and opportunities to benefit from the same
scholarships and study grants as men. Governments are required to ensure that
all education is free from stereotypical concepts of the roles of men and women.

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.

Economic Life, Sport and Culture


Article 13 of CEDAW expressly requires that women have equal access to
family benefits, forms of financial credit, including bank loans and mortgages,
and the same rights as men to participate in recreational activities, sports and
cultural life.

Women Living in Remote and Rural Areas


Article 14 of CEDAW requires all parties to take all appropriate measures to
ensure that the particular needs of rural women are met and to ensure rural
women have access to health care services, training and employment opportunities,
and social security schemes.

Equality Before the Law


Article 15 of CEDAW requires parties to treat women and men equally in all
matters relating to the law, including civil matters, contractual matters, and
property ownership.

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.

Violence Against Women


Gender-based violence is a serious form of discrimination. While CEDAW
does not contain an explicit reference to violence against women, the CEDAW
Committee has issued a General Recommendation which states that violence
directed against a women because she is woman or violence that affects women
disproportionately is recognised and addressed as discrimination under the
convention.
Parties to CEDAW therefore have an obligation under CEDAW to take positive
steps to eliminate all forms of violence against women. The CEDAW Committee
asks countries to provide information in their regular reports about legislation
and other measures it uses to protect women from violence, as well as the support
services available to women.
444 444 Legal Aspect of Business • Module Eleven

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.

Paid Maternity Leave


When the Australian Government ratified CEDAW in 1984, it placed a
reservation to CEDAW Article 11(2). This Article stipulates that countries who are
party to CEDAW must introduce paid maternity or comparable social benefits
which ensure that women do not lose employment, seniority or social benefits.

11.11 JOB RESERVATIONS IN PRIVATE SECTOR


"Economic empow- For sometime past there has been a persistent demand from Dalits that law
erment of the poor, should provide reservation for scheduled castes and scheduled tribes in business
in particular the
enterprises and in works funded by the Governments and Public Sector.
Scheduled Castes
and Scheduled This question has assumed urgency because of undesirable haste by which
Tribes, as is en-
joined under Article public sector is being dismantled, with the inevitable consequence of loss of
46, is a constitu- opportunities for employment for large segment of Dalits.
tional objective as
basic human and It is no longer in dispute that because of the caste system large portion of the
fundamental right population in our country have been deprived of equal opportunity in various
to enable the
labourer, Sche- walks of life. Pt. Nehru even in 1930 wrote "therefore, not only must equal
duled Castes and opportunities be given to all, but special opportunities for educational, economic
Scheduled Tribes to and cultural growth must be given to backward groups so as to enable them to
raise their eco-
nomic empower-
catch up with those who are ahead of them."
ment."
Our Supreme Court has emphasized that the Preamble of the Constitution
which directs the State to secure to all citizens justice will remain a myth unless
first economic justice is guaranteed to all.
In this context, it should not be forgotten that hitherto for centuries, there
have been cent per cent reservations in practice in all fields, in favour of the high
castes and classes, to the total exclusion of others. It was a purely caste and
class-based reservation.
The employment — whether private or public - thus, is a means of social
leveling. A deliberately conscious attempt to secure it to those who were designedly
denied the same in the past, is an attempt to do social and economic justice to
them as ordained by the Preamble of the Constitution and also the mandate of
Article 16 of the Constitution.
Our Supreme Court has held that "economic empowerment of the poor, in
particular the Scheduled Castes and Scheduled Tribes, as is enjoined under Article
46, is a constitutional objective as basic human and fundamental right to enable
the labourer, Scheduled Castes and Scheduled Tribes to raise their economic
empowerment."
Module Eleven • Women and Human Rights at Workplace 445

A look around will show the horrendous deprivation in the matter of


employment, notwithstanding the constitution providing for reservation for Dalits
and backward classes. The backlog of vacancies for Dalits even after over 50
years of the Constitution is appalling — thus there is 70% in Group A jobs and
even 45% in D group the lowest job of peons, khallasis etc. In the public sector it
is more shocking being 88%. The backlog of appointments of S.C. and S.T. is
reported to be about a million in various govt. services.
Even now in many places the country tea shops have two tumblers outside,
Social justice is the
and Dalit is expected to wash his own tumbler. bedrock of any de-
mocracy. A society
Such humiliating inhuman behaviour is done because Dalits do not possess shaped and con-
the financial clout to assert their constitutional rights to equality and non- trolled by the ideo-
discrimination. Poverty is so enveloping amongst Dalits that of agricultural labour logy of caste mili-
about 49% are Dalits, thus being denied dignity because without land ownership tates against the
concept of social
there is no respect in rural areas. justice. A fair soci-
ety is possible only
It is for this reason that it is time when similar legislation like USA is essential when hierarchies
so as to give status in society to Dalits. conceived and nur-
tured by the caste
It is essential to ensure social justice and democratise wealth. system are de-
stroyed.
Social justice is the bedrock of any democracy. A society shaped and controlled
by the ideology of caste militates against the concept of social justice. A fair society
is possible only when hierarchies conceived and nurtured by the caste system
are destroyed. Reservations in the fields of education and employment for people
who have been on the wrong end of the caste hierarchy is a constitutional means
to do it.
All this while, the provision for affirmative action in the form of reservations
has been employed only in the public sector. With the State increasingly receding
from the spheres of education and employment generation, it is time the policy of
affirmative action is introduced in the private sector occupying the space. Or
else, the old social order where the upper castes controlled wealth as well as the
means of production and the lower castes took care of jobs that essentially
facilitated the status quo will continue to hold fort in the future too.
A total destruction of caste is possible only when both the ideology as well as
the economic order it created are defeated. Job reservations are a must for the
latter. They are an integral part of the process of democratising the distribution
of wealth.
In today's world, the caste that historically had access to education, power In today's world, the
caste that histori-
and wealth is at an advantage. That is why one can rarely find a dalit or an cally had access to
adivasi among professionals, be it in the infotech sector or any other private sector education, power
industry. and wealth is at an
advantage. That is
A level playing field in the Indian context necessitates the creation of unequal why one can rarely
opportunities favourable to the lower castes. What-happens-to-merit is only an find a dalit or an
adivasi among pro-
argument that seeks to maintain the status quo in favour of the upper castes. fessionals, be it in
the infotech sector
It is also preposterous to argue that merit is the dominant criterion for or any other private
employment in the private sector. sector industry.

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.

Is job reservation in private sector is a Charity or a Social Necessity?


At the outset, the main purpose of the reservation policy was to ensure social
and economic justice; thereby realize the goal of the empowerment of the dalits
and tribals. It can address certain social inequalities that pervade Indian society
for so long. For, these social inequalities leave the so-called low castes deprived
in everything from education to economy. Thus, the policy of job reservations
intends to bring about proportional representation, as it is a mode of distributing
benefits based on the proportion of population that is 15 percent for the Schedule
Castes (SCs) and 7.5 percent for Scheduled Tribes (STs).
Thanks to Dr. B.R. Thanks to Dr. B.R Ambedkar's instrumental role in the constitution making,
Ambedkar's instru- the governments are bound to implement them on the basis of the principle of
mental role in the
constitution mak- distributive justice and compensation for past disadvantages. But then, that was
ing, the govern- confined to only the public sector that had been shrinking over a period of time.
ments are bound to At a time when the number of educated among these unprivileged classes is
implement them on
the basis of the increasing in geometrical progression, their share of jobs in the public sector is
principle of distribu- dwindling on end. This is more so since the last decade and half, all in the name
tive justice and of so-called globalisation and till date.
compensation for
past disadvan- Now that there is some political consensus, as is evident from the latest
tages.
conclave of national leaders of all parties including the Left ones in Delhi recently,
emerging from several quarters, the Central government of all nomenclatures is
under the obligation to implement the job reservations in the private sector too.
Of course, there were several Ambedkar organizations and Dalit-based parties
raised this issue of private reservations for the past decade or so. Since the Upper
class-oriented business class was adamant to concede this measure, no political
party was willing to bulldoze its decision on the private sector. However, thanks
to vote-bank politics, the political parties of all hues are compelled to consider
the serious nature of this demand and thereby echoed with the aspirations of the
Ever since the underprivileged classes.
present United Pro-
gressive Alliance
Ever since the present United Progressive Alliance (UPA) Government at the
(UPA) Government Centre promised to introduce job reservations in the private sector, there were
at the Centre pro- acrimonious reactions from some quarters. In fact, as part of its Common Minimum
mised to introduce
job reservations in
Programme (CMP), the Congress-led political coalition provided this measure in
the private sector, the election manifesto more than one year ago. While there were no serious
there were acrimo- objections raised from the very private sector since then, certain sections are at
nious reactions
great pains to digest it. As usual, a section of media has always been biased
from some quar-
ters. against the downtrodden and dalit communities in this country. Thus, it evoked
sharp reaction from such vested interests in the media and elsewhere.
Module Eleven • Women and Human Rights at Workplace 447

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

11.12 WHITSLE BLOWING

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."

Types of Whistle Blowers


Report misconduct Most whistle blowers are internal whistle blowers, who report misconduct to
to a fellow em-
ployee or superior
a fellow employee or superior within their company. One of the most interesting
within their com- questions with respect to internal whistle blowers is why and under what
pany. circumstances people will either act on the spot to stop illegal and otherwise
unacceptable behaviour or report it. There is some reason to believe that people
are more likely to take action with respect to unacceptable behaviour, within an
organization, if there are complaint systems that offer not just options dictated
Module Eleven • Women and Human Rights at Workplace 449

by the organization, but a choice of options for individuals, including an option


that offers near absolute confidentiality.
External whistle blowers, however, report misconduct to outside persons or External whistle-
blowers, however,
entities. In these cases, depending on the information's severity and nature, report misconduct
whistleblowers may report the misconduct to lawyers, the media, law enforcement to outside persons
or watchdog agencies, or other local, state, or central government. or entities.

Protecting Whistle Blowers in India


During the past decade, scams, swindles, and rip-offs have become a regular
feature of the Indian political and corporate landscape, costing taxpayers, investors
and banks thousands of crores of rupees. Enactment of a Whistle Blowers
Protection Act is even more necessary for India than it was for the U.K. and the
U.S. Together with the Freedom of Information Act it can be a potent tool for
promoting good governance in the country. What we lack at the moment are public
interest groups like the Government Accountability Project and the National Whistle
Blower Centre in the U.S., and the Public Concern At Work in the U.K., to lobby
for whistle blowers' rights and defend employees against retaliation.

Whistle Blowing and Competitive Advantage


Whistle blowing involves a conflict between two competing duties, to protect
the public and to be loyal to the organization. However, given no real mechanism
to deal fully with ethical concerns, an employee may be left with a 3-way choice:
shut up (and take a hard knock on your conscience); get out (on the grounds of
conflicting values); or blow the whistle (and pay for the heavy consequences). The
inadequacies of law fail to give support.
Although there are ways to tackle it, there might still be limitations. If at all
there should be a situation where an employee does not have to blow the whistle
then the organization should ensure such procedures that minimize potential
whistle blowing situations. There is ethical justification of whistle blowing. The
need of the hour is the protection of the whistle blower. At the moment, those
who do blow the whistle are ill-supported and ultimately pay a heavy price for
being the conscience of us all.
The role of whiste blowing is also important with respect to ethical behaviour
as long as there is no mechanism to reduce the need for whistle blowing. If there
is no mechanism, then the encouragement of whistle blowing, seen in the right
perspective, will bring about a positive image of the organization and will be
applauded by the public. This is the beginning of the road to competitive advantage.
This is because the issue of ethics is placed in the forefront of the organization.
On the other hand, unethical practices in organizations will in all probability lead
to its end.

Whistle Blowing A Casualty


Hundreds of people are murdered every day all over India. What makes the
death of Satyendra Dubey so very special? It is surely a combination of a number
of factors.
There is, first of all, the heart-breaking story of Dreams Unfulfilled: the
young Dubey was the bright son every lower middle-class family prays for. He
450 450 Legal Aspect of Business • Module Eleven

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.

Whistle Blowing is a Deadly Affair


Mr. Satyendra Dubey and Mr. S. Manjunath both IIT/IIM graduates, when
they decided to favour the decrepit public sector in India. They exposed corruption
during their work for which both have paid dearly with their lives. Dubey exposed
a huge swindle in the expensive national highway project, and he was killed in
Bihar. Manjunath refused to take bribe to give consent to the adulteration of
petrol at an IOC booth of which he was an employee. These are the new martyrs
of independent India — an India where governance is free from foreign control,
but where the people are still slaves to a corrupt bureaucracy.
Corruption is an accepted facet of life for most Indians — be it bribing the
police, the council head, the hospital nurse or the school clerk. But whistle blowing
is an honourable technique against corruption — by exposing the malpractices in
one's marketplace.
Only some months back, after Satyendra Dubey's murder, that the Indian
Govt. enacted a law protecting whistle blowers and giving them unprecedented
rights. Dubey was honoured posthumously and the Indian Press rattled with his
news for a few weeks after his unjust murder.

PROS AND CONS OF WHISTLE BLOWING

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

• A commitment to take appropriate action


• A guarantee against retaliation
• There are several statutes and legislations that protects Whistle blowing
• Open right to abuse — disgruntled employees can use it to get back at
employees

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

MORE TEETH TO IT:


SOON, SEXUAL HARASSMENT COULD BECOME NON-BAILABLE
The Maharashtra government has proposed to make sexual
harassment offences against women a non-bailable offence. An
announcement to this effect was made by minister of state for home
Ramesh Bagwe in the legislative assembly here on Friday.
The need for a stringent law for offenders in sexual harassment
cases was raised by BJP legislator Sudhir Mungantiwar by way of a
nonofficial Bill. It is observed that people are not scared of bailable offences as
they are confident of getting out on bail. To deal with such a mindset, the
government s h o u l d amend the law and make it a non-bailable offence, he
added.
In his reply, Bagwe admitted that there was need for harsh action against
those involved in such activities. A letter seeking approval to amend the law
has been forwarded to the Union government, he stated. Mungantiwar also
drew the attention of the assembly to the increasing obscene advertisements
aired on television channels and the print media. People get lured by
advertisements which promise friendship through phones or the internet. This
results in huge telephone bills which the victims find difficult to pay. Finally to
arrange the money, the victim gets involved in criminal activities, Mungantiwar
said and demanded a ban on such advertisements.
Bagwe pointed out that laws to prohibit such incidents already exist in the
legal system. Many people have been prosecuted in connection with these
charges.At present I do not have the figures, but I can table them before the
assembly later, he added.
454 454 Legal Aspect of Business • Module Eleven

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

Section — A Objective Type


1. What is gender equality ?
2. What is work place harassment ?
3. What is harassment of women at work place ?
4. Name the fundamental rights of women as given in Indian Constitution ?
5. What are Human rights ?
6. Expand NHRC.
7. What is whistle blowing ?
8. State any two merits of whistle blowing.
9. State any two demerits of whistle blowing.
10. What you mean by job reservation in private sector ?
11. What is gender discrimination ?
12. What is glass ceiling ?
13. Who are internal whistle blowers ?
14. Who are external whistle blowers ?
15. Expand CEDAW.

Section — B Analytical Type


1. Explain the different forms of gender discrimination.
2. Explain the concept gender equality.
3. Explain the nature of human rights.
4. Explain the different types of harassment of women workforce.
5. Bring out the fundamental rights guaranteed to women under Indian Constitution.
6. What are advantages of whistle blowing ?
7. State the disadvantages of whistle blowing.
8. What are the objectives of NHRC?
9. What are the objectives of UN Protocol on human rights?

Section — C Essay Type


1. Bring out in great detail the concepts — Gender Equality and Gender Discrimination
with decided cases.
2. Discuss the different forms of sexual harassment of women at workplace.
3. Describe the fundamental rights guaranteed to women under the Indian Constitution.
4. Explain the functions of NHRC with leading cases.
5. Discuss the salient features of UN Protocol on Human Rights.
6. Is job reservation in private sector feasible — Deliberate.
7. Whistle blowing is both positive and negative. Comment.
8. Bring out the supreme court guidelines on protecting women rights at workplace.
12 MODULE

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

THE ENVIRONMENT PROTECTION ACT, 1986


The Environment (Protection) Act 1986 is a new piece of legislation enacted
by the Government of India after the Bhopal tragedy under article 253 of the
constitution. The purpose of the act is to protect and improve the human
environment and to prevent hazards to human beings, animals, plants and
property. This act enables the central Govt. to co-ordinate the activities of different
Central and State Authorities formed under previous laws such as Water
(Prevention and Control of Pollution) Act 1974, Air (Prevention and Control of
Pollution) Act 1981.

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.

12.2 TYPES OF POLLUTION


The major forms of pollution are listed below along with the particular
pollutants relevant to each of them:

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

Pollutants can be classified as either primary or secondary. Usually, primary


pollutants are substances directly emitted from a process, such as ash from a
volcanic eruption, the carbon monoxide gas from a motor vehicle exhaust or sulfur
dioxide released from factories.
Secondary pollutants are not emitted directly. Rather, they form in the air
when primary pollutants react or interact. An important example of a secondary
pollutant is ground level ozone - one of the many secondary pollutants that make
up photochemical smog.
The release of chemicals and particulates into the atmosphere. Common
gaseous air pollutants include Carbon monoxide (CO), Sulfur dioxide (SO2),
Chlorofluro carbons (CFCs) and Nitrogen oxides (NO) produced by industry and
motor vehicles.
Air pollution comes from both natural and man made sources. Though globally
manmade pollutants from combustion, construction, mining, agriculture and
warfare are increasingly significant in the air pollution equation. Motor vehicle
emissions are one of the leading causes of air pollution Principal stationary
pollution sources include chemical plants, coal-fired power plants, oil refineries,
petrochemical plants, nuclear waste disposal activity, incinerators, large livestock
farms (dairy cows, pigs, poultry,etc.), PVC factories, metals production factories,
plastics factories, and other heavy industry. Agricultural air pollution comes from
contemporary practices which include clear felling and burning of natural
vegetation as well as spraying of pesticides and herbicides.
Air pollution is the presence of materials in air in such concentration which
are harmful to man and his environment. Various causes of air pollution are
shown in Table 12.1:
Table 12.1: Causes of Air Pollution
Category Examples Important pollutants
1. Chemical plants Petroleum refineries, fertilizers, H2S, sulphur oxide, fluorides,
cements, papermills, ceramic clay organic vapours and dust
products, glass manufacture
2. Crop spraying Pesticides and weedicides Organophosphates, chlorinated
hydrocarbons, lead, arsenic
3. Fuel burning Domestic burning, thermal power Sulphur and nitrogen oxides
plants
4. Metallurgy plants Aluminum refineries and steel plant Metal flumes (Pb and Zn)
fluorides and particulates
5. Nuclear device Bomb explosions Radioactive fall out, Sr-90, Cs-
testing 137, C-14 etc.
6. Ore preparations Crushing, grinding and screening Uranium and beryllium dust,
other particulates
7. Spray painting, ink, Printing and chemical separations, Hydrocarbons and other organic
solvent cleansing furniture, dyeing vapours
8. Transportation Cars, trucks, aeroplanes and railways CO, NO, NO2, Pb, smoke, soot,
smoke organic vapours etc.

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.

Types of Water Pollution


Of late one of the biggest concern is the problem of water pollution has.
Water pollution is caused when pollutants spill into a body of water and cause
adverse affects. Basically there are two different types of water pollution as sources.
These sources are listed as
— point sources of pollution and non-point sources of water pollution.
A non-point source of water pollution comes from runoff diverting pollutants
directly into a source of water such as pesticides or fertilizers being washed into
a storm gutter and then being carried away into nearby streams and rivers. A
non-point source of pollution happens when a sewer pipe leaks toxic substances
into a river.
There are many types of water pollution. Herbicides, pesticides and industrial
compounds release chemical pollutants into the water which are very toxic
substances causing pollution. One more type that affects the water systems is
the Organic Pollution. Organic pollution is caused by manure or sewage. The
main source of organic pollutants is from large feed lots and major farming
practices that produce an extremely large amount of wastes.
When organic matter overwhelms a body of water it basically causes the
oxygen to deplete which kills fish and plants. Apart from this, high levels of nitrogen
and phosphates also cause the decrease in oxygen in the water and create "dead
zones" where algae grows in an abundance killing plants and fish.
One other type of water pollution is the Thermal pollution that occurs when
water is used as a coolant near a power plant or industrial facility. The water gets
heated up and then returned at a higher degree than it was when it was taken
out. This in turn causes a decrease in oxygen levels which affects the plants and
marine life. Unlike chemical pollution, organic pollution and thermal pollution,
one more type of water pollution is the ecological pollution that is caused by
nature. Ecological pollution is caused from landslides, dead animals drowning in
the water supply, and volcanic eruptions.
The different types of water pollution come from many different sources such
as—
Module Twelve • Environment Protection Act, 1986 459

• 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.

Types of Soil Pollution


There are many different types of soil pollution, each stemming from different
origins. Each type of soil pollution causes different effects on the ground and can
permanently damage the land for future use.

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

Effects of Noise Pollution


Hearing Problems: Exposure to noise can damage one of the most vital
organs of the body, the ear. Hearing impairment due to noise pollution can
either be temporary or permanent. When the sound level crosses the 70dB
mark, it becomes noise for the ear. Noise levels above 80 decibels produce
damaging effects to the ear. When ear is exposed to extreme loud noise (above
100 decibels) for a considerable period of time, it can cause irreparable damage
and lead to permanent hearing loss.
Cardiovascular Issues: A noisy environment can be a source of heart related
problems. Studies have shown that high intensity sound cause a dramatic rise
in blood pressure as noise levels constrict the arteries, disrupting the blood
flow. The heart rate (the number of heartbeats per minute) also increase. These
sudden abnormal changes in the blood increase the likelihood of cardiovascular
diseases in the long run. Read more on cardiovascular diseases.
Sleep Disturbances: This is one of the noise pollution effects that can
deter your overall well being. Noise can interrupt a good night's sleep, and
when this occurs, the person feels extremely annoyed and uncomfortable. People
deprived of uninterrupted sleep show a sharp dip in their energy levels which
often results into extreme fatigue. This can considerably decrease a person's
ability to work efficiently.
Interference in Verbal Communication: A noisy environment that
produces more than 50-60 decibels simply does not allow 2 people to
communicate properly. Interpreting the speech of a second person becomes
quite difficult and may lead to misunderstandings.
Mental Health Problems: Exposure to loud sound can lead to elevated
stress levels as well as stimulate violent behaviour. A constant noise in the
vicinity can also trigger headaches, make people tense and anxious, and disturb
emotional balance, blood pressure noted above as well as to increased incidence
of coronary artery disease.

12.3 GLOBAL WARMING


Global warming is when the earth heats up (the temperature rises). It happens
when greenhouse gases (carbon dioxide, water vapour, nitrous oxide, and methane)
trap heat and light from the sun in the earth's atmosphere, which increases the
temperature. This hurts many people, animals, and plants. Many cannot take
the change, so they die.
While some would call global warming a theory, others would call it a proven
set of facts. Opinions differ vehemently. Let us consider global warming to be
both a premise that the environment of the world as we know it is slowly, but very
surely increasing in overall air and water temperature, and a promise that if
whatever is causing this trend is not interrupted or challenged life on earth will
dynamically be affected.
The prevailing counter opinion is that all that is presently perceived to be
global warming is simply the result of a normal climactic swing in the direction of
increased temperature. Many proponents of this global warming ideology have
definitive social and financial interests in these claims.
462 462 Legal Aspect of Business • Module Twelve

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.

Causes of Global Warming


The primary cause The primary cause of global warming is Carbon Dioxide emissions. CO2 is
of global warming is
being pumped into our atmosphere at an insane pace; 8 billion tons of CO2 entered
Carbon Dioxide
emissions. the air last year. Of course some of this is due to natural activity such as volcanic
eruptions and people breathing. But the Earth is equipped to easily absorb those
into the normal regenerative process. No, the beginning of global warming was
caused by fossil fuels being burned and emitting plenty of CO2.
Currently in the world 40% of all CO2 emissions are caused by power plants.
These are burning coal, natural gas and diesel fuel. Some power plants burn
garbage. Some burn methane made from garbage. And discounting those super
green electrical generating plants designed to issue negligible pollutants, all of
our power plants let loose into the atmosphere CO2.
33% of all the CO2 sent forth is the product of cars and trucks. Internal
combustion engines burning fossil fuels…gasoline and diesel spew forth a retching
amount of CO2.
3.5% of all CO2 emissions are released from aircraft traveling our friendly
skies. Unfortunately, jets and other aircraft deliver their payload of pollutants
directly into the troposphere.
Global warming is the increase in the average temperature of Earth's near-
surface air and oceans since the mid-20th century and its projected continuation.
Global surface temperature increased 0.74 ± 0.18 °C (1.33 ± 0.32 °F) between the
start and the end of the 20th century. The Intergovernmental Panel on Climate
Change (IPCC) concludes that most of the observed temperature increase since
the middle of the 20th century was very likely caused by increasing concentrations
of greenhouse gases resulting from human activity such as fossil fuel burning
and deforestation. The IPCC also concludes that variations in natural phenomena
such as solar radiation and volcanic eruptions had a small cooling effect after
1950. These basic conclusions have been endorsed by more than 40 scientific
societies and academies of science, including all of the national academies of
science of the major industrialized countries.
Module Twelve • Environment Protection Act, 1986 463

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.

Global Warming and Environment


Global warming is affecting many parts of the world.
Global warming makes the sea rise, and when the sea rises,
the water covers many low land islands. This is a big
problem for many of the plants, animals, and people on
islands. The water covers the plants and causes some of
them to die. When they die, the animals lose a source of
food, along with their habitat. Although animals have a
better ability to adapt to what happens than plants do, they
may die also. When the plants and animals die, people lose two sources of food,
plant food and animal food. They may also lose their homes. As a result, they
would also have to leave the area or die. This would be called a break in the food
chain, or a chain reaction, one thing happening that leads to another and so on.
The oceans are affected by global warming in other ways, as well. Many
things that are happening to the ocean are linked to global warming. One thing
that is happening is warm water, caused from global warming, is harming and
killing algae in the ocean.
Algae is a producer that you can see floating on the top of the water. (A
producer is something that makes food for other animals through photosynthesis,
like grass.) This floating green algae is food to many consumers in the ocean. (A
consumer is something that eats the producers.) One kind of a consumer is
small fish. There are many others like crabs, some whales, and many other
animals. Fewer algae is a problem because there is less food for us and many
animals in the sea.
Global warming is doing many things to people as well as animals and plants.
It is killing algae, but it is also destroying many huge forests. The pollution that
causes global warming is linked to acid rain. Acid rain gradually destroys almost
everything it touches. Global warming is also causing many more fires that wipe
out whole forests. This happens because global warming can make the earth
very hot. In forests, some plant and tree leaves can be so dry that they catch on
fire.
464 464 Legal Aspect of Business • Module Twelve

12.4 DANGEROUS CHEMICALS


Some other chemicals that cause air pollution and are bad for the environment
and people are:
Ozone: Ozone is produced when other pollution chemicals combine. It is the
basic element of smog. It causes many different kinds of health issues dealing
with the lungs. It can damage plants and limit sight. It can also cause a lot of
property damage.
VOCs (volatile organic compounds, smog formers): VOCs are let into the
Ozone is a colour-
less gas found in
air when fuel is burned. This chemical can cause cancer. It can also harm plants.
the upper atmo-
sphere of the Earth
NOx (nitrogen dioxide): This chemical forms smog. It is also formed by
and formed by the burning sources of energy, like gas, coal, and oil, and by cars. This chemical
action of ultraviolet causes problems in the respiratory system (including the lungs). It causes acid
radiation on oxy-
gen.
rain, and it can damage trees. This chemical can eat away buildings and statues.
CO (carbon monoxide): The source of this chemical is burning sources of
energy. It causes blood vessel problems and respiratory failures.
PM-10 (particulate matter): The source of this chemical is plowing and
burning down fields. It can cause death and lung damage. It can make it hard
for people to breathe. The smoke, soot, ash, and dust formed by this chemical
can make many cities dirty.
Sulfur Dioxide: This chemical is produced by making paper and metals.
This chemical can cause permanent lung damage. It can cause acid rain which
kills trees and damages building and statues.
Lead: This chemical is in paint, leaded gasoline, smelters, and in lead storage
batteries. It can cause many brain and nerve damages and digestive problems.

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.

The Ozone Hole


The discovery of the Antarctic "ozone hole" by British Antarctic Survey
scientists Farman, Gardiner and Shanklin (announced in a paper in Nature in
May 1985) came as a shock to the scientific community, because the observed
decline in polar ozone was far larger than anyone had anticipated. Satellite
measurements showing massive depletion of ozone around the south pole were
becoming available at the same time. However, these were initially rejected as
unreasonable by data quality control algorithms (they were filtered out as errors
since the values were unexpectedly low); the ozone hole was detected only in
satellite data when the raw data was reprocessed following evidence of ozone
depletion in in situ observations. When the software was rerun without the flags,
the ozone hole was seen as far back as 1976.

Causes for Ozone Layer Depletion


The discovery of Ozone depletion occurs when the natural balance between the production
the Antarctic and destruction of stratospheric ozone is tipped in favour of destruction. Although
"ozone hole" by
British Antarctic natural phenomena can cause temporary ozone loss, chlorine and bromine released
Survey scientists from man-made compounds such as CFCs are now accepted as the main cause of
Farman, Gardiner this depletion.
and Shanklin (an-
nounced in a paper It was first suggested by Drs. M. Molina and S. Rowland in 1974 that a man-
in Nature in May
1985) came as a
made group of compounds known as the chlorofluorocarbons (CFCs) were likely
shock to the scien- to be the main source of ozone depletion. However, this idea was not taken seriously
tific community, be- until the discovery of the ozone hole over Antarctica in 1985 by the British Antarctic
cause the observed
decline in polar
Survey.
ozone was far
Chlorofluorocarbons are not "washed" back to Earth by rain or destroyed in
larger than anyone
had anticipated. reactions with other chemicals. They simply do not break down in the lower
atmosphere and they can remain in the atmosphere from 20 to 120 years or
more. As a consequence of their relative stability, CFCs are instead transported
into the stratosphere where they are eventually broken down by ultraviolet (UV)
rays from the Sun, releasing free chlorine. The chlorine becomes actively involved
in the process of destruction of ozone. The net result is that two molecules of
ozone are replaced by three of molecular oxygen, leaving the chlorine free to repeat
the process:
Cl + O3 ClO + O2
ClO + O Cl + O2
Module Twelve • Environment Protection Act, 1986 467

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.

Source: Nasa; Shuttle Solar Backscatter Ultraviolet Instrument

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.

Impact of Ozone Layer Depletion on the Oceans


Increasing amounts of UV radiation will have an impact on plankton and
other tiny organisms at the base of the marine food web. These organisms provide
the original food source for all other living organisms in the oceans. Plankton-
phytoplankton as well as zooplankton are highly sensitive to UV radiation, as
they lack the protective UV-B-absorbing layers that higher forms of plants and
animals have. (Phyto = plant. Zoo = animal).
More UV-B radiation reduces the amount of food phytoplankton create through
photosynthesis. Zooplankton, feeding off the phytoplankton, are also affected.
UV-B also damages small fish, shrimp and crab larvae. It has been estimated
that on shallow coastal shelves, a 16 percent reduction of the ozone layer would
kill more than 50 percent of anchovy larvae, and cause a 5 percent drop in plankton
numbers and a 6-9 percent drop in fish yield.
Ozone-layer depletion seems likely to increase the rate of greenhouse warming,
by reducing the effectiveness of the carbon dioxide sink in the oceans.
Phytoplankton in the oceans assimilates large amounts of atmospheric carbon
dioxide. Increased UV radiation will reduce phytoplankton activity significantly.
This means that large amounts of carbon dioxide will remain in the atmosphere.
A 10 percent decrease in carbon dioxide uptake by the oceans would leave about
the same amount of carbon dioxide in the atmosphere as is produced by fossil
fuel burning.

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.

Interest in Ozone Layer Depletion


While the effect of the Antarctic ozone hole in decreasing the global ozone
is relatively small, estimated at about 4% per decade, the hole has generated a
great deal of interest because:
• The decrease in the ozone layer was predicted in the early 1980s to be
roughly 7% over a 60 year period.
• The sudden recognition in 1985 that there was a substantial "hole" was
widely reported in the press. The especially rapid ozone depletion in
Antarctica had previously been dismissed as a measurement error.
472 472 Legal Aspect of Business • Module Twelve

• 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.

Responses to Global Warming


The broad agreement among climate scientists that global temperatures will
continue to increase has led some nations, states, corporations and individuals
to implement responses. These responses to global warming can be divided into
mitigation of the causes and effects of global warming, adaptation to the changing
global environment, and geoengineering to reverse global warming.
Mitigation of global Mitigation of global warming is accomplished through reductions in the rate
warming is accom-
plished through re-
of anthropogenic greenhouse gas release. The world's primary international
ductions in the rate agreement on reducing greenhouse gas emissions, the Kyoto Protocol, now covers
of anthropogenic more than 160 countries and over 55 percent of global greenhouse gas emissions.
greenhouse gas re-
lease.
As of February 2010, only the United States, historically the world's largest emitter
of greenhouse gases, has refused to ratify the treaty. The treaty expires in 2012.
International talks began in May 2007 on a future treaty to succeed the current
one. The 2009 United Nations Climate Change Conference met in Copenhagen in
December 2009 to agree on a framework for climate change mitigation. No binding
agreement was made.
Climate change mitigation are measures or actions to decrease the intensity
of radiative forcing in order to reduce global warming. Mitigation is distinguished
from adaptation, which involves acting to minimize the effects of global warming.
Most often, mitigations involve reductions in the concentrations of greenhouse
gases, either by reducing their sources or by increasing their sinks.

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.

Quota on Fossil Fuel Production


Most mitigation proposals imply — rather than directly state — an eventual
reduction in global fossil fuel production. Also proposed are direct quotas on
global fossil fuel production.

Pacala and Socolow


Pacala and Socolow of Princeton have proposed a program to reduce CO2
emissions by 1 billion metric tons per year or 25 billion tons over the 50-year
period. The proposed 15 different programs, any seven of which could achieve
the goal, are:
1. more efficient vehicles ? increase fuel economy from 30 to 60 mpg (7.8 to
3.9 L/100 km) for 2 billion vehicles,
2. reduce use of vehicles ? improve urban design to reduce miles driven
from 10,000 to 5,000 miles (16,000 to 8,000 km) per year for 2 billion
vehicles,
3. efficient buildings ? reduce energy consumption by 25%,
4. improve efficiency of coal plants from today's 40% to 60%,
474 474 Legal Aspect of Business • Module Twelve

5. replace 1,400 GW (gigawatt) of coal power plants with natural gas,


6. capture and store carbon emitted from 800 GW of new coal plants,
7. capture and reuse hydrogen created by #6 above,
8. capture and store carbon from coal to syn fuels conversion at 30 million
barrels per day (4,800,000 m3/d),
9. displace 700 GW of coal power with nuclear,
10. add 2 million 1 MW wind turbines (50 times current capacity),
11. displace 700 GW of coal with 2,000 GW (peak) solar power (700 times
current capacity),
12. produce hydrogen fuel from 4 million 1 MW wind turbines,
13. use biomass to make fuel to displace oil (100 times current capacity),
14. stop de-forestation and re-establish 300 million hectares of new tree
plantations,
15. conservation tillage ? apply to all crop land (10 times current usage).
Nature.com argued in June 2008 that "If we are to have confidence in our
ability to stabilize carbon dioxide levels below 450 p.p.m. emissions must average
less than 5 billion metric tons of carbon per year over the century. This means
accelerating the deployment of the wedges so they begin to take effect in 2015
and are completely operational in much less time than originally modelled by
Socolow and Pacala."

12.5 ENERGY EFFICIENCY AND CONSERVATION


Developing countries use their energy less efficiently than developed countries,
getting less GDP for the same amount of energy.

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.

The Energy Landscape


Residential buildings, commercial buildings, and the transportation of people
and freight use the majority of the energy consumed by the United States each
year. Specifically, the industrial sector uses 38 percent of total energy, closely
followed by the transportation sector at 28 percent, the residential sector at 19
percent, and the commercial sector at 16 percent. On a community level,
transportation can account for 40 to 50 percent of total energy use, and residential
buildings use another 20 to 30 percent.
In developed nations, the way of life today is completely dependent on
abundant supplies of energy. Energy is needed to heat, cool, and light homes,
fuel cars, and power offices. Energy is also critical for manufacturing the products
used every day, including the cement, concrete and bricks that shape our
communities.
While the U.S. represents only five percent of the world's population, it
consumes 25 percent of its energy and generates about 25 percent of its total
greenhouse gas emissions. U.S. citizens, for example, use more energy per capita
for transportation than do citizens of any other industrialized nation—which in
part, reflects the greater distances traveled by Americans compared with citizens
of other nations.

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

by 47 percent while the nation's population grew by only 17 percent.[17] Inefficient


land use development practices have increased infrastructure costs as well as
the amount of energy needed for transportation, community services, and
buildings.
At the same time, a growing number of citizens and government officials
have begun advocating a smarter approach to land use planning. These smart
growth practices include compact community development, multiple transportation
choices, mixed land uses, and practices to conserve green space. These programs
offer environmental, economic, and quality-of-life benefits; and they also serve to
reduce energy usage and greenhouse gas emissions.
Approaches such as New Urbanism and Transit-oriented development seek
to reduce distances travelled, especially by private vehicles, encourage public
transit and make walking and cycling more attractive options. This is achieved
through medium-density, mixed-use planning and the concentration of housing
within walking distance of town centers and transport nodes.
Smarter growth land use policies have both a direct and indirect effect on
energy consuming behaviour. For example, transportation energy usage, the
number one user of petroleum fuels, could be significantly reduced through more
compact and mixed use land development patterns, which in turn could be served
by a greater variety of non-automotive based transportation choices.

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

Effective urban planning to reduce sprawl would decrease Vehicle Miles


Travelled (VMT), lowering emissions from transportation. Increased use of public
transport can also reduce greenhouse gas emissions per passenger kilometer.

Alternative Energy Sources


Nuclear power currently produces over 15% of the world's electricity. Due to
its low remittance of greenhouse gases (comparable to wind power) and reliability
it is seen as a possible alternative to fossil fuels, but is controversial for reasons
of capital cost and possible environmental impacts. Also, there are political impacts
in some countries.

Life-cycle Greenhouse Gas Emissions Comparisons


Most comparisons of life cycle analysis (LCA) of carbon dioxide emissions
show nuclear power as comparable to renewable energy sources.
A life cycle analysis centered around the Swedish Forsmark Nuclear Power
Plant estimated carbon dioxide emissions at 3.10 g/kWh and 5.05 g/kWh in 2002
for the Torness Nuclear Power Station. This compares to 11 g/kWh for hydroelectric
power, 950 g/kWh for installed coal, 900 g/kWh for oil and 600 g/kWh for natural
gas generation in the United States in 1999.
The Vattenfall study found Nuclear, Hydro, and Wind to have far less
greenhouse emissions than other sources represented.
The Swedish utility Vattenfall did a study of full life cycle emissions of nuclear,
hydro, coal, gas, solar cell, peat and wind which the utility uses to produce
electricity. The net result of the study was that nuclear power produced 3.3 grams
of carbon dioxide per KW-Hr of produced power. This compares to 400 for natural
gas and 700 for coal (according to this study). The study also concluded that
nuclear power produced the smallest amount of CO 2 of any of their electricity
sources.

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.

Nuclear Fuel Reserves


Current uranium production is expected to be adequate at current
consumption rates for about a century (from uranium mining, see also peak
uranium).
There are a number of alternative nuclear fission technologies, such as breeder
reactors, (see generation IV reactors) which could vastly extend fuel supplies if
successfully developed and utilized.
478 478 Legal Aspect of Business • Module Twelve

Lower-risk Thorium Cycles have been Demonstrated in the Past


Nuclear fusion is another variant of providing nuclear energy, but it will not
provide any immediate mitigation to global warming as the time horizon for its
commercial deployment is expected to be after 2050.

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?

Eliminating Waste Methane


Methane is a significantly more powerful greenhouse gas than carbon dioxide.
Burning one molecule of methane generates one molecule of carbon dioxide.
Accordingly, burning methane which would otherwise be released into the
atmosphere (such as at oil wells, landfills, coal mines, waste treatment plants,
etc.) provides a net greenhouse gas emissions benefit. However, reducing the
amount of waste methane produced in the first place has an even greater beneficial
impact, as might other approaches to productive use of otherwise-wasted methane.
Module Twelve • Environment Protection Act, 1986 479

In terms of prevention, vaccines are in the works in Australia to reduce


significant global warming contributions from methane released by livestock via
flatulence and eructation.

Carbon Intensity of Fossil Fuels


Natural gas (predominantly methane) produces less greenhouse gases per
energy unit gained than oil which in turn produces less than coal, principally
because coal has a larger ratio of carbon to hydrogen. The combustion of natural
gas emits almost 30 percent less carbon dioxide than oil, and just under 45 percent
less carbon dioxide than coal. In addition, there are also other environmental
benefits.
A study performed by the Environmental Protection Agency (EPA) and the
Gas Research Institute (GRI) in 1997 sought to discover whether the reduction in
carbon dioxide emissions from increased natural gas (predominantly methane)
use would be offset by a possible increased level of methane emissions from sources
such as leaks and emissions. The study concluded that the reduction in emissions
from increased natural gas use strongly outweighs the detrimental effects of
increased methane emissions. Thus the increased use of natural gas in the place
of other, dirtier fossil fuels can serve to lessen the emission of greenhouse gases
in the United States.

Reforestation and Avoided Deforestation


Almost 20% (8 GtCO2/year) of total greenhouse-gas emissions were from
deforestation in 2007. The Stern Review found that, based on the opportunity
costs of the landuse that would no longer be available for agriculture if deforestation
were avoided, emission savings from avoided deforestation could potentially reduce
CO 2 emissions for under $5/tCO2, possiblly as little as $1/tCO2. Afforestation
and reforestation could save at least another 1GtCO2/year, at an estimated cost
of $5/tCO 2 to $15/tCO2. The Review determined these figures by assessing 8
countries responsible for 70% of global deforestation emissions.
Pristine temperate forest has been shown to store three times more carbon
than IPCC estimates took into account, and 60% more carbon than plantation
forest. Preventing these forests from being logged would have significant effects.
Further significant savings from other non-energy-related-emissions could
be gained through cuts to agricultural emissions, fugitive emissions, waste
emissions, and emissions from various industrial processes.

Carbon Capture and Storage


Carbon capture and storage (CCS) is a plan to mitigate climate change by
capturing carbon dioxide (CO2) from large point sources such as power plants
and subsequently storing it away safely instead of releasing it into the atmosphere.
Technology for capturing of CO 2 is already commercially available for large CO2
emitters, such as power plants. Storage of CO 2, on the other hand is a relatively
untried concept and as yet (2007) no powerplant operates with a full carbon capture
and storage system. When this technique is used with biomass, the technique is
known as biomass energy with carbon capture and storage and may be carbon
negative.
480 480 Legal Aspect of Business • Module Twelve

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.

Non-CO2 Climate Actors


Action has been suggested on soot, HFCs and other climate drivers, in addition
to that proposed for CO2. Emissions of some of these actors are considered by the
Kyoto Protocol.

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

Solar Radiation Management


Some scientists have suggested using aerosols and/or sulfate dust to alter
the Earth's albedo, or reflectivity, as an emergency measure to increase global
dimming and thus stave off the effects of global warming. A 0.5% albedo increase
would roughly halve the effect of CO2 doubling. In 1974, Russian expert Mikhail
Budyko suggested that if global warming became a problem, we could cool down
the planet by burning sulfur in the stratosphere, which would create a haze. Paul
Crutzen suggests that this would cost 25 to 50 billion dollars/year. It would,
however, increase the environmental problem of acid rain (although optimized
engineering is thought to reduce this to insignificant levels) and drought.
An alternative technique, which may be more benign, is marine cloud
brightening. Others have proposed building a literal solar shade in space.

Greenhouse Gas Remediation


Carbon sequestration has been proposed as a method of reducing the amount
of radiative forcing. Carbon sequestration is a term that describes processes that
remove carbon from the atmosphere. A variety of means of artificially capturing
and storing carbon, as well as of enhancing natural sequestration processes, are
being explored. The main natural process is photosynthesis by plants and single-
celled organisms. Artificial processes vary, and concerns have been expressed
about their long-term effects.
Although they require land, natural sinks can be enhanced by reforestation
and afforestation carbon offsets, which fix carbon dioxide for as little as $0.11 per
metric ton.

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.

Bio-energy with Carbon Capture and Storage, BECCS


During its growth, biomass traps carbon dioxide from the atmosphere through
photosynthesis. When the biomass decomposes or is combusted, the carbon is
again released as carbon dioxide. This process is part of the global carbon cycle.
Through the use of biomass for energy and materials, eg. in biomass fuelled power
plants, parts of this cycle is controlled by man. Combining these biomass systems
with carbon capture and storage technologies, so called bio-energy with carbon
capture and storage, BECCS, is achieved. BECCS systems results in net-negative
carbon dioxide emissions, ie. the removal of carbon dioxide from the atmosphere.
In comparison with other geoengineering options, BECCS has been suggested as
a low-risk, near-term tool to effectively remove carbon from the atmosphere.

Carbon Air Capture


It is notable that the availability of cheap energy and appropriate sites for
geological storage of carbon may make carbon dioxide air capture viable
commercially. It is, however, generally expected that carbon dioxide air capture
482 482 Legal Aspect of Business • Module Twelve

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.

Seeding Oceans with Iron


The so-called Geritol solution to global warming, first proposed by
oceanographer John Martin, is a carbon sequestration strategy whimsically named
for a tonic advertised to treat the effects of iron-poor blood. It is motivated by
evidence that seeding the oceans with iron will increase phytoplankton populations,
and thereby draw more carbon dioxide from the atmosphere. A report in Nature,
10 October 1996, by K. H. Coale et al., measured the effects of seeding equatorial
Pacific waters with iron, finding that 700 grams of CO2 were fixed by the resulting
phytoplankton bloom per 1 gram of iron seeded. Lenton and Vaughan found this
technique to be potentially useful, but limited in its total capacity.
Opponents of this approach argue that fertilizing the ocean is dangerous and
lacks any guarantee of efficacy. The original researchers themselves assert that,
far from being a panacea for global warming, iron seeding may be entirely
ineffective. Among their concerns are that nobody knows where the carbon goes
after it is absorbed by phytoplankton. Instead of being drawn down to the ocean
floor and acting as a carbon sink, the carbon could be reabsorbed by the water,
effectively negating any initial gain. They also express concern that any attempt
at geoengineering could result in massive, unpredictable changes to the
environment. They point out that, considering the immense damage caused by
adding nutrients to lakes and ponds, it would be a logical conclusion that adding
nutrients to the ocean would also cause environmental damage. Large-scale growth
in phytoplankton could reduce oxygen levels, creating dead zones where the ocean
cannot support marine-life. They suggest that there is even the possibility that
blooms would release more carbon dioxide equivalent greenhouse gas in the form
of methane than it would sequester.

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

12.6 GOVERNMENTAL AND INTERGOVERNMENTAL ACTION

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
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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.

Earth Summit 2002


The World Summit on Sustainable Development organised by the United
Nations (UN) in Johannesburg was held in August and September of 2002. Also
called Earth Summit 2002, it brought together over 100 heads of state and 40,000
delegates to try and set up the goals needed to halt poverty around the world
whilst saving the environment at the same time.

Here are a Few Facts on Earth Summit 2002


• It was the largest UN conference to date, with over 100 heads of state
and 40,000 delegates attending.
• It covered everything from measures to cut poverty, improve sanitation,
improve ecosystems, reduce pollution, and improve energy supply for
poor people.
• It fell exactly 10 years after the Earth Summit in Rio de Janeiro which
focused world governments on environmental issues for the first time.
• Two weeks of preparatory meetings took place in Bali, Indonesia to
reach agreements on the key plans that could be realistically met.
• Kofi Annan, the UN Secretary General, put water, energy, health,
agriculture and biodiversity at the top of his list of commitments from
the summit.
• South Africa, the host of Earth Summit 2002, plans to provide clean
water to all South Africans by 2008, having already created access for
7 million of the poorest people since 1994.
• The European Union (EU), which currently spends 1.4 billion euros
(£880 million) on water projects worldwide each year, will focus
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particularly on water supply and sanitation in Africa, boosting


management of water resources and providing better coordination of
water-related development aid.
The summit also aimed to make agreements for the following issues:
• To cut by half by 2015 the proportion of people living on less than $1 a
day.
• To cut by half by 2015 the number of people suffering from hunger.
• To cut by half by 2015 the 1.1 billion people without access to safe
drinking water.
• To cut by a significant amount the 2.4 billion people who live without
inadequate sanitation, and improve sanitation in institutions, such as
schools; and promote safe hygiene.
• To launch an action programme to reduce the number of people who
lack access to modern energy.
• To improve the living standards for at least 100 million people who live
in slums, by 2020.
• To adopt and implement policies and measures that will promote
sustainable production and consumption, using the "polluter-pays"
principle.
• To increase corporate, environmental and social responsibility and
accountability.
• Establish programmes for energy efficiency in poor countries.
• Promote waste prevention and reduction by encouraging production of
reusable goods and biodegradable products.
• Implement programmes against deforestation, erosion, land degradation,
loss of biodiversity and disruption of water flows.
• Promote the development of sustainable tourism.
• Put particular emphasis on development in Africa.
• Develop programmes to reduce by two-thirds by 2015 the mortality
rates for children under the age of five.

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
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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.

Encouraging Use Changes

Carbon Emissions Trading


The European Union Emission Trading Scheme (EU ETS) is the largest multi-
national, greenhouse gas emissions trading scheme in the world. It commenced
operation on 1 January 2005, and all 25 member states of the European Union
participate in the scheme which has created a new market in carbon dioxide
allowances estimated at 35 billion Euros (US$43 billion) per year. The Chicago
Climate Exchange was the first (voluntary) emissions market, and is soon to be
followed by Asia's first market (Asia Carbon Exchange). A total of 107 million
metric tonnes of carbon dioxide equivalent have been exchanged through projects
in 2004, a 38% increase relative to 2003 (78 Mt CO 2e).
With the creation of a market for trading carbon dioxide emissions within the
Kyoto Protocol, it is likely that London financial markets will be the centre for this
potentially highly lucrative business; the New York and Chicago stock markets
may have a lower trade volume than expected as long as the US maintains its
rejection of the Kyoto.
Twenty-three multinational corporations have come together in the G8 Climate
Change Roundtable, a business group formed at the January 2005 World Economic
Forum. The group includes Ford, Toyota, British Airways and BP. On 9 June
2005 the Group published a statement[64] stating that there was a need to act on
climate change and claiming that market-based solutions can help. It called on
governments to establish "clear, transparent, and consistent price signals" through
"creation of a long-term policy framework" that would include all major producers
of greenhouse gases.
The Regional Greenhouse Gas Initiative is a proposed carbon trading scheme
being created by nine North-eastern and Mid-Atlantic American states;
Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New
York, Rhode Island and Vermont. The scheme was due to be developed by April
2005 but has not yet been completed.

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
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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.

Business Opportunities and Risks


In addition to government action and the personal choices individuals can
make, the threat posed by global warming provides business opportunities to be
exploited and risks to be mitigated.
There has also been business action on climate change.
On 9 May 2005 Jeff Immelt, the chief executive of General Electric (GE),
announced plans to reduce GE's global warming related emissions by one percent
by 2012. "GE said that given its projected growth, those emissions would have
risen by 40 percent without such action."
On 21 June 2005 a group of leading airlines, airports and aerospace
manufacturers pledged to work together to reduce the negative environmental
impact of the aviation industry, including limiting the impact of air travel on
climate change by improving fuel efficiency and reducing carbon dioxide emissions
of new aircraft by fifty percent per seat kilometre by 2020 from 2000 levels. The
group aims to develop a common reporting system for carbon dioxide emissions
Module Twelve • Environment Protection Act, 1986 489

per aircraft by the end of 2005, and pressed for the early inclusion of aviation in
the European Union's carbon emission trading scheme.

12.7 TERRITORIAL POLICIES OF MITIGATION

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.

The US and Global Warming Mitigation


In 2007, Transportation Secretary Mary Peters, with White House approval,
urged governors and dozens of members of the House of Representatives to block
California's first-in-the-nation limits on greenhouse gases from cars and trucks,
according to e-mails obtained by Congress. The U.S. Climate Change Science
Program is a group of about twenty federal agencies and US Cabinet Departments,
all working together to address global warming.

US Attempts to Suppress Science of Global Warming


The U.S. government has pressured American scientists to suppress
discussion of global warming, according to the testimony of the Union of Concerned
Scientists to the Oversight and Government Reform Committee of the U.S. House
of Representatives. "High-quality science" was "struggling to get out," as the Bush
administration pressured scientists to tailor their writings on global warming to
fit the Bush administration's skepticism, in some cases at the behest of an ex-oil
industry lobbyist. "Nearly half of all respondents perceived or personally
experienced pressure to eliminate the words 'climate change,' 'global warming' or
other similar terms from a variety of communications." Similarly, according to
the testimony of senior officers of the Government Accountability Project, the
White House attempted to bury the report "National Assessment of the Potential
Consequences of Climate Variability and Change," produced by U.S. scientists
pursuant to U.S. law. Some U.S. scientists resigned their jobs rather than give in
to White House pressure to underreport global warming.

Mitigation in Developing Countries


In order to reconcile economic development with mitigating carbon emissions,
developing countries need particular support, both financial and technical. One
of the means of achieving this is the Kyoto Protocol's Clean Development
Mechanism (CDM). The World Bank's Prototype Carbon Fund is a public private
partnership that operates within the CDM.
In July 2005 the U.S., China, India, Australia, as well as Japan and South
Korea, agreed to the Asia-Pacific Partnership for Clean Development and Climate.
The pact aims to encourage technological development that may mitigate global
warming, without coordinated emissions targets. The highest goal of the pact is
to find and promote new technology that aid both growth and a cleaner environment
simultaneously. An example is the Methane to Markets initiative which reduces
490 490 Legal Aspect of Business • Module Twelve

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.

12.8 POWERS OF THE CENTRAL GOVERNMENT (Sect. 3 to 6)


The central Govt. has the power under the Act to take necessary steps or
measures to protect and improve the quality of the environment and prevent and
control environmental pollution.
The powers of the central Govt. are briefed here, under headings:

I. Measure to Protect and Improve Environment (Sect. 03)


The Central Govt. has the power in all or any the following:
1. to co-ordinate the actions by the state Govt.
2. to plan and control a nation wide programme for the prevention, control
and abatement of environmental pollution.
3. to prescribe standards for the quality of environment.
4. to prescribe different standards for emission (or discharge of
environmental pollution) from different sources as to the quality and
composition of emission.
5. to restrict areas in which any industries shall not be carried out.
6. to lay down procedure and safe guards for preventing the accidents that
may cause environmental pollution.
7. to lay down procedure and safeguards for handling of hazardous
substances.
8. to examine the manufacturing processes and materials that may cause
environmental pollution.
9. to conduct investigations and research on the environmental pollution
problems.
10. to inspect the factories, plants, machinery equipment, materials and
manufacturing processes so as to give directions to the officers to take
necessary step to prevent and control environmental pollution.
11. to establish or recognise environmental laboratories and institutes.
12. to collect and distribute information on environmental pollution.
For the purpose of performing the above said powers and functions, the central
Government may set up an authority, by an order, published in the official
Gazettee.

II. Appointment of Officers and their Powers Functions (Sect. 4)


The Central Govt. may also appoint officers and give them powers and
functions under this act. Such officers shall work under the direction of the Central
Govt. and the other authorities set up under the act.
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III. Power to give Direction (Sect. 5)


Under the act the Central Govt. may give directions in writing to the officers
and authorities on
(1) closing or regulating of any industry operation or process.
(2) stopping or regulating of the supply of electricity and water.

IV. Rules to Regulate Pollution (Sect. 6)


The central Govt. may make rules (through notification in the official Gazettee)
on all or any of the matters mentioned in sect. 3. Such rules are:
1. Fixing the standard of quality of air, water and soil.
2. Fixing Maximum limit for notice and other environment pollution.
3. Framing procedure for the handling of hazardous substances and also
restriction on handling of such substances in different areas.
4. Prohibiting and restricting the location of industries in different areas.
5. Laying procedures and safeguards for preventing a accidents that may
cause environmental pollution.

12.8 PREVENTION, CONTROL AND ABATEMENT (make less) OF


ENVIRONMENTAL POLLUTION (Sect.7 – 15)

(1) Preventing Emission in Excess of Standards (Sect. 7)


Any person carrying on any industry or process shall not discharge (emit)
any environmental pollution over and above the standard prescribed.

(2) Procedure for Handling Hazardous Substances (Sect. 08)


A person shall handle any hazardous substances only according to the
prescribed procedures and after satisfying the safety measure prescribed under
the act.

(3) Duties of Persons Creating Environmental Pollution (Sect. 09)


The duties of the persons causing environmental pollution under Act are
given below:
(1) He must Mitigate (lessen the seriousness ) environmental pollution.
(2) He must inform the prescribed authorities about the (possible) occurence
of environmental pollution.
(3) He must help these authorities in preventing or reducing the
environmental pollution and
(4) He must bear the expenses incurred on the remedial measures.

(4) Power of Entry and Inspection (sect. 10)


Under the act, the person empowered by the central Govt. can enter into any
premises (1) for performing the functions of central Govt. given to him. (2) for
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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).

(5) Power to make Samples and Procedure (Sect. 11)


The central Govt. or the person empowered by it can take the samples of air,
water, soil or other substances for the purpose of Analysis, from any factory. The
sample so taken to be put in a container and shall be marked and sealed and also
shall be signed by the person taking the sample and the occupier.
Then the sealed containers with samples shall be sent to the laboratory
established or recognised under Sect. 12, for analysis by the person taking the
sample.

(6) Establishment of Environmental Laboratories (Sect 12)


Under the Act, the Central Govt. through notification in the official Gazettee,
may establish or recognise one or more environmental laboratories and lay down
the functions to be performed by them.

(7) Appointment of Govt. Analyst (Sect 13)


The Central Govt. may appoint any qualified persons as govt. Analysts for
the purpose of analysis of samples of air, water, soil etc. The appointment may be
notified in the official Gazettee.

(8) Report of Analysis (Sect 14)


This Govt. Analyst may prepare a report of the analysis. Such report prepared
and duly signed by the Govt. Analyst may be used as evidence in the court of
law.

(9) Penalty (Sect 15)


Any person who fails to implement or violates any provisions of this act shall
be punished, with imprisonment of upto 5 years or a fine of Rs. 1,00,000 or both.
And if the failure continues the defaulter shall have to pay additional fine of upto
Rs. 5,000 for every day during which failure continues.

12.9 SOUND POLLUTION


Noise has come to be regarded as a major urban pollutant, capable of causing
annoyance and hearing loss, and perhaps even adverse psychological and
psychological effect. Exposure to high noise levels pose the greatest harm to human
function. The consequences are signified in a higher rate of accidents, general ill-
health, occupational diseases and decrease in productivity.
Sound is the form of energy giving the sensation of hearing. It is produced by
longitudinal mechanical waves in elastic matter and transmitted by the oscillation
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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.

The Frequency of Sound


The frequency of the sound is the rate at which the variation in air pressure
takes place. It is expressed as the number of cycles per second and the unit is
Hertz (Hz). Human hearing is sensitive to frequency in the range of 16,000 to
20,000 Hz.
A two-fold frequency range corresponds to one octave. It has a centre frequency
that is 2 times the lower cut-off frequency, and the upper cut-off frequency, is
twice the lower. Following are preferred centre frequencies for noise level
measurement 31.5, 63, 125, 250, 500, 1,000, 2000, 4000 and 8,000 H.Z.

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

1. Method of Noise Measurement


Sound level meters should be well calibrated before measuring the noise
levels. The noise should be measured at the worker’s ear level if the objective is
to determine whether or not noise are high enough to lead to permanent hearing
damage. Further microphone of the sound level meter should be located at least
one meter away from hard surface such as walls. Sound level meters are fitted
with a ‘fast’ and ‘slow’ response switch. For steady sound the ‘fast’ position is
used and for fluctuating sound levels the ‘slow’ position is used to damp down
the movements of meter needle.

Threshold Limit Values (TLVs)


As regards noise, these TLVs refer to sound pressure levels and duration of
exposure that worker may be repeatedly exposed without adverse effect in their
ability to hear and understand normal speech.

Threshold Limit Value for Noise

Duration Sound level


Per day dB (A)
16 80
8 85
4 90
2 95
1 100
1/2 105
1/4 110
1/8 115
No exposure to continuous or intermittent in excess of 115 dB (A).
It is also recommended that exposure to impulsive or impact noise shall not
exceed the limits. No exposure in excess of 140 decibels peak sound pressure
level are permitted.

Sound Level Impacts Per Day


140 100
130 1,000
120 10,000

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:

Permissible Exposure in Case of Continuous Noise

Total time of exposure Second pressure levels


Per day, in hours dB (A)
8 90
6 92
4 95
3 97
2 100
1.5 102
1.0 105
0.75 107
0.50 110
0.25 115
• No exposure to excess of 115 dB (A) is to be permitted.

Permissible Exposure Levels of Impulsive or Impact Noise

Peak Sound pressure Permitted number


Level in dB of impulsive
140 100
135 375
130 1,000
125 3,160
120 10,000
• No exposure in excess of 140 dB (A) is to be permitted.
Operation of Super Flights: This constitutes an especially loud and startling
impulsive sound produced by the shock wave of a faster than sound air plane
(e.g., Concord) flying above a person. In addition to adverse effects on human
beings, these shock waves can also causes structural damage to buildings, shatter
498 498 Legal Aspect of Business • Module Twelve

glass and move light objects. For this reason many countries have not permitted
the operation of supersonic flight over their lands.

Questions

Section — A Objective Type


1. Name the Environmental Laws.
2. What are “Externalities” under Environmental Law?
3. Name two renowned environmentalists in India.
4. What is zero-economic growth?
5. Define environment.
6. Define environmental pollutant.
7. Define environmental pollution.
8. What is hazardous substance as per Environmental Protection Act, 1986?
9. Define an Occupier.
10. Define stream as per Water Act, 1974.
11. What is Water Pollution?
12. What is Sound Pollution?
13. Name the different types of Noise.
14. What is Noise Pollution?
15. What is Impulse Noise?
16. What is Steady Noise?
17. Name the instrument for measurement of Noise.
18. What is Threshold Limit Values (TLVs)?
19. What is Auditory Effects? Give examples.
20. What are Non-auditory Effects? Give examples.
21. What is sustained economic development?
22. What is global warming ?
23. State any two causes for global warming.
24. What is green house effect ?
25. What is ozone ?
26. What is Ozone layer ?
27. What is depletion of Ozone Layer ?
28. What is ultravires radiation ?
29. State the two ill effects of Ozone layer depletion.
30. State any two remedies for global warming.
31. What is fossil fuel ?
32. What is deforestation ?
33. What is climate change ?
34. What is carbon trading ?
35. What is carbon credit ?
36. State the two ill effects of global warming on human beings.

Section — B Analytical Type


1. Analyse the liability rules for environmental externalities.
2. Discuss opportunity costs of zero growth.
3. Describe environmental effects of zero economic growth.
4. What are the rules for prevention, control and Abatement of Envrionmental Pollution?
5. Describe the measures to protect and improve environment as per Environment
Protection.
6. Explain the powers and functions of Central Pollution Control Board as per the Air
Act, 1981.
Module Twelve • Environment Protection Act, 1986 499

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.

Section — C Essay Type


1. Discuss the optimal intervention into the environment.
2. Write a note on Environment v/s Economic Growth.
3. What is zero Economic Growth? Analyse the Environmental effects of the same.
4. Explain the powers and Rules of Central Government in respect of prevention and
control of Environmental Pollution.
5. Explain the salient features of the Air (Prevention and Control of Pollution) Act, 1981.
6. Explain the salient features of the Water (Prevention and Control of Pollution) Act,
1974.
7. Write a note on Sound and Noise pollution.
8. Write short note on earth summit 1992 and 2002.
9. Discuss fully the kyoto protocol agreement on climate change.
10. Discuss the mechanism for carbon trading.
11. Bring out the salient resolutions of Copenhagen summit.
12. Discuss the causes and remedies of global warming.
INDEX
A Coercion, 141
Abuse of Dominance, 64 Common device, 57
Acceptance, 124 Common Law, 4
Access, 42 Comopetition law, 62,74
Accessing Information, 90 Company, 328
Actual Delivery, 217 Competition Act, 66
Addressee, 42 Competition Advocacy, 65
Adjudication, 304 Competition, 62
Administrative Law, 6 Complaint, 241
Adoption, 430 Computer Network, 42
Aggrieved woman, 423 Computer network, 57
AGM, 370 Computer resource, 48
Agreement, 115 Computer, 42
Air pollution, 456 Concurrent List, 26
Allien Enemy, 139 Condition, 200
Alternate Energy Source, 477 Conditions as to title, 203
Amalgamation, 372 Confidential Disclosure Agreements, 277
Anticompetition Agreement, 62 Consideration, 129
Appellate Tribunal, 403 Constitution, 3, 10
Appellate tribunal, 403 Constructive Delivery, 217
Arbitration in Neural, 287 Consumer Dispute, 239
Arbitration, 286 Consumer, 238
Article 23, 20 Contingent contract, 184
Article, 24, 20 Contract, 114
Articles of Association, 342, 388 Copen Hugen, 477
Assignments, 168 Copmbinations Regulation, 65
Assistant Public Information Officer Copy Right, 278
Asymetric Crypto System, 42 Counter offer, 124
Auditory Effects, 496 Coveat Emptor, 204
Authorised Person, 294 Cracker, 50
Criminal Law, 9
B Cross offer, 124
Bailment, 199 Currency Notes, 294
Bhoomi project, 38 Currency, 294
Bilateral Contract, 194 Current Account Transaction, 294
Bilateral mistake, 149 Cyber crimes, 31
Biochar, 481 Cyber crimes, 49
Biological Effect, 470 Cyber law, 30
Black Hat, 50 Cyber Security, 56
Bonus shares, 350 Cyber terrorism, 57
Book Building, 361, 365
D
Breach of Condition, 201
Breach of Warranty, 202 Damages, 175,
BRLM, 368, 362 Data, 43
Burden of Proof, 144 Dealings in Foreign Exchange, 296
Business Law, 3 Debenture, 351
Defect, 239
C
Deficiency, 239
Capacity to contract, 135 Delivery, 217
Capital Account Transaction, 294 Denial of service attack, 52
Carbon Air Capture, 481 Departmental undertakings, 380
Carbon Tax, 487 Design Patent, 277
Case law, 117 Dharma, 6
CAT, 71 Digital Relooks, 31
CCI, 65, 67 Digital Signature, 31
CCI, 86 Direct link to Customer, 35
CEDAW, 441 Directors, 356
Central Consumer Protection, Council, 239 Discharge of contract, 163
Central Information Commission, 84 Distraction of goods, 200
Certificate of Incorporation, 344 Distributed Denial of Service, 52
Certifying Authority, 42 Distribution of Powers, 14
- Characteristics, 329 District Forum, 240
Chief Information Commission, 84 Doctrine of Frustration, 169
Civil Law, 8 DPSP, 21,62
Drug Trafficking, 316
502 502 Legal Aspect of Business

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

Natural Justice, 5 Rule of Law, 16


NeGP, 37 Rules, 2
NHRC, 426 Runoff, 459
Non-competition Agnates, 276 S
Novation, 171
Sale by Description, 203
Novel, 277
Sale by Sample, 204
NO X, 464
Search, 314
Nuclear Fuel Reserve, 477
SEBI, 346
O Secular, 19
Occupier, 456 Secure system, 43
Offer, 120 Securing Information, 85
Ordinances, 5 Security, 296
Originator, 43 Seizure, 311
Ozone Layer, 465 Service, 239, 296
Ozone, 464 Sexual Harassment, 422,424
P Share Capital, 354
Share Warrant, 355
Pacala and Socolow, 473 Shares, 348, 395
Paperless Society, 41 Shelf prospectus, 346, 394
Patriate to India, 296 Signed, 45
Performance of Contract, 217 Social Justice, 21
Person Resident in India, 295 Societal Control, 482
Person, 295 Soil Contamination, 459
Placement, 314 Solar Radiation Management, 481
Plant Patent, 278 Sources of Law, 3
PM-10, 464 Special offer, 123
Pornogrphy, 52 State Commission, 240
Preamble, 17 State Information Commission, 85
Preference Shares, 348 State List, 25
Private company, 330 Statute, 4
Private key, 43 Stoppage, intrasit, 225
Private Law, 8 Subject Matter, 199
Promissor, 130 Sulfur Dioxide, 464
Promoter, 338 Suo Moto, 81
Property, 270 Surrender of Patent, 283
Prospectus, 344, 393 Sweat Equity, 349
Proxy, 371 Symbolic Delivery, 217
Public Authority, 84
Public Corporation, 382 T
Public Information Officer, 89 Tender, 164
Public key, 43 Third Party, 85
Public Law, 8 Trade Secrets, 276
Q Trademark, 278
Transfer of Property, 195
QIBs, 367 Transfer, 296
Quantum Meruit, 179 Transmission of Shares, 355
Quasi-contract, 118,180 Transparency, 81
Quorum, 370 Trojan Attack, 51
R Two-Tier Mechanism, 83
Racial Harassment, 424 Types, 171-179
Ratification, 136 U
Reciprocal promises, 166 UDHR, 437
Remedies, 173 Ultra Vires, 342
Remission, 171 UN Conventions, 429
Renewable Energy, 478 Unauthorised Access, 49
Reservation, 444 Undue influence, 142
Resolutions, 371 Unenforceable contract, 119
Restitution, 136 Union List, 23
Revocation of Acceptance, 127 Unitary Constitution, 12
Revocation of offer, 126 Unlawful Agreement, 151
Right of Lien, 224 Unmeaning Agreement, 160
Right to Equity, 20 Unpaid Seller, 223
Right to Freedom, 20 Utility Patent, 277
Right to Information, 75
Rights Issue, 350
504 504 Legal Aspect of Business

V Water pollution, 458


Virtual stores, 35 Web based economy, 38
Virus and worm attack, 51 Web Hijacking, 49
VOC, 456 Whistle Blowing, 448
Void Agreement, 119,155 White Hat, 50
Void contract, 119 WIPO, 285
Voidable contract, 119 Work place Harassment, 418
Workplace, 412
W
Written Constitution, 11,15
Wagering Agreement, 161,185 WTO, 74
Warranties, 200

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