F-2,Block, Amity Campus

Sec-125, Nodia (UP)

India 201303

ASSIGNMENTS
PROGRAM:
SEMESTER-I
Subject Name
: Business Environmental Law
Study COUNTRY
: Sudan LC
Permanent Enrollment Number (PEN) : MFC001652014-2016014
Roll Number
: AMF105 (T)
Student Name
: SOMAIA TAMBAL YOUSIF ELMALIK
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
45 Objective Questions

MARKS
10
10
10

b)
c)
d)
e)

Total weightage given to these assignments is 30%. OR 30 Marks

All assignments are to be completed as typed in word/pdf.
All questions are required to be attempted.
All the three assignments are to be completed by due dates (specified
from time to time) and need to be submitted for evaluation by Amity
University.
f) The evaluated assignment marks will be made available within six
weeks. Thereafter, these will be destroyed at the end of each semester.
g) The students have to attach a scan signature in the form.
Signature
:
Date

_______30 January 2015________________________

( ) Tick mark in front of the assignments submitted

Assignment A

Assignment B

Assignment C

Business Environmental Law

ASSIGNMENT A
Q1 what is business environment? What are the
benefits & limitations of environmental analysis?
What is environment?
Environment literarily means the surroundings, external objects, influences
or circumstances under which someone or something exists. The
environment of any organization is the aggregate of all conditions, events
and influences that surround and affect it-Davis, K, the Challenge of
Business, (New york: McGraw Hill, 1975), P43
Environment refers to all external forces that have a bearing on the
functioning of a business. Jauch and Gluecke define environment thus: The
environment includes factors outside which can lead to opportunities or a
threat to the firm. Although there are many factors, the most important of
these sectors are socio-economic, technological, supplier, competitor and the
government
Business is all about reaping profits from the opportunities available in the
environment Opportunity can manifest themselves in the form of short
supply, excess demand, latent need or new better and economical sources of
supply or manufacturing.
Every business operates in a particular environment and each business unit
has its own environment. A change in environment presents opportunity to
some and threat to others.
Sometimes, in the same industry, a relevant change in environment can a
favorable of the opposite impact on different units of the same industry.
For instance, the General Agreement on Trade and Services (GATS)
implemented in India on January 1,2005, is an opportunity for researchbased pharmaceutical companies like Ranbaxy but a threat for smaller
companies. In the long run, only those organizations will survive that are
able to forecast the environment early and can react in time to the change in
environment.
The recent changes in tariff rates have changed the toy industry of India with
the market now being dominated by Chinese products. A slight change in the
Reserve Bank of Indias monetary policy can increase of decrease interest
rates in the market. A slight shift in the governments fiscal policy can shift
the whole demand curve towards the right or the left.
Hindustan Lever Limited (HLL) took advantage of the new takeover and
merger codes and acquired brands like Kissanfrom the UB group. TOMCO

(Tata Oil Mills Company) and Lakme from Tata and Modern Foods from the
government, besides many other small takeovers and mergers.
The new moguls of the Indian business are those who predicted the changes
in the environment and reacted accordingly. Azim Premji of Wipro,
Narayana Murthy of Infosys, Subhash Goyal of ZEE, the Ambanis of
reliance, L.N.Mittal of Mittal Steel, of Bharti Telecom are some of them.
Even a small businessman who plans to open a small shop as a general
merchant in his town needs to study the environment before deciding where
he wants to open his shop, the products he intend to sell and what brands he
wants to stock.
Relationship between a business and an environment:
The relation between a business and an environment is not a one way affair.
The business also equally influences the external environment and can bring
about changes in It. Powerful business lobbies for instance, actively work
towards changing government policies.
The business environment is not all about the economic environment but
also about the social and political environment. Politically, after the
Congress government came to power at the center with the support of the
CPI in May 2004, the whole process of disinvestments took a U-turn
Similarly, a new sociological order in India today has created a market for
fast foods, packaged foods, multiplexes, designer names, valentine day gifts
and presents, and gymnasiums and clubs etc.
So it is quite obvious that success in a business depends upon better
understanding of the environment. A successful organization doesnt look at
the environments on and ad hoc basis but develops a system to study the
environment on a continuous basis to try and protect the organization from
every possible threat and to take the advantage of every opportunity. Some
times better and timely understanding of the environment can even turn
threat into an opportunity.
Characteristics of Environment:
1. Environment is Complex: The environment consists of a number of
factors, events, conditions and influences arising from different
sources. All these interact with each other to create new sets of
influences.
2. It is Dynamic: The environment by its very nature, is a constantly
changing one. The varied influences operating upon it impart a
dynamism to it and cause it ot continually change its shape and
character.
3. Environment is multi-faceted: The same environmental trend can
have different effects on different industries. For instance GATS that
is an opportunity for some companies but a threat for others.

4. It has a far-reaching impact: The environment has a far reaching

impact on organizations inn that the growth and profitability of
organization depends critically on the environment in which it exists.
5. Its impact on different firms with in the same industry differs: A
change in environment may have different bearings on various firms
operating in the same industry. In the pharmaceutical industry in
India, for instance, the impact of the new IPR (Intellectual Property
Rights) law will different for research-based pharmacy companies
such as Ranbaxy and Dr. Reddys Lab and will be different for smaller
pharmacy companies.
6. It may be and opportunity as well as a threat to expansion:
Developments in the general environment often provide opportunities
for expansion in terms of both products and markets. For example,
liberalization in 1991 opened lot of opportunities for companies and
HLL took the advantage to acquire companies like Lakme, TOMCO,
and KISSAN etc. Changes in environment often also pose a serious
threat to the entire industry. Like Liberalization does pose a threat of
new entrants to Indian firms in the form of Multi National
Corporation (MNCs).
7. Changes in the environment can change the competitive scenario:
General environmental changes may alter the boundaries to an
industry and change the nature of its competition. This has been the
case with deregulation in the telecom sector in India. Since
deregulation, every second year new competitors emerge, old foes
become friends and M&As follow every new regulation.
8. Sometimes developments are difficult to predict with any degree
of accuracy: Macroeconomic developments such as interest rate
fluctuations, the rate of inflation, and exchange rate variations are
extremely difficult of predict on a medium of a long term basis. On
the hand, some trends such as demographic and income levels can be
easy to forecast.
Environmental Scanning:
The process by which organizations monitors their environment to
identify opportunities and threats affecting their business, is known
environmental scanning. The following factors to be considered for
environmental scanning:
1. Events: Important and specific occurrences that taking place in a
certain sector.
2. Trends: The general tendencies or course of action along which these
events take

Place.
3. Issues: the current concerns that arise in response to events and
trends.
4. Expectations: The demands made by interested groups in the light of
their concern for issues.(Azhar Kazmi, TATA McGraw Hill,p118)
Type of Environment:
The environment can be divided into three broad categories:
Internal Environment
Macro Environment (General Environment)
Micro Environment(Relevant Environment of Competitive
Environment)
Internal Environment: Internal environment refers to that of the
organization and is controllable. Some internal factors are:
1. Culture and Value Systems: Organizational culture can be viewed as
the system of shared values and beliefs that shape a companys
behavioral norms. A value is an enduring preference as a mode of
conduct or an end state. The value system of the founders of the
organization has a lasting impact on it. The value systems not only
influence the working of the company and the attitude of its people
but also the choice of its business. Values and cultures are inherited
from seniors by juniors in a organization. If a young man gets a job in
a bureaucratic culture he gets accustomed to a work routine of 10 to 6.
On the other hand, if he gets a job in a private concern he works till
the work finishes. Similarly, for organizations accustomed to and
aggressive consumer goods sales culture, a foray into the industrial
goods segment proves difficult.
2. Mission and Objectives: The mission and objectives of the company
guide the priorities, direction of development, business philosophy,
and business policy.
3. Management Structure and Nature: Structure is the manner in
which the tasks and sub-tasks of the organization are related. Structure
is concerned with the hierarchical relationship and the relationship
between the management od different functional areas like the
structure of the top management and the pattern of shareholding.
4. Human Resource: It concerns with factors like manpower planning,
recruitment and selection, compensation, communication and
appraisal.
Besides this, internal environment also includes corporate resources,
production/operation of goods and services, finance and accounting
systems and methods, marketing and distribution.

Macro Environment: The Macro/General environment consists of

factors external to the industry that may have a significant impact on the
firms strategies. Here we will look at six broad dimensions:
demographic, socio-cultural, political/legal, technological, economic and
global.
Dimensions in General Environment

Demographic

Political/Leg
al

Economic

Business

S
oc
io
C
ulT
tuec
reh
n
ol
G
o
lo
gi
ba
ca
l
interrelated.

All these dimensions of general environment are

These
l
dimensions not only influence businesses, but also influence each other.
After a political change in 1991, when congress government came to power,
major economic change took place in the form of LPG, i.e., Liberalization,
Privatization, and Globalizations. This led to and enhancement in the
technological environment of the country. This technological and economic
change has transformed the socio-culture environment of the country.
Globalization has also enabled India to become the software superpower of
the world. All global organizations now have a new and vast market, as well
as cheap manufacturing hub, which has compelled them to change their
global marketing and manufacturing strategies.
With this, over the last ten years there has been a drastic change in the
Indias demography per capita incomes have risen. The number of young
achievers and high earners has increased drastically, which changed the
entire demand schedule of products.

This shows that a single political in 1991 has changed all the components of
the macro environment. So while studying macro environment, one should
not only concentrate on how this factor will influence business but also on
how this will influence other components of the environment and what will
be the impact of these changes in the business. Only then can one design
long term strategies.
1. Political Environment: It is the political environment of the country
that decides the fortune of businesses in a country. After the 1917
revolution in sudden political change transformed the equation of
doing business. After the change of regime in the USSR in late 1980s
and early 1990s business equations changed once again in Resin.
In India in 1977, the janata government came to power because of
which Coca Cola and IBM had to leave the country. All liquor
companies had to close their operations. When P.V Narsimha Rao can
to power and a new economic policy was putin that presented of new
opportunities for Businesses, but at the same time brought a threat for
inefficient organizations.
Not only political philosophy but political stability too has
significance for businesses. The more stable, the political environment
of a country the more conducive will be the environment for business.
The consensus among various political parties on key issues is also
relevant in this case.
2. Regulatory and Legal Environment: The political environment
governs the legal and regulatory environment of country. The
regulatory environment plays a vital role by dictating the dos and
donts of a business. Every county has a different legal environment.
In India we have the Companies Act that governs Companies, the
MRTP Act which restricts monopoly, various laws regarding shares,
the Consumer protection Act, environmental laws, and the
implementation of GATS.GATS has resulted in the implementation of
international laws regarding patents, There are laws for import and
export, licensing etc. that have a drastic impact on business and the
future of organizations.
When an NRI Lord Swaraj Paul, a British Citizen, tried take over
Escorts, its owners, the Nandas approached the government to save
their company. A law restricting any NRI from purchasing shares of
an Indian company came into force, and Escorts was saved.
3. Demographic: It is the demographic environment which decides the
marketing mix for an organization. It decides the type of product the
organization comes out with. In India a lot of research and efforts are
undertaken to reduce the cost of products and to launch products at the

cheapest possible rates. A one rupee sachet of shampoo or a five rupee

ice-cream cone is some examples. It is the demography that decides
the pricing, promotion and distribution strategies. 70% of Indias
population is lives in villages and of this, 70% are youth which is why
every business house is launching new products, specifically for rural
market. ITC launched its unique and ambitious program called echaupal, targeted at the rural market.
4. Socio Culture: Socio culture variables like the beliefs, value system,
attitudes of people and their demographic composition have a major
impact on their personality and behavior style. The consumers
preferences have undergone a drastic change through the 1990s this
has led to the production of more cars, refrigerators, air conditioners
and other articles that were at one time considered ostentatious and
luxurious.
Not only this, this socio-culture paradigms also dictate the preference
of consumer in different regions. For instance companies launch
different products in the south and north because of differing
preferences. Companies have to change their product portfolio
because of cultural preferences as McDonalds and KFC did when they
launched their restaurant chain in India.
5. Technological: Technological forces present a wide range of
opportunities and threats that have to be accounted for in the process
of business strategy formulation. Technological advancement may
dramatically affect an Organizations products, services, markets,
suppliers, distributors, competitors, customers, manufacturing process,
marketing practices, financial composition, and competitive position.
Some of the important factors that influence operating in the
technological environment are:
Sources of technology like company sources, external sources
and foreign sources cost of technology acquisition,
collaboration and transfer of technology.
Rate of change in technology, of obsolesce
Impact of technology on human being, the man machine
system, and the environmental effect of technology.
Communication and infrastructural technology in management.
In fact, technology is today a decisive factor. From FMCGs to the
microprocessor industry is investing heavily technology. The technological
knowledge of consumer the decisions. Organizations have to modify
products according to the level of technological knowledge of the target
costumer, because in developing nations complex household machines that

need programming will not work. So they have to be technologically more

and more focused.
6. Global Environment: The international environment consists of all
factors operate at the transnational, cross-cultural level and across the
border. The world is a global village today and it is getting closer and
closer as far as business is concerned.
For the sake of business, countries are burying their grievances and
forging economic relationships. Erstwhile adversaries like America
and Russia are today goods friends and China and India are coming
closer.
India has signed a bilateral treaty with SriLanka; it is developing close
economic relationship with South Africa and Brazil, and is planning to
develop a road network in South East Asia. India is also a close ally of
ASEAN, and is also signatory of WTO which has a multilateral trade
agreement among more than 100 nations.
India is in a process of laying down a gas pipeline from Iran via
Pakistan. All this is just glimpse of the present international
environment. Every new bilateral and multilateral agreement new
vistas for business and also brings a new threat in the form of global
competition.
7. Economic Environment: The economic environment consists of
macro level factors related to the means of production and distribution
of wealth, which have an impact on the business of an organization.
The economic structure of a country, whether it is socialist, mixed or
capitalist, has drastic impact on the economy. Economic policies such
as foreign trade policy, industrial policy, fiscal policy, GDP growth
tare, policy of licensing, monetary policy, development of financial
institutions, development of money and stock market, and the extent
of globalization are some of the aspects of an economy that reflect on
business in an economy. A slight change in monetary policy can
release crores of rupees into the economy that may result in a decrease
in interest rate, which further increases investment as well as inflation.
Also, banks lending rates decide the level of investment in any
country. The higher the interest rate, the lower the level of investment.
In most industrialized nations like the US, this interest rate between
4% to 6% in India in 1991, the PLR (prime lending rate) was 17% to
18% which was reduced to 8% to 10% by 2000 because of a change in
the countrys economic policy.
8. National Competitive Advantage:
Despite
globalization,
industrialization is clustered in a small and specific number of
countries. Most successful computer and biotechnology firms are

based in the US, the successful chemical and engineering industry is

based in Germany, and the cream of the electronics industry is based
in Japan.
Similarly the successful call centers are clustered in India as are many
of the customized software companies. This suggests that nation and
its environment in which a company is based may have an important
bearing of the competitive position of that company in the global
marketplace.
Michael Porters International Competitiveness Model

Firm Strategy, Structure

& Rivalry

Factor Endowment

Local Demand
Condition

Relating and Supporting

Industries

In a study national competitive advantage, Michael Porter identified four

attributes of a national of country-specific environment that have an
important impact on the global competitiveness of companies located within
that nation.
a. Factor Endowments: A nations position in the factors of production
such as skilled labor, capital, technology or infrastructure necessary to
compete in a given industry.
b. Demand Condition: The nature of home demand for services.
c. Relating and Supporting Industry: The presence and absence in a
nation of supplier industries and related industries that are
internationally competitive.

d. Firm strategy, structure and rivalry: The conditions in the nation

that govern how companies are created, organized and managed and
the nature of domestic rivalry.
Micro Environment: Micro environment of the competitive environment
refers to the environment which and organization faces in its specific arena.
This arena may be an industry; of it may be what is referred to as a strategic
group. Besides looking at primary demand and supply factors, firms
examine the state of competition they face because that determines whether
that determines whether they will remain in the same industry or start a new
one. All the business decisions-what business, pricing, distribution channel,
promotion portfolio, etc. depends on competitive position of the firm.
For instance, a new entrant in the glucose biscuit segment will have to study
and consider the marketing mix as well as strategy of existing players like
Britannia, Parle, Priyagold, etc., before deciding its marketing mix following
are the key Micro Environment factors:
The Five Forces of Competition: Professor Michael Porter of the Harvard
Business School has demonstrated the state of competition in an industry as
a composite of five composite of competitive forces. According to Michael
Porter the five forces of competition are:
a. Threat of Competitors: The rivalry among sellers in the industry.
b. Threat of New Entrants: The potential entry of new competitors.
c. Threat of Substitutes: Market attempts of companies in other
industries to win customers over to their own substitute products.
d. Bargaining Power of Supplier: The competitive pressure stemming
from the supplier-seller collaboration and resultant bargaining.
e. Bargaining Power of Buyers: The competitive pressure stemming
from seller-buyer collaboration and bargaining.
Michael Portes Five Forces Model
Threat of Substitutes

Bargain Power
of supplier

Bargain Power
of Buyer
Threat of Competitor

Threat of New
Entrants

Benefits of Environmental Analysis:

1. Environmental analysis gives an idea of organizations environment.
2. Environmental analysis gives a brief about competitors.
3. Environmental analysis tells us about opportunities to reap profits.
4. Environmental analysis gives details about threats in the environment.
5. Environmental analysis keeps the manager informed and alert.
6. Business is all about making the right decision at the right time.
Without proper environmental analysis the right decision cant be
made.
7. Environmental analysis helps in predicting the future.
8. Environmental analysis helps in suitable modification of strategies, as
and when required.
Limitations of Environmental Analysis:
1. Today the environment is turbulent and dynamic and it is difficult to
forecast of predict the environment.
2. Business environment is global and any development in any part of
the world can influence the business. Even a small political move can
have a drastic impact, which in very difficult to scan and assess. A
sudden disintegration of USSR had very adverse impact on many
exporters in India. A sudden attack of Al Qaeda on the Twin Towers in
the US resulted in the hike of global petroleum prices. After
Signing the WTO, all of a sudden the toy market of India was
captured by Chinese products. Today it is extremely difficult to
predict the external environment.
3. The Effectiveness of environmental analysis depends upon how it is
practiced, i.e., whether it is a systematic approach, ad hoc or
processed. Under a systematic approach, information for
environmental scanning is collected, scanned and monitored on a
continuous basis and forecast and is assessed for the relevant factor. In
an ad hoc approach, an organization conducts special surveys and
studies to deal with specific environmental issues from time to time.
In a processed form approach, an organization uses information in a
processed form, available from different sources, both inside and
outside the organization. For effectiveness, an organization should use
the combination of these approaches instead of just following the tried
formulas, because all have their importance according to requirement
Too much reliance is often placed on the information collected
through environmental scanning.
When there is overloading of information, one is likely to get lost and
become inactive-typical of paralysis through analysis syndrome.

Q2 Define contract, Explain any four element of a

contract?
Definition of Contract: Section 2(h) of the Act, defines a contract as an
agreement enforceable by law. A contract is defined as an agreement
enforceable at law, made between two or more persons, by which rights are
acquired by one or more, to act on the part of the other. It creates and
defines obligations between the parties.
All agreements are not necessarily enforceable by law. An agreement to
sell a house may be a contract enforceable by law. However, an agreement
to attend a party being of a social nature is not enforceable. It is not
necessary that a contract need not be only in writing, unless there is
specific provision in law that it should be in writing. Certain contracts must
be in writing as otherwise they are not enforceable in law. Following are
the examples of such contracts. Contract for sale of immovable property
must be in writing, stamped and registered. Certain other contracts though
are required to be in writing do not compulsorily be require registration, for
example, Bills of Exchange, Promissory Notes, Cheques, A Trust created
under the Indian Trust Act, A promise to pay a time-barred debt, Contracts
made without consideration with natural love and affection.
Elements of Contract: It may be noted that a contract essentially contains
two elements:
Agreement and enforceability by law: For a better understanding, let us
elaborate on these two elements. Section 2(e) of the Act defines agreement
as, every promise and every set of promises, forming consideration for
each other. This essentially means that there should be an offer and
acceptance to form an agreement. It is important that before an agreement
is finalized there should be a consensus ad idem (consent to the matter)
between the two parties. Both the contracting parties should say and mean
the same without, which there cannot be a contract.
The other element of contract, enforceability by law, emphasizes the
importance of intention to create a legal obligation or duty to perform or
abstain from performing certain act(s). These acts could relate to social or
legal matters. The classic case of Balfour vs. Balfour (1919) elaborates this
point. A husband working in Ceylon, had agreed in writing to pay a
housekeeping allowance to his spouse living in England. On receiving
information that she was unfaithful to him, he stopped the allowance. It
was held that the agreement was without any intention of creating a legal

obligation. Hence, there was no contract. It may be summed up that all

contracts are agreements, but all agreements are not contracts.
ESSENTIAL ELEMENTS OF A VALID CONTRACT:
1. Offer and acceptance.
2. Intention to create legal relationship.
3. Capacity to contract.
4. Free consent.
5. Lawful consideration.
6. Legal object.
7. Certainty and possibility of performance.
Each of the essential elements are discussed in detail below.
1. Offer and Acceptance
A contract basically evolves from an offer by one party and acceptance of
the same, by the other party. The acceptance should be definite and without
any qualification. There should be a consensus ad idem between the two
parties on the terms and conditions of contract.
Conditions of Making an Offer: The following conditions that govern
making an offer are:
1. The offer must be definite and not vague.
2. An offer should be differentiated from an invitation to make an offer.
There are occasions where a person may make some statements or
give information with an intention of inviting others to make an
offer. For example, a catalogue with prices indicated on it is not an
offer to sell. On the contrary it is only an invitation to make an offer.
A person interested in buying the product specified in the catalogue,
may make an offer to buy and it is left to the discretion of the seller
to either accept or reject the same.
Lapse of Offer: Section 6 specifies the instances which results in the lapse
of an offer:
I. An offer comes to an end if it is revoked by the offeror at any time
before its acceptance is complete as against him and not after its
acceptance;
II. If either the offeror or the offeree dies or becomes insane and the
offeree comes to know about it, before acceptance. If the offeree

accepts an offer in ignorance of the death and insanity of the offeror,

the acceptance is valid;
III. If the offer is not accepted within the specified time or within a
reasonable time, or if none of it is clearly specified then the law of
limitation applies after that, if none is specified (Law of limitation
applies). In Ramsgate Victoria Hotel Co vs. Montefiore, Montefiore
agreed to take up shares in Ramsgate Victoria Hotel Co in June.
However, when he received the letter of acceptance in November, he
declined to take up shares. The offer had come to an end by lapse of
time and therefore he could not be compelled to take up the shares.
When an offer is made by an agent and it is accepted within a
reasonable time, the contract will be binding on the principal even
though the agent may have been guilty of delay in making the offer;
IV. On failure to fulfill a condition precedent to acceptance. In State of
Madhya Pradesh vs. Gobardhan Dass where the tender required
acceptance of a tender to be accompanied by payment of 25% of the
amount and was fulfilled by the successful tenderer to make the
requisite payment the court held that the omission did not give rise to
a binding contract between the parties;
V. If it is not accepted in the mode prescribed or if no mode is
prescribed, in some usual and reasonable manner or if the offer is
rejected by the distinct refusal of the offeree;
VI. If the offeree makes a counter offer, it amounts to rejection of the
original offer and such an offer by the offeree may be accepted or
rejected by the offeree;
VII. If law is changed making the offer illegal or incapable of
performance. According to the Indian Contract Act, an offer may be
revoked at any time provided it is communicated to the offeree before
the acceptance. Also an offer to keep an offer open for a specified
time (option) is not binding unless it is supported by consideration.
ACCEPTANCE: Under Section 2(b) of the Act, when a person to whom
the proposal is made signifies his assent thereto, the proposal is said to be
accepted. Just as in case of offer, acceptance may also be express or
implied. An acceptance is said to be express when it is communicated by
words spoken or written or by doing some required Act. It is implied when
it is to be gathered from the surrounding circumstances or the conduct of
the parties. In an auction sale, the highest bidder is assumed to be the buyer
of the goods once the deal is struck.

In order to convert an offer into a promise, acceptance should be absolute

and unqualified. It is also essential that the acceptance is given in some
usual and reasonable manner. If the offer prescribes the manner in which
the acceptance is to be given, then the acceptor should adhere to the
prescribed mode. On failure to do so, the offeror can insist that his offer
will be accepted only if it is given in the prescribed manner
Conditions of Acceptance:
i.
An offer should be accepted only by the person to whom it is put
forth. It is clear by the rule of law that if A proposes to make a contract
with B, C cannot substitute himself with B without the consent of A. An
acceptance may be withdrawn before it reaches the offeror.
ii.
Acceptance of an offer should be absolute and unqualified and should
conform totally to the offer made. A conditional or qualified acceptance
does not result in a valid contract. By giving a conditional acceptance or
counter offer, the original offer is deemed to have been rejected. Once the
original offer has been rejected by making a counter offer, it cannot be
accepted again, unless renewed. In Hyde vs. Wrench an offer made for the
sale of a farm for 1,000 pounds was not accepted in the first instance. A
counter offer was made wherein the plaintiff expressed his willingness to
buy the same for 950 pounds. When the counter offer was rejected, the
plaintiff consented to buy the farm for 1,000 pounds which was again
rejected by the defendant. A suit filed for breach of contract was not
maintainable as the counter offer implied that the original offer had been
rejected. Hence, there was no valid contract between the parties.
iii.
The acceptance must be communicated to the offeror. The acceptance
must be in the form specified or in some perceptible form if not specified. A
mere intent of acceptance will not suffice. In this regard, reference may be
made to an American case, Eliason vs. Henshaw the mode of acceptance
as prescribed by the offeror was not adhered to. The offeree sent the letter
of acceptance by post when it was required to be sent by wagon as
indicated by the offeror. A deviation in the mode of acceptance clearly
entitled the offeror to treat the acceptance as invalid.
2. Intention to Create Legal Relationship: The validity of a contract is
dependent on the intention of the contracting parties. A contract will be
valid only when the parties to the contract intend to create a legal
relationship between them. Non-existence of such an intention will not give
rise to a valid contract. Agreements of social nature do not contemplate
legal relationship and hence they are not contracts.

The parties to a contract may either specifically lay down that the
agreement entered is not a formal or legal agreement or in certain cases the
non-existence of an intention to enter into a legal relationship can be
implied from the agreement itself.
3. Capacity to Contract: Section 10 specifies that an agreement to be a
contract is too entered between the two parties who are competent to
contract. The persons declared to be incompetent to contract are:
a. Minors: A minor is a person under the age of eighteen years, except
when a guardian of a minors person or property has been appointed by the
court, in which case it is twenty-one. The purpose of declaring minors as
incompetent to enter into a contract is to protect minors against their own
inexperience. However, law tries not to cause unnecessary hardships to
persons who deal with minors..
b. Persons of Unsound Mind: Section 12 lays down a test of soundness of
mind. It states that a person is said to be of sound mind for the purpose of
making a contract if, at the time of making the contract, he is capable of
understanding it and of forming a rational judgment as to its effect upon his
interests. A person who is a lunatic (who is at times of sound mind) may
enter into contract in these times. Persons who have completely lost their
mental powers or those who are drunken or intoxicated are incapable of
entering into a contract. The question of unsoundness has to be determined
based on unmistakable facts and not merely on speculation. The burden of
proving insanity will be on the person who alleges it. The question whether
a contract is invalidated because of unsoundness of mind will not depend
upon the belief or disbelief of the witness but largely based upon the
inference to be drawn from evidence.
c. Persons Disqualified by any Law to which they are Subject: The
following persons are disqualified by law to enter into a contract:
1. Alien Enemies: They are those persons who are not subjects of
Republic of India and the country, in which they reside, is not at
peace with Republic of India. An Indian who resides voluntarily in a
country hostile to India is also considered as an alien enemy.
Contracts made before war may be either suspended or dissolved
depending whether their performance would benefit the enemy or
not.
2. A special privilege is granted to the foreign sovereigns, their
diplomatic staff and accredited representatives of foreign states. Such
persons can enter into contracts and enforce their performance in
Indian courts. However, they cannot be sued unless these persons

voluntarily submit to the Indian Law. An Indian citizen needs to

obtain the permission of the Central Government to sue such a
person.
3. A contract entered into by a company beyond its authority, as
prescribed in its Memorandum of Association and the relevant
provisions in the Companies Act, is declared as void. A company
formed under the Companies Act, 1956 has a limited contractual
capacity and any Act in excess of its powers whether expressly
conferred on it or derived by reasonable implication from its objects
clause in the Memorandum, is ultra vires the company and is void.
4. Any contract with a person adjudged insolvent is not valid. It is the
official receiver or official assignee of the insolvent who can enter
into contracts relating to his property and sue and be sued on his
behalf.
5. A convict is incapable of entering into a contract while undergoing
imprisonment. The incapacity to contract, or to sue on a contract,
comes to an end when the sentence expires. Also, the convict does
not suffer from the rigors of the Law of Limitation as the period of
the sentence is not included in the lapsed time frame.
4. Free Consent: The fourth essential element of a valid contract is free
consent. Consent is said to be free when it is not caused by any of the
following:
a. Coercion (Section 15): Coercion is the committing or threatening to
commit any act forbidden by the Indian Penal Code, or unlawful detaining
or threatening to detain, any property to the prejudice of any person
whatever with the intention of causing any person to enter into an
agreement. Unlawful detaining or threatening to detain any property is also
an instance of coercion. Threatening at gun-point, threatening to commit
suicide and refusing to hand over the account books of a business to an
agent are some of the instances which amount to coercion. The party whose
consent is obtained by coercion has the right to avoid performance of the
contract. In Ranganayakamma vs. Alwar Setti the question before the court
was regarding the validity of the adoption of a boy by a widow aged 13
years. In the given case, the husbands dead body was not allowed to be
removed for cremation until the widow adopted the boy. It was held that the
adoption was brought about by coercion and was not binding.
b. Undue Influence (Section 16):

Undue influence is defined as follows: A contract is said to be induced by

undue influence where the relations subsisting between the parties are such
that one of the parties is in a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other. It is to be
noted that the emphasis is on the ability to dominate the will of another.
Such ability is said to be existing in cases, where a person:
1. Holds a real or apparent authority over the other. For example,
income tax authority and assesse, police and accused;
2. Stands in a fiduciary relation (relation of trust and confidence).
Fiduciary relationship implies a relationship of confidence and trust.
Examples of fiduciary relationship are solicitor and client, spiritual
adviser and devotee, husband and wife.
3. Makes a contract with a person whose mental capacity is temporarily
or permanently affected by reason of age, illness or mental or bodily
distress. The unconscientiously use by one person of power
possessed by him over another in order to induce the other party to
enter into a contract is referred as moral coercion and is considered
as a form of undue influence. In Lakshmi Amma vs. Telengala, the
executant who was aged and suffering from diabetes made a deed of
settlement of the entire property in favor of one of his grandsons to
the exclusion of his wife, his children and other grandchildren. The
person in whose favor the deed was made was unable to prove that
the executant had executed the deed without any external pressure
while he was not of infirm mind and was fully aware of the
dispositions. The court held the settlement deed to be invalid.
The following relationships raise the assumptions of undue influence:
Parent and child,
Guardian and ward,
Trustee and beneficiary,
Religious advisers and disciple,
Doctor and patient,
Solicitor and client, and
Fiance and fiancee.
c. Misrepresentation (Section 18): Misrepresentation is the innocent or
unconscious presentation of wrong facts by one party which are taken into
account by other party before entering into a contract. The person making

such a misrepresentation honestly believes that such statement is true.

Section 18 defines misrepresentation to be existing.
1. When a person positively asserts that a fact is true when his
information does not warrant it to be so, though he believes it to be
so.
2. When there is any breach of duty by a person which brings an
advantage to the person committing it by misleading another to his
prejudice.
3. When a party causes, however innocently, the other party to the
agreement to make a mistake as to the substance of the thing which is
the subject of the agreement.
d. Fraud (Section 17):
Fraud means and includes any of the following acts committed by a party
to a contract, or with his connivance (intentional active or passive
acquiescence) or by his agent with intent to deceive or to induce a person
to enter into a contract. The essential ingredients of fraud as contemplated
by subsection (1) are as under:
1. There must be a False Representation of a Material Fact.

2. The Representation should be made with Knowledge of its Falsity.

3. The Other Party should have been induced to Enter into the Contract
based on the False Representation.
4. The Other Party should have relied upon the False Representation
and should have been deceived.
5. LAWFUL CONSIDERATION:
Consideration is an important element of a contract. In day to day life,
quite often promises are made without giving them a thought. In order to
make an agreement enforceable, law requires such agreements barring a
few exceptions, to be backed by consideration.
Consideration may be of following kinds:
i.
Executory or future consideration, in return of a promise
which is to be fulfilled in future.
ii.
Executed or present in which it is an act or forbearance made
or suffered for a promise. For example, in a cash sale, consideration
is present or executed.

iii.

Past consideration is the one which pays for a past act or

forbearance. An act constituting consideration which took place and
is complete before the promise is made.
As per Section 23, there has to be a lawful consideration for a legal object in
every contract. Hence, the following aspects should not exist in case of
consideration and object for the contract to be declared as legal and binding.
1. It should not be Forbidden by Law:
2. Performance should not Defeat the Provisions of any Law
3. It should not be Fraudulent
4. It should not be Considered Immoral
6. LEGAL OBJECT. The sixth essential element of a valid contract is
legal object. By object it is to mean the purpose of the contract. Contracts
with unlawful objects are void.
7. CERTAINTY AND POSSIBILITY OF PERFORMANCE: the
agreements in which the meaning is not certain, or is not capable of being
made certain, are void. The uncertainty may exist because of quality,
quantity, price or title of the subject matter. The terms of contract should be
certain. In Keshavlal Lallubhai Patel vs. Lalbhai Trikumlal Mills Limited,
the workers of the respondent Mill went on a strike expressing their
support to the Quit India Movement. As a result, the respondent mill was
closed and could not supply the textile goods to the appellants as agreed. In
a letter seeking extension of time the respondent mill cited the reason for
the failure to supply goods and stated that the delivery time of the goods
stands extended until the normal state of affairs is restored.
In Guthing vs. Lynn, the buyer of a horse agreed to pay 5 pounds extra, if
the horse proved to be lucky. The agreement was held to be void for
uncertainty. The definition of void agreements includes the wager
agreements. Section 30 defines wager as an agreement between the parties
by which one promises to pay money or moneys worth on the happening
of some uncertain event in consideration of the other parties promise to pay
if the event does not happen.
RESTITUTION: When a contract becomes void, any benefit derived out
of the contract by one party is required to be restored to the other. It is
significant to note that the law of restitution covers only benefits received
and not losses incurred. The principle of restitution is that the defendant
who has been unjustly enriched at the expense of the plaintiff is required to
make restitution to the plaintiff. There cannot be restitution where the
parties are wholly incompetent to contract (where one of the parties is
minor). Section 65 which deals with restitution applies to contracts

discovered to be void and contracts which become void. A person who

has received a benefit under any such contract will have to restore the
benefit to the person from whom it was received. In Dharamsey vs.
Ahmedbhai, a person hired a godown for a period of 12 months by paying
an advance for the entire period. When a fire broke out in the godown he
was entitled to claim a proportionate amount of rent paid in advance.
CONTINGENT CONTRACTS: Section 31 of the Act provides for such
contracts and defines it as a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen. In Muthu vs.
Secretary of State, a person was the highest bidder for a house which was
put up for sale. However, one of the conditions was that the sale could be
confirmed only if the Collector authorizes it. The Collector declined to
confirm the sale. It was held that there was no contract. The event on which
the happening of the contract is dependent should be uncertain. Further, the
event should be collateral to the contract. The event should not form part of
the consideration of the contract though the contract is made to depend upon
it. Contracts of indemnity and insurance are examples of contingent
contracts.
PERSONS WHO ARE REQUIRED TO PERFORM CONTRACTS:
Where personal considerations form the basis of a contract, the promisor
alone should perform the contract. Where personal considerations do not
form the basis of a contract, then the contract may be performed by the
promisor or his agent or legal representatives of the promisor in the event of
his death.
Time and Place of Performance: A contract, which does not specify the
time for performance should be performed within a reasonable time. 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. When a
promise is to be performed on a certain day, and the promisor has not
undertaken to perform it, without application by the promisee, it is the duty
of the promisee to apply for performance at a proper place and within the
usual hours of business. A contract should be performed in the manner and
at the time prescribed in the contract.
Devolution of Joint Rights and Liabilities: Where a joint promise is
made, the promisee may compel any one of the joint promisors to perform
the whole of the promise. The joint promisor, who performs the contract,
may claim contribution from the other joint promisors. Where any of the

joint promisors defaults in making his contribution, then the other joint
promisors will have to bear even the defaulted amount equally.
Appropriation of Payments: Where several debts are owed and where
payment made is insufficient to discharge the debt, the debtor may intimate the
creditor as to the nature of appropriation. In such a case, the creditor should
follow the directions issued by the debtor.
Assignment of Contracts: Assignment of a contract means the transfer of
rights and liabilities arising out of the contract in favor of a third person
either with or without the concurrence of other party to a contract. An
assignment may take place either by the act of the parties or by operation of
law.
DISCHARGE OF CONTRACT: We now come to the last stage of
contracts. A contract is said to be discharged when the rights and liabilities
created by such contract come to an end. Contracts may be discharged or
terminated by:
1. Performance of the contract, or
2. By mutual consent, or
3. By lapse of time (by limitation), or
4. By operation of law, or
5. Impossibility of performance, or
6. By breach of contract.
Each of the various modes of discharge of contract is explained below:
1. Performance of Contract: The most obvious and meaningful way
to discharge a contract is to fulfill the terms and conditions agreed by
each of the parties in the contract. Section 38 provides for tender of
performance. As per this section if the promisor offers to perform his
side of the contract, but the promisee does not accept his performance
the promisor is discharged from his liability. This is known as
attempted performance. The promisor may sue the promisee for the
breach of contract, if he so desires.
2. Discharge by Mutual Agreement or Consent: The contract may be
terminated by mutual consent of both the contracting parties. Various
cases of discharge by mutual agreement are specified in Section 62
and Section 63. Section 62 provides about the effect of novation as to
where a new contract is substituted for an existing contract by mutual

agreement of both the parties, the new contract is basically agreed

upon to adjust the remedial rights arising out of the breach of the old
contract.
3. Discharge by Lapse of Time: Any contract cannot be extended
indefinitely. The Limitation Act, 1963 provides for a certain time
frame within which the contract has to be performed (called period of
limitation). If no action is taken by the contracting parties within the
period of limitation, no remedy at law will be available. It provides for
a definite time frame within which, the deprived party may seek
remedy at law.
4. Discharge by Operation of Law: A contract may be discharged
by the operation of law in any of the following ways:
i. By Merger: When the parties agree to include the previous
inferior contract in a superior contract.
ii. Law does not permit any unauthorized alteration of the terms of a
written agreement. Any such act by any one of the parties will
automatically make the contract as discharged by operation of
law.
iii. By Insolvency: When a person is adjudged insolvent, he is
discharged from all liabilities incurred prior to his adjudication.
iv. Death: Where a contract is entered into, based on personal
consideration and where it is required that performance of the
contract should be made by the promisor in person, the contract
will be discharged on the death of the promisor.
5. Discharge by Impossibility of Performance: A contract which is
clearly impossible to perform is discharged. A contract which has its
subject as an act, which is impracticable to perform by either of the
parties is assumed to be impossible to perform and hence the contract is
discharged. Section 56 states that a contract which is made impossible
to perform due to subsequent changes is taken as void and hence
discharged. This is known as, supervening impossibility or
supervening illegality.
6. Discharge by Breach of Contract: Breach of contract is often
referred as the easiest way of discharging a contract. When either of
the parties does not fulfill the duties and liabilities prescribed by the
contract, the contract is said to be breached. There are two types of
breach of contract:

i. Actual breach of contract. Actual Breach of contract may take place

in two instances:
a. When the performance is actually due
b. During the actual performance of the contract.
ii. Anticipatory breach of contract. Anticipatory breach of contract is
stated to have occurred if a breach has been committed before the time
for performance. When a party explicitly denies or abstains from
performing the contract or does some definite act, which makes the
performance impossible, then such a breach is an anticipatory breach of
contract.
REMEDIES FOR BREACH OF CONTRACT: The following
alternatives are available for the injured party in case of a breach of
contract.
a) Rescission: The injured party can rescind the contract and refuse the
performance of contract.
b) Restitution: As per Section 65, when a party treats the contract as
rescinded, he makes himself liable to restore any benefits that he has
received, under the contract to the party from whom such benefits were
received. The court may refuse to rescind the contract where the plaintiff
has expressly or impliedly ratified the contract or where only a part of the
contract is sought and such part is not severable from the rest of the
contract. Section 75 provides relief to the person who sustains damages
through non-fulfillment of the contract by entitling him to claim
compensation for the same.
c) Claim Damages: Section 73 deals with the compensation for loss or
damage caused by breach of contract. The foundation of the claim for
damages rests in the celebrated case of Hadley vs. Baxendale (1854). The
facts of the case are: A delivered a defective shaft in his mill to B, a
manufacturer, for making a new shaft-identical to the one that is sent. A
did not make known to B that delay would result in loss of profits. B by
his neglect delayed the delivery of the shaft beyond a reasonable time. As a
result the mill was idle for a longer period than it would otherwise have
been, had there been no such delay. It was held, B was not liable for the
loss of profits during the period of delay as the circumstances
communicated to A did not show that the delay in the delivery of the shaft
would entail loss of profits to the mill. Damages cannot be awarded if the
injured party did not take any reasonable steps for the loss to be avoided.
Section 74 allows for agreement of a sum to be paid as damages in case of

breach of such contract. If the contract contains any stipulation by way of a

penalty for failure to perform the obligations, the aggrieved party is entitled
to receive from the party who has broken the contract. The damages are
classified into four categories:
i. General or Ordinary Damages: These are damages which naturally
arise in the usual course of things from such breach. General Damages are
usually assessed based on the actual loss suffered. The main aim of
providing general damages is to compensate the aggrieved party and not to
punish the party which is at fault.
ii. Special Damages: These are awarded from a breach of contract under
some peculiar circumstances. At the time of entering into the contract the
party has notice of special circumstances, which makes special loss, the
likely result of the breach in the ordinary course of things. These are the
damages which are claimed in addition to the damages arising from the
breach of contract. In Simpson vs. London and N W Rail Co, Simpson
entrusted a few specimens of his goods to an agent of a railway company in
order that the same be delivered at New Castle where an agricultural show
was to be held. The consignment note clearly specified that the delivery was
to be made in time. Because of default by the railway company, the samples
arrived late for the show. It was held that Simpson could claim damages for
loss of profits.
iii. Vindictive or Exemplary Damages: These are discouraged by court of
law. However, in case of breach of a promise to marry and dishonor of
cheque by banker wrongfully when he possesses sufficient funds to the
credit of the customer, exemplary damages are awarded.
iv. Nominal Damages: These are awarded merely to acknowledge that the
plaintiff has proved his case. Nominal damages are not awarded to
compensate for the damages.

Q3 what are the rights of a finder of a good under the

Indian contract Act?
RIGHTS OF FINDER OF GOODS: When a person finds an article and
takes it into his custody, he assumes the role of a bailee. He then has the
same responsibilities like any other bailee. We shall now discuss the rights
available to him:

i.

According to Section 168, the finder of goods can exercise

lien over the goods till the owner reimburses the expenses incurred
for the safe custody of the goods.

ii.

Where the owner has announced a reward for recovery of the

lost article, the finder has the right to retain the goods till he receives
the award.

iii.

The finder has a right to sell the article:

If the owner cannot be found provided the bailee has made

reasonable efforts;

If the owner refuses, upon demand, to pay the lawful charges of the
finder;

The article is of perishable nature or that, which loses most of its

value with passage of time; or

If the lawful charges of the finder in respect of the goods found,

amount to two thirds of their value.
CONTRACTS OF INDEMNITY: According to Section 124, a contract
by which, one party promises to save the other from loss caused to him by
the conduct of the promisor himself or by the conduct of any other person,
is called a contract of indemnity. The person who promises or makes
good the loss is called the indemnifier (promisor) and the person whose
loss is to be made good is called the indemnified or indemnity holder
(promisee).
A contract of insurance is an example of a contract of indemnity
according to English Law. In consideration of a premium the insurer
promises to make good the loss suffered by the assured on account of the
destruction by fire of his property insured against fire. However, a
contract of life insurance does not come under the category of a contract
of indemnity. This is because, in the case of life insurance, the insurer
agrees to pay a certain sum of money either on the death of a person or
on the expiry of a stipulated period of time. The question of having
suffered a loss does not arise. Moreover, as the life of a person cannot be
valued, the whole of the sum assured becomes payable and for that
reason also it is not a contract of indemnity.
The contract of indemnity in a real sense is a contingent contract. It must
have all essentials of valid contract. It can be expressed or implied. It is
relevant to discuss following cases in this regard:
The case of Goulston Discount Co. Ltd. vs Clark (1967), is an
explicit
example
of
express
contract
of
indemnity.

A and B go into a shop. B says to the shopkeeper let him (A)

have the goods, I will see you paid. The contract is one of
indemnity.
The case of Adamson vs Jarvis (1927) explains an implied contract
of
indemnity.

A on the instruction of T, sold certain cattle belonging to O. O

held A liable for it and recovered damages from him for selling it.
It was held that A could recover the loss from T, as a promise by
T to A from any such loss would be implied from his conduct in
asking A to sell the cattle.
The definition given in Sections 124 and is 125 of the Contract Act are
not exhaustive of the law of indemnity as it does not include implied
promises to indemnify and cases where loss arises from accidents and
events that are not depending on the conduct of the promisor or any
other person. Certain rights have been granted to the indemnity holder
under Section 125.
Rights of Indemnity Holder When Sued: The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover
from the promisor:
a.
all damages within the scope of the terms of the indemnity;
b.
all costs which he may be compelled to pay in any such suit if,
in bringing or defending it, he did not contravene the orders of the
promisor, and acted as it would have been prudent for him to act in
the absence of any contract of indemnity, or if the indemnifier
authorized him to bring or defend the suit; and
c.
All sums to be paid under the terms of any compromise of
any such suit, provided the compromise is not contrary to the
orders of the indemnifier, and should be authorized by him.
Though the Indian Contract Act does not grant specific rights to the
indemnifier, we can however, as in English Law, draw the rights of the
indemnifier to be the same as those of the surety which are detailed in the
foregoing parts.
The Indian Contract Act does not specify the time of commencement of the
indemnifiers liability. Different courts have been following different rules
with regard to this. Some courts contend that the indemnifiers liability will
begin only when the indemnity holder actually suffers a loss. On the other
hand, some have held that an indemnity holder may compel an indemnifier to
fulfill his promise even before actually incurring the loss. Buckley L J in
Richardson, ex parte etc. made the following observation Indemnity is not

given by repayment after payment. Indemnity requires that the party to be

indemnified shall never be called upon to pay.
CONTRACTS OF GUARANTEE: Section 126 deals with contract of
guarantee. According to this Section contract of guarantee is a contract to
perform the promise, or discharge the liability of a third person in case of
his default. The person who gives the guarantee is called the surety, the
person in respect of whose default the guarantee is given is called the
principal debtor, and the person to whom the guarantee is given is called
the creditor. A guarantee may be either oral or written.
The purpose of a contract of guarantee is to provide additional security to
the creditor in the event of default by the principal debtor. In a contract of
guarantee, there are three parties, i.e., the creditor, the debtor and the
surety. Also, there are three contracts in a contract of guarantee (i.e.,
between the creditor and the debtor, between the creditor and the surety and
between the debtor and the surety).
It should also be noted that a contract of guarantee presupposes the
existence of a debt. If there is no existing liability, there cannot be a
guarantee. Therefore, if the debt to be guaranteed is already time barred,
guarantee given will not be valid and the surety will be discharged from his
liability.
KINDS OF GUARANTEE: A guarantee may be given retrospectively for
an existing debt, or for future debt, or for the good conduct or honesty of an
employee, in which case the guarantee is called a fidelity guarantee.
A guarantee may also be specific or continuing guarantee. A specific
guarantee is one which is given for a specific debt, and comes to an end
when the debt is paid. A continuing guarantee relates to a series of
transactions where the surety remains liable for a fixed sum till the
continuance of guarantee. However, a continuing guarantee can be revoked
by the surety by giving due notice to the creditor. This can be explained by
referring to the case Wingfield vs de St Croix. In this case, the creditor (C)
let out his cottage to the principal debtor (P) on the condition that rent
would be paid initially for three months and thereafter from week to week.
S, who was the surety, guaranteed the payment of rentals by P to C. After
four months, the surety revoked his guarantee by giving notice to the
creditor. It was held that the surety was not liable for the rentals which
became due after revocation of the guarantee. The death of a surety also
results in revocation of continuing guarantee as far as future transactions
are concerned.

A continuing guarantee may also be revoked by any of the modes:

a. novation;
b. variance in the terms of the contract;
c. discharge of the principal debtor;
d. compounding with the principal debtor;
e. creditors act or omission impairing suretys eventual remedy; and
f. Loss of security.
The following illustration discusses the case of continuing guarantee: A,
in consideration that B will employ C in collecting the rents of Bs
zamindari, promises B to be responsible, to the amount of Rs.5, 000 for
the due collection and payment by C of those rents. This is a continuing
guarantee. Just like other contracts, a contract of guarantee should also be
supported by consideration. Inadequacy of consideration is not a criterion
to judge the validity of a contract of guarantee. The only requirement is that
there should be some consideration. Further, it is not necessary that
consideration should have passed between the creditor and the surety. It is
sufficient that the creditor has done something for the benefit of the debtor.
Past consideration will not be treated as good consideration for a contract
of guarantee.
CONSIDERATION OF GUARANTEE:
Anything done, or any promise made, for the benefit of the principal
debtor, may be a sufficient consideration to the surety for giving the
guarantee.
It is relevant to discuss following illustrations in this regard: B requests
A to sell and deliver to him goods on credit. A agrees to do so, provided
C will guarantee the payment of the price of the goods. C promises to
guarantee the payment in consideration of As promise to deliver the
goods. This is a sufficient consideration of Cs promise.
A sells and delivers goods to B. C afterwards, without consideration
agrees to pay for them in default of B. The agreement is void.
In a contract of guarantee it is not necessary that all the material facts be
disclosed unless it is in nature of insurance. In other words a contract of
guarantee is not a contract of Uberrimae Fidei.
The following case aptly describes this. London General Omnibus Co. vs.
Holloway (1912) C engaged P as a clerk to collect money for him. P
misappropriated some of Cs receipts and failed to account for them. This
sum was made good by Ps relations and C agreed to retain P in his service

on having a fidelity guarantee. S gave his guarantee for Ps duly

accounting. C did not acquaint S with Ps previous dishonesty. Held, the
guarantee could not be enforced against S owing to the non-disclosure of
Ps previous dishonesty.
BAILMENT & PLEDGE of GOODS: Bailment and Pledge are special
types of contracts which are regulated by Sections 148 to 181 of the Indian
Contract Act, 1872. The word bailment takes its roots from the French
word bailor which means to deliver. According to Section 148,
bailment is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of the
person delivering them. The person delivering the goods is called the
bailor and the person to whom they are delivered is called the bailee.
The following case and illustrations explain the concept of bailment clearly.
N R Srinivasa Iyer vs New India Assurance Co. Ltd. (1983) An insurance
company places a damaged insured car of A in possession of R, a
repairer. A is the bailor, the insurance company is the bailee, and R is the
sub-bailee. It is not necessary that a contract be entered for a bailor and
bailee relationship to be formed. Essentials of a bailment can be
summarized as under:
a.
Firstly, there should be delivery of goods for some purpose.
The delivery of goods should not be accompanied by transfer of
ownership.
b.
Secondly, the goods should either be returned to the bailor
after the purpose has been accomplished or it should be disposed of
according to the bailors directions.
Classification of Bailment: Bailments may be for,
i. exclusive benefit of the bailor;
ii. exclusive benefit of the bailee;
iii. mutual benefit of the bailor and the bailee;
iv. gratuitous bailment; where there is no consideration between the
parties; and
v. Non-gratuitous bailment or bailment for reward.
Duties and Rights of Bailor and Bailee:
DUTIES OF A BAILOR:
I. The bailor is bound to disclose, all the faults in the goods bailed to
the bailee, of which the bailor is aware, and that which materially

interferes with the use of the goods, or exposes the bailee to

extraordinary risks. If he does not make such disclosure, he is
responsible for damage arising to the bailee directly from such faults.
II. In a contract of bailment, the bailee will have to bear all the ordinary
expenses incurred, while the bailor will be responsible for any
extraordinary expenses incurred by virtue of the bailment. In case of
a gratuitous bailment, it is the duty of the bailor to bear the ordinary
and reasonable expenses incurred by the bailee.
III. The bailor is responsible to the bailee for any loss sustained by him
in the following instances:
Where the bailor is not entitled to make the bailment, or to
receive back the goods, or to give directions, regarding them.
Premature termination of a gratuitous bailment.
IV. It is the duty of bailor to receive back the goods after the purpose is
achieved.
Rights of Bailor:
i.

The bailor is entitled to file a suit for enforcing all the

liabilities or duties of the bailee.
ii.
The bailor can terminate the bailment if the bailee does, with
regard to the goods bailed, any act which is inconsistent with the
terms of the bailment (Section 153).
iii.
Emand return of goods lent gratuitously.
iv.
The bailor can sue a third party who by his act causes any
injury or deprives the bailee the possession and use of goods bailed.
DUTIES OF BAILEE:
I. The bailee is duty bound to take reasonable care of the goods bailed,
as he would in similar circumstances take care of his own goods.
According to Section 151, the bailee should take such care of the
goods as a man of ordinary prudence would take of his own goods. If
the bailee has not acted in a prudent manner, he cannot be excused
by pleading that he had taken similar care of his own goods also, and
his goods, have also been lost or damaged along with those of the
bailor, or that the bailor had the knowledge that his goods were being
kept in a negligent manner.
II. The bailee should not make any unauthorized use of goods.

III. The bailee should not mix the goods of the bailor with his own goods,
but keep them separate from his own goods. Where the bailee mixes
the bailors goods with those of his own with the bailors consent, then
the bailor and the bailee shall have an interest in the mixed goods in
proportion to their respective shares. Where he mixes the goods
without the consent of the bailor, two possibilities may arise:
The goods can be separated.
The goods cannot be separated
Where the goods can be separated: Where the goods of the bailor
and the bailee can be separated, then they will remain the owners in
accordance with their respective shares. However, the costs of
separation as well as any damage arising from the mixture will have to
be borne by the bailee.
When the goods cannot be separated: The bailor can recover
damages from the bailee for the loss of the goods.
If, by mistake on the part of the bailee or by accident or by an act of
God or by the act of an unauthorized third party, goods of the bailor
get mixed up with like goods of the bailee, then the mixture belongs to
the bailor and bailee in proportion to their shares but the cost of
separation will have to be borne by the bailee.
IV. The bailee should not set up an adverse title of the goods bailed
claiming them to be his.
V. The bailee not only has to return the goods bailed but also any
accretion to the goods.
Rights of Bailee: The duties of the bailor are the rights of the bailee:
i. Delivery of goods to one of several joint bailors of goods.
According to Section 165, in case of several joint owners of goods,
the bailee may deliver them back to or according to the directions of,
one joint owner without the consent of all, in the absence of any
agreement to the contrary.
ii. Delivery of goods to bailor without title.
According to Section 166, if the bailor has no title to the goods, and the
bailee, in good faith, delivers them back to, or according to the
directions of, the bailor, the bailee is not responsible to the owner in
respect of such delivery.
iii.
Right to apply to court to stop delivery, where it is claimed by
a person other than the bailor.

According to Section 167, if a person other than the bailor claims the
goods bailed, the bailee may apply to the court to stop the delivery of
the goods to the bailor, and to decide the title to the goods.
iv. Right of action against trespassers.
According to Section 180, if a third person wrongfully deprives the
bailee of the use or possession of the goods bailed to him, he has the
right to bring an action against that party. The bailor can also bring a
suit in respect of the goods bailed. In Purushottam Das Banarsi Das vs
Union of India delivery of certain goods were obtained by a person on
a forged railway receipt. The said person later pledged the goods with
a third party. It was held that the railway authorities could recover the
same from the third party.
v.
The bailee is also entitled to recover necessary expenses
incurred on bailment. He can also recover compensation from the
bailor in case he incurs a loss owing to the defective title of the
bailor.
vi. Retain the goods (lien) till his dues are paid, in other words the
bailee can exercise a general lien. The bailee may also exercise a
particular lien when the contract requires him to use his skills.

Q4 For every valid agreement there should be a

consideration. Comment
LAWFUL CONSIDERATION: Consideration is an important element of
a contract. In day to day life, quite often promises are made without giving
them a thought. In order to make an agreement enforceable, law requires
such agreements barring a few exceptions, to be backed by consideration.
Consideration may be of following kinds:
i.
Executory or future consideration, in return of a promise
which is to be fulfilled in future.

ii.

Executed or present in which it is an act or forbearance

made or suffered for a promise. For example, in a cash
sale, consideration is present or executed.
iii. Past consideration is the one which pays for a past act or
forbearance.
iv.
An act constituting consideration which took place and is
complete before the promise is made.
As per Section 23, there has to be a lawful consideration for a legal object
in every contract. Hence, the following aspects should not exist in case of
consideration and object for the contract to be declared as legal and
binding.
It should not be Forbidden by Law
Performance should not Defeat the Provisions of any Law
It should not be Fraudulent
It should not be Considered Immoral
LEGAL OBJECT: The sixth essential element of a valid contract is legal
object. By object it is to mean the purpose of the contract. Contracts with
unlawful objects are void.
CERTAINTY AND POSSIBILITY OF PERFORMANCE: the
agreements in which the meaning is not certain, or is not capable of being
made certain, are void. The uncertainty may exist because of quality,
quantity, price or title of the subject matter. The terms of contract should be
certain. In Keshavlal Lallubhai Patel vs. Lalbhai Trikumlal Mills Limited,
the workers of the respondent Mill went on a strike expressing their
support to the Quit India Movement. As a result, the respondent mill was
closed and could not supply the textile goods to the appellants as agreed. In
a letter seeking extension of time the respondent mill cited the reason for
the failure to supply goods and stated that the delivery time of the goods
stands extended until the normal state of affairs is restored.
In Guthing vs. Lynn, the buyer of a horse agreed to pay 5 pounds extra, if
the horse proved to be lucky. The agreement was held to be void for
uncertainty. The definition of void agreements includes the wager
agreements. Section 30 defines wager as an agreement between the parties
by which one promises to pay money or moneys worth on the happening
of some uncertain event in consideration of the other parties promise to pay
if the event does not happen.
RESTITUTION: When a contract becomes void, any benefit derived out
of the contract by one party is required to be restored to the other. It is

significant to note that the law of restitution covers only benefits received
and not losses incurred. The principle of restitution is that the defendant
who has been unjustly enriched at the expense of the plaintiff is required to
make restitution to the plaintiff. There cannot be restitution where the
parties are wholly incompetent to contract (where one of the parties is
minor). Section 65 which deals with restitution applies to contracts
discovered to be void and contracts which become void. A person who
has received a benefit under any such contract will have to restore the
benefit to the person from whom it was received. In Dharamsey vs.
Ahmedbhai, a person hired a godown for a period of 12 months by paying
an advance for the entire period. When a fire broke out in the godown he
was entitled to claim a proportionate amount of rent paid in advance.
CONTINGENT CONTRACTS: Section 31 of the Act provides for such
contracts and defines it as a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen. In Muthu vs.
Secretary of State, a person was the highest bidder for a house which was
put up for sale. However, one of the conditions was that the sale could be
confirmed only if the Collector authorizes it. The Collector declined to
confirm the sale. It was held that there was no contract. The event on which
the happening of the contract is dependent should be uncertain. Further, the
event should be collateral to the contract. The event should not form part of
the consideration of the contract though the contract is made to depend upon
it. Contracts of indemnity and insurance are examples of contingent
contracts.
PERSONS WHO ARE REQUIRED TO PERFORM CONTRACTS:
Where personal considerations form the basis of a contract, the promisor
alone should perform the contract. Where personal considerations do not
form the basis of a contract, then the contract may be performed by the
promisor or his agent or legal representatives of the promisor in the event of
his death.
Time and Place of Performance: A contract, which does not specify the
time for performance should be performed within a reasonable time. 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. When a
promise is to be performed on a certain day, and the promisor has not
undertaken to perform it, without application by the promisee, it is the duty
of the promisee to apply for performance at a proper place and within the

usual hours of business. A contract should be performed in the manner and

at the time prescribed in the contract.
Devolution of Joint Rights and Liabilities: Where a joint promise is
made, the promisee may compel any one of the joint promisors to perform
the whole of the promise. The joint promisor, who performs the contract,
may claim contribution from the other joint promisors. Where any of the
joint promisors defaults in making his contribution, then the other joint
promisors will have to bear even the defaulted amount equally.
Appropriation of Payments: Where several debts are owed and where
payment made is insufficient to discharge the debt, the debtor may intimate the
creditor as to the nature of appropriation. In such a case, the creditor should
follow the directions issued by the debtor.
Assignment of Contracts: Assignment of a contract means the transfer of
rights and liabilities arising out of the contract in favor of a third person
either with or without the concurrence of other party to a contract. An
assignment may take place either by the act of the parties or by operation of
law.
DISCHARGE OF CONTRACT: We now come to the last stage of
contracts. A contract is said to be discharged when the rights and liabilities
created by such contract come to an end. Contracts may be discharged or
terminated by:

Performance of the contract, or

By mutual consent, or

By lapse of time (by limitation), or

By operation of law, or

Impossibility of performance, or

By breach of contract.

Each of the various modes of discharge of contract is explained below:

1. Performance of Contract: The most obvious and meaningful way
to discharge a contract is to fulfill the terms and conditions agreed by
each of the parties in the contract. Section 38 provides for tender of
performance. As per this section if the promisor offers to perform his
side of the contract, but the promisee does not accept his performance
the promisor is discharged from his liability. This is known as

attempted performance. The promisor may sue the promisee for the
breach of contract, if he so desires.
i. Discharge by Mutual Agreement or Consent: The contract may be
terminated by mutual consent of both the contracting parties. Various
cases of discharge by mutual agreement are specified in Section 62
and Section 63. Section 62 provides about the effect of novation as to
where a new contract is substituted for an existing contract by mutual
agreement of both the parties, the new contract is basically agreed
upon to adjust the remedial rights arising out of the breach of the old
contract.
ii. Discharge by Lapse of Time: Any contract cannot be extended
indefinitely. The Limitation Act, 1963 provides for a certain time
frame within which the contract has to be performed (called period of
limitation). If no action is taken by the contracting parties within the
period of limitation, no remedy at law will be available. It provides for
a definite time frame within which, the deprived party may seek
remedy at law.
iii. Discharge by Operation of Law: A contract may be discharged
by the operation of law in any of the following ways:
i.
By Merger: When the parties agree to include the previous
inferior contract in a superior contract.
ii.
Law does not permit any unauthorized alteration of the terms of a
written agreement. Any such act by any one of the parties will
automatically make the contract as discharged by operation of
law.
iii. By Insolvency: When a person is adjudged insolvent, he is
discharged from all liabilities incurred prior to his adjudication.
iv.
Death: Where a contract is entered into, based on personal
consideration and where it is required that performance of the
contract should be made by the promisor in person, the contract
will be discharged on the death of the promisor.

Q5 Explain the rights of an unpaid seller under Indian

sales of goods Act.
DEFINITIONS:
1.
Buyer means a person who buys or agrees to buy goods;
2.
Delivery means voluntary transfer of possession from one
person to another;

3.
Goods are said to be in a deliverable state when they are in
such state that the buyer would under the contract be bound to take
delivery of them;
4.
Document of title to goods includes bill of lading, dockwarrant, warehouse keepers certificate, harbingers certificate,
railway receipt, [multimodal transport document,] warrant or order
for the delivery of goods and any other document used in the
ordinary course of business as proof of the possession or control of
goods or authorizing or purporting to authorize, either by
endorsement or by delivery, the possessor of the document to
transfer or receive goods thereby represented;
5.
Fault means wrongful act or default;
6.
Future goods means goods to be manufactured or produced
or acquired by the seller after making of the contract of sale;
7.
Goods means every kind of moveable property other than
actionable claims and money; and includes stock and shares,
growing crops, grass, and things attached to or forming part of the
land which are agreed to be severed before sale or under the contract
of sale;
8.
A person is said to be insolvent who has ceased to pay his
debts in the ordinary course of business, or cannot pay his debts as
they become due, whether he has committed an act of insolvency or
not;
9.
Mercantile agent means a mercantile agent having in the
customary course of business as such agent authority either to sell
goods, or to consign goods for the purposes of sale, or to buy goods,
or to raise money on the security of goods;
10. Price means the money consideration for a sale of goods;
11. Property means the general property in goods, and not
merely a special property;
12. quality of goods includes their state or condition;
13. Seller means a person who sells or agrees to sell goods;
14. Specific goods means goods identified and agreed upon at
the time a contract of sale is made; and
15. Expressions used but not defined in this Act and defined in the
Indian Contract Act, 1872, have the meaning assigned to them in that
act.

RIGHTS OF AN UNPAID SELLER AGAINST THE GOODS:

The term unpaid seller is defined by Section 45 of the Sale of Goods Act,
1930. As per this section, the seller of goods is deemed to be an unpaid
seller within the meaning of the Act.
1. When the whole of the price has not been paid or tendered.
2. 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 dishonor of the instrument
or otherwise.
Rights of an Unpaid Seller: As per Subsection (1) of Section 46, subject
to the provisions of this Act and of any law for the time being in force
notwithstanding that the property in the goods may have passed to the
buyer, the unpaid seller of goods, as such, has by implication of law,
1. A lien on the goods for the price while he is in possession of them.
2. In case of the insolvency of the buyer a right of stopping the goods
in transit after he has parted with the possession of them.
3. A right of re-sale as limited by this Act.
Where the property in goods has not passed to the buyer the unpaid seller
has, in addition to his other remedies, a right of withholding delivery
similar to and co-extensive with his rights of lien and stoppage in transit
where the property has passed to the buyer. [Section 46(2)]
Section 46(1) will be applicable only if the plaintiff proves that:
a. He is an unpaid seller.
b. The buyer is insolvent.
c. The goods were in transit.
d. The property in the goods has passed to the buyer.

Unpaid Sellers Lien (Section 47):

1.

Subject to the provisions of this Act, the unpaid seller of

goods who is in possession of them is entitled to retain possession of
them until payment or tender of the price in the following cases, namely
a. Where the goods have been sold without any stipulation as to
credit.
b. Where the goods have been sold on credit, but the term of
credit has expired.

c. Where the buyer becomes insolvent

2. The seller may exercise his right of lien notwithstanding that he is in
possession of the goods as an agent or bailee for the buyer. In Imperial
Bank vs. London & St Katherine Dock Co., it was held that even though
the delivery of a bill of lading transfers legal property, it does not affect the
sellers right of lien on the goods as long as they are in his possession.
Goods sold without any stipulation as to credit: When goods are sold
without any stipulation as to credit, the seller can retain the goods, until the
payment is made.
Goods sold on credit, but the term of credit has expired: When goods
are sold on credit, the possession of the goods is transferred to the buyer
immediately. However, if the seller has retained possession of the goods
until the expiry of the period of credit, the lien which was not available to
him during that period will accrue to him on the expiry of the credit period,
even though the buyer is not insolvent at that time.
Where the buyer becomes insolvent: The third case where the seller has a
lien on the goods is where the buyer becomes insolvent. The sellers lien is
revived in case the time for payment has not arrived and the buyer becomes
insolvent. This is based on the rule, that where one of the parties to the
contract is unable to fulfill the promise required of him, the other party is
absolved from performing his obligation.
In E C Edulji vs. Cafe John Brothers, a second-hand refrigerator was
purchased for Rs.120. Later it was agreed between the vendee and the
vendor that the refrigerator should be put in order at a cost of Rs.320. The
vendee took delivery of the refrigerator on February, 20 and informed the
vendor that the refrigerator was in good working condition. Later, he
informed the vendor that the refrigerator was not in working order. The
vendor took away two parts of the refrigerator for further repairs. As the
full cost of the original repairs had not been paid, the vendor claimed a lien

on the parts taken. It was held that when the contract was fully performed
and when the goods were handed back (although the cost of repairs had not
been fully paid) the lien had come to an end, and could not be revived
because the buyer asked for further repairs.
Part Delivery (Section 48)
Where an unpaid seller has made part delivery of the goods, he may
exercise his right of lien on the remainder, unless such part delivery has
been made under such circumstances as to show an agreement to waive the
lien. A part delivery of goods does not amount to a full delivery of goods.
Hence, an unpaid seller who has made part delivery can exercise his right
of lien over the remaining goods. In such a case, the seller has a lien not
only for the proportion of price to be paid on account of goods retained, but
also for whatever portion of price that remains unpaid. However, if
delivery of part of the goods is intended to be a symbolic delivery of the
whole, the right of lien on the goods retained will come to an end.
TERMINATION OF LIEN (SECTION 49)
1. The unpaid seller of goods loses his lien thereon
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.
b. When the buyer or his agent lawfully obtains possession of the goods.
c. By waiver thereof.
2. 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.
Stoppage in Transit: Subject to the provisions of this Act, when the buyer
of goods becomes insolvent, the unpaid seller who has parted with the
possession of the goods has the right of stopping them in transit, that is to
say, he may resume possession of the goods as long as they are in the
course of transit, and may retain them until payment or tender of the price.
(Section 50)
The following are the conditions required to be fulfilled for the
applicability of Section 50.
a) The seller should be unpaid
b) The buyer must be insolvent
c) The property in the goods should have passed from the seller to the
buyer

d) The goods should be in transit.

The right of stoppage of goods accrues to the seller because of the
insolvency of the buyer. Where during the course of transit, the seller
discovers that the buyer is insolvent; he may retake possession of the goods
before the possession is transferred to the buyer. It should also be noted
that the right of stoppage is exclusive of the right of lien.
RIGHTS OF THE UNPAID SELLER AGAINST THE BUYER
PERSONALLY:
An unpaid seller has the following rights against the buyer personally.
a. Suit for price (Section 55): Where under a contract of sale the property
in the goods has passed to the buyer and the buyer wrongfully neglects or
refuses to pay for the goods, according to the terms of the contract, the
seller may sue him for the price of the goods [Section 55(1)].
Where under a contract of sale, the price is payable on a certain day
irrespective of delivery and the buyer wrongfully neglects or refuses to pay
such price, the seller may sue him for the price although the property in the
goods has not passed and the goods have not been appropriated to the
contract [Section 55(2)].
b. Suit for damages for non-acceptance (Section 56): Where the buyer
wrongfully neglects or refuses to accept and pay for the goods, the seller
may sue him for damages for non-acceptance.
c. Suit for interest (Section 61): Where the buyer wrongfully refuses to
accept and pay for the goods, the court may award interest at such rate as it
thinks fit on the amount of the price to the seller in a suit by him for the
amount of the price from the date of the tender of the goods or from the
date on which the price was payable.
The law relating to sale of goods can be found in the Sale of Goods Act,
1930. The sale of goods is the most common of all commercial contracts
and hence the law relating to this, is bound to be of importance to all
classes of the community.
The general rules applicable to contracts are applicable to contracts of sale
of goods as well. The general provisions of the Indian Contract Act,
continue to apply to contracts for the sale of goods in so far as they are not
inconsistent with the express provisions of the Sale of Goods Act. The Act
has not defined the term sale but contemplates two parties to the contract
a buyer and a seller and that the buyer accepts the goods for a price.
CONTRACT OF SALE:

As per Section 4(1) of the Sale of Goods Act, a contract of sale of goods is
a contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price. As per subsection (2), such contract of sale
may either be absolute or conditional.
Subsection (3) deals with the concept of an agreement to sell and stipulates
that where the transfer of property in the goods is to take place at a future
time or subject to some condition thereafter to be fulfilled, such a contract is
an agreement to sell.
SALE AND AGREEMENT TO SELL:
The distinction between a sale and an agreement to sell may thus be
summarized as follows:
1.
A contract which contemplates transfer of title to goods to the
buyer immediately is a sale while a contract which does not
contemplate a transfer of title to goods immediately is an agreement
to sell.
2.
A contract of sale is an executed contract. It involves a
contract plus a conveyance of the property. When the property is
transferred, the rights and liabilities attached to the goods are also
transferred. An agreement to sell, on the other hand, is an executor
contract. The property in the goods does not pass until a certain time
has lapsed or until a certain condition is fulfilled.
3.
In an agreement to sell, the seller remains the owner of the
property until it is actually transferred to the buyer at a future point
of time. However, in a contract of sale, the buyer becomes the
owner immediately and all the risks attached to the goods are passed
on to him irrespective of the fact whether the goods are delivered to
him or not and whether the price is paid or not.
4.
In an agreement to sell, the seller agrees to sell the goods for a
price and the buyer agrees to buy the goods for a price. In a contract
of sale, the seller sells the goods to the buyer for a price.
5.
The consequences of a breach of an agreement to sell is as
follows:
a.
In case the buyer defaults, the seller may sue for damages; in
case the seller defaults, the buyer has a personal remedy against the
seller.
b.
Where there is a breach by any of the parties to a contract of
sale, the following will be the consequence. If the buyer fails to pay
the price, the seller may sue him; if the seller fails to deliver the

goods, the buyer may sue for delivery of the same or for conversion
or for damages.
6.
Violation of any of the conditions of an agreement to sell
entitles the buyer to rescind the contract.
However, in a sale, the breach of any condition will not be a ground
for rejecting the goods or treating the contract as rescinded. The
breach can only be treated as a breach of warranty.
7.
The property in the goods remains with the seller in the case
of an agreement to sell. He may sell the goods to a third party,
although he will be committing a breach. In a sale, the goods cannot
be resold by the seller. If he does so, the buyer can recover the
goods, sometimes from third parties.
8. The goods in an agreement of sale may not be specified or
ascertained. In a sale, the goods are specified and ascertained.
9.
A sale results in creation of a jus in rem (i.e., right to the buyer
to enjoy the goods as against the world at large including the seller)
while an agreement to sell results in jus in persona (i.e., right to the
buyer against the seller to sue for damages).
10. In a contract of sale, in case the buyer becomes insolvent
before making payment, the seller is required to handover the goods
to the official receiver or the assignee. In such a situation, he can
claim a ratable dividend for the price of the goods. The situation
differs when it comes to an agreement to sell. Here, if the buyer
becomes insolvent and has not made payment, the seller is under no
obligation to part with the goods.
11.
In a contract of sale, if the seller becomes insolvent, the buyer
can claim the goods from the official receiver or assignee. In an
agreement to sell, if the seller is declared insolvent, the buyer can
only claim a ratable dividend in case he has already made payment
ESSENTIALS OF A CONTRACT OF SALE:
The following are the essential ingredients of a valid contract of sale. There
should be:
a.
a contract
b.
two parties (i.e., the buyer and the seller)
c.
transfer or agreement to transfer the property
d.
goods

e.

from the seller to the buyer

f.
For a price (i.e., money consideration).
Contract: The term contract means an agreement that is enforceable by
law. It excludes from its purview all void agreements. It also presumes the
existence of those elements necessary to constitute a valid contract.
Two Parties: The presence of two parties (the seller and the buyer) is
essential to constitute a contract of sale. Also, the two parties should be two
different people and should be competent to enter into a contract.
Transfer the Property: A contract of sale of goods contemplates a transfer
of general property and not special property. Where a person owns the
goods he is said to have general property in the goods. Where he has
special property, he is a mere Pawnee of the goods.
Goods: Any kind of goods may be transferred unless provided otherwise by
law. Even the interest of a pawner and a Pawnee comes within the definition
of goods. The transfer of goods should contemplate a transfer of the
whole interest of the seller in the goods.
From the Seller to the Buyer: The transfer of property should be from the
seller to the buyer. If the seller has no right to sell the goods, then the buyer
is not entitled to receive the same and consequently there will be no
contract.
For a Price: The consideration in a contract of sale should be money
alone. The price should be money, paid or promised. However, if the
consideration is something other than money, then the contract will not be
one of sale.
SALE AND HIRE PURCHASE AGREEMENT
A hire purchase agreement basically involves two stages:
a. Firstly, goods are hired out according to the terms and conditions of
the hire purchase agreement.
b. Secondly, the hirer can become the owner of the goods by exercising
his option to purchase the goods, provided he has paid all the
installments. Thus, in a hire purchase transaction, the hirer is under no
obligation to buy the goods. He may either return the goods or
become the owner by paying all the hire purchase installments and
exercising his option to purchase. The property in the goods
continues to remain with the seller until the hirer has exercised his
option. In case of a sale, the buyer cannot repudiate the contract by
return of the goods. However, in the case of a hire purchase agreement,
the hirer has an option to repudiate the contract by returning the goods.

In Finance Center vs. Sri Ram Prakash, it was held that a hire purchase
agreement is virtually a contract of bailment.
SALE AND BARTER OR EXCHANGE: In a barter or exchange, the
element of price in money is lacking. Similarly, the exchange of one form
of money for another cannot be considered as a sale. Even where foreign
currency is bought and sold in Indian currency or vice versa, it does not
constitute a sale.
SALE AND BAILMENT: When goods are delivered by one person to
another for some purpose, and where it is agreed that on the
accomplishment of the purpose, the goods will be returned or disposed of
according to the directions of the person delivering it, the goods are said to
have been bailed. However, in case of a sale, the ownership of the goods is
transferred from the seller to the buyer.
SALE AND CONTRACT FOR WORK AND MATERIALS: The
question as to whether a particular contract is one of sale or a work
contract will depend upon the facts of each case. Even though it is
difficult to lay down any specific rule to distinguish between the two, it
should be remembered that if the contract is for supply of materials at an
agreed price and the work and the service is incidental to the execution of
the contract, the contract is for sale of materials.
In Dr Baretto vs. T R Pruce, it was held that the supply of artificial teeth by
a dentist was a contract of sale. A works contract for supply of window
frames and fixing them to the building was held to be an indivisible works
contract. It was held that the material supplied for execution of the works
contract was not sale but formed a part of the works contract Nanuram vs.
State of Rajasthan
CONTRACT OF SALE HOW MADE: Section 5 lays down that:
a. A contract of sale is made by an offer to buy or sell goods for a price
and the acceptance of such offer. The contract may provide for the
immediate delivery of the goods or immediate payment of the price
or both, or for the delivery or payment by installments or that the
delivery or payment or both shall be postponed.
b. Subject to the provisions of any law for the time being in force, a
contract of sale may be made in writing or by word of mouth, or
partly in writing and partly by word of mouth or may be implied from
the conduct of the parties. The presence of a buyer and seller is
essential for a contract of sale.
Section 5 lays down that:

i. A contract of sale is made by an offer to buy or sell goods for a price

and the acceptance of such offer. The contract may provide for the
immediate delivery of the goods or immediate payment of the price or
both, or for the delivery or payment by installments or that the delivery
or payment or both shall be postponed.
ii. Subject to the provisions of any law for the time being in force, a
contract of sale may be made in writing or by word of mouth, or partly
in writing and partly by word of mouth or may be implied from the
conduct of the parties.
The presence of a buyer and seller is essential for a contract of sale.
Who may sell: Any person who is competent to contract and who is the
owner of the goods may execute the sale. Also, the owner may authorize
any person to do so on his behalf. Where the goods have been attached, any
sale of the same is void. Such goods are liable to be confiscated and sold in
execution of the decree. A sale may also be made under the authority and
with the consent of the owner. For example, a sale by an agent acting within
the scope of his authority. Similarly, it was held in National Bank vs.
Hampson, that sales made by persons with limited interest in the ordinary
course of business may also be valid, as sales of mortgaged goods by a
mortgagor who has been allowed by his mortgagee to carry on business to
which such sales are incident.
A sale may also be affected by a Pawnee of goods. In this case, even
though the Pawnee is not the owner of the goods, he can sell the goods by
virtue of a special covenant.
Presence of Mutual Assent between the Parties: Mutual assent or
consensus ad idem is an essential ingredient of every contract. The parties
to the contract should be of the same mind regarding the subject matter of
the contract. Mutual assent of the parties may be:
a. Express, or
b. Implied.
If express it may be oral or in writing. However, if it is implied it can be
inferred from the conduct, gestures or sometimes by the mere silence of the
parties. According to Section 5, contract of sale of goods may provide for,
a. immediate delivery of the goods, or

b. delivery of goods at some future time, or

c. Delivery of goods by installments.
Also, there may be,
a. immediate payment of price, or
b. payment of price in future, or
c. Payment of price by installments.
It also lays down another situation where,
a.

both delivery and payment may be simultaneous

b.

both delivery and payment will be postponed

c. Both delivery and payment will be made by installments.

SUBJECT MATTER OF A CONTRACT OF SALE:
Goods form the subject matter of a contract of sale. As per Section 2(7) of
the Sale of Goods Act, goods means every kind of movable property
other than actionable claims and money; and includes stock and shares,
etc. According to Subsection (1) of Section 6, goods which form the
subject matter of a contract of sale may be either
a. Existing goods
1. Owned by the seller, or
2. Possessed by the seller.
b. Future goods it may be noted that the term existing goods is followed
by the words owned or possessed by the seller. Future goods are not
qualified by any such expression as they have no existence at the time of the
contract.
Contract of Sale of Future Goods may be,
a.

Absolute, or

b.

Conditional.

When the contract is absolute, the seller undertakes to unconditionally sell

the goods to be acquired at a later stage. Where the contract is conditional,
he contracts to sell goods conditionally on their acquisition. An absolute
contract for sale of future goods can be categorized into:
a.

Present sale of future goods.

b.
Present sale of a chance of obtaining goods, or a sale of a
mere expectation dependent upon a chance.
PRESENT SALE OF FUTURE GOODS:
a. In reality this is not a sale but an agreement to sell as one cannot transfer
the property in goods which is not in existence. In effect, this is provided
by Subsection (3) of Section 6, which states that such a contract is a mere
agreement to sell. In such contracts the property in the goods passes to the
buyer at a later stage as in the following cases:
i. If the seller after acquiring the goods, expresses an intention to execute
the original agreement. In Lunn vs. Thornton, it was held that a deed of
bargain and sale cannot pass the property in goods which do not belong to
the grantor at the time of execution of the deed, unless there is some new
act done by the grantor after he acquires the property, indicating his
intention that such subsequently acquired property should so pass.
ii. If the buyer gets control and possession of the goods under authority to
seize them. In Congreve vs. Evetts, growing crops were seized and taken
possession under a bill of sale. Before a sale could be executed, a judgment
was delivered in favor of a creditor. Consequently, the Sheriff seized the
goods and sold them. The proceeds of the sale were paid to the creditor.
However, it was held that the purchaser of the bill of sale was entitled to
the proceeds.
iii.

Where the seller performs an act, thus irrevocably appropriating the

goods to the contract. In Langton vs. Higgins, C agreed to sell to
the plaintiff all the crop of oil of peppermint growing on his farm in
the year at a particular price. Subsequently, on Cs request, the
plaintiff sent bottles to C for filling the bottles with oil. C, having
weighed the oil, put it in those bottles, labeled them with the weight
and prepared the invoices. However, before all the bottles could be
filled, he sold and delivered several of them to the defendant. It was

held that the putting of the oil was an act of appropriation and hence
the property vests in the plaintiff.
iv.

If the goods can be ascertained by description, the equitable interest

in them passes to the buyer as soon as they are acquired by the seller.

In Tailby vs. Official Receiver, a bill of sale assigned in favor of the

mortgagor all the book debts due and owing or which might during the
continuance of the security become due and owing. In this case, it was held
that future property, possibilities and expectancies are assignable in equity
for value.
b. Present sale of a chance of obtaining goods: Here the sale is similar to an
agreement to sell. When the buyer agrees to such a sale, he takes the risk of
the happening of the event. The buyers contract is absolute. However, it is
conditional on the part of the seller on the existence of the chance. The
subject matter in such an agreement may turn out to be of a greater value or
of a smaller value. This can be illustrated with the help of an example. A
pearl fisherman may haul oysters from the sea. The buyer of pearl oysters
from a pearl fisherman purchases a chance. The oysters may either yield
pearls of a greater value than the price paid or they may yield pearls of a
lower value or even of no value. Whatever be the outcome, the buyers
contract is absolute. As he has purchased a chance, he has to abide by its
consequences.
Conditional Sale of Future Goods: A seller may also contract to sell
goods conditionally on their acquisition. If the goods do not arrive or fail,
no action can be taken against the seller, except in a case where the seller
himself prevents the goods from coming into existence.
CONTINGENT GOODS: Subsection 2 of Section 6 lays down that a
seller may also undertake to sell goods, the acquisition of which is
dependent upon a contingency. In Jethalal C Thakkar vs. R N Kapur the
defendant agreed to sell 1,000 shares of the plaintiff within 12 months of
the bank being converted into Finance Corporation. In case the first event
failed to occur, he himself would take the 1,000 shares at the agreed rate.
The defendant failed to get the shares sold and consequently was sued by
the plaintiff. In this case, it was held that a conditional obligation is a sort
of quasi obligation consisting of a possibility that a real obligation already
exists, or may come into existence in the future. The fulfillment of the
condition is the transformation of the potentiality into actuality. The failure
of the condition is the failure of the chance to become a fact.

ASSIGNMENT B

Q1What is a negotiable instrument, explain its

characteristics.
DEFINITION OF NEGOTIABLE INSTRUMENT: According to
Section 13 of the Act, Negotiable Instrument means a promissory note, bill
of exchange or cheque payable either to order or to bearer. Justice Willis in
his book The Law of Negotiable Securities has defined a negotiable
instrument as an instrument, the property in which is acquired by anyone
who takes it bona fide, and for value, notwithstanding any defect of title in
the person from whom he took it, from which it follows that an instrument
cannot be negotiable unless it is such and in such a state that the owner
could transfer the contract or engagement contained therein by simple
delivery of instrument.
CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT:
1. Free transferability is one of the most important characteristics of a
negotiable instrument. It can be transferred by mere delivery or by
endorsement and delivery. The former is known as payable to
bearer and the latter payable to order.
2. The holder of the instrument is presumed to be the owner of the
property contained therein.
3. The holder in due course (one who acquires the instrument in good
faith and for consideration) gets it free from all defects including
fraud provided he was not party to it.
4. The holder in due course is entitled to sue for recovery of the sum in
his own name.
5. The instrument is transferable till maturity and in case of cheque till
it becomes stale (on the expiry of six months from the date of the
issue).
6. Under Sections 118 and 119 of the Act, negotiable instruments are
subject to certain presumptions in order to facilitate business
transactions. It shall be presumed that every Negotiable Instrument
is drawn for consideration irrespective of consideration mentioned in
the document. Every bill is accepted within reasonable time before
maturity and transferred before its maturity. The instruments were
endorsed in the order in which they appear on it. It is presumed that
the holder of instrument is holder in due course. However, the above

presumptions are rebuttable by evidence to the contrary. The burden

of proof lies on defendant and not upon the plaintiff.
KINDS OF NEGOTIABLE INSTRUMENTS: Negotiable instruments
may be
a.

Negotiable by Statute:

The Negotiable Instruments Act recognizes only three kinds of

instruments under Section 13 promissory notes, bills of exchange
and cheques.
b.

Negotiable by Custom or Usage:

Certain instruments have acquired the character of negotiability by the usage

or custom of trade. In India, Government promissory notes, bankers drafts
and pay orders, hundies, delivery orders and railway receipts for goods
have been held to be negotiable by usage or custom.
We shall however, restrict our study to those instruments covered under
Section 13 of the Act which is classified below.
Bearer Instrument:
A promissory note, bill of exchange or cheque is payable to bearer when it
is expressed to be so payable or when the last endorsement on the
instrument is an endorsement in blank. A person who is the lawful holder
of a bearer instrument can obtain payment on the instrument.
Order Instruments:
An order instrument is one which is expressed to be payable on order and
when it is expressed to be payable to a particular person it does not contain
any words prohibiting transfer or indicating the intention that it shall not be
transferable.
Inland Instruments:
An inland instrument is one which is drawn or made in India upon any person
resident therein, even though it is made payable in a foreign country.
Foreign Instruments:

A foreign instrument is one which is not an inland instrument. A foreign

instrument must be drawn outside India and made payable outside or inside
India or it must be drawn in India and made payable outside India and
drawn on a person resident outside India.
Demand Instruments:
An instrument like promissory note or a bill of exchange wherein time for
payment is specified or is payable at sight is an instrument payable on
demand.
Ambiguous Instrument [Section 17]:
An instrument which in form is such that it may either be treated by holder
as a bill or as a promissory note, like when the drawer and the drawee are
the same person or where the drawee is a fictitious person the holder can
choose to treat the instrument either as a bill of exchange or a promissory
note. Once decided on the type of the instrument he is bound by his
decision.
Illustration: A draws a bill on B and negotiates it himself. B is a
fictitious drawee. The holder may treat the bill as a note made by A.
Inchoate or Incomplete Instrument: When one person signs and delivers
to another, a stamped instrument which is either wholly blank or
incomplete, he thereby gives a prima facie authority to the holder thereof
to make or complete, as the case may be, upon it a negotiable instrument,
for any amount specified therein, and not exceeding the amount, covered
by the stamp. Such an instrument is called an inchoate instrument.
Escrow:
When a negotiable instrument is delivered conditionally or for a special
purpose as a collateral security or for safe custody only, and not for the
purpose of transferring absolutely property therein, it is called an escrow.
The following example clearly illustrates this.
A, the holder of a bill, endorses it to B or order for the express purpose
that B may get it discounted. B negotiates the bill to C who takes it
bona fide and for value. C is a holder in due course, and he acquires a
good title to the bill.
Accommodation Bill:

A bill which is drawn, accepted or endorsed without consideration is called

an accommodation bill. The party lending his name to oblige the other
party is known as the accommodating or accommodation party, and the
party so obliged is called the party accommodated. The accommodated
party cannot, after he has paid the amount of the bill, recover the amount
from any person who became a party to the bill for his accommodation. An
accommodation bill can be negotiated after maturity provided the person to
whom it is negotiated takes it in good faith and for consideration. Dishonor
or failure to give notice of dishonor does not discharge the prior parties
from the liability.
Trade Bills:
When a bill is drawn, accepted or endorsed for consideration it is called a
genuine trade bill.
Having understood the types and classifications of negotiable instruments
we shall now learn about promissory notes, bills of exchange and cheques.
PROMISSORY NOTES:
Section 4 defines a promissory note as an instrument in writing (not being
a bank note or a currency note) containing an unconditional undertaking,
signed by the maker to pay a certain sum of money only to, or to the order
of a certain person, or to the bearer of the instrument. Section 1(4) (a) of
IT Act 2000 excludes promissory notes, as promissory note cannot be
made by electronic means.
Bill of exchange:
This form of negotiable instrument has been in usage for a very long time.
It was initially used for payment of debts by traders residing in one country
to another country with a view to avoiding transmission of coins. Now-adays it is used as trade bills both for domestic as well as foreign trade
known as inland bills and foreign bills respectively.
According to Section 5, A bill of exchange is an instrument in writing
containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of, a certain
person or to the bearer of the instrument. A bill of exchange cannot be
made by electronic means and hence Section 1(4) (a) of IT Act applicable
to cheques is not applicable to bill of exchange.
CROSSING OF CHEQUES:

A cheque can be either an open cheque or a crossed cheque. Open cheques

are those cheques which can be enchased directly across the counter by
presenting to the drawee bank. In this case, as the cheque is not required to
go through a bank before being presented to the drawee bank for payment,
there are certain risks attached to such cheques. If such a cheque is lost or
stolen, the finder or the thief may get it enchased with the drawee bank
unless the drawer has in the meanwhile countermanded payment. The
concept of crossing cheques was introduced with a view to avoid the losses
that may result because of open cheques.
PARTIES TO NEGOTIABLE INSTRUMENTS:
We have, while describing a promissory note, bill of exchange and
cheque, also discussed the various parties to each of these instruments. In
addition, there are two more parties common to these instruments
holder and holder in due course.
Holder
According to Section 8 of the Act, a person is a holder of a n egotiable
instrument if he is entitled in his own name
(a) to the possession of the instrument, and
(b) to recover or receive its amount due from the parties thereto. To be a
holder, the person must be named in the instrument as the payee, or the
endorsee or bearer thereof.
Holder in Due Course
A holder in due course can claim to be so; only if it can be proved that he
acquired the instrument for valuable consideration. According to the Indian
Contract Act, one of the essential requirements of a contract is the presence
of consideration. It is also necessary that the consideration is not illegal,
immoral, opposed to public policy or injurious to a third person. Further,
Section 2(d) of the Indian Contract Act lays down that consideration should
pass at the desire of the promisor. Where consideration does not pass at the
desire of the promisor, the contract is not a valid contract
NEGOTIATION:
Section 46 of the Act reads as follows: The making, acceptance or
endorsement of a promissory note, bill of exchange or cheque is completed
by delivery, actual or constructive. As between parties standing in
immediate relation, delivery to be effectual must be made by the party

making, accepting or indorsing the instrument, or by a person authorized by

him in that behalf. A promissory note, bill of exchange or cheque payable to
bearer is negotiable by the delivery thereof. A promissory note, bill of
exchange or cheque payable to order, is negotiable by the holder by
endorsement and delivery thereof.
For Example
1. A makes a promissory note in favor of B in respect of a debt owed
by A to B. After As death, the note is found among some of his
papers. B cannot recover the amount on this instrument, even if it is
delivered to him.
2. A the drawee receives a bill from B who is the holder of the same.
A accepts the bill. However, on learning that the drawer has become
bankrupt, he cancels his acceptance and returns the bill to the holder. B
cannot recover the amount from A as A had never delivered the
accepted bill to B.
3. A makes a note in favor of B and hands it over to his agent for
delivery. B does not acquire a right to the note until it is delivered to
him. On the other hand, A can revoke the note any time before it is
delivered.
Negotiation by Endorsement (Section 48): According to Section 48,
subject to the provisions of Section 58, a promissory note, bill of exchange
or cheque (payable to order), is negotiable by the holder by endorsement
and delivery thereof. Instruments payable to order are negotiable only if
they are indorsed by the holder followed by delivery of the instrument.
Where such an instrument is delivered by the holder without indorsing it,
the instrument is said to have been merely assigned and not negotiated. A
person taking such an instrument only acquires the rights of an assignee of
an ordinary chose-in-action. The holder of a negotiable instrument
indorsed in blank may, without signing his own name, by writing above the
endorsers signature a direction to pay to any other person as endorsee,
convert the endorsement in blank into an endorsement in full; and the
holder does not thereby incur the responsibility of an endorser. (Section 49)
For example, A who is the holder of an instrument that has been indorsed
in blank by B, writes the words Pay to C or order above Bs signature.
Here, a blank endorsement is converted into full. A will not be liable as
endorser. The endorsement made by him serves as an endorsement in full
from B to C.

ENDORSEMENT: Section 15 of the Act defines endorsement as the

writing of a persons name on the face or back of a negotiable instrument or
on a slip of paper (called allonge) annexed thereto, for the purpose of
negotiation. An endorsement can be blank or general, special or full,
restrictive, partial and conditional or qualified. An endorsement is said to be
blank or general if the endorser signs his name only on the face or back of
the instrument. If the endorser signs his name and adds a direction to pay
the amount mentioned in the instrument to, or to the order of a specified
person, the endorsement is said to be special or in full. An endorsement is
restrictive which prohibits or restricts the further negotiation of the
instrument. An endorsement is partial which purports to transfer to the
endorsee only a part of the amount payable on the instrument. An
endorsement is conditional or qualified which limits or negatives the
liability of the endorser

Q2 Explain various types of companies.

The Companies Act, 1956 provides a broad legal framework for the
operation of companies registered under this Act. Before the advent of this
legislation, Companies Act, 1913 which was extensively amended in 1936
on lines of the English Companies Act, 1929, was in force. The Indian
version of the Companies Act is the result of the recommendations of the
Company Law Committee formed under the Chairmanship of Mr. H.C.
Bhaba, which was constituted in 1950.
MEANING AND NATURE OF A COMPANY: Section 3(1) of the
Companies Act defines a company as a company formed and registered
under this Act, or an existing company as defined under Section 3(1)(ii)
which lays down that an existing company means a company formed and
registered under any previous Company Law. Lord Justice Lindley defines
a company as an association of many persons who contribute money or
monies worth to a common stock and employed in some trade or business
and who share the profit and loss arising therefrom. The common stock so
contributed is denoted in money and is capital of the company. The persons
who contributed to it or to whom it pertains to are the members. The
proportion of capital to which each member is entitled is his share. The
shares are always transferable although the right to transfer is often more or
less restricted. A company may be formed by coming together of a certain
number of members and getting the same registered and incorporated under
the Companies Act.
FEATURES OF A COMPANY: The following are the characteristic
features of a company:

1. Separate Legal Entity: One of the important features of a company is its

separate legal entity once it is incorporated or registered under the
Companies Act. It exists as an independent legal person and has its own
entity distinct from the persons who constitute it. The company enjoys
rights and liabilities, which are not same as that of its members. No member
can claim to be the owner of the company or claim any ownership rights in
the assets of the company either during its existence or on its winding-up
once incorporated. The company has to bear its own liabilities and the
shareholders are under no liability for anything the company does. Being a
distinct legal entity, the company has the capacity to sue and be sued.
Lifting the Corporate Veil (Exceptions to Salomon Case): As it can be
seen from the case of Salomon vs. Salomon & Co Ltd., a company is given
a distinct legal entity in comparison to the individuals who are managing
the affairs of the company. This provides a veil for the persons who run
the incorporated company as its arms and heads. The courts generally
consider themselves bound by the principle of separate legal entity and
adopt a cautious approach while piercing a corporate veil.
However, there have been instances where the courts lift the corporate veil
of an incorporated company either to expose the ingenuous persons behind
the company or to find out the real purpose of incorporating it. The
corporate veil is said to be lifted or pierced when the court ignores the
company and concerns itself directly with the members or management.
The circumstances under which the court may lift the corporate veil can be
broadly grouped under two heads: Statutory provisions and judicial
interpretations.
Statutory Provisions: The Companies Act, 1956 expressly provides for
the following provisions pertaining to the lifting of the corporate veil:
i.

Reduction of Membership: Section 45 specifies that If any

time the number of members of a company is reduced, (i) in the case
of a public company, below seven, (ii) or in the case of private
company, below two and (iii) the company carries on business for
mor

ii.

is a member of the company... and is cognizant of the fact...

shall be severally liable for the payment of the whole debts of the
company contracted during that period. In this case, the privilege of
limited liability of shareholders is lost and the law pierces the

corporate veil making persons behind the company personally liable

despite their limited liability. It must be noted that Section 45
provides for a grace period of six months for bringing back the
number of members to the required number.
iii.

Misrepresentation in the Prospectus (Section 62): In case of

misrepresentation in a prospectus, every director, promoter and
every other person, who authorizes the issue of such a prospectus
incurs liability towards those who subscribe for shares on the faith of
the untrue statement.

iv.
Failure to Refund Application Money [Section 69 (5)]: If
the directors of the company fail to comply with the deadline for
refunding the application money with interest to unsuccessful
applicants then they are severally and jointly liable. This is provided
by the SEBI guidelines also. The deadline is of 130 days from the
day of opening of the issue.
v.
Mis-description of Company Name (Section 147): The
person(s) signing a contract on behalf of the company would be held
liable if the companys name is not properly published by law as
required. The contract may be any contract, bill of exchange, hundi,
promissory note, cheque or order for money.
vi.

Fraudulent Conduct [Section 542(1)]: If it appears in the course of

winding-up of the company that some business of the company has
been carried on with intent to defraud creditors, then the courts may
declare that any persons who were knowingly parties to the carryingon of the business in this way are personally responsible without
any limitation of liability.

vii.

Holding and Subsidiary Companies: A subsidiary company is

considered as a separate legal entity in the eyes of law without any
affiliation to the parent company; except under certain circumstances.
This viewpoint is reaffirmed by the decision in the case of Freewheel
(India) Ltd vs. Dr. Veda Mitra (1969). A company with a 52% stake of
the parent company, offered to issue further capital to the existing
holder of equity shares. The holding company objected and sought for
subsidiary to be restrained from going ahead with the issue, as it
would deprive the holding company of its controlling interests and
would also result in depreciation in the value of shares. The Court

refused to issue the injunction following the principle of corporate

veil.
2. Common Seal: The case of Salomon vs. Salomon & Co. Ltd also
recognized the principle of limited liability. The members of a limited
company are only liable to contribute towards payment of its debt to a
limited extent. No member can be called upon to pay anything more than
the unpaid value of the shares held by him or the amount guaranteed by
him. In the case of companies formed with unlimited liability of members,
the liability of the members in such cases is not limited only to the extent
of the face value of their shares and the premium, if any, unpaid thereon
but members will also be required to contribute further to meet the debts of
the company in the event of winding-up.
3. Separate Property: The wealth of the shareholders and the wealth of the
company are separate. A member does not even have an insurable interest in
the property of the company. An incorporated companies wealth is clearly
distinguished from that of its members. As Palmer puts it: The property is
vested in the company as a body corporate, and no changes of individual
membership affect the title. The property, remains vested in the company,
and the company can convey, assign, mortgage, or otherwise deal with it
irrespective of these mutations.
4. Transferable Shares: The Companies Act provides that the shares or
other interests of any member in a company shall be movable property,
transferable in the manner provided by the articles of the company. A
member may sell his share in the market without having to withdraw the
capital from the company.
KINDS OF COMPANIES:
On the basis of membership pattern/size
Companies

(1)
Public

(2)

(3)

Private

Government

(a)

(b)

(a)

(b)

Unlisted

Listed

Inde- Subsidiary
pendent of Public

Co.
On the basis of liabilities of the members and directors:
Companies

With Limited liability

(1)
( a)

(b)

With unlimited liability

(2)
(c)

Limited Limited byLimited by

By shares Guarantee & Guarantee
having share
capital
On the basis of place of registration:
Companies

(1)

(2)

Indian
(Incorporated in India)

CompanyForeign
Company
(Company incorporated outside
India but having place of
business in India)

On the basis of control over the management:

Companies

(1)

(2)

(Holding Company)
(Subsidiary Company)
These types of companies have been explained as under:
PRIVATE COMPANIES:

A private company should have at least two persons (Section 12) to

subscribe their names to Memorandum and Articles of Association. Section
26 provides that a private limited company must have articles of its own. As
per Section 3(1)(iii), a private company means a company which has a
minimum paid-up capital of one lakh rupees or such higher paid-up capital
as may be prescribed, and by its articles,
a.

Restricts the right to transfer its shares, if any;

b.

Limits the number of its members to fifty not including

i.

Persons who are in the employment of the company; and

ii.

Persons who having been formerly in the employment of the

company, were members of the company while in that employment
and have continued to be members after the employment ceased;
c.
Prohibits any invitation to the public to subscribe for any
shares in, or debentures of the company.
d.
Prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their relatives.

However, where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this definition, be treated as a single
member. Every private company, existing on the commencement of the
Companies (Amendment) Act, 2000, with a paid-up capital of less than one
lakh rupees, shall within a period of two years from such commencement,
enhance its paid-up capital to one lakh rupees.
According to Section 3(6), a company registered under Section 25 before
or after commencement of Companies (Amendment) Act 2000 shall not be
required to take minimum paid-up capital as specified in this section.
Section 3(5) indicates that where a private company or a public company
fails to enhance its paid-up capital after 14th December, 2002 in the
manner as stated above, such company shall be deemed to be defunct
company within the meaning of Section 560 and its name shall be struck
off from the register by the Registrar.
a.

Restriction on transfer of shares:

A private company is normally a closely knit company with a very few

members. Hence free transferability of shares is restricted. It should be
noted that it is a restriction imposed and not prohibition. The articles
usually provide that directors may in their absolute discretion and
without assigning any reason thereof decline to register a transfer of any
share whether fully paid or partly paid. The articles may also provide
that a member wanting to dispose of his holding should first offer them
to the existing shareholders at a price determined according to the
articles. Only when no existing member agrees to buy his holding, can
the member sell them to an outsider. This restriction is not applicable in
case of a company incorporated as a pure guarantee company.
b.

Limitation on the number of members:

The number of members of a private company is to be compulsorily

limited by its articles to fifty. The membership will be arrived at by
considering joint holders as single member. Also, present employees
who are members and former employees who had become members
during their employment and continued to be members even after they
have ceased to be employees will be excluded.
c. Prohibition upon issue of prospectus:
As per Section 3(1)(iii)(c), a private company cannot issue a prospectus
inviting the public to subscribe for shares in or debentures of, the
company. However, there is nothing to prevent a private company from
soliciting investment in its shares or debentures by private means.
Investment by private approach would mean giving opportunity of
investment to the person approached and not to others through him if
those others are likely to be members of the general public rather than a
restricted circle of known persons such as his relatives.
d. Privileges enjoyed by private companies:
As there are restrictions on raising money and maximum number of
members in a private company, there is not much public accountability.
Therefore a private company need not be subjected to such a rigorous
surveillance as in the case of a public company. The exemptions
enjoyed by a private company under Companies Act are mentioned
below.
PUBLIC COMPANIES:

According to Section 3(1)(iv) of The Companies Act, 1956, public

company means a company which
a.

Is not a private company.

b.
Has a minimum paid-up capital of five lakh rupees or such
higher paid-up capital, as may be prescribed.
c.
Is a private company which is a subsidiary of a company
which is not a private company.
d.

Is incorporated with a minimum of 7 subscribers as required.

e.

Has a minimum 3 directors as stipulated.

Every public company, existing on the commencement of the Companies

(Amendment) Act, 2000, with a paid-up capital of less than five lakh
rupees, shall within a period of two years from such commencement,
enhance its paid-up capital to five lakh rupees.
As per Section 3(6), a company registered under Section 25 of the
Companies Act, 1956 before or after the commencement of Companies
(Amendment) Act, 2000 shall not be required to have minimum paid-up
capital as specified above.
CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC
COMPANY:
A private company is converted into a public company in either of the
circumstances mentioned below. Whatever may be the circumstances under
which a private company is converted into a public company, it will cease
to enjoy all the privileges that are allowed to a private company.
CONVERSION BY DEFAULT (SECTION 43):
Any private company making a default in compliance with the statutory
requirements as laid down in Section 3(1)(iii) of the Act will be
automatically converted into a public company. The Central Government,
under specific circumstances, may grant relief from any of the
consequences that may arise in case of conversion by default. A departure
from the conditions of Section 3(1)(iii) attracts penalty applicable to a
public company for contravention of the provisions of the Companies Act.
This section does not specify any fixed time limit or impose any special
penalty.

In case a company contravenes or does not comply with the conditions laid
down by Section 3(1)(iii), a petition for relief may be filed in case such
contravention was accidental or due to inadvertence.
Such a petition should be made to the Central Government and
accompanied by the documents:
i.
ii.

Copy of memorandum and articles of association.

Copy of document showing that the default has been
committed in complying with the conditions laid down in clause (iii)
of Subsection (1) of Section 3.

iii.

Affidavit verifying the petition.

iv.

Bank draft evidencing payment of application fee.

v.
Memorandum of appearance, shall be filed in Form 5 of
Annexure-I.
CONVERSION BY CHOICE (SECTION 44):
There is always a choice for the company to convert itself into a public
company. Conversion of a private limited company into a public limited
company by choice will necessarily involve a change in the name of the
company. Any change in the name will require the passing of a special
resolution as provided by Section 21. In addition to the passing of a special
resolution, the following requirements will have to be fulfilled:
a.
The company will have to alter its articles so as to delete the
provisions of clause (iii) of Subsection (1) of Section 3.
On the date of such alteration, the company will cease to be a private
company.
b.
The company shall within thirty days from the passing of the
resolution, file a prospectus or a statement in lieu of prospectus with
the Registrar.
c.
If the number of members is less than seven, such number
should be raised to at least seven.
d.
The number of directors should be raised to not less than three
in case it is less than three.
CONVERSION OF PUBLIC LIMITED COMPANY INTO A
PRIVATE LIMITED COMPANY:
Proviso to Section 31(1) read with Section 31 and (2A) provides that no
alteration made in the articles which has the effect of converting a public
company into a private company shall have effect unless such alteration

has been approved by the Central Government. Every such company after
obtaining the approval of the Central Government has to file a printed copy
of the altered articles with the Registrar within 30 days of receipt of the
approval. Approval of the Central Government must be obtained through
an application within three months from the date when the special
resolution altering the articles was passed. The application should be in
Form IA or in any other form as near thereto as circumstances warrant.
LIMITED COMPANY:
A company can limit its liability either by shares or by guarantee.
i.

Companies Limited by Shares [Section 12(2) (a)]:

In this type of a company, the liability of the members is limited to the

amount remaining unpaid on the shares. Hence, holders of shares that are
fully paid-up cannot be called upon for any further contribution. The
liability of the members holding partly paid-up shares exists even if the
company is in the process of winding up.
ii.

Companies Limited by Guarantee not having Share

Capital:

In this type of company, the memorandum limits the members liability. It

is limited to such amount as he may have undertaken by the memorandum
of
association
to
contribute
in
case
of
winding
up.
The form of memorandum and articles of a company limited by guarantee
and not having a share capital is contained in Table C of Schedule I.
This form may be adopted either in toto or as near thereto as circumstances
warrant. The proviso to Section 29 states that a company is permitted to
include additional matters in its articles provided it is not inconsistent with
the provisions contained in Table C. In P C Arvindhan vs. M A Kesavan, it
was held that a provision in the articles of a guarantee company that
prevented its members from participating in the annual general meeting was
illegal and void.
iii.

Companies Limited by Guarantee having Share Capital:

If the company is limited by guarantee while having its own share capital,
the liability of members would be towards guarantee as specified in the
memorandum of association and in addition any sums remaining unpaid
on the shares held by him. The form of memorandum and articles of a
guarantee company having share capital can be found in Table D of
Schedule I. The memorandum of such a company should also specify
the amount of share capital with which the company is to be registered
and the amount of each share.
UNLIMITED COMPANY:

Unlimited Companies do not have any limit on the extent of liability of its
members. The liability of each member extends to the whole amount of the
companys debts and liabilities. However, the members cannot be sued
upon directly by the companys creditors. This is in contrast to the liability
of the partners in a partnership firm where partners can be sued directly. In
case of winding up, the official liquidator may call upon the members to
discharge the debts and liabilities without limit. This type of a company
may be formed where heavy liabilities are not likely to be incurred. An
unlimited company may increase and decrease its share capital (if it exists)
without any restriction by passing a special resolution. Also, the company
may buy its own shares which are not allowed for a limited company by
virtue of Section 77. A company which is registered as an unlimited
company may get itself re-registered as a limited company under Section
32 of the Act. There would not be any change in any debts, liabilities,
obligations or contracts of the company existing at the time of conversion
and such debts will be enforceable. The articles of association of a
company must state the number of members with which the company is
registered and the amount of share capital (if any) [Section 27].
GOVERNMENT COMPANY:
Section 617 defines a Government Company as any company which has at
least 51% of the paid-up share capital held either by the Central
Government, or by any State Government or Governments or partly by the
Central Government and partly by one or more State Governments. As the
concept of Government Company has been introduced in the Companies
Act, 1956, it follows that a government company will mean a company
registered and incorporated under the Companies Act, 1956. A statutory
corporation formed under a statute of the legislature, like Life Insurance
Corporation, Air India, etc., are neither companies coming within the
purview of the Companies Act nor are they Government Companies.
FOREIGN COMPANY:
As per Section 591, a foreign company means a company incorporated
outside India but having a place of business in India. Thus, if a company is
incorporated outside India, but employs agents in India without establishing
a place of business here, it cannot be considered as a foreign company. In
Deverall vs. Grand Advertisement Inc. (1954), it was held that a company
shall be said to have a place of business in India if it has a specified or
identifiable place at which it carries on business such as an office,
storehouse, godown or other premises having some concrete connection
between locality and its business. It may also be noted that if a company is
incorporated outside India, has Indian shareholders but does not have a

place of business in India, then such company will not be included within
the purview of a foreign company.
Likewise, a company that is incorporated in India but which has foreign
shareholders is an Indian company and not a foreign company. If 50 percent
or more of the paid-up share capital (whether equity or preference or partly
equity and partly preference) of a company incorporated outside India is
held by one or more citizens of India or/and by one or more Indian
companies, singly or jointly, such company shall comply with such
provisions as may be prescribed as if it were an Indian company.
INDIAN COMPANY:
Indian company means a company formed and registered under the
companies act, 1956. Any company formed and registered under any law
relating to companies formerly in force in any part of India, other than
Jammu and Kashmir and the union territories as specified or a corporation
established by or under a central, state or provincial act or any institution,
association or a body which is declared by the board to be company under
section 2 (17) are referred as Indian company.
In the case of state of Jammu and Kashmir, a company formed and
registered under any law for the time being in force in the state. Similarly in
case of union territories.
HOLDING AND SUBSIDIARY COMPANY ON THE BASIS OF
EXTENT OF CONTROL:
As per Section 4 of the Companies Act, a company shall be deemed to be a
subsidiary of another, if and only if:
(i) that other company controls the composition of its board of directors, or
(ii) the other company holds more than half in nominal value of its equity
share capital, or
(iii) if it is a subsidiary of a third company which itself is subsidiary of the
controlling company. The composition of the board of directors of a
company shall be deemed to be controlled by another if the latter has the
power, without the consent or concurrence of any other persons, to appoint
or remove the holders of all or a majority of the directorships. A company
shall be deemed to have the power to appoint the holder to a directorship in
the following cases:
If a person cannot be appointed to a directorship without the exercise
in his favor of the power of appointment held by the company.
If a persons appointment to directorship follows necessarily from his
appointment as director, managing agent, secretaries and treasurers or
manager to any other office or employment in the company.

 If the directorship is held by an individual nominated by the company

or by any of its subsidiaries.
Under Section 212, the holding company is under the obligation to attach
the accounts of the subsidiary with its own accounts though the holding
company and its subsidiary are incorporated companies, each having its
own separate legal entity.
A subsidiary company cannot be a member of its holding company.
However, if it was a member before becoming a subsidiary, it shall not
have voting rights at meetings of any class of the holding company, unless
it is holding the shares either as a legal representative of a deceased
member or as a trustee of a person. The subsidiary company can continue
to be a member, but by virtue of Subsection (1) cannot be allotted any
shares including rights or bonus. However, in the event of a scheme of
amalgamation it is permitted to buy the shares in its holding company.
OTHER CLASSIFICATION:
Investment Companies:
Section 372(10) of the Companies Act defines this type of company as a
company whose principal business is the acquisition of shares, stock,
debentures or other securities. Such type of companies buys shares and
other instruments so that they can be sold at a higher price at a later date or
selling them with a view to buy at lower price.
The companies also earn dividend and interest on these instruments. A
company which carries on its business of manufacturing may invest subject
to the objects clause of the memorandum of association. All investments of
such a company are to be made in the companys own name.
Public Financial Institutions:
Companies Act specifies that the following financial institutions shall be
regarded as public financial institutions:
The Industrial Credit and Investment Corporation of India.
(ICICI)

The Industrial Finance Corporation of India. (IFCI)

The Life Insurance Corporation of India. (LIC)

The Unit Trust of India. (UTI)

The Industrial Development Bank of India. (IDBI)

Defunct Company:
A defunct company means a company which never commenced business
or which is not carrying on business and has either no assets or has such
assets as shall not be sufficient to meet the costs of liquidation. However,
a company is not considered as defunct if the cessation of business is due
to the conduct of winding up. Also, the mere reduction of members below
statutory minimum does not render a company defunct.
Under Section 3(5) the existing public company which could not raise
minimum required capital after 14th December 2002 also treated as
defunct company within the meaning of Section 560. Section 560
provides for the restoration of a companys name previously struck off the
register. However, the application must be made by the company, member
or creditor to the tribunal before the expiry of 20 years from the publication
in the Official Gazette.
The effect of an order of restoration shall be that the company shall be
deemed to have continued in existence as if its name had not been struck
off.
Closely Held Company:
A public company which has raised capital only from the members,
directors, relatives and kith and kin of the promoters and not raised capital
from the public.
Widely Held Company (A Listed Company):
A Public Company which has raised capital from the public by issue of
prospectus and its shares are dealt in two or more Stock Exchanges.

Q3 what relief is/are available to the consumer under

Consumer Protection Act.
INTRODUCTION:
The earlier principle of Caveat Emptor or let the buyer beware which was
prevalent has given way to the principle of Consumer is King. The origins of this
principle lie in the fact that in todays mass production economy where there is little

contact between the producer and consumer, often sellers make exaggerated claims
and advertisements, which they do not intend to fulfill. This leaves the consumer in a
difficult position with very few avenues for redressal. The onset on intense
Competition also made producers aware of the benefits of customer satisfaction and
hence by and large, the principle of consumer is king is now accepted. The need to
recognize and enforce the rights of consumers is being understood and several laws
have been made for this purpose. In India, we have the Indian Contract Act, the Sale
of Goods Act, the Dangerous Drugs Act, the Agricultural Produce (Grading and
Marketing) Act, the Indian Standards Institution (Certification Marks) Act,
the Prevention of Food Adulteration Act, the Standards of Weights and Measures Act,
the Trade and Merchandise Marks Act, etc. which to some extent protect consumer
interests.
However, these laws required the consumer to initiate action by way of a civil suit,
which involved lengthy legal process proving, to be too expensive and time
consuming for lay consumers. Therefore, the need for a simpler and quicker access to
redressal to consumer grievances was felt and accordingly, it lead to the legislation of
the Consumer Protection Act, 1986.
RELIEF AVAILABLE TO THE CONSUMERS:
Depending on the nature of relief sought by the consumer and facts, the Redressal
Forums may give orders for one or more of the following reliefs:(a) Removal of defects from the goods,
(b) Replacement of the goods;
(c) Refund of the price paid;
(d) Award of compensation for the loss or injury suffered;
(e) Removal of defects or deficiencies in the services;
(f) Discontinuance of unfair trade practices or restrictive trade practices or direction
not to repeat them;
(g) Withdrawal of the hazardous goods from being offered to sale; or
(h) Award for adequate costs to parties.
PROCEDURE FOR FILING THE APPEAL:
Appeal against the decision of a District Forum can be filed before the State
Commission within a period of thirty days. Appeal against the decision of a State
Commission can be filed before the National Commission within thirty days. Appeal
against the orders of the National Commission can be filed before the Supreme Court
within a period of thirty days.
There is no fee for filing appeal before the State Commission or the National
Commission.
Procedure for filing the appeal is the same as that of complaint, except the
application should be
Accompanied by the orders of the District/State Commission as the case may be and
grounds for filing the appeal should be specified.

SPEEDY DISPOSAL:
The thrust of the Act is to provide simple, speedy and inexpensive redressal to
consumers grievances. To ensure speedy disposal of consumers grievances, the
following provisions have been incorporated in the Act and the rules farmed there
under: It is obligatory on the complainant or appellant or their authorized agents and the
opposite parties to appear before the Forum/Commission on the date of hearing or any
other date to which hearing could be adjourned.
The National Commission, State Commission and District Forums are required to
decide complaints, as far as possible, within a period of three months from the date of
notice received by the opposite party where complaint does not require analysis or
testing of the commodities and within five months if it requires analysis or testing of
commodities.
The National Commission and State Commissions are required to decide the appeal
as far as possible, within 90 days from the first date of hearing.
OBJECT OF THE CONSUMER PROTECTION ACT, 1986:
The main objective of the act is to provide for the better protection of consumers.
Unlike existing laws, which are punitive or preventive in nature, the provisions of this
Act are compensatory in nature. The act is intended to provide simple, speedy and
inexpensive redressal to the consumers grievances, and reliefs of a specific nature and
award of compensation wherever appropriate to the consumer. The act has been
amended in 1993 both to extend its coverage and scope and to enhance the powers of
the redressal machinery. The basic rights of consumers as per the Consumer
Protection
Act (CPA) are
1. The right to be protected against marketing of goods and services which are
hazardous to life and property
2. The right to be informed about the quality, quantity, potency, purity, standard and
price of goods, or services so as to protect the consumer against unfair trade practices
3. The right to be assured, wherever possible, access to variety of goods and services
at competitive prices
4. The right to be heard and be assured that consumers interests will receive due
consideration at appropriate forums
5. The right to seek redressal against unfair trade practices or restrictive trade practices
or unscrupulous exploitation of consumers
6. The right to consumer education
EXTEND AND COVERAGE OF THE ACT:
The salient features of the Act are summed up as under:- The Act applies to all goods and services unless specifically exempted by the Central
Government.
- It covers all the sectors whether private, public or cooperative.

- The provisions of the Act are compensatory in nature. It enshrines the following
rights of consumers:- Right to be protected against the marketing of goods and services which are
hazardous to life and property?
-Right to be informed about the quality, quantity, potency, purity, standard and price of
goods or services so as to protect the consumer against unfair trade practices;
-Right to be assured, wherever possible, access to a variety of goods and services at
competitive prices;
-Right to be heard and to be assured that consumers interests will receive due
consideration at appropriate forums;
-Right to seek redressal against unfair trade practices unscrupulous exploitation of
consumers; and
-Right to consumer education
-The Act envisages establishment of Consumer Protection Councils at the Central and
State levels, whose main objects will be to promote and protect the rights of the
consumers.
The CPA extends to the whole of India except the State of Jammu and Kashmir and
applies to all goods and services unless otherwise notified by the Central Government.
DEFINITIONS OF IMPORTANT TERMS:
Before studying the provisions of the CPA, it is necessary to understand the terms
used in the Act. Let us understand some of the more important definitions.
Complainant Means
1. A consumer; or
2. Any voluntary consumer association registered under the Companies Act, 1956 or
under any other law for the time being in force; or
3. The Central Government or any State Government, who or which makes a
complaint; or
4. One or more consumers where there are numerous consumers having the same
interest
Complaint means any allegation in writing made by a complainant that:1. An unfair trade practice or a restricted trade practice has been adopted by any trader
2. The goods bought by him or agreed to be bought by him suffer from one more
defects
3. The services hired or availed of or agreed to be hired or availed of by him suffer
from deficiency in any respect
4. The trader has charged for the goods mentioned in the complaint a price excess of
the price fixed by or under any law for the time being in force or displayed on the
goods or any package containing such goods.
5. Goods which will be hazardous to life and safety when used, are being offered for
sale to the public in contravention of the provisions of any law for the time being in
force, requiring traders to display information in regard to the contents, manner and

effect of use of such goods; with a view to obtaining any relief provided by law under
the CPA.
Goods mean goods as defined in the Sale of Goods Act, 1930. Under that act, goods
means every kind of movable property other than actionable claims and money and
includes stocks and shares, growing crops, grass and things attached to or forming part
of the land which are agreed to be severed before sale or under the contract of sale.
Service is defined to mean service of any description which is made available to
potential users and includes the provision of facilities in connection with banking,
financing, insurance, transport, processing, supply of electrical or other energy, board
or lodging or both, housing construction, 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.
Consumer dispute means dispute where the person against whom a complaint has
been made, denies or disputes the allegation contained in the complaint.
Restrictive Trade Practice means any trade practice which requires a consumer to buy,
hire, or avail of any good or as the case may be, services as a condition precedent for
buying, hiring or availing of any other goods or services.
Unfair Trade Practice means unfair trade practice as defined under the Monopolies
and Restrictive Trade Practices Act. The MRPT act has defined certain practices to be
unfair trade practices. The detailed definition is given in the Consumer Protection Act,
1986 as amended by the Consumer Protection (Amendment) Act. 1993. It means a
trade practice which, for the purpose of promoting the sale, use or supply of any goods
or for the provision of any service, adopts any unfair method or
Unfair or deceptive practice including any of the following practices, namely: (a) False or misleading representation,
(b) Bargain price
(c) Offering of gifts, prize, contest etc.
(d) Noncompliance of product safety standard.
(e) Hoarding or destruction of goods.
The Act may be consulted before filing a complaint for unfair trade practice.
Defect means any fault, imperfection or shortcoming in the quality, quantity, potency,
purity or standard which is required to be maintained by or under any law for the time
being in force or Under any contract, express or implied, or as is claimed by the trade
in any manner whatsoever in relation to any goods.
Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality,
nature and manner of performance which is required to be maintained by or under any
law for the time being in force or has been undertaken to be performed by a person in
pursuance of a contract or otherwise in relation to any service.
WHO IS A CONSUMER?
All of us are consumers of goods and services. For the purpose of the Consumer
Protection Act, the word Consumer has been defined separately for goods and

services. For the purpose of goods, a consumer means a person belonging to the
following categories:
(i) One who buys or agrees to buy any goods for a consideration which has been paid
or promised or partly paid and partly promised or under any system of deferred
payment;
(ii) It includes any user of such goods other than the person who actually buys goods
and such use is made with the approval of the purchaser.
Note: A person is not a consumer if he purchases goods for commercial or resale
purposes however, the word commercial does not include use by consumer of goods
bought and used by him exclusively for the purpose of earning his livelihood, by
means of self-employment.
- For the purpose of services, a consumer means a person belonging to the
following categories:
(i) One who hires or avails of any service or services for a consideration which has
been paid or promised or partly paid and partly promised or under any system of
deferred payment;
(ii) It includes any beneficiary of such service other than the one who actually hires or
avails of the service for consideration and such services are availed with the approval
of such person.
WHO CAN FILE A COMPLAINT
The following can file a complaint under the Act:- A consumer
- Any voluntary consumer organization registered under the Societies Registration
Act,1860 or under the Companies Act,1956 or under any other law for the time being
in force.
- The Central Government
- The State Government or Union Territory Administrations.
- One or more consumers on behalf of numerous consumers who are having the same
interest
(Class action complaints)
STRUCTURE:
-To provide simple, speedy and inexpensive redressal of consumer grievances, the Act
envisages three- tier quasijudicial machinery at the National, State and District levels.
National Consumer Disputes Redressal Commission - known as National
Commission.
Consumer Disputes Redressal Commissions known as State Commission.
Consumer Disputes Redressal Forums- known as District Forum.
-The provisions of this Act are in addition to and not in derogation of the provisions of
any other law for the time being in force
WHAT CONSTITUTES A COMPLAINT?

Under the Act, a complaint means any allegation in writing made by a complainant in
regard to one or more of the following:- Any unfair trade practice as defined in the Act or restrictive trade practices like tieup sales adopted by any trader.
- One or more defects in goods. The goods hazardous to life and safety, when used,
are being offered for sale to public in contravention of provisions of any law for the
time being in force.
- Deficiencies in services.
- A trader charging excess of price.
(i) Fixed by or under any law for the time being in force; or
(ii) Displayed on goods; or
(iii) Displayed on any packet containing such good;
WHERE TO FILE A COMPLAINT:
Consumer Protection Councils
The interests of consumers are enforced through various authorities set up under the
CPA. The CPA provides for the setting up of the
(a) Central Consumer Protection Council,
(b) the State Consumer Protection Council and
(c) the District Forum
(a) Central Consumer Protection Council:
The Central Government has set up the Central Consumer Protection Council which
consists of the following members:(a) The Minister in charge of Consumer Affairs in the Central Government who is its
Chairman, and
(b) Other official and non-official members representing varied interests
The Central council consists of 150 members and its term is 3 years. The Council
meets as and when necessary but at least one meeting is held in a year.
(b) State Consumer Protection Council:
The State Council consists of:(a) The Minister in charge of Consumer Affairs in the State Government who is its
Chairman, and
(b) Other official and non-official members representing varied interests
The State Council meets as and when necessary but not less than two meetings must
be held every year.
Redressal Machinery under the Act
The CPA provides for a 3 tier approach in resolving consumer disputes. The District
Forum has jurisdiction to entertain complaints where the value of goods / services
complained against and the compensation claimed is less than Rs. 5 lakhs, the State
Commission for claims exceeding Rs. 5 lakhs but not exceeding Rs. 20 lakhs and the
National Commission for claims exceeding Rs. 20 lakhs.
(c) District Forum

Under the CPA, the State Government has to set up a district Forum in each district of
the State. The government may establish more than one District Forum in a district if
it deems fit. Each District Forum consists of :(a) A person who is, or who has been, or is qualified to be, a District Judge who shall
be its President
(b) Two other members who shall be persons of ability, integrity and standing and
have adequate knowledge or experience of or have shown capacity in dealing with
problems relating to economics, law, commerce, accountancy, industry, public affairs
or administration, one of whom shall be a woman.
Appointments to the State Commission shall be made by the State Goverrnment on
the recommendation of a Selection Committee consisting of the President of the State
Committee,
The Secretary - Law Department of the State and the secretary in charge of Consumer
Affairs
Every member of the District Forum holds office for 5 years or up to the age of 65
years, whichever is earlier and is not eligible for re-appointment. A member may
resign by giving notice in
Writing to the State Government whereupon the vacancy will be filled up by the State
Government.The District Forum can entertain complaints where the value of goods or
services and the compensation, if any, claimed is less than rupees five lakhs. However,
in addition to jurisdiction over consumer goods services valued upto Rs. 5 lakhs, the
District Forum also may pass orders against traders indulging in unfair trade practices,
sale of defective goods or render deficient services provided the turnover of goods or
value of services does not exceed rupees five lakhs.
A complaint shall be instituted in the District Forum within the local limits of whose
jurisdiction (a) The opposite party or the defendant actually and voluntarily resides or carries on
business or has a branch office or personally works for gain at the time of institution
of the complaint; or
(b) Any one of the opposite parties (where there are more than one) actually and
voluntarily resides or carries on business or has a branch office or personally works
for gain, at the time of institution of the complaint provided that the other opposite
party/parties acquiescence in such institution or the permission of the Forum is
obtained in respect of such opposite parties; or
(c) The cause of action arises, wholly or in part.
STATE COMMISSION
The Act provides for the establishment of the State Consumer Disputes Redressal
Commission by the State Government in the State by notification. Each State
Commission shall consist of:-

(a) A person who is or has been a judge of a High Court appointed by State
Government (in consultation with the Chief Justice of the High Court ) who shall be
its President;
(b) Two other members who shall be persons of ability, integrity, and standing and
have adequate knowledge or experience of, or have shown capacity in dealing with,
problems relating to economics, law, commerce, accountancy, industry, public affairs
or administration, one of whom must be a woman. Every appointment made under this
hall is made by the State Government on the recommendation of a Selection
Committee consisting of the President of the State Commission, Secretary -Law
Department of the State and Secretary in charge of Consumer Affairs in the State.
Every member of the District Forum holds office for 5 years or up to the age of 65
years, whichever is earlier and is not eligible for re-appointment. A member may
resign by giving notice in writing to the State Government whereupon the vacancy
will be filled up by the State Government.
The State Commission can entertain complaints where the value of goods or services
and the compensation, if any claimed exceed Rs. 5 lakhs but does not exceed Rs. 20
lakhs; The State Commission also has the jurisdiction to entertain appeal against the
orders of any District Forum within the State The State Commission also has the
power to call for the records and appropriate orders in any consumer dispute which is
pending before or has been decided by any District Forum within the State if it
appears that such District Forum has exercised any power not vested in it by law or
has failed to exercise a power rightfully vested in it by law or has acted illegally or
with material irregularity.
NATIONAL COMMISSION
The Central Government provides for the establishment of the National Consumer
Disputes Redressal Commission the National Commission shall consist of:(a) A person who is or has been a judge of the Supreme Court, to be appoint by the
Central Government (in consultation with the Chief Justice of India ) who be its
President;
(b) Four other members who shall be persons of ability, integrity and standing and
have adequate knowledge or experience of, or have shown capacity in dealing with,
problems relating to economics, law, commerce, accountancy, industry, public affairs
or administration, one of whom shall be a woman Appointments shall be by the
Central Government on the recommendation of a Selection Committee consisting of a
Judge of the Supreme Court to be nominated by the Chief Justice of India, the
Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer
Affairs in the Government of India. Every member of the National Commission shall
hold office for a term of five years or up to seventy years of age, whichever is earlier
and shall not be eligible for reappointment.
The National Commission shall have jurisdiction:-

(a) To entertain complaints where the value of the goods or services and the
compensation, if any, claimed exceeds rupees twenty lakhs:
(b) To entertain appeals against the orders of any State Commission; and
(c) To call for the records and pass appropriate orders in any consumer dispute which
is pending before, or has been decided by any State Commission where it appears to
the National Commission that such Commission has exercised a jurisdiction not
vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the
exercise of its jurisdiction illegally or with material irregularity.
Complaints may be filed with the District Forum by:1. The consumer to whom such goods are sold or delivered or agreed to be sold or
delivered or such service provided or agreed to be provided
2. Any recognized consumer association, whether the consumer to whom goods sold
or delivered or agreed to be sold or delivered or service provided or agreed to be
provided, is a member of such association or not
3. One or more consumers, where there are numerous consumers having the same
interest with the permission of the District Forum, on behalf of or for the benefit of,
all consumers so interested
4. The Central or the State Government.
On receipt of a complaint, a copy of the complaint is to be referred to the opposite
party, directing him to give his version of the case within 30 days. This period may be
extended by another 15 days. If the opposite party admits the allegations contained in
the complaint, the complaint will be decided on the basis of materials on the record.
Where the opposite party denies or disputes the allegations or omits or fails to take
any action to represent his case within the time provided, the dispute will be settled in
the following manner:I. In case of dispute relating to any goods: Where the complaint alleges a defect in the
goods which cannot be determined without proper analysis or test of the goods, a
sample of the goods shall be obtained from the complainant, sealed and authenticated
in the manner prescribed for referring to the appropriate laboratory for the purpose of
any analysis or test whichever may be necessary, so as to find out whether such goods
suffer from any other defect. The appropriate laboratory would be required to report
its finding to the referring authority, i.e. the District Forum or the State Commission
within a period of forty-five days from the receipt of the reference or within such
Extended period as may be granted by these agencies.
HOW TO FILE A COMPLAINT
Procedures for filing complaints and seeking redressal are simple. There is no fee for
filing a complaint before the District Forum, the State Commission or the National
Commission. (A stamp paper is also not required) There should be 3 to 5 copies of the
complaint on plain paper.
The complainant or his authorized agent can present the complaint in person.

 The complaint can be sent by post to the appropriate Forum / Commission.

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

CASE STUDY:
Case1
A dealer in radios gives a Murphy radio to a customer on
the terms that Rs. 100 should be paid by him immediately

and Rs 200 more in two monthly equal installments. It was

further agreed that if the radio is found defective the
customer may return it within a week but not later. The
customer makes default in paying the last installment. Can
the radio dealer take back the radio on his default?
Rights of an Unpaid Seller: As per Subsection (1) of Section 46, subject
to the provisions of this Act and of any law for the time being in force
notwithstanding that the property in the goods may have passed to the
buyer, the unpaid seller of goods, as such, has by implication of law,
4. A lien on the goods for the price while he is in possession of them.
5. In case of the insolvency of the buyer a right of stopping the goods in transit
after he has parted with the possession of them.
6. A right of re-sale as limited by this Act.
Where the property in goods has not passed to the buyer the unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and
co-extensive with his rights of lien and stoppage in transit where the property has
passed to the buyer. [Section 46(2)]
Section 46(1) will be applicable only if the plaintiff proves that:
e. He is an unpaid seller.
f. The buyer is insolvent.
g. The goods were in transit.
h. The property in the goods has passed to the buyer.
Unpaid Sellers Lien (Section 47)
1.

Subject to the provisions of this Act, the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until payment or tender
of the price in the following cases, namely
d. Where the goods have been sold without any stipulation as to credit.
e. Where the goods have been sold on credit, but the term of credit has
expired.
f. Where the buyer becomes insolvent

2. The seller may exercise his right of lien notwithstanding that he is in possession of
the goods as an agent or bailee for the buyer.
In Imperial Bank vs. London & St Katherine Dock Co., it was held that even though the
delivery of a bill of lading transfers legal property, it does not affect the sellers right of
lien on the goods as long as they are in his possession.
Goods sold without any stipulation as to credit: When goods are sold without any
stipulation as to credit, the seller can retain the goods, until the payment is made.
Goods sold on credit, but the term of credit has expired: When goods are sold on
credit, the possession of the goods is transferred to the buyer immediately. However, if
the seller has retained possession of the goods until the expiry of the period of credit,
the lien which was not available to him during that period will accrue to him on the
expiry of the credit period, even though the buyer is not insolvent at that time.

Where the buyer becomes insolvent: The third case where the seller
has a lien on the goods is where the buyer becomes insolvent.
The sellers lien is revived in case the time for payment has not arrived and the buyer
becomes insolvent. This is based on the rule, that where one of the parties to the
contract is unable to fulfill the promise required of him, the other party is absolved from
performing his obligation.
TERMINATION OF LIEN (SECTION 49)
1. The unpaid seller of goods loses his lien thereon
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.
b. When the buyer or his agent lawfully obtains possession of the goods.
c. By waiver thereof.
2. 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.
Stoppage in Transit: Subject to the provisions of this Act, when the buyer of goods
becomes insolvent, the unpaid seller who has parted with the possession of the goods
has the right of stopping them in transit, that is to say, he may resume possession of the
goods as long as they are in the course of transit, and may retain them until payment or
tender of the price. (Section 50)
The following are the conditions required to be fulfilled for the applicability of Section
50.
e) The seller should be unpaid
f) The buyer must be insolvent
g) The property in the goods should have passed from the seller to the buyer
h) The goods should be in transit.

The right of stoppage of goods accrues to the seller because of the

insolvency of the buyer. Where during the course of transit, the seller
discovers that the buyer is insolvent; he may retake possession of the

goods before the possession is transferred to the buyer. It should also

be noted that the right of stoppage is exclusive of the right of lien.

Case2
X sees a book displayed in a shelf of a book shop with a price
tag of Rs. 85. X tenders Rs. 85 on the counter and asks for
the book. The bookseller refuses to sell saying that the book
has already been sold to someone else and he does not have
another copy of that book in the stock. Is the bookseller
bound to sell the book to X?
The given case is under the chapter of offer and invitation to an offer which
means the signification by one person to another of his willingness to enter
in to a contract with him on certain terms. It may be expressed or implied
from the conduct of the parties. In this set case Mr. X wanted to purchase
the book which is already sold to other person therefore book seller refuses
the proposal and refuse to sell the book therefore x sue the bookseller.
Judgment : As mentioned above as per the section 2(a) says when one
person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining assent of that other to such act or
abstinence, he is said to make a proposal. Every expression of willingness
of a person to enter into a contract may not be an offer in the legal sense.
Therefore, an offer must be distinguished from invitation to offer. Many
statements which appear to be offer are not really offers but mere invitation
to offer. In this case purchaser makes the offer. Books are not offers and its
already being sold to the other party hence it is not legal action to sale the
particular sold copy to the other party. Therefore book seller is not bound
to sale the book to X.

ASSIGNMENT C
Q1 Any person is a holder in due course if he has obtained the negotiable instrument
a) For consideration
b) By gift
c) Before its maturity

d) Both (a) & (c) above

Q2 Michael Portes Five Forces Model includes:
a) Threat of Substitutes
b) Bargain Power of supplier
c) Bargain Power of Government

d) Both (a) & (b)

Q3 I had applied for subscription in Rajlakshmi scheme of UTI. The essence of the
scheme was that the sum of money deposited with the UTI would grow 21 times in 28
years. However subsequently, the UTI extended the maturity date by two years. Can I
approach a Consumer Court?

a) Yes you can seek relief in a consumer court

b) No you cant seek relief in a consumer court
Q4 Can Consumer Forums adjudicate disputes involving scale of pay?
a) Yes, Consumer Forums do adjudicate dispute-involving scale of pay

b) No, Consumer Forums do adjudicate disputeinvolving scale of pay

Q5 In which of the following instances, the collecting banker shall not be liable for
conversion to the true owner under the Negotiable Instruments Act, 1881?
(a)The collecting bank advances money to the customer against the cheque even before
the cheque is realized
(b)The uncrossed cheque given to the collecting bank for collection is crossed by the
banker
(c)The payment is received by the collecting bank on behalf of a person who is not a
customer of the bank
(d)The collecting bank is a holder for value

(e) The collecting bank is acting as an agent for

receiving the payment.
Q6 Which of the following amounts to reduction of share capital under section 100 of the
Companies Act, 1956?

(a)Redemption of redeemable preference shares under the provisions of Section 80 and

81 of the Companies Act, 1956
(b)Forfeiture of shares for non-payment of calls

(c) Payment of dividend out of share premium

(d)Surrender of shares to a company
(e)Reduction of nominal share capital of a company by canceling any shares which have
not been taken by any person.
Q7 Which of the following statements is false in respect of offer and its acceptance
under the Indian Contract Act, 1872?
(a) An offer will be valid only if it is communicated to the offeree
(b)A person who acts according to the terms of an offer which has not been
communicated to him will not be deemed to have accepted the offer
(c)The communication of the offer must be made with an intention to obtain the assent of
the offeree
(d)A mere intent of acceptance will not suffice, the acceptance must be communicated to
the offeror

(e) The mode of rejection of an offer must be specified

in order to constitute a valid offer.
Q8 Mr. Dheeraj is a director of Laxmi Ltd., which failed to file its annual returns from
the year 2003-04. The
maximum period for which Mr. Dheeraj will be disqualified from becoming a director in
any public limited
company is
(a) 3 years

(b) 5 years
(c) 7 years
(d) 8 years
(e) 10 years.
Q9 Which of the following statements is false in respect of a contract of guarantee under
the Indian Contract Act,
1872?

(a) Guarantee given for a time barred debt is valid

(b) A guarantee may be given retrospectively for an existing debt
(c)A contract of guarantee presupposes the existence of a debt, therefore, if there is no
existing liability, there cannot be a guarantee
(d) There are always three parties in a contract of guarantee
(e)Where the principal debtors liability becomes unenforceable because of illegality, the
surety cannot be made liable on the said debt.
Q10 Which of the following statements is false in respect of a contract of sale under the
Sale of Goods Act, 1930?
(a)Title to goods is immediately transferred to the buyer

(b)A contract of sale is an executed contract

(c) In case of default by the seller, the buyer may rescind

the contract
(d)In a sale, a breach of condition can only be treated as a breach of warranty
(e)In a contract of sale the goods are specified and ascertained.
Q11 The articles of association of Rathi Informatics Ltd. provided for a maximum of 18
directors on the Board. Presently there are 12 directors on the Board of the company. The
company wishes to increase the strength of its Board to 15. Which of the following
statements is correct in respect of these circumstances under the Companies Act, 1956?

(a) As the proposed increase is within the maximum

permissible number fixed by the articles only an
ordinary resolution is required
(b)As the proposed increase is beyond 12, a special resolution is required
(c)As the proposed increase is within the maximum permissible number fixed by the
articles only an ordinary resolution as well as approval of the Central Government is
required
(d)As the proposed increase is beyond 12, a special resolution as well as approval of the
Central Government is required
(e)As the proposed increase is beyond 12, a special resolution as well as approval of the
National Company Law Tribunal (NCLT) is required.
Q12 Which of the following statements is false in respect of dividend on preference
shares?
(a)Where there are two or more types of preference shares, the shareholders of the class
which has priority are entitled to their preferential dividend before any dividend is paid to
other shareholders
(b)Cumulative preference shareholders are entitled to receive all dividends which are in
arrears before any dividend is paid on equity shares

(c) Where cumulative preference shares have been

issued at different times, the arrears of dividend will
have to be paid to all the preference shareholders
equally
(d)In case of non-cumulative preference shares, only the amount of dividend which is due
in the current year will have to be paid to the holders
(e)The preference shareholder cannot sue the company for dividends, unless the company
has declared the same and did not pay the amount.
Q13 Which of the following statements is false in respect of consideration under the
Indian Contract Act, 1872?
(a) Consideration given at the behest of third parties will not be valid consideration

(b) Inadequacy of consideration invalidates a contract

(c) Consideration must be real and not illusory

(d) Performance of an existing legal duty will not constitute valid consideration
(e) Forbearance or abstinence amounts to valid consideration.
Q14 Which of the following statements in respect of bailment is false under the Indian
Contract Act, 1872?
(a)The bailor is bound to disclose, all the faults in the goods bailed to the bailee, of which
the bailor is aware
(b)The bailee will have to bear all the ordinary expenses incurred by vitue of the bailment
(c)The bailor is responsible to the bailee for any loss sustained by him in case the bailor
is not entitled to make the bailment or to receive back the goods

(d) The bailor is not responsible to the bailee for any

loss sustained by him in case of premature termination
of a gratuitous bailment
(e)It is the duty of the bailor to receive back the goods after the purpose is achieved.
Q15 Which of the following statements is false in respect of dividend under the
Companies Act, 1956?
(a)Dividend is to be paid only in cash
(b)Before payment of interim dividend a company must transfer to reserves the
prescribed percentage of estimated profits arrived at after providing for current years
depreciation and arrears of depreciation/loss
(c)A final dividend for any financial year can be declared and paid only when the balance
sheet and profit and loss account are presented to the shareholders at the AGM
(d)The shareholders can approve the recommended rate of dividend or lower the same,
but cannot increase the amount of dividend

(e) A dividend once declared cannot be revoked even

with the consent of all the shareholders.
Q16 Which of the following powers may be exercised by the board of directors without
obtaining consent of the company at a general meeting?

(a) Power to contribute to the welfare of its employees

any amount less than Rs.50,000
(b)Power to borrow in excess of capital and reserves of the company
(c)Power to remit debt due by a director
(d)Power to invest compensation amounts received on compulsory acquisition of any of
the companys properties
(e)Power to appoint sole selling agents.
Q17 Which of the following agreements is not valid under the Contract Act, 1872?
(a)An agreement for training a minor in a particular trade

(b) An agreement between a minor agent and his major

principal

(c)An agreement made by the certified guardian of a minor with authority for benefit of
minor
(d)An agreement made by a minor agent on behalf of his principal
(e)An agreement by a minor to repay a loan taken for supply of necessaries to him during
his minority.
Q18 As per section 166 of the Companies Act, 1956, the first annual general meeting of a
company should be held within
(a) 6 months of its incorporation
(b)12 months of its incorporation
(c)15 months of its incorporation

(d) 18 months of its incorporation

(e)24 months of its incorporation.
Q19 Which of the following is not excluded for the purpose of counting maximum
number of directorships under section 275 of the Companies Act, 1956?
(a)Directorship in a private company

(b) Directorship in a private company which is the

holding company of a public company
(c)Directorship in a unlimited company
(d)Directorship as an alternate director
(e)Directorship in an association not carrying on business for profit.
Q20 Which of the following is not a foreign bill under the Negotiable Instruments Act,
1881?
(a) A bill drawn in Singapore upon a resident of India, payable in Kuala Lumpur
(b) A bill drawn in Kuala Lumpur upon a resident of Singapore, payable in India
(c) A bill drawn in India upon a resident of Kuala Lumpur, payable in Singapore

(d) A bill drawn in India upon a resident of India,

payable in Kuala Lumpur
(e) A bill drawn in Singapore upon a resident of Singapore, payable in Kuala Lumpur.
Q21 A prospectus once registered with the Registrar Of Companies (ROC) should be
issued within
(a) 14 days from the date of registration with ROC
(b) 21 days from the date of registration with ROC
(c) 30 days from the date of registration with ROC
(d) 60 days from the date of registration with ROC

(e) 90 days from the date of registration with ROC.

Q22 Which of the following statements is false in respect of a pawnee under the Indian
Contract Act, 1872?
(a)When the pawnor defaults in payment of the principal debt , the pawnee can retain the
pledged goods as collateral security

(b)When the pawnor fails to perform his part of the promise, the pawnee may sell the
pledged goods after giving the pawnor a reasonable notice of sale

(c) When the pawnor defaults in payment of the

principal debt the pawnee cannot recover from the
pawnor any deficit between the debt due and sale price
(d)When the pawnor defaults in payment of the principal debt, the pawnee can file a suit
for breach of contract against the pawnor
(e)The pawnee can sue the pawnor for any extraordinary expenses incurred by him for
the preservation of the goods pledged.
Q23 Mr. Pankaj who was appointed as an additional director at the Board meeting held
on December 31, 2005 continues to be in his office on the ground that the annual general
meeting of the company for the year 2006 was not held as required under the Act. Mr.
Pankaj was also appointed as a managing director for a period of five years with effect
from January 01, 2006 at the same Board meeting. Which of the following statements is
true in respect of an additional director under the Companies Act, 1956?
(a)Mr. Pankaj shall hold the office as an additional director till the completion of five
years
(b)Mr. Pankaj shall hold the office as an additional director upto the conclusion of any
general meeting
(c)Mr. Pankaj shall hold the office as an additional director as long as he intends to

(d) Mr. Pankaj shall vacate the office of the managing

director
(e)Mr. Pankaj shall hold the office of the managing director till the completion of five
years.
Q24 Which of the following statements is false under the Companies Act, 1956?

(a) A director must be a member of the company

(b) Minimum seven persons are required for incorporation of a public company
(c) Proxy has no right to speak in the general meeting
(d) Company having profits need not declare dividends
(e) A private company cannot issue prospectus.
Q25 Which of the following statements is false in respect of rights of a bailee under the
Indian Contract Act, 1872?
(a)Where the bailee has rendered any service or exercised his skill in respect of the goods
bailed, then he can retain the bailed goods until his dues are paid
(b)If the bailee has agreed to refrain from exercising the right of lien or has waived his
right, then he cannot exercise the same

(c) The right of particular lien will be revived, if the

bailee gets possession of the bailed goods after parting
with the same in the first place
(d)The right of lien can be exercised so long as the bailee has the possession of the goods

(e)The bailee may retain not only those goods of the bailor in respect of which some
particular service has been rendered, but also other goods in the possession of the bailee
belonging to the bailor.
Q26 Section 165 of the Companies Act, 1956, in respect of conduct of statutory meeting
is applicable to

(a) A private company converted into a Public

Company within 6 months of its incorporation
(b) A private company, which is a subsidiary of a public company
(c) A public company having liability of its members unlimited
(d) An independent private company
(e) A government company registered as a private company.
Q27 Hiten Desai picked up a diamond ring from the floor of Divya Jewellers, Surat and
handed it over to Premchand Bhatia, the manager of Divya Jewellers, with a request to
hand it over to the true owner. The true owner could not be traced in spite of best efforts
of Premchand. Hiten Desai paid the expenses incurred by Premchand and asked him to
return the diamond ring to him. Which of the following statements is true under the
Indian Contract Act, 1872?
(a)Premchand is under no obligation to return the ring to Hiten Desai as the ring was
found on the floor of his shop
(b)Premchand is under an obligation to return the diamond ring only to the true owner
(c)Premchand and Hiten Desai can share the value of the diamond ring equally

(d) Hiten Desai being the finder of lost goods can retain
the diamond ring against everyone except the true
owner
(e)Premchand can retain the diamond ring against everyone including the true owner.
Q28 Under the Companies Act, 1956, up to what date a director appointed to fill casual
vacancy shall hold office?
(a) The last day on which the annual general meeting should have been held
(b) Until the original director, in whose place he is appointed, returns back

(c) Till the date up to which the director in whose place

he is appointed would have held office
(d) Up to the next extraordinary general meeting
(e) Up to the conclusion of the annual general meeting.
Q29 At a public auction a car was put up for sale and as Mr. Ramlal was the highest
bidder, he got the car. Later, it was discovered that the car was a stolen one. This fact was
also not known to the auctioneer. The true owner wishes to obtain possession of the car.
Under these circumstances which of the following statements is true under the Sale of
Goods Act, 1930?

(a)Mr. Ramlal did not get any title against the true
owner
(b)The true owner cannot recover any possession as Mr. Ramlal had bought at a public
auction
(c)As Mr. Ramlal had purchased the car in good faith, Mr. Ramlal can enjoy possession
of the car
(d)The true owner can file a suit against the auctioneer for fraudulently selling a stolen
car
(e)The auctioneer is personally liable to the true owner for damages only and the true
owner has no right to
obtain possession of the car.
Q30 Which of the following statements is false under the Companies Act, 1956?
a)The Board of directors should authenticate the accounts before submission to auditors
(b)The Profit and Loss account should reveal the details of auditors remuneration
(c)The provision of depreciation is necessary to show true and fair picture of the accounts

(d)Company with a paid up capital of Rs.2 crores is

required to form an audit committee
(e)The first auditor usually holds office till the conclusion of the first annual general
meeting.
Q31 Which of the following instances is not treated as crossing under the Negotiable
Instruments Act, 1881?

(a) A cheque bearing across its face the words account

payee without two transverse parallel lines
(b)A cheque bearing across its face the words not negotiable with two transverse
parallel lines
(c)A cheque bearing across its face the words not exceeding rupees two hundred within
two transverse parallel lines
(d)A cheque bearing across its face the words HDFC Bank, Karol Bagh Branch, New
Delhi within two transverse parallel lines
(e)A cheque bearing across its face the words Citi Bank, Daryaganj Branch, New Delhi
without two transverse parallel lines.
Q32 Which of the following persons is incompetent to enter into a valid contract under
the Indian Contract Act, 1872?
(a)The official assignee of an adjudged insolvent

(b) A person of the age of twenty years for whose estate

a guardian has been appointed by the Court
(c)A person who is a foreign diplomat
(d)A convict after the expiry of his sentence
(e)An Indian, voluntarily residing in a foreign country.

Q33 Which of the following statements is false in respect of qualification shares to be

held by a director of a company under the Companies Act, 1956?
(a)A director will have to take up qualification shares only if required by the articles of
association
(b)The nominal value of the qualification shares shall not exceed Rs.5,000 or the nominal
value of one share where it exceeds Rs.5,000

(c) The qualification shares required to be taken up by a

director must be purchased from the company
(d)Share warrants will not count for the purpose of share qualification
(e)Any provision in the articles requiring a person to obtain qualification shares before
his appointment as director or within a period shorter than two months of his appointment
shall be void.
Q34 Mr. Ankit, a creditor of Silktech Ltd. issued a demand notice by registered post at
the companys registered office to payback his loan amount worth Rs.1,50,000 (along
with interest). But the company neglected to reply/ respond for a period of two months.
Which of the following statements is true in respect of consequences of
failure of Silktech Ltd. to reply under the provisions of the Companies Act, 1956?
(a)Mr. Ankit has no remedy for the negligent conduct of the company
(b)Mr. Ankit can sell the assets of the company and take his money
(c)Mr. Ankit has to file a complaint to the Central Government

(d) Mr. Ankit can approach the National Company Law

Tribunal (NCLT) for winding up of the company
(e)Mr. Ankit has to conduct the general meeting and pass resolutions for changing the
directors.
Q35 Which of the following casual vacancies of directors cannot be filled by Board of
directors under the
Companies Act, 1956?
(a) A vacancy caused by the death of a director
(b) A vacancy caused by the resignation of a director

(c) A vacancy caused by the resignation of nominee

director of a financial institution
(d) A vacancy caused due to disqualification of a director
(e) A vacancy caused due to failure of an elected director to assume office.
Q36 Which of the following agreements is voidable under the Indian Contract Act, 1872?
(a)Agreements by way of wager
(b)Agreements contingent on impossible events
(c)Agreements made under a mutual mistake of fact

(d) Agreement induced by fraud

(e)Agreements by incompetent parties.

Q37 Which of the following statements is true under the Negotiable Instruments Act,
1881?
(a) Every holder is a holder in due course

(b) Every holder in due course is a holder for value

(c) Every holder for value is a holder in due course
(d) A holder in due course need not have taken the instrument in good faith
(e) Holder in due course may be party to the fraud.
Q38 Which of the following is an illegal agreement under the Indian Contract Act, 1872?
(a)Agreement by way of wager
(b)Agreeing to sell a house for paying money lost in gambling

(c) Hire of a truck knowingly for bringing goods which

are prohibited
(d)Agreement not to enforce promise through legal means
(e)Agreements in restraint of trade.
Q39 Under the Negotiable Instruments Act, 1881, when a negotiable instrument is
delivered conditionally or for a special purpose as a collateral security or for safe custody
only, and not for the purpose of transferring absolutely property therein, it is called an
(a) Inchoate instrument

(b) Escrow
(c) Accommodation bill
(d)Trade bill
(e) Ambiguous instrument.
Q40 Which of the following matters requires passing of special resolution and also the
approval of the Central Government under the Companies Act, 1956?
(a) Increase in the paid up capital
(b) Rectification of name of the company under section 22 of the Companies Act,1956

(c) Payment of interest out of capital

(d) Sub-division of shares
(e) Appointment of company secretary.