MB0051 Legal aspects of Business

Q1.It is important for any person to know law as ignorance of law is no excuse. Modern Indian law has been derived from some sources. Discuss the primary and secondary sources of Indian law. Ans. Primary sources of Indian Law The primary sources of Indian Law are: Custom Judicial precedent (stare decisis) Statute Personal law

Custom Customs have played an important role in making law and therefore are also known as customary laws. In the words of Keeton, customary law may be defined as those rules of human action, established by usage and regarded as legally binding by those to whom the rules are applicable, which are adopted by the courts and applied as sources of law because they are generally followed by the political society as a whole or by some part of it. In simple words, it is a generally observed course of conduct by people on a particular matter. When a particular course of conduct is followed again and again, it becomes a custom. Judicial precedent Judicial precedent is another important source of laws. It is based on the principle that a rule of law that has been settled by a series of decisions generally should be binding in court and followed in similar cases. Only those rules that lay down some new rules or principles are treated as judicial precedents. Thus, where there is a settled rule of law, it is the duty of the judges to follow the same; they cannot substitute their opinion for the established rule of law. This is known as the doctrine of stare decisis. The literal meaning of this phrase is standing by the decision. Statute Statutory law or legislation is the main source of law. This law is created by legislation of bodies such as the Parliament. It is called statute law because it is the writ of the state and is in written form (jus scriptum). In India, the Constitution empowers the Parliament and state legislatures to promulgate law for the guidance or conduct of people to whom the statute is made applicable, either expressly or by implication. It is sometimes called enacted law because it is brought into existence by passing acts in the legislative body.

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Personal Law Many times, a point of issue between the parties to a dispute is not covered by any statute or custom. In such cases, courts are required to apply the personal law of the parties. Thus, in certain matters, we follow the personal laws of Hindus, Mohammedans and Christians.

Secondary sources of Indian law The secondary sources of Indian Law are English Law and principles of Justice, Equity and Good Conscience. English Law The chief sources of English law are:

Common law This source consists of all those unwritten legal doctrines embodying customs and traditions developed over centuries by the English courts. Equity The literal meaning of the term equity is natural justice. In its technical and narrower sense, equity means a body of legal doctrines and rules emanating from the administrations of justice, developed to enlarge, supplement or override a narrow rigid system of existing common laws. However, like the common law, equity is also unwritten. Statute Statutes consist of laws passed by the legislature and is the written law. The authority of the Parliament is supreme but is subject to limitations laid down by the Constitution. The Parliament can pass laws as it pleases and can override its own previous acts and decisions of courts. A statute, therefore, is superior to and can override rules of common law or equity. Law merchant or Lex Mercatoria It is a source of law based on customs and usage prevalent among merchants and traders of the Middle Ages. Its evolution, like that of equity, can be traced to the unsuitability of the common law for commercial transactions. The common law was found to be unsatisfactory in dealing with disputes between merchants. The merchants, therefore, developed certain rules based on customs and usages to govern their mercantile transactions. These rules are known as Lex Mercatoria or the law merchant.

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Q2.We all enter into many contracts in a day knowingly or unknowingly. Explain the definition of a valid contract. How are contracts classified? Ans. Valid Contract A contract that satisfy all the essential elements of a valid contract are enforceable in a court of law. Contract According to Section 2 (h) of the Indian Contracts Act, 1872, a contract is an agreement enforceable by law made between at least two parties as per which rights and obligations are mutually created for both parties. Agreement Section 2 (e) of the Contracts Act defines an agreement as every promise and every set of promises forming a consideration for each other. For an agreement, a promise becomes essential. Essentials of a contract Section 10 of the Contracts Act provides that all agreements are contracts if they are made by free consent of parties competent to contract for a lawful consideration with a lawful object and are not expressly declared by law to be void.

Classification of contracts Contracts may be classified as follows: Classification according to formation: A contract may be made: In writing (express) By spoken words (implied) Inferred from the conduct of parties or circumstances of the case. Contracts are also classified as formal or informal on the basis of their formation. A formal contract is one in which the law gives special effect because of formalities or special language used in creating it. Classification according to validity: Contracts may be classified according to their validity as follows: Valid Voidable Void Non-enforceable

Valid means that the contract possesses all the elements of a contract as mentioned in Section 10 of the Contracts Act. If one or more of the essential elements are missing, the contract is voidable, void, illegal or non-enforceable. As per Section 2 (i), a voidable contract is one
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which may be repudiated (i.e., avoided) at the will of one or more parties, but not by others. Q3. The parties to bailment have certain rights and duties. Discuss the duties of both parties i.e. the bailor and bailee. Ans. Duties of a bailor To disclose known faults in goods (Section 150) The bailor is bound to disclose to the bailee, all faults in goods bailed, of which he/she is aware of. These faults materially interfere with the use of them or expose the bailee to extraordinary risks. To bear liability for breach of warranty as to title The bailor is responsible to the bailee for any loss that the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive goods or give directions respecting them (Section 164). To bear expenses in case of gratuitous bailment Regarding bailment under which the bailee is to receive no remuneration, Section 158 provides that in the absence of a contract to the contrary, the bailor must repay to the bailee all necessary expenses incurred by him for the bailment. To bear expenses in case of non-gratuitous bailment In case of non-gratuitous bailments, the bailor is responsible for bearing only extraordinary expenses.

Duties of a bailee To take care of goods bailed (Section 151) In all cases of bailment, the bailee is bound to take care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. Not to make unauthorised use of goods (Section 154) In case the bailee makes unauthorised use of goods, i.e. uses them in a way not warranted by the terms of bailment, he is liable to make a compensation to the bailor for any damages arising to the goods from or during such use of them. Not to mix bailors goods with his own (Sections 155-157) If the bailee without the consent of the bailor mixes the goods of the bailor with his own and the goods cannot be separated or divided, the bailee shall bear the expenses of separation or division and any damages arising from the mixture. To return goods bailed without demand (Section 160) It is the duty of the bailee to return, or deliver according to the bailors directions, the goods bailed without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. To return any accretion to goods bailed (Section 163) In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his/her directions, any increase or profit that may have accrued from the goods bailed.

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Q4. A contract comprises of reciprocal promises. In a contract of sale who is an unpaid seller? Discuss the remedies for breach of contract under Sale of Goods Act, 1930. Ans. Unpaid Seller A seller of goods is an unpaid seller when: The entire price has not been paid or tendered. A bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. Remedies for Breach of a Contract the seller has the following remedies against the buyer personally: Suit for price (Section 55) Damages for non-acceptance of goods (Section 56), and Suit for interest (Section 56). Suit for price (Section 55) Section 55 states that 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 the price, the seller can sue the buyer for the price of the goods. Where the property in goods has not passed to the buyer, as a rule, the seller cannot file a suit for the price; his only remedy is to claim damages. Suit for damages for non-acceptance According to 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. Where the property in the goods has not passed to the buyer and the price was not payable without passing of property. Suit for interest Section 61 claims that when under a contract of sale, the seller tenders the goods to the buyer and the buyer wrongfully refuses or neglects to accept and pay the price, the seller has a further right to claim interest on the amount of the price. Buyers remedies against seller The buyer has the following rights against the seller for breach of contract: Damages for non-delivery (Section 57) Right of recovery of the price Specific performance (Section 58) Suit for breach of condition Suit for breach of warranty (Section 59)
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 Anticipatory breach (Section 60) Recovery of interest (Section 61) Q5. The Companies Act, 1956 deals with the formation and transaction of business of a company. Discuss the features of a company. Also explain the process of formation of a company. Ans. key features of a company are An independent corporate existence separate from its members Limited liability Perpetual succession as a juristic person Common seal Ability to transfer ownership by way of shares Right to property, and Right to seek legal relief in its own name

Formation of a company may be divided into three parts: Promotion Registration Floatation Promotion Promotion denotes the preliminary steps undertaken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. The promoter may be an individual, syndicate, association, partnership or company. The term promoter has not been defined under the Act, although the term is used expressly in Sections 62, 69, 76, 478 and 519. Registration Before the formation of a company, preliminary decisions regarding the type of company, share capital, etc. have to be decided by the promoters, who do the work incidental to the formation of a company. According to Section 12, seven or more persons (two or more for a private limited company) associated for a lawful purpose may form an incorporated company, with or without limited liability. They subscribe their names to Memorandum of Association (MoA) and comply with other formalities for registration. A company so formed may be limited by shares or guarantee or may be an unlimited company. Floatation When a company has been registered and has received its COI, it is ready for floatation, that is to say, it can go ahead with raising capital that is needed to commence and carry on its business. Section 70 makes it obligatory for every public company to take either of the following two steps:

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privately. It must be done at least three days before allotment.

Q6. With Information Technology Act, 2000, India has a set of cyber laws to provide legal infrastructure for e commerce. Discuss the objectives and limitations of this Act. Ans. Objectives of the Information Technology Act The objectives of the Act as reflected in the preamble to the Act are: To provide legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly referred to as electronic commerce, which involves the use of alternatives to paper-based methods of communication and storage of information To facilitate electronic filing of documents with the government agencies To facilitate electronic storage of data in place of paper-based methods of storage of data To amend the Indian Penal Code, the Indian Evidence Act, 1872, the Bankers Books Evidence Act, 1891, and the Reserve Bank of India Act, 1934, and To provide for matters connected therewith or incidental thereto.

Limitations of the Information Technology Act, 2000 The Act does not cover the following aspects of e-commerce: The Act deals only with the commercial and criminal areas of law as affected by information technology and does not deal with certain other issues, such as intellectual property rights, (i.e., copyright, trademarks

and patents). Thus, infringement of copyright on e-commerce will be governed by the Copyright Act, 1957. The Act does not address itself to internet related issues such as domain names and cyber squatting. There have arisen many disputes about domain names globally, including infringement, concurrent claims and cyber squatting. In the USA, these issues are tackled by the US AntiCyber Squatting Consumer Protection Act, 1999. This Act is a powerful deterrent to cyber squatting, as it provides for the levy of damages up to US$300,000 per mark against the guilty parties. In India, however, cyber squatting can be opposed by relying on the provisions of the Trade Marks Act, 1999. The Act is not applicable to negotiable instruments, power of attorney, trusts, testamentary dispositions (wills), contracts for sale or conveyance of immovable property or any interest in such property. The nonapplicability of the Act to negotiable instruments would result in ePage | 7

commerce in India being limited to payment systems that are nontraditional or credit card-based. The banks cannot extend their services to the online medium of payments. The IT Act, 2000, is silent as regards taxation of goods and services traded through e-commerce. The IT Act makes no provision for jurisdictional aspects of electronic contracts, i.e., jurisdiction of courts and tax authorities. No provision has been made for payment of stamp duty on electronic documents

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