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MB0035- Unit 1 Law of Contract

Unit 1 Law of Contract

Introduction

Some knowledge of law is necessary for all persons since life of each member of society

must proceed to a large extent in conformity with recognized rules and principles of social

conduct. Life in general and business in particular could not continue without law to regulatethe conduct of people and to protect their property and contract rights.

The law of contracts forms the oldest branch of the law relating to business. Its object is to

introduce definiteness in commercial and other transactions, and to ensure the realization of reasonable expectations of the parties who enter into a contract. In India the law of contracts

is governed by the Indian contracts Act, 1872.

Objectives

After studying this unit you will be able to:

y Define contract.

y Explain the essentials of a valid contract.

y State the essentials of offer, proposal, acceptance and consideration.

Indian Contract Act ± 1872

Law ± Its origin

Every human being would like to have his own way to express himself and act. Such an

unrestricted freedom can be enjoyed only in isolation. Being a social being, man wants to live

in harmony with his fellow men. In such a life, one¶s interests are bound to clash with that of

other members of the society despite best co-operation. So there is a need for control or

regulations. Law happens to be one of the most effective instruments of control.

In the words of Holland, µlaw is a general rule of external human action enforced by a

sovereign political authority¶.

In the words of Salmond, µlaw is the body of principles recognized and applied by the State in

the administration of justice¶.

Thus, law is a rule of action evolved to regulate social life and to avoid conflict of interests.

The phrase commercial law, mercantile law or business law is used to denote those portionsof the law which deal with the rights and obligations arising out of transactions between

mercantile persons. It can be regarded as a part of Civil Law though certain aspects of Criminal Law such as forgery and fraud often become relevant in business transactions.

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There is no statute titled mercantile or business law. It comprises a vast number of lawsgoverning the relation of businessmen to the society.

The Indian Contract Act-1872

The Indian Contract Act, 1872 lays down the law relating to contracts. It does not lay down a

number of enforceable rights and duties, but lays down a number of limiting principlessubject to which the parties may create rights and duties for themselves.

Definition:

Contract: Sec. 2 (h) µAn agreement enforceable by law is a contract¶. To make a contract,there must be (I) an agreement and (ii) the agreement should be enforceable by law.

Agreement: Agreement is defined as µevery promise and every set of promises forming

consideration for each other µ. A promise is defined as ³an accepted proposal.´ Thus, everyagreement in its ultimate analysis is made of a proposal from one side and its acceptance by

the other.

To become a contract an agreement must be enforceable by law. Sec. 10 of the Act lays down

the condition of enforceability. An agreement becomes enforceable only when it is coupled

with obligation. An obligation is the legal bond, which binds the parties to a contract. The

obligations springing from agreements should be legal obligations and not moral, social or religious obligations.

Essentials of a Valid Contract :

All contracts are agreements but all agreements need not be contracts. The agreements

that create legal obligations only are contracts. The validity of an enforceable agreement

depends upon whether the agreement satisfies the essential requirements laid down in theAct. Section 10 lays down that all the agreements are contracts if they are made by the free

consent of the parties competent to contract for a lawful object and are not hereby

expressly declared to be void.

The following are the essentials:

a) Agreement : An agreement which is preliminary to every contract is the outcome of

offer and acceptance. An offer to do or not to do a particular act is made by one party

and is accepted by the other to whom the offer is made. Then we say that there is a

meeting of the minds of the parties. Such a position is known as consensus a d idem.

b) Free consent : The parties should agree upon the same thing in the same sense and

their consent should be free from all sorts of pressure. In other words it should not be

caused by coercion, undue influence, misrepresentation, fraud or mistake.

c) Contractual capacity: The parties entering into an agreement must have legal

competence. In other words, they must have attained the age of majority, should be of

sound mind and should not be disqualified under the law of the land. A contract entered

into between the parties having no legal capacity is nullity in the eyes of law.

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d) Lawful consideration: There must be consideration supporting every contract.

Consideration means something in return for something. It is the price for the promise.

An agreement not supported by consideration becomes a nudum pactum i.e., naked

agreement. The consideration should be lawful and adequate. However, there are

certain exceptions to this rule.

e) Lawful object : The object or purpose of an agreement must be lawful. It should not

be forbidden by law, should not be fraudulent, should not cause injury to the person or

property of another, should not be immoral or against public policy.

f) Not expressly declared void: The statute should not declare an agreement void. The

Act itself has declared certain types of agreements as void. E.g., agreements in restraint

of marriage, trade, legal proceedings. In such cases, the aggrieved party cant seek any

relief from the court of law.

g) Possibility of performance: The agreement should be capable of being performed.

e.g., Mr. A agrees with Mr. B to discover treasure by magic. Mr. B cant seek redressal of

the grievance if Mr. A fails to perform the promise.

h) Certainty of terms: The terms of the agreement should be certain. E.g., Mr. A. agrees

to sell 100 tons of oil. The agreement is vague as it does not mention the types of oil

agreed to be sold.

i) Intention to create legal obligation: Though Sec. 10 is silent about this, under English

law this happens to be an important ingredient. Therefore, Indian courts also recognise

this ingredient. An agreement creating social obligation cant be enforced.

j) Legal formalities: Indian Contract Act deals with a simple contract supported by

consideration. Agreements made in India may be oral or written. However, Sec. 10states that where the statute states that the contract should be in writing and should be

witnessed or should be registered, the same must be observed. Otherwise, the

agreement cant be enforced e.g., Under Indian Companies Act, the Memorandum of

Association and Articles of Association must be registered.

Classes of Contracts:

On the basis of enforceability, contracts may be classified as follows:

Valid contract: It is a contract which satisfies all the legal requirements provided for under

Sec. 10.

Void contract: An agreement not enforceable by law is said to be void. Sec. 2 (g). A void

agreement is a nullity in the eyes of law creating no legal rights or obligations. Therefore, it

is inappropriate to call it void contrac t. However, sometimes it may happen that an

agreement which is valid in the beginning may become void subsequently due to various

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reasons, such as impossibility of performance or illegality. Then we do refer to the term

void contract.

An agreement void from the beginning is known as Void ab initio. Then we cant use the

term void contract. E.g., an agreement with a minor.

An agreement which ceases to enforceable by law becomes void when it ceases to be

enforceable. Such a contract, though valid in the b eginning becomes void subsequently.

Voidable contract: An agreement which is enforceable by law at the option of one or more

of the parties thereto but not at the option of the other or others is a voidable contract. The

party entitled to affirm or reject it is the aggrieved party. This right of revocation has to be

exercised within the reasonable time and before third parties acquire rights under contract.

When the aggrieved party avoids the contract, the other party there to need not perform

any promise and the party avoiding the contract should restore any benefit he has received

under the contract.

Illegal contract: There is nothing like a legal contract or an illegal contract. It is right to callillegal agreement. An agreement is illegal when it is against the law of the land. E.g., an

agreement to commit fraud, crime or one that is opposed to good morals. It is to be noted

that while all the illegal agreements are void, all void agreements need not be illegal.

Unenforceable contract: An unenforceable contract is one which is valid but for certain

technical reasons such as want of proof, expiry of period within which enforceable, absence

of writing or registration etc. it becomes unenforceable. By clearing the technical reasons it

can be enforced.

Offer or Proposal

Sec. 2 (a) defines offer as follows: When one person signifies to another his willingness to

do or to abstain from doing anything with a view to obtaining the assent of that other

person to such act or abstinence, he is said to make a propo sal .

The person making the proposal is called promisor and the person accepting it is called

promisee.

Essentials of a Valid Offer:

a) An offer may be general or specific: According to Sec. 2 (a) an offer must be made to

a specific person. An offer may be made to the world at large. But the contract is made

only with the person who accepts and fulfills the conditions of the proposal.

In the words of Anson, An offer need not be made to an ascertained person, but no

contract can arise until it has been accepted by an ascertained person .

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In C arlill Vs C arbolic Smoke Ball C o. (1893) , a Company offered by advertisement to pay

£100 to any one who contacts the increasing epidemic influenza, cold or any disease

caused by taking cold after having used the ball as per printed directions. It was added

that £1000 is deposited with the Alliance Bank showing our sincerity in the matter. The

plaintiff used the smoke mokeball as per the directions but subsequently suffered from

influenza. She was held entitled to recover the promised reward.

b) An offer should be made with an intention of creating legal obligation: This principle

of English law though not incorporated specifically under S ection 10, is generally

accepted as vital to form a legal agreement. Social, moral or religious agreements are

not legally enforceable. For example, Mr. A invites Mr. B to dinner. Mr. B fails to attend.

Mr. A cannot sue Mr. B for unconsumed food.

Whether the offeror intended to enter into legal obligations or not could be known from

the nature of the agreement and the surrounding circumstances. The court has to

ascertain the intention of the parties. The test of contractual intention is objective and

not subjective. What is considered is not what the parties had in mind but what a

reasonable person would think in the circumstances their intentions to be.

c ) An offer must be definite and certain: The terms of an offer should not be uncertain

and ambiguous. Anson expressed The law requires the parties to make their own

contract, it will not make a contract for them out of terms which are indefinite or

illusory . This is so because the courts cannot say what the parties to the contract are to

do and whether there is violation of the contract.

However, all the terms of an offer need not be expressed. If some of the essential terms

of a bargain may not be specified but are capable of being determined by some method

other than by a future agreement there will be a good contract between the parties.

d) A statement of intention and an invitation to offer are not offers: Preliminary

negotiations are likely to take place before entering into an agreement. In the course of

such negotiations one party may make some declarations regarding his intention of

doing something. Such a declaration by itself does not become an offer. e.g., A tells B I

want to sell my car. This is not an offer.

An invitation to offer is not an offer. An advertisement for tenders for sale of good s by

auction, an announcement about the stock of goods for sale, display of goods in shop

windows, prospectus of a company, catalogue, price-lists, loudspeaker announcements

etc. are merely invitations to offer or offers.

E )An offer must be communicated to the offeree: An offer becomes operative only

when it has been communicated to the person to whom the offer is made.

Communication is necessary whether the offer is specific or general. Under Section 4

the communication of a proposal is complete when it comes to the knowledge of the

person to whom it is made. However, mere knowledge of a proposal does not amount

to communication unless the offeree acquires it with express or implied intention of the

offeror.

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The Act does not indicate the mode of communication. The offeror may communicate

the offer by choosing any available means. However, a letter containing an offer which is

never mailed is not an offer even if the contents are known by the offeree in some

manner.

General offers are communicated to public through notice and advertise-ments. But as

regards reward cases the question arises whether the person performing the conditions

of the offer can claim the reward even if he is ignorant of the offer. In Lalman Shukla Vs.

Gouri Dutt case it was held that knowledge of the offer is essential. There can be no

acceptance unless there is knowledge of the offer.

When the offer is not communicated silence on the part of the offeree does not amount

to consent since he does not have the opportunity to reject the of fer. E.g., A works for B

without the request or knowledge of B. A cant sue B for remuneration since Bs consent

cant be presumed from his silence.

f) The terms and conditions of offer should also be communicated: An agreement is a

two-sided bargain based on freedom of contract. However, in modern times the buyerof an article is in an unfavourable position. Freedom of contract becomes one -sided in

the case of agreements with common carriers, dry cleaners, tailors, insurance

companies, landlords, public ut ilities etc. It is also difficult to draw up a separate

agreement with each individual. Therefore, printed forms of agreements known as

standard form contracts are used. Such forms contain large number of terms and

conditions very often small in print absolving the dominant party of all liability. The

economically weaker party has to accept all such terms and conditions irrespective of

whether he likes them or not. The Court too finds it difficult at times to protect the

interest of the weaker party. Therefore the courts have evolved certain methods. When

the offer contains special terms and conditions the offeror must communicate all the

terms and conditions either before or at the time of contracting in order to bind theacceptor.

On the other hand if the acceptor knew that there was writing and knew or believed

that the writing contained conditions he is then bound by the conditions even though he

did not read them. It is enough if the offeror has done all that can be considered

necessary to give notice to the acceptor.

g) Two identical offers do not make a contract: An offer made by a person may cross a

similar one made by another person of course in the course of transit. They are just two

identical or cross offers, though there seems to be identity of mind.

h) An offer should not contain any term the non -compliance of which amounts to

acceptance: There may be any number of terms and conditions in an offer. The acceptor can

accept or reject them. While the offeror can prescribe mode of acceptance, he can t

prescribe the form or time of refusal so as to fix a contract upon the acceptor. He cant say,

for example, that if the offeree does not communicate before a given time, he is deemed to

have accepted the offer.

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Acceptance

According to Sec. 2 (b) When the person to whom the proposal is made signifies his

willingness thereto the proposal is said to be accepted. A proposal, when accepted, becomes

a promise.

By accepting the offer, the acceptor expresses his willingness to be bound by the terms and

conditions of the offer. Regarding an offer and its acceptance, Anson has given an analogy of

a lighted match stick. Acceptance is to an offer what a lighted match is to a train of

gunpowder. It produces something which cant be recalled or undone . An acceptance turns

the offer into a binding obligation.

Rules Regarding Acceptance:

a) An offer can be accepted only by the person to whom it is made: The offeree only

has to accept the offer. In case it is accepted by any other person no agreement is

formed. However, in case authority is given to another person to accept the offer on

behalf of the person to whom it is made, it is a valid acceptance.

b) Acceptance should be unconditional and absolute: Sec. 7 (I) states that the

acceptance should be absolute and unconditional. The acceptor should accept the offer

in toto. If it is qualified or conditional, it ceases to be valid. In fact, a qualified or

conditional acceptance is nothing but a counter -offer.

c) Acceptance should be communicated: The party accepting the offer must

communicate his acceptance to the offeror. Acceptance is not a mental resolve but

some external manifestation. The acceptance can be communicated in writing or word

of mouth or also by conduct. An agreement does not result from a mere state of m ind.

As regards unilateral contracts (e.g., offer of reward) it is impossible to the offeree to

communicate his acceptance otherwise than by performing the contract. In the case of

bilateral contracts acceptance must be communicated. The offeror cant force a contract

on offeree by fixing the mode of refusal. Further, acceptance should be communicated

only to the offeror and not to somebody else.

d) Acceptance should be according to the prescribed form: Unless specified in the offer

the acceptance must be in some usual and reasonable manner. The proposer has the

right to prescribe the manner of acceptance. He may require it to be oral or in writing or

to be communicated to him by phone or telephone etc. He can also waive his right or

may ask the offeree to express acceptance by some gesture. Once he prescribes themode of communication later he cant say that it was insufficient.

If the offeree does not signify his assent to the offeror according to the mode prescribed

it becomes deviated acceptance and strictly speaking it is no acceptance at all.

However, such a regid rule is not followed in India. In the case of deviated acceptance

the proposer may insist for the acceptance in the prescribed manner. He then has to do

this within a reasonable time after communication of acceptance to him. Otherwise it

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will be presumed that the proposer has accepted the deviated acceptance. Sec. 7 of the

Act does not tell that deviated acceptance is no acceptance.

e) Acceptance must be provoked by offer: The acceptor must be aware of the offer.

Even if he fulfills the conditions mentioned in the offer, if he is ignorant of the offer

itself, he cant give a valid acceptance. [Lalmann Shukla V, Gouridutt ].

f) Acceptance must be given before the offer lapses or is revoked: Where a time limit

has been fixed the acceptor has to accept the offer within such time. Where no time

limit is prescribed the acceptance has to be within the reasonable time. An offer once

dead cant be accepted unless there is a fresh offer.

g) Provisional acceptance is no acceptance: A provisional acceptance does not make a

binding agreement unless final approval is given. The offer may be withdrawn before

giving final approval. However, whether an agreement is provisional or final depends

upon the intention of the parties.

Contract by post: No problem arises where there is instantaneous communication of offerand acceptance which is possible when the parties are face to face. But how to determine

the point of time when the contract is complete if the parties are at distance by each other ?

As regards the point of time when the contract is complete, there is fundamental difference

between English Law and Indian Law.

Under English Law, the proposer is legally bound by the acceptance effected through postal

medium when the letter is prepared, addressed, stamped and mailed eventhough it is

delayed or lost in transit.

Indian Law (Sec. 4) lays down that the communication of an acceptance is complete as

against the proposer when it is put in a course of transmission to him so as to be out of the power of the acceptor; as against the acceptor when it comes to the knowledge of the

proposer . The distinction between English Law and Indian Law lies with regard to the

position of the acceptor. While under English Law, the acceptor is bound by acceptance the

moment the letter is mailed properly, under Indian Law the communication of acceptance is

complete as against, the acceptor only when it comes to the knowledge of the proposer.

Termination of offer: Following are the circumstances under which an offer is terminated.

a) Lapse : An offer lapses because of passage of time, death or insanity of the proposer.

In case time limit for acceptance is prescribed by the offeror, offer lapses if not accepted

within that time. In the absence of any stipulation of time, it has to be accepted within areasonable time depending upon the circumstances of each case.

A proposal is revoked by the death or insanity of the proposer, if the fact of his death or

insanity comes to the knowledge of the acceptor before acceptance. An acceptance is

not effective if it is communicated to the legal representatives of the proposer. But in

case the offeree is ignorant of the offerors death, it can be accepted.

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b) Failure to fulfill a condition procedent: Sec. 6 (3) provides that an offer is terminated

by the failure of the acceptor to fulfil a condition precedent to acceptance. e.g., A offers

to sell his car to B for Rs. 1,00,000 on the condition that B has to show his driving licence

to A. B has to comply with this condition if he has to accept the offer.

c) Re jection: By rejecting the offer offeror can terminate an offer. This rejection may be

express or implied. A counter offer has the same effect as rejection.

d) Destruction of the subject matter or illegality : If the thing offered is destroyed or

cant be bought and sold due to operation of law, the offer itself lapses.

e) Revocation: The withdrawal of an offer by the offeror is known as revocation. Till the

acceptance of the offer, the offeror can revoke it. Sec. 5 provides that a proposal may be

revoked by the proposer at any time before the communication of its acceptance is

complete. Communication of acceptance as against the proposer is complete where it is

put in the course of transmission to h im so as to be out of the reach of the acceptor.

In England, an acceptance cant be revoked.

Contractual Capacity

Legal disability of the parties would render the agreement entered into between them

unenforceable in a court of law. In fact, even a desirabl e person may enter into an

agreement. Law does not infringe his freedom of making an agreement with anybody he

likes. But by declaring certain classes of persons having no contractual capacity, law seeks to

protect their interests from being exploited by u nscrupulous persons.

Definition: Section II lays down that Every person is competent to contract who is of the

age of majority according to the law to which he is subject and who is of sound mind and isnot disqualified from contracting by any law to which he is subject. This section declares

following persons to be incompetent: (1) Minors (2) persons of unsound mind and (3)

persons disqualified by law to which they are subject.

Minors:

A minor is a person who has not attained the age of majority. According to Indian Majority

Act, 1875 the age of 18 years is a major. However, if a guardian is appointed by the court or

if the minor or his property is under the supervision of a court of wards, the age of majority

is 21 years.

Principles governing minors contracts: The law protects minors persons, preserves either

their rights and estates, excuses their shortcomings and negligences and assists them in

their pleadings, the judges are their counsellors, the jury are their servants and law is their

guardian.

In pursuing the above objective, the law should not cause unnecessary hardship to those

who deal with minors.

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Sec. II of the Act is silent as regards the legal effects of an agreement entered into by or with

a minor. In Mohari Bibi Vs. Dharmo Das Ghosh case it was held that a minors agreement is

void-ab-initio.

Effects of minors agreement: A minors agreement is void-ab-initio . Where there is no

contract, there should be no contractual obligation on either side. Hence, the effects of a

minors agreements are worked out independently of any contract.

1. No estoppel against minor: A minor who has made an agreement by

misrepresentation of his age may disclose his real age. There is no estoppel against

him.

2. No liability in contract or tort arising out of contract: A minor is, in law, incapable of

giving consent. Hence, there could be no change in the character or status of the

parties. A minor who misrepresents his age to obtain a contract cannt be sued for

deceit. You cannt convert a contract into a tort to enable you to sue an infant. This

principle has been followed in India.

Where, however, the tort is independent of contract the mere fact that a contract isalso involved will not absolve the minor from liability.

3. Doctrine of restitution: If a minor obtains property or goods by misrepresentating

his age, he can be compelled to restore it but only so long as the same is traceable in

his possession. This is known as the equitable doctrine of restitution. Suppose the

minor has sold the goods he cant be made to r epay the value of the goods because

that would amount to enforcing a void contract.

However, when a minor invites the aid of the court for the cancellation of his

contract the court may grant relief subject to the condition that he shall restore all

benefits obtained by him under the contract or make suitable compensation to theother party. But the court will not compel any restitution by a minor even when he is

a plaintiff, where the other party was aware of the infancy so that he was not

deceived or where the other party was unscrupulous in his dealings with the minor.

4. Beneficial contracts: The law that a minors agreement is absolutely void has been

confined to the cases where a minor is charged with obligations and the other party

seeks to enforce them. On the other hand a minor is allowed to enforce a contract

which is of some benefit to him and under which he is required to bear no

obligations. A minor is capable of purchasing immovable property and he may sue to

recover the possession of the property purchased by tendering the purchase money.

A minor can be a beneficiary e.g., a payee, an endorsee, or a promisee under a

contract. A promissory note executed in favour of a minor is valid and can be

enforced in a court.

5. Ratification: On attaining majority, a person cant ratify an agreement made by him

when he was a minor. Ratification relates back to the date of making of the contract.

Therefore, a contract which was void originally cant be made valid by subsequent

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ratification. If it is necessary, a fresh contract should be made on attaining majority.

A new contract requires a fresh consideration. The consideration which passed

under the earlier contract cant be implied into the contract into which the minor

enters on attaining majority.

6. Liability for necessaries (Sec. 68): Persons incompetent to contract are made liable

for necessaries supplied to them. Sec. 68 reads If a person incapable of entering

into a contract or any one whom he is legally bound to support is supplied by

another person with necessaries suited to his conditions in life, the person who has

furnished such supplies is entitled to be reimbursed from the property of such

incapable person.

The liability is only for necessaries. But what is necessary is not defined by the Act.

We have to depend upon judicial decisions. Things necessary are those without

which an individual cannt reasonably exist such as food, raiment, lodging etc. What

may be necessary for one class may be luxury for another. Therefore, the class has to

be ascertained and then whether a thing is a necessity or not has to be determined.

To render an infants estate liable for necessaries, two conditions must be satisfied:

(1) The contract must be for goods reasonably necessary for his support in his state

of life and (2) he must not have already a sufficient supply of these necessaries. The

supplier has to prove not only that the goods supplied were suitable to the

conditions in life of the minor but that he was not sufficiently supplied with the

goods of that class.

Thus, the liability for supply of necessaries attaches only to the estate of a minor and

he does not incur any personal liability.

Persons of Unsound Mind:

A person is said to be of sound mind for the purpose of making a contract if at the timewhen he makes it, he is capable of understanding it and of forming a rational judgement as

to its effects upon his interests. A person who is usually of sound mind but occasionally of

unsound mind may not make a contract when he is of unsound mind (Sec. 12).

Two tests are laid to determine the soundness of mind while making a contract. They are (i)

the person making a contract should be capable of understanding it and (ii) should be

capable of forming a rational judgement as to its effects upon his interests.

In English Law, a person of unsound mind is competent to contract. He may avoid his

contract by satisfying the court that he was incapable of understanding the contract at the

time of its formation and the other party knew it. The contract is voidable at his op tion.

Under Indian Law, the agreement of a person of unsound mind is absolutely void. A person

of unsound mind, however, may make a contract when he is of sound mind. Sec. 12 also

puts the persons such as drunkard or a person who is delirious from fever in the same

category as a person of unsound mind.

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Free Consent

One of the essentials of a valid contract is free consent. Sec. 13 of the Act defines consent as

Two or more persons are said to consent where they agree upon the thing in the same

sense. There should be consensus ad idem or identity of minds.

The validity of a contract depends not only on consent of the parties but their consent must

also be free. According to Sec. 14, consent is said to be free when it is not caused by (i)

coercion as defined under Section 15, or (ii) undue influence as defined under Section 16, or

(iii) fraud as defined under Section 17, or (iv) mis -representation or defined under Section

18, or (v) mistake subject to the provisions of Section 21, 21 and 22.

1. Coercion:

(Sec. 15) Coercion is the committing or threatening to commit any act forbidden by the

Indian Penal Code or the unlawful detaining or threatening to detain any property, to the

prejudice of any person whatever, with the intention of causing any person to enter into an

agreement. It is immaterial whether the Indian Penal Code is or is not in force in the placewhere the coercion is employed.

Under English Law, coercion must be applied to ones person only whereas under Indian

Law it can be ones person or property. So also under English Law, the subject of it must be

the contracting party himself or his wife, parent, child or other near relative. Under Indian

Law, the act or threat may be against any person. It is to be noted that the act need not be

committed in India itself. Unlawful detaining or threatening to detain any property is also

coercion. While threat to sue does not amount to coercion threat to file a false suit amounts

to coercion since such an act is forbidden by Indian Penal Code.

2. Undue influence:

In the words of Holland, Undue influence refers to the unconscious use of power over

another person, such power being obtained by virtue of a present or previously existing

dominating control arising out of relationship between the parties.

According Sec. 16 (1) A contract is said to be induced by undue influence where the

relation 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 advant age over the

other.

A person is deemed to be in a position to dominate the will of other

a) Where he holds a real or apparent authority over the other or where he stands in a

fiduciary relation to the other; or

b) Where he makes a contract with a person whose mental capacity is temporarily or

permanently affected by reason of age, illness or mental or bodily distress;

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c) Where a person who is in a position to dominate the will of another, enters into a

contract with him and the transaction appears to be unconscionable. The burden of

proving that such contract was not induced by undue influence shall lie upon the person

in a position to dominate the will of the other.

Both coercion and undue influence are closely related. What contributes coercion or undue

influence depends upon the facts of each case.

Sec. 16 (i) provides that two important elements must be present. The first one is that the

relations subsisting between the parties to a contract are such that one of them is in a

position to dominate the will of the other. Secondly, he uses that position to obtain unfair

advantage over the other. In other words, unlike coercion undue influence must come from

a party to the contract and not a stranger to it. Where the parties are not in equal footing or

there is trust and confidence between the parties, one party may be able to dominate the

will of the other and use that position to obtain an unfair advantage. However, where there

is no relationship shown to exist from which undue influence is presumed, that i nfluence

must be proved.

Presumptions as to undue influence: Sec. 16 (2) mentions certain types of relationships

which give rise to presumptions of undue influence. They are (i) parent and child (ii)

guardian and ward (iii) trustee and beneficiary (iv) religious advisor and disciple (v) doctor

and patient (vi) solicitor and client (vii) fiance and fiancee.

The presumption about undue influence is rebuttable one by proving that

a ) the person complaining of undue influence had independent advice.

b) Full disclosure of facts was made to him and he understood the same.

c) There was no undue influence and adequate consideration was there.

As regards the relationship between debtor and creditor, landlord and tenants, mother and

daughter, husband and wife, grandson and grand/father there exists no presumption of

undue influence. The party avoiding the contract must prove the existence of undue

influence.

Contracts with pardanashin women: A pardanashin woman is one who according to the

customs of her community lives in complete seclusion. The law presumes undue influence in

the case of a contract with a pardanashin women. Ordinary presumption is that a person

who signs a document understands its contents. But as regards a pardanashin woman thispresumption does not hold good. The burden of proof lies on the other party to show that

there was no undue influence, that the party understood the contents and the effects of the

document upon her interests.

Unconscionable or catching bargains: When a dominant party enters into contract with a

weaker party, he may take undue advantage or that others ignorance, infirmity or impaired

bargaining power. Such contracts are known as unconscionable contracts .

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Sec. 16 (3) lays down that in the case of unconscionable bargain the onus of proof that the

transaction was not induced by undue influence is on the person who is in a dominating

position in relation to the other party to the contract.

Coercion and undue influence distinguished:

1. In the case of coercion, contract is obtained by committing or treatening to commit

an act punishable under Indian Penal Code. In the case of undue influence the

consent is obtained by dominating the will of the other.

2. Coercion involves physical force. Undue influence involves moral force.

3. Coercion may proceed from a stranger and may be directed against a stranger.

Undue influence must proceed from a party to the contract.

4. There is no presumption as regards coercion. On the other hand law presumes

undue influence in certain circumstances.

5. The offence may be committed in or outside India in order to render it coercion.

Undue influence must be exercised in India.

6. Coercion affects provisions of Indian Penal Code. There is no criminal liability for

undue influence. 7. The party avoiding a contract under coercion has to restore any benefit he received

under the contract to the other party. Under undue influence the party avoiding the

contract may or may not be directed by the court to do so.

8. Fraud:

A false statement made knowingly or without belief in its truth or recklessly careless

whether it be true or false is called fraud.

Sec. 17 of the Act instead of defining fraud, gives various acts which amount to fraud.

Sec. 17: Fraud means and includes any of the following acts committed by a party to acontract or with his connivance or by his agent to induce him to enter into contract:

1. The suggestion that a fact is true when it is not true by one who does not believe it

to be true. A false statement intentionally made is fraud. An absence of honest belief

in the truth of the statement made is essential to constitute fraud. The false

statement must be made intentionally.

2. The active concealment of a fact by a person who has knowledge or belief of the

fact. Mere non-disclosure is not fraud where there is no duty to disclose .

3. A promise made without any intention of performing it.

4. Any other act fitted to deceive. The fertility of mans invention in devising new

schemes of fraud is so great that it would be difficult to confine fraud within thelimits of any exhaustive definition.

5. Any such act or omission as the law specially declares to be fraudulent.

Essentials of fraud:

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1. Making a false suggestion: There should be a false suggestion by a party who knows

it to be false or the statement must have been made recklessly without caring to

know its truthfulness. The false suggestion can be made by conduct of the party.

2. The representation must be of a fact. The false suggestion or representation must be

of a fact and not of opinion or intention. Commendatory explanations as found in

advertisements that a soap washes whiter than white do not constitute

representations of fact. It is usual for a trader to praise his own goods.

3. Active concealment of facts amounts to fraud: Instead of making a false

representation a person may conceal a material fact which according to him, if

stated, would be disadvantageous to him, such concealment of fact amounts to

suppression of truth.

4. A promise made without any intention of performing it: A promise includes a

representation to the effect that the promisor has the intention of performing it. So

if a party makes a promise without having any intention of performing it, he commits

fraud e.g., buying goods with no intention of paying for the same.

5. Any other act filled to decieve: Sec. 17 (4) brings within the purview of Sec.17 all

such acts which though apparently amount to misrepresentation of fact, may

amount to fraud considering the facts of the case.

6. Any act of ommission which the law specifically declares to be fraudulent.

7. Misrepresentation should be addressed to the party misled: The idea behind making

misrepresentation should be that the other person must act upon it. Once it is

shown that the misrepresentation was addressed to him, it becomes fraud if the

person acts upon it though the person making representation may say that he did

not intend that the person to whom it was addressed, should act upon it.

8. The representation must induce the contract: The person to whom the

representation is made should rely upon the same and should enter into a contract .

A false representation is merely irrelevant if it has not induced the party to whom it

was made to act upon it by entering into a contract.

9. The party acting on the representation should have been deceived and suffereddamage. The aggrieved party can not set aside the contract if he has not sustained

damage. If one knows that he is going to be deceived later he cannot complain of

being deceived by entering into contract.

Silence whether fraud ? While active concealment of a material fact is fraud, silence is not

fraud except under two circumstances. There is no general duty cast upon a party to a

contract to disclose to the other party material facts within his knowledge, but are unknown

to the other party. This principle is known as Caveat Emptor (let the buyer beware) in

contracts of sale of goods. However, under the following two circumstances silence would

amount to fraud:

a) Circumstances of the case cast a duty upon the person keeping silence to speak and (b)

silence itself is equivalent to speech.

Duty to speak arises when the parties to a contract are in a fiduciary relationships. Such

contracts are known as uberrimae fide contracts, the most common examples being

insurance contracts, contracts of suretyship, releases or compromises.

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4. Misrepresentation is not an offence under Indian Penal Code and hence not

punishable. Fraud, in certain cases is a punishable offence under Indian Penal Code.

5. Generally, silence is not fraud except where there is a duty to speak or the relation

between parties is fiduciary. Under no circumstances can silence be considered as

misrepresentation.

6. The party complaining of misrepresentation cannt avoid the contract if he had the

means to discover the truth with ordinary deligance. But in the case of fraud, the

party making a false statement cannot say that the other party had the means to

discover the truth with ordinary deligance.

5. Mistake:

Usually, mistake refers to mis-understanding or wrong thinking or wrong belief. But legally,

its meaning is restricted and is to mean operative mistake. Courts recognise only such

mistakes which invalidate the contract. Mistake may be mistake of fact (either unilateral or

bilateral) or mistake of law (either Indian law or foreign law).

Sec. 20 Where both parties to an agreement are under a mistake as to a matter of factessential to the agreement, the agreement is void.

Sec. 21 A contract is not voidable because it was caused by a mistake as to any law in force

in India; but a mistake as to a law not inforce in India has the same effect as a mistake of

fact.

Bilateral mistake: Sec. 20 deals with bilateral mistake. Bilateral mistake is one where there is

no real correspondence of offer and acceptance. The parties are not really in consensus -ad-

idem. Therefore there is no agreement at all.

A bilateral mistake may be regarding the subject matter or the possibility of performing thecontract.

Mistake as to the subject matter: This mistake arises when the parties to the contract

assume at the time of making the contract, that a certain state of things exists, but in reality

it does not exist. Such a mistake may relate to

(i ) existance of the subject matter: Two parties may enter into the contract on the

assumption that the subject matter exists at the time contract. But actually it may have

ceased to exist or has never existed at all. Then the contract becomes void.

(ii) Identity of the subject matter: A mutual mistakes as to the identity of subjectmatter renders the contract void.

(iii) A mistake as to the quality of the subject matter will no t render the agreement void

owing to the application of the principle of caveat emptor unless there is

misrepresentation or guarantee by the seller.

(iv)Price of the subject matter: An explanation to Sec. 20 provides that an erraneous

opinion as to the value of the thing which forms the subject matter of the agreement is

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not to be deemed a mistake as to a matter of fact. A mistaken notion about the value

of a thing bought or sold may be unilateral or bilateral. If it is unilateral, the buyer or

seller has to presume that he has made a bad bargain.

Where the mistake is mutual and the parties enter into the contract with false

assumption and mistake as to the value of the subject matter is the basis of their

agreement, there cant be an enforceable contrac t between them.

(v) Title of the subject matter: If a person agrees to purchase property which is

unknown to himself and the seller is his own already, the contract may be void. A

mistake as to the title does not invalidate a contract since Sec. 14 of the Sale of Goods

Act imposes an implied condition as to the title of the seller. Where there is no such

warrantee or the buyer purchases his own property the agreement will be void-ab-

initio.

(vi) A false and fundamental assumption: A false and fundamental as sumption going to

the root of the contract would render the contract invalid.

Mistake as to the possibility of performance: There may not be any possibility of the

performance of the contract. This impossibility of performance may be physical or legal

impossibility. However, impossibility of performance cannot be included under the head

bilateral mistake as there is Sec. 56 which lays down a positive rule of law regarding

responsibility.

Unilateral mistakes: Mistake of one of the parties to a contract as to a matter of fact is

known as unilateral mistake. Sec. 22 provides that a contract is not voidable merely because

it was caused by unilateral mistake. A person is bound by an agreement to which he has

expressed a clear assent unless the unilateral mistake is caused by misrepresentation or

fraud.

However, where consent to an agreement is given by a party to it under mistake which

prevents the formation of a contract, the unilateral mistake multifies the consent and the

contract becomes void. The following are such exceptional cases:

(a)Mistake as to identity: It is a rule of law that if a person intends to contract with A, B

cannot give himself any right under it. An offer can be accepted only by the person to whom

it is offered. If it is accepted by some one else, there arises a unilateral mistake rendering

the contract void.

Mistake as to identity is of two types: (i) where the parties are dating with each otherfrom a distance (ii) where they are face to face with each other.

(b)Mistake as to the character of a written document: If a person signs a document

under the mistaken impression that he is signing a document of a different nature

altogether he may escape liability in the document signed by him, provided he can prove

that the nature of the document is different from what it is supposed to be. One party to

a contract may not disclose to the other the nature of the document and induce the

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other to sign the same. The other party may sign it presuming it to be a document of

different nature. In such a case, the contract becomes wholly void for want of concent.

Mistake of law: A mistake of law may be of law of land or of foreign law. Mistake as to

the law of the land doesnot render the contract voidable as ignorance of law is no

excuse.

Consideration

Consideration means something in return.It is one of the essentials of valid contract. Ex

Nudo Pacto Non Oritar Actio means out of bare promise no action arises.

Definition:

Blackstone defined consideration as the recompense given by the party contracting to the

other. In the words of Pollack, Consideration is the price for which the promise of theother is bought and the promise thus given for value is enforceable.

Sec. 2 (d) of the Act defines consideration in the following terms: When at the desire of the

promisor the promisee or any other person has done or abstained from doing, or does or

abstains from doing, or promises to do or abstain from doing something, such act or

abstinence or promise is called a consideration for the promise.

Rules Governing Consideration:

(i) Consideration should be furnished at the desire of the promisor . The consideration

should be the outcome of the desire of the promisor. The desire may be express orimplied. The act done at the instance of third party or gratuitously does not become

consideration. e.g. As house catches fire. B goes and helps in extinguishing it. B later

cannot ask for any payment for his services. Even spiritual promises or mental

satisfaction are not enforceable. The question arises whether a promise of a

subscription to a public or charitable trust becomes legal. (Kedarnath Vs Gorie

Mohammed). A mere promise is not enough. The promisee must have done some act

or incurred expenses on the strength of the promise. (Abdul Aziz Vs Maznoon Ali).

(ii) Consideration may move from the promisee or any other person: Sec. 2 (d) provides

that the consideration may be furnished by the promisee or any other person. At this

point Indian law differs from English law according to which the consideration mustmove from the promisee only and not from the third party. However, there is a

doctrine known as constructive consideration under which if the person who was to

take a benefit under the contract was nearly related by blood to the promisee, a right

of action would vest to him. But this doctrine is no more valid.

(iii) Consideration may be past, presen t or future: Past consideration is something done

or not done at the request of the promisor, before the making of the agreement.

Under English Law, past consideration is no consideration. Nevertheless, past

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consideration will support a subsequent promise of the promisor. If services are

rendered under circumstances which raise an implication of a promise to pay for them,

the subsequent promise to pay is merely fixing a reasonable compensation for the

services.

In India past consideration is sufficient to s upport a promise provided it is made at the

request of the promisor.

Present consideration refers to one furnished at the time of the promise. Where both

the parties to a contract promise to each other of doing or not doing something the

consideration on both sides moves to a future date and is known as future

consideration. Present and future considerations are also known as executed and

executory consideration respectively.

(iv) Consideration need not be adequate: The law does not expect that the

consideration should be adequate. It is the lookout of the promisor. The parties as

between themselves can determine adequate consideration. The consideration which

the contracting parties give to each other need not be of equal value. However,explanation 2 to Sec. 25 provides that the agreement to which the consent of the

promisor is given is not void merely because the consideration is inadequate; but the

inadequacy of the consideration may be taken into consideration by the court in

determining whether the cons ent of the promisor was freely given.

(v) Consideration should be valuable: The consideration should not be unreal or illusory

or of the nature of moral obligation. It should be valuable, though the value of the

consideration need not be the same as the value of the promise which it supports.

(vi) The discharging of a pre-existing obligation is not consideration: The law may

compel a person to do an act. Then the mere doing of such act cant becomeconsideration for anothers promise. However, doing or agre eing to do more than what

a person is legally bound amounts to good consideration. In the same way performing

or promising to perform an existing obligation imposed by a previous contract will not

form consideration.

(vii) Consideration should be certain a nd lawful: Consideration should not be illusory or

uncertain or impossible. Discovering a treasury by magic, for example, cannot form

consideration.

Exceptions to the rule no consideration, no contract : Sec. 25 of the Act declares that an

agreement made without consideration is void. However, Sec. 25 also provides for thefollowing statutory exceptions:

1. Agreement made on account of natural love and affection: It is valid provided it is

in writing, is registered and is made between the parties standing in near relation to

one another. Nearness of relation implies blood relationship. However, even mental

relationship is equally nearness of relationship.

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2. Promise to compensate voluntary services: Sec. 25 (2) provides that a promise to

compensate wholly or in part a person who has already voluntarily done something

for the promisor is valid and enforceable. E.g., A finds Bs purse and gives it to him. B

promises to give A Rs. 50. This is a contract.

Sec. 2 (d) also deals with past consideration. But the diff erence between Sec. 2 (d)

and Sec. 25 (2) is that under Section 2 (d) the services are rendered at the request of

the promisor whereas under Section 25 (2) the services are voluntary.

However, voluntary act should satisfy following conditions so as to become an

exception:

i) The voluntary act should have been done for the promisor and not

anybody else.

ii) The promisor must have been existing at the time when the act was

done.

iii) The promisor should be competent to contract at the time when the act

was done.

iv) The intention of the promisor should have been to compensate the

promisee.

v) The services rendered should not be immoral.

3. A promise to pay a time-barred debt: The time-barred debt i.e. the one barred by

the law of limitation, cant be recovered. But Sec. 25 (3) provides that if a promise is

made in writing and signed by the person to be charged therewith or by his agentgenerally or specially authorised in that behalf, to pay wholly or in part a debt of

which the creditor might have enforced payment but for the law for the limitation of

suits is valid and enforceable. However, mere oral promise or acknowledgement of

debt is not enforceable.

4. A completed gift: In the case of a gift actually made not being an agreement to make

a gift, no consideration is necessary. The donor and donee may not be the near

relatives.

5. Agency: No consideration is necessary to create an agency.

6. Remission: No consideration is necessary for a n agreement to receive less than what

is due. Similarly, an agreement to extend time for performance of a contract need

not be supported by consideration. 7. Contribution to charity: A promise to contribute to charity, though gratuitous, would

be enforceable if on the faith of the promised subscription, the promisee takes

definite steps in furtherance of the object and undertakes a liability.

Privity of Contract

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The general rule of law is that a person who is not a party to a contract can not claim any

rights under the contract even though the contract is for his benefit. Such a person is known

as a stranger to the contract.

Though Indian Contract Act is silent about the position of a stranger to a contract, the Privy

Council and later the Supreme Court exten ded the principle of the English Law to India.

Exceptions:

The rule discussed above has the following exceptions:

1. In the case of a trust or a charge: Where a trust is created by a contract, the

beneficiary can enforce his rights which the trust has conferred upon him

eventhough he is not a party to the contract creating the trust.

2. In the case of acknowledgement or estoppel: Wherein a contract between two

parties, the promisee may be required to make a payment to a third party. The

promisor may acknowledge the payment by conduct or otherwise to the third party.

Then the third party can sue the promisor though there is no privity of contractbetween himself and the promisor.

3. In the case of assignment: When rights under a contract are assigned, the assignee

can sue upon the contract for the enforcement of his rights.

4. In the case of family and marriage settlements: When a provision is made for the

maintenance of female members of a Hindu family in a partition of Joint Hindu

property, or for the marriage expenses of a female member the person for whose

benefit such a provision is made is entitled to enforce the provision in her favour.

5. In the case of agency: A contract entered into by the agent acting within the scope of

his authority can be enforced by the princip al.

Lawful Object

Section 23 of the Act seeks to impose limitations on the freedom of contract by declaring

certain agreements to be void and certain others unlawful and void.

Sec. 23: The consideration or object of an agreement is lawful unless it is f orbidden by law,

or is of such a nature that if permitted it would defeat the provisions of any law or is

fraudulent or involves or implies injury to the person or property of another or the court

regards it as immoral or opposed to public policy. In each of these cases the consideration

or object of an agreement is said to be unlawful. Every agreement of which the object orconsideration is unlawful is void.

Unlawful consideration and objects: In the following cases consideration or the object of an

agreement is unlawful:

(a)Forbidden by law: Sec. 23 provides that if the consideration or object is forbidden by

law it becomes unlawful and the agreement based on it also becomes unlawful and

hence void. Under the English law a contract that is expressly or implicitly prohibited by

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statute is termed as illegal contract. On the other hand Sec. 23 of the Act uses only the

term unlawful. Though both illegal and unlawful agreements are void an illegal

agreement is necessarily unlawful whereas an unlawful agreement need not be illegal.

Nevertheless, the difference between the two is very thin and quite often they are used

interchangeably.

The term law under Sec. 23 means the enactment of the legislature, subordinate

legislation and the Hindu and Mohammadan laws .

(b)Defeat the provisions of any law: Sometimes the object may not be illegal. But it may

aim at circumventing the provisions of any law. Then it becomes void under Section 23.

(c)Fraudulent: An agreement entered into between the parties with a fraudulent

purpose or to perpetuate fraud on others is void.

(d)In jury to the person or property of another : If the object of an agreement is to cause

injury to the person or property of another, then i t is unlawful.

(e)Immoral: Anson states, Although it has sometimes been said that contracts contrary

to good morals are void the only aspect of immorality with which courts of law have

actually dealt is sexual immorality.The same view was referred to by the Supreme

Court. Thus though the word immoral is very comprehensive, Sec. 23 of the Act regards

promises to pay in consideration of concubinage, contracts of sale or hire of things to be

used in a brothel or by a prostitute for purposes incidental to her profession, agreement

to pay money for future cohabitation, contracts facilitating divorce as immoral.

A promise to pay for past cohabitation has been held to be enforceable by the Supreme

Court. But a promise to pay for future cohabitation whether adulte ry or not is

unenforceable. So also a promise to pay for past cohabitation for securing thecontinuation of the cohabitation is not enforceable. Agreements interfering marital

relations are also considered immoral.

(f)Opposed to public policy: The Act has not defined the term public policy. Sec. 23

intends to leave what is opposed to public policy for the courts to decide considering the

circumstances of the case. Lord Truro defined: Public policy is that principle of law

which holds that no subject can lawfully to that which has a tendency to be injurious to

the public or against the public good.

As the courts can decide whether a particular type of agreement could be considered to

be opposed to public policy the judiciary can invent new heads of public policyconsidering the economic and social conditions prevailing in India. Public Policy is an

elastic term and its connotations may vary with the social structure of the state.

Agreements which are held void on the ground that the consideration or obje ct is opposed

to public policy are as follows:

i) Trading with enemy: An agreement entered into with an enemy countrys citizen is

against public policy. Because such an agreement if performed would benefit an enemy

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country or injure the State in its relations with other States. The term alien enemy

means a person resident in the enemy country or the enemy-occupied territory. Even

temporary residence is sufficient.

ii) Stifling prosecution: An agreement which seeks to absolve an offender of the criminal

liability either by promising not to prosecute him for his offence or withdraw a criminal

case pending against him is known as an agreement to stifle prosecution. Such an

agreement is unlawful as opposed to public policy. This principle of law was established

in 1866.

iii) Maintenance and champerty: Maintenance refers to an agreement seeking to

provide assistance financial or otherwise to bring or defend a lawsuit. Champerty

refers to the agreement for sharing the benefit to be derived from the lawsuit. The

object of maintenance is to encourage speculative litigation whereas the object of

champerty is to share the proceeds of the litigation. Under English law the agreements

of this kind are illegal and void. However, it is not so in India. In order to be unla wful,

they must be against public policy. Thus an agreement to render professional service

with a bona-fide object of assisting a claim which is just, although made by way of

maintenance is valid. But if it is made by way of champerty (i.e., making the

remuneration dependent to any extent whatsoever upon the result of the suit) it is void.

iv) Interference with the course of justice: Agreements for using improper influence of

any kind with judges or officials of court, to bribe witnesses, inducing them to give false

evidence etc. are opposed to public policy. Thus, any agreement intended to obstruct or

prevent legal process or interfere in any manner the course of justice, is void.

v) Trafficking in public offices: These agreements interfere with free exercise of

governmental functions. They include agreements to influence public officers by

promising illegal gratification, to provide money to the members of parliament forpresenting his convictions on a certain legislation, sale of public offices etc.

vi) Marriage brokerage contracts: Society desires to prevent reckless or unsuitable

marriages. So third parties are not allowed to make money by bringing about

matrimonial unions. Such agreements to pay money to one who brings marriage

connections are void.

vii)Agreements in restraint of trade: Every agreement by which any one is restrained

from exercising a lawful profession, trade or business of any kind is void. However, an

agreement in restraint of trade is valid in the following cases: sale of goodwill, partners

agreements, trade combinations, negative stipulations in service agreements.

vii) Agreements tending to create an interest against duty: If an agreement entered

into by or with a public servant imposes an obligation upon such person to do

something which is inconsistent with his duty (official) then it is void as being opposed

to public policy.

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ix) Agreements intefering with parental duties: Agreements tending to transfer

absolutely the rights of parents over their children as to their custody, education and

religious training are void as being opposed to public policy. Father being the natural

guardian can entrust the custody of his children to others. But this is revokable.

x) Agreements restraining personal liberty: An agreement which unduly restrains the

liberty of an individual is void.

Summary

y The Indian Contract Act lays down the law relating to contracts.

y An agreement enforceable by law is a contract.

y To make a contract, there must be (I) an agreement and (ii) the agreement should be

enforceable by law.

y All contracts are agreements but all agreements need not be contracts.

y The object or purpose of an agreement must be lawful.

y An agreement not enforceable by law is said to be void.

y An agreement which is enforceable by law at the option of one or more of the partiesthereto but not at the option of the other or others is a voidable contract.

y A void agreement is a nullity in the eyes of law creating no legal rights or obligations.y Under Indian Companies Act, the Memorandum of Association and Articles of

Association must be registered.y The person making the proposal is called µ promisor¶ and the person accepting it is

called µ promisee¶.y A contract is valid only if it is not caused by coercion, undue influence,

misrepresentation, fraud or mistake.y The object or purpose of an agreement must be lawful.

y An agreement which is enforceable by law at the option of one or more of the parties

thereto but not at the option of the other or others is a voidable contract.

y An offer should be made with an intention of creating a legal obligation.y An offer must be communicated to the offeree.

y An offer should not contain any term the non-compliance of which amounts to

acceptance.

y An acceptance turns the offer into a binding obligation.

y One of the essentials of a valid contract is free consen.

y Two or more persons are said to consent where they agree upon the thing in the same

sense.

y Coercion is the committing or threatening to commit any act forbidden by the Indian

Penal Code or the unlawful detaining or threatening to detain any property, to the

prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

y Undue influence refers to ³the unconscious use of power over another person, such power being obtained by virtue of a present or previously existing dominating control

arising out of relationship between the parties.y A false statement made knowingly or without belief in its truth or recklessly careless

whether it be true or false is called fraud.y Before entering into a contract, the parties will make certain statements inducing the

contract. Such statements are called representation.

y Blackstone defined consideration as ³the recompense given by the party contracting

to the other.´

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MB0035- Unit 2 Discharge of Contract

Unit 2 Discharge of Contract

Introduction

Discharge of contract means parties to the contract are no more liable to the contract. In

other words, the liability of the parties to the contract will come to an end.

Objectives

After studying this unit, you will be able to:

y Mention the ways of discharge of contract.

y State the remedies for breach of contract.

Ways of Discharge of Contract

When the rights and obligations arising out of a contract are extinguished, the contract is

said to be discharged or terminated. A contract may be discharged in any of the following

ways:

1. By performance actual or attempted.

2. By mutual consent or agreement.

3. By subsequent or supervening impossibility or illegality.

4. By lapse of time.

5. By operation of law.

6. By breach of contract.

1.

Discharge by performance:

When a contract is duly performed by both the parties, the contract is discharged or

terminated by due performance. But if one party only performs his promise, he alone is

discharged. Such a party gets a right of action against the other party who is guilty of

breach. Performance may be: (1) Actual performance; or (2) Attempted performance or

Tender.

1. Actual performance: When each party to a contract fulfills his obligation arising

under the contract within the time and in the manner prescribed, it amounts to

actual performance of the contract and the contract comes to an end.

2. Attempted performance or tender: When the promisor offers to perform his

obligation under the contract, but is unable to do so because th e promisee does not

accept the performance, it is called attempted performance or tender. Thus

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tender is not actual performance but is only an offer to perform the obligation

under the contract. A valid tender of performance is equivalent to perfor mance.

Essentials of a valid tender. A valid tender or offer of performance must fulfil the following

conditions:

1. It must be unconditional. A conditional tender is not a tender.

2. It must be made at proper time and place. A tender before or after the due date or

at a place other than agreed upon is not a valid tender.

3. It must be of the whole obligation contracted for and not only of the part.

4. If the tender relates to delivery of goods, it must give a reasonable opportunity to

the promisee for inspection of goods so that he may be sure that the goods tendered

are of contract description.

5. It must be made by a person who is in a position and is willing to perform the

promise. A tender by a minor or idiot is not a valid tender.

6. It must be made to the proper per son i.e., the promisee or his duly authorised agent.

Tender made to a stranger is invalid.

7. If there are several joint promisees, an offer to any one of them is a valid tender. 8. In case of tender of money, exact amount should be tendered in the legal tender

money. Tendering a smaller or larger amount is an invalid tender. Similarly, a tender

by a cheque is invalid as it is not legal tender but if the creditor accepts the cheque,

he cannot afterwards raise an objection.

E ffect of refusal to accept a valid tender (Sec. 38): The effect of refusal to accept a properly

made offer of performance is that the contract is deemed to have been performed by the

promisor i.e., tenderer and the promisee can be sued for breach of contract. A valid tender,

thus, diacharges the contract.

Ex ception: Tender of money, however, does not discharge the contract. The money will haveto be paid even after the refusal of tender of course without interest from the date of

refusal. In case of a suit, cost of defence can also be recovere d from the plaintiff, if tender of

money is proved.

2. Discharge by Mutual Consent or Agreement

Since a contract is created by means of an agreement, it may also be discharged by another

agreement between the same parties. Sections 62 and 63 provide for th e following methods

of discharging a contract by mutual agreement:

1. Novation: Novation occurs when a new contract is substituted for an existingcontract, either between the same parties or between different parties, the

consideration mutually being the di scharge of the old contract. When the parties to

a contract agree for novation, the original contract is discharged and need not be

performed. The following points are also worth -notng in connection with novation:

1. Novation cannot be compulsory, it can only be with the mutual consent of all

the parties.

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2. The new contract must be valid and enforceable. If it suffers from any legal

flaw on account of which it becomes unenforceable, then the original

contract revives.

2. Alteration: Alteration of a contract means change in one or more of the material

terms of a contract. If a material alteration in a written contract is done by mutual

consent, the original contract is discharged by alteration and the new contract in its

altered form takes its place. A material alteration made in a written contract by one

party without the consent of the other, will, make the whole contract void and no

person can maintain an action upon it.

3. Rescission: A contract may be discharged, before the date of performance, by

agreement between the parties to the effect that it shall no longer bind them. Such

an agreement amounts to rescission or cancellation of the contract, the

consideration for mutual promises being the abandonment by the respective parties

of their rights under the contract. An agreement of rescission releases the parties

from their obligations arising out of the contract. There may also be an implied

rescission of a contract e.g., where there is non-performance of a contract by both

the parties for a long period, without complaint, it amounts to an implied rescission.

4. Remission: Remission may be defined As the acceptance of a lesser sum than what

was contracted for or a lesser fulfilment of the promise made. Section 63 lays down

that a promisee may give up wholly or in part, the performance of the promise made

to him and a promise to do so is binding even though there is no consideration for it.

An agreement to extend the time for the performance of a promise also does not

require consideration to support it on the groun d that it is a partial remission of

performance.

5. Waiver: Waiver means the deliberate abandonment or giving up of a right which a

party is entitled to under a contract, whereupon the other party to the contract is

released from his obligation.

3. Discharge by subsequent or supervening impossibility or illegality: Impossibility at the time of contract: There is no question of discharge of a contract which is

entered into to perform something that is obviously impossible, e.g., an agreement to

discover treasure by magic, because, in such a case there is no contract to terminate, it

being an agreement void ab-initio by virtue of Section 56, Para 1, which provides: An

agreement to do an act impossible in itself is void.

Subsequent impossibility: Section 56, Para 2, declares: A contract to do an act which, after

the contract is made, becomes impossible, or, by reason of some event which the promisor

could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

The following conditions must be fulfilled: (1) that the act should have become impossible;

(2) that impossibility should be by reason of some event which the promisor could notprevent; and (3) that the possibility should not be self -induced by the promisor or due to his

negligence.

Thus, under Section 56 (Para 2), where an extent which could not reasonably have been in

the contemplation of the parties when the contract was made, renders performance

impossible or unlawful, the contract becomes void and stands dischraged. This is kn own as

frustration of the contract brought about by supervening impossibility. It is also known as

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the doctrine of supervening impossibility. The rationale behind the doctrine is that if the

performance of a contract becomes impossible by reason of supervening impossibility or

illegality of the act agreed to be done, it is logical to absolve the parties from further

performance of it as they never did promise to perform an impossibility. The doctrine of

supervening impossibility as enunciated in Section 56 (Para 2), is wider than the doctrine of

frustration known to the English law. The doctrine of frustration is an aspect or part of the

law of discharge of contract by reason of supervening impossibility or illegality of the act

agreed to be done. In the case of subsequent impossibility or illegality, the dissolution of the

contract occurs automatically. It does not depend on the choice of the parties.

Cases where the doctrine of supervening impossibility applies: A contract will be discharged

on the ground of supervening impossibility in the following cases:

1. Destruction of subject-matter: When the subject-matter of a contract, subsequent

to its formation, is destroyed, without the fault of the promisor or promisee, the

contract is discharged. It is so only when specific property or goods are destroyed

which cannot be regained.

2. Failure of ultimate purpose: Where the ultimate purpose for which the contract was

entered into fails, the contract is discharged, although there is no destruction of any

property affected by the contract and the performance of the contract remains

possible.

3. Death or personal incapacity of promisor: Where the performance of a contract

depends upon the personal skill or qualification or the existence of a given person,

the contract is discharged on the illness or incapacity or the death of that person.

4. Change of law: A subsequent change in law may render the contract illegal and in

such cases the contract is deemed discharged. The law may actually forbid the doing

of some act undertaken in the contract, or it may take from the control of the

promisor something in respect of which he has contracted to act or not to act in a

certain way.

Cases not covered by supervening impossibility: He that agrees to do an act must do it or

pay damages for not doing it is the general rule of the law of contract. Thus, unless the

performance becomes absolutely impossible (as discussed above), a person is bound to

perform any obligation which he has undertaken, and cannot claim to be excused by the

mere fact that performance has subsequently become unexpectedly burdensome, more

difficult or expensive. Some of the cases where impossibility of performance is not an

excuse are as follows:

1. Difficulty of performance: Increased or unexpected difficulty and expense do not, as

a rule, excuse from performance. 2. C ommercial impossibility: When in a transaction profits dwindle to a very low level or

actual loss becomes certain, it is said that the performance of the contract has

become commercially impossible. Commercial impossibility also does not discharge

a contract.

3. Impossibility due to the default of a third person. The doctrine of supervening

impossibility does not cover cases where the contract could not be performed

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1. Anticipatory breach: An anticipatory breach of contract is a breach of contract

occurring before the time fixed for performance has arrived. It may take place in two

ways: (a) Expressly by words spoken or written. Here a party to the contract

communicates to the other party, before the due date of performance, his intention

not to perform it. (b) Impliedly by the conduct of one of the parties. Here a party by

his own voluntary act disables himself from performing the contract. When a party

to a contract has refused to perform or disabled himself from performing, his

promise in its entirity, the promisee may put an end to the contract, unless he has

signed, by words or conduct his acquiscence in its continuance.

2. Actual breach: Actual breach may also discharge a contract. It occurs when a party

fails to perform his obligations upon the date fixed for performance by the contract.

Actual breach entitles the party not in default to elect to treat the contract as

discharged and to sue the party at fault for damages for breach of contr act.

Remedies for Breach of Contract

Whenver there is breach of a contract, the injured party becomes entitled to any one or

more of the following remedies against the guilty party:

1. Rescission of the contract.

2. Suit for damages.

3. Suit upon quantum merit.

4. Suit for specific performance of the contract.

5. Suit for an injunction.

As regards the last two remedies stated above, the law is regulated by the Specific Relief

Act, 1963.

1 Rescission of the contract: When there is a breach of contract by one party, the other

party may rescind the contract and need not perform his part of obligations under the

contract. But in case the aggrieved party intends to sue the guilty party for damages for

breach of contract, he has to file a suit for rescission of the contract. W hen the court grants

rescission, the aggrieved party is free from all his obligations under the contract and

becomes entitled to compensation for any damage which he has sustained through the non -

fulfilment of the contract (Sec. 75).

2.

Suit for damages: Damages are a monetary compensation allowed to the injured party forthe loss or injury suffered by him as a result of the breach of contract. The fundamental

principle underlying damages is not punishment but compensation. By awarding damages

the court aims to put the injured party into the position in which he would have been, had

there been performance and not to punish the defaulting party. As a general rule,

compensation must be commensurate with the injury or loss sustained, arising naturally

from the breach. If actual loss is not proved, no damages will be awarded.

Different kinds of damages: Damages may be of four kinds:

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Liquidated damages and penalty: Liquidated damages means a sum fixed up in advance,

which is a fair and genuine pre -estimate of the probable loss that is likely to result from the

breach. Penalty means a sum fixed up in advance, which is extravagant and unconscionable

in amount in comparison with the greatest loss that could conceivably be proved to have

followed from the breach.

Courts in England usually allow liquidated damages as stipulated in the contract, without

any regard to the actual loss sustained. Penalty clauses, however, are treated as invalid

and the courts in that case calculate damages according to the ordinary principles and allow

only reasonable compensation.

Under the Indian Law the courts are not bound to treat the sum mentioned in the contract,

either by way of liquidated damages or penalty, as the sum payable as damages for the

breach. Instead the courts are required to allow reasonable compensation so as to cover the

actual loss sustained, not exceeding the amount so named in the contract. The court will

award to the party aggrieved only reasonable compensation not exceeding the amount

named or penalty stipulated.

The principles governing the measure of damages discussed above may be summarised as

under:

1. The damages are awarded by way of compensation for the loss suffered by the

aggrieved party and not for the purpose of punishing the guilty party for the breach.

2. The injured party is to be placed in the same position, so far as money can do, as if

the contract had been performed.

3. The aggrieved party can recover by way of compensation only the actual loss

suffered by him, arising naturally in the usual course of things from the breach itself.

4. Special or remote damages i.e., damages which are not the natural and probable

consequence of the breach are usually not allowed until they are in the knowledgeof both the parties at the time of entering into the contract.

5. The fact that damages are difficult to assess does not prevent the injured party from

recovering them.

6. When no real loss arises from the breach of contract, only nominal damages are

awarded.

7. If the parties fix-up in advance the sum payable as damages in case of breach of

contract, the court will allow only reasonable compensation so as to cover the actual

loss sustained, not exceeding the amount so named in the contract.

8. Exemplary damages cannot be awarded for breach of contract except in case of

breach of contract of marriage or wrongful refusal by the bank to honour the

customers cheque. 9. It is the duty of the injured party to minimise the damage suffered.

10. The injured party is entitled to get the costs of getting the decree for damages from

the defaulter party.

3.

Suit upon quantum merit (Sections 65 and 70): The third remedy for a breach of contract

available to an injured party against the guilty party is to file a suit upon quantum merit. The

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phrase quantum merit literally means as much as is earned or in proportion to the work

done. This remedy may be availed of either without claiming damages (i.e., claiming

reasonable compensation only for the work done) or in addition to claiming damages for

breach (i.e., claiming reasonable compensation for part performance and damages for the

remaining unperformed part).

The aggrieved party may file a suit upon quantum merit and may claim payment in

proportion to work done or goods supplied in the following cases:

1. Where work has been done in pursuance of a contract, which has been discharged

by the default of the defendant.

2. Where work has been done in pursuance of a contract which is discovered void or

becomes void.

3. When a person enjoys benefit of non -gratuitous act although there exists no express

agreement between the parties. One of such cases is provided in Section 70 (other

cases are covered under quasi-contracts). Section 70 lays down that when services

are rendered or goods are supplied by a person, (i) without any intention of doing so

gratuitously, and (ii) the benefit of the same is enjoyed by the other party, the latter

must compensate the former or restore the thing so delivered.

4. A party who is guilty of breach of contract may also sue on quantum merit provided

both the following conditions are fulfilled: (a) the contract must be divisible and (b)

the other party must have enjoyed the benefit of the part which has been

performed, although he had an op tion of declining it.

4.

Suit for specific performance: Specific performance means the actual carrying out of the

contract as agreed. Under certain circumstances an aggrieved party may file a suit for

specific performance, i.e., for a decree by the court directing the defendant to actually

perform the promise that he has made. Such a suit may be field either instead of or inaddition to a suit for damages.

A decree for specific performance is not granted for contracts of every description. It is only

where it is just and equitable so to do, i.e., where the legal remedy is inadequate or

defective, that the courts issue a decree for specific performance. It is usually granted in

contracts connected with land, buildings, rare articles and unique goods having so me special

value to the party suing because of family association. In all these contracts monetary

compensation is not an adequate relief because the injured party will not be able to get an

exact substitute in the market.

Specific performance is not granted, as a rule, in the following cases:

i) Where monetary compensation is an adequate relief.

ii) Where the court cannot supervise the actual execution of the contract, e.g., a

building construction contract. Moreover, in most cases damages afford an adequate

remedy.

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iii) Where the contract is for personal services, e.g., a contract to marry or to paint a

picture. In such contracts injunction (i.e., an order which forbids the defendant to

perform a like personal service for other persons) is granted in pla ce of specific

performance.

iv) Where the contract is not enforceable by either party against the other, that is,

where one of the parties does not possess competency to contract. Thus a minor

cannot succeed in an action for specific performance since he cannot himself be sued

for breach of contract.

5.

Suit for an in junction: Injunction is an order of a court restraining a person from doing a

particular act. It is a mode of securing the specific performance of the negative terms of the

contract. To put it differently, where a party is in breach of a negative term of the contract

(i.e., where he is doing something which he promised not to do), the court may, by issuing

an injunction, restrain him from doing, what he promised not to do. Thus injunction is a

preventive relief. It is particularly appropriate in cases of anticipatory breach of contract

where damages would not be an adequate relief.

Summary

y When the rights and obligations arising out of a contract are extinguished, the contract

is said to be discharged or terminated. A contract may be discharged in any of the

following ways:

1. By performance actual or attempted.

2. By mutual consent or agreement.

3. By subsequent or supervening impossibility or illegality.

4. By lapse of time. 5. By operation of law.

6. By breach of contract.

y When a contract is duly performed by both the parties, the contract is discharged or

terminated by due performance. Since a contract is created by means of an agreement,

it may also be discharged by another agreement between the same parties.

y ³He that agrees to do an act must do it or pay damages for not doing it´ is the general

rule of the law of contract.

y µInjunction¶ is an order of a court restraining a person from doing a particular act.

MB0035- Unit 3 Contract of Indemnity and

Guarantee

Unit 3 Contract of Indemnity and Guarantee

Structure:

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3.1 Introduction

O bjectives

3.2 Contract of Indemnity

3.2.1 Definition of Indemnity

3.2.2 Elements of Indemnity Contract

3.3 Contract of Guarantee

3.3.1 Definition of Guarantee

3.3.2 Essentials of Contract of Guarantee

3.3.3 Kinds of Guarantee

3.3 4 Continuing Guarantee

3.3.5 Rights of Surety/Co-surety

1. Discharge of Surety

Self Assessment Questions I

1. Summary

2. Terminal Questions

3. Answers to SAQs and TQs

Introduction

Both contract of indemnity and guarantee are special types of contract. They must fulfill all

the essentials of contract as well as some special provisions.

Objectives:


y Explain the meaning and essentials of contract of indemnity.y Explain the meaning and essentials of contract of guarantee.

y Explain the rights of surety.

y Explain the discharge of surety liabilities.

Contract of Indemnity

Contract of indemnity is a special type of contract wherein one person promises the loss of other party.

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Definition of Indemnity

Section 124, 125 and 127 of the Indian Contract Act deal with contract of indemnity. AContract by which one party promises to save the other from any loss caused to him by the

conduct of the promisor himself, or by the conduct of any other person is called contract of

indemnity. The promisor in such a contract is called indemnifier while the promisee who is to

be protected is called the indemnity holder or indemnified (Sec. 124).

Essentials of a Contract of Indemnity

1. There must be two parties in a contract of indemnity viz., indemnifier and indemnified.

2. A contract of indemnity may be express or implied.

3. This contract being a species of contract, is subject to all the rules of contract, such as free

consent, legality of object etc.

4. A contract of indemnity is enforceable only when the promisee suffers a loss the happening

of which is unknown and against which the indemnity holder was promised to be protected.

5. Consideration in the case of contract of indemnity is essential to enable the indemnity

holder to make claim to be compensated.

Contract of Guarantee

Definition of Contract of Guarantee: It is a contract to perform the promise or discharge

the liability of a third person in case of his default (S. 126). Surety is a person who gives the

guarantee. The person in respect of whose default the guarantee is given is called µ principal

debtor.¶ The person to whom the guarantee is meant for is called the µCreditor¶.

Essential of Contract of Guarantee:

1. From: A contract of guarantee is just like any other contract which may be either oral

or in writing.

2. Tripartite agreement: Every contract of guarantee involves three agreements

between (i) the creditor and principal debtor, (ii) the surety and the creditor, and (iii) the

surety and the principal debtor.

Consent of the parties: There must be consent of all the three parties.

Example: X sells and delivers goods to Y. X afterwards requests Z to pay in default of Y.

Z agrees to do so. Here, Z cannot become surety without the consent of Y.

3. Secondary Liability: The test which applied to determine whether the contract is one

of guarantee or indemnity is whether the obligation has been undertaken at the debtor¶srequest in which case the contract is one of guarantee. If the obligation is undertaken

without any request of the debtor, the contract is one of indemnity. The intention of the parties is also important whether one making oneself primarily or collaterally liable.

Hence, the promise to be primarily and independently liable is not a guarantee, though itmay be an indemnity. Hence in a contract of guarantee, the primary liability is with the

principal debtor.

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4. Existing liability: It is not necessary that the principal contract must be in existence atthe time the contract of guarantee is made; the original contract by which the principal

debtor undertakes to repay the money to the creditor may be about to come into existence.

Example: X took a loan of Rs.10,000 from Y on 1st

Jan. 1999 and paid nothing on

account of interest and principal. On 2nd

Jan. 2002, Z gave the guarantee to Y for the

payment of Rs.10,000 due from X. This is not a valid contract of guarantee because the primary liability between X and Y is a time barred debt which is not enforceable by law.

1. The promise to pay must be conditional: In other words, the liability of the surety should

arise only when the principal debtor makes a default.

2. Consideration: Something done for the benefit of the principal debtor is considered as

consideration for the guarantee to make the contract valid. The legal detriment incurred by

the promisee at the promisors request is sufficient to constitute the element of

consideration.

3. Competency: The principal debtor, surety and creditor must be a person competent to

contract. However, under certain circumstances, a surety is liable though the principal

debtor is not i.e. the original contract is void as is the case of a contract with a minor in

which the surety is liable not only as surety but also as principal debtor. A person of unsoundmind or an undischarged insolvent cannot give a valid guarantee.

4. Consent: There must be free consent; otherwise the contract of guarantee may become void

or voidable. Generally a contract of guarantee is not the contract of utmost good faith i.e.,

uberrimae fidei , but it is sometimes a first cousin to it. Mere non-disclosure will not effect

the contract of surety unless there is an intentional concealment.

Example: I: A engages B as clerk to collect money from him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his

duty accounting. C gives his guarantee for B¶s duty accounting. A does not acquaint Cwith B¶s previous conduct. B afterwards makes a default. The guarantee is invalid.

Example: II: A guarantees to C payment for iron to be supplied by him to B to theamount of 2000 tons. B and C have privately agreed that we should pay Rs.500 per

ton beyond the market price, such excess to be applied on liquidation of an old debt.This agreement is concealed from A. A is not liable as a surety.

Kinds of Guarantee

A contract of guarantee may be either µretrospective¶ e.g., for an existing debt or

µ prospective¶ i.e. for a future debt. Guarantee are further divided into ¶specific¶ also known assimple or single guarantee and µcontinuing¶. When the guarantee is given for a single or

particular debt, it is called a ¶specific guarantee¶ and it comes to an end when the debtguaranteed has been paid. A guarantee which extends to a series of transactions is called a

continuing guarantee. (Sec. 129 of the Indian Contract Act).

Guarantee may be for a part of a whole debt or for the whole debt subject to a limit:

When the intention of the parties is not explicit it will be presumed that where a portion of afloating balance is guaranteed it is for a part of it only. When portion of a fixed and

ascertained debt is guaranteed the guarantee applied to the whole debt subject to the limit.

Distinction between Indemnity and Guarantee

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Indemnity Guarantee

1.

2.

3.

4.

5.

6.

7.

Number of parties: There are two parties: Indemnifier and Indemnified.

Number of Contracts: There is only

one contract between the indemnified

and Indemnifier.

Form: May be written or oral in both

Indian and English Law.

Interest in the transaction: The

indemnifier has interest in thetransaction apart from the indemnity

i.e., apart from his promise to pay theloss.

Nature of risk : It is possibility of

risk of any loss happening in future

against which the indemnifier

undertakes to indemnify

i.e., continuing risk.

Nature of liability: The indemnifier

is primarily and independently liable.

Subrogation: An indemnifier cannothave subrogation unless there is an

assignment. Otherwise he must bring

the suit in the name of the

indemnified.

Request: It is not necessary for the

indemnifier to act the request of theindemnified.

1.

2.

3.

4.

5.

6.

There are three parties to it viz., the principaldebtor, the surety & the creditor.

Three contracts: (i) between the principal

debtor and the creditor, (ii) between the

surety and the creditor, and (iii) between the

surety and the principal debtor (implied).

According to section 4, of the Statute of

Frauds (in England) it should be in writing: inIndian Law it may be written or oral.

The guarantee is totally unconnected with the

contract but the only interest in the contract

is his promise to the loss.

There is an existing debt the discharge or

performance of which is guaranteed by thesurety i.e., it is the absolute and subsisting

risk.

In a guarantee the liability of the surety is co-extensive with that of the principal debtor

(ancillary liability). The guarantor if secondarily liable except where the principal

debtor is incapable of contracting).

If a surety pay the debt or perform the

obligation he can file a suit in his own name

against the principal debtor to reimburse the

amount so paid.

It is necessary for the surety to give hisguarantee at the request of the debtor.

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8.

7.

8.

Continuing Guarantee

Definition of Continuing Guarantee : A guarantee which extends to a series transactions is

called Continuing Guarantee (Sec. 129). A guarantee may be ordinary guarantee or a

continuing guarantee. In the former, the guarantee is in respect of one single transaction while

in the case of continue guarantee, the guarantee extends to a series of transactions.

Illustration: A in consideration that B will employ C in collecting the rents of B¶s shoppingcomplex promises B to be responsible, to the amount of 3,000 rupees, for the due collection

of payments by C of those rents. This is a continuing guarantee.

1. Notice of Revocations: A continuing guarantee is revoked when the surety gives anotice to the creditor for the revocation of guarantee. Notice will be applicable only for

future transactions and not those transactions which had already taken place. (Sec. 130).

2. Death: The continuing guarantee is revoked by the death of the surety provided such a

notice had been received by the creditor. (Section 131)

3. Variation in Contract: If any variation has been made in the terms of contract of

guarantee between the creditor and the principal debtor without the knowledge or

concurrence of the surety, the contract of guarantee is revoked. (Sec. 133)

4. Creditor¶s act of Omission: Any act or omission by the creditor which impairs theeventual remedy of the surety against the debtor amounts to revocation of the contract of

guarantee (Sec. 139).

5. Novation: When the parties agree to substitute a new contract for the old contract or

rescind or alter the old contract of guarantee, it will amount to revocation. (Sec. 62)

6. Release or discharge of principal debtor (Section 134)

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7. When the creditors enter into an arrangement with the principal debtor (Section 135).

8. Loss of Security (Section 141)

5 Rights of Surety

Rights of Surety

A. Rights of Surety against the Creditor

1. Ask the creditor to sue the debtor: On the guaranteed debt having fallen due for payment,

the surety may ask the creditor to sue the debtor to collect the due amount, but he cannot

compel him to do so. But he must then indemnify the creditor against any risk or delay

arising as a consequence.

1. Require the creditor to terminate the debtors services: In the case of the fidelity

guarantee, if the principal debtors dishonesty comes to light, the surety can require the

creditor to terminate the principal debtors services so as to save him from further loss.

2. Claim to any set off : The surety on being called upon to pay, can claim any set-off to which

the principal debtor is entitled from the creditor.

3. Access to the securities of the debtor with the creditor: The surety can, after paying the

guaranteed debt, compel the creditor to assign to him all the securities taken by the creditor

either before or at the time of the contract of guarantee, whether the surety was aware of

them or not.

4. Right to Share Reduction: On debtors insolvency the surety is entitled to claim the

proportionate reduction of his liability by the amount of dividend claimed by the creditor

(from the Official Receiver of the Principal debtor). Similarly, debtors debt obligation is

scaled down by subsequent legislation, the creditor is entitled to claim proportionate

reduction in his liability.

B. Against the Principal Debtor

1. Right of subrogation: After paying the guaranteed debt, the surety steps into the shoes of

the creditor and acquires all the rights which the latter had against the principal debtor (i.e.,

he gets subrogated to all the rights and remedies available to the creditor) (Sec. 140). If the

creditor has the right to stop goods in transit or has a lien, the surety, on payment of all he is

liable for, will be entitled to exercise these rights.

2. Right as to securities with the creditor: The surety has the right to proceed against such

securities of the principal debtor, as the creditor could himself proceed.

3. Right of indemnity: The surety is entitled to be indemnified by the principal debtor for all

payments rightfully made by him (Sec. 145).

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4. Compel the principal debtor to perform the promise: The surety has also the right to insist

the principal debtor to perform the promise. The surety can, before making payment,

compel the debtor to relieve him from liability by paying of the debt, provided that liability is

an ascertained and subsisting one.

10. Prove the debt in case of bankruptcy of the debtor : In case of the

bankruptcy of the principal debtor, the surety may prove the debt in respect of contingent ability even if he has not been called upon to pay a definite amount.

C. Against Co-sureties

When two or more persons guarantee the same debt jointly or severally, whether under the

same or different contracts, they are known as co-sureties. As the co-sureties share the

liabilities, they have in equity also the right to share the means of recovery.

11. Right to share the Securities Ratably (Proportionately): If they are liable in

equal amounts, they will be entitled to share equally the securities belonging to the

principal debtor in possession of the creditor. In case their liabilities are unequal, they

will share the securities ratably.

12. Right to contributions: If any one of the sureties has to pay more than his share,

he has a right to call upon his co-sureties for such contribution as will enable him to

recoup himself to the extent of excess amount paid by him over and above his

proportionate liability.

13. Right to counter-security: Co-surety has also the right to benefit of a counter-

security given to another surety by the principal debtor.

14. Right to plead the co-sureties and debtor in one suit : It is open to a surety to

implead the co-sureties as well as the principal debtor in one suit. Where one surety has

paid more than his proportionate share the proper procedure is to file a suit for

contribution against his co-surety making the principle debtor also a party thereto.

Rights of the Creditor against Surety

1. Demand payment when due: As the liability of the surety arises, the creditor is entitled todemand payments from the surety although the debt is time-barred against the principal

debtor (Bombay Dyeing and Manufacturing Co. Ltd. Vs. State of Bombay, 1985) or principaldebtor has been adjudged as bankrupt or the principal debtor¶s contract is void or voidable.

He can file a suit against the surety without suing the principal debtor even if the principaldebtor is solvent. The liability of the surety is immediate and not be deferred until the creditor

has exhausted his remedies against the principal debtor.

2. Proceed against surety before resorting to debtor¶s securities: A creditor can directly

proceed against the surety before resorting to the securities deposited by the principal debtor.

This is feasible although the liability of the surety becomes the primary one along with the

principal debtor. Of course, a contract may specifically provide that the creditor must exhaust

his remedies against the principal debtor or give notice of default or proceed against the

securities.

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i)D makes default in payment to the extent to of Rs.30,000. Liabilities of A, B and C isRs.10,000 each.

ii)D makes default to the extent to Rs.40,000. Liability shall be as of A¶s 10,000 (maximum

obligation), as of B and C, Rs.15,000 each being equal contribution.

D makes default of Rs.70,000 A, B and C will pay the full amount of guarantee.

Discharge of Surety

Discharge of surety means he is freed from his obligations. This can happen in various ways,

either by the action of the surety himself or by the creditor or by the principal debtor or by both or by operation of law.

A. From the side of the Principal Debtor/Surety

1. Payment by debtor

2. Revocation

3. Death

4. General rules of contract

B. From the side of the Creditor

5. Variation in the term of the contract

6. Release or discharge of debtor by creditor

7. Compounding with the principal debtor by creditor or extending time for payment.

8. Agreement not to sue debtor

9. Creditor¶s omission impairing surety¶s remedy.

C. From the side of the Contract itself

The surety is liable under the guarantee only if the contract of guarantee is valid. If thecontract of guarantee is invalid, then the surety will not be liable i.e., he will be discharged

from his liabilities. Thus, where a guarantee is obtained by coercion, undue influence, fraud

etc., then it will not be valid and the surety is not be liable under such a guarantee. The

following are the ways in which a contract of guarantee becomes invalid.

10. Guarantee obtained by misrepresentation.

11. Guarantee obtained by concealment.

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12. Failure of the co-surety to join with the contract (other sureties and creditor).

13. Failure of consideration.


State whether the following statements are True or False:

1. If the surety becomes insolvent, the creditor has the right to recover the dues from the

estate of the insolvent party.

2. A guarantee which extends to a series transactions is called Continuing Guarantee

3. A contract of guarantee may only be prospective.

4. Generally a contract of guarantee is not the contract of utmost good faith.

5. If an obligation is undertaken without any request of the debtor, the contract is one of

indemnity.

Summary

y Contract of indemnity is a special type of contract wherein one person promises the loss of

other party.

y A Contract by which one party promises to save the other from any loss caused to him by

the conduct of the promisor himself, or by the conduct of any other person is called contract

of indemnity.

y Surety is a person who gives the guarantee.

y A contract of guarantee is just like any other contract which may be either oral or in writing.

y Every contract of guarantee involves three agreements between (i) the creditor and principal

debtor, (ii) the surety and the creditor, and (iii) the surety and the principal debtor.

y Hence in a contract of guarantee, the primary liability is with the principal debtor.

y The liability of the surety should arise only when the principal debtor makes a default.y A person of unsound mind or an undischarged insolvent cannot give a valid guarantee.

y A contract of guarantee may be either retrospective or prospective.

y A guarantee which extends to a series of transactions is called a continuing guarantee

y A continuing guarantee is revoked when the surety gives a notice to the creditor for the

revocation of guarantee.

y When the parties agree to substitute a new contract for the old contract or rescind or alter

the old contract of guarantee, it will amount to revocation.

y When two or more persons guarantee the same debt jointly or severally, whether under the

same or different contracts, they are known as co-sureties.

y Co-sureties are jointly and severally liable in India.

MB0035-Unit 4-Negotiable Instruments Act

Unit 4 Negotiable Instruments Act

Structure:

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4.1 Introduction

O bjectives

4.2 Negotiable Instruments Act

4.3 Definition & Features

4.3.1 Promissory Notes, Definition, Essentials

4.3.2 Bill of Exchange, Definition, Essentials

4.3.3 Cheque, Definition,Distinction between a Cheque and a Bill of Exchange

1. Bank Draft and Hundis

2. Parties to Negotiable Instruments

1. Holder

2. Holder in Due Course

3. Negotiation of Negotiable Instruments

1. Definition

2. Modes of Negotiation

4. Dishonour and Discharge

1. Dishonour of Negotiable Instruments2. Discharge of the Instrument and Parties


1. Summary

2. Terminal Questions

3.

Answers to SAQs and TQs

Introduction

Negotiable instruments are the most common credit devices used in modern business. They

are basically written promises or orders to pay money, and may be transferred from person to

person. The law relating to negotiable instruments is contained in the Negotiable InstrumentsAct, 1881. The chief objective of this Act is to legalise the system under which negotiable

instruments pass from hand to hand in negotiation like ordinary goods. The Act is based on

the principles of English Law. In fact the law of negotiable instruments is not the law of a

single country but of the whole of the commercial world and the general rule of the law will

be of the same pattern in all the countries.

Objectives:

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y Explain the features of negotiable instruments.

y Define Promissory note, bill of exchange and cheque.

y Mention the parties to negotiable instruments.

Negotiable Instruments Act

The law relating to ³Negotiable Instruments´ is contained in the Negotiable Instruments Act,

1881, as amended up-to-date. It deals with three kinds of negotiable instruments, i.e.,Promissory Notes, Bills of Exchange and Cheques. The provisions of the Act also apply to

µhundis¶ (an instrument in oriental language), unless there is a local usage to the contrary.Other documents like treasury bills, dividend warrants, share warrants, bearer debentures,

port trust or improvement trust debentures, railway bonds payable to bearer etc., are alsorecognised as negotiable instruments either by mercantile custom or under other enactments

like the Companies Act, and therefore, Negotiable Instruments Act is applicable to them.

Definition & Features

The word µnegotiable¶ means µtransferable by delivery¶, and the word µinstrument¶ means µa

written document by which a right is created in favour of some person¶. Thus, the term

µnegotiable instrument¶ literally means µa written document transferable by delivery¶.

According to Section 13 of the Negotiable Instruments Act, ³a negotiable instrument means a

promissory note, bill of exchange or cheque payable either to order or to bearer.´ The Act,thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and

declares that to be negotiable they must be made payable in any of the following forms:

a)Payable to order: A note, bill or cheque is payable to order which is expressed to beµ payable to a particular person or his order¶. But it should not contain any words

prohibiting transfer, e.g., µPay to A only¶ or µPay to A and none else¶ is not treated as

µ payable to order¶ and therefore such a document shall not be treated as negotiable

instrument because its negotiability has been restricted. There is, however, an exception

in favour of a cheque. A cheque crossed ³Account Payee only´ can still be negotiated

further, of course, the banker is to take extra care in that case.

b)Payable to bearer: µPayable to bearer¶ means µ payable to any person whom so ever

bears it.¶ A note, bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. The definition given in

Section 13 of the Negotiable Instruments Act does not set out the essential characteristicsof a negotiable instrument. Possibly the most expressive and all encompassing definition

of negotiable instrument had been suggested by Thomas which is as follows:

´A negotiable instrument is one which is, by a legally recognised custom of trade or by

law, transferable by delivery or by endorsement and delivery in such circumstances that

(a) the holder of it for the time being may sue on it in his own name and (b) the property

in it passes, free from equities, to a bonafide transferee for value, notwithstanding any

defect in the title of the transferor.´

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Characteristics of Negotiable Instruments:

An examination of the above definition reveals the following essential characteristics of negotiable instruments which make them different from an ordinary chattel:

1. Easy negotiability: They are transferable from one person to another without any

formality. In other words, the property (right of ownership) in these instruments passes by either endorsement and delivery (in case it is payable to order) or by

delivery merely (in case it is payable to bearer), and no further evidence of transfer is

needed.

2. Transferee can sue in his own name without giving notice to the debtor: A bill,

note or a cheque represents a debt, i.e., an ³actionable claim´ and implies the right of

the creditor to recover something from his debtor. The creditor can either recover this

amount himself or can transfer his right to another person. In case he transfers his

right, the transferee of a negotiable instrument is entitled to sue on the instrument in

his own name in case of dishonour, without giving notice to the debtor of the fact that

he has become holder.

3. Better title to a bonafide transferee for value: A bonafide transferee of a negotiable

instrument for value (technically called a holder in due course) gets the instrumentµ free from all defects.¶ He is not affected by any defect of title of the transferor or any

prior party. Thus, the general rule of the law of transfer applicable in the case of ordinary chattels that µnobody can transfer a better title than that of his own¶ does not

apply to negotiable instruments.

Examples of Negotiable Instruments: The following instruments have been recognized as

negotiable instruments by statute or by usage or custom: (i) Bills of exchange; (ii) Promissory

notes; (iii) Cheques; (iv) Government promissory notes; (v) Treasury bills; (vi) Dividend

warrants; (vii) Share warrants; (viii) Bearer debentures; (ix) Port Trust or Improvement Trust

debentures; (x) Hundis; (xi) Railway bonds payable to bearer, etc.

Examples of Non-negotiable Instruments: These are: (i) Money orders; (ii) Postal orders;

(iii) Fixed deposit receipts; (iv) Share certificates; (v) Letters of credit.

PromissoryNote-Definition & Essentials

Definition: According to Section 4 ³a promissory note is 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.´

Essentials of a Promissory Note: From the definition given in the Act it follows that to be a

valid promissory note an instrument must fulfill the following essential requirements:

1. It must be in writing: A promissory note has to be in writing. An oral promise to pay

does not become a promissory note. The writing may be on any paper, on any book. It

may be in pencil or in ink and includes printing or typing. No particular form of

words is necessary, even a promise contained in a letter will suffice, provided the

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other requirements of Section 4 are complied with. The following is the usual form of a promissory note:

1.

It must contain a promise or undertaking to pay: There must be a promise or anundertaking to pay. The undertaking to pay may be gathered either from express

words or by necessary implication. A mere acknowledgement of indebtedness is not a

promissory note, although it is valid as an agreement and may be sued upon as such.

2. The promise to pay must be unconditional: A promissory note must contain an

unconditional promise to pay. The promise to pay must not depend upon the

happening of some uncertain event i.e., a contingency or the fulfillment of a

condition. If an instrument contains a conditional promise to pay, it is not a valid

promissory note.

3. It must be signed by the maker: It is imperative that the promissory note should be

duly authenticated by the ¶signature¶ of the maker.

4. The maker must be a certain person: The instrument itself must indicate with

certainty who is the person or are the persons engaging himself or themselves to pay.5. The payee must be certain: Like the maker the payee of a promissory note must also

be certain.

6. The sum payable must be certain: For a valid promissory note it is also essentialthat the sum of money promised to be payable must be certain and definite.

7. The amount payable must be in legal tender money of India : A documentcontaining a promise to pay a certain amount of foreign money or to deliver a certain

quantity of goods is not a promissory note.

8. Other formalities: Though it is usual and proper to state in a note the place where it

is made and the date on which it is made but their omission will not render the

instrument invalid. But a promissory note must be properly stamped as required by

the Indian Stamp Act and each stamp must also be duly cancelled. The maker¶s

signature with the date across the stamp cancels the stamp effectively. Although anunstamped or inadequately stamped promissory note is invalid, but the amount of loan

can be recovered if proved otherwise.

Bill of Exchange-Definition & Essentials

Definition: Section 5 of the Negotiable Instruments Act defines a bill of exchange as follows:

³A bill of exchange is an instrument in writing containing an unconditional order, signed by

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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.´

Parties to a bill of exchange: There are three parties to a bill of exchange viz., drawer,

drawee and payee. The person who makes the bill is called the µdrawer¶. The person who is

directed to pay is called the µdrawee.¶ The person to whom the payment is to be made is

called the µ payee¶. The drawer, or if the bill is endorsed to the payee, the endorsee, who is in possession of the bill is called the µholder¶. The holder must present the bill to the drawee for

his acceptance. When the drawee accepts the bill, by writing the words µaccepted¶ and then

signing it, he is called the µacceptor¶.

Drawee in case of need: Sometimes the name of another person may be mentioned in a bill

of exchange as the person who will accept the bill, if the original drawee does not accept it.

Since another person so named is to be approached in case of need, he is known as ³drawee

in case of need.´

Acceptor for honour: When a bill of exchange has been noted or protested for non-

acceptance or for better security and any person accepts it supra protest for honour of the

drawer or of any one of the endorsers, such person is called an ³acceptor for honour´.

Essentials of a Bill of Exchange: To be a valid bill of exchange an instrument must comply

with the requirements of the definition given in Section 5, which are as follows:

1. It must be in writing.

2. It must contain an order to pay. A mere request to pay on account will not amount to

an order.

3. The order to pay must be unconditional.

4. It must be signed by the drawer.

5. The drawer, drawee and payee must be certain.

6. The sum payable must be certain.

7. The bill must contain an order to pay money only.

8. It must comply with the formalities as regards date, consideration, stamps, etc.

Specimen of a Bill of Exchange:

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Cheque- Definitions & Distinction between a Cheque and a Bill of Exchange

Definition: ³A cheque is a bill of exchange drawn on a specified banker and not expressed to

be payable otherwise than on demand.´ Thus, a cheque is a bill of exchange with two

distinctive features, namely: (i) it is always drawn on a bank, and (ii) it is always payable on

demand.

Distinction between a Cheque and a Bill of Exchange: Although a cheque, being a species

of a bill of exchange, must satisfy almost all the essentials of a bill, e.g., signed by thedrawer, containing an unconditional order, to pay a certain sum of money, to the order of a

person or the bearer, etc., yet there are few points of difference between the two, namely:

1. A cheque is always drawn on a banker, while a bill may be drawn on any person,

including a banker.

2. A cheque can only be drawn payable on demand, whereas a bill may be drawn

payable on demand or on the expiry of a certain period after date or sight.

3. A cheque drawn µ payable to bearer on demand¶ is valid but a bill drawn µ payable to

bearer on demand¶ is absolutely void and illegal.4. A cheque does not require any acceptance by the drawee before payment can be

damanded. But a bill requires acceptance by the drawee before he can be made liable

upon it.

5. A cheque does not require any stamp, whereas a bill of exchange must be properlystamped.

6. Three days of grace are allowed while calculating the maturity date in the case of time bills (i.e., bills drawn payable after the expiry of a certain period). Since a cheque is

always payable on demand, there is no question of allowing any days of grace.

7. Unlike cheques, a bill of exchange cannot be crossed.

8. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

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9. Unlike bills, there is no system of Noting or Protest in the case of a cheque.10. The drawer of a bill is discharged from liability, if it is not duly presented for

payment, but the drawer of a cheque will not be discharged by delay of the holder in presenting it for payment, unless through the delay, the drawer has been injured, e.g.,

by the failure of the bank the drawer has lost the money which would have otherwise

discharged the amount of the cheque. However, where the drawer is so discharged,

the payee may rank as creditor of the bank for the amount of the cheque.

Bank Draft and Hundis

A bank draft is an order issued by one bank on another bank or on its own branch (usually

drawn on its own branch) instructing the latter to pay a specified sum of money to a specified

person or his order. It is a negotiable instrument and is very much like a cheque, with the

following distinctions:

a)It can be drawn only by a bank on another bank or on its another branch and not by anindividual as in the case of a cheque.

b)It cannot so easily be countermanded as a cheque.

c)It cannot be made payable to bearer.

Hundis: Hundis are negotiable instruments written in Hindustani language. Sometimes theyare in the form of promissory notes but usually they are like bills of exchange in form and

substance. The provisions of the Negotiable Instruments Act apply to Hundis unless there is alocal usage to the contrary. They are quite popular among the Indian merchants from the very

old days.

Parties to Negotiable Instruments

Holder:

The µholder¶ of a negotiable instrument means any person entitled to the possession of the

instrument in his own name and to receive or recover the amount due thereon from the partiesliable thereto. Thus, in order to be called a µholder¶ a person must satisfy the following two

conditions:

1. He must be entitled to the possession of the instrument in his own name. Actual possession of the instrument is not essential. What is required is a right to possession

under some legal or valid title. If a person is in possession of a negotiable instrument

without having a right to possess the same, he cannot be called the holder. Thus, a

thief, or a finder on the road, or an indorsee under a forged indorsement, although

may be having the possession of the instrument, cannot be called its holder because he

does not acquire legal title thereto and hence is not entitled in his own name to the

possession thereof.

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2. He must be entitled to receive or recover the amount due thereon from the partiesliable thereto. In order to be called a holder the person must have the right to receive

or recover the amount of the instrument and give a valid discharge to the payer. Thus,one may be the bearer or the payee or indorsee of an instrument but he may not be

called a holder if he is prohibited by a court order from receiving the amount due on

the instrument.

Holder in due course

The µholder in due course¶ means any person who for consideration became the possessor of

a negotiable instrument if payable to bearer, or the payee or indorsee thereof if payable to

order, before the amount mentioned in it became, payable, and without sufficient cause to

believe that any defect existed in the title of the person from whom he derived his title. Thus,

in order to be called a µholder in due course¶ a person must possess the following

qualifications:

1. He must be a µholder¶ i.e., he must be entitled to the possession of the instrument in

his own name under a legal title and to recover the amount thereof from the parties

liable thereto.2. He must be a holder for valuable consideration i.e., there must be some consideration

to which law attaches value. The consideration, however, need not be adequate. A

donee, who acquires title to the instrument by way of gift, is not a holder in due

course for want of consideration, although he is a holder. The consideration must also

be lawful.

3. He must have become the holder of the negotiable instrument before its maturity. The

holder who acquires a negotiable instrument after maturity cannot be a holder in due

course. In case of instruments payable on demand, e.g., a cheque, he must have taken

the instrument within a reasonable time of its issue.

4. He must take the negotiable instrument complete and regular on the face of it. It is the

duty of every person who takes a negotiable instrument to examine its form andcontents thoroughly, for if it contains any material alteration which has not been

confirmed by the drawer through his signature, or if it is incomplete, say, drawer¶sname is not there or it is not properly stamped, he will not become a holder in due

course.5. He must have become holder in good faith without having sufficient cause to believe

that any defect existed in the title of the transferor. He must exercise great care andtake all necessary precautions in finding out if the transferor¶s title was defective. He

must take the instrument without any negligence on his part.

Negotiation of Negotiable Instruments

The process of transferring the title or ownership of negotiable instruments is called

negotiation.

Definition

According to Section 14, ³When a promissory note, bill of exchange or cheque is transferred

to any person, so as to constitute that person the holder thereof, the instrument is said to be

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negotiated.´ Thus negotiation implies a transfer of negotiable instrument so as to constitutethe transferee a holder thereof, who should be entitled in his own name to sue on the

instrument and recover the amount due thereon. There must be a transfer with intention to pass title and in the manner prescribed by the Act.

Every maker, drawer, payee or indorsee, and if there are several makers, drawers, payees or

indorsees, all of them jointly can negotiate an instrument, provided the negotiability of suchinstrument has not been restricted or excluded by any express words used in the instrument.

But the maker, drawer, payee or indorsee cannot negotiate an instrument, unless he is in

lawful possession or is holder thereof.

A negotiable instrument may be negotiated until payment or satisfaction thereof by the

maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction.

Thus, negotiability of an instrument stops only when the party ultimately liable thereon pays

it at or after maturity. It can be negotiated even at or after maturity if it has not been paid or

satisfied. A payment before maturity does not stop negotiability. The acceptor or maker who

receives the instrument after payment but before maturity may reissue it.

Modes of Negotiation

There are two ways of negotiating or transferring a negotiable instrument:

1. Negotiation by mere delivery: A negotiable instrument payable to bearer isnegotiable by delivery thereof. Thus, a bearer instrument may be negotiated by

delivery only. It does not require signature of the transferor (i.e. indorsement) and the

transferee becomes the holder thereof by mere possession. The transferor of a bearer instrument is not liable on its dishonour.

2. Negotiation by indorsement and delivery: A negotiable instrument payable to order

is negotiable by the holder by indorsement and delivery thereof. Thus the negotiation

of an order instrument requires two formalities, namely, first the holder should

indorse it and then deliver to his indorsee.

In both the modes of negotiation stated above, delivery with the intention of transferring the

ownership of the instrument to the transferee is essential. Mere delivery without the intention

of passing the property is not sufficient to constitute a complete negotiation.

Indorsement:

Section 15 defines indorsement as follows: ³When the maker or holder of a negotiable

instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on

the back or face thereof or on a slip of paper annexed thereto, or so signs for the same

purpose a stamped paper intended to be completed as negotiable instrument, he is said to

indorse the same, and is called the indorser.´

Thus, an indorsement consists of the signature of the holder usually made on the back of thenegotiable instrument with the object of transferring the instrument. If no space is left on the

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back of the instrument for the purpose of indorsement, further indorsements are signed on aslip of paper attached to the instrument. Such a slip is called µallonge¶ and becomes part of

the instrument. The person making the indorsement is called an µindorser¶ and the person towhom the instrument is indorsed is called an µindorsee.¶

Kinds of Indorsements: Indorsements may be of the following kinds:

1. Blank or general indorsement: If the indorser signs his name only and does not

specify the name of the indorsee, the indorsement is said to be in blank. The effect of

a blank indorsement is to convert the order instrument into bearer instrument which

may be transferred merely by delivery.

2. Indorsement in full or special indorsement: If the indorser, in addition to his

signature, also adds a direction to pay the amount mentioned in the instrument to, or

to the order of, a specified person, the indorsement is said to be in full.

3. Partial indorsement: Section 56 provides that a negotiable instrument cannot be

indorsed for a part of the amount appearing to be due on the instrument. In other

words, a partial indorsement which transfers the right to receive only a part payment

of the amount due on the instrument is invalid.

4. Restrictive indorsement: An indorsement which, by express words, prohibits theindorsee from further negotiating the instrument or restricts the indorsee to deal with

the instrument as directed by the indorser is called µrestrictive¶ indorsement. Theindorsee under a restrictive indorsement gets all the rights of an indorser except the

right of further negotiation.5. Conditional indorsement: If the indorser of a negotiable instrument, by express

words in the indorsement, makes his liability, dependent on the happening of aspecified event, although such event may never happen, such indorsement is called a

µconditional¶ indorsement.

In the case of a conditional indorsement the liability of the indorser would arise only upon the

happening of the event specified. But the indorsee can sue other prior parties, e.g., the maker,acceptor etc., if the instrument is not duly met at maturity, even though the specified event

did not happen.

Dishonour and Discharge of Negotiable Instruments

Dishonour of Negotiable Instruments

A negotiable instrument may be dishonoured by (i) non-acceptance or (ii) non-payment. As

presentment for acceptance is required only in case of bills of exchange, it is only the bills of

exchange which may be dishonoured by non-acceptance.

Dishonour by Non-acceptance:

A bill of exchange is said to be dishonoured by non-acceptance when the drawee makes

default in acceptance upon being duly required to accept the bill.

Dishonour by Non-payment:

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A promissory note, bill of exchange or cheque is said to be dishonoured by non -payment

when the maker of the note, acceptor of the bill or drawee of the cheque makes default in

payment upon.

Effect of Dishonour

As soon as a negotiable instrument is dishonoured (either by non-acceptance or by non-

payment) the holder becomes entitled to sue the parties liable to pay thereon. The drawer

of cheque, maker or note, acceptor and drawer of bill and all the indorsers are liable

severally and jointly to a holder in due course. The holder must, however, give notice of

dishonour to all parties against whom he intends to proceed. He may (at his option) also

have the instrument noted and protested before a notary public.

Discharge of the Instrument and the Parties

The term discharge in relation to negotiable instruments has two connotations, viz., (1)

discharge of instrument, and (2) discharge of one or more parties from liability on the

instrument.

Discharge of the Instrument

A negotiable instrument is said to be discharged when it becomes completely useless, i.e.,

no action on that will lie, and it cannot be negotiated further. After a negotiable instrument

is discharged the rights against all the parties thereto comes to an end, and no party, even a

holder in due course, can claim the amount of the instrument from any party thereto.

Discharge of the party primarily and ultimately liable on the instrument results in the

discharge of the instrument itself. For example, in the following cases and instrument is

deemed to be discharged:

1. When the party primarily liable on the instrument (i.e., the maker of the note,

acceptor of the bill or drawee bank) makes the payment in due course to the holder

at or after maturity. A payment by a party who is secondarily liable does no t

discharge the instrument because in that case the payer holds it to enforce it against

prior indorser and the principal debtor.

2. When a bill of exchange which has been negotiated is, at or after maturity, held by

the acceptor in his own right, the instrum ent is discharged.

3. When the party primarily liable becomes insolvent, the instrument is discharged and

the holder cannot make any other prior party liable thereon. Similarly, an instrument

stands discharged when the primary party liable is discharged by material alterationin the instrument or by lapse of time making the debt time barred under the

Limitations Act.

4. When the holder cancels the instrument with an intention to release the party

primarily liable thereon from the liability, the instrument is discharged and ceases to

be negotiable.

Discharge of One or More Parties

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A party is said to be discharged from his liability when his liability on the instrument comes

to an end. When only some of the parties to a negotiable instrument are discharged, the

instrument continues to be negotiable and the undischarged parties remain liable on it.

One or more parties to a negotiable instrument are are discharged from liability in the

following ways:

1. By cancellation: When the holder of a negotiable instrument delibera tely cancels the

name of any of the party liable on the instrument with an intent to discharge him

from liability thereon, such party and all indorsers subsequent to him, who have a

right of action against the party whose name is so cancelled, are discharged from

liability. If the name of an indorser has been cancelled then all the indorsers

subsequent to him will be discharged but those prior him will remain liable. Where

the cancellation is done under a mistake or without the authority of the holder if wi ll

not discharge any party.

2. By release: If the holder of a negotiable instrument releases any party to the

instrument by any method other than cancellation of names (i.e., by a separate

agreement of waiver, release or remission), the party so released and all parties

subsequent to him, who have a right of action against the party so released, are

discharged from liability.

3. By payment: When the party primarily liable on the instrument makes the payment

in due course to the holder at or after maturity, all the parties to the instrument

stand discharged.

4. By allowing drawee more than 48 hours to accept: If the holder of a bill of exchange

allows the drawee more than forty-eight hours, to consider whether he will accept

the same, all previous parties not consenting to such allowance are thereby

discharged from liability to such holder.

5. By taking qualified acceptance: If the holder of a bill agrees to a qualified

acceptance all prior parties whose consent is not obtained to such an acceptance aredischarged from liability.

6. By not giving notice of dishonuour: Any party to a negotiable instrument (other than

the party primarily liable) to whom notice of dishonour is not sent by the holder is

discharged from liability as against the holder, unless the circumstances are such

that no notice of dishonour is required to be sent.

7. By non-presentment for acceptance of a bill: When a bill of exchange is payable

certain period after sight, its holder must present it for acceptance to the drawee

within a reasonable time after it is drawn. If he makes a default in making such

presentment the drawer and all indorsers who were liable towards such a holder are

discharged from their liability towards him.

8. By delay in presenting cheque: It is the duty of the holder of a cheque to present itfor payment within reasonable time of its issue. If he fails to do and in the

meanwhile the bank fails.

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Summary

y Negotiable instruments are basically written promises or orders to pay money, and

may be transferred from person to person.

y A negotiable instrument means a promissory note, bill of exchange or cheque payable

either to order or to bearer.

y A note, bill or cheque is payable to order which is expressed to be µ payable to a particular person or his order¶.

y µPayable to bearer¶ means µ payable to any person whom so ever bears it.¶

y Negotiable instruments are easily transferable from one person to another without any

formality.

y A bonafide transferee of a negotiable instrument for value gets the instrument µ freefrom all defects.¶

y A promissory note is an instrument in writing (not being a bank note or a currencynote) 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 theinstrument.

y 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.

y A cheque is a bill of exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand.

y The µholder¶ of a negotiable instrument means any person entitled to the possession of

the instrument in his own name and to receive or recover the amount due thereon

from the parties liable thereto.

y When a promissory note, bill of exchange or cheque is transferred to any person, so as

to constitute that person the holder thereof, the instrument is said to be negotiated.

MB0035- Unit 5-Companies Act Unit 5-Companies Act

Introduction

Law regulates the rights and obligations of persons, and divides them into two classes ± natural persons and artificial persons. Natural persons are human beings of different degrees

of capacity. Artificial persons are created and devised by human laws for the purposes of society and government, which are called companies.

Objectives:


y Define of company.

y Name the types of companies.

y Explain the process of incorporation of a company.y Describe the Management of company.

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Companies Act, 1956

Definition:

The term µcompany¶ implies an association of a number of persons for some commonobjective e.g. to carry on a business concern, to promote art, science or culture in the society,

to run a sport club etc. Every association, however, may not be a company in the eyes of lawas the legal import of the word µcompany¶ is different from its common parlance meaning. In

legal terminology its use is restricted to imply an association of persons, µregistered as a

company¶ under the law of the land. The following are some of the definitions of company

given by legal luminaries and scholars of law:

³Company means a company formed and registered under this Act or an existing company.

Existing company means a company formed and registered under the previous companylaws.´ ± Companies Act, 1956 Sec. 3(i & ii)

³A joint stock company is an artificial person invisible, intangible and existing only in the

eyes of law. Being a mere creature of law, it possesses only those properties which the charter

of its creation confers upon it, either expressly or as incidental to its very existence.´ ± JusticeMarshall

³A company is an association of many persons who contribute money or money¶s worth to a

common stock and employ it in some common trade or business and who share the profit or

loss arising therefrom. The common stock so contributed is denoted in terms of money and is

the capital of the company. The persons who contribute it or to whom it belongs are

members. The proportion of capital to which each member is entitled is his share. Shares are

always transferable although the right to transfer them is often more or less restricted.´ ±

Lord Lindley

From the above definitions it is clear that a company has a corporate and legal personality. It

is an artificial person and exists only in the eyes of law. It has an independent legal entity, a

common seal and perpetual succession.

Sometimes, the term µcorporation¶ (a word derived from the Latin word µcorpus¶ which

means body) is also used for a company.

At present the companies in India are incorporated under the Companies Act, 1956.

Characteristics of Company

The various definitions reveal the following essential characteristics of a company:

1. Artificial Person: A company is an association of persons who have agreed to form

the company and become its members or shareholders with the object of carrying on alawful business for profit. It comes into existence when it is registered under the

Companies Act. The law treats it as a legal person as it can conduct lawful business

and enter into contracts with other persons in its own name. It can sell or purchase property. It can sue and be sued in its name. It cannot be regarded as an imaginary

person because it has a legal existence. Thus company is an artificial person created by law.

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2. Independent corporate existence: A company has a separate independent corporateexistence. It is in law a person. Its entity is always separate from its members. The

property of the company belongs to it and not to the shareholders. The companycannot be held liable for the acts of the members and the members can not be held

liable for the acts or wrongs or misdeeds of the company. Once a company is

incorporated, it must be treated like any other independent person. As a consequence

of separate legal entity, the company may enter into contracts with its members andvice-versa.

3. Perpetual existence: The attribute of separate entity also provides a company a

perpetual existence, until dissolved by law. Its life remains unaffected by the lunacy,

insolvency or death of its members. The members may come and go but the company

can go on for ever. It is created by law and the law alone can dissolve it.

4. Separate property: A company, being a legal entity, can buy and own property in its

own name. And, being a separate entity, such property belongs to it alone. Its

members are not the joint owners of the property even though it is purchased out of

funds contributed by them. Consequently, they do not have even insurable interest in

the property of the company. The property of the company is not the property of theshareholders; it is the property of the company.

5. Limited liability: In the case of companies limited by shares the liability of everymember of the company is limited to the amount of shares subscribed by him. If the

member has paid full amount of the face value of the shares subscribed by him, hisliability shall be nil and he cannot be asked to contribute anything more. Similarly, in

the case of a company limited by guarantee, the liability of the members is limited upto the amount guaranteed by a member. The Companies Act, however, permits the

formation of companies with unlimited liability. But such companies are very rare.

6. Common seal: As a company is devoid of physique, it can¶t act in person like a

human being. Hence it cannot sign any documents personally. It has to act through a

human agency known as Directors. Therefore, every company must have a seal with

its name engraved on it. The seal of the company is affixed on the documents which

require the approval of the company. Two Directors and the Secretary or such other

person as the Board may authorize for this purpose, witness the affixation of the seal.

Thus, the common seal is the official signature of the company.

7. Transferability of shares: The shares of a company are freely transferable and can

be sold or purchased through the Stock Exchange. A shareholder can transfer his

shares to any person without the consent of other members. Under the articles of

association, even a public limited company can put certain restrictions on the transfer

of shares but it cannot altogether stop it. A shareholder of a public limited company possessing fully paid up shares is at liberty to transfer his shares to anyone he likes in

accordance with the manner provided for in the articles of association of the company.However, private limited company is required to put certain restrictions on

transferability of its shares. But any absolute restriction on the right of transfer of

shares is void.8. Capacity to sue and be sued: A company, being a body corporate, can sue and besued in its own name.

Types of Companies

Companies may be classified into various categories as shown in the chart below:

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Royal or Chartered Companies: These companies are incorporated under a special charter

such as the East India Company, the Bank of England. A chartered company is regulated by

the charter incorporating it and the Companies Act does not apply to it. These companies arecreated and regulated by the king or queen in exercise of an ancient prerogative vested in the

crown. Such companies are formed in England and do not exist in India.

Statutory Company: These companies are formed under a special Act of Parliament or the

state legislature e.g. the Reserve Bank of India, the State Bank of India, IFCI, Life Insurance

Corporation, Unit Trust of India. The powers which are to be exercised by such companies

are defined by the Acts constituting them and therefore, they are not required to have a

memorandum of association. Although each statutory company is governed by the provisions

of its special Act, the provisions of the Companies Act, 1956 also apply to them, in so far as

the said provisions are not inconsistent with the provisions of the Special Acts under which

these companies are formed.

These companies are mostly public undertakings and are formed with the main object of

public utilities and not for profit. They also need not use the word limited with their names.

Registered Companies: A registered company is one which is formed and registered under

the Indian Companies Act, 1956 or under any earlier Companies Act in force in India. The

two basic types of companies which may be registered under the Act are:

(a) Private Companies; and (b) Public Companies. These companies may be:

(i) Companies limited by shares;

(ii) Companies limited by guarantee;

(iii) Unlimited companies.

Companies may also be classified as:

1. Association not for profit having licence under Section 25 of the Act;2. Government companies;

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3. Foreign companies;4. Holding and Subsidiary companies.

A brief description of each type of company is given below:

1. Private Company: A µPrivate Company¶ is defined by Section 3(1) (iii) of the Act as

a company which, by its articles of association:

a) Restricts the right of the members to transfer shares, if any,

b) Limits the number of its members to fifty, excluding members who are or

were in the employment of the company and

c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of the company.

Section 26 of the Companies Act, provides that a private limited company must

necessarily have articles of its own.

2. Public Company: The Companies Act does not provide any positive definition of a

µPublic Company¶. Section 3(1) (iv) defines it as, ³A public company means a

company which is not a private company´. Elaborating the above definition, a µPublic

Company¶ is one which:

i) does not have any restriction on the transfer of shares;

ii) does not limit the maximum number of members and

iii) can invite public for the subscription of its shares and debentures.

The minimum number of members required to form a public company is seven.

There are no restrictions with regard to the maximum number of members in a public

company.

3. Companies Limited by Shares: When the liability of the members of a company islimited up to the unpaid value of their shares, it is called a limited liability company

or a company limited by shares. This liability or unpaid amount may be called up at

any time during the life time of the company or at the time of its winding up. Such a

company must have share capital since the extent of liability is determined on the

basis of the face value of shares. This company may be a public company or a private

company.

4. Companies Limited by Guarantee: The liability of a member in these companies islimited to the amount undertaken to be contributed by him at the time of winding up

of the company. The amount of guarantee is mentioned in the memorandum of

association. Such companies are formed for non-trading purposes such as charity,

promotion of sports, science, art, culture etc. These companies may or may not have

any share capital. If these companies do not have any share capital, the members can

be required to pay the amount of guarantee undertaken by them and that too in the

event of liquidation. But if these companies have any share capital, the members areliable to pay the amount which remains unpaid on their shares together with the

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amount payable under the guarantee. A company limited by guarantee and having ashare capital may be a public company or a private company.

5. Unlimited Companies: An unlimited company is that company which has no limit onthe liability of its members. It means that its members are liable to contribute to the

debts of the Company in proportion to their respective interests. In case a member is

unable to contribute his share, his deficiency is shared by the rest of the members in

proportion to their capital in the company. If the assets of such a company are notsufficient to pay off its liabilities, the private assets of the members can be utilised for

this purpose. Such a company may or may not have share capital. In case, it has a

share capital, it can be either a public company or a private company. It is essential

for this type of company to have its Articles of Association which must state the

number of members with which the company is to be registered. However, under

Section 32 of the Act, it is provided that an unlimited company can be converted into

a limited company by passing a special resolution for this purpose.

6. Holding Company & Subsidiary Company: A company which controls another

company is known as µholding company¶ and the company so controlled is termed a

¶subsidiary company¶.7. Government Company: The Companies Act defines a government company as a

company in which not less than 51 percent of the paid up share capital is held by:

(a) The Central Government; or

(b) Any State Government; or

(c) Partly by the Central Government and partly by one or more State

Government. A company which is a subsidiary of a government company shall be

considered a government company.

8. Foreign Companies: Foreign companies are those companies which are incorporated

outside India but which have a place of business within India. Place of business heremeans an identifiable place where it carries on business such as office, store house, go

down, etc.

If 50 percent or more of the paid up share capital of a foreign company is held byIndian citizens and or by companies incorporated in India whether singly or jointly, it

shall be treated as an Indian company in respect of its business in India. It means thatsuch a company has to comply with the provisions of the Companies Act as if it were

an Indian Company.

9. Licensed Companies or Associations not for profit: The Companies Act permits

the registration under a licence granted by the Central Government of an association

not for profit with limited liability. However, such a company can not use the wordµLtd.¶ or the words µPvt. Ltd.¶ with its name. This type of association or company isformed for the promotion of charity, science, commerce, sports, art or culture etc.

Naturally, such associations are not of a commercial nature and do not aim at earning profits.

Formation of a Company

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The process of formation of a company can be divided and discussed under the followingfour stages:

1. Promotion;

2. Incorporation or Registration;

3. Capital subscription;

4. Commencement of business.

Of these stages only the first two are necessary for the formation of a private company and of

a public company not having any share capital. They may commence business immediately

after they have received a certificate of incorporation. But a public company having a share

capital has to pass through all the four stages mentioned above before it can commence

business or exercise any borrowing powers.

Promotion: Before a company can be formed, there must be some persons who intend to

form a company and who take the necessary steps to carry that intention into operation. Such persons are called promoters. It is they who conceive the idea of forming the company and it

is they who take the necessary steps to incorporate it by registration. The promotion of a

company is comprehensive term denoting that process by which a company is incorporatedand floated or established financially as a joint concern by the issue of a prospectus.

The µ promotion¶ is the first stage in the formation of a company. Promotion may be defined

as ³the discovery of business opportunities and the subsequent organisation of funds,

property and managerial ability into a business concern for the purpose of making profits

therefrom.´

The promoter: The promoter of a company is a person who does the necessary preliminary

work incidental to the formation of a company. The word µ promoter¶ has not been defined

anywhere in the Companies Act. Palmer has defined a µ promoter¶ as ³a person who originates

a scheme for the formation of the company, has the memorandum and articles prepared,

executed and registered and finds the first directors and settles the terms of the preliminary

contracts and prospectus (if any) and making arrangement for advertising and circulating the prospectus and placing the capitals is a promoter.´

Incorporation of a company: Any seven or more persons or where the company to be

formed will be a private company, any two or more persons, associated for any lawful

purpose may, by subscribing their name to a memorandum of associations and otherwise

complying with the requirement of this Act in respect of registration, form an incorporated

company, with or without limited liability.

Documents to be filed for registration: After ascertaining the availability of name, the

promoter should proceed to prepare the following documents and file with the Registrar of companies:

1. Memorandum of Association: The memorandum of association is the charter of the

company. This includes its objectives, its name, the address of its registered office,

the capital which the company is authorised by law, the nature of liability of members

as well as the names, addresses and agreement of people who agree to form a

company.

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2. Articles of Association: The other important document is the articles of associationwhich contains the rules and regulations relating to the internal management of the

company. However, it is not necessary for a public company limited by shares to filethe Articles of Association. If such public company does not file Articles of

Association, it is deemed to have adopted ³Table A´ of schedule I of the Act.

3. Copy of proposed agreement: If a company purposes to enter into an agreement

with any individual for appointment as a Managing Director, or a whole-time director or manager, a copy of such an agreement should also be filed with the Registrar of

companies.

4. Consent of the Directors: According to Section 266, in the case of a public limited

company having share capital, a person cannot be appointed as a Director by the

Articles of Association unless, he has, before the registration of the articles, either

himself or through his agent, signed and filed, with the Registrar his consent in

writing to act as Director.

Certificate of Commencement of Business: A private company can commence business

immediately after incorporation. However, in the case of companies other than the privatecompany and a company having no share capital, further requirement is to be complied with,

namely, obtaining µa certificate of commencement of business¶ before it can commence its business.

Memorandum of Association: Section 2(28) defines it as ³The Memorandum of

Association of a company as originally framed or as altered from time to time in pursuance of any previous companies or of this Act´. It sets out the constitution of the company and

defines the scope of the activities of the company. It is the foundation on which the structureof the company depends. It also defines the relationship of the company with the public. As

the interests of the shareholders, creditors and other members of the public are to be protected

by law, this document cannot be altered easily. It was regarded as an unalterable charter of a

company in England, until the year 1980, when the Act was amended to allow alterations in

certain cases and to a certain extent. Section 16 of the Indian Companies Act lays down that

the conditions in the memorandum cannot be altered except in the cases and in the manner

and to the extent provided in the Act.

Importance of Memorandum:

1. Memorandum of Association of a company is its charter and defines the limitations of the powers of the company, established under the Act.

2. The Memorandum contains the fundamental conditions upon which alone the

company is allowed to be incorporated.

3. The Memorandum of Association is the most important document with regard to its

constitution.

4. It is the foundation on which the whole super structure of company is built-up.5. Its purpose is two fold. The first is the prospective inventor knows within what field

his money is to be risked. Secondly, outsiders also know the nature of the activities of

the company and their rights against the company in times of breach of contracts.

6. The memorandum is the basis of the company on which is existence depends.

Section 9 lays down that the memorandum cannot contain anything contrary to the provisions

of the Act. The memorandum must be signed at least by seven members in the case of a

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public company and two members in the case of a private company. It is to be divided into paragraphs, numbered consecutively and printed. It must be dated and duly stamped.

Contents of Memorandum of Association (Section 13):

i) Name clause: A company may have any name which is not undesirable in the view of

the Central Government. For example, the name cannot be identical or similar to thename of another existing company. It must contain at its end, the word µLimited¶ if it is a

public limited company or the words µPrivate Limited¶ if it is a private limited company.

But companies formed for the promotion of art, science, etc., may be exempted from

adding words ³Limited´ or ³Private Limited´ as the case may be, by means of general or

special order granted by the Central Government under Section 25. Section 147(1) lays

down that the name must appear on the outside of every office or place of business in a

conspicuous manner and on all bills, notices, etc., of the company.

ii) The Situation Clause: It shows the State in which the registered office of thecompany is situated.

iii) The Objects Clause: It states separately (1) the main objects and objects ancillary or incidental to the main objects to be pursued by the company and (2) other objects. It

defines the powers of the company beyond which, the company cannot act. But it cannot

contain the objects or powers which are contrary to the provisions of the Act.

iv) The Liability Clause: It states whether the liability of the members is limited to the

extent of the nominal value of the shares or the extent of the amount guaranteed by the

members or unlimited.

v) The Capital Clause: It states the amount of the capital and the way in which it is to

be divided into shares.

vi) The Association and Subscription Clause: All the signatories of the memorandum

make a declaration that they are desirous of forming themselves into a company and that

they agree to take the number of shares mentioned against their respective names given

therein, with their addresses and occupations.

Articles of Association: They are the rules, regulations and bye-laws for the internal

management of the company. They bind the company and its members. They also bind the

members inter sec. But they do not constitute a contract between the company and the public.

Articles of association are filed with the Registrar for the incorporation of a company. Where

they are not filed, the rules contained in Table A of the Companies Act shall apply. In the

case of companies with unlimited liability or with liability limited to the guarantee and a

private company limited by shares, the articles of association are compulsory.

The usual contents of the articles of association relate to the following:

a) Share capital and variation of rights.

b) The company¶s lien on the shares.

c) Calls on shares.

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d) Transfer and transmission of shares.

e) Forfeiture and re-issue of forfeited shares.

f) Conversion of shares into stock and re-conversion of stock into shares.

g) Rules regarding the holding and conducting of the general meetings and board meetings.

h) Rules regarding the appointment of directors, managing agents, secretaries and treasurers,

Managing Director and secretary their remuneration, powers and duties etc.

i) Alteration of share capital.

j) Borrowing powers.

k) Accounts and audit.

l) The common seal etc.

1. List of persons who act as directors.2. The consent of directors in writing to act as such.

3. Director¶s undertaking to take up and pay for qualification shares. This undertaking isto be given by all the Directors jointly or individually and signed by each one of them

and should contain their names, occupations, etc.

The articles are subservient to the memorandum. It must not contain anything inconsistent

with the memorandum. It defines the relationship between the company and members as well

members inter se. The memorandum defines the relation of the company with the public. An

act ultra vires the articles but intra vires the memorandum can be ratified by the company.

But an act ultra vires the memorandum cannot be ratified.

Share Capital

After having obtained the Certificate of Incorporation, the promoters of a public company

will have to take steps to raise the necessary capital for the company. A public company mayinvite the public to subscribe to its shares or debentures. For this purpose, a document known

as µ prospectus¶ has to be issued.

A document containing detailed information about the company and an invitation to the

public for subscribing to the share capital and debentures issued is called prospectus.

According to Section 2(36) of the Companies Act, ³prospectus means any document

described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the

subscription or purchase of any shares in or debentures of a body corporate.´

The term µcapital¶ usually means a particular amount of money with which business is

started. In relation to a company limited by shares, the word µcapital¶ means share capital. In

fact the amount required by the company for its business activities is raised by the issue of

shares. The amount so raised is called the share capital of the company. The persons

contributing towards the share capital are known as ¶shareholders¶.

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The share capital of a company may be classified as follows:

1. Authorised Capital: It is the capital which is stated in company¶s memorandum of association with which the company intends to be registered. It is called the nominal

or registered capital. It is the maximum amount of share capital which a company is

authorised to raise by issuing the shares. The amount of nominal capital is determined

on the basis of present and future capital need of the company. The authorised capitalmay be increased or reduced by the company by passing an ordinary resolution.

2. Issued Capital: It is that part of the authorised capital which is actually offered

(issued) to the public for subscription. Therefore, the issued capital can never be more

than the authorised capital. It can at the most be equal to the nominal capital. The

balance of nominal capital remaining to be issued is called µunissued capital¶.

3. Subscribed Capital: It is that part of the issued capital which has been actually

subscribed by the public. The amount of subscribed capital cannot exceed the amount

of issued capital. This is so, because the company cannot accept for subscription on

amount greater than the issued amount.

4. Called-up Capital: It is that part of nominal value of issued capital which has beencalled-up or demanded on the shares by the company. Normally, a company does not

collect the full amount on shares it has allotted. It collects it in installments known asapplication money, allotment money, first call, second call and so on. The amount of

installments which have been demanded for the time being are termed as µcalled-upcapital¶ and the amount not yet demanded is termed as µuncalled capital¶ and the

shareholders continue to be liable to pay this amount as and when called.5. Paid-up Capital: It is that part of the called-up capital which has actually been

received from the shareholders.

6. Reserve Capital: It is part of the uncalled capital which cannot be called by the

company except in the event of its winding up. The company may, by a special

resolution, determine that a portion of its uncalled capital shall be called-up: (i) in the

event of winding up, (ii) for the purposes of winding up.

Meaning of a Share: The capital of a company is divided into a number of indivisible units

of a fixed amount. These units are known as shares. Section 2(46) defines, ³A share is a share

in the share capital of a company and includes stock except where a distinction between stock

and shares is expressed or implied.´ A share is the interest of a shareholder in the company,

measured by a sum of money.

Types of shares: Prior to the Companies Act, 1956, a company could issue the following

kinds of shares:

1. Preference shares; 2) Equity shares/Ordinary shares; 3) Deferred shares.

After the Companies Act, 1956, a company can issue only two kinds of shares:

2. Preference shares; 2) Equity shares. However, a private company which is not a

subsidiary of a public company may issue shares of such other kind as it may think fit.

Preference Shares: Preference shares are those which carry:

a) A right to be paid a fixed amount of dividend or the amount of dividend calculated

at a fixed rate.

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b) A right to be paid the amount of capital paid up on such shares in the event of winding up of the company. The articles of the company may provide some other

preferences too to the preference shareholders.

Types of Preference Shares: These may be of the following types:

(i) Cumulative Preference Shares: These shares are entitled to dividend at a fixedrate whether there are profits or not. The company pays dividend if it has sufficient

profits. In case the company does not have sufficient profits, dividend on cumulative

preference shares will go on accumulating till it is fully paid off. Such arrears are

carried forward to the next year and are actually paid out of the subsequent years¶

profits. All preference shares are presumed to be cumulative unless expressly stated in

the articles to be non-cumulative.

(ii) Non-cumulative Preference Shares: Non-cumulative preference shares are those

on which the arrears of dividend do not accumulate. If in a particular year there are no profits or profits are inadequate, the shareholders shall not get anything or receive a

partial dividend and they cannot claim the arrears of dividends in the subsequent year.

(iii) Participating Preference Shares: The holders of such shares are entitled to

receive dividend at a fixed rate and in addition, they have a right to participate in the

surplus profits along with equity shareholders after dividend at a certain rate has been

paid to equity shareholders. In the event of winding up, if after paying back both the

preference and equity shareholders, there are surplus assets, then the holders of such

shares shall be entitled to share in the surplus assets as well.

(iv) Non-participating Preference Shares: The holders of such shares are entitled to

only a fixed rate of dividend and do not participate further in the surplus profits. If the

articles are silent, all preference shares are deemed to be non-participating.

(v) Convertible Preference Shares: The holders of such shares have a right to

convert these shares into equity shares within a certain period.

(vi) Non-convertible Preference Shares: The preference shares, where the holders

have no right to convert their shares into equity shares are known as non-convertible

preference shares. Unless otherwise stated preference shares are assumed to be non-

convertible.

(vii) Redeemable Preference Shares: Ordinarily, the amount received by the

company on shares is not returned except on the winding up of the company. A

company limited by shares, if authorised by its articles, may issue preference shares

which are to be redeemed or repaid after a certain fixed period. Thus, the amountreceived on such shares can be returned during the life-time of the company. Such

shares are termed as µredeemable preference shares¶.

Ordinary Shares (Equity Shares) Capital: Equity share capital means all share

capital which is not preference share capital. Equity shareholders receive dividend out

of profits after preference shareholders have been paid their fixed dividend. They

have a right to vote on every resolution placed in the meeting and the voting right

shall be in proportion to the paid up equity capital.

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Appointment by the Articles as regard first directors: The first Directors areusually named in the articles. The articles may also provide that both the number and

the names of the first Directors shall be determined in writing by the subscribers tothe memorandum or a majority of them.

Managing Director: According to Sec. 2(26), a µManaging Director¶ means a

Director who by virtue of an agreement with the company or of a resolution passed bythe company in a general meeting or by its Board of Directors or, by virtue of its

Memorandum or Articles of Association, is entrusted with substantial powers of

management, which would not otherwise be exercisable by him, and includes a

Director occupying the position of a Managing Director, by whatever name called.

(1) Appointment of the Managing Director: The following provisions relate to the

appointment of the Managing Director in Section 269:

13. Every public company or a private company which is a subsidiary of a publiccompany, having a paid up capital of rupees five cr. or more shall have a

Managing Director or a Whole-timeDirector or Manager.

14. No appointment of a person as a Managing or Whole-time Director or aManager in a public company or a private company which is a subsidiary of a

public company shall be made except with the approval of the Central

Government unless such appointment is made in accordance with the

conditions specified in parts I and II of Schedule XIII.

Ordinarily a person cannot be the Managing Director of more than one company.

Section 316 restricts the managing directorship to only one company except in the

following cases:

15. A public company or a private company subsidiary of public company may

appoint a person as its Managing Director if he is already the Managing

Director or Manager of one and not more than one other company including a

private company which is not a subsidiary of a public company. However,such appointment must have been approved by a board resolution which has

been consented to by all the directors present at the meeting. Under thisclause, a person can be appointed the Managing Director of only two

companies and not more.16. A person can be the Managing Director of any number of private companies

but he can not be the Managing Director of any public and one privatecompany.

17. The Central Government may permit any person to be appointed as the

Managing Director of more than two companies if it thinks that the companies

should, for their proper working, function as a single unit and have a commonManaging Director.

18. Manager: According to Sec. 2(24), Manager means an individual who has the

management of the whole or virtually the whole of the affairs of a companyunder his control. He is subject to superintendence, control and direction of the

Board of Directors. µManager¶ includes a Director or any other personoccupying the position of a Manager, by whatever name called, and whether

under a contract of service or not. A company can not appoint or employ a

firm, body corporate or association as its Manager.

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According to Section 385, the following person can not be appointed as managers:

i) A person who is an undischarged insolvent, or has to any time within the preceding five years been adjudged an insolvent.

ii) A person who suspends, or has at any time within the preceding five years

suspended, payment to his creditors, or makes, or has at any time within the preceding five years made, a composition with them.

iii) A person who is, or has at any time within the preceding five years been,convicted by a court in India of an offence involving moral turpitude.

The company may appoint a Managing Director or Manager for the management of

the company in addition to the Board of Directors. However, according to Section197A, a company can not appoint both a Managing Director and a Manager at the

same time. The following officers are included in the category of other managerial personnel:

Secretary:

Section 2(45) of the Companies Act, 1956 defines a Secretary as follows: Secretary

means a Company Secretary within the meaning of Clause C of sub-section 1 of

Section 2 of the Company Secretaries Act, 1980, and includes any other individual

possessing the prescribed qualifications and appointed to perform the duties which

may be performed by a Secretary under this Act and any other ministerial or

administrative duties. The definition reveals the following characteristics of a

Company Secretary.

19. Only an individual may be appointed a Company Secretary. Thus, a firm or a

body corporate cannot be a Company Secretary. 20. A Company Secretary should possess the requisite qualifications to be

prescribed by the Central Government.

21. The Company Secretary performs the functions performed by a Secretary

under the Companies Act including any other ministerial or administrative

duties.

Section 383-A of the Companies Act, 1956 provides for the statutory requirement for

certain companies to have a Company Secretary.

No firm or body corporate can hold the office of a secretary and no individual can be

a secretary in more than one company at the same time.

Meetings

Meaning of a meeting

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A meeting may be generally defined as a gathering or assembly or getting together

of a number of persons for transacting any lawful business. For proper working of

the company, it is necessary that the shareholders meet as often as possible and

discuss matters of mutual interest and take important decisions, there must be at

least two persons to constitute a meet ing.

Company meetings must be convened and held in perfect compliance with the

various provisions of the Companies Act, 1956, and the rules framed thereunder.

Kinds of company meetings

Company meetings can broadly be classified as follows:

(A) Shareholders meetings: Such meetings are known as general meeting of the

members which are held to exercise their collective rights. The meetings of the

shareholders may be of the following types:

22. Statutory meetings 23. Annual general meeting

24. Extra-ordinary general meetings;

25. Class meeting of shareholders.

(B) Meeting of Directors:

These meetings may be of two types: (i) Board meeting; (ii) Meeting of the board

committees.

(C) Other Meetings: These meetings may be either of the following;

(i) Meetings of the debentu re holders; (ii) Meeting of creditors.

Statutory Meeting: Every public company limited by shares or limited by guarantee

and having a share capital must hold a general meeting of the members of the

company which may be called the statutory meeting. It is to be convened after not

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less than one month but within six months from the date at which the company is

entitled to commence business.

A meeting held prior to the statutory period of one month from the date of

entitlement of a company to commence business can not be called the statutory

meeting. The notice for such a meeting should state that it is intended to be

statutory. The statutory meeting is held only once in the life time of a company.

The following companies need not hold statutory meeting:

i) Private company,

ii) Company limited by guarantee having no sh are capital.

iii) Unlimited liability company.

iv) Government companies.

Objectives of statutory meeting

The statutory meeting is held to inform the shareholders about matters relating to

incorporation, allotment of shares, the details of the contracts concluded by the

company, etc. Statutory meeting is convened in order to afford the shareholders an

opportunity for seeing what degree of success has attained the floatation of the

company and in order that any special matters requiring their approval may be laid

before them.

Annual general meeting: A meeting known as an annual general meeting is required

to be held by every company, public or private, annually for the purpose of transacting the companys ordinary business.

First annual general meeting: The first annual general meeting of a company may be

held within 18 months of incorporation, and so long as the company holds its first

annual general meeting within that period, the company need not hold any general

meeting in the year of incorporation or in th e following year.

However, the provision of Section 210 must be complied with which provide that the

first annual general meeting of the company must be held not later than 9 months

from the date of the closing of its financial year.

Subsequent annual general meeting: Section 166(1) of the Companies Act, 1956

provides that every company shall in each calendar year hold in addition to any

other meetings, its annual general meeting and shall specify the meeting as such in

the notice calling the meeting, provided that not more than 15 months shall elapse

between two annual general meetings.

Meeting must be held not later than 6 months from the close of financial year and

extension granted by the Registrar.

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Extra-ordinary general meeting: All the general meetings of a company, with the

exception of the statutory meeting and the annual general meeting, are called

extraordinary general meetings.

There are, various matters in relation to the administration of a Companys affairs

which can be transacted only by resolutions of members in a general meeting. It is

not always possible or expedient for consideration of such matters to wait until the

next annual general meeting. The Articles of Association of the company therefore

make provisions for the convention of general meeting than the annual general

meeting. Such meetings are termed extraordinary general meetings.

All business transacted at such meeting is deemed to be special.

In nut shell, extraordinary general meeting is a meeting which is held between two

annual general meetings.

This meeting is called to discuss some urgent special business which cannot be

postponed till the next annual general meeting.

An extraordinary general meeting may be convened by:

3. Board of Directors on its own moti on.

4. Board of Directors on the requisition of members.

1. Requisitionists themselves on the failure of the Board to call the meeting.

5. Company Law Board.

Board Meeting: The affairs of a Company are managed by the Board of Directors. Inother words, powers delegated by a company to its directors must be exercised at

properly convened and duly constituted meeting generally referred as Board

meeting. Only acts done at duly constituted meetings are therefore valid, unless the

articles provide otherwise. The rules regarding the holding and conduct of Board

meetings are laid down by the Act and the Articles. Section 285 require the Board to

meet at least once every three months irrespective of whether it is the Board of a

public company or a private company and at least four such meetings must be held

in every year.

Resolutions: Decisions of the members at a general meeting are expressed by way of

resolutions. At the meetings a definite proposal in the form of a motion is placed, itis discussed thoroughly and finally is put to vote. When the motion is passed by a

majority, it is called a resolution. In simple words, resolution means the decision

taken at the meeting. A company expresses its will by means of resolution.

Three kinds of resolutions are recognised by the Companies Act:

i) Ordinary resolutions,

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ii) Special resolutions,

iii) Resolutions requiring a special notice.

(i) Ordinarily Resolution: Section 189(1) defines an ordinary resolution as follows:

A resolution shall be an ordinary resolution when at a general meeting of which

the notice required under this Act has been duly given, the votes cast (whether on

a show of hands, or on a poll, as the case may be) in favour of the resolution

(including the casting vote, if any, of the chairman) by members who, being

entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed

the votes, if any, cast against the resolution by members so entitled and voting.

An ordinary resolution means a resolution passed by a simple majority of

shareholders present and voting. As distinguished from a simple majority, an

absolute majority is a majority of all those entitled to vote whether they attend or

not.

So all resolutions which are not special or which do not require special notice are

ordinary resolutions.

Ordinary resolutions normally do not require filing with the Registrar of companies.

The usual notice of 21 days is however, required for passing an ordinary resolution.

The important items of business of a company which can be transacted with ordinary

resolutions are:

a) To authorise an issue of shares at a discount.

b) To increase the share capital if authorised by the articles, or otherwisealter the share capital apart from its reduction.

c) To appoint auditors; but in the case of a company in whi ch not less than 25

per cent of the subscribed share capital is held. Whether single or in any

combination, by a public financial institution or a Government company or

Central or any State Government, or a nationalised bank or an insurance

company carrying a general insurance business, the appointment of auditors

requires a special resolution (Section 224A);

d) To appoint directors;

e) To adopt annual accounts;

f) To declare dividends;

g) To wind up voluntarily when the period, if any, fixed for the durati on of the

company by the articles has expired, or the event, if any, has occurred, on the

occurrence of which the articles provide that the company is to be dissolved.

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h) To appoint liquidators in a members voluntary winding up and to fix their

remuneration.

i) To register an unlimited company as a limited company.

j) To do all things for which a special resolution is not specifically required

either by the Act or the companys articles.

ii) Special resolution: A resolution shall be a special resolution wh en:

a) The intention to propose the resolution as a special resolution has been

duly specified in the notice;

b) The notice required under the Act (21 days) has been duly given; and

c) The votes cast in favour of the resolution by members entitled to vote

either in person or by proxy are not less than three times the number of

votes if any, cast against the resolution. The votes may be cast either on ashow of hands or by poll. There is no question of a casting vote in case of a

special resolution.

A resolution is said to be a special resolution if notice of the intention to move it as a

special resolution is given specifically and it is passed by three -forth of the votes. The

notice convening the meeting at which a special resolution is to be considered mus t

set out the actual wording of the resolution.

The articles of association may provide that certain types of business shall be

approved by a special resolution. The Act also provides that in certain specified

cases, a company must pass a special resolution. It is not necessary that a specialresolution should be passed only at an extraordinary meeting of the shareholders. It

may be passed at any general meeting of the shareholders. A special resolution is

required for the following purposes:

1. To alter any provisions contained in the memorandum which could lawfully

have been contained in the articles instead of the memorandum;

2. To alter the objects or the place of registered office of a company;

3. To change the name of a company;

4. To alter the articles of association;

5. To create a reserve capital;

6.

To reduce the share capital; 7. To move the companys registered office within the same State but outside

the local limits of the city, town or village where such office is situated;

8. To commence any new business which is not related to the business the

company is carrying on currently; though covered by the objects clause of the

memorandum;

9. To pay interest on shares out of capital;

10. To appoint auditors, if not less than 25 per cent of the companys subscribed

capital is held, whether singly or in any combination, by the Central or any

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State Government, Government companies, financial institutions,

nationalised banks, etc.;

11. To support an application to the Central Government to appoint inspectors to

investigate the affairs of the company;

12. To appoint sole selling agents, if the companys paid -up capital is Rs. 50 lakhs

or more;

13. To authorise payment of remuneration to directors who are not in the whole -

time employment of the company;

14. To make the liability of directors unlimited;

15. To have the company wound up by the court;

16. To wind up the company voluntarily;

In addition, a companys own articles may prescribe for special resolution where

under the Act only an ordinary resolution is required, but vice versa is not allowed

i.e. where the Act specifies for a special resolution, the articles cannot provide in the

different kind of resolution.

17. Resolution requiring a special notice: Where the Act requires a special

notice, i.e., 14 clear days notice, to be received by the company from a

shareholder of his intention to move the resolution, either as an ordinary or

as a special resolution. After the receipt of the notice, the company must

immediately issue a notice to the shareholders in this regard, not less than 7

days before the meeting either by serving it on them or through an

advertisement in the newspaper having an appropriate circulation or in any

other mode allowed by the articles.

The object of drawing special attention of the company, and through the company of

the members to it, is to give the members sufficient time to consider the proposed

resolution and to give an opportunity to the directors to indicate their views if theresolution is proposed by the shareholders.

Resolutions where special notice is required:

18. A resolution appointing an auditor other than the retiring one.

19. A resolution providing expressly that the retiring auditor shall not be

reappointed.

20. A resolution purposing to remove a director before the expiry of his period of

office.

21. A resolution to appoint another direc tor in place of the removed director.

Summary

y The term µcompany¶ implies an association of a number of persons for some common

objective.

y A joint stock company is an artificial person invisible, intangible and existing only in

the eyes of law. Being a mere creature of law, it possesses only those properties which

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the charter of its creation confers upon it, either expressly or as incidental to its veryexistence.

y A company has a corporate and legal personality. It is an artificial person and existsonly in the eyes of law.

y A company, being a legal entity, can buy and own property in its own name.

y In the case of companies limited by shares the liability of every member of the

company is limited to the amount of shares subscribed by him.y Every company must have a seal with its name engraved on it.

y The shares of a company are freely transferable and can be sold or purchased through

the stock exchange.

y Chartered Companies are incorporated under a special charter.

y Statutory companies are formed under a special Act of Parliament or the state

legislature.

y A registered company is one which is formed and registered under the Indian

Companies Act, 1956 or under any earlier Companies Act in force in India.

y The Companies Act defines a government company as a company in which not less

than 51 percent of the paid up share capital is held by the Central Government or anyState Government or partly by the Central Government and partly by one or more

State Governments.y Promoters conceive the idea of forming the company and it is they who take the

necessary steps to incorporate it by registration.y The memorandum of association is the charter of the company.

y µArticles of association¶ contains the rules and regulations relating to the internalmanagement of the company.

y A private company can commence business immediately after incorporation.

y The Memorandum of Association of a company as originally framed or as altered

from time to time in pursuance of any previous companies or of this Act.

y Memorandum of Association of a company is its charter and defines the limitations of

the powers of the company, established under the Act.

y In relation to a company limited by shares, the word µcapital¶ means share capital.

y A company can issue only two kinds of shares: Preference shares and Equity shares.

y Equity share capital means all share capital which is not preference share capital.

y Equity shareholders receive dividend out of profits after preference shareholders have

been paid their fixed dividend.

y The persons who are in charge of the management of the affairs of a company are

called Directors. They are collectively known as Board of Directors or the Board.

y The company may appoint a Managing Director or Manager for the management of the company in addition to the Board of Directors.

y Company meetings must be convened and held in perfect compliance with the various provisions of the Companies Act, 1956, and the rules framed thereunder..

MB0035- Unit 6-Information TechnologyAct 2000

Unit 6 Information Technology Act 2000

Introduction

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New communication systems and digital technology have made dramatic changes in the wayof transacting business. Use of computers to create, transmit and store information is

increasing. Computer has many advantages in e-commerce. It is difficult to shift businessfrom paper to electronic form due to two legal hurdles ± (a) Requirements as to writing and

(b) Signature for legal recognition. Many legal provisions assume paper- based records and

documents and signature on paper.

The General Assembly of the United Nations by resolution dated the 30th January, 1997

adopted the Model Law on Electronic Commerce and recommended that all States should

give favourable consideration to the Model Law when they enact or revise their laws.

The Information Technology Act has been passed to give effect to the U N resolution and to

promote efficient delivery of Government services by means of reliable electronic records.

As per Preamble to the Act, the purpose of Act is (a) to provide legal recognition for

transactions carried out by means of electronic data interchange and other means of electroniccommunication, commonly referred to as ³electronic commerce´, which involve the use of

alternatives to paper-based methods of communication and storage of information and (b) to

facilitate electronic filing of documents with the Government agencies. The Act came intoeffect on 17.10.2000.

The Act does not apply to:(a) a negotiable instrument as defined in section 13 of the

Negotiable Instruments Act, except cheque (b) a power-of-attorney as defined in section 1A

of the Powers-of-Attorney Act (c) a trust as defined in section 3 of the Indian Trusts Act (d) a

will as defined in section 2(h) of the Indian Succession Act, including any other testamentary

disposition by whatever name called (e) any contract for the sale or conveyance of

immovable property or any interest in such property (f) any such class of documents or

transactions as may be notified by the Central Government in the Official Gazette. Broadly,

documents which are required to be stamped are kept out of the provisions of the Act.

Objectives:


y Explain the importance of IT Act 2000.

y Explain the importance of Cyber Law in India.

Overview of the Act:

According to the said Act:

y Electronic contracts will be legally valid.y Legal recognition of digital signatures.

y Digital signature to be effected by use of asymmetric crypto system and hash

function.

y Security procedure for electronic records and digital signature.

y Appointment of Certifying Authorities and Controller of Certifying Authorities,

including recognition of foreign Certifying Authorities.

y Controller to act as repository of all digital signature certificates.

y Certifying authorities to get License to issue digital signature certificates.

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y Various types of computer crimes defined and stringent penalties provided under theAct.

y Appointment of Adjudicating Officer for holding inquiries under the Act.y Establishment of Cyber Appellate Tribunal under the Act.

y Appeal from order of Adjudicating Officer to Cyber Appellate Tribunal and not to

any Civil Court.

y Appeal from order of Cyber Appellate Tribunal to High Court.y Act to apply for offences or contraventions committed outside India.

y Network service providers not to be liable in certain cases.

y Power of police officers and other officers to enter into any public place and search

and arrest without warrant.

y Constitution of Cyber Regulations Advisory Committee who will advice the Central

Government and Controller.

What does IT Act enable?

The Information Technology Act:

y Enables Legal recognition to Electronic Transaction / Recordy Facilitates Electronic Communication by means of reliable electronic record

y Provides for acceptance of contract expressed by electronic means

y Facilitates Electronic Commerce and Electronic Data interchange.

y Facilitates Electronic Governance.

y Facilitates electronic filing of documents.

y Enables retention of documents in electronic form.

y Where the law requires the signature, digital signature satisfies the requirement.

y Ensures uniformity of rules, regulations and standards regarding the authentication

and integrity of electronic records or documents.

y Facilitates Publication of Official Gazette in the electronic form.

y Enables interception of any message transmitted in the electronic or encrypted form.

y Prevents Computer Crime, forged electronic records, international alteration of

electronic records fraud, forgery or falsification in Electronic Commerce andelectronic transaction.

Digital Signature: Any subscriber may authenticate an electronic record by affixing his digital

signature. [section 3(1)]. Subscriber means a person in whose name the Digital Signature

Certificate is issued. [section 2(1)(zg)]. Digital Signature Certificate means a Digital Signature

Certificate issued under section 35(4) [section 2(1)(q)].

³Digital signature´ means authentication of any electronic record by a subscriber by means of

an electronic method or procedure in accordance with the provisions of section 3. [section

2(1)(p)].

³Affixing digital signature´ with its grammatical variations and cognate expressions means

adoption of any methodology or procedure by a person for the purpose of authenticating an

electronic record by means of digital signature. [section 2(1)(d)].

Authentication of records: The authentication of the electronic record shall be effected bythe use of asymmetric crypto system and hash function which envelop and transform the

initial electronic record into another electronic record. [section 3(2)].

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V erification of digital signature: Any person by the use of a public key of the subscriber canverify the electronic record. [section 3(3)]. The private key and the public key are unique to

the subscriber and constitute a functioning key pair. [section 3(4)].

The idea is similar to locker key in a bank. You have your µ private key¶ while bank manager

has µ public key¶. The locker does not open unless both the keys come together match.

Electronic records are acceptable unless specific provision to the contrary: Where any law

provides that information or any other matter shall be in writing or in the typewritten or

printed form, then, notwithstanding anything contained in such law, such requirement shall

be deemed to have been satisfied if such information or matter is ± (a) rendered or made

available in an electronic form; and (b) accessible so as to be usable for a subsequent

reference. [section 4]. ± - Unless there is specific provision in law to contrary, electric record

or electronic return is acceptable. ± - Soon, it will be possible to submit applications, income

tax returns and other returns through internet.

Department or Ministry cannot be Compelled to Accept Electronic Record - Section 8

makes it clear that no department or ministry can be compelled to accept application, return

or any communication in electronic form.

Legal recognition of digital signatures: Where any law provides that information or any

other matter shall be authenticated by affixing the signature or any document shall be signed

or bear the signature of any person then, notwithstanding anything contained in such law,

such requirement shall be deemed to have been satisfied, if such information or matter is

authenticated by means of digital signature affixed in such manner as may be prescribed by

the Central Government. ± - ³Signed´, with its grammatical variations and cognate

expressions, shall, with reference to a person, mean affixing of his hand written signature or

any mark on any document and the expression ³signature´ shall be construed accordingly.

[section 5].

Secure digital signature: If, by application of a security procedure agreed to by the parties

concerned, it can be verified that a digital signature, at the time it was affixed, was ± (a)unique to the subscriber affixing it (b) capable of identifying such subscriber (c) created in a

manner or using a means under the exclusive control of the subscriber and is linked to theelectronic record to which it relates in such a manner that if the electronic record was altered

the digital signature would be invalidated, ± - then such digital signature shall be deemed to be a secure digital signature. [section 15].

C ertifying digital signature: The digital signature will be certified by µCertifying Authority¶.

The µcertified authority¶ will be licensed, supervised and controlled by µController of

Certifying Authorities¶.

Why Cyber Law in India?

In the 49th

year of Indian independence, Internet was commercially introduced in India. The

beginnings of Internet were small and the growth of subscribers painfully slow.

However, as Internet has grown, the need has been felt to enact the relevant Cyber laws,

which are necessary to regulate Internet in India. This need for Cyber laws was propelled by

numerous factors.

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Firstly, India has an extremely detailed and well-defined legal system in place. Numerouslaws have been enacted and implemented and the paramount among them is The Constitution

of India. We have various laws like Indian Penal Code, 1860, The Indian Evidence At, 1872,The Banker¶s Book Evidence Act, 1891, The Reserve Bank of India Act, 1934, The

Companies Act, 1956, and so on. However, the arrival of Internet signaled the beginning of

the rise of new and complex legal issues. It may be pertinent to mention that all the existing

laws in place in India were enacted keeping in mind the relevant political, social, economic,and cultural scenario of that time. Nobody then could really visualize the emergence of the

Internet. Despite the brilliant acumen of our master draftsmen, the requirements of

cyberspace could hardly be anticipated. The advancement of Internet led to the emergence of

numerous ticklish legal issues and problems, which necessitated the enactment of Cyber

Laws.

Secondly, the existing laws of India could not be interpreted in the light of the emerging

cyberspace, to include all aspects relating to different activities in cyberspace.

Thirdly, none of the existing laws gave any legal validity or sanction to the activities in

Cyberspace. For example, the Net is used by a large majority of users for email purposes.

Yet, e-mail was not ³legal´ in our country. There was no law in the country, which accordedlegal sanctity to e-mail and the electronic format. The judiciary in our country had been

reluctant to grant judicial recognition to the legality of e-mail in the absence of any specificlaw having been enacted by Parliament on the subject. Thus the need arose for enacting

Cyber Law in our country.

Fourthly, Internet requires an enabling and supportive legal infrastructure in time with the

times. This legal infrastructure can only be given by the enactment of the relevant Cyber

Laws as the traditional laws have failed to provide it. E-commerce, the biggest future of

Internet, can only be possible if necessary legal infrastructure complements the same to

enable its vibrant growth. As such, an urgent need was felt for enacting Cyber Law in our

country.

Definition of Cyber Crime:

Cyber crime refers to all the activities done with criminal intent in cyberspace or using themedium of Internet. These could be either the criminal activities in the conventional sense or

activities, newly evolved with the growth of the new medium. Any activity, which basicallyoffends human sensibilities, can be included in the ambit of Cyber crimes.

Because of the anonymous nature of Internet, it is possible to engage in a variety of criminal

activities with impunity, and people with intelligence, have been grossly misusing this aspect

of the Internet to commit criminal activities in cyberspace. The field of cyber crime is just

emerging and new forms of criminal activities in cyberspace are coming to the forefront eachday. For example, child pornography on Internet constitutes one serious cyber crime.Similarly, online pedophiles, using Internet to induce minor children into sex, are as much

cyber crimes as any others.

Categories of cyber crimes:

Cyber crimes can be basically divided in to three major categories:

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1. Cyber crimes against persons;2. Cyber crimes against property; and

3. Cyber crimes against government.

1. Cyber crimes against persons: Cyber crimes committed against persons include various

crimes like transmission of child-pornography, harassment of any one with the use of a

computer and cyber stalking.

The trafficking, distribution, posting, and dissemination of obscene material including

pornography, indecent exposure, and child pornography constitute the most important cyber

crimes known today. These threaten to undermine the growth of the younger generation and

also leave irreparable scars on the minds of the younger generation, if not controlled.

Similarly, cyber harassment is a distinct cyber crime. Various kinds of harassments can anddo occur in cyberspace, or through the use of cyberspace. Harassment can be sexual, racial,

religious, or of any other nature. Cyber harassment as a crime also brings us to another related area of violation of privacy of citizens. Violation of privacy of online citizens is a

cyber crime of a grave nature.

Cyber stalking: The Internet is a wonderful place to work, play and study. The net is merely a

mirror of the real world, and that means it also contains electronic versions of real life

problems. Stalking and harassment are problems that many persons especially women, are

familiar within real life. These problems also occur on the Internet, in the form of ³cyber

stalking´ or ³online harassment´.

2. Cyber crimes against property: The second category of Cyber crimes is Cyber crimes

against all forms of property. These crimes include unauthorized computer trespassing

through cyberspace, computer vandalism, and transmission of harmful programs and

unauthorized possession of computerized information.

3. Cyber crimes against Government: The third category of Cyber crimes is Cyber crimes

against Government. Cyber Terrorism is one distinct kind of crime in this category. The

growth of Internet has shown that the medium of cyberspace is being used by individuals and

groups to threaten international governments as also to terrorize the citizens of a country.

This crime manifests itself into Cyber Terrorism when an individual ³cracks´ into a

government or military maintained website, for the purpose of perpetuating terror.

Since Cyber crime is a newly emerging field, a great deal of development has to take place in

terms of putting into place the relevant legal mechanism for controlling and preventing cyber

crime. The courts in United States of America have already begun taking cognizance of

various kinds of fraud and cyber crimes being perpetrated in cyberspace. However, much

work has to be done in this field. Just as the human mind is ingenious enough to devise newways for perpetrating crime, similarly, human ingenuity needs to be canalized intodeveloping effective legal and regulatory mechanisms to control and prevent cyber crimes. A

criminal mind can assume very powerful manifestations if it is used on a network, given thereachability and size of the network.

Legal recognition granted to Electronic Records and Digital Signatures would certainly boost

E ± Commerce in the country. It will help in conclusion of contracts and creation of rights

and obligations through electronic medium. In order to guard against the misuse and

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fraudulent activities over the electronic medium, punitive measures are provided in the Act.The Act has recognized certain offences, which are punishable. They are: -

Tampering with computer source documents (Sec 65)

Any person who knowingly or intentionally conceals, destroys or alters or intentionally or

knowingly causes another person to conceal, destroy or alter any -

a. Computer source code when the computer source code is required to be kept by law for the

time being in force,

b. Computer programme,

c. Computer system and

d. Computer network.

- is punishable with imprisonment up to three years, or with fine which may extend up to two

lakh rupees or with both.

Hacking with computer system (Sec 66):

Hacking with computer system is a punishable offence under the Act. It means any person

intentionally or knowingly causes wrongful loss or damage to the public or destroys or

deletes or alters any information residing in the computer resources or diminishes its value or

utility or affects it injuriously by any means, commits hacking.

Such offenses will be punished with three years imprisonment or with fine of two lakh rupees

or with both.

Publishing of information which is obscene in electronic form (Sec 67):

Whoever publishes or transmits or causes to be published in the electronic form, any material

which is lascivious or appeals to prurient interest or if its effect is such as to tend to depraveand corrupt persons who are likely, having regard to all relevant circumstances, to read, see

or hear the matter contained or embodied in it shall be punished on first conviction withimprisonment for a term extending up to 5 years and with fine which may extend to one lakh

rupees. In case of second and subsequent conviction imprisonment may extend to ten yearsand also with fine which may extend up to two lakh rupees.

Failure to comply with orders of the controller by a Certifying Authority or any employee of such

authority (Sec 68):

Failure to comply with orders of the Controller by any Certifying Authority or by any

employees of Certifying Authority is a punishable offence. Such persons are liable toimprisonment for a term not exceeding three years or to a fine not exceeding two lakh rupees

or to both.

Fails to assist any agency of the Government to decrypt the information (Sec 69):

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If any subscriber or any person-in-charge of the computer fails to assist or to extend anyfacilities and technical assistance to any Government agency to decrypt the information on

the orders of the Controller in the interest of the sovereignty and integrity of India etc. is a punishable offence under the Act. Such persons are liable for imprisonment for a term, which

may extend to seven years.

Unauthorized access to a protected system (Sec 70):

Any person who secures access or attempts to secure access to a protected system in

contravention of the provisions is punishable with imprisonment for a term which may extendto ten years and also liable to fine.

Misrepresentation before authorities (Sec 71):

Any person who obtains Digital Signature Certificate by misrepresentation or suppressing

any material fact from the Controller or Certifying Authority as the case may be punished

with imprisonment for a term which may extend two years or with fine up to one lakh rupees

or with both.

Breach of confidentiality and privacy (Sec 72):

Any person in pursuant of the powers conferred under the act, unauthorisedly secures access,

to any electronic record, books, register, correspondence, information, document or other

material without the consent of the person concerned discloses such materials to any other

person shall be punished with imprisonment for a term which may extend to two years, or

with fine up to one lakh rupees or with both.

Publishing false particulars in Digital Signature Certificate (Sec 73):

No person can publish a Digital Signature Certificate or otherwise make it available to anyother person with the knowledge that: -

a. the Certifying Authority listed in the certificate has not issued it; or

b. the subscriber listed in the certificate has not accepted it; or

c. the certificate has been revoked or suspended

unless such publication is for the purpose of verifying a digital signature created prior to such

suspension or revocation. Any person who contravenes the provisions shall be punishable

with imprisonment for a term, which may extend to two years or with fine up to rupees one

lakh or with both.

Publication of Digital Signature Certificate for fraudulent purpose (Sec 74):

Any person knowingly creates, publishes or otherwise makes available a Digital Signature

Certificate for any fraudulent or unlawful purpose shall be punished with imprisonment for aterm which may extend to two years or with fine up to one lakh rupees or with both.

Search and Arrest

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Any Police Officer not below the rank of a Deputy Superintendent of Police or any other officer of the Central Government or a State Government authorised in this behalf may enter

any public place, search and arrest without warrant any person found therein who isreasonably suspected or having committed or of committing or of being about to commit any

offence under this Act.

Civil liabilities, penalties and adjudication:

Penalty for damage to computer, computer system etc.(Sec 43):

Any person, who, without the permission of the owner or any other person in-charge of a

computer, computer system or computer network ±

a. accesses or secures access to such computer, computer system or computer network;

b. downloads, copies or extracts any data, computer database or information from suchcomputer, computer system or computer network including information or data held or stored

in any removable storage medium;

c. introduces or causes to be introduced any computer contaminant or computer virus into any

computer, computer system or computer network;

d. damages or causes to be damaged any computer, computer system or computer network,data, computer database or any other programmes residing in such computer, computer

system or computer network;

e. disrupts or causes disruption of any computer, computer system or computer network;

f. denies or causes the denial of access to any person authorised to access any computer,

computer system or computer network;

g. provides any assistance to any person to facilitate access to a computer, computer system

or computer network in contravention of the provisions this Act, rules or regulations made

under thereunder;

h. charges the services availed of by a person to the account of another person by tampering

with or manipulating any computer, computer system or computer network, ± shall be liable

to pay damages by way of compensation not exceeding one crore rupees to the person soaffected.

Penalty for failure to furnish information, return etc.(Sec 44):

Any person who is required under the Act, or rules or regulations made thereunder to±

a. furnish any document, return or report to the Controller or the Certifying Authority fails to

furnish the same, shall be liable to a penalty not exceeding one lakh and fifty thousand rupees

for each such failure;

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Objectives:


y Explain the objectives of the Arbitration Act.

y Explain the composition of Arbitral Tribunal.

y Explain the conduct of Arbitral Proceedings.

Scheme of the Act:

The Act is divided into the following parts:

(a) Part I ± Domestic arbitration

(b) Part II ± Enforcement of foreign awards

(c) Part III ± Conciliation procedures

(d) Part IV ± Supplementary provisions

(e) First Schedule ± Convention on recognition and enforcement of foreign arbitral

award as per New York Convention

(f) Second Schedule ± Protocol on Arbitration Clauses

(g) Third Schedule ± Convention on the execution of foreign arbitral awards as per

Geneva Convention.

Law Based on UNCITRAL Model Law: The present Act is based on model law drafted byU

nited Nations Commission on International Trade Laws (U NCITRAL), both on domesticarbitration as well as international commercial arbitration, to provide uniformity and certainty

to both categories of cases.

Matters not referable to arbitration:

Certain matters which are not arbitrable are:

y Suits for divorce or restitution of conjugal rights

y Taxation

y Non-payment of admitted liability

y Criminal matters.

Arbitration- (The Arbitrator decides):

Arbitration is a dispute resolution process where the opposing parties select or appoint an

individual called an Arbitrator. U pon appointment, the Arbitrator will arrange the process tohear and consider the evidence, review arguments and afterwards will publish an award in

which the items of dispute are decided.

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In some cases the Arbitrator can conduct the arbitration on documents evidence only. When published the Arbitrator¶s decisions are final and binding on the parties. It is rare for an

arbitration to be appealed to the courts. Arbitration may comprise a sole Arbitrator, or may bea panel of Arbitrators.

Costs of the arbitration are disposed of in the Arbitrator¶s award, unless the parties have some

agreement to the contrary.

Arbitration is a settlement of dispute by the decision of one or more persons called

arbitrators. It is an arrangement for investigation and settlement of a dispute between

opposing parties by one or more unofficial persons chosen by the parties. In arbitration some

dispute is referred by the parties for settlement to a tribunal of their own choosing. The

dispute is not submitted for decision to the ordinary courts but a domestic tribunal. It is thus a

method of settling the disputes in a quasi-judicial manner. The essence of arbitration is that

the arbitrator decides the case and his award is in the nature of a judgement. Arbitration is a

speedy and inexpensive method of settling the disputes between the parties.

In lines with the international trend, the Government of India has also enacted the Arbitration

and Conciliation Act, 1996 and repealed the three earlier enactments namely, the Arbitration(Protocol and Convention) Act, 1937; the Arbitration Act, 1940; and the Foreign Award

(Recognition and Enforcement) Act, 1961.

Objectives of the Act

The main objectives of the Act are as under :

i) To comprehensively cover international commercial arbitration and conciliation as alsodomestic arbitration and conciliation.

ii) To make provision for an arbitral procedure which is fair, efficient and capable of meetingthe needs of the specific arbitration.

iii) To provide that the arbitral tribunal gives reasons for its arbitral award.

iv) To ensure that the arbitral tribunal remains with in the limit of jurisdiction.

v) To minimize the supervisory role of courts in the arbitral process.

vi) To permit an arbitral tribunal to use mediation, conciliation or other procedures during the

arbitral proceedings to encourage settlement of disputes.

vii) To provide that every final arbitral award is enforced in the same manner as if it were adecree of the court.

viii) To provide that a settlement agreement reached by the parties as a result of conciliation

proceedings will have the same status and effect as an arbitral award on agreed terms on the

substance of the dispute rendered by an arbitral tribunal.

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relate to an act of commission or omission, for example, with holding a certificate towhich a person is entitled or refusal to register a transfer of shares.

Under the present law, certain disputes such as matrimonial disputes, criminal

prosecution, questions relating to guardianship, questions about validity of a will etc. or

treated as not suitable for arbitration. Section 2(3) of the new Act maintains this position.

Subject to this qualification Section 7(1) of the new Act makes it permissible to enter intoan arbitration agreement ³in respect of a defined legal relationship whether contractual or

not´.

4. An arbitration agreement may be in the form of an arbitration clause in a

contract or in the form of a separate agreement [Section 7(2)].

Appointment of Arbitrator: The parties can agree on a procedure for appointing thearbitrator or arbitrators. If they are unable to agree, each party will appoint one arbitrator and

the two appointed arbitrators will appoint the third arbitrator who will act as a presidingarbitrator [Section 11(3)]. If one of the parties does not appoint an arbitrator within 30 days,

or if two appointed arbitrators do not appoint third arbitrator within 30 days, the party can

request Chief Justice to appoint an arbitrator [Section 11(4)]. The Chief Justice can authorizeany person or institution to appoint an arbitrator. [Some High Courts have authorized District

Judge to appoint an arbitrator]. In case of international commercial dispute, the application

for appointment of arbitrator has to be made to Chief Justice of India. In case of other

domestic disputes, application has to be made to Chief Justice of High Court within whose

jurisdiction the parties are situated [Section 11(12)]

Challenge to Appointment of arbitrator: An arbitrator is expected to be independent and

impartial. If there are some circumstances due to which his independence or impartiality can

be challenged, he must disclose the circumstances before his appointment [Section 12(1)].

Appointment of Arbitrator can be challenged only if (a) Circumstances exist that give rise to

justifiable doubts as to his independence or impartiality (b) He does not possess thequalifications agreed to by the parties [Section 12(3)]. Appointment of arbitrator cannot be

challenged on any other ground. The challenge to appointment has to be decided by thearbitrator himself. If he does not accept the challenge, the proceedings can continue and the

arbitrator can make the arbitral award. However, in such case, application for setting asidearbitral award can be made to Court. If the court agrees to the challenge, the arbitral award

can be set aside [Section 13(6)]. Thus, even if the arbitrator does not accept the challenge tohis appointment, the other party cannot stall further arbitration proceedings by rushing to

court. The arbitration can continue and challenge can be made in Court only after arbitral

award is made.

C onduct of Arbitral Proceedings: The Arbitral Tribunal should treat the parties equally and

each party should be given full opportunity to present his case [Section 18]. The ArbitralTribunal is not bound by Code of Civil Procedure, 1908 or Indian Evidence Act, 1872[Section 19(1)]. The parties to arbitration are free to agree on the procedure to be followed

by the Arbitral Tribunal. If the parties do not agree to the procedure, the procedure will be asdetermined by the arbitral tribunal.

Law of Limitation Applicable: Limitation Act, 1963 is applicable. For this purpose, date on

which the aggrieved party requests other party to refer the matter to arbitration shall beconsidered. If on that date, the claim is barred under Limitation Act, the arbitration cannot

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continue [Section 43(2)]. If Arbitration award is set aside by Court, time spent in arbitrationwill be excluded for purpose of Limitation Act. So that case in court or fresh arbitration can

start.

Flexibility in respect of procedure, place and language: Arbitral Tribunal has full powers

to decide the procedure to be followed, unless parties agree on the procedure to be followed

[Section 19(3)]. The Tribunal also has powers to determine the admissibility, relevance,materiality and weight of any evidence [Section 19(4)]. Place of arbitration will be decided

by mutual agreement. However, if the parties do not agree to the place, the same will be

decided by tribunal [Section 20]. Similarly, language to be used in arbitral proceedings can be

mutually agreed. Otherwise, Arbitral Tribunal can decide [Section 22].

Submission of statement of claim and defence: The claimant should submit statement of

claims, points of issue and relief or remedy sought. The respondent shall state his defense in

respect of these particulars. All relevant documents must be submitted. Such claim or defense

can be amended or supplemented any time [section 23].

Hearings and Written Proceedings: After submission of documents and defense, unless the

parties agree otherwise, the Arbitral Tribunal can decide whether there will be oral hearing or proceedings can be conducted on the basis of documents and other materials. However, if one

of the parties requests the hearing shall be oral. Sufficient advance notice of hearing should

be given to both the parties [Section 24]. [Thus, unless one party requests, oral hearing is not

compulsory].

Settlement during Arbitration: It is permissible for parties to arrive at mutual settlement

even when arbitration is proceeding. In fact, even the Tribunal can make efforts to encourage

mutual settlement. If parties settle the dispute by mutual agreement, the arbitration shall be

terminated. However, if both parties and the Arbitral Tribunal agree, the settlement can be

recorded in the form of an arbitral award on agreed terms. Such Arbitral Award shall have the

same force as any other Arbitral Award [Section 30].

Arbitral Award : Decision of Arbitral Tribunal is termed as µArbitral Award¶. Arbitrator candecide the dispute ex aequo et bono (In justice and in good faith) if both the parties expressly

authorize him to do so [Section 28(2)]. The decision of Arbitral Tribunal will be by majority.The arbitral award shall be in writing and signed by the members of the tribunal [Section 29].

The award must be in writing and signed by the members of Arbitral Tribunal [Section31(1)]. It must state the reasons for the award unless the parties have agreed that no reason

for the award is to be given [Section 31(3)]. The award should be dated and place where it ismade should be mentioned. Copy of award should be given to each party. Tribunal can make

interim award also [Section 31(6)].

C ost of Arbitration: Cost of arbitration means reasonable cost relating to fees and expensesof arbitrators and witnesses, legal fees and expenses, administration fees of the institutionsupervising the arbitration and other expenses in connection with arbitral proceedings. The

tribunal can decide the cost and share of each party [Section 31(8)]. If the parties refuse to pay the costs, the Arbitral Tribunal may refuse to deliver its award. In such case, any party

can approach Court. The Court will ask for deposit from the parties and on such deposit, theaward will be delivered by the Tribunal. Then Court will decide the costs of arbitration and

shall pay the same to Arbitrators. Balance, if any, will be refunded to the party [Section 39].

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Intervention byC ourt - One of the major defects of earlier arbitration law was that the party could access court

almost at every stage of arbitration ± right from appointment of arbitrator to implementationof final award. Thus, the defending party could approach court at various stages and stall the

proceedings. Now, approach to court has been drastically curtailed. In some cases, if an

objection is raised by the party, the decision on that objection can be given by Arbitral

Tribunal itself. After the decision, the arbitration proceedings are continued and the aggrieved party can approach Court only after Arbitral Award is made. Appeal to court is now only on

restricted grounds. Of course, Tribunal cannot be given unlimited and uncontrolled powers

and supervision of Courts cannot be totally eliminated.

Arbitration Act has Over-Riding Effect: Section 5 of Act clarifies that notwithstanding

anything contained in any other law for the time being in force, in matters governed by the

Act, the judicial authority can intervene only as provided in this Act and not under any other

Act.

Modes of Arbitration

(a) Arbitration without the intervention of the court. [Sec.3 to 19]

(b) Arbitration with the intervention of the court when there is no suit pending [Sec.20]

(c) Arbitration with the intervention of the court where a suit is pending. [Sec.21 to 25]

Power of Judicial Authority to Refer Parties to Arbitration

A judicial authority before which an action is brought in a matter which is the subject of anarbitration agreement shall refer the parties to arbitration if a party so applies. The party must,

however, apply before submitting his first statement on the substance of the dispute

[Sec.8(1)1].

Further, the application shall not be entertained unless it is accompanied by the original

arbitration agreement or a duly certified copy there of. [Sec. 8(2)]

Notwithstanding that an application has been made and that the issue is pending before the

judicial authority, an arbitration may be commenced or continued and in arbitral award made,[Sec.8(3)].

In order that the judicial authority may refer the parties to arbitration under section 8(1), the

following conditions must be satisfied.

1. There must be a valid and subsisting agreement between the parties.2. The matter about which a suit has been filed should be within the scope of the

arbitration agreement.3. The party asking for the stay must have applied at the earliest opportunity, i.e., before

submitting his first statement on the substance of the dispute.

4. The application must be made to the judicial authority before which the proceedingsare pending.

5. The application must be accompanied by the original arbitration agreement or by aduly certified copy thereof.

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6. The judicial authority must be satisfied that there is no sufficient reason why thematter should not be referred.

This is a very important provision inasmuch as if any party to the Arbitration Agreement

brings an action before the Court ignoring the Arbitration Agreement, the other party can

move an application before the court along with original arbitration Agreement or a duly

certified copy of agreement but before submitting his first statement on the substance of thedispute otherwise the party will lost its right of objecting the matter to be tried before the

Court. Above all, the most important provision is that the arbitration proceedings can

continue or proceed further despite the fact that one of the parties has moved a petition before

the court.

Under the previous old Act, there was no such specific provision and consequently, in the

past, the arbitration proceedings remained in abeyance.

Who may refer to Arbitration?

Capacity to make reference is co-extensive with capacity to contract. Every person capable of

entering into the contract may be a party to a submission. Therefore, he who cannot contractcannot make a submission. In the case of a person whose capacity to contract is restricted, his

power of making submission is in the same manner also limited. The capacity of various

persons to submit disputes to arbitration is discussed below:

1. M inor : As a minor is not competent to enter into a contract there cannot be a valid

submission to arbitration by him. Where a minor joins a reference to arbitration the award is

not void, it is voidable at the option of the minor but the major parties are bound by it. A

guardian can refer a dispute to arbitration only with the permission of the court for the benefit

of a minor in good faith.

2. M anager of a Joint Hindu Family:

The manager of a Joint Hindu Family can refer

disputes to arbitration and the award, in the absence of a fraud, will bind the other members

of the family including the minors. Thus, a manager in a Joint Hindu Family has power to

refer to arbitration disputes relating to family property provided the reference is for the

benefit of the family.

3. A gent : An agent who is duly authorized may enter into an arbitration agreement. Such an

agent on reference may bind his principal.

4. O fficial

(in case of bankrupt¶s estate): The Official Assignee or Receiver is given the power to refer

any dispute to arbitration and compromise all debts, claims and liabilities on such terms as

may be agreed upon.

5. Partner : A partner cannot bind his co-partners by a reference to arbitration. The implied

authority of a partner does not, in the absence of any usage or custom of trade, empower him

to submit dispute relating to the business of the firm to arbitration.

Subject-matter of Reference

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All matters which form the subject of civil litigation affecting private rights may be referredto arbitration. In other words, all disputes between the parties relating to private rights of

which the civil court may take cognizance of, may be referred to arbitration. Thus, matterswhich are purely criminal and give rise to no civil remedy cannot be referred to arbitration.

Similarly, matters of public right cannot be decided by arbitration.

W hat can be referred?

1) Disputes concerning movable property;

2) Disputes arising out of breaches of contract;

3) Disputes relating to breach of promise of marriage;

4) Questions of title to immovable property;

5) Questions of law or fact;

6) Disputes regarding, compliment, dignity, trespass, etc.

7) Time barred claims;

8) Questions as to whether judgement has been properly obtained or not.

9) Questions relating to the past or future maintenance of a widow.

W hat cannot be referred?

1. A claim for custody of wife, petition for restitution of conjugal rights, divorce, etc;

2.

Insolvency proceedings;3. Claims arising out of illegal transactions;4. Questions relating to public charities and charitable trusts;

5. Cases relating to public nuisance;6. Execution proceedings;

7. Proceedings relating to the appointment of a guardian to a minor;8. Questions relating to offences affecting public at large;

9. Lunacy proceedings;

10. Questions relating to the genuineness of a will;

11. Matters of a criminal nature.

Composition of Arbitral Tribunal

An arbitrator is a person selected by mutual consent of the parties to settle the matters in

controversy between them. A person appointed to adjudicate the difference between two or

more parties is called an arbitrator. An arbitrator is a tribunal chosen by the consent of the

parties. The person who is so appointed must also give his consent to act as an arbitrator.

Number of Arbitrators (Section 10)

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The parties are free to determine the number of arbitrators provided that such number shallnot be an even number. If the parties fail to make the determination the arbitral tribunal shall

consist of a sole arbitrator.

Under the old and new law, the mode of appointment of arbitrators and their number is left to

the agreement by the parties. But unlike old law, the new law envisages only odd number of

arbitrators. This will do away with the system of having two arbitrators and one umpire prevalent under the old law. Section 10 of the new Act provides that there shall be only a sole

arbitrator, where the parties do not specify the number of arbitrators.

Appointment of Arbitrators (Section 11)

A person of any nationality may be an arbitrator, unless otherwise agreed by the parties. The

parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

P residing arbitrator . Failing any agreement on a procedure, in an arbitration with threearbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall

appoint the third arbitrator who shall act as the presiding arbitrator [Sec: 11(3)].

If the appointment procedure agreed on by the parties applies and:-

(a) A party fails to appoint an arbitrator within thirty days from the receipt of a

request to do so from the other party; or

(b) The two appointed arbitrators fail to agree on the third arbitrator within thirty daysfrom the date of their appointment,

the appointment shall be made, upon request of a party, by the Chief Justice or any person or

institution designated by him. [Sec.11(4)].

Failure of P arties to agree on procedure: It may so happen that the parties may fail to agree

on the procedure for the appointment of the arbitrator or arbitrators. In such a case, a sole

arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a

request by one party from the other party to so agree the appointment shall be made, upon

request of a party, by the Chief Justice or any person or institution designated by him

[Sec.11(5)].

Sometimes, under an appointment procedure agreed upon by the parties:-

a) A party fails to act as required under that procedure; or

b) The parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

c) A person, including an institution, fails to perform any function entrusted to him or it

under that procedure.

In such a case, a party may request the Chief Justice or any person or institution designated

by him to take the necessary measure, unless the agreement on the appointment procedure

provides other means for securing the appointment. [Sec. 11(6)].

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A decision on a matter entrusted to the Chief Justice or the person or institution designated byhim is final. [Sec.11(7)].

Qualification for the appointment of arbitrator

The Chief Justice or the person or institution designated by him, in appointing an arbitrator,

shall have due regard to ±

a) Any qualifications required of the arbitrator by the agreement of the parties; and

b) Other considerations as the likely to secure the appointment of an independent and

impartial arbitrator. [Sec. 11(8)]

In the case of appointment of sole or third arbitrator in an international commercialarbitration, the Chief Justice of India or Inc. person or institution designated by him may

appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities. [Sec. 11(9)]

The Chief Justice may make such scheme as he may deem appropriate for dealing with above

matters [Sec. 11(10)].

Jurisdiction of Arbitral Tribunals

Competence of arbitral tribunal to rule on its jurisdiction (Section 16)

The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with

respect to the existence or validity of the arbitration agreement for this purpose:-

a) An arbitration clause which forms part of a contract shall be treated as an agreementindependent of the other terms of the contract; and

b) A decision by the arbitral tribunal that the contract is null and void shall not entail

ipso jure by the law it self the invalidity of the arbitration clause [Sec. 16(1)].

Thus, the New Act confers competence on the arbitral tribunal to decide on its own

jurisdiction and to consider objections with respect to the existence or validity of the

arbitration agreement.

A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the

submission of the statement of defense. However, a party shall not be precluded from raising

such a pica merely because that he has appointed, or participated in the appointment of, anarbitrator [Sec. 16(2)].

A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon

as the matter alleged to be beyond the scope of its authority is raised during the arbitral

proceedings [Sec, 16(3)].

The arbitral tribunal may, in these cases admit a later plea if it considers the delay justified

[Sec16(4)].

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The arbitral tribunal shall decide on a plea referred to above and, where the arbitral tribunaltakes a decision rejection the plea, continue with the arbitral proceedings and make an arbitral

award [Sec. 16(5)].

A party aggrieved by such an arbitral award my make an application for setting aside such an

arbitral award in accordance with Section 34 [Sec. 16(6)].

Interim measures ordered by arbitral tribunal (Section 17)

Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party,order a party to take any interim measure of protection as the arbitral tribunal may consider

necessary in respect of the subject-matter of the dispute. Further, the arbitral tribunal mayrequire a party to provide appropriate security in connection with a measure so ordered.

Section 17 provides for the taking of interim measures in respect of the subject-matter of the

dispute by the arbitral tribunal. However, the parties may by agreement exclude the exerciseof such a power by the arbitral tribunal.

The Arbitration Act, 1940, did not confer any specific powers on arbitrators to take interim

measures. It was, however, open on the parties to confer such powers on the arbitrator.

Conduct of Arbitral Proceedings

Equal treatment of Parties (Section 18)

The parties shall be treated with equality and each party shall be given a full opportunity to

present his case. Thus, section 18 laws down two obligations on the arbitral tribunal i.e. to

treat the party with equality and to give full opportunity to each party to present his case. Itconstitutes a fundamental principle which is applicable to entire proceedings. The principle of

equality and full opportunity to present the case should be observed by the parties also, when

laying down any rules of procedure. An agreed procedure which violates the fundamental

principle of equality and grant of opportunity to be heard, is null and void and an award

passed in violation of this principle can be set aside.

Determination of rules of Procedure (Section 19)

The arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 or the Indian

Evidence Act, 1872.

The arbitral tribunal is not bound to follow the procedure as followed by a Court. However,the arbitral tribunal is to observe fundamental principles underlying the Code of Civil

Procedure and the Evidence Act. The procedure adopted by arbitral tribunal should be

according to the principles of natural justice.

Section 19(2) provides that subject to provisions of the Part-I, the parties are free to agree on

a procedure to be followed by the arbitral tribunal in conducting its proceedings. Parties

generally incorporate arbitration rules of a particular institution by reference to the same in

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the agreement. The arbitral tribunal does not have any discretion where any such rule has been provided for in the agreement.

The arbitral tribunal may conduct the proceeding in the manner it considers appropriate, but

such power is subject to two exceptions mentioned below:-

1) The arbitral tribunal cannot conduct the proceedings in a manner which is inviolation of a mandatory provision of the law.

2) The arbitral-tribunal cannot conduct proceedings in a manner which is in violation of the procedure agreed by the parties if any.

However, if there were no agreed rules by the parties, the arbitral tribunal has power to

determine the admissibility, relevance, materiality and weight of any evidence and makedecision in the manner it considers appropriate [Sec. 19(4)].

Place of Arbitration (Section 20)

Section 20(1) provides that parties are free to agree on the place of arbitration. Where parties

have not agreed on the place of arbitration the arbitral tribunal has to determine the place of

arbitration having regard to the circumstances of the case, including the convenience of the

parties. Section 31(4) provides, A mandatory requirement and obligation on the arbitral

tribunal to state the place of arbitration as determined in accordance with section 20 in theaward and award is then deemed to have been made at that place.

The arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it

considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of documents, goods or other property. [Sec.20(1)].

Place of arbitration in arbitration other than international commercial arbitration i.e., indomestic arbitration does not pose any problem. Parties may agree on the place of arbitrationanywhere in India. But in international commercial arbitrations, place of arbitration has legal

implications in terms of law applicable to arbitration.

Commencement of Arbitral Proceedings (Section 21)

Section 21 gives freedom to the parties to agree on the date of commencement of arbitral

proceedings. The arbitral proceedings, subject to agreement of party, in respect of a particular dispute, commence on the date, on which a request for the dispute to be referred to arbitration

is received by the respondent. A request for reference of disputes to arbitration is differentfrom request for the appointment of arbitrator of constitution or arbitral tribunal.

Language (Section 22)

Section 22 gives freedom to parties to agree upon the language or languages to be used in the

arbitral proceedings. The arbitral tribunal, subject to an agreement of parties, has power to

determine the language or languages to be used in the arbitral proceedings. The arbitral

tribunal may ask for translation of documentary evidence into the agreed language.

Statement of claim and defence (Section 23)

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Section 23 is a mandatory provision. The claimant should state the facts supporting his claim,the points at issue and the relief or remedies sought and the respondent should state his

defence in respect of these particulars. However, the parties have been given freedom toagree on required elements of those statements. The parties have also been given freedom to

agree upon the period of time for submission of those statements. The arbitral tribunal has

power to determine the period of time for submission of these statements where parties have

not agreed on the same [Section 23(1)].

The statement Contemplated by section 23 need not be in writing.

The parties may submit with their statements all documents they consider to be relevant or

may add a reference to documents or other evidence they will submit [Sec. 23(2)].

The parties may agree to amend or supplement their statements during the course of arbitral proceedings. The arbitral tribunal has exclusive discretion to restrict supplementary claim and

defences having regard to the delay in making it [Sec. 23(3)].

Hearings and written proceedings (Section 24)

Unless otherwise agreed by the parties, the arbitral tribunal shall decide whether to hold oral

hearings for the presentation of evidence or for oral argument, or whether the proceedings

shall be conducted on the basis of documents and other materials. However, the arbitral

tribunal shall hold oral hearings, at an appropriate stage of the proceedings, on a request by a

party, unless the parties have agreed that no oral hearing shall be held. [Sec. 24(1)].

N otice. The parties shall be given sufficient advance notice of any hearing and of any

meeting of the arbitral tribunal for the purposes of inspection of documents, goods or other property. [Sec. 24(2)].

C

ommunication.

All statements, documents or other information supplied to, or applicationsmade to the arbitral tribunal by one party shall be communicated to the other party and any

expert report or evidentiary document, on which the arbitral tribunal may rely in making its

decision shall be communicated to the parties [Sec. 24(3)].

Receipt of written C ommunications (Section 3). Unless otherwise agreed by the parties:-

(a) Any written communication is deemed to have been received if it is delivered to

the addressee personally or at his place of business, habitual residence or mailingaddress; and

(b) If none of the places referred to in clause (a) can be found after making a

reasonable inquiry, a written communication is deemed to have been received if it issent to the addresse¶s last known place of the business, habitual residence or mailing

address by registered letter or by any other means which provides a record of the

attempt to deliver it. [Sec.3(1)].

The communication is deemed to have been received on the day it is so delivered [Sec.3(2)].

Default of a party (Section 25)

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Section 25 of the Act provides that subject to an agreement between the parties, where,without showing sufficient cause, the claimant falls to communicate his statement of claim

within the agreed period, the arbitration proceedings shall be terminated by the arbitrator.Similarly where the respondent falls to communicate his statement of defence within the

predetermined period, the arbitrator shall continue the proceedings without treating such

failure, in itself, as an admission of the claimant¶s allegations. Further, when a party fails to

appear at an oral hearing or to produce documentary evidence the arbitrator can proceed and pronounce the award on the basis of evidence otherwise available.

Expert appointed by arbitral tribunal (Section 26)

Section 26(1) of the Act provides for appointment of experts subject to agreement between

parties. It also provides for submission of relevant information to experts by the parties. The

expert should also make himself available for cross-examination by parties, if necessary.

Court assistance in taking evidence (Section 27)

Application:

The arbitral tribunal, or a party with the approval of the arbitral tribunal, may apply to the

Court for assistance in taking evidence. [Sec. 27(1)].

Particulars of application: The application shall specify ±

a) The names and addresses of the parties and the arbitrators;

b) The general nature of the claim and the relief sought;

c) The evidence to be obtained, in particular ±

i) The name and address of any person to be heard as witness or expert witness and

a statement of the subject-matter of the testimony required;

ii) The description of any document to be produced or property to be inspected.

[Sec.27(2)].

Order of C ourt . The Court may, within its competence and according to its rules on taking

evidence, execute the request by ordering that the evidence be provided directly to the arbitral

tribunal. Further, the Court may, while making an order issue the same processes to witnesses

as it may issue in suits tried before it.

Persons failing to attend in accordance with such process, or making any other default, or

refusing to give their evidence, or guilty of any contempt to the arbitral tribunal during the

conduct of arbitral proceedings, shall be subject to the like disadvantages, penalties and

punishments by order the Court on the representation of the arbitral tribunal as they would

incur for the like offences in suits tried before the Court.

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In this Section the expression ³Processes´ includes summonses and commissions for theexamination of witnesses and summonses to produce documents.

It may be noted that the arbitral tribunal does not have coercive power to issue processes to

witnesses and other production of documents in the possession of a third party.

Rules applicable to substance of dispute (Section 28)

In an arbitration other than an international commercial arbitration, the arbitral tribunal shall

decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India. Further, the arbitral tribunal shall decide exaeguo et bono (according

to equity and conscience) or as amiable compositeur) (authorized to abate something of thestrictness of the law in favour of natural equity) only if the parties have expressed authorized

it to do so.

In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract andshall take into account the usages of the trade applicable to the transactions.

Decisions making by Panel of Arbitrators (Section 29)

Unless otherwise agreed by the parties, in arbitral proceedings with more than one arbitrator,

any decision of the arbitral natural shall be made by a majority of all its members.

However, if authorisd by the parties or all the members of the arbitral tribunal, questions of

procedure may be decided by the presiding arbitrator.

Settlement (Section 30)

An arbitral tribunal may encourage settlement of the dispute, in spite of an arbitration

agreement. It may also, with the agreement of the parties, use mediation, conciliation or other procedures at any time during the arbitral proceedings to encourage settlement. [Sec.30(1)].

If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall

terminate the proceedings and, if requested by the parties and not objected to by the arbitral

tribunal, record the settlement in the form of an arbitral award on agreed terms. [Sec.30(2)].

An arbitral award on agreed terms shall be made in accordance with Section 31 and shall

state that it is an arbitral award. [Sec. 30(3)].

An arbitral award on agreed terms shall have the same status and effect as any other arbitral

award on the substance of the dispute. [Sec. 30(4)].

Section 30 of the Act allows arbitral tribunal to resort to mediation, conciliation or other

procedures for settlement of the disputes, during the arbitration proceedings. The conciliation

as envisaged in this section is different from the conciliation that has been provided under

sections 61-81 of the Act. The conciliation under Part III (Sections 61-81) is separate and

independent proceedings as against informed and flexible proceedings under this section.

Termination of Proceedings (Section 32)

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The arbitral proceedings shall be terminated by the final arbitral award. [Sec. 32(1)]. It shallalso be terminated by an order of the arbitral tribunal where ±

a) The claimant withdraws his claim, unless the respondent objects to the order and the

arbitral tribunal recognizes a legitimate interest on his part in obtaining a final settlement

of the dispute.

b) The parties agree on the termination of the proceedings, or

c) The arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible. [Sec. 32(2)]

The mandate of the arbitral tribunal shall terminate the termination of the arbitral proceedings

[Sec.32(3)].

Award

Award means an arbitral award. It is a final decision or judgement of the arbitral tribunal on

all matters referred to it. An award in order to be valid must be final, certain and must decide

all the matters referred to. An award by the arbitrator is as binding in its nature as the

judgement of a court.

Arbitral award includes an interim award

There are two types of decisions to be made by the arbitral tribunal i.e. decision on the meritsof the dispute and decision on questions of procedure. Decision on merits of dispute is to be

made by the, majority of members of the arbitral tribunal but question of procedure can bedecided by the presiding arbitrator, if authorised by the parties or all members of the arbitral

tribunal. In the absence of such authorisation by the parties or other members of the tribunal,

the decision on question of procedure is also to be made by majority of members of thearbitral tribunal. In the absence of such authorisation by the parties or other members of thetribunal, the decision on question of procedure is also to be made by majority of members of

the arbitral tribunal. The presiding arbitrator has not been given any special power and he acts

like any other arbitrator. All arbitrators have been given equal power irrespective of mode of

appointment.

Essentials of an Arbitral Award

Section 31 deals with the form and contents of the arbitral award. The provisions of Section

31 are discussed in the form of essentials which are as under:

1. An arbitration agreement is required to be in writing. Similarly, a reference toarbitration and award is also required to be made in writing. The arbitral award is

required to be made on stamp paper of prescribed value. An oral decision is not anaward under the law.

2. The award is to be signed by the members of the arbitral tribunal. However, the

signatures of majority of all the members of the tribunal are sufficient if the reason for any omitted signature is stated.

3. Unless the agreement provides otherwise, the arbitrator must give reasons for theaward. Thus, the making of an award is a rational process which is accentuated by

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recording the reasons. However, there are two exceptions where award withoutreasons is valid i.e.

(a) Where the arbitration agreement expressly provides that no reasons are to

be given, or

(b) Where the award has been under section 30 of the new Act i.e. where the parties settled the dispute and the arbitral tribunal has recorded the settlement in

the form of an arbitral award on agreed terms.

4. The award should be dated i.e. the date of the making of the award should be

mentioned in the award.

5. The arbitral tribunal shall state the place of arbitration in the award.

6. The arbitral tribunal may include in the sum for which award is made, interest upto the date of award and also a direction regarding future interest. The rate of interest

shall be eighteen per cent.

7. The award may also include decisions and directions of the arbitrator regarding

the cost of the arbitration.

8. After the award is made, a signed copy should be delivered to each party for appropriate action.

9. The arbitral tribunal may, at any time during the arbitral proceedings, make an

interim arbitral award on any matter with respect to which it may make a final arbitralaward.

Finality of Arbitral Awards (S

ection 35)

An arbitral award shall be final and binding on the parties and persons claiming under them

respectively. Now, under the new Act, by virtue of section 35 of the Act, the award made by

the Arbitrator shall be final and binding on the parties itself and shall be decree without being

made a decree by the court.

Conciliation (Section 61 to 81)

In conciliation proceedings, there is no agreement for arbitration. In fact, conciliation can be

done even if there is arbitration agreement. The conciliator only brings parties together and

tries to solve the dispute using his good offices. The conciliator has no authority to give anyaward. He only helps parties in arriving at a mutually accepted settlement. After such

agreement they may draw and sign a written settlement agreement. It will be signed by the

conciliator. However after the settlement agreement is signed by both the parties and the

conciliator, it has the same status and effect as if it is an arbitral award. Conciliation is the

amicable settlement of disputes between the parties, with the help of a conciliator.

Conciliation is a less frequently used form of ADR, and can be described as similar tomediation. The Conciliator¶s role is to guide the parties to a settlement.

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The parties must decide in advance whether they will be bound by the Conciliators

recommendations for settlement.

The parties generally share equally in the cost of the conciliation.

Offer for Conciliation: The conciliation proceedings can start when one of the parties makes

a written request to other to conciliate, briefly identifying the dispute. The conciliation canstart only if other party accepts in writing the invitation to conciliate. Unless there is written

acceptance, conciliation cannot commence. If the other party does not reply within 30 days,the offer for conciliation can be treated as rejected [Section 62]. All matters of a civil nature

or breach of contract or disputes of movable or immovable property can be referred toconciliation. However, matters of criminal nature, illegal transactions, matrimonial matters

like divorce suit etc. cannot be referred to conciliation.

The new Act has added new Chapter containing sections from 61 to 81 which deal withConciliation proceedings to resolve the disputes. The New Act provides a detailed statutory

framework for the conduct of independent conciliation proceedings outside the court. It also

encourages the arbitral tribunals to use mediation, conciliation or other Alternative Dispute

Resolution (ADR) procedure during the arbitral proceedings to encourage settlement of

disputes. It is based on the Conciliation Rules adopted by the U NCITRAL in 1980, whichwere conceived primarily in the context of dispute resolution in international commercial

relations.

Conciliation is an informal process in which the conciliator (the third party) tries to bring thedisputants to agreement. He does this by lowering tensions, improving communications,

exploring potential solutions and bringing about a negotiated settlement.

Conciliation is a philanthropic concept of resolving disputes through mediation and cannot be

reduced to any specific definition. The dispute should arise within legal relationship whether

contractual or not and to all proceedings relating thereto, but excludes all those disputeswhich are not required to be submitted to conciliation by virtue of any other law for the time

being in enforce.

The difference between conciliation and arbitration is that in conciliation the attitude is ³win-

win´ as against the attitude of ³win-lose´ in case of arbitration.

Conciliator tries to bring the parties together so that they can discuss their disputes andresolve and hence there is no award as such from the conciliator, whereas in the case of

arbitrator, parties are required to give their own logic and arguments and after hearing boththe parties the arbitrator gives the award.

Role of the conciliator is difficult than that of arbitrators and hence the conciliator should be aman of integrity, trust, confidence and above board so that parties should have total

confidence in his impartiality.

Conciliation is optional at present in the Act. But incase parties have agreed to resolve thedisputes through Conciliation, they have to follow the mandatory provisions contained in

sections 61 to 81. These sections provide application and scope, commencement of conciliation proceedings, number of conciliators and their appointment, procedures for

conducting the conciliation proceedings, roles of the conciliators, etc.

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Commencement of Conciliation proceedings (Section 62)

The party initiating conciliation shall send to the other party a written invitation to conciliateunder this Part, briefly identifying the subject of the dispute. [Sec. 62(1)].

Conciliation proceedings shall commence when the other party accepts in writing the

invitation to conciliate. [Sec. 62(2)].

If the other party rejects the invitation, there will be no conciliation proceedings. [Sec. 62(3)]

Where the party initiating conciliation does not receive a reply within thirty days from the

date on which he sends the invitation, or within such other period of time as specified in theinvitation, he may elect to treat this as a rejection of the invitation to conciliate and if he so

elects, he shall inform in writing the other party accordingly. [Sec. 62(4)].

Number of Conciliators (Section 63)

There shall be one conciliator unless the parties agree that there shall be two or three

conciliators. Where there is more than one conciliator, they ought, as a general rule, to act

jointly.

Appointment of Conciliators (Section 64)

In conciliation proceedings with one conciliators, the parties may agree on the name of a sole

conciliator. In conciliation proceedings with two conciliators, each party may appoint one

conciliator. In conciliation proceedings with three conciliators, each party may appoint one

conciliator and the parties may agree on the name of the third conciliator who shall act as the

presiding conciliator. [Sec.64(1)].

(2) Parties may enlist the assistance of a suitable institution or person in connection

with the appointment of conciliators, and in particular :-

(a) A party may request such an institution or person to recommend the names of

suitable individuals to act as conciliators; or

(b) The parties may agree that the appointment of one or more conciliators be

made directly by such an institution or person. However, in recommending or

appointing individuals to act as conciliator, the institution or person shall have

regard to such considerations as are likely to secure the appointment of an

Independent and impartial conciliator and, with respect to a sole or third conciliator,shall take into account the advisability of appointing a conciliator of a nationality

other than the nationalities of the parties. [Sec. 64(2)].

The conciliator is not bound by the Code of Civil Procedure, 1908, or the Indian

Evidence Act, 1872. (Section 66).

Submission of statement to Conciliator (Section 65)

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The conciliator, upon his appointment, may request each party to submit to him a brief written statement describing the general nature of the dispute and the points at issue. Each

party shall send a copy of such statement to the other party. [Sec.65(1)].

The conciliator may request each party to submit to him a further written statement of his

position and the facts and grounds in support thereof, supplemented by any documents and

other evidence that such party deems appropriate. The party shall send a copy of suchstatement, documents and other evidence to the other party. [Sec. 65(2)].

At any stage of the conciliation proceedings the conciliator may request a party to submit to

him such additional information as he deems appropriate. [Sec. 65(3)].

Role of Conciliator (Section 67)

The conciliator shall assist the parties in an independent and impartial manner in their attempt

to reach an amicable settlement of their dispute. [Sec. 67(1)].

The conciliator shall be guided by principles of objectivity, fairness and justice, giving

consideration, to among other things, the rights and obligations of the parties, the usages of

the trade concerned and the circumstances surrounding the dispute, including any previous

business practices between the parties. [Sec. 67(2)].

The conciliator may conduct the conciliation proceedings in such a manner as he considersappropriate, taking into account the circumstances of the case, the wishes the parties may

express, including any request by a party that the conciliator hear oral statements, and, theneed for a speedy statement of the dispute. [Sec. 67(3)].

The conciliator may, at any stage of the conciliation proceedings, make proposals for a

settlement of the dispute. Such proposals need not be in Writing and need not be

accompanied by a statement of the reasons therefore. [Sec. 67(4)].

Administrative assistance: In order to facilitate the conduct of the conciliation proceedings,

the parties, or the conciliator with the consent of the parties, may arrange for administrative

assistance by a suitable institution or person. (Section 68)

Communication between Conciliator and parties (Section 69)

The conciliator may invite the parties to meet him or may communicate with them orally or in writing. He may meet or communicate with the parties together or with each of them

separately.

Unless the parties have agreed upon the place where meetings with the conciliator are to beheld, such place shall be determined by the conciliator, after consultation with the parties,

having regard to the circumstances of the conciliation proceedings.

Disclosure of information (Section 70)

When the conciliator receives factual information concerning the dispute from a party, he

shall disclose the substance of that to present any explanation which he considers appropriate.However, when a party gives any information to the conciliator subject to a specific condition

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that it be kept confidential, the conciliator shall not disclose that information to the other party.

Co-operation of the Parties with Conciliator (Section 71)

The parties shall in good faith co-operate with the conciliator, and in particular, shall

endeavour to comply with requests by the conciliator to submit written materials, provideevidence and attend meetings.

Suggestion by parties for settlement of dispute (Section 72)

Each party may, on his own initiative or at the invitation of the conciliator, submit to theconciliator suggestions for the settlement of the dispute.

Confidentiality (Section 75)

The confidentiality principle applies to all persons who have access to matters relating to the

conciliation proceedings. The conciliator and the parties are under obligation to keep all

matters relating to conciliation proceedings confidential, whether it has resulted in a

settlement agreement or not. The law provides that notwithstanding anything contained in

any other law, the principle of confidentiality shall be maintained by the parties as well as theconciliator except where its disclosure is necessary for parties for the implementation and

enforcement of the settlement agreement.

Settlement Agreement (Section 73)

When it appears to the conciliator that there exists an element of a settlement which may be

acceptable to the parties, he shall formulate the terms of a possible settlement and submitthem to the parties for their observations. After receiving the observation of the parties, the

conciliator may reformulate the terms of a possible settlement in the light of such

observations [Sec. 73(1)].

If the parties reach agreement on a settlement of the dispute, they may draw up and sign a

written settlement agreement [Sec. 73(2)].

When the parties sign the settlement agreement, it shall be final and binding on the partiesand persons claiming under them respectively [Sec. 73(3)].

The conciliator shall authenticate the settlement agreement and furnish a copy thereof to each

of the parties [Sec. 73(4)].

Status and effect of settlement agreement (Section 74)

A settlement agreement will have the same status and effect as if it is an arbitral award on

agreed terms. A settlement reached after the conclusion of the conciliation proceedings will

also be enforceable like a decree of court.

Termination of Conciliation Proceedings:

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The conciliation proceedings shall be terminated ±

(a) By the signing of the settlement agreement by the parties, on the date of theagreement; or

(b) By a written declaration of the conciliator, after consultation with the parties, to

the effect that further efforts at conciliation are no longer justified, on the date of thedeclaration; or

(c) By a written declaration of the parties addressed to the conciliator to the effect thatthe conciliation proceedings are terminated, on the date of the declaration; or

(d) By a written declaration of a party to the other party and the conciliator; if

appointed, to the effect that the conciliation proceedings are terminated, on the date of the declaration.

Since conciliation is a consensual proceeding, it is entirely dependent on the continued

goodwill of the parties and could be terminated by the parties at any time before the signing

of the settlement agreement.

However, parties cannot initiate any arbitral or judicial proceedings, pending conciliation

proceedings, unless it is necessary to protect the rights of the parties. (Section 77)

Costs (Section 78)

U pon termination of the conciliation proceedings, the conciliator shall fix the costs of the

conciliation and give written notice thereof to the parties. µCosts¶ means reasonable costsrelating to

(a) The fee and expenses of the conciliator and witnesses requested by the conciliator with the consent of the parties;

(b) Any expert advice requested by the conciliator with the consent of the parties;

(c) Any assistance provided pursuant to clause (b) of sub-section (2) of Section 64 and

Section 68;

(c) Any other expenses incurred in connection with the conciliation proceedings and the

settlement agreement.

The costs shall be borne equally by the parties unless the settlement agreement provides for a

different apportionment. All other expenses incurred by a party shall be borne by that party.

Deposits (Section 79)

According to Section 79, before initiating the proceedings the conciliator may ask the partiesto deposit a particular amount as he think fit as cost of proceeding. He may, during the

proceedings also ask the parties to deposit supplement amount. This section empowers theconciliator to suspend proceedings, if the amount is not deposited by the parties within 30

days.

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Similarly, conciliator is under obligation to render accounts at the termination of proceedingsand return unspent amount to the parties.

Role of Conciliator in Other Proceedings (Section 80)

Unless otherwise agreed by the parties:

(a) The conciliator shall not act as an arbitrator or as a representative or counsel of a

party in any arbitral or judicial proceeding in respect of a dispute that is the subject of

the conciliation proceedings;

(b) The conciliator shall not be presented by the parties as a witness in any arbitral or judicial proceedings.

However, the parties by agreement can do so.

Admissibility or evidence in other proceedings (Section 81)

The parties shall not rely on or introduce as evidence in arbitral or judicial proceedings,

whether or not such proceedings relate to the dispute that is the subject of the conciliation

proceedings:-

(a) View expressed or suggestions made by the other party in respect of a possible

settlement of the dispute.

(b) Admissions made by the other party in the course of the conciliation proceedings;

(c) Proposals made by the conciliator;

(d) The fact that other party had indicated his willingness to accept a proposal for settlement made by the conciliator.

Mediation ± (The Parties decide):

A dispute resolution process in which the parties freely choose to participate and any

agreements reached to settle disputes is done solely by the parties, without interference.

The Mediator is selected by the parties and once selected, the Mediator will arrange the

mediation process. The Mediator makes no decisions, instead he/she acts as a facilitator

only to assist the parties to understand the dispute, provide structured discussion and to

help the parties reach a dispute settlement agreement.

If the parties can¶t reach a settlement agreement, they are free to pursue other options. The parties generally decide in advance how they will contribute to the cost of the mediation.Mediation is a very important form of ADR, particularly if the parties wish to preserve their

relationship.

Negotiation

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Negotiation is a less structured form of ADR. The facilitator¶s role is to keep the partiestalking and bargaining. The parties may be individuals or teams. The facilitator keeps record

of party positions, and points of agreement they reach as discussions proceed.

The process can be lengthy, as in labour or sports negotiation. The facilitator will prepare a

memorandum of agreement containing all of the points agreed.

The parties can formalize the memorandum of agreement by inserting a condition that will

be binding. The parties generally share equally in the cost. On any matters unresolved, the

parties are free to pursue other options.

Summary

y Arbitration is a dispute resolution process where the opposing parties select or appoint

an individual called an Arbitrator.

y Arbitration is a settlement of dispute by the decision of one or more persons calledarbitrators.

y Arbitration may comprise a sole Arbitrator, or may be a panel of Arbitrators.

y In lines with the international trend, the Government of India has also enacted the

Arbitration and Conciliation Act, 1996.

y The foundation of arbitration is the arbitration agreement between the parties to

submit to arbitration all or certain disputes which have arisen or which may arise

between them.

y The arbitration agreement must be in writing.

y A point as to which there is no dispute cannot be referred to arbitration.

y Decision of Arbitral Tribunal is termed as µArbitral Award¶.y The arbitral award shall be in writing and signed by the members of the tribunal.

y An arbitrator is a person selected by mutual consent of the parties to settle the mattersin controversy between them.

y An arbitral tribunal may encourage settlement of the dispute, in spite of an arbitrationagreement.

MB0035- Unit 8-The Consumer Protection

Act, 1986

Unit 8-The Consumer Protection Act, 1986

Introduction

Most of the manufacturers and traders have been adopting unfair trade practices for the

purpose of promoting sale, use of supply of any goods, or for the provision of any services.

Unfair practices like false and misleading descriptions about the nature and quality of the

goods, exaggerated statements about their power and potency, false weights and

measurements etc., have been causing loss or injury to consumers of such goods and

services. A number of Acts were enacted by the Government to protect the interests of

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consumers. For instance, Prevention of Food Adulteration Act, Essential Commodities Act,

Sales of Goods Act, Standards of Weights and Measures Act, Monopolies and Restrictive

Trade Practices Act, Indian Standard Institution (certification of marks) Act etc. were passed

by the Government for the purpose of protecting the interests of the consumers. But these

Acts failed to provide the needed protection to the interests of the consumers. To provide

for better protection of the interests of the consum ers, and to save the consumers from the

evils of unfair trade practices, the Government of India enacted the Consumer Protection

Act in 1986. Most of the defects in the Act were removed by amendments to the Act in

1991, 1993 and 2001.

Objectives:


y Explain the objectives of Consumer Protection Act.

y Explain the unfair trade practices and restrictive trade practices.

y Explain the role of Consumer Disputes Redressal Agencies.

y Explain the functions of Consumer Protection Councils.

Rights of Consumer or Objectives of the Act

The Consumer Protection Act, 1986 seeks to provide for better protection of the interests of

consumers. This Act seeks, inter alia, to promote and protect the basic rights of consumers

such as:

Right of Protection to Life and Property: The Right to be protected against marketing of

goods which are hazardous to life and property.

Right to be informed: The Right to be informed about quality, quantity, potency, purity,

standard and price of goods to protect the consumers against unfair trade practices.

Right to choose: The Right to be assured, wherever possible, access to a variety of goods at

competitive prices.

Right to be heard: The Right to be heard and to be assured that consumer¶s interests will

receive due consideration at appropriate forums.

Right to Redress: The Right to seek Redressal against unfair trade practices or unscrupulous

exploitation of consumers, and

Right to Education: The Right to consumer education.

This is based on the basic rights of consumers as defined by the International Organization of Consumers (IOCU) viz. Right to safety, to information, of choice, to be heard, to redressal, to

consumer education, to healthy environment and basic needs.

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These objects are being promoted and protected by the Consumer Protection Councils

established at the Central and State level. The Act seeks to provide speedy and simple

redressal to consumer disputes. For this purpose a quasi -judicial machinery is being set up

at the District, State, and Central level. These quasi-judicial bodies will observe the

principles of natural justice. These have been empowered to give reliefs of a specific nature

and to award compensation to consumers. Penalties for non-compliance of the orders given

by the quasi-judicial bodies have also been provided. The remedies under this Act are

additional supplemental remedies.

Sec. 3 of the Consumer Protection Act states that provision of this Act shall be in addition

and not in derogation of the provisions of an y other law or Act for the time being in force.

Advantages of seeking relief under the Consumer Protection Act 1986 .

Following are the most important advantages of seeking relief before a Consumer Forum

instead of approaching Civil Court. While evaluating the comparative benefits we may also

consider the remedy available to consumers under the MRTP Act, 1969 against restrictive

trade practices and unfair trade practices:

Firstly administration of justice under the Consumer Protection Act is totally free. Consumer

Courts do not levy court fee in respect of legal proceedings.

Secondly consumer courts are expected to delivery speedy justice. Despite criticism on this

aspect some of which is justified, one agrees that Consumer Courts certainly score over the

Civil Courts.

You can be your own lawyer before consumer courts. Though appearance of lawyer is not

prohibited consumer courts do not encourage appearance of lawyers and extensive long

winded arguments.

Procedural simplicity and amiable atmosphere prevailing in consumer courts is more

encouraging to any ordinary litigant as compared to lengthy and procedure oriented civil

court proceedings.

While the provisions of Restrictive Trade Practices and Unfair trade practices cannot be

invoked against Central Govt., State Govt., and public sector organisations, the provisions

C.P. Act, 1986 can be invoked against Govt. run organisations such as railways, post office,

air line, telephone boards, electricity boards , insurance companies, banks. Further

Consumer Forum is vested with quasi criminal powers/provisions u.s. 27 of the Act.

Definitions:

Consumer: µConsumer¶ means any person who: (i) ³Buys any goods for a considerationwhich has been paid or promised, or partly paid and partly promised, or under a system of

deferred payment,´ or (ii) Hires any services for a consideration which has been paid or promised, or partly paid and partly promised, or under a system of deferred payment i.e., in

respect of hire-purchase, transactions, [Sec. 2(d)].

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Thus, consumer is a person who (i) buys any goods for a consideration, or (ii) hires or avails

any services for a consideration. In addition to buyer(s) of goods or hirer(s) or user(s) of

services, any beneficiary of such services, using the goods/services with the approval of

purchaser or hirer or user would also be a deemed a Consumer under the Act. The widow

of the deceased Policy holder was held as consumer under the Act by the State Commission

of A.P. in the case of A v s. LIC of India. The consideration may be either paid or promised, or

partly paid and partly promised or under any system of deferred payment. The Act thus

covers transactions for the supply of goods and rendering of services.

Buyer of goods for consideration: The Act, unlike the Sale of Goods Act, does not insist on

money consideration only. Transactions of transfer of services, or barter, or exchange will

come within the purview of the Act. The user of such goods, with the approval of the buyer

of goods, is also a consumer as per the Act. But according to Section 2(d) of the Act, the term

consumer does not include a person who obtains such goods for resale or for any commercial

purpose. Thus a purchaser of goods for reselling them or a purchaser of a taxi for plying the

same on hire, a purchaser of a V.C.R. for running a video library, or purchaser of machinery

for his commercial establishment is not a consumer. However, according to Consumer

Protection (Amended) Act 1993, a person who purchases tools or machinery under self-employment scheme is also a consumer.

Hirer of services for consideration: Any person who hires services for a consideration is a

consumer. Consumer, not only means merely one who hires services for consideration, but

also includes a person who is a beneficiary of such services. For example, the user of a

telephone, even though he is not himself the subscriber is a consumer under the Act. Services

include all kinds of professional services, be it the routine services of a barber or the technical

services of a highly qualified person. For example, supply of electricity has been held to be a

service and not sale of goods. The services must be of commercial nature in the sense that

they must be on payment. The payments may be in cash or kind. It may be made either at

once, or partly at once, or partly on credit. The services may be rendered wholly or partly on

credit. However, free services or personal service under a contract have been excluded fromthe protective spell of the Consumer Protection Act.

Union of India Vs. Mrs. S. Prakash: It was held that the subscriber of telephone is a

consumer as the rental charges paid to the Central Government is the consideration for the

services rendered by the Tele-Communication Department, District Manager, Telephones,

Patna Vs. Lalith Kumar Bajla (1989).

Mumbai Grahak Panchayat, Vs. Andhra Pradesh Scooters Ltd. The complainant made an

advance deposit of Rs.500 with the A.P. Scooters Ltd., booking a scooter. The complaint was

not given the refund of the deposit when he demanded the same as per his contract with

the opposite party. It was held that the complainant was a consumer, and was entitled torelief asked by him.

Ganapathi Vs. Postmaster, Karnataka State: In this case, the remitter of T.M.O.,was held to be a consumer and was awarded a compensation.

Cosmopolitan Hospitals Vs. Smt. V.P. Nairs: The National Commission held, that a patient is

a consumer and the medical assistance was a service. The Medical Officers service was not

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a personal service so as to constitute an exception to the application of the Consumer

Protection Act.

Who are not Consumers?

The following persons are not consumers as per the Consumer Protect Act.

(a) A person who purchased goods for resale.

(b) A person who purchased goods for commercial purpose

(c) A person who obtains services without consideration

(d) A person who obtains services under a contract of personal service

The National Commission, in various cases, had decided that the following are not

consumers:

y Tax-payers to municipality

y Contractors

y Applicants for jobs

y Persons who filed suits in courts, etc.

Consumer Dispute: According to Section 2(1)(e) of the Consumer Protection Act,µConsumer Dispute¶ means ³a dispute where the person against whom a complaint has been

made denies or disputes the allegations contained in the complaint´.

Defect: ³Defect´ means µany 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 has been undertaken to be performed by a person in pursuance of acontract or otherwise in relation to any service´.

From the above definition, it is clear that non-fulfilment of any of the standards or

requirements laid down by or under any law for the time being in force or as claimed by thetrader in relation to any goods would fall under the ambit of µdefect¶.

Three types of defects are envisaged (i) manufacturing defect, (ii) design defect (iii)

instruction defect.

Manufacturing defect: A product is said to have manufacturing defect when it is not built

according to specification and is consequently unsafe. For example, there may be negligence

on the part of an employee in assembling a part or tightening a nut or a latent defect (hiddenflaw) in the raw material out of which the product is made.

Design defect: It appears there is no clear standard with reference to standards prescribed by

Government or industry, if any, but courts may liberally interpret the provision to test the

complaint from the angle of reasonable care in designing a product. Some American Courts

have held that a product is defectively designed if the product is more dangerous than the

benefits that accrue on account of product design in the eyes of an ordinary consumer. For instance, under Indian conditions if a moped manufacturer does not provide a µSaree guard¶

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Who is liable to pay compensation is indeed an important question. The liability extends

from manufacturer to retailer or in other words to everyone in the chain of distribution.

Even an occasional seller may be held liable for his own negligence to the extent he should

have known or discovered that the product was dangerous to users. In most states in USA

strict liability applies only to manufacturers.

Therefore, contravention of any of the provisions of enactments such as the Drugs &

Cosmetics Act, 1950, Standards of Weights & Measures Act, 1976, the Prevention of Food

Adulteration Act, 1955, the Indian Standards Institutio n (Certification Marks) Act, 1952 etc.

or any rules framed under any such enactment or contravention of the conditions or implied

warranties under the Sale of Goods Act, 1930 in relation to any goods would also be termed

as a defect under the Act. Fault, imperfection or shortcoming in quality, quantity, potency,

purity or standard as claimed by the trader in any manner whatsoever in relation to goods is

to be determined with reference to the warrants or guarantees expressly given by a trader.

Deficiency: Deficiency means any fault, imperfection, 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 [Section 2(1)(g)].

The definition of deficiency also has two parts to it like the definition of defect pertaining

to services for which standards are prescribed by the law and services for which express

warranties or guarantees are given by the persons concerned, say, traders, etc.

Goods: Goods means goods as defined in the Sale of Goods Act, 1930 [Section 2(1)9i)]. As

per Section 2(7) of the Sale of Goods Act, 1930 µGoods¶ means every kind of movable

property other than actionable claims and money; and includes stock & 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 or sale. Therefore, most consumer products would comeunder the purview of this definition.

Manufacturer: (i) Manufacturer means a person makes or manufactures any goods or (ii)

parts thereof, or ii. does not make or manufacture any goods but assembles parts their of

made of manufactured by himself, or iii, puts or cause to be put his own mark on any goods

made or manufactured by any other manufacturer and claims such goods to be goods made

or manufactured by himself. [Sec. 20(j)].

Service: ³Service´ means Service of any description which is made available to potential

users and includes the provisions of facilities in connection with banking, financing,

insurance, transport, processing, supply of electrical or other energy, boarding or lodging or

both, house construction, entertainment, amusement or other information [Sec.2(O)].

The expression Service includes in its scope provis ion of facility in connection with

telephone provided by Telecommunication Department and houses and plots by Housing &

Development Board.

Free services and personal services under a control have been excluded from the protective

spell of the Act. Thus services must be of commercial nature in the sense that they must be

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on payment. The payment may be in cash or kind. It may be made either at once or partly at

once or partly later i.e., on credit. For services rendered without consideration the

complaint cannot be maintained in forum. For example, a medical service rendered by

Government hospitals will not come within the scope of Consumer Protection Act.

In Consumer Unity and Trust Society Vs. State of Rajasthan (1989), the National Commission

while hearing an appeal from the State of Rajasthan, held that complaints against

Government hospitals cannot entertained under the Act on the ground that a person

receiving treatment in such hospital is not a consumer as the patient does not higher the

services of the hospital; moreover, the treatment provided is free of charge, and therefore,

it does not amount to service.

In the case of Cosmopolitan Hospitals Vs. Smt. Vasantha P Nair, (1991) and Cosmopolitan

Hospitals Vs. Smt. V.P. Santha (1992) the National Commission considered at length

whether service rendered by doctors in private hospitals for consideration would come

under the purview of `service, whether the medical profession was outside the scope of the

Consumer Protection Act, and whether legal representatives of a deceased patient could file

a complaint against the hospital alleging negligence. The facts of both cases were similar

the widows of the deceased patients alleged the hospital authorities with negligence in

the diagnosis and treatment in the first case and in the performance of an operation in the

second case.

The contentions or the hospital authorities denying the allegation of negligence were that

(i) the complainants were not consumers under the Act, and therefore, were not entitled

to initiate the proceedings; and (ii) the treatment rendered in the hospital did not constitute

service under the Act. Their contention was that the Act ensured protection to consumers

against unscrupulous traders selling defect ive goods or indulging in unfair trade practice and

against deficiency in service relating to commercial transactions only and that services

rendered to a patient by a medical practitioner, which is a professional service, is of apersonal nature and contracts of personal service being outside the purview of the Act, the

services rendered in hospitals whether by government or private agencies were not

services under the Act.

The National Commission upholding the decision of the State Commission held tha t (i) the

complainants who were legal representatives of the deceased were clothed by operation of

law with the rights which the deceased had to initiate action against the hospital on the

ground of alleged deficiency in service and that those rights had not become extinguished

by his death but remained enforceable by his legal representatives. Unless such a broad and

pragmatic view is taken, the intention of the legislature in enacting the Consumer Protection

Act would be defeated. Therefore, the complainants were consumers and had full locusstandi to maintain the complaint petitions before the Forums.

(ii) The activity carried on by the hospital constituted service under the Act and did not fall

within the exempted category of service rendered under a contract of personal service.

The definition of service as given in Section 2(1)(0) of the Act mentions service of any

description made available to potential users and only exempts service rendered free of

charge or under a contract of personal service from its ambit. Restricting the scope of the

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definition to only service relating to commercial transactions would not be warranted,

given the intention of the legislature. Thus, there is no substance in the contention that

service rendered by hospitals and members of the medical profession for consideration will

not constitute service as defined in the Act because it does not relate to a commercial

transaction.

Quoting its own observations in the case of A.C. Modagi Vs. Cross Well Tailor (1991) the

National Commission reiterated that there was a distinction between contract for service

and contract of service. Personal service stemmed from a master and servant relationship

where the master can order what is to be done and how it shall be don e and under which,

an employee could be turned out of service by the master at will, and therefore, no

occasion would arise for the master to complain above the deficiency in the rendering of

service by the employee. Where the hirer of the service is not i n a position to exercise any

sort of control or supervision over the work of the person rendering the service, there

would not be any personal service. In the case of hospitals which provide treatment to

patients for payment, there could be no reason to hold that there was any element of

personal service in such arrangement. The provisions of the consumer protection act

relating to adjudication of consumer disputes and award of reliefs under Sec.14 fully applied

to disputes concerning deficiency in the se rvice rendered by hospitals and members of the

medical profession also.

T he following have been held to be services for the purpose of application of the provisions of

the Consumer P rotection Act:

Banking services, Insurance services, Railway services, Airline services, Telephone services,

Transport services, Electricity Board services, Private hospitals services, services of

intermediate board, tourist services, services proved by Universities, postal department

services, Registration department services.

The following services are held to be not covered by the Consumer Protection Act:

Services provided by Government Hospitals, Service Commission Services, service of Courts

etc.

Consumer Complaint

³Complaint´ means any allegation in writing made by a complainant that : as a result of any

unfair trade practice or restrictive trade practice, adopted by a trader, the complainant has

suffered loss or damage; the goods mentioned in the compliant suffer from one or more

defects; the services mentioned in the complainant suffer from deficiency in any respect; a

trader has charged for the goods mentioned in the complainant a price in excess of the price

fixed by or under any law for the time being in force. The complaint is to made with a view

to obtaining any relief provided by or under this Act.

Who can make a Compliant?

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A complaint in relation to any goods sold or delivered, or any service provided may be fieldwith quasi-judicial organs constituted under the Consumer Protection Act by any of the

following:

i) The consumer to whom such goods are sold or delivered or such service provided;

ii) Any recognized consumer¶s association registered under law, or

iii) The Central or any State Government, and

iv) One or more consumers on behalf of many consumers having same interest.

Note: µRecognized Consumer Association¶ means any voluntary consumer association

registered under the Companies Act, 1956 or any other law for the time being in force.

To whom the Complaint is to be made: According to the Consumer Protection

(Amendment) Act 1993, a complaint can be made in the following quasi-judicial agencies in

the following manner.

(a)where the value of goods or services and compensation, if any, claimed does not

exceed Rs. 20 lakhs, complaint is to be filed with the District Forum;

(b)Where the value of goods or services and compensation, if any, claimed exceeds Rs.20

lakhs, but does not exceed Rs.50 lakhs, complaint is to be filed with the State

Commission.

Where to file a Complaint?

A complaint should be filed in a District Forum (subject to pecuniary jurisdiction) within the

limits of whose jurisdiction all the opposite parties reside or carry on business, or

Any one of the opposite parties resides or carry on business (with the permission of District

Forum or acquiescence of the opposite party not residing there) or where the cause of

action wholly or in part arises.

How to file a Complaint?

Procedure for filing a complaint are simply and speedy.

a) No fees have been prescribed.

b) Complainant or his authorized agent can present the complaint in person.

c) Complaint can be sent by post to the appropriate Forum/Commission.

How to draft a Complaint: A complaint should contain the following information:

a) Name and description and address of the complainant.

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b) Name, description and address of the opposite party or parties.

c) The facts relating to complaint and when and where it arose.

d) Documents, if any, in support of the allegation contained in the complaint.

e) The relief which the complainant is seeking.

The complaint should be signed by the complainant or his authorized agent.

Unfair Trade Practices

The Consumer Protection Act has adopted the definition of µUnfair Trade Practices¶ as given

in the MRTP Act.

Section 36-A of the Monopolies and Restrictive Trade Practices Act, 1969, amended in 1993

explains what unfair trade practice means. Unfair trade practice methods are listed in

section 36-A. Where the methods listed in section 36-A are adopted for the purpose of

promoting the sale, use or supply of any goods, or for the provision of any services and

thereby some loss or injury is caused to the consumers of such goods or services, it is an

unfair trade practice. The practices mentioned in section 36-A are grouped into the

following five categories.

1. Misleading Advertisement and False Representation: These include:

(a) Falsely representing that the goods are of a particular standard, quality, quantity,

grade, composition, style or model.

(b) Falsely representing that the services are of a particular standard, quality or

grade

(c) Falsely representing that the re-built, second-hand, renovated, reconditioned or old goods as new goods.

(d) Representing that the goods or services have sponsorship, approval,

performance, characteristic, accessories, uses or benefits which such goods or servicesdo not have.

(e) Representing that the seller or the supplier has a sponsorship or approval or

affiliation which he does not have.

(f) Making a false or misleading representation concerning the need, for, or the

usefulness of any goods or services.

(g) Giving to the public any warranty or guarantee of the performance or length of life of a product which is not based on adequate test.

(h) Making a materially misleading representation to the public concerning the price

at which a product or like products of goods have been or are ordinarily sold.

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(i) Giving false or misleading facts disparaging the goods, services or trade of another person.

The mode of representation or statement to the public may be by any method. It will be

enough if the statement comes to the knowledge of the buyer of those goods etc. The

representation may appear on the article or on its wrapper or container or on anything on

which the article is mounted.

2. Sale offer of bargain price: This includes advertising for supply, at a bargain price, goods

or services that are not intended to be offered for supply at the price for a reasonable period

or reasonable quantities.

3. Schemes offering Gifts or Prizes: This category includes: (a) offering gifts or prizes or

other items with the intention of not providing them and conducting promotional contests; (b)the conduct of any contest, lottery or game of chances, etc.

4. Non-compliance of prescribed Standards: This category includes cases where goods are

sold for use by consumers knowing or having reason to believe that they do not comply with

the standards prescribed by some competent authority. The prescribed standard may relate to performance, composition, contents, design, construction, finishing or packing as are

necessary to prevent or reduce the risk of injury to the person using the goods.

5. Hoarding, destruction or refusal: The fifty and last category of unfair trade practices

includes cases of hoarding, destruction of goods or refusal to sell goods or services so as to

raise the cost of those or similar goods.

Ingredients of Unfair Trade practices:

(a) The trade practices must consist of any of the practices listed as above.

(b) The purpose of such trade practice must be to promote the sale, use or supply of anygoods or provision of any services.

(c) The trade practices must have caused loss or injury to the consumer whether by

Eliminating or restricting competition.

Restrictive Trade Practice

Sec. 2(nn) of the Consumer Protection Act defines ³Restrictive Trade Practice´ as any trade

practice which requires a consumer to buy, hire or avail of any goods or, as the case may be,services as a condition precedent for buying, hiring, or availing of other goods or services.´

While the ³restrictive trade practice´ covered under C.P. Act relates to tie up sales of slow

moving goods with fast moving goods, Sec.2 (0) of MRTP Act as a wider ambit which covers

all practices which prevents distort or restrict competition and obstructs free flow of goods

and services or obstruct free flow of capital and resources into production.

Restrictive Trade Practices (R TP ± under MR TP Act 1969)

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Restrictive Trade practices are those trade practices which have the effect of preventing,distorting or restricting competition in any manner and in particular acts intended to result in:

1. Obstruction of Capital and Resources into stream of production.

2. Manipulation of price or to abstract production, distribution/supply of goods or provision of

services.

3. Agreement falling within the scope of Sec.33(of the MRTP Act) which are deemed asRegistrable Agreements relating to Restrictive Trade Practices.

Consumer Disputes Redressal Agencies

For the purpose of speedy and simple settlement of µConsumer¶s disputes¶ section 9 of the

Act, 1986 provides for the establishment of the following three Consumer Disputes RedressalAgencies.

A Consumer Disputes Redressal Forum to be known as the District Forum established by

the State Government in each district of the State of notification.

A Consumer Disputes Redressal Commission to be known as State Commission established

by the State Government, with the prior approval of the Central Government, in the State

by notification and

A National Consumer Disputes Redressal Commission to be known as National

Commission established by the Central Government by Notification.

Thus, the Act envisages a hierarchy of three Redressal Forums: (1) District Forums, (2) State

Commission and (3) National Commission. These are quasi-judicial bodies.

District Forum:

District Forum means a Consumer Disputes Redressal Forum, established under Section 9 (2)

of the Consumer Protection Act, 1986. This is established by the State Government in each

district of the State by means of a notification. If reasonable and necessary, the State

Government can establish more than one district forum in a district. As per the amended Act,1993, permission of the Central Government is not necessary for establishing a district forum.

Composition of the District Forum: According to section 10 of the Act, each district forum

shall consist of : (i) a person who is, or has been or is qualified to be a District Judge shall be

nominated by the State Government and shall be the President of the Forum, (ii) a person of

eminence in the field of education, trade, or commerce, law etc., and (iii) a lady social

worker.

Appointments to the State Commission shall be made by the State Government on the

recommendation of a Selection Committee consisting of the President of the State

Committee, the Secretary-Law Department of the State and Secretary in charge of

Consumer Affairs in the state.

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Every member of the District Forum shall hold office of a term office 5 years or up to the age

of 65 years, whichever is earlier. Of course, a member may resign by giving a notice in

writing to the State Government where upon the vacancy will be filled up by the State

Government. The salary of honorarium and other allowances payable to the members and

their conditions of service may be prescribed by the State Government. A member shall not

be eligible for re -appointment.

Pecuniary and Territorial Jurisdiction of the District Forum: Section 11 provides for the

jurisdiction of the District Forum under two criteria: Pecuniary and Territorial. The district

forum enjoys jurisdiction to entertain complaints where the value of go ods or the services

and the compensation, if any, claimed, does not exceed Rs.20 lakhs. A complaint can be

filed either at the place where the opposite party resides or carry on business or at the place

where the cause of action arises. In case of action arises also at the place where the product

is sold.

In the case, Consumer Education and Research Society Vs. Canara Bank, it was held that a

banking company to be proceeded against the district forum where its branch was located.

Manner of making a Complaint:

A complaint, in relation to any goods sold or delivered, or any service period, may be filed

with a District Forum by any of the following: The consumer to whom such goods are sold or

delivered, or such services provided, any recognised consumer association, whether the

consumer is a member of such association or not, the Central or the State Governments,

any consumer of consumers on behalf of a number of consumers.

Procedure on Receipt of Complaint: The District Form has to observe the following

procedure as detailed in section 13 of the Act.

i) The first step on receiving a complaint is to refer a copy of the complaint to the

opposite party directing him to give his version of the case within a period of 30 days.

When the opposite party denies or disputes the allegations contained in the complaint,

or omits or fails to take any action to represent his case within the 30 days or extended

period of 15 days, a dispute arises, the District Form shall proceed to settle the

consumer dispute. After these preliminary steps, the Forum has to follow the procedure prescribed in section 13 of the Act.

ii) The complaint may relate to the defects of goods. The term µdefect¶ means any

fault, imperfection or short coming in the quality, quantity, purity, or standard whichis required to be maintained by any law in force or which the trader claimed that his

goods possessed. If the alleged defect in the goods is such that his goods possessed. If the alleged defect in the goods is such that it cannot be determined without proper

analysis or test of the goods, the Forum should obtain a sample of goods from thecomplainant. The sample of goods should be protected by a seal. The sample of goods

received must be sent to µappropriate laboratory¶ along with a direction that the goods

should be tested or analysed for the alleged defect. The time allowed for the

laboratory is 45 days.

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The Direct Form/State Commission may require the complainant to deposit with itsuch amount as may be specified towards payment of fees to the µappropriate

laboratory¶ for the purpose of carrying out the necessary analysis or tests [Section13(1)(d)]. The amount so deposited shall be remitted by them to the appropriate

laboratory to enable it to carry out the analysis and send the report.

iii) On receipt of the report from the laboratory, the Forum should send a copy of itto the opposite party along with such remarks, as the District Forum may feel

necessary.

iv) If any party disputes the correctness of the report or the correctness of the

methods of analysis, the Form shall require him to submit his objections in writing.

v) Before issuing any final order in the matter, the Forum will provide anopportunity to both parties to present their views about the report. The Forum shall

proceed to settle the dispute on the basis of allegations, counter allegations and theevidence produced by the parties in support of their case. Where the opposition party

does nothing in response to the complaint, the matter may be decided on the basis of

the evidence produced by the complainant. The proceedings of the Forum incompliance with the procedure laid down by the Act are to be regarded as valid. The

validity cannot be questioned on the ground that the principles of natural justice have

not been complied with.

Limitation Period for filing of Complaint: Section 24A provides that the District Forum,

the State Commission or the National Commission shall not admit a complaint unless it is

filed within one year from the date on which the cause of action has arisen. However, where

the complainant satisfies the Forum/Commission as the case may be, that he had sufficient

cause for not filling the complaint within one year, such complaint may be entertained by it

after recording the reasons for condoning the delay.

Administrative Control:

Section 24-B provides that the National Commission shall have administrative control over

all the State Commission in the matter of calling for periodical returns regarding the

institution, pendency and disposal of cases, issuance of instructions regarding adopting of

uniform procedure in hearing of matters, serving copies of documents, translation of

judgements etc. and generally over-seeing the functioning of the State Commission/ District

fora to ensure that the objects and purposes of the Act are served in the best possible manner.

The State Commission shall have administrative control over all the District fora within its

jurisdiction in all the above -referred matters.

Findings of the Forum: If the Forum is convinced that the goods are really defective, or that

the complaint about the service is proved, the Forum shall have to order the opposite party to

do one or more of the following things.

- To remove the defect pointed out by the laboratory from the goods in question.

- To replace the goods with new goods of a similar description, which should be free

from any defect.

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1. The summoning and enforcing the attendance of any defendant or witness and examining

the witness on oath.

2. The discovery and production of any document or other material object producible as

evidence.

3. The reception of evidence on affidavits.

4. The requisitioning of the report of the concerned analysis or test from the appropriate

laboratory or other relevant source.5. Issuing of ay commission for the examination of any witness.

6. dismiss a complaint which appears to have been filed frivolously or with a view to cause

vexation, order the complainant to make payment of cost, not exceeding Rs.10,000 to the

(under the Sec.26 of the Act) opposite party.

7. The authorized officer may seize such books, papers, documents or commodities as are

required for the purpose of this Act.

8. The Officer has a right to exercise power of entry and search of any premises of the opposite

party.

Isaac Mathew Vs. Maruti Udyog Ltd.: A car which was damaged and was subsequentlyrepaired and supplied as new car was ordered to be replaced and some compensation for

inconvenience was also allowed.

Kailash Kumari Vs. Narandra Electronics: A defective television was orders to be

replaced along with compensation.

Vinod Seth Vs. Rathan Road Lines: The carrier was held liable for loss of goods and for mental agony.

Bnany Vs. Shenoy, K .S.R .T.C. Karnataka: The passenger who could not be conveyed to

his destination owing to road obstruction was allowed to recover from the bus operators histicket money to and from.

State Commission

State Commission is a ³Consumer Disputes Redressal Commission: established by the State

Government with the prior approval of the Central Government, in the State notification

under Section 9(b) of the Consumer Protection Act.

Composition of the State Commission: According to section 16(1) of the Act, each State

Commission shall consist of the following:

- A person who is or has been a judge of High Court shall be appointed, on the

recommendation of a Selection Committee, by the State Government and shall be its president.

- Two other members, who shall be persons of ability, integrity, and standing. They

shall 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 such members shall be a woman.

The provision to this clause states that every appointment made under this clause shall be

made by the State Government on the recommendation of a Selection Committee

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consisting of the President of the State Commission, Secretary Law Department of the State

and Secretary in charge of Consumer Affairs in the State.

Under Section 16(2), the State Government has the power to decide on the salary or

honorarium and other allowances payable to the members of the State Commission and theother terms and conditions of service.

Every member of the State Commission shall hold office for a term of 5 years or up to the

age of 67 years, whichever is earlier and shall not be eligible for re-appointment.

Pecuniary and Territorial Jurisdiction: According to Section 17 of the Act, subject to theother provision of this Act, the State Commission shall have jurisdiction in the following

matters.

1. To entertain complaints where the value of the goods or services and compensation, if any,

claimed exceeds Rs. 20 lakhs, but does not exceed Rs.50 lakhs.

2. To entertain appeal against the orders of any District Forum within the State, and

3. To call for the records and pass appropriate orders in any consumer dispute which is

pending before and has been decided by any District Forum within the state.

Therefore, the State Commissions jurisdiction may be original, appellate or revisional. In

respect of (3) above, the State Commission may reverse the orders passed by the District

Forum on any question of fact or law or correct or error of fact of law made by the Forum.

In respect of the original jurisdiction of the State Commission Section 17 only prescribes

pecuniary limits. No territorial limits have been fixed for the exercise of original jurisdiction

under the Act though the provision contained in Section 11(2) of the Act apply matis

mutandis in the matter of entertaining original complaints by the State Commission has was

held National Commission of Indian Airlines Vs. Consumer Education and Research Society

(1992). Territorial jurisdiction of the State Co mmission, therefore, extends to the territoriallimit of the State.

In the exercise of its appellate jurisdiction, the State Commission may entertain appeals only

against the orders of any District Forum with the State. Similar condition also applies in

respect of the State Commissions power to revise orders of the District Forum - only orders

of the District Forum within the State may be subject to revision by the State Commission.

Procedure applicable to State Commission: The procedure prescribed for the working of District Forums by Sections 12, 14 and rules framed under these sections, with suitable

modifications, is also applicable to State Commission.

Findings of the State Commission: According to Section 13 of the Act, if the State

Commission is convinced that the goods are really defective or that the compliant about the

service is proved the State Commission shall issue an order to the opposite party to take one

or more of the following things:

1. To remove the defect pointed out by the appropriate laboratory from the goods in question.

2. To replace the goods with new goods of similar description which shall be free from any

defect.

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3. To return to the complainant the price of goods or the service charges paid by the

complainant.

4. To pay such amount as may be awarded by it as compensation to the negligence of the

opposite party.

Appeal: Any person aggrieved by an order made by the State Commission may prefer an

appeal against such order to the National Commission within a period of 30 days from thedate of the order. The appeal must be made in such form and manner as may be prescribed.

National Commission may, however, entertain an appeal after the expiry of the said period of

30 days if it is satisfied that there was sufficient cause for not filing it within that period.

Where no appeal has been preferred, the order of the state commission shall be final.However, the order of State Commission on appeal made against the order of a District

Forum shall not be entertained by the National Commission.

Enforcement of Orders: The orders of a State Commission are enforceable in the manner of

an order or decree made by a Civil Court in a civil suit. If the State Commission is not able to

execute its order, it may forward the same to the civil court for execution.

Penalties: Every trader or a person against whom complaint is made is bound to comply withthe order of the State Commission. If a trader fails comply with the order, he shall be

punishable as under:

- With imprisonment for a minimum period of one month and maximum of 3 years; or

- With minimum fine of Rs.2000 and maximum of Rs.10,000 or

- Both with imprisonment and fine as stated above.

National Commission:

In exercise of the powers conferred under sec 9(c) of The Consumers Protection Act, the

Central Government established a ³National Consumer Disputes Redressal Commission´ to be known as the µ National Commission¶ by notification.

Composition of the National Commission: According to section 20(1) of the Act, the National

Commission shall consist of the following:

(a) A person who is or has been a judge of the Supreme Court shall be appointed by theCentral Government in consultation with the Chief Justice of India. He shall be its

president.

(b) Four other members shall be person of ability, integrity and standing. They shallhave adequate experience of or have shown capacity in dealing with problems relating to

economics, law, commerce, accountancy, industry, public affairs or administration. One

of them shall be a woman. The Selection Committee shall consist 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 incharge of consumers Affairs in the

Government of India. A sitting judge of the Supreme Court can be appointed only after

consulting the Chief Justice of the Supreme Court. Every member of the National

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A. Refer a copy of the complaint to the opposite party directing him to give his versionof the case within a period of 30 days or such extended period not exceeding 15 days.

B. Where the opposite party, on receipt of a complaint copy, denies or disputes the

allegation contained in the complaint, the omits or fails to take any action to represent his

case within the time given by the National Commission, the National Commission shall

proceed to settle the consumer dispute in the manner provided by the Act.

C. If the complaint relates to some defects in the goods, which cannot be determined

without proper analysis or test of the goods, the National Commission shall obtain a

sample of the goods from the complainant and refer the sample to the appropriate

laboratory for analysis or test.

D. The appropriate laboratory has to analyse or test the sample received to find outwhether such goods suffer from any defect alleged in the complaint, within 45 days of the

receipt of the reference or with such extended period as may be grated by theCommission the laboratory shall submit its report to the National Commission.

E. On receipt of the report from the appropriate laboratory, the National Commissionshall forward a copy of the report along with such remarks as the National Commission

may feel appropriate to the opposite party.

F. If any of the parties dispute the correctness of the findings of the laboratory, or

disputes the correctness of the methods of analysis or test adopted by the laboratory, the

National Commission shall require the opposite party or the complaint to state in writing

his objections in regard to the report made by the laboratory.

G. The National Commission, before issuing any final order in the matter, will provide

an opportunity to both parties to present their views about the report of the laboratory. Onthe date of hearing, it shall be obligatory on the parties or their agents to appear before the

National Commission. Where the complainant or his agent fails to appear before the

National Commission on the date of hearing, the National Commission may in its

discretion, either dismiss the complaint for default or decide its merits. Where the

opposite party or its agent fails to appear on the date of hearing, the National Commission

may decide the complaint ex parte.

Findings of the National Commission: If the National Commission is convinced that the

goods were really defective or that the complaint about the service is proved, it shall order the

opposite party to do one or more of the following things:

- To remove the defect pointed out by the appropriate laboratory from the goods.

- To replace the goods with new goods of a similar description, which shall be free from

any defect.

- To return to the complainant the price of the goods or the charges for services paid by

the complainant.

- To pay to the complainant a sum of money by way of compensation for any loss or injury suffered by the consumer due to the negligence of the opposite party.

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- To remove the defects or deficiencies in the services in question.

- To discontinue the unfair trade practice or the restrictive trade practice or not to repeatthem.¶

- Not to offer the hazardous goods for sale.

- To withdraw the hazardous goods from being offered for sale.

- To provide for adequate costs to parties.

Appeal: An appeal against the orders of the National Commission can lie to the SupremeCourt. An appeal to the Supreme Court can be made within a period of 30 days from the date

of the order of National Commission. The Supreme Court may permit an appeal even after the expiry of the prescribed period if there was a sufficient cause for not being able to file an

appeal in time.

Finality of the Orders: Where no appeal has been filed against the order of the National

commission, the same shall be final.

Enforcement of Orders: Every order made by the National Commission may be enforced in

the same manner as a decree or order made by a Civil Court.

Penalties: Every trader or a person against whom complaint is made is bound to comply with

the order of the National Commission. If a trader or a person fails to comply with the order heshall be punishable.

- With imprisonment for a minimum period of one month and maximum of 3 years, or

-W

ith minimum fine of Rs.2000 and maximum of Rs.10,000 or

- Both, (with imprisonment and fine as stated above)

According to Section 19 of the Consumers Protection Act, a person aggrieved by an order of

the State Commission can prefer an appeal against such order to the National Commission

within 30 days from the date of the order in such form and manner as may be prescribed.

The procedure for hearing the appeal is laid down by the Consumer Protection Rules, 1987.

Procedure for hearing an appeal

1. A Memorandum shall be presented by the appellant or his agent to the National

Commission in person or be sent by registered post to the Commission.

2. The Memorandum shall be in legible hand writing, preferably typed. The

memorandum shall include grounds of appeal without any argument or narrative. The

grounds must be numbered consecutively.

3. The Memorandum shall be accompanied by a certified copy of the order the State

Commission appealed against. It shall also be accompanied by any of the documents as

may be required to support grounds of objection stated in the Memorandum.

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4. The appellant shall submit six copies of the memorandum to the Commission for office use.

5. On the date of hearing, all the parties or agents must appear before the National

Commission.

6. The appellant shall not, except by leave of the National Commission, urge or beheard in support of any ground of objection not set forth in the Memorandum but the

National Commission, in deciding the appeal, may not confine to the grounds of objection

set forth in the Memorandum.

Provided that the Commission shall not rest its decision on any other ground than thosespecified in the Memorandum unless the party who may be affected thereby, has been

given an opportunity of being heard by the National Commission.

7. The National commission may, on such terms as it deems fit and at any stage of the proceedings, adjourn the hearing of the appeal, but not more than one adjournment shall

ordinarily be given and the appeal should be decided, as far as possible, within 90 days

from the first date of hearing.

8. The order of the National Commission shall be communicated to the parties

concerned free of cost.

Appeal: An appeal to the Supreme Court, against the order of the National Commission in

case of an appeal to it, cannot be made as per law.

An appeal lies to the Supreme Court from an order passed by the National Commission

Order XX(F) of the Supreme Court Rules, 1966 provides the following procedure for filing of

appeals to the Supreme Court:

1. Subject to the provisions of Section 4,5, and 12 of the Limitation Act, 1963, the

petition of appeal from the order of the National Commission shall be presented by anaggrieved person within 30 days from the date of the order sought to be appealed against.

However, in computing the said period of 30 days, the time required for obtaining a copyof such order shall be excluded.

2. Petition of appeal shall recite succinctly and clearly all the relevant facts leading upto the order from which appeal is sought. The appeal petition shall also set forth in brief,

objections to the order appealed from and other grounds relied upon in support of theappeal. The petition shall further state the date of the order appealed from as well as the

date on which it was received by the appellant.

3. The petition of appeal shall be accompanied by the following:

(i) an authenticated copy of the order in appeal.

(ii) at least 7 spare sets of petition and the papers filed with it.

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1. If the appeal is registered, it is put up for hearing ex-parte before the Court. The Court may

dismiss it either summarily or direct issue of notice to all concerned parties or make such

order as the circumstances of the case may require.

2. A fixed court fee of Rs.350 shall be paid on the petition of appeal.

For the purpose of settling the disputes, under section 13 of the Consumer Protection Act,

State Commission or National Commission shall have the same powers as are vested in theCivil Court under the Civil Procedures Code in the following matters:

1. The summoning and enforcing the attendance of any defendant and witness and examining

the witness on oath.

2. The discovery and production of any document or other material object producible as

evidence.

3. The reception of evidence of affidavits.

4. The requisition of the report of the concerned analysis or test from the appropriate

laboratory or other relevant source.

5. Issuing of any commission for the examination of any witness, and

6. Dismissal of frivolous or vexatious complaints.

Consumer Protection Rules, 1987 framed by the Central Government have given additional

powers to the National Commission and State Commission: They are:

1. The National Commission or the State Commission shall have power to require any person:

(a) to produce before and allow to be examined and kept by an officer of the

National commission or the State Commission such books, accounts documents or

commodities in the custody or under the control of the person so required described

in the requisition.

(b) to furnish to an office so specified such information as may be required for the

purpose of this Act.

2. Where during any proceedings under this Act, the National Commission of the StateCommission has any ground to believe that any book, paper, commodity or document

which may be required to be produced in such proceedings are being or may bedestroyed, mutilated, altered, falsified or secreted, it may be written order authorise any

officer to exercise the power of entry and search of any premises. Such authorised officer

may also seize such books, papers, documents or commodities as are required for the

purpose of this Act.

Consumer Protection Councils

The objects of the Consumer Protection Act are sought to be promoted and protected by

the consumer protection councils established at the Central and State levels. The consumer

protection council established at Central level is known as Central Coun cil. The consumer

protection council established at State level is known as State Council.

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Central Council

The Central Government has constituted a Central Protection Council by notification with

effect from 1-6-1987. As per the Consumer Protection Rules t he Central Council consists of

150 members. They are:

1. The Minister-in-charge of Department of Civil Supplies in the Central Government. He shall

be the Chairman of the Central Council.

1. The Minister of State or Deputy Minister in the Department of Civil Supplies in the Central

Government. He shall be the Vice-Chairman of the council.

2. The Minister of Food and Supplies in States.

3. Eight Members of Parliament- Five from the Lok Sabha and three from Rajya Sabha.

4. The Commissioner of scheduled castes and scheduled tribes.

5. 10 representatives of women

6. 20 representatives of farmers, trade and industries.

7. 15 persons capable of representative consumer interests.

8. 35 representatives of the consumer organization or consumers.

9. The Secretary of the Department of Civil Supplies. He shall be the Member Secretary of theCentral Council.

Procedure of the Central Council: The Central Council shall meet as and when necessary.

At least one meeting of the council shall be held every year. The Central Council shall meet

as at such time and place as the Chairman may think fit. It shall observe such procedure inregard to the transaction of its business as may be prescribed. For the purpose of performing

its functions under the Act, the Central Council may constitute from amongst its membersnecessary working groups. Every working group shall perform such functions as are assigned

to it by the Central Council. The findings of such working groups shall be placed before theCentral Council for its consideration. The resolutions passed by the Central Council shall be

recommendatory in nature.

Objects of the Central Council: Section 6 of the Consumers Protection Act, 1986 lays down

the objects of the Central Council. The objects of the Central Council shall be to promote and

protect the right of the consumers.

1. The right to be protected against the marketing of goods which are hazardous to life and

property: For example, adulterated goods are dangerous to life as well as to property. The

consumer is assured by this Act that if he has been victimized into purchasing goods which

have injured his person or property, he will have simple, speedy and effective remedy under

the hierarchy constituted under the Act. The subject matter of dangerous goods is generally

taken care of under law of Torts. All such matters can now be taken before the authorities

constituted under the Act. It has become an established principle that a producer sending

goods into the market would be liable to the ultimate user if his person or property is

injured in the normal use of goods.

2. The right to informed about the quality, quantity, potency, purity, standard and price of

goods so as to protect consumer against unfair trade practices: This is intended to save the

consumer from unfair trade practices like false and misleading descriptions about the nature

and quality of the goods, and exaggerated statements about their power and potency. In all

cases of unfair trade practices or restrictive trade practices, the consumer would have the

option of either apply to Monopolies Commission under the Monopolies and Restrictive

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Trade Practices Act, 1969 or the Redressal Agencies constituted under the Consumer

Protection Act., viz., (a) District Forum, (b) State Commission, (c) National Commission.

3. The right to be assured, wherever, possible, access to variety of goods at competitive price:

The Central Council constituted under this Act has been charged with the responsibility or

bringing about the organization of markets and market practices in such a way that all

dealers are supplied with a variety of goods for the benefit of consumer and that the goods

with a variety are being offered at competitive prices. It is only then that the consumer willhave success to variety and will be able to enjoy the benefit of competitive prices.

4. The right to be heard and to be assured that consumers interest will receive due

consideration at appropriate Forums: The Central Council is charged with the responsibility

of assuring the consumers that they would be heard of right by the appropriate Forums and

the consumers will receive due attention and consideration from such Forums.

5. The right to seek redressal against unfair trade practices, or unscrupulous exploitation of

consumers: Three redressal agencies have been established to provide simple and speedy

redressal to consumer disputes. These agencies have been empowered to give relief of

specific nature and to award compensation to consumers. They will observe the principles of

natural justice. Their orders are final unless appealed.

6. The right to consumer education: The consumer has been given the right to education by

Sec. 6 of the Consumer Protection Act, 1986. The Central Council has been charged with theresponsibility to provide the people proper education in terms of their remedies under Act.

Peoples awareness is likely to prove a better for putting the trade on sum level of discipline

that of Governments Control.

State Council

The objects of every state council shall be the same as those of the Central Council. The

objects of every State Councils shall be to promote and protect within the state the rights of

consumers as laid in Section 6 of the Consumer Protection Act.

Section 7 provides for the establishment of State Consumer Protection Council s by any State

Government (by notification) to be known as Consumer Protection Council for (name of thestate). The State Council shall consist of a Minister-in-charge of Consumer Affairs in the

State Government who shall be its Chairman and such number of other official or non-

official members representing such interests as may be prescribed by the State

Government. The State Council shall meet as and when necessary but not less than two

meetings shall be held every year. The procedure to be observed in re gard to the

transaction of its business at such meetings shall be prescribed by the State Government.

Consumer Protection Council Vs. National Dairy Development Board: The complainant

wanted to know in what way the Dairy Board and using the imported palm oil. The board

was refusing to give the information on the ground that the disclosure was against the

public interest. Without that information the complainant was to able to make out his case.It was held that the consumer had the right to the requisite in formation.

Summary

y The Consumer Protection Act, 1986 seeks to provide for better protection of the interests of

consumers.

y The Act seeks to provide speedy and simple redressal to consumer disputes. For this purpose

a quasi-judicial machinery is being set up at the District, State, and Central level.

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y According to Section 2(1)(e) of the Consumer Protection Act, Consumer Dispute means a

dispute where the person against whom a complaint has been made denies or disputes the

allegations contained in the complaint.

y Non-fulfilment of any of the standards or requirements laid down by or under any law for

the time being in force or as claimed by the trader in relation to any goods would fall under

the ambit of defect.

y Three types of defects are: (i) manufacturing defect, (ii) design defect (iii) instruction defect.y Restrictive Trade Practice is defined as any trade practice which requires a consumer to

buy, hire or avail of any goods or, as the case may be, services as a condition precedent for

buying, hiring, or availing of other goods or services.

y For the purpose of speedy and simple settlement of Consumers disputes, section 9 of the

Act, 1986 provides for the establishment of the following three Consumer Disputes

Redressal Agencies.

- Consumer Disputes Redressal Forum

- Consumer Disputes Redressal Commission

- National Consumer Disputes Redressal Commission

MB0035- Unit 9-The Shops and

Establishments Act

Unit 9-The Shops and Establishments Act

Introduction

Legislation regulating the working and employment conditions of workers in shops and

establishments including commercial establishments, who are not covered by the Factories

Act, or Mines Act, or Plantations Labour Act, or any other enactment regulating working

conditions, has been enacted by all State Governments, except Nagaland, for their

respective States. In some States like Karnataka, J & K and Orissa, this legislation is known as

Shops and Commercial Establishments Act, and in others it is named as Shops and

Establishments Act. In pursuance of a decision taken by the Standing Labour Committee in

1950, the Government of India drafted a Bill for enacting a Central law to regulate the

working conditions of employees of shops and commercial establishments as a model for

the guidance of the State Governments, and for enactment of a similar legislation where it

did not exist. After considering the response received from the State Governments, theproposal for a Central Law for shops and establishments was dropped, because practically

all the State Governments, including some Union Territories, had already enacted such a

legislation with practically the same provisions as contained in the proposed Central Bill in

regard to working hours, rest interval, spread-over, overtime, weekly holidays, and leave

with wages. In fact, some State legislation had also additional provisions regarding casual

and sick leave, termination of service, compensation for accidents, maternity leave and

payment of wages.

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So at present the Shops and Establishments Act is a State Legislation. It is administered by

the State Governments in their respective territories. Each State Government has framed its

own rules for carrying out the purposes of this Act, and has also set up its own inspectorate

for enforcing its provisions. The following study regarding the scope and provisions of this

legislation is based on such Acts as are now in force in ten States and Union Territories, i.e.,

Assam, Bihar, Delhi, Gujarat, Jammu and Kashmir, Madhya Pradesh, Maharashtra,

Karnataka, Orissa, and West Bengal. This joint study has been attempted so that in this so -

called unorganized sector of employment, i.e., shops and establishments, both the

employers and employees should know as to what are their statutory obligations and rights.

Objectives:


y Explain the provisions relating to shops.

y Explain the provisions relating to establishments.

y Explain the obligation and rights of employers and employee.

Scope and Coverage

In all States, this Act extends to the whole of the State, and within the State it covers such

areas as the State Government may notify from time-to-time, It is applicable to all persons

employed in or about an establishment, with or without wages, including persons employed

indirectly through an agency or contractor, apprentices, clerical and other staff of a factory

who are not covered by the Factories Act. It also covers persons discharged or dismissed

whose claims have not been settled in accordance with this Act. It, however, excludes

members of the employer¶s family.

The Shops and Establishments Act, provides for the regulation of conditions of work in

shops, commercial establishments, restaurants, theatres and other establishments, and for

certain other purposes.

The Shops and Establishments Acts in the country have been State enactments. The Acts in

operation in the country include: the Acts of Tamil Nadu (1947), Assam (1948), Maharashtra

(1948), Gujarat (1948), Bihar (1953), Delhi (1954), Orissa (19 56), Madhya Pradesh (1958),

Punjab (1961), Rajasthan (1958), Haryana (1958), Kerala (1960), Karnataka (1961), Uttar

Pradesh (1962), and Goa (1973). Such Acts are also in operation in Union Territories.

Definitions:

Child: µChild¶ means a person who has not completed the age of fourteen years. [Sec.2(IA)].

Young person: µYoung person¶ means a person who is not a child and has not completed theage of eighteen years. [Sec.2(22)].

Shop: ³Shop´ means any premises where any trade or business is carried on or where

services are rendered to customers and includes offices, store-rooms, godowns and

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Besides one whole day, the State Government may by Notification require shops to be

closed at such hour in the afternoon of one weekday in every week. Every person employed

in any such notified shop(s) is to be allowed in each week an additional holiday of one -half

day. The State Government may, for this purpose fix different hours for different shops or

different classes of shops or for different areas or for different times of the year. There

should be no deduction of wages of any person employed in a shop on account of weekly

holiday (one whole day) and additional holiday (one -half day).

Provisions Applicable to Establishments other than Shops (Sections 12 -16)

Besides the above provision in Sections 7 to 11 the following provisions are also applicable.

Employment of Children and Young Persons: They are allowed to work only between 6

a.m. and 7 p.m. Young persons are not allowed to work for more than 7 hours in any day and

40 hours in any week. They are also not allowed to work overtime (Sections 17-19).

Cleanliness, Ventilation, Light and Precautions against Fire : The premises of every

establishment should be kept clean by lime washing, colour washing, painting, varnishing,

disinfecting and deodoring. Proper ventilation and sufficient lighting should also be provided

in accordance with such standards and by such methods prescribed by the Inspector.

Precautions against fire should be provided as prescribed (Sections 20-24).

Annual Holidays with Wages (Sections 25-28)

Every person employed in any establishment after 12 months of continuous service, is

entitled to annual holidays with wages for a period of 12 days, in the subsequent period of 12

months, such holidays with wages may be accumulated up to a maximum period of 24 days.

Further, he is entitled to (i) 12 days leave with wages on the ground of sickness incurred or accident sustained by him and (ii) 12 days casual leave with wages on any reasonable ground.

If a person entitled to any holidays as above is discharged by his employer before he has

been allowed the holidays or he quits his employment (after having applied for he has been

refused the holidays), the employer shall pay him the amount payable in respect of such

holidays. Similarly, if a person entitled to sick leave is discharged by his employer when he is

sick or suffering from the result of an accident, the employer should pay him the amount

payable in respect of such period of leave.

While calculating a period of 12 months continuous service the following interruptions in

service need not be considered.

i) on account of sickness, accident or authorized leave (including authorized holidays) not

exceeding 90 days in the aggregate for all three, or

ii) by a lock-out, or

iii) by a strike which is not an illegal strike, or

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h) by order of court or other competent authority,

i) any recognized provident fund or repayment of advances for such provident fund,

j) payment to cooperative societies approved or to a scheme of insurance.

Claims arising out of Deductions from Wages or Delayed Payment

In case any unauthorised deduction has been made from the wages of an employee, or any

payment of wages has been delayed, or any sum is otherwise due from the employer, theemployee or any legal practitioner or any authorised agent or any office-bearer of a registered

trade union or an Inspecting Officer may make an application to the prescribed authority for adirection. The prescribed authority is required to hear the application and he may direct the

refund of the amount deducted or payment of the delayed wages or any other sum to theemployee together with the payment of compensation not exceeding ten times the amount of

unauthorised deduction from wages, and not exceeding Rs.10 in other cases. No direction for compensation is, however, to be made in the case of delayed wages if the authority is

satisfied that the delay was due to : (i) a bona fide error or bona fide dispute as to the amount

payable to the employee; or (ii) occurrence of an emergency or existence of exceptionalcircumstances, on account of which, the person responsible for the payment of wages was

unable, though exercising reasonable diligence to make prompt payment; or (iii) failure of the

employed person to apply for or accept payment. If the authority is satisfied that it was either

malicious or vexatious, he may direct that a penalty not exceeding Rs.25 be paid to the

employer or other person responsible for the payment of wages by the person presenting the

application. The authority may deal with any numbers of separate pending applications as a

single application.

An appeal against the order of the authority or a direction given by him may be preferred to

the prescribed appellate authority, whose decision will be final.

The authorities have the power of a civil court under the Code of Civil Procedure for the

purpose of taking evidence, enforcing the attendance of witnesses and compelling the

production of documents. They are also deemed to be a civil for the purposes of the Code of

Criminal Procedure, [Sec. 28].

A legal practitioner may appear, plead or act on behalf of any party in proceedings under

the Act subject to prescribed conditions. [Sec. 28].

Dismissal, discharge and termination of employment from Service

The services of a person employed continuously for a period of not less than six months shall

not be dispensed with by and employer except for a reasonable cause and without giving such person at least one month¶s notice or wages in lieu of such notice. However, such a notice is

not necessary where the services of such a person are dispensed with on a charge of misconduct supported by satisfactory evidence recorded at an enquiry held for the purpose.

The person, however, has a right of appeal to such authority and within such time prescribed.The decision of the appellate authority is final and binding on both the employer and the

person employed.

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An employee, who has been in continuous employment for a year or more and whoseservices are dispensed with otherwise than on a charge of misconduct, is also to be paid

compensation equivalent to fifteen days average wages for every completed year of serviceand any of its part in excess of 6 months before his discharge, in addition to notice or pay in

lieu of the notice.

An employee aggrieved by his dismissal, discharge or termination of service may make awritten complaint to the prescribed authority within 90 days of the receipt of the order. The

authority may condone the delay in filing the complaint if it is satisfied that there was

sufficient cause for not making the application within the prescribed time. On the receipt of

the complaint, the authority is required to serve notice on the employer record briefly the

evidence furnished by the parties, hear them and after making necessary enquiry pass his

orders. The authority is empowered to give relief to the employee by way of reinstatement

or money compensation or both. The order of the authority is final and binding on the

employer and employee.[Sec. 26].

Inspecting Officers

The state government is empowered to appoint a Chief Inspecting Officer and Inspecting

Officers for the purposes of the Act. The Chief Inspecting Officer, in addition to exercising

the powers prescribed for him, is to exercise the powers of an Inspecting Officer throughout

the state. The District Magistrate and Sub-divisional Magistrate are also Inspecting Officers

within the limits their respective jurisdictions. The state government may also appoint other

public servants as Additional Inspecting Officers.

Subject to the Rules made by the state government, an Inspecting Officer is empowered to:

1. Enter, during prescribed hours and with necessary assistance, an establishment

2. Inspect, take extracts from any prescribed registers, records and notices required to be maintained under the Act or the Rules and seize them if he considers relevant in

respect of an offence which he thinks to have been committed;

3. Take the statement of any person which he considers necessary for carrying out the

purposes the Act; but no person is to be compelled to answer any question or give any

evidence tending incriminate himself; and

4. Exercise other prescribed powers.

The Inspecting Officer has the same powers as vested in a civil court regarding summoning,

and enforcing the attendance of, witnesses and compelling the production of documents for

the purpose of an inquiry under the Act. He is also a public servant within the meaning of

the Indian Penal Code. [Sec. 30 -31].

Penalties and Cognizance of Offences

1. An employer who contravenes any provisions of the Act or any rule or order madeunder it, if no other penalty is provided for the offence, is punishable with fine which may

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extend to Rs.250 for the first offence and to Rs.500 for every subsequent offence after thefirst conviction [Sec. 34].

2. Any person, who voluntarily obstructs an Inspecting Officer in exercise of the powers

conferred on him or any person lawfully assisting him or who fails to comply with any

lawful direction made by the Inspecting Officer is punishable with imprisonment which

may extend to 6 months or with fine which may extend to Rs.250 or with both. [Sec. 32].

3. The person, who gives a malicious or vexatious application to the prescribed

authority relating to deduction from wages or delayed payment, may be directed to pay

penalty not exceeding Rs.25 to the employer or the other person responsible for the

payment of wages. [Sec. 28(30)].

If the person contravening the provision of the Act or a rule or order made under it is a

company or partnership firm, every director, partner, manager or secretary is to be deemed

to be guilty of the contravention, unless he proves that the contravention took place

without him knowledge or that he exercised all due diligence to prevent such contravention.

[Sec.35].

No court is to take cognizance of an offence punishable under the Act, rule, or order except

on a written complaint made by Inspecting Officer or any person authorised by the State

Government within months of the date on which the offence is alleged to have been

committed. In certain cases such as annual leave with wages [Sec. 16], other kinds of leave

[Sec. 16A], notice of dismissal or discharge [Sec. 26] and claims arising out of deductions

from wages or delay in payment [Sec. 28], the Court may take cognizance of the offence

even after six months if it is satisfied that the complainant was prevented by sufficient cause

from filing the complaint within this period. No court inferior to that of Magistrate of the

first class is authorised to take cognizance or try an offence punishable under the Act [Sec.

36].

No suit, prosecution or other legal proceeding is to lie against any person for any thing done

in good faith [Sec. 37].

Other Provisions:

Maintenance of Registers and Display of Notices and others:

Employers of industrial establishments are required to maintain prescribed records and

registers and display notices in the prescribed manner. There also required to produce themfor inspection of Inspecting Officer when demanded [Sec. 33].

Obligations and Rights of Employers and Employee

Obligations of Employers

Important obligations of employers under this Act are:

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1. Get their establishment registered with the Chief Inspector or Area Inspector andintimate to him any changes in the particulars supplied to him, or if the establishment is

closed.

2. O bserve the opening and closing hours, the closed day, and religious holidays

notified by the Government.

3. Comply with the provisions regarding daily and weekly hours, rest intervals, weekly

rest, employment of children, young persons and women, leave with wages, health and

safety, overtime payment, notice for termination of service, and issue of appointment

letters to employees.

4. Comply with the provisions of the payment of wages Act 1936, Workmen¶s

Compensation Act, 1923, and Maternity Benefit Act, 1961 as made applicable by this Actto persons employed in establishments.

5. Maintain all registers and records, and submit such annual and other returns and

statements as may be required by the Government, or as provided in the rules framed

under this Act.

6. Co-operate with Inspectors in inspecting the premises, and produce all registers, and

documents that they might like to inspect to ensure compliance with the provisions of the

Act.

Right of Employees:

Most of the obligations of the employers are the rights of the employees. The latter have theright to claim benefits and privileges regarding hours of working, extra wages for overtime,

rest interval, weekly holiday, leave with wages, maternity benefits, protection against

excessive fines and deductions as provided under the Payment of W

ages Act, compensationfor employment injury under the Workmen¶s Compensation Act, gratuity and Provident Fund

if provided under this Act, Letter of Appointment, and one month¶s notice or shorter notice as

provided under the Act, for termination of service for reasons other than that of misconduct.

General Remarks

This Legislation is meant largely to improve the working and employment conditions of

white collar employees working in ships, commercial and other establishments. Although it isa State legislation, it is operated throughout the Country, as practically all States have enacted

such a legislation. This legislation is benefiting about 5.5 million persons, of whom about2.75 million are employed in shop, 1.75 million in commercial establishment, nearly 1

million in hotels, restaurants, theatres, and other places of public entertainment.

Like Factories and Mines Act it is also comprehensive legislation. In fact it is more

comprehensive as it not only regulates working hours, rest intervals, weekly holidays,

spread-over, leave with wages, health and safety, and employment of Women and Children,

but it also provides job and social security and protection of earned wages by requiring

employers to issue letter of appointment to their employees and not to terminate their

service without giving them some notice, and by applying the provisions of the Workmens

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Compensation Act, 1923, Maternity Benefit Act, and Payment of Wages Act, 1936, to the

employees of shops, commercial and other establishments.

As in the case of other legislation, the main complaint about the working of this Act is about

its inadequate implementation. This is generally attributed to inadequate strength of

Inspectors, and their small salaries and low calibre which make them vulnerable to political,

social and economic influences which the rich and influential merchants and traders are

capable of exercising in some States. The position has been made worse by entrusting

administration of this A ct to local authorities.

The working of the Act was examined by the National Commission of Labour

(Gajendragadkar Commission 1969) and the Commission recommended that the

Central Government should again consider the question of enacting Central Shops and

Establishments Act, limiting its coverage to establishments with stipulated minimum

number of employees or having a stipulated turnover. The Commission also suggested that

this Act should be administered by the Office of Labour. These recommendations of the

Commission if accepted and implemented together with the strengthening of Inspectorate,enhancement of penalties which are now far from being deterrent in many States, and

employment of right type of persons as Inspectors, may make this Act more effective and

beneficial for the workers.

Summary

y The Shops and Establishments Act, provides for the regulation of conditions of work in shops, commercial establishments, restaurants, theatres and other establishments,

and for certain other purposes.