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ASSIGNMENTS

MB0035
LEGAL ASPECTS OF BUSINESS
(3 credits)
Set I

Submitted By:
Omar Saleh Hassan Batais
Roll Number = 540811267

MBA- Marketing Management


MBA Semester III
Fall, 2009
Fall, 2009
Q.1.What are the essentials for a Valid Contract? Describe them in
details.
Ans.
“A contract is an agreement that can be enforceable by law.”
An agreement is an offer and its acceptance. An agreement which can be
enforceable by law must have some essential elements. According to Section 10 "All
agreements are contracts if they are made by the free consent of the parties competent to
contract, for a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void" As per the above section, a contract must have the
following elements.
1. Intention to create legal relationship.
2. Lawful object
3. Agreement not expressly declared void
4. Proper offer and it s acceptance
5. Free Consent
6. Capacity of parties to contract
7. Certainty of meaning.
8. Possibility of performance.
9. Lawful consideration
10. Legal formalities

Essentials of contract

Contracts come in many shapes and formats, but there are a few essentials you should
consider including. These can go a long way to stopping a problem before it starts and
preventing a small problem from becoming a big nightmare.

· Explain the product. Tell customers ahead of time what they should expect from
their purchase. For example, if you're selling windows, explain in the contract what
ambient temperature is and that condensation on or within a window is not a "defect."
Explain color variations in siding runs and roof tile lots, etc.

· Interest and legal fees. If your contract doesn't say you're going to be able to
recover interest on past due balances or your legal fees if you have to sue the
consumer, then don't expect to be able to.
· Late cancellation fees. Make sure your contract says you can allow a late
cancellation request (after the rescission period has already run) in exchange for a
reasonable fee, 10% to 20% of the purchase price, for example. If the fee isn't
reasonable, it will be considered a penalty against the consumer and unenforceable in
many courts. (Not that you should be suing on this type of issue anyway; the fee
should come out of the deposit you took at closing.)

· Punch list. Make sure your contract calls for payment of the entire balance on
substantial completion and define what that means. Then allow for a 5% to 10% hold-
back on a punch list if there are disagreements on the walkthrough after the final
installation.

· Force majeure. Force majeure clauses let you off the hook if you run into an event
beyond your control that prevents performance of the job - natural disasters or other
"Acts of God," weather problems, or the failure of third parties, such as suppliers and
subcontractors, to perform their obligations.

· Clear and full acknowledgement. Make sure that above the buyer's signature line
you have a clear, bold statement confirming that the buyer has read the entire
contract, has no questions, understands the terms, and is not relying on any oral
agreements.
Q.2 What are the rules regarding the accpetange of a proposal?
Describe them in details.

Ans. Writing a business proposal has no set rules for composition or layout. A business
proposal is meant to persuade your prospective client. So what it should do is answer all
their questions and persuade them to select you. In order for it to do so, you need to know
your client's questions, needs and expectations. Hence, the first step in writing a winning
proposal is to find all those out.

Once you have all this information with you, measure what you have to offer against that
and plan out your proposal by matching the two. If you are responding to a request for
proposal (RFP), plan your proposal according to the guidelines provided. Otherwise key
in to the client's goals, to the comments if given orally, or to the contents in a letter or e-
mail you may have received.

Now that you have everything ready, write your proposal. Although there is no "formula"
for writing a proposal, you should make sure that you are including all the information
that you should. Following are some guidelines which you must adhere to in order to
cover all aspects of a good business proposal:

1. Say who and what you are, and what is significant and distinguishing about
you/your company. Give all your/your company's background, credentials, and
achievements.
2. Be clear and specific in saying why you/your company/your product is different -
it could be skills, experiences, technology, quality, or functionality. Say how what
you have to offer will make a difference to their business and why you should be
chosen.
3. Make sure to include reference to the market size and its predicted growth path.
Describe the segment of the market you intend to pursue and what you will do to
take market share away from competitors. It is important that your client knows
that you understand the market and competition.
4. Summarize your business plan. Outline how you will take the project from the
beginning to end, highlighting anything notable about you that separates you from
competition. Make it professional and realistic with credible projections and
accurate content. Make it brief but include enough detail so your client can make
informed decisions.
5. Discuss any regulatory issue or outside factors which you think you or your
company might have to deal with during the life of the project. This is important
because it saves you from any blame that you may have to face due to some third
party involvement. It also shows that you have experience and know the pitfalls
you have to watch out for.
6. Identify the team members who will be working on the project. Provide a short
resume of each team member. This way the client will know not only the team,
but also each individual member.
7. Discuss how much money you think you will need, how it will be used, and from
where you plan to obtain it. Document all your predictions and expectations in
simple cashflow and breakeven charts.

When giving all the information given above in your business proposal, be sure to -

• Make it concise and clear. Check for spellings, grammar, and syntax.
• Make it readable and understandable - in simple, clear language that does not
contain too many technical words.
• Make it believable. Do not praise yourself so much that your client is put off, or
promise something you cannot offer.
• Give the information from the client's perspective, not yours.
• Concentrate more on the results rather than the methodology. It is the results that
your client is interested in.
• Make sure that all the information you have given is relevant to the point.
• After you have written your proposal, wait a day or two, and then read it over. Be
completely satisfied with it.

As for the layout and design of your proposal, there are no rules for this either. It all
depends on the relationship you have with your client, the nature of the request, and what
fits your needs. Also, you should use a format or design that you feel most comfortable
with. Do not go for advanced or complicated layouts that you have difficulty in
producing. The important thing to keep in mind is that your proposal should be highly
readable and information should be easy to locate. Make extensive use of graphics as
they enhance the readability of the document and convey information well. The length of
the proposal also does not matter. What counts is quality, not quantity
Q. 3 What is the difference between fraud and
misinterpretation? What do you understand by mistake?
Ans.
1. In misinterpretation the person making the false statement honestly believes it to
be true. In fraud, the false statement is made by person who knows that it is false or
he does not care to know whether it is true or false
2. There is no intention to deceive the other party when there is misinterpretation of
fact. The very purpose of fraud is to deceive the other party to the contract
3. Misinterpretation renders the contract voidable at the option of the party whose
consent was obtained by misinterpretation. In the case of fraud the contract is
voidable. It also gives rise to an independent action on tort for damages.
4. Misinterpretation as not an offence under Indian penal code and hence not
punishable. Fraud in certain cases is a punishable offence under Indian penal code.
5. Silence is not fraud except where is a duty to speak or the relation between parties
is fiduciary. Under no circumstances can silence be considered as misinterpretation.
6. The party complaining of misrepresentation cannot 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 diligence.

Unilateral mistakes

A unilateral mistake is where only one party to a contract is mistaken as to the terms or
subject-matter contained in a contract. This kind of mistake is more common than other
types of mistake. One must first distinguish between mechanical calculations and
business error when looking at unilateral mistake. For mechanical calculations, a party
may be able to set aside the contract on these grounds provided that the other party does
not try to take advantage of the mistake, or 'snatch up' the offer (involving a bargain that
one did not intend to make, betrayed by an error in arithmetic, or something like that).
This will be seen by an objective standard, or if a reasonable person would be able to
know that the mistake would not make sense to one of the parties. Unless one of the
parties 'snatched up' the one-sided offer, courts will otherwise uphold the contract.
Conversely, when a party is guilty of an error in business judgment, there is no relief.

Leading cases on unilateral mistake are Smith v. Hughes [1871] and Hartog v. Colin &
Shields [1939] 3 All E.R. 566. There are situations, such as in the contracting and
subcontracting contexts, where a subcontractor provides a bid that would not seem
reasonable in the context of industry norms. Similar to Donovan v. RRL Corp., 27 P.2d
702 (Cal. 2001), if a person sees an advertisement and there is a mistake that a person
reading the newspaper would believe to be a valid offer (not discussed here), and there is
sufficient reliance on the offer (which is foreseeable to the seller that there will be
reliance...which is why the advertisement is in the newspaper anyways) then it is unlikely
that a court will rescind the contract. In the case of Donovan, the error in the newspaper
was not the fault of the car dealer. The mistake was made on the part of the newspaper
company that printed the error. This would be more of an example of a mutual mistake.
Both the buyer (Donovan) and seller (RRL Corp.) mistakenly believed that the
advertisement was correct. As is discussed in the mutual mistake section on this page,
most likely a court will excuse each of a duty to perform the contract. Mutual mistake
theory will also discuss the factors that will determine the allocation of risk in the event
of a mutual mistake. The test to determine the allocation of risk is as follows: A
defendant should bear the risk of the mistake if: (i) the agreement allocated the risk to the
defendant; (ii) the defendant was aware of having limited knowledge with respect to the
facts to which the mistake related but treats his limited knowledge as sufficient; or (iii)
the court finds that it is reasonable under the circumstances to allocate the risk to the
defendant. Given the facts in Donovan, who is in the better position to bear the risk? The
car dealer who provides the advertisement? Or the consumer? Many jurisdictions would
claim that the car dealer has more knowledge in this regard than a consumer. A
consumer, generally, will not be aware of errors in an advertisement nearly as often as a
commercial seller of goods that is in the business of advertising their own products to the
public at large.

As any area of law, any doctrine has its exceptions. In Speckle v. Perkins, 364 N.W.2d
890 (Minn. Ct. App. 1985), there was a unilateral mistake by one of the parties. However,
the mistake should have been apparent to a reasonable person in the position of the party
who did not make the mistake. The court determined that the offer of $50,000 was, on its
face, clearly a mistake. The correct amount, as both parties were aware, was for $15,000.
The question raises, at what point will the unilateral mistake become so apparent that it
leaves unilateral mistake theory and enters into mutual mistake doctrine?

Mistake of identity

It is also possible for a contract to be void if there was a mistake in the identity of the
contracting party. In the leading English case of Lewis v Avery [1971] 3 All ER 907 Lord
Denning held that the contract can be avoided only if the plaintiff can show, that at the
time of agreement, the plaintiff believed the other party's identity was of vital importance.
A mere mistaken belief as to the credibility of the other party is not sufficient.
Shogun Finance Ltd v. Hudson (2004) is now the leading UK case on mistake as to
identity. In this case, the House of Lords stated there was a strong presumption the owner
intends to contract with the person physically present before him and only in extreme
cases would the presumption be rebutted.

Mutual mistake

A mutual mistake occurs when the parties to a contract are both mistaken but about the
same material fact within their contract. They are at cross-purposes. As such, there is no
consensus ad idem, and this overlaps with the objective theory of contract, and there is no
offer and acceptance. Hence the contract is void. Collateral mistakes will not afford the
right of rescission. A collateral mistake is one that 'does not go to the heart' of the
contract. For a mutual mistake to be void, then the item the parties are mistaken about
must be material (emphasis added). When there is a material mistake about a material
aspect of the contract, the essential purpose of the contract, there is the question of the
assumption of the risk. Who has the risk contractually? Who bears the risk by custom?
Restatement (Second) Contracts Sec. 154 deals with this scenario.
Q.4 What are the different ways in which a contract can be
discharged? Describe these ways in details.
Ans. Discharge of contract :- When a party to a contract is "discharged", the obligations
and duties of that party have been fulfilled, waived, excused, or released. The party may
be discharged by "full and exact performance" of his or her obligations, or may plead (in
litigation) that discharge resulted from the breach of material terms by the opposing
party, or failure of consideration, or other condition, excusing further performance. Note
that the OTHER party may not be equally discharged and may continue to be bound by
the terms, perhaps in proportion to the value of consideration received.

By comparison, all further obligations and legal relationship of all parties under a
contract can also be "terminated or canceled" by mutual consent, whether or not any party
has fully "discharged" its obligations, or may (under limited conditions) be rescinded or
modified in equity.

Way of Discharge of Contracts

The duties under a contract are discharged when there is a legally binding termination of
such duty by a VOLUNTARY ACT of the parties or by operation of law. Among the
ways to discharge a contractual duty are impossibility or impracticability to perform
personal services because of death or illness; or impossibility caused by the other party.

The two most significant methods of voluntary discharge are ACCORD AND
SATISFACTION and innovation. An accord is an agreement to accept some
performance other than that which was previously owed under a prior contract.
Satisfaction is the performance of the terms of that accord. Both elements must occur in
order for there to be discharge by these means.

An innovation involves the substitution of a new party while discharging one of the
original parties to a contract by agreement of all three parties. A new contract is created
with the same terms as the original one, but the parties are different.

Contractual liability may be voluntarily discharged by the agreement of the parties, by


estoppels, and by the cancellation, intentional destruction, or surrender of a contract
under seal with intent to discharge the duty.
The discharge of a contractual duty may also occur by operation of law through illegality,
merger, statutory release, such as a discharge in bankruptcy, and objective impossibility.
Merger takes place when one contract is extinguished because it is absorbed into another.

There are two types of impossibility of performance that discharge the duty of
performance under a contract. Subjective impossibility is due to the inability of the
individual promissory to perform, such as by illness or death. Objective impossibility
means that no one can render the performance. The destruction of the subject matter of
the contract, the frustration of its purpose, or supervening impossibility after the contract
is formed are types of objective impossibility. "Impracticability" because of extreme and
unreasonable difficulty, expense, injury, or loss involved is considered part of
impossibility.

Q.5 What do you understand by Discharge of Instrument? What


are the different ways in which one or more parties to a negotiable
instrument are discharged?
Ans. Discharge of the instrument :-
A negotiable instrument is said to be discharged when it becomes completely useless.
After a negotiable instrument is discharged the right 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.
In the following cases and instrument is deemed to be discharged
1. When the party primarily liable on the instrument makes the payment in due
course to the holders at or after maturity. A payment by a party who is secondarily
liable does not discharge the instrument because in that case the payer holds it to
enforce it against prior indorse 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 instrument 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 primarily party liable is liable is
discharged by material alteration in the instrument or by lapse of time is
discharged by material in the instrument or by lapse of time making the debt time
barred under the limitation act.
4. When the holder cancels the instrument within intention to release the party
primarily liable thereon from the liability, the instrument is discharge and ceases
to be negotiable.

Q.6 What do you understand by Arbitration? What are the


objectives of the Arbitration Act? What are the essentials
for Arbitration Agreement?

Ans. Arbitration, a form of alternative dispute resolution (ADR), is a legal


technique for the resolution of disputes outside the courts, wherein the parties to a
dispute refer it to one or more persons (the "arbitrators", "arbiters" or "arbitral
tribunal"), by whose decision (the "award") they agree to be bound. It is a
settlement technique in which a third party reviews the case and imposes a
decision that is legally binding for both sides. Other forms of ADR include
mediation (a form of settlement negotiation facilitated by a neutral third party)
and non-binding resolution by experts. It is more helpful, however, simply to
classify arbitration as a form of binding dispute resolution, equivalent to litigation
in the courts, and entirely distinct from the other forms of dispute resolution, such
as negotiation, mediation, or determinations by experts, which are usually non-
binding. Arbitration is most commonly used for the resolution of commercial
disputes, particularly in the context of international commercial transactions. The
use of arbitration is far more controversial in consumer and employment matters,
where arbitration is not voluntary but is instead imposed on consumers or
employees through fine-print contracts, denying individuals of their right to
access the courts.

Arbitration can be either voluntary or mandatory and can be either binding or


non-binding. Non-binding arbitration is, on the surface, similar to mediation.
However, the principal distinction is that whereas a mediator will try to help the
parties find a middle ground on which to compromise, the (non-binding) arbitrator
remains totally removed from the settlement process and will only give a
determination of liability and, if appropriate, an indication of the quantum of
damages payable.
Nature

Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator


whose decision the parties to the dispute have agreed will be final and binding.
Arbitration is not the same as:

• judicial proceedings, although in some jurisdictions, court proceedings are


sometimes referred as arbitrations
• alternative dispute resolution (or ADR)
• expert determination
• mediation

Advantages and disadvantages

Parties often seek to resolve their disputes through arbitration because of a number of
perceived potential advantages over judicial proceedings:

• when the subject matter of the dispute is highly technical, arbitrators with an
appropriate degree of expertise can be appointed (as one cannot "choose the
judge" in litigation)
• arbitration is often faster than litigation in court
• arbitration can be cheaper and more flexible for businesses
• arbitral proceedings and an arbitral award are generally non-public, and can be
made confidential
• because of the provisions of the New York Convention 1958, arbitration awards
are generally easier to enforce in other nations than court judgments
• in most legal systems, there are very limited avenues for appeal of an arbitral
award

However, some of the disadvantages of arbitration can be that:

• arbitration agreements are sometimes contained in ancillary agreements, or in


small print in other agreements, and consumers and employees sometimes do not
know in advance that they have agreed to mandatory binding pre-dispute
arbitration by purchasing a product or taking a job
• if the arbitration is mandatory and binding, the parties waive their rights to access
the courts and have a judge or jury decide the case
• in some arbitration agreements, the parties are required to pay for the arbitrators,
which adds an additional layer of legal cost that can be prohibitive, especially in
small consumer disputes
• in some arbitration agreements and systems, the recovery of attorneys' fees is
unavailable, making it difficult or impossible for consumers or employees to get
legal representation; however most arbitration codes and agreements provide for
the same relief that could be granted in court.
• if the arbitrator or the arbitration forum depends on the corporation for repeat
business, there may be an inherent incentive to rule against the consumer or
employee.
• there are very limited avenues for appeal, which means that an erroneous decision
cannot be easily overturned.
• although usually thought to be speedier, when there are multiple arbitrators on the
panel, juggling their schedules for hearing dates in long cases can lead to delays
• in some legal systems, arbitral awards have fewer enforcement remedies than
judgments; although in the United States, arbitration awards are enforced in the
same manner as court judgments and have the same effect.
• arbitrators are generally unable to enforce interlocutory measures against a party,
making it easier for a party to take steps to avoid enforcement of an award, such
as the relocation of assets offshore
• rule of applicable law is not necessarily binding on the arbitrators, although they
cannot disregard the law.
• discovery may be more limited in arbitration
• the potential to generate billings by attorneys may be less than pursuing the
dispute through trial
• unlike court judgments, arbitration awards themselves are not directly
enforceable. A party seeking to enforce an arbitration award must resort to
judicial remedies, called an action to "confirm" an award
• although grounds for attacking an arbitration award in court are limited, efforts to
confirm the award can be fiercely fought, thus necessitating huge legal expenses
that negate the perceived economic incentive to arbitrate the dispute in the first
place.

Arbitrability

By their nature, the subject matter of some disputes is not capable of arbitration. In
general, two groups of legal procedures cannot be subjected to arbitration:

• Procedures which necessarily lead to a determination which the parties to the


dispute may not enter into an agreement upon: Some court procedures lead to
judgments which bind all members of the general public, or public authorities in
their capacity as such, or third parties, or which are being conducted in the public
interest. Examples: Until relatively recently (80s), antitrust matters were not
arbitrable in the United States. Matters relating to crimes, status and family law
are generally not considered to be arbitrable, as the power of the parties to enter
into an agreement upon these matters is at least restricted. However, most other
disputes that involve private rights between two parties can be resolved using
arbitration. In some disputes, parts of claims may be arbitrable and other parts not.
For example, in a dispute over patent infringement, a determination of whether a
patent has been infringed could be adjudicated upon by an arbitration tribunal, but
the validity of a patent could not: As patents are subject to a system of public
registration, an arbitral panel would have no power to order the relevant body to
rectify any patent registration based upon its determination.
• Some legal orders exclude or restrict the possibility of arbitration for reasons of
the protection of weaker members of the public, e.g. consumers. Examples:
German law excludes disputes over the rental of living space from any form of
arbitration, while arbitration agreements with consumers are only considered valid
if they are signed by either party, and if the signed document does not bear any
other content than the arbitration agreement.

Arbitration agreement

See also: Arbitration clause

In theory, arbitration is a consensual process; a party cannot be forced to arbitrate a


dispute unless he agrees to do so. In practice, however, many fine-print arbitration
agreements are inserted in situations in which consumers and employees have no
bargaining power. Moreover, arbitration clauses are frequently placed within sealed users'
manuals within products, within lengthy click-through agreements on websites, and in
other contexts in which meaningful consent is not realistic. Such agreements are
generally divided into two types:

• agreements which provide that, if a dispute should arise, it will be resolved by


arbitration. These will generally be normal contracts, but they contain an
arbitration clause
• agreements which are signed after a dispute has arisen, agreeing that the dispute
should be resolved by arbitration (sometimes called a "submission agreement")

The former is the far more prevalent type of arbitration agreement. Sometimes, legal
significance attaches to the type of arbitration agreement. For example, in certain
Commonwealth countries, it is possible to provide that each party should bear their own
costs in a conventional arbitration clause, but not in a submission agreement.

In keeping with the informality of the arbitration process, the law is generally keen to
uphold the validity of arbitration clauses even when they lack the normal formal language
associated with legal contracts. Clauses which have been upheld include:

• "arbitration in London - English law to apply"


• "suitable arbitration clause"
• "arbitration, if any, by ICC Rules in London"

The courts have also upheld clauses which specify resolution of disputes other than in
accordance with a specific legal system. These include provision indicating:

• that the arbitrators "must not necessarily judge according to the strict law but as a
general rule ought chiefly to consider the principles of practical business"
• "internationally accepted principles of law governing contractual relations"
Agreements to refer disputes to arbitration generally have a special status in the eyes of
the law. For example, in disputes on a contract, a common defence is to plead the
contract is void and thus any claim based upon it fails. It follows that if a party
successfully claims that a contract is void, then each clause contained within the contract,
including the arbitration clause, would be void. However, in most countries, the courts
have accepted that:

1. a contract can only be declared void by a court or other tribunal; and


2. if the contract (valid or otherwise) contains an arbitration clause, then the proper
forum to determine whether the contract is void or not, is the arbitration tribunal.

Arguably, either position is potentially unfair; if a person is made to sign a contract under
duress, and the contract contains an arbitration clause highly favourable to the other
party, the dispute may still referred to that arbitration tribunal. Conversely a court may be
persuaded that the arbitration agreement itself is void having been signed under duress.
However, most courts will be reluctant to interfere with the general rule which does allow
for commercial expediency; any other solution (where one first had to go to court to
decide whether one had to go to arbitration) would be self defeating.

Applicable laws

Arbitration is subject to different laws. These may be summarized as follows:

• The law governing the arbitration agreement


• The law governing the arbitral tribunal and its proceedings (lex arbitral -
procedural law)
• The law governing the substance of the dispute
• The law governing recognition and enforcement of the award

Severability and law governing the arbitration agreement

The arbitration agreement which is part of the main contract (often referred to as
"container contract") is governed by the law which governs the main contract. An
important feature of arbitration, however, is severability - the fact that arbitration
agreement lives a life of its own and is autonomous of the main agreement. Invoking the
invalidity of the main agreement may not necessarily bring with it the invalidity of the
arbitration clause. Another feature closely tied to this is "competence-competence" - the
ability of the arbitration tribunal to decide on its own jurisdiction. Therefore a party who
is trying to avoid arbitration at an early stage by claiming that the main contract is invalid
will face the arbitration agreement separate from the main one and the arbitrators
deciding on their own competence.

In American law, this was recognized by the Prima Paint Corp. v. Flood & Conklin Mfg.
Co. decision of the U.S. Supreme Court.

Seat of the arbitration


Most legal systems recognize the concept of a "seat" of the arbitration, which is a
geographical and legal jurisdiction to which the arbitration is tied. The seat will normally
determine the procedural rules (lex arbitral) which the arbitration follows, and the courts
which exercise jurisdiction over the seat will have a supervisory role over the conduct of
the arbitration.

Parties to the arbitration are free to choose the seat of arbitration and often do so in
practice. If they do not, the arbitral tribunal will do it for them. Whereas it is possible to
detach procedural law from the seat of arbitration (e.g. seat in Switzerland, English
procedural law) this creates confusion as it subjects the arbitration to two controlling and
possibly conflicting laws. The procedural law of arbitration, normally determined by the
seat, ought to be distinguished from the procedure that the arbitration panel will follow.
The latter refers to daily operation of the arbitration and is normally determined either by
the institution in question (if arbitration is institutional, e.g. ICC Rules) or by reference to
a ready-made procedure (such as the UNCITRAL Rules).

The seat of arbitration might not be the same as the place where proceedings are actually
happening. Thus, for instance, an ICC arbitration may have its seat in London (and
therefore be governed by the English lex arbitral and ICC procedural rules) and most
sessions may take place outside the UK.

Law applicable to procedure

The essential matters of procedure -- such as any disagreement over the appointment or
replacement of arbitrators, the jurisdiction of the tribunal itself, or the validity of an
arbitration award -- are determined by the procedural law of the seat of the arbitration,
and may be decided by recourse to courts. The parties normally influence this through
their choice of the seat of arbitration or directly through choice of procedural law.

All other matters of procedure are generally determined by the arbitral tribunal itself
(depending on national law and respect for due process) and the preferences of the
arbitrators, the parties, and their counsel. The arbitrators' power to determine procedural
matters normally includes:

• mode of submitting (and challenging) evidence


• time and place of any hearings
• language and translations
• disclosure of documents and other evidence
• use of pleadings and/or interrogatories
• the appointment of experts and assessors

Law applicable to substance

Parties in a commercial dispute will often choose the law applicable to the substance of
their dispute. In fact, they are more likely to choose substantive than procedural law as
this will have direct impact on the outcome of their dispute. This choice is usually
expressed in the arbitration clause itself or at least in part of the contract where the clause
is located.

If the parties do not choose the applicable law, the arbitral tribunal will. This is normally
interpreted as the ability of the tribunal to choose the choice-of-law rules which will, in
turn, point to the applicable law. The arbitrators are not strictly speaking bound by public
policy order or mandatory rules of third states but will normally observe them as that
increases the chance of the award being recognized.

The tribunal may decide ex aqua et bono only if the parties have expressly authorized
them to do so.

Law applicable to recognition and enforcement

The law that applies to issues of recognition will always be the law of the state where this
recognition is sought. In a large number of states this will be governed by 1958 New
York Convention which harmonizes the recognition and enforcement of foreign arbitral
awards.

Sources of law

States regulate arbitration through a variety of laws. The main body of law applicable to
arbitration is normally contained either in the national Private International Law Act (as
is the case in Switzerland) or in a separate law on arbitration (as is the case in England).
In addition to this, a number of national procedural laws may also contain provisions
relating to arbitration.

By far the most important international instrument on arbitration law is the 1958 New
York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Some
other relevant international instruments are:

• The Geneva Protocol of 1923


• The Geneva Convention of 1927
• The European Convention of 1961
• The Washington Convention of 1965 (governing settlement of international
investment disputes)
• The UNCITRAL Model Law (providing a model for a national law of arbitration)
• The UNCITRAL Arbitration Rules (providing a set of rules for an ad hoc
arbitration)

Arbitral tribunal

Main article: Arbitral tribunal

The term arbitral tribunal is used to denote the arbitrator or arbitrators sitting to
determine the dispute. The composition of the arbitral tribunal can vary enormously, with
either a sole arbitrator sitting, two or more arbitrators, with or without a chairman or
umpire, and various other combinations.

In most jurisdictions, an arbitrator enjoys immunity from liability for anything done or
omitted whilst acting as arbitrator unless the arbitrator acts in bad faith.

Arbitrations are usually divided into two types:

• ad hoc arbitrations and administered arbitrations.

In ad hoc arbitrations, the arbitral tribunals are appointed by the parties or by an


appointing authority chosen by the parties. After the tribunal has been formed, the
appointing authority will normally have no other role and the arbitation will be managed
by the tribunal.

In administered arbitration, the arbitration will be administered by a professional


arbitration institution providing arbitration services, such as the LCIA in London or the
ICC in Paris. Normally the arbitration institution also will be the appointing authority.

Arbitration institutions tend to have their own rules and procedures, and may be more
formal. They also tend to be more expensive, and, for procedural reasons, slower.

Duties of the tribunal

The duties of a tribunal will be determined by a combination of the provisions of the


arbitration agreement and by the procedural laws which apply in the seat of the
arbitration. The extent to which the laws of the seat of the arbitration permit "party
autonomy" (the ability of the parties to set out their own procedures and regulations)
determines the interplay between the two.

However, in almost all countries the tribunal owes several non-derogable duties. These
will normally be:

• to act fairly and impartially between the parties, and to allow each party a
reasonable opportunity to put their case and to deal with the case of their
opponent (sometimes shortened to: complying with the rules of "natural justice");
and
• to adopt procedures suitable to the circumstances of the particular case, so as to
provide a fair means for resolution of the dispute.[20]

Arbitral awards

Main article: Arbitration award


Although arbitration awards are characteristically an award of damages against a party, in
many jurisdictions tribunals have a range of remedies that can form a part of the award.
These may include:

1. payment of a sum of money (conventional damages)


2. the making of a "declaration" as to any matter to be determined in the proceedings
3. in some jurisdictions, the tribunal may have the same power as a court to:
1. order a party to do or refrain from doing something ("injunctive relief")
2. to order specific performance of a contract
3. to order the rectification, setting aside or cancellation of a deed or other
document.
4. In other jurisdictions, however, unless the parties have expressly granted the
arbitrators the right to decide such matters, the tribunal's powers may be limited to
deciding whether a party is entitled to damages. It may not have the legal
authority to order injunctive relief, issue a declaration, or rectify a contract, such
powers being reserved to the exclusive jurisdiction of the courts.
ASSIGNMENTS
MB0035
LEGAL ASPECTS OF BUSINESS
(3 credits)
Set II
Marks 60

Submitted By:
Omar Saleh Hassan Batais
Roll Number = 540811267

MBA- Marketing Management


MBA Semester III
Fall, 2009
Q.1.What do you understand by the Offer of Proposal? What are
the essentials of a Valid Offer?

Ans. Offer of Proposal :-

The offer must be made in order to create legal relations otherwise there will be an
agreement. If an offer does not give rise to legal obligations between the parties it is
not a valid offer in the eye of law. In business transactions there is a presumption that
the parties propose to make legal relationships. For example a person invite to another
person to diner if the other person accepts the invitation then it is not any legal
agreement between the parties it is social agreement.

An offer must be definite and clear. If the terms of an offer are not definite and clear
it cannot be called a valid offer. If such offer is accepted it cannot create a binding
contract. An agreement to agree in future is not a contract because the terms of an
agreement are not clear. A person has two motorbikes. He offers to another person to
sell his one bike for a certain price then it is not a legal and valid offer because there
is an ambiguity in the offer that which motorcycle the person wants to sell. There is a
difference between the offer and invitation of offer. Sometime people offer the
invitation for the sale.

A contract may be defined as an agreement between two or more parties to do or to


abstain from doing an act and which is intended to create a legally binding
relationship. This is typically the same for sale agreements during the sale of Jamaica
beachfront properties. There are two basic requirements of a contract, these are:

(a) An agreement, the terms of which are fully understood to mean the same thing to
both parties (consensus ad idem); and

(b) An intention to create legal relations rather than a mere exchange of promises.

Essentials of a Valid Offer

A contract is made up of the following elements, and will only be enforced when
these-elements exist:

1. Offer and Acceptance - There must be an offer for Jamaica real estate for sale by
one party (known as the vendor) and an acceptance of it by the other party (known as
the purchaser);

2. Consideration - Each party must give consideration (except in contracts under


seal);
3. Intention to create legal relations - The parties must intend that their agreement is
to be legally binding;

4. Capacity - Each party must have legal capacity to make the contract;

5. Form - If a particular legal form is required for the contract, this must be complied
with;

6. Consent must be genuine - The contract must not be induced by duress, undue
influence, fraud or misrepresentation;

7. legality of purpose - Contracts must not be for an illegal purpose;

8. Possibility of performance - It must be capable to being performed.

Void, Voidable and Unenforceable Contracts

A contract which does not satisfy the above requirements may according to
circumstances be:

(a) Void - This means that the contract is totally inoperative and is automatically
treated as if it had never occurred at all. Neither party may enforce it nor must any
goods which have passed be restored to their original owners. This means that a
person would have no legal right to sell, such as beachfront property in Jamaica,
hence the contract would not be legal. Contracts which are illegal and those made
under a mistake of fact are usually void.

(b) Voidable - Such a contract is valid until one of the parties elects to end it. From
the date of the election the contract is inoperative. The electing party may then sue for
the equitable remedy of rescission in order to recover any goods or money that he has
given over to the other contracting party. Although rescission can restore the parties
to the same position that they were in before the contract was made, it is different
from making a contract void because rescission is only awarded at the discretion of
the court and may easily be lost. Contracts induced by misrepresentation, duress or
undue influence are voidable.

(c) Unenforceable - The contract is valid if the parties perform it but it cannot be
enforced in law if either party fails to do so.
Q.2 What are the effects of Minor’s Agreement? State in details.

• Minor :- As per Indian Majority Act:


a person below age of eighteen years under normal circumstances.
a person below age of twenty one years in case of a guardian being appointed for his
person or property.
Effects of agreement with or by a minor
• Usually it is Void – ab - initio (absolutely void and inoperative)
• No ratification on attaining age of majority
• No estoppel against a minor
• Minor is however responsible for necessaries provided to him during his minority
• Minor can be admitted to benefits of partnership
• Beneficial agreements are valid
• minor is eligible to get benefits but cannot be responsible towards liabilities
Q.3 What do you understand by Consideration? What are the rules
governing Consideration?
Ans. Consideration :- consideration is like accepting/thinking about something that
someone asked you like going out with them are going to a party and anything that you
think this word means in your head then it can't be wrong.

RULES GOVERNING CONSIDERATION

1. CONSIDERATION MUST NOT BE PAST

If one party voluntarily performs an act, and the other party then makes a promise, the
consideration for the promise is said to be in the past. The rule is that past consideration
is no consideration, so it is not valid and cannot be used to sue on a contract. For
example, A gives B a lift home in his car. On arrival B promises to give a £5 towards the
petrol. A cannot enforce this promise as his consideration, giving B a lift, is past.

EXCEPTIONS TO THIS RULE:

(A) PREVIOUS REQUEST

If the promissory has previously asked the other party to provide goods or services, then a
promise made after they are provided will be treated as binding.

(B) BUSINESS SITUATIONS

If something is done in a business context and it is clearly understood by both sides that it
will be paid for, then past consideration will be valid.

(C) THE BILLS OF EXCHANGE ACT 1882

Under s27(1) it is provided that any antecedent debt or liability is valid consideration for
a bill of exchange. For example, A mows B's lawn and a week later B gives a cheque for
£10. A's work is valid consideration in exchange for the cheque.

2. CONSIDERATION MUST BE SUFFICIENT BUT NEED NOT BE ADEQUATE

Providing consideration has some value, the courts will not investigate its adequacy.
Where consideration is recognised by the law as having some value, it is described as
"real" or "sufficient" consideration. The courts will not investigate contracts to see if the
parties have got equal value.

3. CONSIDERATION MUST MOVE FROM THE PROMISEE


The person who wishes to enforce the contract must show that they provided
consideration; it is not enough to show that someone else provided consideration. The
promise must show that consideration "moved from" (i.e., was provided by) him. The
consideration does not have to move to the promissory. If there are three parties involved,
problems may arise.

4. FOREBEARANCE TO SUE

If one person has a valid claim against another (in contract or tort) but promises to
forbear from enforcing it, that will constitute valid consideration if made in return for a
promise by the other to settle the claim.

5. EXISTING PUBLIC DUTY

If someone is under a public duty to do a particular task, then agreeing to do that task is
not sufficient consideration for a contract.

If someone exceeds their public duty, then this may be valid consideration.

6. EXISTING CONTRACTUAL DUTY

If someone promises to do something they are already bound to do under a contract that
is not valid consideration..

7. EXISTING CONTRACTUAL DUTY OWED TO A THIRD PARTY

If a party promises to do something for a second party, but is already bound by a contract
to do this for a third party, this is good consideration.

8. PART PAYMENT OF A DEBT


Q.4 What do you understand by the ‘Negotiable Instruments
Act’? What are the different characteristics of the Negotiable
Instruments?

Ans. The Negotiable Instruments Act was passed in 1881. Some provisions of the Act
have become redundant due to passage of time, change in methods of doing business
and technology changes. However, the basic principles of the Act are still valid and
the Act has stood test of time. The Act extends to the whole of India. There is no
doubt that the Act is to regulate commercial transactions and was drafted to suit
requirements of business conditions then prevailing.

The instrument is mainly an instrument of credit readily convertible into money and
easily passable from one hand to another.

LOCAL USAGE PREVAILS UNLESS EXCLUDED - The Act does not affect any
local usage relating to any instrument in an oriental language. However, the local
usage can be excluded by any words in the body of the instrument, which indicate an
intention that the legal relations of the parties will be governed by provisions of
Negotiable Instruments Act and not by local usage. [section 1]. - - Thus, unless
specifically excluded, local usage prevails, if the instrument is in regional language.

BILL OF EXCHANGE AND PROMISSORY NOTES EXCLUDED FROM


INFORMATION TECHNOLOGY ACT - Section (1)(4)(a) of Information
Technology Act provides that the Act will not apply to bill of exchange and
Promissory Notes. Thus, a bill of exchange or Promissory Note cannot be made by
electronic means. However, cheque is covered under of Information Technology Act
and hence can be made and / or sent by electronic means.

CHANGES MADE BY AMENDMENT ACT, 2002 - (a) Definition of ‘cheque’ and


related provisions in respect of cheque amended to facilitate electronic submission
and/or electronic clearance of cheque. Corresponding changes were also made in
Information Technology Act. (b) Bouncing of cheque - Provisions amended *
Provision for imprisonment up to 2 years against present one year * Period for issuing
notice to drawer increased from 15 days to 30 days * Government Nominee Directors
excluded from liability * Court empowered to take cognizance of offence even if
complaint filed beyond one month * Summary trial procedure permitted for imposing
punishment up to one year and fine even exceeding Rs 5,000 * Summons can be
issued by speed post or courier service * Summons refused will be deemed to have
been served * Evidence of complainant through affidavit permitted * Bank’s slip or
memo indicating dishonor of cheque will be prima facie evidence unless contrary
proved * Offence can be compounded. - - The amendments have been made
effective from 6-2-2003.
Transferee can get better title than transferor – Normal principle is that a person
cannot transfer better title to property that he himself has. For example, if a person
steals a car and sells the same, the buyer does not get any legal title to the car as the
transferor himself had no title to the car. The real owner of car can anytime obtain
possession from the buyer, even if the buyer had purchased the car in good faith and
even if he had no idea that the seller had no title to the car. This provision is no doubt
sound, but would make free negotiability of instrument difficult, as it would be
difficult to verify title of transferor in many cases. Hence, it is provided that if a
person acquires ‘Negotiable Instrument’ in good faith and without knowledge of
defect in title of the transferor, the transferee can get better title to the negotiable
instrument, even if the title of transferor was defective. This is really to ensure free
negotiability of instrument so that persons can deal in the instrument without any fear.

DIFFERENCE BETWEEN NEGOTIATION AND TRANSFER/ASSIGNMENT -


Difference between “Negotiation’ and assignment/transfer is that in case of
negotiation, the transferee can get title better than transferor, who can never happen in
assignment/transfer.

STATUTORY DEFINITION OF NEGOTIABLE INSTRUMENT - A “negotiable


instrument” means a promissory note, bill of exchange or cheque payable either to
order or to bearer. Explanation (i) : A promissory note, bill of exchange or cheque is
payable to order which is expressed to be so payable or which is expressed to be
payable to a particular person, and does not contain words prohibiting transfer or
indicating an intention that it shall not be transferable. Explanation (ii) : A promissory
note, bill of exchange 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.
Explanation (iii): Where a promissory note, bill of exchange or cheque, either
originally or by endorsement, is expressed to be payable to the order of a specified
person and not to him or his order, it is nevertheless payable to him or his order at his
option. [section 13(1)]. - - A negotiable instrument may be made payable to two or
more payees jointly, or it may be made payable in the alternative to one of two, or
one or some of several payees. [section 13(2)].

Promissory Note - A “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. [Section 4].

Bill of Exchange – As per statutory definition, “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. [Para 1 of section 5]. A cheque is a special type of bill of
exchange. It is drawn on banker and is required to be made payable on demand.

DRAWER, DRAWEE AND PAYEE - The maker of a bill of exchange or cheque is


called the “drawer”; the person thereby directed to pay is called the “drawee” [section
7 para 1]. - - The person named in the instrument, to whom, or to whose order the
money is by the instrument directed to be paid, is called the “payee” [section 7 para
5]. - - However, a drawer and payee can be one person as he can order to pay the
amount to himself.

AT SIGHT, ON PRESENTMENT, AND AFTER SIGHT - In a promissory note or


bill of exchange the expressions “at sight” and “on presentment” mean ‘on demand’.
The expression “after sight” means, in a promissory note, after presentment for sight,
and, in a bill of exchange, after acceptance, or noting for non-acceptance, or protest
for non-acceptance. [section 21]. - - Thus, in case of document ‘after sight’, the
countdown starts only after document is ‘sighted’ by the concerned party.

Stamp duty on Negotiable Instrument – A negotiable instrument is required to be


stamped. Stamp duty on Bill of Exchange and Promissory Note is a Union Subject.
Hence, stamp duty is same all over India.

Hundi – a local instrument – Hundi is an indigenous instrument similar to


Negotiable Instrument. The term is derived from Sanskrit word ‘hund’ which means
‘to collect’. If it is drawn in local language, it is governed by local usage and customs.

Provisions in respect of Cheques - A “cheque” is a bill of exchange drawn on a


specified banker and not expressed to be payable otherwise than on demand.
‘Cheque’ includes electronic image of a truncated cheque and a cheque in electronic
form. [section 6]. The definition is amended by Amendment Act, 2002, making
provision for electronic submission and clearance of cheque. The cheque is one form
of Bill of Exchange. It is addressed to Banker. It cannot be made payable after some
days. It must be made payable ‘on demand’.

Crossing of Cheque – The Act makes specific provisions for crossing of cheques.

CHEQUE CROSSED GENERALLY - Where a cheque bears across its face an


addition of the words “and company” or any abbreviation thereof, between two
parallel transverse lines, or of two parallel transverse lines simply, either with or
without the words “not negotiable”, that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed generally. [section 123]

CHEQUE CROSSED SPECIALLY - Where a cheque bears across its face an


addition of the name of a banker, either with or without the words “not negotiable”,
that addition shall be deemed a crossing, and the cheque shall be deemed to be
crossed specially, and to be crossed to that banker. [section 124].

PAYMENT OF CHEQUE CROSSED GENERALLY OR SPECIALLY - Where a


cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise
than to a banker. Where a cheque is crossed specially, the banker on whom it is
drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent
for collection. [section 126].
CHEQUE BEARING “NOT NEGOTIABLE” - A person taking a cheque crossed
generally or specially, bearing in either case the words “not negotiable”, shall not
have, and shall not be capable of giving, a better title to the cheque than that which
the person form whom he took it had. [section 130]. Thus, mere writing words ‘Not
negotiable’ does not mean that the cheque is not transferable. It is still transferable,
but the transferee cannot get title better than what transferor had.

Electronic Cheque - Provisions of electronic cheque has been made by Amendment


Act, 2002. As per Explanation I(a) to section 6, ‘A cheque in the electronic form’
means a cheque which contains the exact mirror image of a paper cheque, and is
generated, written and signed by a secure system ensuring the minimum safety
standards with the use of digital signature (with or without biometrics signature) and
asymmetric crypto system.

Truncated Cheque - Provisions of electronic cheque has been made by Amendment


Act, 2002. As per Explanation I(b) to section 6, ‘A truncated cheque’ means a cheque
which is truncated during the clearing cycle, either by the clearing house during the
course of a clearing cycle, either by the clearing house or by the bank whether paying
or receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.

Penalty in case of dishonor of cheques for insufficiency of funds - If a cheque is


dishonoured even when presented before expiry of 6 months, the payee or holder in
due course is required to give notice to drawer of cheque within 30 days from
receiving information from bank.. The drawer should make payment within 15 days
of receipt of notice. If he does not pay within 15 days, the payee has to lodge a
complaint with Metropolitan Magistrate or Judicial Magistrate of First Class, against
drawer within one month from the last day on which drawer should have paid the
amount. The penalty can be up to two years imprisonment or fine up to twice the
amount of cheque or both. The offense can be tried summarily. Notice can be sent to
drawer by speed post or courier. Offense is compoundable.

It must be noted that even if penalty is imposed on drawer, he is still liable to make
payment of the cheque which was dishonoured. Thus, the fine/imprisonment is in
addition to his liability to make payment of the cheque.

Return of cheque should be for insufficiency of funds - The offence takes place only
when cheque is dishonoured for insufficiency of funds or where the amount exceeds
the arrangement. Section 146 of NI Act only provides that once complainant produces
bank’s slip or memo having official mark that the cheque is dishonoured, the Court
will presume dishonor of the cheque, unless and until such fact is disproved.

Calculation of date of maturity of Bill of Exchange - If the instrument is not payable


on demand, calculation of date of maturity is important. An instrument not payable on
demand is entitled to get 3 days grace period.
Presentment of Negotiable Instrument - The Negotiable Instrument is required to be
presented for payment to the person who is liable to pay. Further, in case of Bill of
Exchange payable ‘after sight’, it has to be presented for acceptance by drawee.
‘Acceptance’ means that drawee agrees to pay the amount as shown in the Bill. This
is required as the maker of bill (drawer) is asking drawee to pay certain amount to
payee. The drawee may refuse the payment as he has not signed the Bill and has not
accepted the liability.

In case of Promissory Note, such acceptance is not required, as the maker who has
signed the note himself is liable to make payment. However, if the promissory note is
payable certain days ‘after sight’ [say 30 days after sight], it will have to be presented
for ‘sight’.

If the instrument uses the expressions “on demand”, “at sight” or “on presentment”,
the amount is payable on demand. In such case, presentment for acceptance is not
required. The Negotiable Instrument will be directly presented for payment.

Acceptance and payment for honour and drawee in need - Provisions for acceptance
and payment for honour have been made in case when the negotiable instrument is
dishonoured. Bill is accepted for honour when it is dishonoured when presenting for
acceptance, while payment for dishonor is made when Bill is dishonoured when
presented for payment.

Negotiation of Instrument - The most salient feature of the instrument is that it is


negotiable. Negotiation does not mean a mere transfer. After negotiation, the holder
in due course can get a better title even if title of transferor was defective. If the
instrument is ‘to order’, it can be negotiated by making endorsement. If the
instrument is ‘to bearer’, it can be negotiated by delivery. As per definition of
‘delivery’, such delivery is valid only if made by party making, accepting or
indorsing the instrument or by a person authorised by him.

An instrument can be negotiated any number of times. As per section 118(e),


endorsements appearing on the negotiable instrument are presumed to have been
made in the order in which they appear on the instrument, unless contrary is proved.
[There is no mandatory provision to put date while signing, though advisable to do
so]. Section 118(d) provides that there is presumption that the instrument was
negotiated before its maturity, unless contrary is proved. As per section 60, Bill can
be negotiated even after date of maturity by persons other than maker, drawee or
acceptor after maturity. However, person getting such instrument is not ‘holder in due
course’ and does not enjoy protections available to ‘holder in due course’.

Liability of parties - Basic liability of payment is as follows – (a) Maker in case of


Promissory Note or Cheque and (b) Drawer of Bill till it is accepted by drawee and
acceptor after the Bill is accepted . They are liable as ‘principal debtors’ and other
parties to instrument are liable as sureties for maker, drawer or acceptor, as the case
may be. When document is endorsed number of times, each prior party is liable to
each subsequent party as principal debtor. In case of dishonor, notice is required to be
given to drawer and all earlier endorsees.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS - Until the contrary is


proved, the following presumptions shall be made :— (a) of consideration - that every
negotiable instrument was made or drawn for consideration, and that every such
instrument, when it has been $ accepted, indorsed, negotiated or transferred, was
accepted, indorsed, negotiated or transferred for consideration; - - (b) as to date - that
every negotiable instrument bearing a date was oide or drawn on such date; - - (c) as
to time of acceptance - that every accepted bill of exchange was accepted within a
reasonable time after its date and before its maturity; - - (d) as to time of transfer - -
that every transfer of a negotiable instrument was made before its maturity; - - (e) as
to order of endorsements - that the endorsements appearing upon a negotiable
instrument were made in the order in which they appear thereon; (f) as to stamps -
that a lost promissory note, bill of exchange or cheque was duly stamped; - - (g) that
holder is a holder in due course - that the holder of a negotiable instrument is a
holder in due course : provided that, where the instrument has been obtained from its
lawful owner, or from any person in lawful custody thereof, by means of an offence
or fraud, or has been obtained from the maker or acceptor thereof by means of an of-
fence or fraud, or for unlawful consideration, the burden of proving that the holder in
due course lies upon him.
Q.5 What do you understand by Company? What are the
characteristics of a Company? What are the different types of
company?

Ans. Introduction
The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or
together" and 'Pains' meaning "bread". Originally, it referred to a group of persons who
took their meals together. A company is nothing but a group of persons who have come
together or who have contributed money for some common person and who have
incorporated themselves into a distinct legal entity in the form of a company for that
purpose. Under Halsbury’s Laws of England, the term "company" has been defined as a
collection of many individuals united into one body under special domination, having
perpetual succession under an artificial form and vested by the policies of law with the
capacity of acting in several respect as an individual, particularly for taking and granting
of property, for contracting obligation and for suing and being sued, for enjoying
privileges and immunities in common and exercising a variety of political rights, more or
less extensive, according to the design of its institution or the powers upon it, either at the
time of its creation or at any subsequent period of its existence. However, the Supreme
Court of India has held in the case of State Trading Corporation of India v/s CTO that a
company cannot have the status of a citizen under the Constitution of India.

A company as an entity has several distinct features which together make it a unique
organization. The following are the defining characteristics of a company :-

Separate Legal Entity :


On incorporation under law, a company becomes a separate legal entity as compared to
its members. The company is different and distinct from its members in law. It has its
own name and its own seal, its assets and liabilities are separate and distinct from those
of its members. It is capable of owning property, incurring debt, borrowing money,
having a bank account, employing people, entering into contracts and suing and being
sued separately.

Limited Liability :
The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the
uncalled money due on shares held by him when called upon to pay and nothing more,
even if liabilities of the company far exceeds its assets. On the other hand, partners of a
partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to
pay the liabilities of the firm, the creditors can force the partners to make good the deficit
from their personal assets. This cannot be done in case of a company once the members
have paid all their dues towards the shares held by them in the company.
Perpetual Succession:
A company does not die or cease to exist unless it is specifically wound up or the task for
which it was formed has been completed. Membership of a company may keep on
changing from time to time but that does not affect life of the company. Death or
insolvency of member does not affect the existence of the company.

Separate Property:
A company is a distinct legal entity. The company’s property is its own. A member
cannot claim to be owner of the company's property during the existence of the company.

Transferability of Shares:
Shares in a company are freely transferable, subject to certain conditions, such that no
share-holder is permanently or necessarily wedded to a company. When a member
transfers his shares to another person, the transferee steps into the shoes of the transferor
and acquires all the rights of the transferor in respect of those shares.

Common Seal:
A company is an artificial person and does not have a physical presence. Therefore, it
acts through its Board of Directors for carrying out its activities and entering into various
agreements. Such contracts must be under the seal of the company. The common seal is
the official signature of the company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the company may not be accepted as
authentic and may not have any legal force.

Capacity to sue and being sued:


A company can sue or be sued in its own name as distinct from its members.

Separate Management:
A company is administered and managed by its managerial personnel i.e. the Board of
Directors. The shareholders are simply the holders of the shares in the company and need
not be necessarily the managers of the company.

One Share-One Vote:


The principle of voting in a company is one share-one vote. I.e. if a person has 10 shares,
he has 10 votes in the company. This is in direct contrast to the voting principle of a co-
operative society where the "One Member - One Vote" principle applies i.e. irrespective
of the number of shares held, one member has only one vote.

Distinction between Company and Partnership

1. A Partnership firm is sum total of persons who have come together to share the
profits of the business carried on by them or any of them. It does not have a
separate legal entity. A Company is association of persons who have come
together for a specific purpose. The company has a separate legal entity as soon as
it is incorporated under law.
2. Liability of the partners is unlimited. However, the liability of shareholders of a
limited company is limited to the extent of unpaid share or to the tune of the
unpaid amount guaranteed by the shareholder.
3. Property of the firm belongs to the partners and they are collectively entitled to it.
In case of a company, the property belongs to the company and not to its
members.
4. A partner cannot transfer his shares in the partnership firm without the consent of
all other partners. In case of a company, shares may be transferred without the
permission of the other members, in absence of provision to contrary in articles of
association of the company.
5. In case of partnership, the number of members must not exceed 20 in case of
banking business and 10 in other businesses. A Public company may have as
many members as it desires subject to a minimum of 7 members. A Private
company cannot have more than 50 members.
6. There must be at least 2 members in order to form a partnership firm. The
minimum number of members necessary for a public limited company is seven
and two for a private limited company.
7. In case of a partnership, 100 % consensus is required for any decision. In case of a
company, decision of the majority prevails.
8. On the death of any partner, the partnership is dissolved unless there is provision
to the contrary. On the death of the shareholder the company' existence does not
get terminated.

Illegal Association:
Under the Companies Act, 1956, not more than 10 persons can come together for
carrying on any banking business and not more than 20 persons can come together for
carrying on any other of business, unless the association is registered under the
Companies Act or any other Indian law. Any association which does not comply with the
above norms is an illegal association. Therefore, a partnership of more 10 or 20 members,
as the case may be, is an illegal association unless the registered under the Companies
Act or any other Indian law.

However, this provision does not apply in the following cases :-

1. A Joint Hindu Family business comprising of family members only. But where
two or more Joint Hindu families come together for business through partnership,
the total number of members cannot exceed 10 or 20 as the case may be, but in
computing the number of persons, minor members of such family will be
excluded.
2. Any association of charitable, religious, scientific trust or organization which is
not formed with a profit motive
3. Foreign companies.

When the number of members exceeds the prescribed maximum, members must register
it under Companies Act or any other Indian law.
Consequences of non-registration:
An illegal association is not recognized by law. An illegal association cannot enter into
any contract, cannot sue any members or any outsider, cannot be sued by any members or
outsiders for any of its debts. The members of the illegal association are personally for
the obligations of the illegal association. A member may be liable to a fine of Rs. 1000.
Any member of an illegal association cannot sue another member in respect of any matter
connected with the association.

Minimum number of members


A public company must have at least 7 members whereas a private company may have
only 2 members. If the number of members falls below the statutory minimum and the
company carries on its business beyond a period of six months after the number has so
fallen, the reduction of number of members below the legal minimum is a ground for the
winding up of the company.

Types of Companies
1.Public Company means a company which not a private company.

2.Private Company means a company which by its articles of association :-

a. Restricts the right of members to transfer its shares


b. Limits the number of its members to fifty. In determining this number of
50, employee-members and ex-employee members are not to be
considered.
c. Prohibits an invitation to the public to subscribe to any shares in or the
debentures of the company.

If a private company contravenes any of the aforesaid three provisions, it ceases to be


private company and loses all the exemptions and privileges which a private company is
entitled.

Following are some of the privileges and exemptions of a private limited company:-

1. Minimum number is members is 2 (7 in case of public companies)


2. Prohibition of allotment of the shares or debentures in certain cases unless
statement in lieu of prospectus has been delivered to the Registrar of Companies
does not apply.
3. Restriction contained in Section 81 related to the rights issues of share capital
does not apply. A special resolution to issue shares to non-members is not
required in case of a private company.
4. Restriction contained in Section 149 on commencement of business by a company
does not apply. A private company does not need a separate certificate of
commencement of business.
5. Provisions of Section 165 relating to statutory meeting and submission of
statutory report do not apply.
6. One (if 7 or less members are present) or two members (if more than 7 members
are present ) present in person at a meeting of the company can demand a poll.
7. In case of a private company which not a subsidiary of a public limited company
or in the case of a private company of which the entire paid up share capital is
held by the one or more body corporate incorporated outside India, no person
other than the member of the company concerned shall be entailed to inspect or
obtain the copies of profit and loss account of that company.
8. Minimum number of directors is only two. (3 in case of a public company)

The Company Law Board on being satisfied that the infringement of the aforesaid 3
conditions was accidental or due to inadvertence or that on other grounds, it just an
equitable to grant relief, may grant relief to the company from the consequences of such
infringement. The infringement of the aforesaid 3 conditions does not automatically
convert a private company into a public company. It continues to remain a private
company; it merely ceases to be entitled to the privileges and exemptions available to a
private company.

3.Companies deemed to be public limited company:


A private company will be treated as a deemed public limited company in any of the
following circumstances :-

1. Where at least 25% of the paid up share capital of a private company is held by
one or more bodies corporate, the private company shall automatically become
the public company on and from the date on which the aforesaid percentage is so
held.
2. Where the annual average turnover of the private company during the period of
three consecutive financial years is not less than Rs 25 crores, the private
company shall be, irrespective of its paid up share capital, become a deemed
public company.
3. Where not less than 25% of the paid up capital of a public company limited is
held by the private company, then the private company shall become a public
company on and from the date on which the aforesaid percentage is so held.
4. Where a private company accepts deposits after the invitation is made by
advertisement or renews deposits from the public (other than from its members or
directors or their relatives), such companies shall become public company on and
from date such acceptance or renewal is first made.

4.Limited and Unlimited companies:


Companies may be limited or unlimited companies. Company may be limited by shares
or limited by guarantee.

a. Company limited by shares In this case, the liability of members is limited to the
amount of uncalled share capital. No member of company limited by the shares
can be called upon to pay more than the face value of shares or so much of it as is
remaining unpaid. Members have no liability in case of fully paid up shares.
b. Company limited by the guarantee A company limited by guarantee is a registered
company having the liability of its members limited by its memorandum of
association to such amount as the members may respectively thereby undertake to
pay if necessary on liquidation of the company. The liability of the members to
pay the guaranteed amount arises only when the company has gone into
liquidation and not when it is a going concern. A guarantee company may be a
company with share capital or without share capital.

Unlimited Company: The liability of members of an unlimited company is unlimited.


Therefore their liability is similar to that of the liability of the partners of a partnership
firm.

5.Section 25 Companies: Under the Companies Act, 1956, the name of a public limited
company must end with the word 'Limited' and the name of a private limited company
must end with the word 'Private Limited'. However, under Section 25, the Central
Government may allow companies to remove the word "Limited / Private Limited" from
the name if the following conditions are satisfied :-

1. The company is formed for promoting commerce, science, art, religion, charity or
other socially useful objects
2. The company does not intend to pay dividend to its members but apply its profits
and other income in promotion of its objects.

6.Holding and Subsidiary companies


A company shall be deemed to be subsidiary of another company if :-

1. That other company controls the composition of its board of directors ; or


2. That other company holds more than half in face value of its equity share capital
3. Where the first mentioned company is subsidiary company of any company which
that other's subsidiary. eg Company B is subsidiary of the Company A and
Company C is subsidiary of Company B, therefore Company C is subsidiary of
Company A.

The control of the composition of the Board of Directors of the company means that the
holding company has the power at its discretion to appoint or remove all or majority of
directors of the subsidiary company without consent or concurrence of any other person.

7.Government Companies
Means any company in which not less than 51% of the paid up share capital is held by the
Central Government or any State Government or partly by the Central Government and
partly by the one or more State Governments and includes a company which is a
subsidiary of a government company. Government Companies are also governed by the
provisions of the Companies Act. However, the Central Government may direct that
certain provisions of the Companies Act shall not apply or shall apply only with such
exceptions, modifications and adoptions as may be specified to such government
companies.
8. Foreign Companies
Means a company incorporated in a country outside India under the law of that other
country and has established the place of business in India.

Q.6 What do you understand by Cyber Crime? Explain the


importance of the IT Act 2000.

Ans. Cyber Crimes & Cyber Law

Information is a resource which has no value until it is extracted, processed and utilized.
Information technology deals with information system, data storage, access, retrieval,
analysis and intelligent decision making. Information technology refers to the creation,
gathering, processing, storage, presentation and dissemination of information and also the
processes and devices that enable all this to be done.

Information technology is affecting us as individual and as a society. Information


technology stands firmly on hardware and software of a computer and tele-
communication infrastructure. But this is only one facet of the information Technology,
today the other facets are the challenges for the whole world like cyber crimes and more
over cyber terrorism. When Internet was first developed, the founding fathers hardly had
any inkling that internet could transform itself into an all pervading revolution which
could be misused for criminal activities and which required regulations. With the
emergence of the technology the misuse of the technology has also expanded to its
optimum level the examples of it are:
- Cyber stalking
- Cyber harassment
- Cyber fraud
- Cyber defamation
- Spam
- Hacking
- Trafficking
- Distribution
- Posting and dissemination of obscene material including pornography,
- Indecent exposure and child pornography etc.

The misuse of the technology has created the need of the enactment and implementation
of the cyber laws but whether this cyber laws are capable to control the cyber crime
activities, the question requires the at most attention.

Cyber Crimes and Cyber terrorism: “Is the Internet the new “Wild Wild West?”
There can be no one exhaustive definition about Cybercrime. However, any activities
which basically offend human sensibilities, can also be included in its ambit. Child
Pornography on the Internet constitutes one serious Cybercrime. Similarly, online
pedophiles, using internet to induce minor children into sex, are as much Cyber criminals
as any other.

“Cyber terrorism is the premeditated, politically motivated attack against information,


computer systems, computer programs, and data which result in violence against
property, government and people at large.”

In the era of globalization: the use of steganography[1] as a means for communicating the
terrorist design online – Red Fort case, E-mail threats in Taj Mahal Case, Supreme Court
E mail Threat Case. The use of internet to plan and carry out the terrorists’ acts of
September 11th – World Trade Center attack, reflects the present condition and provides
the answer to the question that “Is the internet the new Wild Wild West?”

Forms of Cyber Terrorism:[2]


(I) Privacy violation:
The law of privacy is the recognition of the individual's right to be let alone and to have
his personal space inviolate. The right to privacy as an independent and distinctive
concept originated in the field of Tort law, under which a new cause of action for
damages resulting from unlawful invasion of privacy was recognized. In recent times,
however, this right has acquired a constitutional status, the violation of which attracts
both civil as well as criminal consequences under the respective laws. The intensity and
complexity of life have rendered necessary some retreat from the world. Man under the
refining influence of culture, has become sensitive to publicity, so that solitude and
privacy have become essential to the individual. Modern enterprise and invention have,
through invasions upon his privacy, subjected him to mental pain and distress, far greater
than could be inflicted by mere bodily injury. Right to privacy is a part of the right to life
and personal liberty enshrined under Article 21 of the Constitution of India. With the
advent of information technology the traditional concept of right to privacy has taken
new dimensions, which require a different legal outlook. To meet this challenge recourse
of Information Technology Act, 2000 can be taken.

The various provisions of the Act aptly protect the online privacy rights of the citizens.
Certain acts have been categorized as offences and contraventions, which have tendency
to intrude with the privacy rights of the citizens.

(II) Secret information appropriation and data theft:


The information technology can be misused for appropriating the valuable Government
secrets and data of private individuals and the Government and its agencies. A computer
network owned by the Government may contain valuable information concerning defense
and other top secrets, which the Government will not wish to share otherwise. The same
can be targeted by the terrorists to facilitate their activities, including destruction of
property. It must be noted that the definition of property is not restricted to moveable’s or
immoveable alone.

In R.K. Dalmia v Delhi Administration the Supreme Court held that the word "property"
is used in the I.P.C in a much wider sense than the expression "movable property". There
is no good reason to restrict the meaning of the word "property" to moveable property
only, when it is used without any qualification. Whether the offence defined in a
particular section of IPC can be committed in respect of any particular kind of property,
will depend not on the interpretation of the word "property" but on the fact whether that
particular kind of property can be subject to the acts covered by that section.

(III) Demolition of e-governance base:


The aim of e-governance is to make the interaction of the citizens with the government
offices hassle free and to share information in a free and transparent manner. It further
makes the right to information a meaningful reality. In a democracy, people govern
themselves and they cannot govern themselves properly unless they are aware of social,
political, economic and other issues confronting them. To enable them to make a proper
judgment on those issues, they must have the benefit of a range of opinions on those
issues. Right to receive and impart information is implicit in free speech. This, right to
receive information is, however, not absolute but is subject to reasonable restrictions
which may be imposed by the Government in public interest.

(IV) Distributed denial of services attack:


The cyber terrorists may also use the method of distributed denial of services (DDOS) to
overburden the Government and its agencies electronic bases. This is made possible by
first infecting several unprotected computers by way of virus attacks and then taking
control of them. Once control is obtained, they can be manipulated from any locality by
the terrorists. These infected computers are then made to send information or demand in
such a large number that the server of the victim collapses. Further, due to this
unnecessary Internet traffic the legitimate traffic is prohibited from reaching the
Government or its agencies computers. This results in immense pecuniary and strategic
loss to the government and its agencies.

It must be noted that thousands of compromised computers can be used to simultaneously


attack a single host, thus making its electronic existence invisible to the genuine and
legitimate citizens and end users. The law in this regard is crystal clear.

(V) Network damage and disruptions:


The main aim of cyber terrorist activities is to cause networks damage and their
disruptions. This activity may divert the attention of the security agencies for the time
being thus giving the terrorists extra time and makes their task comparatively easier. This
process may involve a combination of computer tampering, virus attacks, hacking, etc.

Information Technology Act, 2000 deals with the cyber crime problems. It has some
positive as well as negative aspects.

Positive Aspects of the IT Act, 2000[3]


1. Prior to the enactment of the IT Act, 2000 even an e-mail was not accepted under the
prevailing statutes of India as an accepted legal form of communication and as evidence
in a court of law. But the IT Act, 2000 changed this scenario by legal recognition of the
electronic format. Indeed, the IT Act, 2000 is a step forward.
2. From the perspective of the corporate sector, companies shall be able to carry out
electronic commerce using the legal infrastructure provided by the IT Act, 2000. Till the
coming into effect of the Indian Cyber law, the growth of electronic commerce was
impeded in our country basically because there was no legal infrastructure to regulate
commercial transactions online.

3. Corporate will now be able to use digital signatures to carry out their transactions
online. These digital signatures have been given legal validity and sanction under the IT
Act, 2000.

4. In today’s scenario, information is stored by the companies on their respective


computer system, apart from maintaining a back up. Under the IT Act, 2000, it shall now
be possible for corporate to have a statutory remedy if any one breaks into their computer
systems or networks and causes damages or copies data. The remedy provided by the IT
Act, 2000 is in the form of monetary damages, by the way of compensation, not
exceeding Rs. 1, 00, 00,000.

5. IT Act, 2000 has defined various cyber crimes which includes hacking and damage to
the computer code. Prior to the coming into effect of the Indian Cyber law, the corporate
were helpless as there was no legal redress for such issues. But the IT Act, 2000 changes
the scene altogether.

The Grey Areas of the IT Act, 2000[4]:


1. The IT Act, 2000 is likely to cause a conflict of jurisdiction.

2. Electronic commerce is based on the system of domain names. The IT Act, 2000 does
not even touch the issues relating to domain names. Even domain names have not been
defined and the rights and liabilities of domain name owners do not find any mention in
the law.

3. The IT Act, 2000 does not deal with any issues concerning the protection of
Intellectual Property Rights I the context of the online environment. Contentious yet very
important issues concerning online copyrights, trademarks and patents have been left
untouched by the law, thereby leaving many loopholes.

4. As the cyber law is growing, so are the new forms and manifestations of cyber crimes.
The offences defined in the IT Act, 2000 are by no means exhaustive. However, the
drafting of the relevant provisions of the IT Act, 2000 makes it appear as if the offences
detailed therein are the only cyber offences possible and existing. The IT Act, 2000 does
not cove various kinds of cyber crimes and Internet related crimes. These Include:-
a) Theft of Internet hours
b) Cyber theft
c) Cyber stalking
d) Cyber harassment
e) Cyber defamation
f) Cyber fraud
g) Misuse of credit card numbers
h) Chat room abuse

5. The IT Act, 2000 has not tackled several vital issues pertaining to e-commerce sphere
like privacy and content regulation to name a few. Privacy issues have not been touched
at all.

6. Another grey area of the IT Act is that the same does not touch upon any anti- trust
issues.

7. The most serious concern about the Indian Cyber law relates to its implementation.
The IT Act, 2000 does not lay down parameters for its implementation. Also, when
internet penetration in India is extremely low and government and police officials, in
general are not very computer savvy, the new Indian cyber law raises more questions
than it answers. It seems that the Parliament would be required to amend the IT Act, 2000
to remove the grey areas mentioned above.