Llegal Aspects of Business

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Master of Business Administration – MBA Semester 3

Legal Aspects of Business - 4 Credits

Assignment Set- 1

Q.1 Explain the characteristics of law and briefly describe the

sources of Indian Law. [10 marks]

Ans :

The term ‘law’ is used in many senses; you may speak of the law of physics,

mathematics, science, or the laws of the football or health. In its widest

sense, ‘law’ means any rule of conduct, standard or pattern, to which actions

are required to conform; if not conformed, sanctions are imposed.

Characteristics of Law :

1. Law is a body of rules : These rules prescribe the conduct, standard or

pattern to which actions of the persons in the state are required to

conform. However, all rules of conduct do not become law in the strict

sense. We resort to various kinds of rules to guide our lives. For

example, our conduct may be guided by a rule such as “do not be

arrogant” or “do not be disrespectful to elders or women”. These are

ethical or moral rules by which our daily lives are guided. If we do not

follow them, we may lose our friends and their respect, but no legal

action can be taken against us.

2. Law is for the guidance or conduct of persons – both human and

artificial : The law is not made just for the sake of making it. The rules

embodies in the law are made, so as to ensure that actions of the

persons in the society conform to some predetermined standard or

pattern. This is necessary so as to ensure continuance of the society.

No doubt, if citizens are ‘self-enlightened’ or ‘self-controlled’, disputes

may be minimized, but will not be eliminated. Rules are, therefore,



drawn up to ensure that members of the society may live and work

together in an orderly manner. Therefore, if the rules embodied in the

law are broken, compulsion is used to enforce obedience, and certain

consequences ensue.

3. Law is imposed : Law is imposed on the members to bring about an

order in the group, enabling it to continue and prosper. It is not

something which may or may not be obeyed at the sweet will of the

members of society. If you cannot impose a rule it is better not to have

it. Thus, law is made obligatory on the members of the society.

4. Law is enforced by the executive : Obviously, unless a law is enforced

it ceases to be a law and those persons subject to it will regard it as

dead. For example, if A steals B’s bicycle, he may be prosecuted by a

court and may be punished. Also, the court may order the restitution

of the bicycle to its rightful owner i.e., B if government passes many

laws but does not attempt to enforce them, the citizens lose their

respect for government and law, and society is greatly weakened. The

force used is known as sanction which the state administers to secure

obedience to its laws.

5. The state : A state is a territorial division, with people therein subject toa uniform system of law administered by some authority of the state.

Thus, law presupposes a state.

6. Content of law : The law is a living thing and changes throughout the

course of history. Law responds to public opinion and changes

accordingly. Law can never be static. Therefore, amendments are

made in different laws from time to time. For example, the

Monopolistic and Restrictive Trade practices Act, 1969 has been

subjected to many amendments since its inception in 1969.

7. Two basic ideas involved in law : The two basic ideas involved in any

law are : (i) to maintain some form of social order in a group and (ii) to

compel members of the group to be within that order. These basic

ideas underline formulations of any rules for the members of a group. A



group is created because first, there is a social instinct in the people to

live together and secondly, it helps them in self-preservation. Rules are

made by the members of the group, so that the group doesn’t whither

away.

8. Law is made to serve some purpose which may be social, economic or

political : Some examples of ‘law’ in the widest sense of the term. ‘Law’

in its widest sense may include : (i) Moral rules or etiquettes, the non-

observance of which may lead to public ridicule, (ii) Law of Land the

non-observance of which may lead to arrest, imprisonment, fines, etc.

(iii) Rules of international law, the non-observance of which may lead

to social boycott, trade-sanctions, cold war, hot war, proxy war, etc.

The main sources of modern Indian Law, as administered by Indian courts,

may be divided into two broad categories : (i) Primary Sources and, (ii)

Secondary Sources.

Primary Sources of Indian Law:

The primary sources of Indian law are : (a) customs, (b) Judicial precedents

(c) statutes and (d) personal Law.

Customary Law : In Simple words “ it is the uniformity of conduct of all

persons under like circumstances.” It is generally observed course of conduct

by people on a particular matter.

Judicial precedents are an important source of law

It is based on the principle that a rule of law which has been settled by a

series of decisions generally should be followed in similar cases. These rules

of law are known as judicial precedents.

“Statute” an important source of law

The statutes or the statutory law or the legislation is the main source of law.



This law is created by legislation such as Parliament. It is sometimes called

‘enacted law’ as it is brought into existence by getting Acts passed by the

legislative body.

Personal Law :

Many times, a point of issue between parties to a dispute is not covered by

any statute or custom. In such cases, the courts are required to apply the

personal law of the parties.

Secondary Sources of Indian Law :

The secondary sources of Indian Law are English Law and Justice, Equity and

Good Conscience.

English Law

The chief sources of English Law are : (i) the common Law, (ii) Equity, (iii)

The law Merchant and (iv) The Statute Law.

Even though the bulk of our law is based on and follows the English law, yet

in its application our courts have to be selective. It is only when the courts donot find a provision on a particular problem in the primary sources of Indian

law that it may look to subsidiary sources such as English Law.

Q.2 Suman is an agent. In an agency contract, what will be Suman’s

rights and duties? Explain. [10 marks]

Ans :

Duties of Agent:

The duties of agent towards his principal are :



1. To conduct the business of agency according to the principal’s

directions (Sec. 211). The duty of the agent must be literally complied

with i.e. the agent is not supposed to deviate from the directions of the

principal even for the principal’s benefit. If he does so, any loss

occasioned thereby shall have to be borne by the agent, whereas any

surplus must be accounted for to the principal.

2. The agent should conduct the business with the skill and

diligence that is generally possessed by persons engaged in similar

business, except where the principal knows that the agent is wanting in

skill.

3. To render proper accounts (Sec. 213) The agent has to render proper

accounts. If the agent fails to keep proper accounts of the principal’s

business, everything consistent with the proved facts will be presumed

against him. Rendering of accounts does not mean showing the accounts,

but maintaining proper accounts supported by vouchers.

4. To communicate with the principal in case of difficulty (Sec. 214)

It is the duty of agent, in case of difficulty, to use all reasonable diligence,

in communicating with his principal and in seeking to obtain his

instructions. In case of emergency, however, the agent can do all that areasonable man would, under similar circumstances, do with regard to his

own business. He becomes agent by necessity.

5. Not to make any secret Profits. Agent should deliver to the principal

all moneys including secret commission received by him. He can,

however, deduct his lawful expenses and remuneration.

6. Not to deal on his own account. Agent should not deal on his own

account without first obtaining the consent of his principal. If he does so,

the principal can claim from the agent any benefit which he might have

obtained.

7. Not entitled to remuneration for misconduct (Sec. 220). Agent who

is guilty of misconduct in the business of agency is not entitled to any

remuneration in respect of that part of the business which he has



misconducted.

8. Not to disclose confidential information supplied to him by the

principal.

9. To take all reasonable steps for the protection and preservation

of the interests entrusted to him when the principal dies or becomes

of unsound mind (Sec 209).

Rights of Agents

Agents has a number of rights these are :

1. Right to remuneration (Sec. 219-220). Agent is entitled to his

agreed commission or remuneration and if there is no agreement, to a

reasonable remuneration. But the remuneration does not become

payable unless he has carried out the object of agency, except where

there is a contract to the contrary. When the object of agency is

deemed to have been carried out or the act assigned to the agent is

completed would depend on the terms of the contract.

2. Right of retainer (Sec 217). Agent may retain, out of any sums

received on account of the principal in the business of the agency, allmoneys due to himself in respect of advances made or expenses

properly incurred by him in conducting such business and also such

remuneration as may be payable to him for acting as agent. This is

known as agents right of retainer.

3. Right of Lien (Sec . 221). In the absence of any contract to the

contrary, agent is entitled to retain goods, papers and other property,

whether movable or immovable of the principal received by him, until

the amount due to himself for commission, disbursements and services

in respect of the same has been paid or accounted for to him. This lien

of the agent is a particular lien confined to all claims arising in respect

of the particular goods and property. By a special contract, however,

agent may get a general lien extending to all claims arising out of the



agency. Since, the word ‘lien’ means retaining possession, it can be

enjoyed by the agent only where the goods or papers are in actual or

constructive possession of the agent. The right of lien will, therefore,

be lost where he parts with the possession of goods or papers. But if

the possession is obtained from the agent by fraud or unlawful means,

his lien is not affected by the loss of possession.

4. Right of stoppage in transit. The agent can stop the goods while in

transit in two cases : (a) where he has purchased goods on behalf of

the principal either with his own funds, or by incurring a personal

liability for the price, he stands towards the principal in the position of

an unpaid seller. Like an unpaid seller, he enjoys the right of stopping

the goods in transit if in the meantime the principal has become

insolvent. (b) Where agent holds himself liable to his principal for the

price of the goods sold, For E.g. del credere agent, he may exercise the

unpaid seller’s right of stopping the goods in transit in case of buyer’s

insolvency.

5. Right of Indemnification (Secs. 222-224) The principal is bound to

indemnify agent against the consequences of all lawful acts done by

the agent in exercise of authority conferred on him.



Q.3. a. What is a contract of indemnity? Explain? [5 marks]

Ans :

Sec. 124 and 125 for a contract of indemnity. Sec. 124 provides that a

contract of indemnity is a contract whereby one party promises to save the

other from loss caused to him (the promisee) by the conduct of the promisor

himself or by the conduct of any other person. A contract of insurance is a

glaring example of such type of contracts. A contract of indemnity may arise

either by (i) an express promise or (ii) operation of law, e.g. the duty of a

principal to indemnify an agent from consequences of all lawful acts done by

him as an agent. The contract of indemnity, like any other contract, must

have all the essentials of a valid contract. These are two parties in a

contraction of indemnifier and indemnified. The indemnifier promises to

make good the loss of the indemnified (i.e. the promisee).

Example : A contracts to indemnify B against the consequences of any

proceeding which C may take against B in respect of a certain sum of Rs.

200. This is a contract of indemnity.

b. Mention the features of different kinds of guarantees. [5 marks]

Oral or written guarantee

A contract of guarantee may either be oral or in writing (Sec.126), though a

creditor should always prefer to put it in writing to avoid any dispute



regarding the terms, etc. In case of an oral agreement the existence of the

agreement itself is very difficult to prove.

Specific and continuing guarantee

From the point of view of the scope of guarantee a contract of guarantee

may either by specific or continuing. A guarantee is a “specific guarantee”, if

it is intended to be applicable to a particular debt and thus comes to end on

its repayment. A specific guarantee once given is irrevocable.

Example: A guarantees the repayment of a loan of Rs. 10,000 to B by

C (a banker). The guarantee in this case is a specific guarantee.

A guarantee which extends to a series of transactions is called a “continuing

guarantee” (Sec.129)

Example: A guarantees payment to B, a tea-dealer, to the amount of Rs.

10,000 for any tea he may from time to time supply to C. B supplies C with

tea of the value above Rs. 10,000 and C pays B for it. Afterwards B supplies

C with tea to the value of Rs. 15,000. C fails to pay. The guarantee given by

A was a continuing guarantee and he is accordingly liable to B to the extent

of Rs. 10,000.

A guarantee regarding the conduct of another person is a continuing

guarantee. Unlike a specific guarantee which is irrevocable, a continuing

guarantee can be revoked regarding further transactions (Sec.130).

However, continuing guarantee cannot be revoked regarding transactions

that have ready taken place.

The death of the surety operates, in the absence of any contract to the

contrary, as a revocation of a continuing guarantee, so far as regards future

transactions. (Sec.131).



A guarantee may either be for the whole debt or a part of the debt

Difficult questions arise in case of guarantee for a limited amount because

there is an important distinction between a guarantee for only a part of the

whole debt and a guarantee for the whole debt subject to a limit.

For instance, where X owes Y Rs 50,000 and A has stood as surety for

Rs. 30,000, the question may arise whether A has guaranteed Rs. 30,000 out

of Rs. 50,000 or whether he has guaranteed the full amount of

Rs. 50,000 subject to a limit of Rs. 30,000. This matter becomes important if

X is adjudged insolvent and Y wants to prove in X’s insolvency and also

enforce his remedy against A. If A stood surety only for a part of the debt and

if X’s estate can pay only 25 paisa dividend in the rupee, then Y can get

Rs. 30,000 the full amount of guarantee from A and Rs. 5,000 from X’s

estate, being ¼ of the balance, i.e., Rs. 50,000 – Rs. 30,000 = Rs. 20,000

which was not guaranteed. Since after paying Rs. 30,000 to Y, A can claim

from X’s estate, he will get Rs. 7,500 being ¼ of Rs. 30,000 paid by A to Y. If

on the other hand, A had stood surety for the whole debt of Rs 50,000

subject to a limit of Rs. 30,000 then Y can recover from A Rs. 30,000 and

from X’s estate Rs. 12,500, i.e., ¼ of Rs. 50,000. A will not get any dividend

unless Y has been fully paid. This can happen only if X’s estate declares a

higher dividend.



Q.4. Divya, Vidya and Rajendra want to start a partnership firm

dealing with designer jewelery. Explain to them the different

elements in a Partnership deed and other aspect of a partnership

firm. [10 marks]

Ans :

A partnership is defined as “the relationship between persons who have

agreed to share profits of a business carried on by all, or by any of them

acting for all”. On analysis of the definition, certain essential elements of

partnership emerge. These elements must be present so as to form a

partnership and are discussed below.

1. Partnership is an association of two or more than two persons.

There must be at least two persons who should join together to constitute a

partnership, because one person cannot become a partner with himself.

These persons must be natural persons having legal capacity to contract.

Thus, a company (which is an artificial person) cannot be a partner. Similarly,

a partnership firm cannot be a partner of another partnership firm. As

regards maximum number of partners in a partnership firm, Sec.11 of the

Companies Act, 1956, puts the limit at 10 in case of banking business and 20

in case of any other business.



2. Partnership must be the result of an agreement between two or

more persons.

An agreement presupposes a minimum number of two persons. As

mentioned above, a partnership to arise, at least two persons must make an

agreement. Partnership is the result of an agreement between two or more

persons (who are known as partners after the partnership comes into

existence).

3. The agreement must be to carry on some business. The term

‘business’ includes every trade, occupation or profession [Sec.2(b)]. Though

the word ‘business’ generally conveys the idea of numerous transactions, a

person may become a partner with another even in a particular adventure or

undertaking (Sec.8). Unless the person joins for the purpose of carrying on a

business, it will not amount to partnership.

4. The agreement must be to share profits of the business. The joint

carrying on of a business alone is not enough; there must be an agreement

to share profits arising from the business. Unless otherwise so agreed,

sharing of profits also involves sharing of losses. But whereas the sharing of profits is an essential element of partnership, sharing of losses is not.

Example: A, a trader, owed money to several creditors. He agreed to pay his

creditors out of the profits of his business (run under the creditors’

supervision) what he owed to them. Held, the arrangement did not make

creditors partners with A in business [Cox v. Hickman, (1860) 8 H.L.C., 268].

Q. 5 a. Explain the rights of unpaid seller. [5 marks]



Ans :

A contract is comprised of reciprocal promises. In a contract of sale, if selleris under an obligation to deliver goods, buyer has to pay for it. In case buyerfails or refuses to pay, the seller, as unpaid seller, shall have certain rights.

Who is an unpaid seller?

A seller of goods is an unpaid seller when (i) the whole of the price has not

been paid or tendered. (ii) a bill of exchange or other negotiable instrument

has been received as conditional payment and the condition on which it was

received has not been fulfilled by reason of the dishonour of the instrument

or otherwise.

Rights of an unpaid seller

The rights of an unpaid seller may broadly be classified under two heads,

namely: (i) Rights under the Secs.73-74 of the Indian Contract Act, 1872, i.e.,

to recover damages for breach of contract. (ii) Rights under the Sale of

Goods Act, 1930: (a) rights against the goods; (b) rights against the buyer

personally. The rights against the goods are as follows:

Lien on goods (Secs. 47-49)

The word lien means to retain possession of. An unpaid seller who is in

possession of goods is entitled to retain them in his possession until paymentor tender of the price in three situations, namely, (a) where the goods have

been sold without any stipulation as to credit; (b) where the goods have been

sold on credit, but the term of credit has expired; (c) where the buyer

becomes insolvent. Lien can be exercised only for non-payment of the price

and not for any other charges due against the buyer. For Example, the seller

cannot claim lien for godown charges for storing the goods in exercise of his

lien for the price.

Right of stoppage in transit

This right of the unpaid seller consists in preventing the goods from being

delivered to the buyer and resuming and regaining their possession while in

transit, retaining them till the price is paid. The right of stoppage in transit is

earned only where the right of lien is lost and is available only where the

buyer has become insolvent (Sec.50).



Right of resale (Sec.54)

The unpaid seller, who has retained the possession of the goods in exercise

of his right of lien or who has resumed possession from the carrier upon

insolvency of the buyer, can resell the goods, (i) if the goods are of a

perishable nature, without any notice to the buyer and (ii) in other casesafter notice to buyer calling upon him to pay or tender the price within a

reasonable time and upon failure of the buyer to do so.

b. What are the remedies available for breach of contract? [5 marks]

Ans :

When someone breaches a contract, the other party is no longer obligated to

keep its end of the bargain. From there, that party may proceed in several

ways: (i) the other party may urge the breaching party to reconsider the

breach; (ii) if it is a contract with a merchant, the other party may get help

from consumers’ associations; (iii) the other party may bring the breaching

party to an agency for alternative dispute resolution; (iv) the other party may

sue for damages; or (v) the other party may sue for other remedies.

Rescission of the contract: When a breach of contract is committed byone party, the other party may treat the contract as rescinded. In such a

case the aggrieved party is freed from all his obligations under the contract.

Damages (Sec.75): Another relief or remedy available to the promisee in

the event of a breach of promise by the promisor is to claim damages or loss

arising to him therefrom. Damages under Sec.75 are awarded according to

certain rules as laid down in Secs.73-74. Sec.73 contains three important

rules: (i) Compensation as general damages will be awarded only for those

losses that directly and naturally result from the breach of the contract. (ii)

Compensation for losses indirectly caused by breach may be paid as special

damages if the party in breach had knowledge that such losses would also



follow from such act of breach. (iii) The aggrieved party is required to take

reasonable steps to keep his losses to the minimum.

What is the most common remedy for breach of contracts: The usual

remedy for breach of contracts is suit for damages. The main kind of

damages awarded in a contract suit are ordinary damages. This is the

amount of money it would take to put the aggrieved party in as good a

position as if there had not been a breach of contract. The idea is to

compensate the aggrieved party for the loss he has suffered as a result of

the breach of the contract.

Q. 6. a. Discuss the essentials of a valid contract. [6 marks]

Ans :

Contract

A contract is an agreement, enforceable by law, made between at least two

parties by which rights are acquired by one and obligations are created on

the part of another. If the party, which had agreed to do something, fails to

do that, then the other party has a remedy.

Example: D Airlines sells a ticket on 1 January to X for the journey from

Mumbai to Bangalore on 10 January. The Airlines is under an obligation to

take X from Mumbai to Bangalore on 10 January. In case the Airlines fails to

fulfil its promise, X has a remedy against it.

Thus, X has a right against the Airlines to be taken from Mumbai to

Bangalore on 10 January. A corresponding duty is imposed on the Airlines. As

there is a breach of promise by the promisor (the Airlines), the other party to

the contract (i.e., X) has a legal remedy.



Agreement

Sec.2(e) defines an agreement as “every promise and every set of promises

forming consideration for each other”. In this context, the word ‘promise’ is

defined by Sec.2(b). In a contract there are at least two parties. One of them

makes a proposal (or an offer) to the other, to do something, with a view to

obtaining the assent of that other to such act. When the person to whom the

proposal is made signifies his assent thereto, the proposal is said to be

accepted. A proposal, when accepted becomes a promise (Sec.2(b)).

Enforceability by law: The agreement must be such which is enforceable by

law so as to become a contract. Thus, there are certain agreements which do

not become contracts as this element of enforceability by law is absent.

Essentials of a contract

Sec.10 provides that all agreements are contracts, if they are made by free

consent of parties, competent to contract, for a lawful consideration, and

with a lawful object, and are not expressly declared by law to be void. To

constitute a contract, there must be an agreement between two or more

than two parties. No one can enter into a contract with himself. An

agreement is composed of two elements – offer or proposal by one party and

acceptance thereof by the other party.

Effect of absence of one or more essential elements of a valid contract: If one

or more essentials of a valid contract are missing, then the contract may be

either voidable, void, illegal or unenforceable.

b. What is consideration? Give some examples.

Ans :



One of the essential elements of a valid contract is that it must be supported

by consideration.

In simple terms consideration is what a promisor demands as the price for

his promise. The term consideration is used in the sense of quid pro que, i.e.,

“something in return”. This something or consideration need not be in terms

of money. This “something” may even be some benefit, right, interest or

profit accruing to one party, or some forbearance, detriment, loss or

responsibility given, suffered or undertaken by the other party. Also a

promise by one party may be consideration for the promise of other party.

“No consideration, no contract” (Secs.10 and 25)

A promise without consideration cannot create a legal obligation. A person

who makes a promise to do or abstain from doing something usually does so

as a return of equivalent of some loss, damage, or inconvenience that may

have or may have been occasioned to the other party in respect of the

promise.

Assignment Set- 2

Q.1 What is a negotiable instrument? Explain its features and differenttypes of

negotiable instruments with its treatment.

To understand the meaning of negotiable instruments let us take a fewexamples of day-to-day

business transactions.

Suppose Pitamber, a book publisher has sold books to Prashant for Rs

10,000/- on three months

credit. To be sure that Prashant will pay the money after three months,

Pitamber may write an



Order addressed to Prashant that he is to pay after three months, for value of

goods received by

him, Rs.10, 000/- to Pitamber or anyone holding the order and presenting it

before him (Prashant)

for payment. This written document has to be signed by Prashant to show his

acceptance of theorder. Now, Pitamber can hold the document with him for three months and

on the due date can

collect the money from Prashant. He can also use it for meeting different

business transactions.

For instance, after a month, if required, he can borrow money from Sunil for

a period of two

months and pass on this document to Sunil. He has to write on the back of

the document an

instruction to Prashant to pay money to Sunil, and sign it. Now Sunil becomes

the owner of thisdocument and he can claim money from Prashant on the due date. Sunil, if

required, can further

pass on the document to Amit after instructing and signing on the back of

the document. This

passing on process may continue further till the final payment is made.

In the above example, Prashant who has bought books worth Rs. 10,000/-

can also give an

undertaking stating that after three month he will pay the amount to

Pitamber. Now Pitamber can

retain that document with himself till the end of three months or pass it on toothers for meeting

certain business obligation (like with Sunil, as discussed above) before the

expiry of that three

months time period.

You must have heard about a cheque. What is it? It is a document issued to a

bank that entitles

the person whose name it bears to claim the amount mentioned in the

cheque. If he wants, he

can transfer it in favour of another person. For example, if Akash issues a

cheque worth Rs.5,000/

- In favour of Bidhan, then Bidhan can claim Rs. 5,000/- from the bank, or he

can transfer it to

Chander to meet any business obligation, like paying back a loan that he

might have taken from

Chander. Once he does it, Chander gets a right to Rs. 5,000/- and he can

transfer it to Dayanand,



if required. Such transfers may continue till the payment is finally made to

somebody.

In the above examples, we find that there is certain documents used for

payment in business

transactions and are transferred freely from one person to another. Such

documents are calledNegotiable Instruments. Thus, we can say negotiable instrument is a

transferable document,

where negotiable means transferable and instrument means document. To

elaborate it further, an

instrument, as mentioned here, is a document used as a means for making

some payment and it

is negotiable i.e., its ownership can be easily transferred.

Thus, negotiable instruments are documents meant for making payments,

the ownership of which

can be transferred from one person to another many times before the final

payment is made Definition of Negotiable Instrument

According to section 13 of the Negotiable Instruments Act, 1881, a

negotiable instrument means

“promissory note, bill of exchange, or cheque, payable either to order or to

bearer”.

Types of Negotiable Instruments

According to the Negotiable Instruments Act, 1881 there are just three types

of negotiable

instruments i.e., promissory note, bill of exchange and cheque. However

many other documents

are also recognized as negotiable instruments on the basis of custom and

usage, like hundis,

treasury bills, share warrants, etc., provided they possess the features of

negotiability. In the

following sections, we shall study about Promissory Notes (popularly called

pronotes), Bills of

Exchange (popularly called bills), Cheque and Hundis (a popular indigenous

document prevalent

in India), in detail.i. Promissory Note

Suppose you take a loan of Rupees Five Thousand from your friend Ramesh.

You can make a

document stating that you will pay the money to Ramesh or the bearer on

demand. Or you can



mention in the document that you would like to pay the amount after three

months. This

document, once signed by you, duly stamped and handed over to Ramesh,

becomes a

negotiable instrument.

Now Ramesh can personally present it before you for payment or give thisdocument to some

other person to collect money on his behalf. He can endorse it in somebody

else’s name who in

urn can endorse it further till the final payment is made by you to whosoever

presents it before

you. This type of a document is called a Promissory Note.

Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note

as ‘an instrument in

writing (not being a bank note or a currency note) containing anunconditional 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’.

Specimen of a Promissory Note

Rs. 10,000/- New Delhi

September 25, 2002

On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a sum

of

Rs 10,000/- (Rupees Ten Thousand only), for value received. To, Ramesh Sd/ Sanjeev

Address… Stamp

Features of a promissory note

Let us know the features of a promissory note.

i. A promissory note must be in writing, duly signed by its maker and

properly stamped as per

Indian Stamp Act.

ii. It must contain an undertaking or promise to pay. Mere acknowledgement

of indebtedness is

not enough. For example, if some one writes ‘I owe Rs. 5000/- to SatyaPrakash’, it is not a

promissory note.

iii. The promise to pay must not be conditional. For example, if it is written ‘I

promise to pay

Suresh Rs 5,000/- after my sister’s marriage’, is not a promissory note.

iv. It must contain a promise to pay money only. For example, if some one

writes ‘I promise to



give Suresh a Maruti car’ it is not a promissory note.

v. the parties to a promissory note, i.e. the maker and the payee must be

certain.

vi. A promissory note may be payable on demand or after a certain date. For

example, if it is

written ‘three months after date I promise to pay Satinder or order a sum of rupees Five

Thousand only’ it is a promissory note.

vii. The sum payable mentioned must be certain or capable of being made

certain. It means

that the sum payable may be in figures or may be such that it can be

calculated

Cheque is a very common form of negotiable instrument. If you have asavings bank account orcurrent account in a bank, you can issue a cheque in your own name or in

favour of others,thereby directing the bank to pay the specified amount to the person namedin the cheque. Therefore, a cheque may be regarded as a bill of exchange; the onlydifference is that the bank isalways the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchangedrawn on aspecified banker and not expressed to be payable otherwise than ondemand. Actually, a chequeis an order by the account holder of the bank directing his banker to pay on

demand, the specifiedamount, to or to the order of the person named therein or to the bearer.iv. HundisA Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn inany local language in accordance with the custom of the place. Some times itcan also be in theform of a promissory note. A Hundi is the oldest known instrument used forthe purpose of transfer of money without its actual physical movement. The provisions of the NegotiableInstruments Act shall apply to hundis only when there is no customary ruleknown to the people.Types of Hundis There are a variety of hundis used in our country. Let us discuss some of themost common ones.Shah-jog Hundi: one merchant draws this on another, asking the latter to paythe amount to a



Shah. Shah is a respectable and responsible person, a man of worth andknown in the bazaar. Ashah-jog Hundi passes from one hand to another till it reaches a Shah, who,after reasonableenquiries, presents it to the drawee for acceptance of the payment.

Darshani Hundi: This is a Hundi payable at sight. The holder must present itfor payment within areasonable time after its receipt. Thus, it is similar to a demand bill.Muddati Hundi: A Muddati or miadi Hundi is payable after a specified period of time. This issimilar to a time bill. There are few other varieties like Nam-jog Hundi, Dhani-jog Hundi, and Jawabee Hundi, JokhamiHundi, Fireman-jog Hundi, etc.Features of Negotiable InstrumentsAfter discussing the various types of negotiable instruments let us sum up

their features as under.A negotiable instrument is freely transferable. Usually, when we transfer anyproperty tosomebody, we are required to make a transfer deed, get it registered, paystamp duty, etc.But, such formalities are not required while transferring a negotiableinstrument. The ownership ischanged by mere delivery (when payable to the bearer) or by validendorsement and delivery(when payable to order). Further, while transferring it is also not required togive a notice to the

previous holder.ii. Negotiability confers absolute and good title on the transferee. It meansthat a person whoreceives a negotiable instrument has a clear and undisputable title to theinstrument. However,the title of the receiver will be absolute, only if he has got the instrument ingood faith and for aconsideration. Also the receiver should have no knowledge of the previousholder having anydefect in his title. Such a person is known as holder in due course. Forexample, suppose Rajeev

issued a bearer cheque payable to Sanjay. A person, who passed it on toGirish, stole it fromSanjay. If Girish received it in good faith and for value and without knowledgeof cheque havingbeen stolen, he will be entitled to receive the amount of the cheque. HereGirish will be regardedas ‘holder in due course’.



iii. A negotiable instrument must be in writing. This includes handwriting,typing, computer printout and engraving, etc.iv. In every negotiable instrument there must be an unconditional order orpromise for payment.

v. The instrument must involve payment of a certain sum of money only andnothing else. Forexample, one cannot make a promissory note on assets, securities, or goods.vi. The time of payment must be certain. It means that the instrument mustbe payable at a timewhich is certain to arrive. If the time is mentioned as ‘when convenient’ it isnot a negotiableinstrument. However, if the time of payment is linked to the death of aperson, it is nevertheless anegotiable instrument as death is certain, though the time thereof is not.vii. The payee must be a certain person. It means that the person in whose

favour the instrumentis made must be named or described with reasonable certainty. The term‘person’ includesindividual, body corporate, trade unions, even secretary, director orchairman of an institution. The payee can also be more than one person.viii. A negotiable instrument must bear the signature of its maker. Withoutthe signature of thedrawer or the maker, the instrument shall not be a valid one.

ix. Delivery of the instrument is essential. Any negotiable instrument like acheque or apromissory note is not complete till it is delivered to its payee. For example,you may issue acheque in your brother’s name but it is not a negotiable instrument till it isgiven to your brother.x. Stamping of Bills of Exchange and Promissory Notes is mandatory. This isrequired as per theIndian Stamp Act, 1899. The value of stamp depends upon the value of thepromote or bill andthe time of their payment.Negotiation and indorsementPersons other than the original obligor and obligee can become parties to anegotiableinstrument. The most common manner in which this is done is by placingone's signature on theinstrument (“indorsement”): if the person who signs does so with theintention of obtainingpayment of the instrument or acquiring or transferring rights to theinstrument, the signature is



called anin do rse me nt. There are four types of indorsements contemplatedby the Code:•An indorsement which purports to transfer the instrument to a specifiedperson is a

special indorsement;•An indorsement by the payee or holder which does not contain any additionalnotation(thus puporting to make the instrument payable to bearer) is an indorsementin blank ;•An indorsement which purports to require that the funds be applied in acertain manner(i.e. "for deposit only", "for collection") is a restrictive indorsement; and,•

An indorsement purporting to disclaim retroactive liability is called aqu a lif iedindorsement (through the inscription of the words "without recourse" as partof theindorsement on the instrument or in allonge to the instrument).If a note or draft is negotiated to a person who acquires the instrument1.in good faith;2.for value;3.without notice of any defenses to payment,the transferee is a holder in due course and can enforce the instrument wit ho ut being subject todefenses which the maker of the instrument would be able to assert against

the original payee,except for certain real defenses. These real defenses include (1) forgery of theinstrument; (2)fraud as to the nature of the instrument being signed; (3) alteration of theinstrument; (4)incapacity of the signer to contract; (5) infancy of the signer; (6) duress; (7)discharge inbankruptcy; and, (8) the running of a statute of limitations as to the validityof the instrument. The holder-in-due-course rule is a rebuttable presumption that makes the freetransfer of

negotiable instruments feasible in the modern economy. A person or entitypurchasing aninstrument in the ordinary course of business can reasonably expect that itwill be paid whenpresented to, and not subject to dishonor by, the maker, without involvingitself in a disputebetween the maker and the person to whom the instrument was first issued(this can be



contrasted to the lesser rights and obligations accruing to mere holders).Article 3 of the UniformCommercial Code as enacted in a particular State's law contemplate realdefenses available topurported holders in due course.

The foregoing is the theory and application presuming compliance with therelevant law.Practically, the obligor-payor on an instrument who feels he has beendefrauded or otherwiseunfairly dealt with by the payee may nonetheless refuse to pay even a holderin due course,requiring the latter to resort to litigation to recover on the instrument.

\

Q.2 a Q.4. Discuss the Patents Act applicable to business organisation in detail.

A patent (a set of exclusive rights granted by a state (national government) to an inventor or their

assignee for a limited period of time in exchange for a public disclosure of an invention.

The procedure for granting patents, the requirements placed on the patentee, and the extent of the

exclusive rights vary widely between countries according to national laws and international agreements.

Typically, however, a patent application must include one or more claims defining the invention which

must be new, non-obvious, and useful or industrially applicable. In many countries, certain subject

areas are excluded from patents, such as business methods, treatment of the human body[citation needed ], and

mental acts. The exclusive right granted to a patentee in most countries is the right to prevent others from

making, using, selling, or distributing the patented invention without permission.[1] It is just a right to

prevent others' use. A patent does not give the proprietor of the patent the right to use the patented

invention, should it fall within the scope of an earlier patent.

Under the World Trade Organization's (WTO) Agreement on Trade-Related Aspects of Intellectual

Property Rights, patents should be available in WTO member states for any inventions, in all fields of

technology,[2] and the term of protection available should be the minimum twenty years.[3]Different types of

patents may have varying patent terms (i.e., durations).

Q. 5 a. What is a digital signature? Explain briefly. [6 marks]

b. Distinguish between patents and copyrights

http://en.wikipedia.org/wiki/Exclusive_right

http://en.wikipedia.org/wiki/State_(polity)

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http://en.wikipedia.org/wiki/Invention



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http://en.wikipedia.org/wiki/Agreement_on_Trade-Related_Aspects_of_Intellectual_Property_Rights





http://en.wikipedia.org/wiki/Patent#cite_note-PatentLength-2

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A digital signature or digital signature scheme is a mathematical scheme for demonstrating the

authenticity of a digital message or document. A valid digital signature gives a recipient reason to believe

that the message was created by a known sender, and that it was not altered in transit. Digital signatures

are commonly used for software distribution, financial transactions, and in other cases where it is

important to detect forgery or tampering.

opyright is a form of protection provided to the authors of "original works of authorship"

including literary, dramatic, musical, artistic, and certain other intellectual works, both

published and unpublished. The 1976 Copyright Act generally gives the owner of copyright

the exclusive right to reproduce the copyrighted work, to prepare derivative works, to

distribute copies or phonorecords of the copyrighted work, to perform the copyrighted work

publicly, or to display the copyrighted work publicly.

The copyright protects the form of expression rather than the subject matter of the writing.

For example, a description of a machine could be copyrighted, but this would only prevent

others from copying the description; it would not prevent others from writing a description

of their own or from making and using the machine. Copyrights are registered by the

Copyright Office of the Library of Congress.

What Is a Trademark or Servicemark?

A trademark is a word, name, symbol or device which is used in trade with goods to indicate

the source of the goods and to distinguish them from the goods of others. A servicemark is

the same as a trademark except that it identifies and distinguishes the source of a service

rather than a product. The terms "trademark" and "mark" are commonly used to refer to

both trademarks and servicemarks.

Trademark rights may be used to prevent others from using a confusingly similar mark, but

not to prevent others from making the same goods or from selling the same goods or

services under a clearly different mark. Trademarks which are used in interstate or foreign

commerce may be registered with the Patent and Trademark Office. The registration

procedure for trademarks and general information concerning trademarks is described in a

separate pamphlet entitled "Basic Facts about Trademarks".

What Is a Patent?



A patent for an invention is the grant of a property right to the inventor, issued by the

Patent and Trademark Office. The term of a new patent is 20 years from the date on which

the application for the patent was filed in the United States or, in special cases, from the

date an earlier related application was filed, subject to the payment of maintenance fees. US

patent grants are effective only within the US, US territories, and US possessions.

The right conferred by the patent grant is, in the language of the statute and of the grant

itself, "the right to exclude others from making, using, offering for sale, or selling" the

invention in the United States or "importing" the invention into the United States. What is

granted is not the right to make, use, offer for sale, sell or import, but the right to exclude

others from making, using, offering for sale, selling or importing the invention.

(Excerpted from General Information Concerning Patents, U.S. Patent and Trademark Office

website)

Some additional differences between a copyright and a trademark are as follows:

1. The purpose of a copyright is to protect works of authorship as fixed in a tangible form

of expression. Thus, copyright covers: a) works of art (2 or 3 dimensional), b) photos,

pictures, graphic designs, drawings and other forms of images; c) songs, music and sound

recordings of all kinds; d) books, manuscripts, publications and other written works; and e)

plays, movies, shows, and other performance arts.

2. The purpose of a trademark is to protect words, phrases and logos used in federally

regulated commerce to identify the source of goods and/or services.

3. There may be occasions when both copyright and trademark protection are desired with

respect to the same business endeavor. For example, a marketing campaign for a new

product may introduce a new slogan for use with the product, which also appears in

advertisements for the product. However, copyright and trademark protection will coverdifferent things. The advertisement's text and graphics, as published in a particular vehicle,

will be covered by copyright - but this will not protect the slogan as such. The slogan may

be protected by trademark law, but this will not cover the rest of the advertisement. If you

want both forms of protection, you will have to perform both types of registration.

4. If you are interested in protecting a title, slogan, or other short word phrase, generally



you want a trademark. Copyright law does not protect a bare phrase, slogan, or trade

name.

5. Whether an image should be protected by trademark or copyright law depends on

whether its use is intended to identify the source of goods or services. If an image is used

temporarily in an ad campaign, it generally is not the type of thing intended to be protected

as a logo.

6. The registration prcesses of copyright and trademark are entirely different. For

copyright, the filing fee is small, the time to obtain registration is relatively short, and

examination by the Copyright Office is limited to ensuring that the registration application is

properly completed and suitable copies are attached. For trademark, the filing fee is more

substantial, the time to obtain registration is much longer, and examination by the

Trademark Office includes a substantive review of potentially conflicting marks which are

found to be confusingly similar. While copyright registration is primarily an administrative

process, trademark registration is very much an adversarial process.

7. Copyright law provides for compulsory licensing and royalty payments - there is no

analogous concept in trademark law. Plus, the tests and definition of infringement are

considerably different under copyright law and trademark law.

Q. 6 Krishnakanth is a consumer who usually feels manipulated by the sellers. He

has a misconception that the value or the price he pays for products especially

for electronic goods is not actually that much worth. He wants to know about

Consumer Protection Act and its proceedings. Please educate him on this

Penalties; consumer protection act proceedings; agent liability. (a) Any person

who violates any provision of this act is guilty of a class C misdemeanor for the first

conviction, a class B misdemeanor for the second conviction and a class A

misdemeanor for a third or subsequent conviction.



(b) In addition to or instead of the criminal penalties provided by subsection (a),

a person who violates any provision of this act shall be subject to proceedings under

the Kansas consumer protection act.

(c) An individual who violates any provision of this act while acting in the name

of or on behalf of any person is liable to the same extent as if the individual wereacting in the individual's own name or own behalf.

Documents

Llegal Aspects of Business