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Business Laws Unit 1: Business Organization By-CS.Pradeep Kumar Gupta
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Types of Business Organization 1. Proprietorship 2. Partnership – Make a partnership deed - Optional to register with the Registrar of Firms’ Office which exist in each state 3. Company – To register with the Registrar of Companies which exist in each state (ROC) governed by the Companies Act, 1956
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Various Registrations under different acts a. If sell goods which are subject to VAT, get registered with the state VAT governed by the state VAT Act b. If sell Services, get registered with the Central Service Tax governed by the Service Tax Act c. If manufacturer of Goods, apply for registration under The Central Excise Act, 1960
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Registration under Income Tax Act, 1961 d.Income Tax Act, 1961 applicable if in case of - proprietor, the income of the proprietor exceeds the exemption limit of income liable for tax - In case of partnership once the firm starts earning income - In case of Company once the Co. starts earning income - to register with Income Tax apply for PAN No. e.Apply for TAN No. if liable to deduct tax at source (TDS) under sections 192 to 206 of Income Tax Act, 1961 - TDS applicable, if employees earn more than the exemption limit of income liable for tax - If make payment to contractors exceeding Rs. 30,000 / aggregate of payments Rs. 75,000 in a financial year (F.Y.) - If make payment of rent exceeding Rs. 1,80,000 in a F.Y. - If make payment of fees for professional & technical services exceeding Rs.30,000 in a F.Y., etc.
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Registrations under various other acts The Industries (Development and Regulations) Act, 1951; Factories Act, 1948; The Minimum Wages Act, 1948; The Banking Regulation Act, 1949; The Employees’ Provident Funds & Miscellaneous Provisions Act,1952; The Insurance Regulatory & Development Authority Act, 1999; The Foreign Exchange Management Act, 1999; The Shops & Establishments Act; The Securities & Exchange Board of India Act, 1992; The Export-Import Bank of India Act, 1981;
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The Indian Contract Act 1872 Meaning of Agreement- “Every promise and every set of promises forming the consideration for each other is an agreement” Here promise means a proposal or offer which has been accepted. “when a person puts any offer before the other and the other accept it,the same become promise” Ex-1 Dinner Between Ram and Shyam Ex-2 A pays to B 5000 if B does not go to outside
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Offer indicates a persons willingness to do or not to do something so that the other person may give his consent Agreement =Offer +Acceptance Essentials of an Agreement- 1-Minimum two parties 2-Promise 3-Identity of mind-Same things in same sense
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Meaning of Contract- “A contract is a legal agreement. It is an exchange of promises by two persons in which there is an obligation to do or not to do a particular act and such obligation is enforceable by law.” It means for contract- 1-There must be an agreement 2-Such agreement must be enforceable by law
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Offer + Acceptance Agreement + Enforceable by Law Agreement Contract
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All Contracts are agreements, but all agreements are not contracts A- All Contracts are Agreement-for a contract there must be two things- 1-There must be an agreement 2-Such agreement must be enforceable by law
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The Indian Contract Act, 1872 Essentials of a Valid Contract u/s 2(h), 3 to 18, 29 and 56 u/s 2(h): An agreement enforceable by law is a contract u/s 10: All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. 1.Offer and Acceptance - Lawful offer & lawful acceptance resulting into an agreement - Lawful means the offer & acceptance must satisfy the requirements of the Contract Act
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2. Intention to create legal relations - Intention among the parties that the agreement must be attached by legal consequences & create legal obligations - Agreements of social nature do not create legal relations - Case of Balfour vs. Balfour - In commercial agreements an intention to create legal relations is presumed unless parties to the agreement expressly resolve that the intention is not to create legal obligations
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3. Lawful Consideration - Presence of consideration - Consideration is the price paid by one party for the promise of the other - Each of the parties to it gives something and gets something - Consideration may be an act (doing something) or forbearance (not doing something) - u/s 23 Consideration is lawful if a. it is not forbidden by law b. does not defeat the provisions of any law c. is not fraudulent d. does not involve/imply injury to the person/property of another e. is not immoral f. is not opposed to public policy
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4. Capacity of Parties - The parties to an agreement must be competent to contract otherwise it cannot be enforced by a court of law - u/s 11 Every person is competent to contract who is- a. of the age of majority b. of sound mind c. not disqualified from contracting by any law to which he is subject.
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5. Free Consent - U/S 13 Consent means that the parties must have agreed upon the same thing in the same sense - u/s 14 There is absence of ‘free consent’ if the agreement is induced by i) Coercion (u/s 15) ii) Undue Influence (u/s 16) iii) Fraud (u/s 17) iv) Misrepresentation (u/s 18) a statement of fact made innocently/ believing it to be true to induce the other party to enter into contract For e.g. A wants to sell land to B. A says that land is fertile believing it to be true but without verifying it. B purchases the land and the land turns out to be non-fertile i) Mistake
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6. Lawful Object - u/s 23 Object is lawful if a. it is not forbidden by law b. does not defeat the provisions of any law c. is not fraudulent d. does not involve/imply injury to the person/property of another e. is not immoral f. is not opposed to public policy - If a landlord knowingly lets a house to carry out illegal activities, the object is unlawful
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7. Writing & Registration - A contract may be oral/in writing - But, where under any other act, it is laid down that for the agreement to be valid, it must be in writing or/and registered it must be done so - u/s 25 Agreement without consideration/ promise to compensate for something done or promise to pay a debt barred by limitation law, must be in writing and registered
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8. Certainty - The terms of the agreement must not be vague/uncertain - It must be possible to ascertain the meaning of the agreement - A agrees to sell B a hundred tons of oil, this is uncertain since the type of oil is not specified 9. Possibility of performance - Agreement must be capable of performance - The act must not be impossible in itself, physically/legally - A agrees with B to discover treasure by magic 10. Not expressly declared Void - u/s 24-30 restrain of marrige,restrain of trade expessly declared void - If A agree to B pay rs.5000 to not marrige in his whole life is void contract.
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Void and Voidable Contracts and Void Agreements u/s 2(i), 19 to 30, 32, 36, 56 Voidable Contract u/s 2(i) - An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract - A contract becomes voidable i) * When the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud * u/s 19 & 19A Such contract is voidable at the option of the aggrieved party if a. The option is exercised within a reasonable time and b. Before the rights of third parties intervene
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Voidable Contract (Contd.) ii) u/s 53 When a contract contains reciprocal promises and one party to the contract prevents the other from performing his promise * A contracts with B to whitewash B’s house. A is ready & willing to execute the work but B prevents iii)u/s 55 When a party to the contract promises to do a certain thing within a specified time, but fails to do it, and the intention of the parties was that, time should be of the essence of the contract
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Consequences of rescission of Voidable Contract - u/s 64 i) When a person at whose option a contract is voidable rescinds it, the other party need not perform any promise therein contained in which he is a promisor ii) If the party rescinding a voidable contract has received any benefit from another party to such contract, he must restore such benefit to the person from whom it was received
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Void Contract -Void means not binding in law - u/s 2(j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable - A void contract is valid and binding on the parties, when originally entered, but after its formation it becomes invalid because of: a) Supervening impossibility (u/s 56) * Performance is impossible after the formation of the contract * A & B contract to marry, but before marriage, A goes mad b) Subsequent illegality (u/s 56) A agrees to sell B 100 bags of wheat at Rs. 1,650 per bag. Before delivery, Govt. bans private trading in wheat
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Reasons of Valid Contract becoming Void (Contd.) c) Repudiation of a voidable contract If the party at whose option the contract is voidable exercises the option, the contract becomes void d) u/s 32 In the case of a contract contingent on the happening of an uncertain future event, if that event becomes impossible A contracts to give Rs. 1,000 as loan to B, if B marries C. C dies without being married to B
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Void Agreement - u/s 2(g) An agreement not enforceable by law is said to be void - It is void ab-initio i.e. such an agreement is no agreement from the beginning - There is absence of one or more essential elements of a valid contract except that of free consent - Void agreement is void ab-initio
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Void Agreements Expressly Declared as Void Contract 1. u/s 11 Agreements by a minor or a person of unsound mind 2. u/s 20 Agreements made under a bilateral mistake of fact material to the agreement 3. u/s 23 Agreements of which the consideration/ object is unlawful 4. u/s 24 Agreements of which the consideration/ object is unlawful in part and the illegal part cannot be separated from the legal part 5. u/s 25 agreements made without consideration
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Expressly declared Void Agreements 1. Agreement in restraint of Marriage u/s 26 Eg. A agrees with B that she will not marry C 2. Agreement in restraint of Trade u/s 27 Eg. A agrees to close his business Exceptions: i) Sale of Goodwill The seller of goodwill of a business can be restrained from carrying on a similar business within specified local limits provided the restraint is reasonable in point of time and space e.g. A sells the goodwill of his business to B & promises not to carry on similar business anywhere in the world. Restraint is unreasonable and so the agreement is void
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Exceptions to agreements in Restraint of Trade (Contd.) ii) Partner’s agreements Partners can be restrained if there is an agreement: a. Among the partners that a partner shall not carry on any business while he is a partner b. By a partner with his other partners that on retiring from the partnership he will not carry on any business similar to that of the firm within a specified period/within specified local limits, if the restrictions imposed are reasonable c. Among the partners upon/in anticipation of the dissolution of the firm that some/ all of them will not carry on a business similar to that of the firm within a specified period/within specified local limits, if the restrictions imposed are reasonable d. Between any partner and the buyer of the firm’s goodwill that such partner will not carry on any business similar to that of the firm within a specified period/within specified local limits, if the restrictions imposed are reasonable
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Exceptions to agreements in Restraint of Trade (Contd.) iii) Trade Combinations * An agreement, to regulate the business is valid If- * Agreements in the nature of a business combination between traders/manufacturers e.g. not to sell their goods below a certain price (Fraser & Co. Vs Bombay Ice Co.) * But, if an agreement attempts to create a monopoly, it is void
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Exceptions to agreements in Restraint of Trade (Contd.) iv) Negative stipulations in service agreements * An agreement of service by which a person binds himself during the term of the agreement, not to take service with anyone else, is valid * But, an agreement of service which restricts occupation for some period, after the termination of service, is void (Brahamputra Tea Co. Vs Scarth)
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Expressly declared Void Agreements (Contd.) 3. Agreements in restraint of Legal Proceedings u/s 28 Following agreements are void i)An agreement by which a party is restricted from taking legal proceedings, in respect of any rights arising from a contract Exceptions (a)Does not affect the law relating to arbitration (b) Does not affect an agreement whereby parties agree not to file an appeal in a higher court (c) Does not prevent the parties to a contract from selecting one of the two courts which are equally competent to try the suit
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Agreements in restraint of Legal Proceedings (Contd.) ii)An agreement which limits the time within which one may enforce his contract rights, without regard to the time allowed by the Limitation Act E.g. A & B contract that either party can sue for breach within a year of breach. The clause is void because the time allowed by the Limitation Act is three years iii) An agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified period, without regard to the time allowed by the Limitation Act. E.g. Insurance companies cannot insist that suits for claims be brought within a period of time shorter than the period provided under the Limitation Act, otherwise all benefits under the policy shall be forfeited
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Expressly declared Void Agreements (Contd.) 4. Uncertain Agreements u/s 29 An agreement to enter into an agreement in future is void for uncertainty unless all the terms of the proposed agreement are agreed clearly 5. Wagering Agreements u/s 30 Wager means a bet, something stated to be lost/won on the result of a doubtful issue Ex- There is an agreement between A and B which provides that if it rains on a particular day,will pay B Rs.1000 and if it does not rain B will pay the same amount to A. It is wagering Agreement Exception Prize amounting to >= Rs.500 to be awarded to the winner of any horse race.
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Special cases whether wager/not a. Commercial transactions * Agreements for sale & purchase of any commodity/share market transactions, with a genuine intention to give & take delivery of goods/shares are not wagering agreements * If parties only want to gamble on the rise/fall of the market by paying/receiving the difference in prices only, the transaction is a wager b. Lotteries * It is a wager * Sometimes lottery is authorised by Govt. e.g Maharashtra & Gujarat, then the effect is that persons running the lottery are not guilty of criminal offence but such agreements are void because they are wager
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Special cases whether wager/not (Contd.) c. Crossword Puzzles * When prizes depend upon a chance, it is a lottery and so a wager * if prizes depend upon skill & intelligence, it is not a wager, but, if such prizes exceed Rs. 1,000 they are wagers as per the provisions of the Prize Competition Act, 1955 d. Insurance Contracts Valid contracts because: i) They are entered to protect the interest of the holder of the policy but in wagering there is no interest to protect but only a means to make some easy money ii) Insurance contracts are based on scientific calculation of risks whereas wagering agreements are a gamble without any scientific calculation of risks iii) Insurance contracts are beneficial to the public whereas wagering agreements do not serve any useful purpose
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Expressly declared Void Agreements (Contd.) 6. Agreements contingent on impossible events u/s 36 Contingent agreements to do/ not to do, if an impossible event happens are void e.g. A agrees to pay B Rs. 1,000 as a loan if B marries A’s daughter C. But, C was dead at the time of agreement. 7.Agreements to do Impossible Acts u/s 56
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Obligation of person receiving advantage under Void Agreement/Void Contract u/s 65 the person is bound to restore the advantage received/make compensation for it, to the person from whom he received it when a)An agreement is discovered to be void * But, if the agreement is known to be void when entered into, no such obligation arises if A pays Rs. 10,000 to B to murder C, the money cannot be recovered * Nothing can be recovered in the case of expressly declared void agreements except for: i)u/s 20 In the case of an agreement caused by bilateral mistake of essential fact restoration is allowed since agreement is not known to be void but is discovered to be void ii) In the case of an agreement with a minor who commits fraud by misrepresenting his age restoration is allowed
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Performance of Contracts It means fulfilling of their respective legal obligations created under the contract by both the promisor and the promisee Who can demand Performance -Only the promisee can demand performance - A third party cannot demand performance of the contract even if it was made for his benefit - In case of death of the promisee, his legal representatives can enforce performance - E.g. A promises B to pay C a sum of Rs. 1,000. B can demand performance and not C
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By whom Contracts must be Performed 1. By the promisor himself u/s 40 Contract involving personal skill, taste or credit, e.g. a contract to paint a picture, the promisor must himself perform 2. By the promisor/ his agent u/s 40(2) In the case of impersonal contract, the promisor/his agent may perform 3. By the legal representatives u/s 37(2) In the case of death of the promisor before performance, the liability of performance falls on his legal representatives but their liability is limited to the estate of the deceased which has come to their hands 4. By a third person u/s 41 If a promisee accepts performance of the promise from a third person, promisee cannot then enforce it against the promisor
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Performance of Joint Promises Who can demand Performance u/s 45 When a promise is made to several persons jointly, the right to claim performance rests with all the promisees jointly & a single promisee cannot demand performance By whom Joint Pomises must be performed u/s 42 to 44 Rules 1.All promisors must jointly fulfill the promise 2. - Any one or more of joint promisors may be compelled to perform u/s 43 because the liability of the joint promisors is joint and several. - but the liability in case of Co-heirs is joint and not several because they are not joint promisors E.g. A, B and C jointly promise to pay D Rs. 3000. D may compel either A/B/C/All/Any two to pay
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By whom Joint Pomises must be performed u/s 42 to 44 (Contd.) 3. Right of contribution inter-se between joint promisors If one of several joint promisors are made to perform, he may require equal contribution from the other joint promisors 4. Sharing of loss by default in contribution If any joint promisor makes default in making contribution, the remaining joint promisors must bear the loss arising from such default in equal shares 5. Effect of release of one joint promisor u/s 44 If one of the joint promisors is released from his liability by the promisee, his liability to the promisee ceases but does not discharge the other joint promisors from their liability, neither does it free the joint promisors so released from his liability to contribute to the other joint promisors
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Assignment of contracts Means transfer of contractual rights & liabilities to a third party Rule 1. Contracts involving personal skill, taste or credit cannot be assigned 2. The obligations under a contract cannot be assigned except with the consent of the promisee 3. Assignment of a claim to any debt/ beneficial interest in movable property to be complete & effectual must be made by an instrument in writing 4. Assignment by operation of law takes place in case of death upon his heirs and in case of insolvency upon the Official Assignee/Receiver
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Order of performance of Reciprocal Promises (u/s 51 to 54) Promises which form the consideration for each other are reciprocal promises There is an obligation on each party to perform his own promise & to accept performance of other’s promise Three types of reciprocal promises & rules for order of performance: 1. Mutual & Independent -Where each party must perform his promise independently without waiting for the performance of the other - Promises must be performed in the order expressly fixed by the contract & where it is not fixed, they must be performed in the order of the nature of the transaction u/s 52 - E.g. A promises to deliver goods to B on 10th April & B promises to pay the price in advance on 1 st April and on default to pay interest @ 15% p.a. from 1 st April till the date of payment. So, B need to perform first but even if B does not perform, A must perform & then claim for price & damages
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Types of Reciprocal Promises (Contd.) 2. Mutual and Dependent -Where the performance of the promise by one party depends on the prior performance of the promise by the other party - u/s 54 if the promisor who is required to perform his promise first does not perform, such promisor cannot claim the performance of the reciprocal promise 3. Mutual & Concurrent -Where the two promises are to be performed simultaneously - u/s 51 the promisor need not perform unless the promisee is ready & willing to perform his reciprocal promise - E.g. A & B contract that A shall deliver goods to B to be paid for by B on delivery 4. Consequences where a party prevents performance u/s 53 the contract becomes voidable at the option of the party so prevented
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Time & Place of Performance u/s 46 to 50 & 55 Where prescribed by the promisee at the specified time & place Where not prescribed by the promisee then the contract must be performed a) Within a reasonable time on a working day & within the usual hours of business b)At proper place e.g. at godown/shop & not at a public meeting/ fair
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Efffect of failure to perform a contract within the stipulated time Rules u/s 55 1. Where “time is of the essence of the contract” the contract becomes voidable at the option of the promisee The promisee may rescind the contract & sue for the breach 2. Where “time is not the essence of the contract” the promisee has to accept the delayed performance, and can claim compensation for loss caused by the delay But if the delay is beyond a reasonable time the contract will become voidable by promisee 3. In case of a voidable contract if the promisee accepts the delayed performance, he cannot later claim compensation for loss due to delay
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When time is the essence of the contract i) If the parties expressly agree ii) If the nature of transaction and the intention of parties was such Normally in commercial contracts the time of delivery of goods is the essence of the contract but not the time of payment of price Mode of performance The promisor must perform as per the terms of the contract/ instructions from the promisee
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Appropriation of Payments When a debtor owes several debts to the same creditor & if the creditor accepts the payment, he must follow the rules for appropriation as follows, otherwise he must refuse to accept the payment: 1. Debtor’s express instructions must be followed 2. Debtor’s implied intention must be followed 3. Appropriation by Creditor If there is no express/implied directions by the debtor, creditor may appropriate to any debt 4. Appropriation by Law -Where debtor/creditor has not appropriated, order of time need to be followed - If debts are of equal standing, payment shall be applied proportionately 5. When principal & interest both due to be applied towards interest first
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Contracts which need not be performed If parties to a contract agree to Novation, Rescission or Alteration * Original contract disappears & is substituted by a new contract * Novation - Same contract, new parties * Rescission – Cancellation of old contract * Alteration – Same party, change of terms u/s 64 When a person at whose option a contract is voidable rescinds it, the other party need not perform his promise
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Breach of a Contract and its Remedies
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Quasi-Contracts
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