Unit 9: Legal Aspects of Business mind map

The Indian Contract Act, special contracts and the Sale of Goods Act.

Formation of a contract

How a contract is born

A contract grows step by step from an offer. Each step has a legal name.

• Order: offer, acceptance, promise, agreement, contract.
• An accepted proposal becomes a promise (Sec 2(b)).
• Promises with consideration form an agreement. An agreement enforceable by law is a contract.
• All contracts are agreements, but not all agreements are contracts.

A shopkeeper's display of priced goods is only an invitation to make an offer. Price lists, catalogues and newspaper advertisements are also invitations. An acceptance by post is complete against the offeror once a stamped, addressed letter is posted.

Capacity to contract and kinds of contract

A person must be able to contract. Contracts are valid, void or voidable.

• A minor (below 18) has no capacity. A minor's agreement is void from the start.
• It cannot be ratified on reaching majority.
• A minor's estate is liable for necessaries supplied (Sec 68).
• Voidable: enforceable at the option of one party only. Void: ceases to be enforceable.

The case of Mohori Bibee v Dharmodas Ghose settled that a minor's agreement is void. If A takes Rs 4,000 as a minor and then a fresh Rs 3,000 after majority, only the fresh loan is enforceable.

Free consent: coercion, undue influence, fraud, misrepresentation

Consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.

• Sec 14 free consent, 15 coercion, 16 undue influence, 17 fraud, 18 misrepresentation.
• Active concealment of a fact is a form of fraud (Sec 17).
• Undue influence is presumed between parent and child, doctor and patient, fiance and fiancee.
• It is not presumed between husband and wife or creditor and debtor.

Coercion needs a threat or an unlawful act. In the widow case, relatives threatened not to allow the cremation unless she adopted a boy. Her consent was not free. A contract caused by fraud is voidable at the option of the cheated party.

Void agreements and mistake

Some agreements are void by law. Some mistakes make an agreement void from the start.

• Sec 23: unlawful object or consideration. Sec 25: no consideration.
• Sec 26: restraint of marriage. Sec 27: restraint of trade. Sec 28: restraint of legal proceedings.
• Sec 30: wagering agreements.
• Mistake of identity or of a document's nature makes it void from the start.

The general rule is that an agreement without consideration is void. Exceptions are natural love and affection with a registered written document, past voluntary service, and a written promise to pay a time-barred debt.

Performance, discharge and remedies

Discharge of a contract

A contract ends by performance, agreement, impossibility or breach.

• Mutual consent: novation, rescission, remission, alteration, accord and satisfaction.
• Novation (Sec 62): a new contract replaces the old one.
• Supervening impossibility (Sec 56): destruction of subject matter, or death or disablement of a party.
• Rescission also covers an aggrieved party avoiding the contract.

Novation can change the terms or even the parties. In supervening impossibility, an event after the contract is made makes performance impossible. The contract becomes void automatically.

Remedies for breach, damages and quantum meruit

On breach, the injured party may claim damages or other relief.

• Ordinary damages arise naturally from the breach.
• Special damages arise from special circumstances known to both parties.
• Exemplary or vindictive damages are awarded for breach of promise to marry.
• Quantum meruit means as much as is earned.

Quantum meruit works for the part done in a divisible contract. It cannot succeed when an indivisible lump-sum contract is only partly performed. An injunction is a remedy that stops a party from doing something.

Quasi contracts, legal maxims and contingent contracts

Some obligations are imposed by law. Several Latin maxims are tested.

• Quasi contract is based on unjust enrichment (Sec 68 to 72).
• A contract of indemnity (Sec 124) is a contingent contract (Sec 31).
• Consensus ad idem: meeting of minds. Quid pro quo: something in return.
• Caveat emptor: buyer beware.

A quasi contract has no offer or acceptance. The law imposes it so that no one keeps a benefit at another's expense. The indemnity holder can recover only absolute liabilities, not uncertain ones.

Special contracts

Bailment and pledge

Bailment is delivery of goods for a purpose, to be returned afterwards.

• Bailment is covered from Sec 148. Pledge is bailment as security for a debt or promise.
• Pledgor gives the goods. Pledgee keeps possession.
• Bailor must bear extraordinary expenses, indemnify the bailee and disclose known faults.
• Taking care of the goods and returning accretions are bailee's duties.

Hiring a bank locker is a contract of bailment. A fixed deposit of money with a bank is not. Ownership stays with the pledgor. Only possession passes to the pledgee until the debt is repaid.

Agency

An agent acts for a principal. Sometimes the agent becomes personally liable.

• Agent is liable if the principal is undisclosed.
• Also liable if trade usage makes the agent liable.
• Privity of contract does not exist between the principal and a sub-agent.
• The agent is responsible to the principal for the sub-agent's acts.

Agency by necessity arises in an emergency when the agent must act without prior consent. It needs real necessity, good faith and a reasonable course. Destruction of the subject matter ends an agency; it does not create one.

Sale of Goods Act 1930

Goods, conditions and warranties

Goods mean movable property other than actionable claims and money.

• Growing crops count as goods. Actionable claims and immovable property do not.
• Condition is essential. Breach lets the buyer repudiate the contract.
• Warranty is collateral. Breach lets the buyer claim damages only.
• Implied conditions: title, description, quality or fitness, merchantability. Free from encumbrances is a warranty.

A bottle that bursts breaches the condition of merchantable quality. A phone sold with a faulty battery breaches a warranty. The buyer can claim a new battery but cannot return the whole phone.

Classes of goods and passing of property

Goods are existing or future. Ownership passes at a time set by the Act.

• Specific goods are identified when the contract is made.
• Ascertained goods are identified later. Unascertained goods are defined by description only.
• Future goods are made or acquired after the contract.
• For specific goods in a deliverable state, property passes when the contract is made (Sec 20).

Ascertained goods are not a separate class in the key. They are unascertained goods later identified, so they are the odd one out. Appropriation means separating the goods sold from the stock.

Delivery and the unpaid seller

Delivery can be actual, constructive or symbolic. An unpaid seller has rights against the goods.

• Actual delivery: physical handing over.
• Constructive: a third person holding the goods acknowledges the buyer's right.
• Symbolic: key of the godown or a bill of lading.
• Unpaid seller: lien, stoppage in transit, resale.

Lien is the right to keep possession. Stoppage in transit is the right to regain possession when the buyer becomes insolvent. A suit for price recovers the price and is a right against the buyer.

Caveat emptor, implied terms and sections

The buyer must take care, but the Act gives protection through implied terms.

• Caveat emptor: let the buyer beware.
• It applies when the buyer does not tell the purpose and relies on his own skill.
• Section 13: breach of warranty. Section 15: sale by description.
• Section 27: transfer of title. Section 64: sale by auction.

A bursting soft drink bottle breaks the condition of merchantable quality. Sale by sample and sale by description carry implied conditions. Free from encumbrances and quiet possession are implied warranties.

Firms, LLPs and companies: formation, rules and winding up.

Partnership

Kinds, mutual agency and dissolution

A partnership is an association of persons who share profit. Each partner is agent and principal.

• Partnership at will has no fixed period.
• Particular partnership is for a specific venture or period.
• Mutual agency: a partner is both agent and principal.
• On dissolution, assets pay debts to outsiders first, then advances, then capital, then residue.

Interest on capital is payable only out of profits. Partners must carry on the business to the greatest common advantage. After dissolution a partner has no right to be consulted, because the business is being wound up.

Limited Liability Partnership

LLP features and members

An LLP is a body corporate with perpetual succession. Partners are not personally liable for LLP debts.

• Separate legal entity, like a company.
• No upper limit on the number of partners. Minimum is two.
• Members can be resident Indians, companies, including foreign companies, and other LLPs.
• Four schedules deal with rights and conversions.

First Schedule gives default rights where there is no agreement. Second Schedule converts a firm. Third converts a private company. Fourth converts an unlisted public company. A DPIN is for designated partners.

Forming and closing an LLP

Incorporating an LLP is an online process. It can be wound up voluntarily or by the Tribunal.

• Steps: DSC, reserve name, prepare documents, FiLLiP form for incorporation and DPIN, then LLP agreement.
• Voluntary winding up needs consent of three-fourths of partners.
• Compulsory winding up is by NCLT.
• Petitioners: creditors, the LLP or partners, Registrar, a person authorised by the Centre.

A different version of the question puts deciding partners first, then DPIN and DSC, name, agreement, and filing. Learn the idea: people first, name next, agreement, then filing with the Registrar.

Company law

Forming a company and types of company

Section 3 allows three ways to form a company. Special types have their own sections.

• Seven or more persons for a public company.
• Two or more for a private company. One person for a One Person Company.
• Small company: Sec 2(85). Associate company: Sec 2(6). Dormant company: Sec 455. Producer company: Sec 378A.
• Holding or subsidiary companies, Sec 8 companies and Special Act companies cannot be small companies.

A dormant company holds an asset or idea for a future project and has no significant accounting transaction. It suits real estate and construction promoters because compliance is light while it waits.

Stages of formation and incorporation

A company is born in stages. The certificate of incorporation is final proof.

• Order: promotion, selection of name, incorporation, raising capital, commencement.
• Certificate of incorporation is conclusive evidence of valid registration.
• It cannot be challenged even if irregular, such as a minor among the subscribers.
• A promoter undertakes to form a company for a given object.

The old certificate of commencement of business was abolished. A contract made on the promoter's behalf before incorporation cannot bind the company. The promoter stays personally liable unless the company makes a fresh contract.

Memorandum, articles and doctrines

The memorandum sets the company's objects and limits. The articles set internal rules.

• MOA clauses: name, registered office state, objects, liability, capital.
• Rules and bye-laws for internal management are in the Articles.
• Constructive notice: everyone knows the public documents.
• Turquand rule (indoor management) is the exception to constructive notice.

Outsiders may assume internal procedures were followed. Schedule I gives MOA and AOA formats. Ultra vires acts go beyond the objects clause.

Schedules, KMP and directors

Several schedules and persons are tested.

• Schedule I: MOA and AOA formats. Schedule II: depreciation.
• Schedule III: balance sheet format. Schedule IV: code for independent directors.
• Schedule V: managerial remuneration. Schedule VII: CSR.
• KMP: CEO, MD or manager, whole-time director, company secretary, CFO.

Directors' general duties (Sec 166) include good faith, due care and independent judgement, and not assigning the office. Attending board meetings is a practical obligation, not listed among them. Chief risk officer is not KMP.

Share capital, buy-back and transmission

Capital can be altered, shares bought back and shares transmitted.

• Alteration (Sec 61): increase, consolidate, sub-divide, convert fully paid shares into stock, cancel unissued shares.
• Buy-back (Sec 68) can be from free reserves, securities premium or proceeds of other shares.
• Securities premium can fund bonus shares and preliminary expenses, but not dividend.
• Transmission is on death or insolvency, needs no transfer instrument.

Reduction of capital is separate from alteration. Shares issued at a discount need a resolution stating the maximum rate and must be of a class already issued. Transmission carries no stamp duty because it is by operation of law.

Meetings and winding up

A statutory meeting and winding up follow fixed procedures.

• Statutory meeting: 21 days notice, then report, certification, copy to Registrar, member list.
• Winding up by the Tribunal: petition, appoint liquidator, liquidator report, Tribunal direction, settle list of contributories.
• Petition by shareholders, creditors, or a person authorised by the Centre.
• Grounds include special resolution, fraud, reduced membership and inability to pay debts.

Costs of winding up are paid first, then secured creditors and workmen, then preferential creditors, then unsecured creditors. The answer keys here have some disputed orders, so learn the idea: costs first, unsecured last.

Insolvency

Strengthening the insolvency process

The Insolvency and Bankruptcy Code resolves failing businesses in a time-bound way.

• The Parliamentary committee suggested a code of conduct for the committee of creditors.
• Specialised NCLT benches for IBC.
• A stronger role for resolution professionals.
• Digitised IBC platforms.

The key leaves out strengthening asset reconstruction companies. The aim is faster resolution and better recovery of asset value.

Competition law, consumer protection, GST, cyber law, transparency law and intellectual property.

Competition law

Objectives, agreements and penalties

The Competition Act 2002 replaced the MRTP Act, 1969. It protects competition and consumers.

• Objectives: prevent practices harming competition, promote competition, protect consumers, ensure freedom of trade.
• Not an objective: preventing monopoly rights from intellectual property.
• Cartel is a horizontal agreement. Tie-in, resale price maintenance, exclusive supply and exclusive distribution are vertical.
• Penalty: up to 10 per cent of average turnover of the three preceding years.

The 2023 amendment added a deal value threshold of Rs 2,000 crore and cut the time to assess a combination from 210 to 150 days. Complaints on profiteering under GST moved to the CCI from December 2022.

The Competition (Amendment) Act 2023

The 2023 amendment changed several rules of merger control and agreements.

• A deal value threshold: a deal above Rs 2,000 crore must be told to the CCI.
• Time to assess a combination is cut from 210 days to 150 days.
• 'Exclusive selling agreement' is now 'exclusive dealing agreement'.
• The penalty cap is 10 per cent of average turnover of the three preceding years.

The Competition Act 2002 replaced the MRTP Act 1969. The old law looked at size. The new law looks at conduct. The objectives are to prevent practices that harm competition, promote competition, protect consumers and ensure freedom of trade.

Consumer protection

Consumer rights and redressal

The Act gives consumers six rights and a three-tier redressal system.

• Rights: safety, information, choice, to be heard, redressal, consumer education.
• Three tiers: District, State and National Commissions.
• A District Forum has a president and at least two members, with a woman member.
• Reliefs rise in severity: remove defects, return price, compensation, stop unfair practice, impose costs.

The key treats 24 December 1986 as the date of the first Act. Money limits for each tier have been revised by later rules, so learn the three tiers and their order, not the limits.

GST

GST basics: destination, cascading and rates

GST is a destination-based tax on supply of goods and services. It removes the cascading effect.

• Cascading means tax on tax. Input tax credit removes it.
• The burden falls on the final consumer.
• Imports are inter-state supplies and bear IGST.
• From 22 September 2025: 5 per cent, 18 per cent, and 40 per cent special.

Petroleum products remain outside GST. Taxes replaced include central excise, service tax and taxes on advertisements. Special additional duty of customs was not a state tax. GST benefits consuming states more.

Input tax credit, ledgers and recovery

Credit moves in a fixed order. Payments and recovery follow set sequences.

• ITC is in Sections 16 to 21 of the CGST Act.
• CGST credit pays CGST then IGST. SGST credit never pays CGST.
• IGST credit pays IGST, then CGST, then SGST or UTGST.
• Rule 154 recovery order: cost of recovery, amount due, other dues, balance refunded.

Provisional ITC can be used only against self-assessed tax. To pay tax, generate the challan, deposit the amount, then note the CIN. Chapter III of the CGST Act is levy, Chapter VI registration, Chapter V ITC, Chapter X payment.

CGST chapters, registration and special category states

The CGST Act is organised in chapters. Registration depends on turnover and the state.

• Chapter III: levy and collection of tax. Chapter V: input tax credit.
• Chapter VI: registration. Chapter X: payment of tax.
• Special category states have a lower registration limit than other states.
• Arunachal Pradesh, Meghalaya, Manipur, Mizoram and Sikkim are in that group.

To pay tax, a taxpayer generates a challan, deposits the money, and the payment is credited to the electronic cash ledger. Complaints about profiteering moved to the CCI in December 2022. Petroleum products are outside GST.

Cyber law

What the IT Act covers and key sections

The IT Act gives legal recognition to electronic records and defines cyber offences.

• Covers electronic documents, signatures, offences and a justice system for cyber crime.
• Sec 65: tampering with computer source documents, up to 3 years or Rs 2 lakh.
• Sec 66C: identity theft, using another's password or signature.
• Does not apply to sale or conveyance of immovable property or negotiable instruments.

A digital signature is a type of electronic signature that uses cryptography. Spoofing is forging a return address on an email. The Act has a First Schedule of documents it does not cover.

Transparency law

RTI Act: time limits and rules

The RTI Act, 2005 lets citizens obtain information from public authorities.

• Reply in 30 days. For life or liberty, within 48 hours.
• Third party representation within 10 days of notice.
• On rejection, give reasons, appellate authority and appeal period.
• Only citizens can apply, not companies or corporations.

The Act came fully into force on 12 October 2005. File notings are not included in information in the key. The APIO receives applications and forwards them to the PIO.

Intellectual property

Patents, trademarks and copyright

Intellectual property protects creations of the mind that have commercial value.

• Patent lasts 20 years from filing, given for full disclosure.
• Trademark: generic, descriptive and invented types. Generic cannot be protected.
• Copyright first offence: up to 3 years and Rs 2 lakh.
• Layout designs of integrated circuits are outside the Copyright Act's term work.

Work under the Copyright Act includes literary, dramatic, musical, artistic works, cinematograph films and sound recordings. IP includes trade secrets and moral rights. A patent also needs the invention to be new, non-obvious and useful.

Cheques and notes, foreign exchange law, and the Acts and years that frame business law.

Negotiable instruments

Promissory note, bill and cheque

Negotiable instruments are promissory notes, bills of exchange and cheques. They pass freely by delivery or endorsement.

• Promissory note: in writing, signed by the maker, an unconditional promise to pay money.
• A cheque is always drawn on a banker and payable on demand.
• Parties to a cheque: drawer, payee, holder.
• Mutual fund units are not negotiable instruments.

A note saying 'I acknowledge to be indebted to you for Rs 10,000, to be paid on demand' is valid. A promise to pay after a marriage or on a death is conditional, so it is not a note. Negotiability means free transfer, a clean title and the right of the holder to sue in his own name.

Holder in due course and dishonour

A holder in due course takes the instrument for value, in good faith and without notice of defects. He gets a clean title.

• Privilege: the instrument is cleansed of earlier defects.
• Presumptions (Sec 118): consideration, date, time of acceptance, transfer and order of endorsements.
• Absolute and good title of the transferee is not presumed.
• On dishonour: notice, noting, protest, then compensation.

A minor can draw and endorse an instrument, but it binds everyone except the minor. So a holder can recover from the endorser who took the cheque from the minor. Parties are discharged by cancelling a name or qualified acceptance.

FEMA

Foreign exchange, current and capital account

FEMA manages foreign exchange. The RBI is the main regulator.

• Foreign exchange includes foreign currency deposits and drafts, cheques or bills payable in foreign currency.
• Drafts drawn outside India but payable in Indian currency are also included.
• Current account: interest on loans, net income, remittance for living expenses of family abroad.
• Capital account: overseas direct investment, borrowing or lending in foreign exchange.

The central government can regulate payments to and from persons outside the country. RBI can restrict capital account transactions even by an authorised person. Foreign financial transactions go through an authorised person.

Legal framework

Matching Acts, years and subjects

Questions often match Acts with years, or arrange them by year.

• Contract Act 1872, Negotiable Instruments Act 1881, Sale of Goods Act 1930.
• Insurance Act 1938, Life Insurance Act 1956, Marine Insurance Act 1963, Motor Vehicles Act 1988.
• IT Act 2000, Competition Act 2002, RTI Act 2005, Companies Act 2013.
• Labour laws: Minimum Wages 1948, Mines 1952, Apprentices 1961, Gratuity 1972.

Caveat emptor belongs to the Sale of Goods Act. Holder in due course belongs to the Negotiable Instruments Act. Bailment and pledge are special contracts. DPIN belongs to the LLP law. Transfer of ownership is a sale.