05 Business Laws and Ethics

Kuvempu UniversityDirectorate of Distance Education

Jnana Sahyadri, Shankaraghatta - 577 451Shimoga, Karnataka

Kuvempu University

eMBA I Semester

Business Laws and Ethics

Executive Master of Business Administration - eMBA

International CorporateBusiness Management Studies

Educational TrustChennai

Incollaboration

with

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Preface

The study materials cover the syllabi very briefly and students are expected to be familiar withthe text book referred to in the reference. At the end of the detail syllabus supplied to students

and also the suggested reading books at the end of each chapter in this study material. Students are alsoexpected to go through the bare acts separately for better understanding of the concepts.

The syllabi for business law are designed to cover all most all the aspects of legal implication ofcurrent business. Unless and until the students put extra effort, there might be a practical difficulty inunderstanding the importance of the whole syllabi. This study material is an effort to include all aspectsof business law very briefly as per the syllabi.

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Contents

Unit 1 1-24Introduction to Legal System, State,Rule of Law and Framework of Business Laws.

Unit 2 25-44Law of Contracts

Unit 3 45-64Law Relating to Companies

Unit 4 65-79Law Relating to Taxation

Unit 5 80-105Law of Intellectual Property Rights

Unit 6 106-114Law of Sale of Goods and Consumer Protection

Unit 7 115-130Law of International Ttrade

Unit 8 131-153Business Ethics

Unit 1

Introduction to Legal System, State, Rule ofLaw and Framework of Business Laws.

Unit Structure

1.1 Learning Outcomes

1.2 Introduction to Legal System

1.3 Rule of Law

1.3.1 Dicey’s Theory

1.3.2 Rawl’s Theory

1.4 Law, State and Rule of Law

1.5 Introduction to Business Laws

1.6 Freedom of Trade, Commerce and Intercourse

1.7 Let us sum up

1.8 Glossary

1.9 Check Your Progress

1.10 Suggested Readings

1.11 Model Questions

1Unit 1 - Introduction to Legal System, State, Rule of Law and Framework of Business Laws.

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After going through this chapter you will be able to:

� Learn the basic concepts of Law

� Trace the origin, evolution and history of Law

� Know the Economic and Legal justifications for Business

� Know what is Rule of Law

� Learn Constitutional Provisions of Business

� Know the legal framework of Business Laws

1.2 Introduction to Legal System

If we are to live with others, we must have a way to resolve the inevitable disputes. Perhapswe also need to have a code to provide a framework for our relations with others. We needto be able to create contracts that are enforceable over long time periods. So if we are to

design the institutions for a free society, we must include a legal system in our deliberations.

Although our primary purpose is to create proposals for the future, we may get some ideas or,at least, some inspiration, from studying the history of legal systems. Perhaps we can avoid someof the mistakes that have already been made.

Philosophical Foundations

Since the legal system will be one of the few areas where we will allow the use of compulsion,we must be very careful to select a system that will not violate our philosophy. A legal system iscertainly a “useful servant but a fearful master.” This study will not comment on the philosophyappropriate to the legal systems discussed. Suffice it to say that most of them are more appropriateto statism than to freedom.

The Evolution of Law

If we look back at the history of law in many societies, we can discern the same evolutiontaking place in the same sequence.

• First, people live in family units with rule by the patriarch.

• Second, a patriarchal sovereign, who is usually heroic, issues rulings in individual cases


after the fact.

• Third, customs grow up from the sovereign’s rulings.

• Fourth, a code is created. This code bears on relationships between families or betweenthe patriarchs of the families.

• Fifth, the code begins to bear on individuals rather than families.

• Sixth, more relationships are defined by contracts, i.e., “a movement from Status to Contract.

Accustomed as we are to legal systems with voluminous codes and well defined procedures forcontracts, many of these don’t sound like much of a legal system to our ears. But for most of theexistence of humans, these are the systems they lived under.

The Patriarch

In the earliest records and in the observations of more primitive cultures by more study, theearliest stage of development is characterized by people living in small groups based on kinshipand ruled by the eldest male. Usually the ruler was determined by very strict customs of descentthrough the eldest sons from the “original” ancestor. Often his rule was quite complete and almostalways included property, earnings, and contract. This was entirely at the caprice of the patriarch,with the ruled having none of what we would think of as rights. But the patriarch did have acustomary responsibility to provide for his family. And males having obtained the age of majoritycould free themselves from the rule of their father and even start their own patriarchy.

The Sovereign

Later there develops a sovereign ruling over a collection of families. This rule is in the style ofthe patriarch: he issues rulings after the fact and without reference to any established rules. Primitiveman at this stage supposed that the gods (Themis to the Greeks) dictated to the king what to award.Themistes was the name for the awards. Note that these are not laws but judgments. By a patternof themistes, a custom was created (as opposed to the theory that the laws embody the customs ofa previous era).

Customary Law

Usually the initial kings were heroic, but often feebler monarchs followed. Often an oligarchywould grow up around the monarch. These aristocrats became the depository and administratorsof the law. This was the epoch of customary law. English common law pretends to be of this type(at one time, the judges relied on rules, principles, and distinctions not fully known to lawyers orthe public), but it is today based on written precedents.

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A Legal Code

Finally a legal code is written down. This usually occurs just after the invention of writing.Often the initial code mixes civil, religious, and moral issues. But at last we have arrived at a stagewhere the legal system becomes regonizable. Usually the initial code retains the flavor of theearlier patriarchal era and primarily deals with relationships between families or between thepatriarchs of the families.

In English history, King Alfred the Great declared that the law would be written before the factso that people could know what the law was. (I date the beginning of the Libertarian revolutionfrom this point.)

Individuals

Next, the legal code begins to deal with individuals rather than just the patriarch. It even beginsto regulate relations within the family.

Contractual Relationships

Finally, relationships within a legal system begin to be determined more by contracts than bythe status of the actors. The most obvious is employment, which becomes a matter of contractbetween parties rather than master and slave. This process can be observed in historical times andis still proceeding today.

Ancient Legal Codes

One of the most important steps a society takes is reducing its legal structure to a written code.It provides three important protections to a society:

a) It reduces the likelihood and the magnitude of the excesses of the legal oligarchy.

b) It helps reduce the degradation of national traditions.

c) It reduces the likelihood of superstitious extension of the prohibitions in the original code.

Methods of Legal Improvements

Western European civilization is a rare exception in the history of the world. Most societieshave not had the objective of improving their legal system. Where societies have attempted to beprogressive, social necessities and social opinion are usually ahead of the law. The happiness ofthe people depends on how quickly the gap is narrowed. The improvements usually come in threeways, and they usually develop in this order: First, legal fictions bridge over problems. Second,


equity courts provide a means of relief. Third, legislation brings the law nearer the improved socialopinion.

A legal fiction is an assumption that changes the operation of a law without changing the letterof the law. For example, an adoption allows a family tie to be created even though the child wasnot born into the family.

Equity courts’ reason for existence is that they supersede civil law on the grounds of superiorsanctity, often expressed as providing more just decisions.

Legislation includes any agency for changing the code, from rulings by a despot to representativeassembly deliberations. Two of these steps, legal fictions and equity courts, need more explanation.

Legal Fictions

Legal fictions usually come into being when a change is needed but no one wants to appear tobe making changes. In the English common law system, before a decision is reached the theory isthat any case can be decided on existing precedents, but after the decision is handed down, thiscase affects all future cases that are similar. The Roman Responsa Prudentum operated in a similarmanner, except for three details of procedure: the proceedings could consider hypothetical cases;decisions were made by lawyers rather than judges; and entry to the bar (and therefore to theability to render decisions) was open to anyone.

Equity Courts and the Appearance of the Law of Nature

The equity court of England is the Court of Chancery. It received its guidance from CanonLaw (religious), from Roman law, and from the mixture of jurisprudence and morals in the LowCountries. The equity court of Rome was the Jus Gentium. The need for this court grew from thepresence of many foreigners and their subsequent legal needs. Rome was unwilling to allow themto use the system set up for Roman citizens. An alien could not use the normal Roman law courtsor make contracts. The lawyers got around this by creating a new law: Jus Gentium. In theory thislaw was supposedly composed of those laws common to all nations (actually just the other Italiantribes, because that was all they knew at the time). It was not held in high regard at the time of itscreation, but was forced by political and commercial necessity.

The theory of the Law of Nature came from Greece later; the Stoic philosophy was very popularamong lawyers. This led to Prætors wanting their Edicts to restore an assumed natural law. ThusJus Gentium gained respect. The Prætor was the supreme justice of Rome, but held office for onlyone year. The Prætors were drawn from lawyers or controlled by lawyers. At the beginning of histerm, the new Prætor explained what he intended to do in an Edict; such an Edict was usually aminor modification of his predecessor’s.

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Law of Nature

The idea behind the Law of Nature confuses past and future. It implicitly assumes a past stateof nature ruled by a natural law. It assumes society can change toward a perfect future — an ideapicked up from Christianity. It has been very important to the evolution of thought. Roman lawyersworked to perfect the “elegance” of their law. But the Law of Nature has much influenced modernlaw. Even though France had a very confusing law, with different laws for different people anddifferent laws for different jurisdictions, the Law of Nature provided a theory and an article offaith for lawyers.

Then in the middle of the 18th century there occurred the most important event in the evolutionof the Law of Nature: the writings of Rousseau. He widely influenced many levels of people.Rousseau held, in the words of Sir Henry Maine, that “A perfect social order could be evolvedfrom [a] natural state.” Unfortunately, in disdaining the superstitions of the priests, the adherents ofnatural law “flung themselves headlong into a superstition of the lawyer.” This led to many of thedisappointments of the French Revolution: “its tendency is to become distinctly anarchical.” Italso gave birth to International Law and the Law of War. International Law came from the ideathat nations are equal (even if one is overwhelmingly more powerful than the other).

Primitive Society and Ancient Law

Legal Writing

Much of legal writing has been a restatement of the Roman thesis of natural law. There aresome exceptions: Montesquieu’s Esprit des Lois stated that laws come from local circumstance,that the nature of man is entirely plastic. He underrates the stability of the race and the inheritedqualities of individuals. He doesn’t realize that, in Maine’s words, “An approximation of truth maybe all that is attainable with our present knowledge, but there is no reason for thinking that [truth]is so remote or (what is the same thing) that it requires so much future correction, as to [make ourpresent knowledge] be entirely useless and uninstructive.” Bentham held that societies modifylaws for general expediency. Most legal theories have not examined antiquity; yet we have alwayshad evidence of early social states from three sources: accounts by contemporaries of less advancedcivilizations; records by primitive societies of their history; and ancient law texts. Today we wouldhave to add archaeology and anthropology.

Patriarchy

From ancient law we get the Patriarchal Theory. In the earliest history of most societies theFather ruled the entire family. Earliest states dealt with families, not individuals. Adoption wasused to include outsiders who wanted to join the society. When recruitment by adoption stoppedand outsiders were still drawn to a society, the growth of aristocracy began. Although these societies

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were very restrictive, adult males were able to withdraw from the family. Lineage followed malesonly, as the Scottish clans still do. This implies reduced rights for women. But after the Law ofNature became fashionable in Rome, women began having equal rights. Dark ages reducedwomen’s status again. Slavery also is illustrative of primitive legal thinking. Slaves were consideredmembers of the family, because the slave was subject to the commands of the head of the family.By contrast, English common law (which came later) regarded slaves as chattel property.

The Early History of Property

Because Roman law referred to certain ways of obtaining property as natural, people haveassumed those were “natural” ways; but if we look further back we see a different pattern. Similarto other aspects of ancient law, property rights were held by family units. In India, villages (familygroups) held property in common; in Russia, the serf communities held property in common.

Roman Property

Under Roman law, three elements were necessary for possession: occupancy, adverse possession(holding for exclusive use), and prescription (keeping over a period of time). Many legal systemsdivide property into classes, e.g., land property (which for the Romans included slaves and workanimals) versus other property; ownership of land was usually harder to transfer. Over time, easiermethods of transfer are worked out. Sometimes there is a system of dual ownership. For instance,in Rome, both the landlord and the tenant had rights in the property. Under feudalism, both thelord and the liegeman had rights.

1.3 Rule of Law

What is the Rule of Law?

The ideal of the rule of law, which can be traced back at least as far as Aristotle, is deeplyembedded in the public political cultures of most modern democratic societies. For example, theUniversal Declaration of Human Rights of 1948 declared that “it is essential if man is not to haverecourse as a last resort, to rebellion against tyranny and oppression, that human rights should beprotected by the Rule of Law.” Although the ideal of the rule of law has been criticized on theground that it is an ideological construct that masks power relationships, even some Marxist criticsacknowledge that observance of the ideal could curb abuses by the ruling class.

What is the ideal of the rule of law? An initial observation is that there are several differentconceptions of the meaning of the rule of law. Indeed, the rule of law may not be a single conceptat all; rather, it may be more accurate to understand the ideal of the rule of law as a set of idealsconnected more by family resemblance than a unifying conceptual structure.

Unit 1 - Introduction to Legal System, State, Rule of Law and Framework of Business Laws.

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1.3.1 Dicey’s Influential Formulation

Historically, the most influential account of the rule of law was offered by A.V. Dicey. Hisformulation incorporated three ideas:

(1) the supremacy of regular law as opposed to arbitrary power;

(2) equality before the law of all persons and classes, including government officials; and,

(3) the incorporation of constitutional law as a binding part of the ordinary law of the land.

1.3.2 Rawls on the Rule of Law

A contemporary elaboration of the ideal of the rule of law is provided by John Rawls. Hedefines the rule of law as “the regular, impartial, and in this sense fair” administration of “publicrules.” In schematic form and with some alterations, Rawls offered the following conception ofthe rule of law:

1. The Requirement that Compliance Be Possible. The legal system should reflect the preceptthat ought to imply ‘can’.

a. The actions which the rules of law require and forbid should be of a kind which mencan reasonably be expected to do and to avoid.

b. Those who enact the laws and issue legal orders should do so in good faith, in thesense that they believe “a” with respect to the laws and orders they promulgate.

c. A legal system should recognize impossibility of performance as a defense, or at leasta mitigating circumstance.

2. The Requirement of Regularity. The legal system should reflect the precept that similarcases should be treated similarly.

a. Judges must justify the distinctions they make between persons by reference to therelevant legal rules and principles.

b. The requirement of consistency should hold for the interpretation of all rules.

3. The Requirement of Publicity. The legal system should reflect the precept that the lawsshould be public.

a. The laws should be known and expressly promulgated.

b. The meaning of the laws should be clearly defined.

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4. The Requirement of Generality. Statutes and other legal rules should be general in statementand should not be aimed at particular individuals.

5. The Requirement of Due Process. The legal system should provide fair and orderlyprocedures for the determination of cases.

a. A legal system ought to make provision for orderly and public trials and hearings.

b. A legal system ought to contain rules of evidence that guarantee rational proceduresof inquiry.

c. A legal system ought to provide a process reasonably designed to ascertain the truth.

d. Judges should be independent and impartial, and no person should judge this her owncase.

Absent from Rawls’s formulation is the notion that the rule of law requires that thegovernment and government officials be subject to the law. Thus, a sixth aspect of the ruleof law might be added to Rawls’ formulation as follows:

6. The Requirement of Government under Law. Actions by government and governmentofficials should be subject to general and public rules.

a. Government officials should not be above the law.

b. The legality of government action should be subject to test by independent courts oflaw.

More can be said about the content of the ideal of the rule of law, but this brief expositionprovides sufficient clarity for this brief introduction.

The Values Served by the Rule of Law

What values are served by the rule of law? Why is the rule of law important? Those are bigquestions, but we can at least give some quick and dirty answers. One reason that the rule of lawis important has to do with predictability and certainty. When the rule of law is respected, citizensand firms will be able to plan their conduct in conformity with the law. Of course, one can digdeeper and ask why that predictability and certainty are important. Lot’s of answers can be givento that question as well. One set of answers is purely instrumental. When the law is predictable andcertain it can do a better job of guiding conduct. Another set of answers would look to the functionof law in protecting rights or enhancing individual autonomy. The predictability and certainty ofthe law creates a sphere of autonomy within which individuals can act without fear of governmentinterference.


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Another way to look at the value of the rule of law is to focus on what the world would be likeif there were systematic and serious departures from the requirements of the rule of law. What ifthe laws were secret? What if officials were immune from the law and could act as they pleased?What if the system of procedure were almost completely arbitrary, so that the results of legalproceedings were random or reflected the whims and prejudices of judges? What if some classesof people were above the law? Or if other classes were “below the law’s” and denied the lawsprotections? These rhetorical questions are intended to draw out a “parade of horribles” in yourimagination. In other words, the rule of law serves as a bulward against tyranny, chaos and injustice.

The Rule of Law and Bad Law

One final question: “Is the rule of law a good thing, even if the laws are bad, unjust, or in theextreme case evil?” This question is too tough to take on in a systematic way, but here is onehelpful thought. In a reasonably just society, one might believe that the rule of law is a good thing,even if some of the laws are bad. Certainty and predictability provide very great goods, whichwould be undermined if each judge or official picked and chose among the laws, enforcing theones that the judge thought were good and nullifying the ones the judge thought were bad. But ina thoroughly evil society, the rule of law will be extremely problematic. Even an evil society maybenefit from regularity in the enforcement of ordinary laws, but when it comes to horrendouslyevil laws, anarchy or revolution is likely to be preferable to the rule of law.

1.4 Law, State and Rule of law

The rule of law, in its most basic form, is the principle that no one is above the law. ThomasPaine stated in his pamphlet Common Sense (1776): “For as in absolute governments the king islaw, so in free countries the law ought to be king; and there ought to be no other.”

In England, the issuing of the Magna Carta was a prime example of the “rule of law.” TheGreat Charter forced King John to submit to the law and succeeded in putting limits on feudal feesand duties. Another earlier example was Islamic law and jurisprudence, which recognized theequal subjection of all classes, including caliphs and sultans, to the ordinary law of the land.

Perhaps the most important application of the rule of law is the principle that governmentalauthority is legitimately exercised only in accordance with written, publicly disclosed laws adoptedand enforced in accordance with established procedural steps that are referred to as due process.The principle is intended to be a safeguard against arbitrary governance, whether by a totalitarianleader or by mob rule. Thus, the rule of law is hostile both to dictatorship and to anarchy. SamuelRutherford was one of the first modern authors to give the principle theoretical foundations, inLex, Rex (1644), and later Montesquieu in The Spirit of the Laws (1748).

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In continental Europe and legal thinking, the rule of law has frequently, but not always, beenassociated with a Rechtsstaat. According to modern Anglo-American thinking, hallmarks ofadherence to the rule of law commonly include a clear separation of powers, legal certainty, theprinciple of legitimate expectation and equality of all before the law.

The concept is not without controversy, and it has been said that “the phrase ‘the Rule of Law’has become meaningless thanks to ideological abuse and general over-use”

Overview

The contrast between the rule of men and the rule of law is first found in Plato’s Statesman andLaws and subsequently in Aristotle’s Politics, where the rule of law implies both obedience topositive law and formal checks and balances on rulers and magistrates. The rule of law was laterpresent in early Islamic law and jurisprudence, which recognized the equal subjection of all classesto the ordinary law of the land, where no person is above the law and where officials and privatecitizens are under a duty to obey the same law. There were a number of cases where even Caliphshad to appear before Qadi (judges) as they prepared to take their verdict.

In his treatise, Law of the Constitution (10th Ed., 1959), pp. 187, et seq., Dicey identified threeprinciples which together establish the rule of law: (1) the absolute supremacy or predominance ofregular law as opposed to the influence of arbitrary power; (2) equality before the law or the equalsubjection of all classes to the ordinary law of the land administered by the ordinary courts; and (3)the law of the constitution is a consequence of the rights of individuals as defined and enforced bythe courts.”

— Halsbury’s Laws of England, Vol: Constitutional Law and Human Rights, paragraph 6,footnote 1

... every official, from the Prime Minister down to a constable or a collector of taxes, isunder the same responsibility for every act done without legal justification as any othercitizen. The Reports abound with cases in which officials have been brought before thecourts, and made, in their personal capacity, liable to punishment, or to the payment ofdamages, for acts done in their official character but in excess of their lawful authority.[Appointed government officials and politicians, alike] ... and all subordinates, thoughcarrying out the commands of their official superiors, are as responsible for any act whichthe law does not authorise as is any private and unofficial person.

— Law of the Constitution (London: MacMillan, 9th ed., 1950), 194. Another definition canbe found at Halsbury’s Laws of England, Vol: Constitutional Law and Human Rights,paragraph 6

The legal basis of government gives rise to the principle of legality, sometimes referred to



as the rule of law. This may be expressed as a number of propositions, as described below.

(1) The existence or non-existence of a power or duty is a matter of law and not of fact, and somust be determined by reference either to the nature of the legal personality of the body inquestion and the capacities that go with it, or to some enactment or reported case. As far asthe capacities that go with legal personality are concerned, many public bodies areincorporated by statute and so statutory provisions will define and limit their legal capacities.Individuals who are public office-holders have the capacities that go with the legalpersonality that they have as natural persons. The Crown is a corporation sole or aggregateand so has general legal capacity, including (subject to some statutory limitations andlimitations imposed by European law) the capacity to enter into contracts and to own anddispose of property. The fact of a continued undisputed exercise of a power by a publicbody is immaterial, unless it points to a customary power exercised from time immemorial.In particular, the existence of a power cannot be proved by the practice of a private office.

(2) The argument of state necessity is not sufficient to establish the existence of a power orduty which would entitle a public body to act in a way that interferes with the rights orliberties of individuals. However, the common law does recognise that in case of extremeurgency, when the ordinary machinery of the state cannot function, there is a justificationfor the doing of acts needed to restore the regular functioning of the machinery of government.

(3) If effect is to be given to the doctrine that the existence or non-existence of a power or dutyis a matter of law, it should be possible for the courts to determine whether or not a particularpower or duty exists, to define its ambit and provide an effective remedy for unlawfulaction. The independence of the judiciary is essential to the principle of legality. The rightof access to the courts can be excluded by statute, but this is not often done in expressterms. A person whose civil or political rights and freedoms as guaranteed by the Conventionfor the Protection of Human Rights and Fundamental Freedoms (the European Conventionon Human Rights) have been infringed is entitled under the Convention to an effectiveright of access to the courts and an effective national remedy. On the other hand, powersare often given to bodies other than the ordinary courts, to decide questions of law withoutappeal to the ordinary courts, and sometimes in such terms that their freedom from appellatejurisdiction extends to their findings of fact or law on which the existence of their powersdepends.

(4) Since the principal elements of the structure of the machinery of government, and thepowers and duties which belong to its several parts, are defined by law, its form andcourse can be altered only by a change of law. Conversely, since the legislative power ofParliament is unrestricted, save where European Community law has primacy, its formand course can at any time be altered by Parliament. Consequently there are no powers orduties inseparably annexed to the executive government.

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In American law, the most famous exposition of the same principle was drafted by John Adamsfor the constitution of the Commonwealth of Massachusetts, in justification of the principle ofseparation of powers:

In the government of this commonwealth, the legislative department shall never exercisethe executive and judicial powers or either of them: the executive shall never exercise thelegislative and judicial powers, or either of them: the judicial shall never exercise thelegislative and executive powers, or either of them: to the end it may be a government oflaws and not of men.

— Massachusetts Constitution, Part The First, art. XXX (1780).

The last phrase, “to the end it may be a government of laws and not of men,” has been quotedwith approval by the U.S. Supreme Court and every state supreme court in the United States.

A similar concept is found in Common Sense by Thomas Paine:

. . . the world may know, that so far as we approve of monarchy, that in America THELAW IS KING. For as in absolute governments the King is law, so in free countries the lawOUGHT to be King; and there ought to be no other.

The concept “rule of law” is generally associated with several other concepts, such as:

· Nullum crimen, nulla poena sine praevia lege poenali — No ex post facto laws

· Presumption of innocence — All individuals are “presumed innocent until provenotherwise”

· Legal equality — All individuals are given the same rights without distinction to theirsocial stature, religion, political opinions, etc. That is, as Montesquieu would have it, “lawshould be like death, which spares no one.”

· Habeas corpus — in full habeas corpus ad subjiciendum, a Latin term meaning “youmust have the body to be subjected (to examination)”. A person who is arrested has theright to be told what crimes he or she is accused of, and to request that his or her custodybe reviewed by judicial authority. Persons unlawfully imprisoned have to be freed.

The concept of “rule of law” per se says nothing of the “justness” of the laws themselves, butsimply how the legal system upholds the law. As a consequence of this, a very undemocraticnation or one without respect for human rights can exist with or without a “rule of law”, a situationwhich many argue is applicable to several modern dictatorships. However, the “rule of law” orRechtsstaat is considered a prerequisite for democracy, and as such, has served as a common basisfor human rights discourse between countries such as the People’s Republic of China and theWest.



The rule of law is an ancient ideal first posited by Plato as grounded in divine reason and soinherent in the natural order. It continues to be important as a normative ideal, even as legal scholarsstruggle to define it. The concept of impartial rule of law is found in the Chinese political philosophyof legalism, but the totalitarian nature of the regime that this produced had a profound effect onChinese political thought which at least rhetorically emphasized personal moral relations overimpersonal legal ones. Although Chinese emperors were not subject to law, in practice they foundit necessary to act according to regular procedures for reasons of statecraft.

In the Anglo-American legal tradition rule of law has been seen as a guard against despotismand as enforcing limitations on the power of the government. In China, the discourse around ruleof law centers on the notion that laws ultimately enhance the power of the state and the nation,which is why the Chinese government adopts the principle of rule by law rather than rule of law.

More recently, the rule of law has been considered as one of the key dimensions that determinesthe quality and good governance of a country. Research, like the Worldwide Governance Indicators,defines the rule of law as: “the extent to which agents have confidence and abide by the rules ofsociety, and in particular the quality of contract enforcement, the police and the courts, as well asthe likelihood of crime or violence.” Based on this definition the Worldwide Governance Indicatorsproject has developed aggregate measurements for the rule of law in more than 200 countries.

Declaration of Delhi

In 1959, an international gathering of over 185 judges, lawyers, and law professors from 53countries, meeting in New Delhi and speaking as the International Commission of Jurists, made adeclaration as to the fundamental principle of the rule of law.

Lord Bingham’s sub-rules

In his speech on November 16, 2006, for the Sir David Williams Lecture in the Law Faculty ofCambridge University, Lord Bingham of Cornhill postulated eight sub-rules of the rule of law. Itshould be noted that Bingham takes a strongly substantive view on the rule of law and that thesesub-rules would be subject to fierce criticism by journalists.

· the law must be accessible and so far as possible intelligible, clear and predictable

· questions of legal right and liability should ordinarily be resolved by application of the lawand not the exercise of discretion

· the laws of the land should apply equally to all, save to the extent that objective differencesjustify differentiation

· the law must afford adequate protection of fundamental human rights

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· means must be provided for resolving, without prohibitive cost or inordinate delay, bonafide civil disputes which the parties themselves are unable to resolve

· ministers and public officers at all levels must exercise the powers conferred on themreasonably, in good faith, for the purpose for which the powers were conferred and withoutexceeding the limits of such powers

· adjudicative procedures provided by the state should be fair

· the state must comply with its obligations in international law, the law which, whetherderiving from treaty or international custom and practice, governs the conduct of nations.

Authoritarianism

Rule of law is frequently opposed by authoritarian and totalitarian states. The explicit policy ofsuch governments, as evidenced in the Night and Fog decrees of Nazi Germany, is that thegovernment possesses the inherent authority to act purely on its own volition and without beingsubject to any checks or limitations. Dictatorships generally establish secret police forces, whichare not accountable to established laws, which can suppress threats to state authority.

Critique

Marxist theory asserts the capitalist state is an instrument of oppression of the proletariat at thehands of the bourgeoisie, which set the laws to suit itself. Following this, some critical theoristsanalyze the “rule of law” as a judicial fiction which aims at disguising the reality of violence and,in Marxist terminology, “class struggle”. This theory presumes that the “bourgeoisie” holds thepower to set the laws.

The Italian philosopher Giorgio Agamben argues that the state of exception is at the core of theconcept of sovereignty, and not the “rule of law” as liberal thinkers have it. While the sovereignclaims to follow the “rule of law”, any protection the people have, however fundamental, can bejettisoned once the government finds it convenient to do so.

Those that take formal conceptions of the rule of law have criticized more substantive conceptionswhich question whether a law is “good or bad”.

1.5 Introduction to Business Law and Legal framework

Constitutional Perspective of Business

The constitutional perspective of business are fiscal policies which have been incorporated in



to the Indian constitution under Articles of 19, 37, 38, 43, 44, 45, 47, 52, 82, 85, and 86, 301, 302,303, 305 of the list 1st union list; entry 24 of list 11- state list.

The Indian Constitution incorporated a number of matters that are economically very significantand have far-reaching implications for business. The socio-economic and political objectives ofthe Indian Republic and the basic guiding principles of state functioning have been clearly laiddown in the Preamble to the Constitution, the Fundamental Rights and in the Directive Principlesof state Policy. The Constitution also outlines the economic powers and responsibilities of theUnion Government and the State Governments.

The economic responsibility bestowed on the state by the Indian Constitution is so enormousthat it calls for great government interference in the functioning of the economy. In fact, a numberof constitutional amendments, including the first amendment, were effected to enable the state toimplement its economic policies and programmes.

It is indeed paradoxical that though the government, in the past, had proclaimed that certainpolicy measures had been taken and laws had been enacted to give effect to certain Constitutionalprovisions, some of these very policies have been given up or reversed and Acts repealed since theliberalization ushered in 1991 while those Constitutional provisions continue unchanged.

The Preamble of a statute conveys the general object and intention of the legislature in enactingit. Although not an essential feature, whenever a Constitution contains a Preamble, it expresses thepolitical, religious and socio-economic values, which it envisages to promote. But, it does notcontrol the meaning and scope of the other provisions of the Constitution. However, the Preamblemay be a guide when the statute is vague. Otherwise, full effect should be given to the expresswords of the enactment.

The Preamble to the Indian Constitution lays down that the attainment of social, economic andpolitical justice, and equality of status and of opportunity should be among the most importantbasic guiding principles of the functioning of the State. As if this were not enough, the constitutionwas amended in 1976 to add, among other things, that India should be a socialist state. In fact, asearly as December 1954, the Indian parliament had accepted the socialist pattern of society as theobjective of social and economic policy. As if to give this objective more prominence, it wasincorporated in the preamble to the constitution in 1976 under the controversial 42nd amendment.

As the preamble conveys the general object and intention of the Constitution and would beguide in the interpretation of a statue when it is vague, the above mentioned aspects of the preambleto the constitution give some indications of the need and scope for the state intervention in thefunctioning of the economy with a view to discharging its duties and responsibilities for the realizationof economic and associated objectives.

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The Fundamental Rights

It has been claimed that the Indian constitution offers all citizens, individually and collectively,the best fruits of democracy and those basic freedoms and conditions of life, which alone make lifesignificant and productive. The rights enumerated in part III of the constitution cover a wide rangeand are declared to be fundamental and justifiable.

The theory of fundamental rights implies limited government. It aims at preventing the governmentand the legislature from becoming totalitarian, and in doing so it affords the individual an opportunityfor self-development. But these rights are not absolute; they are subject to limitations opposed bythe state in order to secure rights for all individuals or to promote the greater interests of thecommunity or the state, or to serve the ends of a planned society.

The fundamental rights enumerated in part III of the constitution are:

(1) Right to equality.

(2) Right to freedom

(3) Right against exploitation

(4) Right to freedom of religion

(5) Cultural and educational rights

(6) Right to constitutional remedies

The constitution had also guaranteed, under Article 19(1) (f), the fundamental right to property;and Article 31 had prohibited the deprivation of property of any person save by authority of law;and for the deprivation of property compensation had been payable, but, in 1976, the 44thamendment of the constitution abolished the fundamental right to property by deleting Articles 19(1) (f) and 31. However, Article 300 ‘A of the new chapter IV added to part XII of the constitutionprovides that” no person shall be deprived of his property save by authority of law”. Thus, thoughthe right to property is no longer a fundamental right, it has been retained as a constitutional right.

The Fundamental Right also has Economic Significance

The right to equality prohibits discrimination against any citizens on grounds of religion, race,caste, sex or place of birth. In public employment, it ensures equality of opportunity to all citizens.This is, however, subject to certain limitations, such as the right of the state to reserve posts forbackward classes, which, in the opinion of the state, are not adequate, by represented in the services.

The constitution guarantees the citizens the fundamental right to freedom to practice anyprofession, carry on any occupation, trade or business. This right is subject to reasonable restrictions



in the interest of the general public. Under the first Amendment to the constitution (1951), the stateis empowered to make laws relating to professional or technical qualifications necessary forpracticing any profession or carrying on any trade, business, industry or service, whether to theexclusion, complete or partial, of citizens or otherwise.

The fundamental right against exploitation prohibits traffic in human beings, and beggary andother forms of forced labour; and any contravention of this provision shall be an offence punishablein accordance with the law. However, this does not prevent the state from imposing compulsoryservice for public purposes. In imposing such service, the state shall not make any discriminationon grounds only of religion, race, caste or class, or any of them.

Thus, the fundamental rights enumerated in the constitution guarantee a number of economicrights to the citizens; but at the same time, the state has the power to impose reasonable restrictionson such rights in the public interest. A very important thing to be noted is that this power of thestate to impose reasonable restrictions in the public interests had resulted in a remarkable increasein the statutory control over the business and a substantial expansion of the entrepreneurial orparticipated activities of the state. Consequently, there has been an abridgement of the economicliberty of the citizens embodied in Article 19 (I) (g).

Fundamental Duties

By the 42nd Amendment of the Constitution, adopted in 1976, Fundamental Duties of thecitizens have also been enumerated. These enjoin upon a citizen among other things, to abide bythe Constitution, to cherish and follow noble ideals which inspired our national struggle for freedom,to defend the country and render national service when called upon to do so and to promoteharmony and spirit of common brotherhood amongst all people of India transcending religious,linguistic and regional or sectional diversities.

The Directive Principles

The Directive Principles of State Policy is a unique feature of India’s Constitution. The directivePrinciples are in the nature of directions to the legislature and executive that they should exercisetheir authority in such a manner as to ensure due respect for, and observance of, these principles.Although these directives are not justifiable, the courts cannot altogether avoid taking cognizanceof them. They are the imperative basis of state policy and the Constitution directs the state to applythese principles in making laws.

The Directive Principles that are economically very significant are quoted below:

(a) The state shall strive to promote the welfare of the people by securing and protecting aseffectively as it may a social order in which justice, social, economic and political, shall

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inform all the institutions of the national life [Article 38 (1 )].

(b) The state shall, in particular, strive to minimize the inequalities in income, and endeavor toeliminate inequalities in status, facilities and opportunities, not only among individuals butalso amongst groups of people residing in different areas or engaged in different vocations[Article 38 (2)].

(c) The state shall, in particular, direct its policy towards securing:

That the citizens, men and women equally, have the right to an adequate means of livelihood.

That the ownership and control of the material resources of the community are so distributedas best to sub serve the common good.

That the operation of the economic system does not result in the concentration of wealthand means of production to the common detriment.

That there is equal pay for equal work for both men and women.

That the health and strength of workers, men and women, and the tender age of childrenare not abused and that citizens are not forced by economic necessity to enter a vocationunsuited to their age or strength.

That children are given opportunities and facilities to develop in a healthy manner and inconditions of freedom and dignity and that childhood and youth are protected againstexploitation and against moral and material abandonment (Article 39).

It may be noted that sections of Article 30 were quoted as the basis of certain policies andActs.

(d) The state shall ensure that the operation of the legal system promotes justice, on a basis ofequal opportunity, and shall, in particular, provide for legal aid, by suitable legislation ofschemes or in any other way, to ensure that opportunities for securing justice are not deniedto any citizens by reason of economic or other disabilities (Article 39 - A)

(e) The state shall take steps to organize village panchayats and endow them with such powersand authority as may be necessary to enable them to function as units of self-government(Article 40).

(f) The state shall, within the limits of its economic capacity and development, make effectiveprovisions for securing the right to work, to education and to public assistance in cases ofunemployment, old age, sickness and disablement, and in other cases of underserved wants(Article 41 ).



(g) The state shall make provisions for securing just and humane conditions of work and formaternity relief (Article 42).

(h) The state shall endeavor to secure, by suitable legislation or economic organization or anyother way, to all workers, agricultural, industrial or otherwise, a living wage, conditions ofwork ensuring a decent standard life and full enjoyment of leisure and social and culturalopportunities and in particular the state shall endeavor to promote cottage industries on anindividual or co-operative basis in rural areas (Article 43).

(i) The state shall take steps, by suitable legislation or in any other way; to secure theparticipation of workers in the management of understanding, establishments or otherorganization engaged in any industry (Article 43-A).

(j) The state shall promote with special care the educational and economic interest of theweaker sections of the people, and, in particular, of the schedules castes and the scheduledtribes, and shall protect them from social injustice and all forms of exploitation (Article46).

(k) The state shall regard the raising of the level of nutrition and the standard of living of itspeople and the improvement of public health as among its primary duties and, in particular,the state shall endeavor to bring about prohibition of the consumption, except for medicinalpurposes, of intoxicating drinks and of drugs, which are injurious to health.

(l) The state shall endeavor to organize agriculture and animal husbandry on modern andscientific lines and shall, in particular, take steps for preserving and improving the breeds,and prohibiting the slaughter of cows and calves and other milch and draught cattle (Article48).

(m) The state shall endeavor to protect and improve the environment and to safeguard theforests and wild life of the country (Article 48-A).

These Directive Principles make quite clear how important is the economic responsibilitybestowed on the state by the constitution.

Through constitutional amendments, new directives were added to provide a greater socialistorientation to development. For instance, in 1978, by the 44th Amendment, a new clause wasadded to Article 38; and this new clause contains a directive to strive to minimize the inequalitiesin status, facilities and opportunities. The 42nd amendment incorporated a new Article, 43-A, todirect the state to take suitable steps to secure workers’ participation in management.

There have been many occasions when the Directive Principles and Fundamental Rights havebeen in conflict with each other. In the early days, the Supreme Court held that the FundamentalRights were a sacrosanct part of the Constitution and nothing, including the Directive Principles,

21

could override them. But the view that the Fundamental Rights should be subordinate to theDirective Principles gained ground in later years.

While asking the LokSabha to refer the Constitution (Fourth Amendments) Bill to the selectcommittee, Prime Minister Nehru declared that the Fundamental rights must sub serve the directiveprinciples. In the Keshwanand Bharti vs. state of kerala, Justice Mathew observed, “In buildingup a just social order, it is sometimes imperative that the fundamental rights should be subordinatedto directive principles... Economic goals have an uncontestable claim for priority over ideologicalonce on the ground that excellence comes only after existence. .It is only if men existed that therecan be fundamental rights”.

In short, the Directive Principles of state policy enunciated in the Indian constitution provide anenormous scope for Government intervention in the functioning of the economy. However, quiteinterestingly, although state control of the economy had been deepened and widened as if it wereconstitutional requirement, this trend has been reversed since 1991 while the same preamble anddirective principle are held sacrosanct.

1.6 Freedom of Trade, Commerce and Intercourse

According to Article 301 of the constitution of India, trade commerce and intercourse throughoutthe territory of India shall be free. This freedom, however, is not without restrictions.

The freedom guaranteed by Article 301 is in the widest terms and applies to all forms of trade,commerce and intercourse. It is subject only to restrictions specified in Article 302 to 305 and thefreedom to carry on trade, commerce and intercourse throughout India guaranteed under Article301 cannot be taken away by an executive action.

According to Articles 302-305, the state can impose reasonable restrictions on the freedomexpressed by Article 301. Accordingly, parliament may impose such restrictions on the freedom oftrade; commerce or intercourse between one state and another or within any part of the territory ofIndia has been required in the public interest. States governments are empowered to impose anytax on goods imported from other states if similar goods in the state are subject to similar tax so asnot to discriminate between goods so imported and goods manufactured or produced interstate.

Separation of Powers

Separation of powers is an important feature of the Indian constitution. “The Sparation” ofpowers contemplates the idea that the governmental functions must be based on a tripartite divisionof legislature, executive and judiciary. Each organ should be separated, distinct and sovereign inits own allocated sphere and it should not exercise the functions designated to another”. As chief



justice Subba Rao observed in the Golak Nath. vs State of Punjab, the constitution demarcates thejurisdiction of these organs minutely and expects them. to exercise their respective powers withoutoverstepping their limits. They should function within the spheres allotted to them.....NO authoritycreated under the constitution is supreme; the constitution is supreme and all the authorities functionunder the supreme law of the land”.

Division of Power

India’s constitution distributes the items for legislation among three lists

Union list

State list

Concurrent list

The respective jurisdiction of the union and the states and their mutual relations has been clearlydefined.

The union has exclusive power to make laws on all maters in the union list and the states haveexclusive powers to make laws in the state list. Except for the union territories, the centre cannotnormally legislate on any matter included in the state list. Parliament can, however, do so if thecouncil of states recommends by at least two-thirds majority that such legislation is in nationalinterest; if two or more states mutually agree that this should be done for such states and to implementtreaties or international agreements or conventions.

Both the union and States can legislate on matters in the concurrent list. However, in case ofany conflict between the union laws and state laws, the union laws shall prevail. Further, the unionhas exclusive power to make laws of any matter not enumerated in concurrent list or state list.

1.7 Let us Sum up

The first four decades of planning witnessed an expansion of state intervention in the economy.The constitution was amended a number of times. The constitution of India, which came intoforce in 1950, was first amended in the very next year. By the first amendment of the constitution,State has been empowered to impose restrictions on the right of citizens to carry on any trade,business, industry or service with a view to enabling the state to undertake any scheme ofnationalization or prescribing the professional or technical qualification necessary for practicingany profession or carrying on any occupation, trade or business.

The state has, from time to time, acquired increasing power to control private activity and

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enlarge its own ownership and management of the economy.

The brief account of the economic significance of the Indian constitution given above makes itabundantly clear that the state has to shoulder a very heavy responsibility to attain the egalitariangoals set forth in the constitution. Any responsibility should have commensurate authority also.Over the years, the government has assumed enormous power of control over the economy. Howeffectively the judiciously these powers have been exercised, and how satisfactorily the problemshave been solved are different questions.

1.8 Glossary

State = Nation or Country

Right = Interest recognized and protected by law

Jurisprudence = Study of philosophical background of Law

Constitution = Basic Law of the Land

Business = Buying and Selling of goods and services with an intention of Profit

Legislature = Organ of the Government which makes laws

Executive = Organ of Government which executes the laws made by Legislature

Judiciary = Interprets the Laws and applies them to administer justice


1. Trace the history of Law.

2. What is Rule of law?

3. Quote the Provisions of Indian Constitution with regard to Business.

4. What is freedom of Trade Commerce and Intercourse?

1.10 Suggested Reading

1. Friedmann, Legal Theory, Eastern Book Company.



2. John Rawls, Theory of Justice, Eastern Book Company.

3. Salmond, Jurisprudence, Eastern Book Company.

4. M.P.Jain, Constitutional Law of India, Eastern Book Company.

5. D.D.Basu, Indian Constitution, Eastern Book Company.


1. Trace the historical background of law.

2. Write a note on Rule of Law.

3. Compare Dicey’s and Rawl’s theories of Rule of Law.

4. Explain the Constitutional background for business.

5. Write a note on Fundamental rights and Duties which confirm freedom of Business andTrade.

6. Comment on legal regulation of business activities.

* * * * * *

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Unit 2

Law of Contracts

Unit Structure


2.2 Introduction

2.3 Agreement and Contract

2.4 Standard form Contract

2.5 Promissory Estoppel

2.6 Agreement

2.7 Offer

2.8 Acceptance

2.9 Consideration

2.10 Free consent

2.11 Remedies for breach of contract

2.12 Performance of Contract

25Unit 2 - Law of Contracts


2.13 Suit for Breach of Contract

2.14 Contract of agency

2.15 Authority

2.16 Ratification

2.17 Termination of Agency

2.18 Compensation

2.19 Agent’s rights and duties

2.20 Principal’s duties and rights

2.21 Contract of Indemnity and Guarantee

2.22 Duties of Surety

2.23 Let us sum up

2.24 Glossary




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After reading this chapter you will be able to understand:

� General principles of law relating to contracts.

� Law of sale of goods.

� Law of agency contracts.

� Law of indemnity and guarantee.

2.2 Introduction

The principles of law of contracts are creature of English courts. The law of contractsconsisting of limiting principles subject to which the law will uphold. The parties to acontract, in a sense, make the law for themselves. So long as they do not infringe some

legal provisions, they can make what rules they like in respect of the subject matter of their agreementand the law will give effect to their decisions.

Indian Contract Act, 1872,

Act IX of 1872

The notion of contract is part of men’s common stock even outside the field of legal science,and to men of law, so familiar and necessary in its various application, that we might expect asettled and just apprehension of it to prevail everywhere. Nevertheless, we are yet far short of this.

Indian contract Act is the Act which regulates the entire arena of business world which does itsbusiness on the basis of contract. Contract Act contains 238 sections. Contract Act covers a widerange of areas like formation of contracts, contingent contracts, performance of the contract, andconsequences of breach of contract, sale of goods, indemnity and guarantee, bailment, agency andso on. Under Section 1 of Contract Act says that the Act is applicable to the whole of India, exceptthe state of Jammu and Kashmir.

In the following chapter, some of the important parts of the Contract Act were discussed.

A contract means an agreement which is enforceable by law. An agreement consists of reciprocalbetween the two parties. In case of contract each party is legally bound by the promise made byhim. A contract or an obligation to perform a promise could arise in the following way: -

I. By Agreement and Contract;

Unit 2 - Law of Contracts


II. By Standard Form Contract; and

III. By Promissory Estoppel.

2.3 Agreement and Contract

The most common way of making contract is through an agreement. The two parties mayagree to something through mutual negotiations. When one party makes an offer and the otheraccepts the same, there arises an agreement, which may be enforceable by law.

2.4 Standard Form Contract

In the modern age some persons, institutions or establishments such as the Railway, InsuranceCompanies, Bank, Manufacturers of various goods, etc., may have to enter into a very largenumber of contracts with thousands of persons. They cannot possibly negotiate individually withthe persons with whom the contracts are to be made. Contract with pre-drafted matters are generallyprepared by one party, which the other has to agree to. As a general rule, such Standard FormContract are as much valid as those entered into through due negotiation.

2.5 Promissory Estoppel

Sometimes there may be no agreement and contract in strict sense of the term, but a personmaking a promise may become bound because of the application of the equitable doctrine ofEstoppel.

Contract

According to Section 2(h) of the Indian Contract Act, 1872 “An agreement enforceable by lawis a contract”. All agreements are not enforceable by law and, therefore, all agreements are notcontracts. Some agreements may be enforceable by law and others not. For example, an agreementto sell a radio set may be a contract, but an agreement to go to see a movie may be a mere agreementnot enforceable by law. Thus, all agreements are not contracts. Only those agreements whichsatisfy the essentials mentioned in Section 10 becomes contracts. However, all contracts areagreements.

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2.6 Agreement

According to Section 2(e): “Every promise and every set of promises forming the considerationfor each other is an agreement”.

In an agreement there is a promise from both sides. For example, A promises to deliver hiswatch to B and in return B promises to pay a sum of Rs. 2000 to A, there is said to be an agreementbetween A and B.

Thus, when there is a proposal from one side and the acceptance of that proposal by the otherside, it results in a promise. This promise from the two parties to one another is known as anagreement.

The Essentials needed for a Valid Contract

1. An agreement between the two parties. An agreement is the result of a proposal or an offerby one party followed by its acceptance by the other.

2. Agreement should be between the parties who are competent to contract.

3. There should be a lawful consideration and lawful object in respect of that agreement.

4. There should be free consent of the parties, when they enter into the agreement.

5. The agreement must not be one, which has been expressly declared to be void.

From the point of view of the legality, there are different types of agreements.

1. Contract

According to Section 2(h), Contract is an agreement which is enforceable by law. It has beennoted above that in order that an agreement becomes a contract, it has to satisfy all the essentials ofa valid contract as mentioned in Section 10.

2. Void Agreements

According to Section 2(g), an agreement not enforceable by law is said to be void. For instance,an agreement by a minor has been held to be void. Sections 24 to 30 make a specific mentionabout agreements which are void. Those agreements include an agreement without consideration,an agreement in restraint of marriage, and an agreement in restraint of trade.

3. Voidable Contracts

According to Section 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, is a voidable contract. Thus, avoidable contract is one which could be avoided by one of the parties to the contract at his option.Even if one of the parties does not avoid the contract, the contract still becomes void. For instance,when the consent of a party to a contract has been obtained by coercion, undue influence, fraud ormisrepresentation, the contract is voidable at the option of the party whose consent has been soobtained.

2.7 Offer and Acceptance

It has been noted that an agreement between the parties is one of the essentials for creating acontract. An agreement arises by an “offer” or proposal by one of the parties and the “acceptance”of such offer by the other. The rules regarding proposal and acceptance are being discussed below.

Proposal or Offer

The term proposal has been defined in Section 2(a) as follows: -

“When one person signifies to another his willingness to do or abstain from doing anything,with a view to obtaining the assent of that other to such act or abstinence, he is said to make aproposal”.

The term proposal used in the Indian Contract Act is synonymous with the term ‘offer’ used inEnglish law. The willingness to do or abstain from doing something, i.e., the proposal or the offermay be made with a view to obtaining the assent of the other party thereto.

Communication of offer necessary

An offer when accepted results in a contract. An offer can be accepted only after the same hascome to the knowledge of the offeree. It means that the offer has to be communicated to theofferee in order that the offeree can accept it. According to Section 4, “The communication of aproposal is complete when it comes to the knowledge of the person to whom it made.

If an offer has not yet been communicated, even if somebody acts according to the terms of theoffer, he cannot be deemed to be the acceptor of that offer. Acting in ignorance of an offer does notamount to the acceptance of the same. The point may be explained by referring to the case ofLalman Shukla v. Gauri Dutt. In this case the defendant’s nephew absconded form home. Theplaintiff, who was defendant’s servant, was sent to search the missing boy. After the plaintiff hadleft in search of the boy, the defendant issued handbills announcing a reward of Rs. 501 to anyonewho might find out the boy. The plaintiff, who was ignorant of this reward, was successful insearching of the boy. When he came to know of the reward, which had been announced in his

31

absence, he brought an action against the defendant to claim this reward, his act of bringing thelost boy did not amount to the acceptance of the offer, and, therefore, he was not entitled to claimthe reward.

Cross Offers

When the offers made by two persons to each other containing similar terms of bargain crosseach other in post, they are known as cross offer. For example, on 1st January, A offers to sell hiswatch to B for Rs. 2000 through a letter sent by post. On the same date B also writes to A makingan offer to purchase A’s watch for Rs. 2000. When A or B send other letters, they do not knowabout the offer which is being made by the other side. In these cross offers, even though both theparties intend the same bargain, there arises no contract. A contract could arise only if either A orB, after having the knowledge of the offer, had accepted the same.

Specific and General Offers

When the offer is made to a specific or an ascertained person, it is known as a specific offer, butwhen the same is not made to any particular person but to the public at large, it is known as generaloffer. According to Section 8, “Performance of the conditions of a offer is made to the public atlarge, the contract is concluded only with that person who acts upon the terms of the offer, viz.,who accepts the offer.

Standing, Open or continuing offer

An offer which is allowed to remain open for acceptance over a period of time is known as astanding, open or continuing offer. For example, an offer to supply 1,000 bags of wheat from 1st

January to 31st December, in accordance with the orders which may be placed from time to time,is a standing offer. As and when the orders are placed that amounts to acceptance of the offer tothat extent.

2.8 Acceptance

A proposal, when accepted, results in an agreement. It is only after the acceptance of the proposalthat a contract between the two parties can arise.

According to Section 2(b): “When the person to whom the proposal is made signifies his assentthereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise”.

The person making the proposal does not become bound thereby until acceptance. As soon ashis proposal is accepted that is known as promise whereby both the parties become bound.



Effect of Acceptance

A contract is created only after an offer is accepted. Before the acceptance is made neither partyis bound thereby. At that stage the offeror is free to revoke or withdraw his offer, and the offeree isfree not to accept the offer or to reject the same. After the offer has been accepted, it becomes apromise which, if other conditions of a valid contract are satisfied, binds both the parties to thepromise. After acceptance, each party becomes legally bound by the promise made by him throughthe medium of offer and acceptance of it.

Essentials of Valid Acceptance

In order that acceptance of an offer can result in a contract, the acceptance must satisfy thefollowing requirements: -

1. Acceptance should be communicated by the offeree to the offeror.

2. Acceptance should be absolute and unqualified.

3. Acceptance should be made in some usual and reasonable manner, unless the proposalprescribes the manner of acceptance.

4. Acceptance should be made while the offer is still subsisting.

Acceptance should be communicated

It has been noted that when the person to whom the proposal is made signifies his assentthereto, the proposal is said to be accepted. It means that the offeree must signify his assent, orcommunicat the acceptance. The communication of acceptance is deemed to be made by any actor omission of the party accepting, by which he intends to communicate such acceptance, orwhich has the effect of communicating it.

For a valid contract the acceptance must be communicated and moreover, such communicationshould be made to the offeror. If I decide to accept your offer but do not communicate my acceptanceto you, or after having decided to accept your offer I tell my servant about my intention that cannotgive rise to a contract. This point may be explained by referring to the case of Felthouse v. Bindley.Felthouse wrote a letter to his nephew offering to buy his horse for £ 30-15 sh. In the lettercontaining the offer it was also mentioned: “If I hear no more about the horse I shall consider thesame to be made mine at £ 30-15 sh”. The nephew did not reply this letter. He, however, told hisauctioneer, Bindley, that he wanted to reserve this horse for his uncle and, therefore, desired thatthe horse be not sold by the auctioneer. The auctioneer (Bindley) disposed of the horse by mistake.Felthouse sued Bindley for the tort of conversion on the plea that Felthouse had become the ownerof the horse which Bindley had disposed of. It was held that since the nephew had not communicated

33

the acceptance to Felthouse, no contract had arisen in this case, and therefore, Felthouse had notbecome the owner of the horse and as such his action for conversion failed.

2.9 Consideration

Presence of consideration is one of the essentials of a valid contract. Subject to certain exceptions,the general rule in India is that “an agreement without consideration is void”.

In England, the contracts are divided mainly into two categories: -

1. Contracts under seal, or contracts in the form of a deed. Such contracts are valid evenwithout consideration.

2. Simple contracts, or parol contracts. For the validity of such contracts the presence ofconsideration is needed.

Consideration means something in return for the promise. It may be either some benefit conferredon one party or some detriment suffered by the other.

Definition of Consideration under Section 2(d)

Section 2(d), Indian Contract Act defines consideration as under: -

“When at the desire of the promisee any other person has done or abstained from doing, or doesor abstains from doing, or promises to do or to abstain from doing something, such act or abstinenceor promise is called a consideration for the promise”.

The definition requires the following essentials to be satisfied in order that there is validconsideration: -

1. Consideration to be given at the desire of the promisor,

2. Consideration to be given by the promisee or any other person,

3. Consideration may be past, present or future, in so far as definition says that the promisee:

i) has done or abstained from doing, or

ii) does or abstains from doing, or

iii) Promises to do or to abstain form doing, something.

4. There should be some act, abstinence or promise by the promisee, which constitutesconsideration for the promise.



2.10 Free Consent

What is Free Consent?

One of the essentials of a valid contract mentioned in Section 10 is that the parties should enterinto the contract with their free consent. According to Section 14, consent is said to be free whenit is not caused by:

a) coercion, as defined in Section 15, or

b) undue influence, as defined in Section 16, or

c) fraud, as defined in Section 17,or

d) misrepresentation, as defined in Section 18, or

e) mistake, subject to the provision of Section 20, 21 and 22.

Consent is said to be so caused when it would not have been given but for the existence of suchcoercion, undue influence, fraud, misrepresentation or mistake.

If the consent of one of the parties is not free consent, i.e., it has been caused by one or the otherof the above stated factors, the contract is not a valid one. When consent to an agreement is causedby coercion, undue influence, fraud or misrepresentation, the agreement is a contract voidable atthe option of the party whose consent was so caused. If, however, the consent is caused by mistake,the agreement is void.

Performance of Contract

Every contract consists of reciprocal promises. Each party to a contact is bound to perform thepromise made by him. According to Section 37:

“The parties to a contract must either perform or offer to perform, their respective promises,unless such performance is dispensed with or excused under the provisions of this Act, or of anyother law”.

The parties to the contract have a duty to:

i) perform, or

ii) offer to perform,

their respective promises. According to Section 38, as has been explained below, just actualperformance, an offer of performance (or tender) by the promisor discharges a promisor from hisobligation under a contract. Thus, if A offers to perform his part of the promise, but the other party

35

B, does not avail of such performance, A would be discharged from his obligation under thecontract.

The parties to a contract, however, need not perform their promises in case:

i) Such performance is dispensed with, or

ii) Excused under the provisions of this Act, or of any other law.

According to Section 63, the promisee may dispense with the performance of the promise bythe promisor. In such a case, the promisor need not perform the promise. For example, to paint apicture for B, B afterwards forbids him to do so. A is no longer bound to perform the promise.

Section 38: Effect of refusal to accept offer of performance

Where a promisor has made an offer of performance to the promisee, and the offer has not beenaccepted, the promisor is not responsible for non-performance, nor does he thereby lose his rightsunder the contract.

Every such offer must fulfill the following conditions: -

a) It must be unconditional;

b) It must be made at a proper time and place, and under such circumstances that the personto whom it is made may have a reasonable opportunity of ascertaining that the person bywhom it is made is able and willing there and then to do the whole of what he is bound byhis promise to do;

c) If the offer is an offer to deliver anything to the promisee, the promisee must have areasonable opportunity of seeing that the thing offered is the thing which the promisor isbound by his promise to deliver;

An offer to one of several joint promisees has the same legal consequences as an offer to all ofthem.

Performance on the Death of a Party

If a party to the contract dies before he has performed the contract that, by itself, does not put anend to the obligation to perform the same. Promisee bind the representatives of the promisors incase of the death of such promisors before performance, unless contrary intention appears fromthe contract. For example, A promises to deliver goods to B on a certain day on payment of Rs.1,000. A dies before that day, A’s representatives are bound to deliver the goods to B and B isbound to pay Rs. 1,000 to A’s representatives.



By whom should the Contract be performed?

Performance by the promisor or his agent

Whether only the promisor can perform the contract himself, or it can be performed through anagent also, may be the question arising in some cases. Section 40 of the Contract Act makes thefollowing provisions in this regard:

“If it appears from the nature of the case that it was the intention of the parties to any contractthat any promise contained in it should be performed by the promisor himself, such promise mustbe performed by the promisor.

In other cases, the promisor or his representatives may employ a competent person to performit”.

Time and Place of Performance

The parties are free to decide as to when and where the performance of the contract is to bemade. Section 46 to 50 lay down the principles for the performance of contracts containing differentstipulations as to time and place of the contract.

Time and Place of promise, where no application is to bemade and no time is specified.

According to Section 46:

“Where by the contract, a promisor is to perform his promise without application by the promisee,and no time for performance is specified, the engagement must be performed within a reasonabletime.

Time and Place for performance of promise, where time isspecified, and no application to be made.


“When a promise is to be performed on a certain day, and the promisor has undertaken toperform it without application by the promisee, the promisor may perform it at any time during theusual hours of business on such day and at the place at which the promise ought to be performed”.

When the promisee is to apply for performance, he must do soat proper time and place.

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“When a promise is to be performed on a certain day, and the promisor has not undertaken toperform it without application by the promisee, it is the duty of the promisee to apply for performanceat a proper place and within the usual hours of business”.

Place for performance of promise, where application to be madeand no place fixed for performance.


When a promise is to be performed without application by the promisee, and no place is fixedfor the performance of it, it is the duty of the promisor to apply to the promisee to appoint areasonable place for the performance of the promise, and to perform it at such place.

The performance of any promise may be made in any manner, or at any time which the promiseeprescribes or sanctions Under Section 50.

Effect of failure to perform the contract in time (Section 55)

When one party fails to perform the contract in time, the question may arise as to what remedythe other party can have in such a case. Section 55 mentions two different remedies: one in a casewhen the time of performance is of the essence of the contract, and the other when the time is notof the essence of the contract.

2.11 Remedies for Breach of Contract

Under sec 73 “when a contract has been broken, the party who suffers by such breach isentitled to receive, from the party who has broken the contract, compensation tor any loss ordamage caused to him thereby, which naturally arose in the usual course of things from suchbreach, or which the parties knew, when they made the contract, to be likely to result from thebreach of it. Such compensation is not to be given for any remote and indirect loss or damagesustained by reason of the breach.

Damages may be classified into four categories,

1. Ordinary or general damages.

2. Special damages

3. Exemplary or vindictive damages

4. Nominal damages



Under sec 74, when a contract has been broken, if a sum is named in the contract as the amountto be paid in case of such breach, or if the contract contains any other stipulation by way ofpenalty, the party complaining of the breach is entitled, whether or not actual damage or loss isproved to have been caused thereby, to receive from the party who has broken the contract reasonablecompensation not exceeding the amount so named or, as the case may be, the penalty stipulatedfor.

2.12 Performance of the contract

1. Payment and delivery are concurrent conditions.

2. Delivery of goods.

3. Buyer to apply for deliver.

4. Instalment deliveries.

5. Delivery to carrier or wharfinger.

6. Buyer’s right of examining the goods.

7. Acceptance.

8. Liability of buyer for neglecting or refusing delivery of goods.

2.13 Suits for breach of the contract (Under Specific ReliefAct)

1. Suit for price- sec 55

2. Suit for damages of non-acceptance-sec56

3. Damages for non-delivery-sec 57

4. Specific performance-sec 58

5. Remedy for breach of warranty-sec 59

6. Repudiation of contract before due-date- sec 60

7. Interest by way of damages and special damages-sec 61.

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2.14 Contract of Agency (Indian Contract Act 1872, Sec182 to 238)

Under Indian Contract Act, from Section 182 to 238 deals with the contract of Agency. Underthe following chapter some important provisions of the Agency contract were mentioned.

Under section 182 of Indian Contract Act 1872, an Agent is a person employed to do any actfor another or to represent another in dealings with third persons. The person for whom such act isdone, or who is so represented, is called the Principal.

Any person who is of the age of majority according to the law to which he is subject, and whois of sound mind, may employ an agent, sec183.

As between the principal and third persons any person may become an agent, but no personwho is not of the age of majority and of sound mind can become an agent, so as to be responsibleto his principal according to the provisions in that behalf, sec 184. And no consideration is necessaryto create an agency.

2.15 Authority

An authority is said to be expressed when it is given by words spoken or written. An authorityis said to be implied when it is to be inferred form the circumstances of the case; and things spokenor written, or the ordinary course of dealing, may be accounted circumstances of the case. Sec187.

An agent having an authority to do an act has authority to do every lawful thing, which isnecessary in order to do such act. An agent having an authority to carry on a business has authorityto do every lawful thing necessary for the purpose, or usually done in the course of conductingsuch business. Section 188.

An agent has authority, in emergency, to do all such acts for the purpose of protecting hisprincipal from loss as would done by a person of ordinary prudence, in his own case, under similarcircumstances. Section 189.

An agent can not lawfully employ another to perform acts which he has expressly or impliedlyundertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, fromthe nature of the agency, a sub-agent must, be employed. Section 190.

A sub-agent is a person employed by, and acting under the control of, the original agent in thebusiness of the agency. Section 191.



2.16 Ratification

Where acts are done by one person on behalf of another, but without his knowledge or authority,he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as ifthey had been performed by his authority. Section 196.

Ratification may be either expressed or implied in the conduct of the person on whose behalfthe acts are done.

An act done by one person on behalf of another, without such other person’s authority, whichif done with authority, would have the effect of subjecting a third person to damages, or ofterminating any right or interest of a third person, can not, by ratification, be made to have sucheffect. Section 200.

2.17 Termination of Agency

Under section 201 “An agency is terminated by the principal revoking his authority; or by theagent renouncing the business of the agency; or by the business of the agency being completed; orby either the principal or agent dying or becoming of unsound mind; or by the principal beingadjudicated an insolvent under the provisions of any Act for the time being in force for the relief ofinsolvent debtors”.

Under section 202, where the agent has himself an interest in the property which forms thesubject matter of the agency,, the agency can not, in the absence of an express contract, be terminatedto the prejudice of such interest.

2.18 Compensation

Under section 205, where there is an express or implied contract that the agency should becontinued for any period of time, the principal must make compensation to the agent, or the agentto the principal, as the case may be, for any previous revocation or renunciation of the agencywithout sufficient cause.

Notice

Reasonable notice must be given of such revocation or renunciation; otherwise the damagethereby resulting to the principal or the agent, as the case may be, must be made good to the one bythe other, under section 206.

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Revocation or renunciation may be expressed or may be implied in the conduct of the principalor agent respectively.

2.19 Agent’s duties and rights

1. Agent is bound to conduct the business of his principal according to the directions givenby the principal.

2. He should exercise due care and diligence in the conduct of business.

3. He should maintain accounts.

4. He should communicate with the principal.

5. He can retain the money of the business.

6. He can claim his part of remuneration.

7. He can take decisions in his authority.

8. Agent can exercise lien on principal’s property in case of non-payment of the remuneration.

2.20 Principal’s duties and rights

1. Should give proper guidelines and advices.

2. He should communicate with the agent properly.

3. Take all the necessary steps for the better conduct of the business.

4. Should make proper payments to the agent.

5. He can claim the benefit earned out of the business.

6. No obligation to pay the remuneration in case of business mis-conducted by agent.

7. Should pay compensation to agent for injury caused by principal’s neglect.

2.21 Contracts of Indemnity and Guarantee (IndianContract Act, 1872, Sec 124 to 147)

Indian Contract Act under section 124 to 147 speaks about the contracts of indemnity and



guarantee. Some of the important provisions and sections are mentioned in the following chapter.

Contract of indemnity is defined under section 124 as “a contract by which one party promisesto save the other from the loss caused to him by the conduct of the promisor himself, or by theconduct of any other person.

Under section 125, rights of indemnity holder were explained. The promisee in a contract ofindemnity, acting within the scope of his authority, is entitled to recover from the promisor,-

1. all damages which he may be compelled to pay in any suit in respect of any matter towhich the promise to indemnify applies;

2. all costs which he may be compelled to pay in any such suit if, in bringing or defending it,he did not contravene the orders of the promisor, and acted as it would have been prudentfor him to act in the absence of any contract of indemnity, or if the promisor authorizedhim to bring or defend the suit;

3. all sums which he may have paid under the terms of any compromise of any suit, if thecompromise was not contrary to the orders of the promisor, and was one which it wouldhave been prudent for the promisee to make in the absence of any contract of indemnity, orif the promisor authorized him to compromise the suit.

Section 126 defines contract of guarantee as the contract to perform the promise, or dischargethe liability, of a third person in case of his default. The person who gives the guarantee is calledthe Surety; the person in respect of whose default the guarantee is given is called the Principaldebtor, and the person to whom the guarantee is given is called the Creditor. A guarantee may beeither oral or written. Under section 127, anything done, or any promise made, for the benefit ofthe principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

Any variance, made without the surety’s consent, in the terms of the contract between theprincipal debtor and the creditor, discharges the surety as to transactions subsequent to the variance,under section 133.

Under section 134, the surety is discharged by any contract between the creditor and the principaldebtor, by which the principal debtor is released, or by any act or omission of the creditor, the legalconsequence of which is the discharge of the principal debtor.

2.22 Duties of Surety

1. He shall not vary terms of the contract between the creditor and principal debtor.

2. He should not release the principal debtor from his liability under the contract.

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3. He should not impair the surety’s eventual remedy against the principal debtor.

2.23 Let us Sum up

Unless a manager is having the knowledge of the legal regulations of the contracts, he can notmaintain the business effectively. So the introductory chapters on the issues of contracts, sale ofgoods, indemnity, guarantee etc will provide you a required framework of law on contracts.

2.24 Glossary

Agreement = Offer and Acceptance

Contract = Agreement enforceable by law

Indemnify = Undertaking

Breach = Non-fulfillment, Violation

Agent = Person acting on behalf of the Principal

Consideration = Monetary benefit

Damage = Loss

Damages = Compensation in the form of money


1. What is contract?

2. What is offer and acceptance?

3. What are the conditions of a valid contract?

4. Who is an agent?

5. What is free consent?

6. Differentiate Indemnity and Guarantee.




1. Avtar Singh, Law of Contracts, Eastern Book Company.

2. R.K.Bangia, Law of Contracts, Allahabad law Agency.

3. Subbarao, Law of Contracts, I and II, S.Gogia and Co.

4. Indian Contract Act, 1872, Bare Act.


1. Describe Contract and its essentials.

2. Write a note on contract of agency.

3. Describe and distinguish contract of indemnity and guarantee.

4. Write a note on essentials of a contract.

5. Explain the remedies for breach of contracts.

* * * * *

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Unit 3

Law Relating to Companies

Unit Structure


3.2 Introduction

3.3 Types of Companies

3.4 Incorporation Procedure

3.5 Capital Structure

3.6 Borrowing

3.7 Dividend

3.8 Managerial Remuneration

3.9 Provisions Concerning Winding Up

3.10 Prevention of Mismanagement

3.11 Let us sum up

3.12 Glossary


Unit 3 - Law Relating to Companies 45


3.14Suggested Readings

3.15Model Question

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After reading this chapter you will be able to understand:

� Rules for Incorporation of companies.

� Memorandum and Articles of Associations.

� Capital Structure, Shares and Debentures.

� Managerial Remuneration, and prevention of mis-management.

� Provisions for winding up of the companies.

3.2 Introduction

There is no clear definition for the term Company in the Companies Act, 1956. Howeveraccording to sec 3(i) Company means a company formed and registered under theCompanies Act. When the law fails to provide clear definition, it seeks the opinion of

the court. In the famous case Solomon v Solomon and co it is stated that a company is a legalperson or legal entity separate from and capable of surviving beyond the lives of its share holdersor members.

The Companies Act, 1956 consists of 658 sections and 15 schedules dealing in various aspectsof company commencing from registration to various functions and winding up. The CompaniesAct, 1956 is dealing in substantive and procedural aspects of the company.

Companies Act 1956 has been amended as and when it was found necessary to deal with thechanging business atmosphere. One of the amendment Acts has brought in to companies Act anew part on Producers Company. Another recent amendment Act brings in a new part providingfor Revival and Rehabilitation of sick industries and companies. However this part is yet to reachthe enforcement stage. Further the latest amendment Act makes a serious reallocation of the role ofdifferent authorities under the companies Act.

In this chapter we are concentrating only on specific areas like incorporation procedures of thecompany sec 11 to 80, capital and debentures sec 83 to 120, managerial remuneration undersections 198 to 208 and winding up under sections 425 to 520.

3.3 Types of Companies

Sec 3.(1) In this Act, unless the context otherwise requires, the expressions “company”, “existing

Unit 3 - Law Relating to Companies


company”, “private company” and “public company”, shall, subject to the provisions of sub-section (2), have the meanings specified below :—

(i) “company” means a company formed and registered under this Act or an existing companyas defined in clause (ii);

(ii) “existing company” means a company formed and registered under any of the previouscompanies laws specified below:—

(a) any Act or Acts relating to companies in force before the Indian Companies Act, 1866(10 of 1866) and repealed by that Act;

(b) the Indian Companies Act, 1866 (10 of 1866);

(c) the Indian Companies Act, 1882 (6 of 1882);

(d) the Indian Companies Act, 1913 (7 of 1913);

(e) the Registration of Transferred Companies Ordinance, 1942 (54 of 1942); and 46d

(f) any law corresponding to any of the Acts or the Ordinance aforesaid and in force—

(1) in the merged territories or in a Part B State (other than the State of Jammu and Kashmir),or any part thereof, before the extension thereto of the Indian Companies Act, 1913 (7of 1913); or

(2) in the State of Jammu and Kashmir, or any part thereof, before the commencement ofthe Jammu and Kashmir (Extension of Laws) Act, 1956 46e[in so far as banking,insurance and financial corporations are concerned, and before the commencement ofthe Central Laws (Extension to Jammu & Kashmir) Act, 1968, in so far as othercorporations are concerned and

(iii) “private company” 46h[means a company which has a minimum paid-up capital of onelakh rupees or such higher paid-up capital as may be prescribed, and by its articles,—]

(a) restricts the right to transfer its shares, if any;

(b) limits the number of its members to fifty not including—

(i) persons who are in the employment of the company; and

(ii) persons who, having been formerly in the employment of the company, were membersof the company while in that employment and have continued to be members after theemployment ceased; and

(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of,

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the company;

(d) prohibits any invitation or acceptance of deposits from persons other than its members,directors or their relatives:

Provided that where two or more persons hold one or more shares in a companyjointly, they shall, for the purposes of this definition, be treated as a single member;

(iv) “public company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, asmay be prescribed;

(c) is a private company which is a subsidiary of a company which is not a privatecompany.

(2) Unless the context otherwise requires, the following companies shall not be included withinthe scope of any of the expressions defined in clauses (i) to (iv) of sub-section (1), and suchcompanies shall be deemed, for the purposes of this Act, to have been formed and registeredoutside India :—

(a) a company the registered office whereof is in Burma, Aden or Pakistan and whichimmediately before the separation of that country from India was a company as defined inclause (i) of sub-section (1);

(3) Every private company, existing on the commencement of the Companies (Amendment)Act, 2000, with a paid-up capital of less than one lakh rupees shall, within a period of two yearsfrom such commencement, enhance its paid-up capital to one lakh rupees.

(4) Every public company, existing on the commencement of the Companies (Amendment)Act, 2000, with a paid-up capital of less than five lakh rupees shall, within a period of two yearsfrom such commencement, enhance its paid-up capital to five lakh rupees.

(5) Where a private company or a public company fails to enhance its paid-up capital in themanner specified in sub-section (3) or sub-section (4), such company shall be deemed to be adefunct company within the meaning of section 560 and its name shall be struck off from theregister by the Registrar.

(6) A company registered under section 25 before or after the commencement of the Companies(Amendment) Act, 2000 shall not be required to have minimum paid-up capital specified in thissection.



3.4 Incorporation Procedure

Company form of business organization provides high rate of advantages to the entrepreneurfor his business. Now we shall glance the important provisions of the Act, which regulates theaffairs of the company.

To obtain the registration of a company an application has to be filed with the Registrar ofCompanies. The application must be accompanied by the following documents.

1. Memorandum of Association

2. Articles of Association

3. Agreements if any.

1. Memorandum of Association-Sec 13 to 18

An important step in the formation of a company is to prepare a document called thememorandum of association. It contains five clauses.

a. Name Clause

The first clause of the memorandum is required to state the name of the proposed company. Acompany, being a legal person, must have a name to establish its identity. The name of a corporationis the symbol of its personal existence. Any suitable name may be selected provided it should notresemble any other company name under section 20. Name should end with words “Limited”. Formulti-national companies, it should end with “International” or “Global”.

b. Registered office Clause- Sec 17

The second clause of the memorandum must specify the state in which the registered office ofthe company is to be situated.

Within thirty days of incorporation or commencement of business, whichever is earlier, theexact place where the registered office is to be located must be decided and notice of the situationgiven to the Registrar who is to record the same. All communications to the company must beaddressed to its registered office.

To change the registered office, company should take the permission form the Registrar and itshould be published under Sec 17 and 17A.

c. Object Clause- Sec 13

In the third clause, the memorandum must state the objects for which the proposed company isto be established. The Companies (Amendment) Act, 1965, requires that in case of companies in

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existence before this amendment, the objects clause has simply to state the objects of the company.But in the case of a company to be registered after the amendment, the object clause must bedivided into three sub-clauses, viz.

1. Main objects:- This sub-clause has to state the main objects to be pursued by the companyon its incorporation and objects incidental or ancillary to the attainment of the main objects.

2. Other objects:- This sub-clause must state other objects which are not included in theabove clause.

Doctrine of Ultra Vires: When a company assumes the powers beyond the memorandum andproceeds with the contracts beyond the scope of Object clause, then those contracts are called asultravires which means beyond the scope of the objects. Then those acts were treated as violations.The remedies available are Injunctions and Personal liability of directors for contracts.

d. Liability Clause –Sec 13(2)

The fourth clause has to state the nature of liability that the members incur. If the company is tobe incorporated with limited liability, the clause must state that “the liability of the members shallbe limited by shares”. This means that no member can be called upon to pay more than the nominalvalue of the shares held by him, or so much thereof as remains unpaid; and if his shares be fullypaid up his liability is nil.

If it is proposed to register the company limited by guarantee, this clause will state the amountwhich every member undertakes to contribute to the assets of the company in the event of itswinding up.

e. Capital Clause –Sec 13(3) and 13(4)(a)

The last clause states the amount of the nominal capital of the company and the number andvalue of shares into which it is divided. The Companies Amendment Act 2000 has, by amendingSec 3, prescribed the requirement that a public company must have a minimum paid up capital offive lakh rupees or such higher amount as may be prescribed. A private company is required tohave a minimum paid up capital of 1 lakh rupees or such higher amount as may be prescribed byits articles.

2. Articles of Association –Sec 26 to 31

Articles of association are the second document which has, in the case of some companies, tobe registered along with the memorandum. Companies which must have articles of associationare;

1. Unlimited companies



2. Companies limited by guarantee

3. Private companies limited by shares

If articles are proposed to be registered they must be printed. They should be divided intoparagraphs, each consisting generally of one regulation and numbered consecutively. Eachsubscriber of the memorandum has to sign the document in the presence of at least one witness,both of them adding their addresses and occupations.

Contents of Articles

Articles of association may prescribe such regulations for the company, as the subscriber to thememorandum deems expedient. The Act gives the subscribers a free hand. Any stipulation as tothe relations between the company and its members and between members inter se may be insertedin the articles. But everything stated therein is subject to the Companies Act.

The document must not conflict with the provisions of the Act. Any clause which is contrary tothe provisions of the Act or of any other law for the time being in force, is simply inoperative andvoid.

Prospectus

Prospectus is defined by Sec 2(36). A prospectus means any document described or issued asprospectus and includes any notice, circular, advertisement or other document inviting depositsfrom the public or inviting offers from the public for the subscription or purchase of any shares inor debentures of a body corporate. In nutshell it means that a prospectus is an invitation issued tothe public to take shares or debentures of the company or to deposit money with the company.

Business Commencement Certificate –Sec 149

A private company can commence business right from the date of its incorporation. But in thecase of a public company, a further certificate for the commencement of business has to be obtained.This becomes necessary where a company has issued a prospectus inviting public to subscribe forits shares.

3.5 Capital Structure

A number of types of financial instruments are used and issued by the corporate undertaking toobtain the required capital from the general public. The financial instruments are of two kinds,namely, ownership securities and creditorship securities. The amount of capital mobilized by the

53

issue of two kinds of shares are ordinary shares or equity shares and preference shares. The amountof capital raised by the issue of ordinary and preference shares are called ordinary or equity sharecapital and preference share capital respectively.

However, share is defined under Sec 2 (46) of the Companies of Act of 1956 as “a share is ashare in the share capital of the company and includes stock except where a distinction betweenstock and share is expressed or implied”, which means each share is a share in the total capital ofthe company.

Share Capital

Composition of Equity Share Capital

Authorized share capital

Issued Share capital

Non-issued share capital

Un-subscribed share capital

Subscribed share capital

Uncalled capital

Called up capital

Paid-up Capital

Calls in arrears

Others

Reserve Capital

Authorized Share Capital: Represents the maximum share capital which the company, asstated in its memorandum of association, is authorized to raise.

Issued Share Capital: It denotes the nominal value of that part of authorized share capitalwhich is issued or offered to the general public for subscription.

1. Subscribed Share Capital: It is that part of the issued share capital, which the generalpublic has subscribed.

2. Called up Capital: It denotes that part of allotted (Subscribed) share capital, which hasbeen called up by the company to the subscribers to pay.

3. Paid up Capital: It refers to the difference between the called up capital and calls in



arrears that is the amount which the shareholder has not paid though called up.

4. Reserve Share Capital: A limited company, by a special resolution, may declare that aportion or whole of its uncalled share capital shall not be called except in the event of its(company’s) winding up and this portion of uncalled share capital is called reserve capital.

Kinds of share capital

One can find a number of kinds of shares, issued by the corporate undertakings, with varyingrights of the shareholders as to the dividends, voting, etc, which are presented below.

Kinds of Shares

Cumulative Preference Shares

Non-cumulative Preference Share

Participating Preference Shares

Non-participating Preference Shares

Convertible Preference Shares

Non-Convertible Preference Shares

Redeemable Preference Shares

Irredeemable Preference Shares

With Voting Rights

With Differential Rights (as to Dividend,Voting etc)

Preference share capital is that part of share capital, which carries a preferential right to get afixed amount of dividend to be paid annually.

Cumulative preference shares carry the right to cumulative dividend in case an organizationfails to pay the dividend in any accounting year and this is paid by the company before payingdividend to any other category of shares.

Kinds of

Shares

Preference

Shares

Equity Shares

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On the other hand, the non-cumulative preference shares do not enjoy the benefit of carryingthe right to receive the arrears of dividend.

Participating preference shareholders enjoy a right to participate in the surplus profit if left afterpaying all the categories of shareholders. They also participate in the surplus assets while windingup of the company.

The non-participating preference shareholders do not enjoy the rights to participate in the surplusprofit or assets of the company while winding up.

The convertible preference shareholders will have the right to convert their convertible preferenceshares into the same company’s equity shares at a later date as per the terms of the issue. This rightto convert is not available to the non-convertible preference shareholders.

In the case of redeemable preference shares, the company pays back the capital received onsuch shares. However the redemption price may differ from the issue price during the life of thecompany. This facility is not available to the irredeemable preference shareholders. The repayment,in this case, takes place only on the winding up of the company.

The Companies Act of 1956 does not define the term “ordinary or equity share capital”. Accordingto Sec 85 (2) of the Companies Act Equity share capital means all share capital which are notpreference share capital. Equity shares are major corporate financial instruments issued to generalpublic to mobilize a portion of the required capital ranging from major portion to almost wholecapital. They carry voting rights. Voting rights are based on the principle one-share one vote.Along with voting rights they also carry some other rights like;

Voting Rights

Right to transfer the shares

Pre-emptive rights

Rights against ultra vires acts

Right to inspect books of accounts

Miscellaneous rights

Debenture Capital

Another kind of capital which the corporate undertakings have been extensively using is thedebt finance which refers to the loan capital or debt capital. The loan raised may be for short term


Rights of Equity Shares


or for long term period. The long term loan capital is normally mobilized from both the individualsand the institutions (banks) and by issuing the creditorship securities such as debentures.

The word debenture has been derived from the Latin word debere, which simply means,“to owe” or “debt”. Debenture has been defined as “a document given by a company as evidenceof a debt to the holder, usually arising out of a loan and most commonly secured by charge”.

Under Sec 12 of the Companies Act of 1956 debenture is defined as “debenture includesdebenture stock, bonds and any other securities of a company, whether constituting a charge onthe asset of the company or not”.

The claim of the debenture holder is to be settled fully before any amount can be paid to theshareholders. The company has to pay the interest at the agreed fixed rate to the debenture holdersperiodically irrespective of the profit. Debentures are issued for a fixed period and therefore,immediately after the expiry of the stipulated period they are to be redeemed as per the terms of theissue. Normally, a debenture gives but not necessarily a charge in the form of the security for theamount lent. However, debenture holders do not enjoy the voting rights.

Classes or kinds of Debentures

Redeemability- — 1.Redeemable

2. Irredeemable

Security————— 1.Secured

2.Unsecured

Transferability —— 1.Bearer

2.Registered

Convertibility——— 1.Convertible

2.Non-Convertible

Redeemable debentures can be received back by the company by paying the amount beforematurity but not in case of irredeemable debentures. Secured debentures are secured by the chargecreated on the assets of the company, where as unsecured debentures are not secured by charge.Bearer debentures are not registered in any person’s name and it can be easily transferred fromperson to person. But registered debentures are registered in person’s name and it can not be

Debentures

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transferred easily. Convertible debentures can be converted into shares whereas non-convertibledebentures can not be converted into shares.

3.6 Borrowings - Inter-corporate loans and investments.

Sec. 372A. (1) No company shall, directly or indirectly,—

(a) make any loan to any other body corporate;

(b) give any guarantee, or provide security, in connection with a loan made by any otherperson to, or to any other person by, any body corporate; and

(c) acquire, by way of subscription, purchase or otherwise the securities of any other bodycorporate, exceeding sixty per cent of its paid-up share capital and free reserves, or onehundred per cent of its free reserves, whichever is more:

Provided that where the aggregate of the loans and investments so far made, the amounts forwhich guarantee or security so far provided to or in all other bodies corporate, along with theinvestment, loan, guarantee or security proposed to be made or given by the Board, exceeds theaforesaid limits, no investment or loan shall be made or guarantee shall be given or security shallbe provided unless previously authorised by a special resolution passed in a general meeting:

Provided further that the Board may give guarantee, without being previously authorised by aspecial resolution, if,—

(a) a resolution is passed in the meeting of the Board authorising to give guarantee in accordancewith the provisions of this section;

(b) there exists exceptional circumstances which prevent the company from obtaining previousauthorisation by a special resolution passed in a general meeting for giving a guarantee;and

(c) the resolution of the Board under clause (a) is confirmed within twelve months, in a generalmeeting of the company or the annual general meeting held immediately after passing ofthe Board’s resolution, whichever is earlier:

Provided also that the notice of such resolution shall indicate clearly the specific limits, theparticulars of the body corporate in which the investment is proposed to be made or loan or securityor guarantee to be given, the purpose of the investment, loan or security or guarantee, specificsources of funding and such other details.

(2) No loan or investment shall be made or guarantee or security given by the company unless



the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directorspresent at the meeting and the prior approval of the public financial institution referred to in section4A, where any term loan is subsisting, is obtained:

Provided that prior approval of a public financial institution shall not be required where theaggregate of the loans and investments so far made, the amounts for which guarantee or securityso far provided to or in all other bodies corporate, along with the investments, loans, guarantee orsecurity proposed to be made or given does not exceed the limit of sixty per cent specified in sub-section (1), if there is no default in repayment of loan installments or payment of interest thereon asper the terms and conditions of such loan to the public financial institution.

(3) No loan to any body corporate shall be made at a rate of interest lower than the prevailingbank rate, being the standard rate made public under section 49 of the Reserve Bank of India Act,1934 (2 of 1934).

(4) No company, which has defaulted in complying with the provisions of section 58A, shall,directly or indirectly,—

(a) make any loan to any body corporate;

(b) give any guarantee, or provide security, in connection with a loan made by any otherperson to, or to any other person by, any body corporate; and

(c) acquire, by way of subscription, purchase or otherwise the securities of any other bodycorporate, till such default is subsisting.

(5) (a) Every company shall keep a register showing the following particulars in respect ofevery investment or loan made, guarantee given or security provided by it in relation to any bodycorporate under sub-section (1), namely :—

(i) the name of the body corporate;

(ii) the amount, terms and purpose of the investment or loan or security or guarantee;

(iii) the date on which the investment or loan has been made; and

(iv) the date on which the guarantee has been given or security has been provided in connectionwith a loan.

(b) The particulars of investment, loan, guarantee or security referred to in clause (a) shall beentered chronologically in the register aforesaid within seven days of the making of such investmentor loan, or the giving of such guarantee or the provision of such security.

(6) The register referred to in sub-section (5) shall be kept at the registered office of the companyconcerned and—

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(a) shall be open to inspection at such office; and

(b) extracts may be taken there from and copies thereof may be required, by any member ofthe company to the same extent, in the same manner, and on payment of the same fees asin the case of the register of members of the company; and the provisions of section 163shall apply accordingly.

(7) The Central Government may prescribe guidelines for the purposes of this section.

(8) Nothing contained in this section shall apply,—

(a) to any loan made, any guarantee given or any security provided or any investment madeby—

(i) a banking company, or an insurance company, or a housing finance company in theordinary course of its business, or a company established with the object of financingindustrial enterprises, or of providing infrastructural facilities;

(ii) a company whose principal business is the acquisition of shares, stock, debentures orother securities;

(iii) a private company, unless it is a subsidiary of a public company;

(b) to investment made in shares allotted in pursuance of clause (a) of sub-section (1) of section81;

(c) to any loan made by a holding company to its wholly owned subsidiary;

(d) to any guarantee given or any security provided by a holding company in respect of loanmade to its wholly owned subsidiary; or

(e) to acquisition by a holding company, by way of subscription, purchases or otherwise, thesecurities of its wholly owned subsidiary.

(9) If default is made in complying with the provisions of this section, other than sub-section(5), the company and every officer of the company who is in default shall be punishable withimprisonment which may extend to two years or with fine which may extend to fifty thousandrupees:

Provided that where any such loan or any loan in connection with which any such guarantee orsecurity has been given, or provided by the company, has been repaid in full, no punishment byway of imprisonment shall be imposed under this sub-section, and where such loan has beenrepaid in part, the maximum punishment which may be imposed under this sub-section by way ofimprisonment shall be appropriately reduced:



Provided further that all persons who are knowingly parties to any such contravention shall beliable, jointly and severally, to the company for the repayment of the loan or for making good thesame which the company may have been called upon to pay by virtue of the guarantee given orthe securities provided by such company.

(10) If default is made in complying with the provisions of sub-section (5), the company andevery officer of the company who is in default shall be punishable with fine which may extend tofive thousand rupees and also with a further fine which may extend to five hundred rupees forevery day after the first day during which the default continues.

Explanation.—For the purposes of this section,—

(a) “loan” includes debentures or any deposit of money made by one company with anothercompany, not being a banking company;

(b) “free reserves” means those reserves which, as per the latest audited balance sheet of thecompany, are free for distribution as dividend and shall include balance to the credit of thesecurities premium account but shall not include share application money.

3.7 Dividend

Dividend means the share of profit that falls to the share of each individual member of a company.It is that portion of the corporate profits, which has been set aside and “declared by the companyas liable to be distributed among the shareholders”. The profits of the company when distributedamong its members are called “dividends”.

The payment of dividend is bound by two fundamental principles. The first one is that dividendmust never be paid out of capital. It is supplemented by the second that dividends shall be paidonly out of profits. The Act allows dividends to be paid out of the following three sources.

Profits of the company for the year for which dividends are to be paid,

Undistributed profits of the previous financial years,

Money provided by the central or a state government for the payment of dividends in pursuanceof a guarantee by the government concerned.

The principle behind payment of dividend is that it should be paid only after the deduction ofincome tax, all payables, payment of all debts, creation of statutory and special reserve funds,contingency reserves etc. after deducting these amounts from the total profits the remaining amountis distributed as dividend on the basis of number of shares.

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3.8 Managerial Remuneration

It is needless to say that the services of a few people are essential for proper management ofcompanies. And these people are termed as managerial personnel which normally refers to part-time Directors, whole-time Directors and Managing Director or Managers (Chief Executives).However, it excludes other executives irrespective of the amount of salary or remuneration paid tothem by the companies. Further, under the provisions of the Companies Act, Board of Directors iscompulsory for the management administration of a company.

According to Sec 252(1), every public company shall have at least three directors; providedthat a public company having a paid up capital of Rs. 5 crores or more or1,000 or more smallshareholders may have a director elected by such small shareholders in the manner as may beprescribed. Small Shareholders refers to a shareholder holding shares of nominal value of Rs.20,000 or less in a public company. Every other company shall have at least two directors. Accordingto Sec 253, only the individuals but not the associations, firms or corporates shall be appointed asDirectors. Every public company or a private company which is a subsidiary of a public company,having a paid-up share capital of such sum as may be prescribed, shall have a managing or whole-time director or a manager.

The Articles of association or the resolution of the shareholders enable the company to pay theremuneration to them, which is, for all purposes, in the nature of honorarium.

According to Sec 198 (1), the total managerial remuneration payable by a public company or aprivate company which is a subsidiary of a public company, to its directors and its managers inrespect of any financial year shall not exceed 11 % of the net profits of that company for thatfinancial year computed in the manner laid down in Sec 349 and 350, except that the remunerationof the directors shall not be deducted from the gross profits.

For the above purpose, remuneration includes any expenditure incurred by the company:

in providing any rent free accommodation, or any other benefit or amenity in respect ofaccommodation free of charge, to any of the persons specified in Sec 198(1).

In providing any other benefit or amenity free of charge or at a concessional rate to any of thepersons aforesaid.

In respect of any obligation or service, which but for such expenditure by the company, wouldhave been incurred by any of the persons aforesaid: and

To effect any insurance on the life of, or to provide any pension, annuity or gratuity for, any ofthe persons aforesaid or his spouse or child.



3.9 Provisions Concerning Winding Up

Winding up of a company is the process whereby its life is ended and its property administeredfor the benefit of its creditors and members. An administrator, called liquidator, is appointed and hetakes control of the company, collects its assets, pays its debts and finally distributes any surplusamong the members in accordance with their rights.

Types of Winding up Sec 425

Compulsory winding up under the order of the tribunal

Voluntary winding up

Member’s voluntary winding up

Creditor’s voluntary winding up

Under compulsory winding up under the order of the tribunal there are circumstances whichmake a company to wind up.

Special Resolution: by the special resolution in the general body meeting, the company candecide to wind up itself.

Default in holding the statutory meeting: if a company had made default in delivering thestatutory report to the Registrar or in holding the statutory meeting, it may be ordered to wind up.

Failure to commence business: if a company does not commence its business within a yearfrom the date of its incorporation or has suspended business for a whole year, it may be ordered tobe wound up.

Reduction in membership: if the number of members is reduced, in the case of a public company,below seven, and in the case of a private company, below two, the company may be ordered to bewound up.

Inability to pay debts: a company may be ordered to be wound up if it is unable to pay its debts.

A liquidator is appointed by the court to supervise and conduct the winding up of the company.First he take custody of the assets of the company and sells them in the market at market price.Then he will distributed the sales procceds among the creditors and members of company in thesame order.

The order of payment of sale proceeds will be as follows

1. The institutions creditors like rates and financial institution will be paid first

2. Then the creditors like Debenture holders and bondholders will be paid next.

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3. If the money to be distributed still remained preference shareholders will be paid at a ratedecided by the liquidator.

4. If the money out of the sales proceeds remained latter, the equity shareholders will be paid.

3.10 Prevention of mismanagement

Section 398 provides for relief in cases of mismanagement. For a petition under this section tosucceed, it must be established that the affairs of the company are being conducted in a mannerprejudicial to the interest of the company or public interest, or that, by reason of any change in themanagement or control of the company, it is likely that the affairs of the company will be conductedin that manner. If the Tribunal is so convinced, it may, with a view to prevent the matter complainedof or apprehended, make such order as it thinks fit. Company law board can change the board ofdirectors to prevent mismanagement in the company, or the central government can appoint thedirectors on the order of Tribunal, or it can order the transfer of powers to company law board orto Tribunal.

3.11 Let us sum up

The modern day business world had grown to such an extent that it is in need of huge amountof capital. That’s why it is now opting towards the combinations like Joint Ventures and MultiNational Companies. How to regulate these corporate ventures under the existing Company lawis a new challenge posed to the arena of law as a whole. However, the need to amend the CompanyLaw has been come and the activism is needed towards that.

The modern business arena is based on the multi nationals and corporate structure on itssubsistence. It has to choose any one form of organizational structure which suits better. And thebusiness should know about the legal regulations regarding the business organizations. This chapterwill provide you the knowledge of legal regulation of business organizations.

3.12 Glossary

1. Capital = Share capital of the company

2. Debenture = to owe the debt

3. Incorporation = registration

4. Dividend = share in the profit



5. Equity = a kind of share capital which gives voting rights and membershipto the Owner

6. Debenture = a kind of creditorship security

7. Winding up = close down

8. Cumulative = accumulate

9. Redeemable = a right to buy back

10. Remuneration = salary, reward

3.13 Check your Progress

1. Write a note on incorporation procedures.

2. Briefly explain the types of capital.

3. What is borrowing?

4. What is Memorandum of Association?

5. What is Articles of Association?


1. Avtar Singh, Company Law, Eastern Book Company.

2. Ramaiyah, Company Laws, Wadhwa and Co.

3. Companies Act, 1956 – Bare Act.

4. Taxmanns, Company Law, Taxmann Publications.


1. Brief the laws relating to companies?

2. Describe the laws relating to the Dividends.

3. State the regulations regarding the winding up of companies.

4. State the procedures for the incorporation of the company.

5. How to prevent the mis-management in the company?

6. Write a note on the capital structure of the company.

* * * * *

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Unit 4

Law Relating to Taxation

Unit Structure


4.2 Introduction to Taxation System in India

4.3 Direct Taxes

4.4 Indirect Taxes

4.5 Sales Tax Acts of various State Governments and Central Sales Act governed the applicationof Sales Tax/VAT

4.6 Fringe Benefits Tax

4.7 Special Economic Zones (SEZ)

4.8 Let us sum up

4.9 Glossary



4.12 Model Question

Unit 4 - Law Relating to Taxation 65



After reading this chapter you will be able to;

� Know the taxation system

� Learn Direct taxes

� Know Indirect taxes

� Learn State taxes

� Understand Fringe benefit taxes

� Know about Special Economic Zones

4 2 Introduction to Taxation System in India

India has a well-developed tax structure with clearly demarcated authority between Centraland State Governments and local bodies. Central Government levies taxes on income (except taxon agricultural income, which the State Governments can levy), customs duties, central excise andservice tax.Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, StateExcise, land revenue and tax on professions are levied by the State Governments. Local bodiesare empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.

In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rateshave been rationalized and tax laws have been simplified resulting in better compliance, ease oftax payment and better enforcement. The process of rationalization of tax administration is ongoingin India.

Since April 01, 2005, most of the State Governments in India have replaced sales tax with VAT.

Taxes Levied by Central Government

a. Direct Taxes

Tax on Corporate Income

Capital Gains Tax

Personal Income Tax

Tax Incentives

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Double Taxation Avoidance Treaty

b. Indirect Taxes

Excise Duty

Customs Duty

Service Tax

Securities Transaction Tax

c. Taxes Levied by State Governments and Local Bodies

Sales Tax/VAT

Other Taxes

4.3 Direct Taxes

a. Taxes on Corporate Income

Companies resident in India are taxed on their worldwide income arising from all sources inaccordance with the provisions of the Income Tax Act. Non-resident corporations are essentiallytaxed on the income earned from a business connection in India or from other Indian sources. Acorporation is deemed to be resident in India if it is incorporated in India or if it’s control andmanagement is situated entirely in India.

Domestic corporations are subject to tax at a basic rate of 35% and a 2.5% surcharge. Foreigncorporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an education cess atthe rate of 2% on the tax payable is also charged. Corporates are subject to wealth tax at the rate of1%, if the net wealth exceeds Rs.1.5 mn (approx. $ 33333).

Domestic corporations have to pay dividend distribution tax at the rate of 12.5%, however,such dividends received are exempt in the hands of recipients.Corporations also have to pay forMinimum Alternative Tax at 7.5% (plus surcharge and education cess) of book profit as tax, if thetax payable as per regular tax provisions is less than 7.5% of its book profits.

b. Capital Gains Tax

Tax is payable on capital gains on sale of assets. Long-term Capital Gains Tax is charged if

· Capital assets are held for more than three years and

Unit 4 - Law Relating to Taxation


· In case of shares, securities listed on a recognized stock exchange in India, units of specifiedmutual funds, the period for holding is one year.

Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain fromsale of equity shares or units of mutual funds are exempt from tax. Short-term capital gains aretaxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer ofequity shares or units of mutual funds are taxed at a rate of 10%.

Long-term and short-term capital losses are allowed to be carried forward for eight consecutiveyears. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.

c. Personal Income tax

Personal income tax is levied by Central Government and is administered by Central Board ofDirect taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act.The rates for personal income tax are as follows:-

Income range (Rupee) Tax Rate (%)

0-100,000 Nil

1,00,000-1,50,000 10

1,50,000-2,50,000 20

2,50,000 and above 30

Surcharges of 10% on total tax is levied if income exceeds Rs. 8,50,000.

Recent budget initiatives in this regard are as follows

Threshold limit of exemption in the case of all assessees to be increased by Rs.10,000 thusgiving every assessee a relief of Rs.1,000; in the case of a woman assessee, threshold limit to beincreased from Rs.135,000 to Rs.145,000 and in case of a senior citizen from Rs.185,000 toRs.195,000 giving him or her a relief of Rs.2,000; deduction in respect of medicalinsurance premium under section 80D to be increased to a maximum of Rs.15,000 and, in case ofa senior citizen, a maximum of Rs.20,000.

Rates of Withholding Tax

Current rates for withholding tax for payment to non-residents are:-

(i) Interest 20%

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(ii) Dividends paid by domestic companies: Nil

(iii) Royalties 10%

(iv) Technical Services 10%

(v) Any other services Individuals: 30% of the income

Companies: 40% of the net income

The above rates are general and are applicable in respect of countries with which India does nothave a Double Taxation Avoidance Agreement (DTAA).

d. Tax Incentives

Government of India provides tax incentives for:-

• Corporate profit

• Accelerated depreciation allowance

• Deductibility of certain expenses subject to certain conditions.

These tax incentives are, subject to specified conditions, available for new investment in

• Infrastructure,

• Power distribution,

• Certain telecom services,

• Undertakings developing or operating industrial parks or special economic zones,

• Production or refining of mineral oil,

• Companies carrying on R&D,

• Developing housing projects,

• Undertakings in certain hill states,

• Handling of food grains,

• Food processing,

• Rural hospitals etc.



e. Double Tax Avoidance Treaty

India has entered into DTAA with 65 countries including the US. In case of countries withwhich India has Double tax Avoidance Agreement, the tax rates are determined by such agreements.Domestic corporations are granted credit on foreign tax paid by them, while calculating tax liabilityin India.

In the case of the US, dividends are taxed at 20%, interest income at 15% and royalties at 15%.

4.4 Indirect Taxes

a. Excise Duty

Manufacture of goods in India attracts Excise Duty under the Central Excise act 1944 and theCentral Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence anew article having a distinct name, character, use and marketability and includes packing, labelingetc.

Most of the products attract excise duties at the rate of 16%. Some products also attract specialexcise duty/and an additional duty of excise at the rate of 8% above the 16% excise duty. 2%education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied onad valorem basis or based on the maximum retail price in some cases.

Recent budget initiatives in this regard are as follows:

Reduction in ad valorem component of excise duty on petrol and diesel from 8% to 6%. Reliefto deserving cases especially job creating sectors: exemption limit for small scale industry (SSI) tobe raised from Rs.1 crore to Rs.1.5 crore; to encourage food processing sector, biscuits whoseretail sale price does not exceed Rs.50 per kilogram and all kinds of food mixes including instantmixes to be fully exempt; reduction in duty on umbrellas and parts of footwear from 16% to 8%;on plywood from 16% to 8%; biodiesel to be fully exempt.

To provide access to pure drinking water, water purification devices operating on specifiedmembrane based technologies and domestic water filters not using electricity to be fully exempt;exemption on pipes used for carrying water from a water supply plant to a storage facility to beextended to all pipes of diameter exceeding 200 mm used in water supply systems.

Reduction in the rate of duty from Rs.400 per metric tonne to Rs.350 per metric tonne oncement sold in retail at not more than Rs.190 per bag; rate of Rs.600 per metric tonne on cementthat has a higher MRP.

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Specific rates of duty on cigarettes to be increased by about 5%; duty (excluding cess) on didisto be raised from Rs.7 to Rs.11 per thousand for non-machine made didis and from Rs.17 to Rs.24per thousand for machine made didis; duty on pan masala not containing tobacco to be reducedfrom 66% to 45%; withdrawal of exemption for pan masala containing tobacco and other tobaccoproducts given to units in the North Eastern States.

b. Customs Duty

The levy and the rate of customs duty in India are governed by the Customs Act 1962 and theCustoms Tariff Act 1975. Imported goods in India attract basic customs duty, additional customsduty and education cess. The rates of basic customs duty are specified under the Tariff Act. Thepeak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customsduty is equivalent to the excise duty payable on similar goods manufactured in India. Educationcess at 2% is leviable on the aggregate of customs duty on imported goods. Customs duty iscalculated on the transaction value of the goods.

Rates of customs duty for goods imported from countries with whom India has entered intofree trade agreements such as Thailand, Sri Lanka, BIMSTEC, south Asian countries andMERCOSUR countries are provided on the website of CBEC.

Customs duties in India are administrated by Central Board of Excise and Customs underMinistry of Finance.

Recent budget initiatives in this regard are as follows:

Customs duties:

· Reduction in peak rate for non-agricultural products from 12.5% to 10%.

· Reduction in duty on most chemicals and plastics from 12.5% to 7.5%; on seconds anddefectives of steel from 20% to 10%.

· All coking coal irrespective of ash content to be fully exempt.

· Reduction in duty on polyester fibres and yarns from 10% to 7.5% and on raw-materialssuch as DMT, PTA and MEG from 10% to 7.5%; on cut and polished diamonds from 5%to 3%; on rough synthetic stones from 12.5% to 5%; and on unworked corals from 30% to10%.

· Dredgers to be fully exempt from import duty.

· To augment irrigation facilities and processing of agricultural products, reduction in duty



on drip irrigation systems, agricultural sprinklers and food processing machinery from7.5% to 5%.

· Reduction in general rate of import duty on medical equipment to 7.5%.

· To make edible oils more affordable, crude and refined edible oils to be exempt fromadditional CV duty of 4%; reduction in duty on sunflower oil, both crude and refined, by15 percentage points.

· Reduction in duty on pet foods from 30% to 20%; on watch dials and movements andumbrella parts from 12.5% to 5%; to promote research and development, concessionalrate of 5% duty to be extended to all research institutions registered with the Directorate ofScientific and Industrial Research; reduction in duty from 7.5% to 5% on 15 specifiedmachinery for pharmaceutical and biotechnology sector.

· Duty of 3% (WTO bound rate) to be levied on all private import of aircraft includinghelicopters; such import to also attract countervailing duty and additional customs duty.

· Duty of Rs.300 per metric tonne to be levied on export of iron ores and concentrates andRs.2,000 per metric tonne on export of chrome ores and concentrates.

c. Service Tax

Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxableservices provided in India by specified service providers. Service tax on taxable services renderedin India are exempt, if payment for such services is received in convertible foreign exchange inIndia and the same is not repatriated outside India. The Cenvat Credit Rules allow a service providerto avail and utilize the credit of additional duty of customs/excise duty for payment of service tax.Credit is also provided on payment of service tax on input services for the discharge of outputservice tax liability.

Exemption limit for small service providers to be raised from Rs.400,000 to Rs.800,000.

Extension of service tax to: services outsourced for mining of mineral, oil or gas; renting ofimmovable property for use in commerce or business (residential properties, vacant land used foragriculture and similar purposes, and land for sports, entertainment and parking purposes &immovable property for educational or religious purposes to be excluded); developmentand supply of content for use in telecom and advertising purposes; asset management servicesprovided by individuals; design services; services involved in execution of a works contract withan optional composition scheme under which tax will be levied at only 2% of the total value ofworks contract.

Exemption to: Services provided by Resident Welfare Associations to their members who

73

contribute Rs.3000 or less per month for services rendered, services provided by technology businessincubators, their incubatees whose annual business turnover does not exceed Rs.50 lakhs to beexempt for first three years; clinical trial of new drugs to make India a preferreddestination for drug testing.

Department of Telecommunications to constitute a committee to study the present structure oflevies on telecom industry.

d. Securities Transaction Tax

Transactions in equity shares, derivatives and units of equity-oriented funds entered in arecognized stock exchange attract Securities Transaction Tax at the following rate:-

• Delivery base transactions in equity shares or buyer and seller each units of an equity-oriented fund - 0.075%

• Sale of units of an equity-oriented fund to the seller mutual fund - 0.15%

• Non delivery base transactions in the above - 0.015%

• Derivatives (futures and options) seller - 0.01%

4.5 Sales Tax Acts of various State Governments and CentralSales Act governed the application of Sales Tax/VAT.

a. Sales Tax/VAT

Sales tax is levied on the sale of movable goods. Most of the Indian States have replaced Salestax with a new Value Added Tax (VAT) from April 01, 2005. VAT is imposed on goods only andnot services and it has replaced sales tax. Other indirect taxes such as excise duty, service tax etc.,are not replaced by VAT. VAT is implemented at the State level by State Governments. VAT isapplied on each stage of sale with a mechanism of credit for the input VAT paid. There are fourslabs of VAT:-

• 0% for essential commodities

• 1% on bullion and precious stones

• 4% on industrial inputs and capital goods and items of mass consumption

• All other items 12.5%



• Petroleum products, tobacco, liquor etc., attract higher VAT rates that vary from State toState

A Central Sales Tax at the rate of 4% is also levied on inter-State sales and would be eliminatedgradually.

b. Municipal/Local Taxes

• Octori/entry tax: - Some municipal jurisdictions levy octori/entry tax on entry of goods

c. Other State Taxes

• Stamp duty on transfer of assets

• Property/building tax levied by local bodies

• Agriculture income tax levied by State Governments on income from plantations

• Luxury tax levied by certain State Government on specified goods

4.6 Fringe Benefits Tax

The taxation of perquisites — or fringe benefits — provided by an employer to his employees,in addition to the cash salary or wages paid, is fringe benefit tax.

Any benefits — or perks — that employees (current or past) get as a result of their employmentare to be taxed, but in this case in the hands of the employer.

This includes employee compensation other than the wages, tips, health insurance, life insuranceand pension plans.

Fringe benefits as outlined in section 115WB of the Finance Bill, mean any privilege, service,facility or amenity directly or indirectly provided by an employer to his employees (includingformer employees) by reason of their employment.

They also include reimbursements, made by the employer either directly or indirectly to theemployees for any purpose, contributions by the employer to an approved superannuation fund aswell as any free or concessional tickets provided by the employer for private journeys undertakenby the employees or their family members.

What are these fringe benefits that will be taxed?

As per the Finance Bill, fringe benefits shall be deemed to have been provided if the employer

75

has incurred any expense or made any payment for the purposes of:

(a) entertainment;

(b) festival celebrations;

(c) gifts;

(d) use of club facilities;

(e) provision of hospitality of every kind to any person whether by way of food and beverageor in any other manner, excluding food or beverages provided to the employees in theoffice or factory;

(f) maintenance of guest house;

(g) conference;

(h) employee welfare;

(i) use of health club, sports and similar facilities;

(j) sales promotion, including publicity;

(k) conveyance, tour and travel, including foreign travel expenses;

(l) hotel boarding and lodging;

(m) repair, running and maintenance of motor cars;

(n) repair, running and maintenance of aircraft;

(o) consumption of fuel other than industrial fuel;

(p) use of telephone;

(q) scholarship to the children of the employees.

In cases where the employer is engaged in the business of carriage of passengers or goods bymotor car or by aircraft, a lower percentage of expenses on repair, running and maintenance ofmotor cars or aircrafts or fuel expenses has been specified.

Similarly, for hotels, a lower percentage of the expenses incurred on hospitality have beenspecified for purposes of calculating the liability under the fringe benefit tax.

An employer liable to pay fringe benefit tax is required to furnish a Return of fringe benefitsbefore the due date as given in section 115WD.



Section 115WE outlines the procedure for the assessment of the return of fringe benefits filedby the employer and the determination of tax or interest payable or refund due and in either casethe issue of intimation to that effect.

Who pays fringe benefit tax?

Under the proposed provisions, fringe benefit tax is payable by an employer who is either anindividual or a Hindu undivided family engaged in a business or profession; a company; a firm; anassociation of persons or a body of individuals; a local authority; a sole trader, or an artificialjuridical person.

The tax is payable in respect of the value of fringe benefits provided or deemed to have beenprovided by an employer to his employees during the previous year.

The value of fringe benefits so calculated, is subject to additional income tax in respect offringe benefits at the rate of thirty per cent, as provided in section 115WA.

The fringe benefit tax is payable by the employer even where he is not liable to pay income-taxon his total income computed in accordance with the other provisions of the Act.

The benefit does not have to be provided by the employer directly for him to attract fringebenefit tax. Fringe benefit tax may still be applied if the benefit is provided by a third party or anassociate of the employer or by any other person under an arrangement with the employer.

4.7 Special Economic Zones (SEZ)

The Foreign Trade Policy of Government of India provides for setting up of Special EconomicZones (SEZ) in the country with a view to provide an internationally competitive hassle freeenvironment for exports. Units may be set up in SEZ for manufacture of goods and rendering ofservices. The units in SEZs have to be a net foreign exchange earner but they are not subjected toany pre-determined value addition or minimum export performance requirements. Sales in thedomestic tariff area by SEZ units shall be subject to payment of full custom duty and import policyinflows.

SEZs could be set up in public, private, joint sector or by State governments. 100% FDI isallowed in setting up of SEZs. The government of India has also converted existing ExportProcessing Zones into SEZs.

The minimum size of the SEZs shall be 1000 hectares except in product specific and port/airport based SEZs. Approval for setting up of new SEZs is given by Department of Commerce,Government of India.

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For setting up units in SEZs, all approvals are given by a Committee headed by DevelopmentCommissioner of the concerned SEZ. For setting up a unit in SEZ, application in prescribedformat should be submitted to the Development Commissioner.

A large number of new SEZs have come up in private sector in India including SEZs set up byforeign companies. A number of new SEZs have been set up by State governments.

List of SEZs Facilities to SEZ Units Detailed policy applicable to SEZ units is given in Appendix14-II of Handbook of Procedures Vol-I of Director General of Foreign Trade (DGFT).

• SEZ units may import or procure from the domestic sources, duty free, all their requirementsof capital goods, raw materials, consumables, office equipment etc., for setting up of unitsor further operations without any license or specific approval

• Goods imported/procured locally duty free could be utilized over the approval period offive years

• 100% income tax exemption (Section 10 A) for first five years and 50% for two yearsthereafter

• 100% FDI is allowed in manufacturing sector in SEZ units under automatic route exceptsectors requiring industrial license. 100% FDI allowed in items reserved for small scaleunits

• Setting up of offshore banking units allowed in SEZs. They would be entitled for 100%income tax exemption for three years and 50% for next two years

• More flexible exchange control regulations for units in SEZs and for external commercialborrowing upto $ 500 million in a year

• Exemption from service tax to SEZ units

4.13 Let us sum up

Tax is the life blood of any country by which it gains funds for operations. There are differencesin modalities of levy and collection methods. However, the major portion of national incomecomes from the taxation. Tax evasion and avoidance is the biggest challenge to the tax departmentsin any country. To overcome this, various measures have been taken like VAT, Fringe benefittaxes and so on.



4.14 Glossary

Tax = A Percentage of money to be payable to the Government on theincome

Assessee = Person who pays the tax

FDI = Foreign Direct Investment

Octori = Entry cess

Perks = Perquisites


1. What is tax?

2. List the Direct taxes.

3. What are the different Indirect taxes?

4. What do you mean by Fringe benefit tax?

5. Write a note on SEZs.


1. Central Sales tax Act

2. Manual of Taxation

3. SEZ Act

4.17 Model Question

1. What is tax?

2. List the Direct taxes.

3. What are the different Indirect taxes?

4. What do you mean by Fringe benefit tax?

79Unit 4 - Law Relating to Taxation

5. Write a note on SEZs.

6. Write a note on Direct and Indirect Taxes and explain the categories.

* * * * *


Unit 5

Law of Intellectual Property Rights

Unit Structure


5.2 Introduction

5.3 Patents

5.4 Designs

5.5 Trademarks

5.6 History of Information Technology and Cyber Space

5.7 Development of Internet

5.8 Impact of IT

5.9 IT Offences

5.10 Let us sum up

5.11 Glossary




MBA80

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After reading this chapter you will be able to,

� Define Patent

� Understand procedures for obtaining patent

� Know the infringements

� Learn remedies available against infringements

� Know the meaning of Designs and Trademarks

� Learn the procedures for registration

� Know the infringements

� Learn the available remedies against infringements

5.2 Introduction

The laws relating to intellectual property rights have assumed great significance in thepresent millennium on account of global economy faster travel by supersonic aero planesand rapid means of satellite communications. The original literary works, patents, designs,

inventions cinema or video films accomplished and perfected by an individual or group by theirintellect, pursuit and labor for years together can reach now to any remote corner of the globe in notime and expose them to greater risk of piracy, copying, passing off, infringement of rights andunfair trade practices. In this background, it is an effort to consolidate the inter-connected laws tocater to the needs of the society.

The Patents Act, 1970 (Act No. 39 of 1970) is a comprehensive legislation to amend andconsolidate the existing law on patents and designs. Any new and useful invention comprising ofart, process, method or manner of manufacture, machine, apparatus or other article and a substanceproduced by manufacturer are regulated by this Act and the rules made there under. The definitionof patents and designs, procedure for grant and revocation of patents, suits concerning patents,restrictions in grant of injunctions, penalties, international arrangements etc. are all prescribed andcovered by the Act.

The earlier law on the Trade marks was insufficient and out-dated and so the present enactment,the Trade Marks Act, 1999 (Act No. 17 of 1999) was brought on the statute book. The Actprovides for the procedure of registration of trade marks of the goods and services, its protectionand prevention of fraudulent marks. The Act is comprehensive and complete Code on the subject.

Unit 5 - Law of Intellectual Property Rights


The Designs Act, 1999 replaces the earlier enactment the Designs Act, 1911 which had becomeobsolete in the new era of science and technology. The Act consolidates law regarding copyrightin respect of designs which are not included in the Trade Marks Act or the Copyright Act or comein the category of property mark as defined in Sec. 479 of the Indian Penal Code. The Copyrightin designs is also an intellectual property right and it was necessary to provide an up-to-date legalsystem for its protection and the Act aims to provide the same.

5.3 Patents

Introduction

The need for a comprehensive law so as to ensure more effectively that patent rights are notworked to the detriment of the consumer or to the prejudice of trade or the industrial developmentof the country was felt as early as 1948 and in that year the Government appointed the PatentsEnquiry Committee to review the working of the patents law in India. Keeping in view the aboveobjective the Patents Act, 1970 was enacted to amend and consolidate the existing Indian Patentsand Designs Act, 1911 and it also contained amendments as recommended by the Joint Committeewhich was established by the Central Government.

India is a signatory to the agreement for the establishment of the World Trade Organizationincluding the Agreement on Trade Related Aspects of Intellectual Property Rights for the purposeof education of distortions and impediments to international trade and promotion of effective andadequate protection of intellectual property rights. It had become necessary to amend the PatentsAct, 1970 in conformity with the obligations under the Agreement with Signatory Countries, informulating or amending their laws and regulations.

The Patents (Amendment) Ordinance, 1994 was promulgated by the President in exercise ofthe powers conferred by Cl. (1) of Art. 123 of the Constitution of India since at that time Parliamentwas not in session and the President was satisfied that circumstances existed which rendered itnecessary for him to take immediate action.

Since the Patents (Amendment) Ordinance, 1994 could not be matured into an Act of Parliament,it ceased to have effect after the expiry of six months from the date of its promulgation.

Again on 8th January, 1999 the President of India promulgated the Patents (Amendment)Ordinance, 1999 as this time also Parliament was not in session and the President was satisfiedthat circumstances exist which rendered it necessary for him to take immediate action to giveeffect to the provisions of the Bill. During March Session of Parliament the Patents (Amendment)Act, 1999 was passed by both Houses and it received the assent of the President on 26th March,1999.

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Meaning of the Term Patent

It means a grant of some privilege, property or authority made by the Government or theSovereign of the country to one or more individuals. The instrument by which such grant is madeis known as ‘Patent’. The term ‘Patent’ acquired statutory meaning in India when the Patents Act,1970 was promulgated. Patent, under the Act, is grant from the Government to the inventor for alimited period of time the exclusive right to make use of exercise and vend his invention.

It conveys to the inventor substantive rights and secures to him the valuable monetary rightwhich he can enforce for his own advantage either by using it himself or by conveying the privilegesto others. He receives something tangible; something which has present existing value whichprotects him from some competition and is the source of gain and profit. After the expiry of theperiod for which exclusive right is granted to the inventor, the invention can be put to use by anyperson other than the one to whom a patent had been granted.

The person to whom a patent is granted is called patentee.

Legislative Provisions Regulating Patents

The Indian Patents Act, 1970 and the Patent Rules, 1972 regulate the grant, the operativeperiod, the revocation and infringement, etc., of the patents.

Principles Underlying the Patent Law in India

Principles upon which Indian Patent Law is based are enumerated below.

Invention must be new, useful and non – obvious

To be patentable, the invention must be new and useful. It also must be non – obvious to aperson possessed of average skill in the art. What is obvious to a person skilled in the art cannot bepatented. For instance, an invention in carpentry may be non – obvious to a layman but it may beobvious to a carpenter of average skill. Such obvious invention would not be patentable.

Newness

The element of novelty (newness) in an invention is dependent upon the state of prior art, i.e.,the existing knowledge and similar inventions already known in the particular field. There wouldbe no novelty if there has been prior publication and prior use of an identical invention.

Usefulness

The invention besides being new and non – obvious must also be useful. An invention which is



new and also non – obvious but cannot be put to any beneficial use of the mankind cannot bepatented. However, not so useful, inventions are protected in some countries as ‘utility models’.But that concept is not statutorily recognized in India.

Non - obviousness

The invention must be non – obvious to a person skilled in the art to which the invention relates.

Procedure for Obtaining Patent (Section 6 to 11)

Procedure for obtaining patent consists of the following steps:-

a) Submission of application.

b) Examination of application.

c) Advertisement of acceptance of complete specification.

d) Opposition to grant of patent to the applicant.

e) Hearing of the parties.

f) Grant and sealing of patent.

The Applicant to File Provisional and Complete Specification

Section 9 provides that where an application is accompanied by a provisional specification, thecomplete specification has to be filed within twelve months from the date of filing of the applicationand if the complete specification is no so filed, the application shall be deemed to have beenabandoned. The time period of twelve months may be extended to fifteen months, if such requestfor extension is accepted by the Controller.

What is Specification?

A patent specification is a technical document describing the invention. A specification may beprovisional which gives the initial description of an invention when the application is filed. Acomplete specification gives full and sufficient detail of an invention in such a manner that aperson skilled in the art can use the invention when he reads such a description. The purpose offiling a specification is to make available the invention to the public on the expiry of the term of thepatent.

Kinds of Specification

Depending upon the sufficiency of description, a specification may be either:

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1) Provisional Specification, or

2) Complete Specification.

Provisional Specification

While an inventor is in the process of finalizing his invention, he may file a specification knownas ‘Provisional Specification’ which is not a full and specific description. It contains only a generaldescription of the invention, its field of application and anticipated results. The Provisional neednot contain the claims.

Complete Specification

The Complete Specification is the full description of the invention containing all the claimsover which the applicant seeks monopoly right. The object of a complete specification is to defineclearly and with precision the monopoly claimed so that others may know the exact boundaries ofthe monopoly right of the applicant.

Rights conferred on a Patentee under the Act (Section 48)

a) to exploit the patent,

b) to license the patent to another,

c) to assign the patent to another,

d) to surrender the patent,

e) to sue for the infringement of the patent,

f) which accrue acceptance of the specification but before the patent is sealed.

Exceptions and Limitations

The Act confers on the patentee certain exclusive rights. However, the Act provides certainlimitations on the exercise of such rights.

a) Government use of patent.

b) Compulsory licenses and licenses of rights.

c) Use of inventions for defense purposes.

d) Revocation for non-working of patents.

e) Limitation on resorted patents.



Transfer of Patent

A patent is a transferable property. It can be transferred from the original patentee to any otherperson by assignment by the patentee or by operation of law, for example, devolution of the righton legal heirs. Transfer of patent can also occur by grant of license by the patentee to anotherperson to work the patented invention.

Forms of Transfer of Patent Rights

The patentee is authorized to assign, grant license(s) or otherwise deal with the patent for aconsideration.

The transfer of patent rights are generally in the following forms:

1) Assignment.

2) License.

3) Transmission of patent by operation of law.

Infringement of Patents

A patent confers the exclusive right on the patentee to make, distribute or sell the invention inIndia. An infringement would be when any of these rights is violated. A patentee may assign orlicense all or some of these rights. The exercise of the rights so transferred in favor of the assigneeor the licensee by the assignor or the licensor would not amount to infringement of the patent.

In case of a product patent the rights of the patentee are infringed by anyone who makes orsupplies that substance commercially. In case of a process patent, the use of such a method orprocess in India by anyone other than the patentee amounts to infringement.

What can amount to infringement

1) The colorable imitation of an invention.

2) Immaterial variations in the invention.

3) Mechanical equivalents.

4) Taking essential features of the invention.

All the above acts often overlap each other when an infringement of a patent or process occurs.

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Action for Infringement

Whenever the monopoly rights of the patentee are violated his rights are secured again by theAct through judicial intervention. The patentee has to institute a suit for infringement. The reliefswhich may be awarded in such a suit are –

1) Interlocutory / interim injunction.

2) Damages or account of profits.

3) Permanent injunction.

Injunction

An injunction is an order of a court prohibiting someone from doing some specified act orcommanding someone to undo some wrong or injury. Generally it is a preventive and protectiveremedy aimed at preventing future wrongs. Injunction are of two kinds –

Temporary/Interlocutory injunctions

These are the court orders which are in force for a specified time or until further orders of thecourt. An interlocutory injunction may be granted at any time during the proceedings of the suit.

Final injunction

Such injunction is granted at the termination of the trial. For which the final injunction is inforce is the remaining term of the patent at the time of grant of the final injunction.

Damages or Account of Profits

A successful plaintiff in a suit for infringement is entitled to the relief of damages or account ofprofits but both reliefs cannot be granted together.

Object of awarding Damages

The damages are awarded to compensate for the loss or injury suffered by the plaintiff due tothe action of the defendant.

Account of Profits

Section 108 provides that the court may either award damages or account of profits but both ofthem cannot be claimed together. The plaintiff has to prefer either of the two.



The account of profits are determined on the basis of actual use of the patentee’s invention bythe infringer during the period of commission of the act of infringement. Account of profits is thepart of profits which can be attributed to the use of the patentee’s invention by the infringer.

5.4 Designs

Subject-matter of Designs

An article is distinguished not only by its utility but also by its visual appeal which too usuallyplays an important role in shaping the buyers preference for the article. Therefore, the design of anarticle and even design of its packaging is important from the commercial view point.

The Designs Act, 2000, after repealing the Act of 1911 aims at the protecting the designswhich serve the purpose of visual appeal. A design to be registerable under the Designs Act, 2000,must be some shape, configuration, pattern or ornamentation or composition of lines or coloursapplied to such article in any form by any industrial process or means but does not include anymode or principle of construction or anything which is in substance a mere mechanical device butdoes not include Trade or Property mark or artistic work. Only particular class of articles can beregistered under the Act. The design must be capable of being applied to an article in such a waythat the article to which it is applied will appeal to and be judged solely by the eye. The particularshape, configuration, pattern or ornamentation must have only an appeal.

Designs which are not new or original or has been disclosed to the public anywhere in India orin any other country by publication, or not significantly distinguishable from known designs orcombination of known designs or comprise or contain scandalous or obscene matter are notregisterable under the Design Act.

Conditions for a Registerable Design

Original and not previously published in India

A design can be registered only when it is new or original and not previously published inIndia. A design would be registerable if the pattern though already known is applied to a newarticle, e.g., the shape of teddy bear if applied to a school bag would be registerable. What isessential is that the design must be new with respect to the class of article to which it has beenapplied.

Can a combination of previously known designs be registered?

A combination of previously known designs can be registered if the combination produce anew visual appeal.

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No Prior Publication

The design must not be previously published in India. Though the word publication has notbeen defined by the Designs Act, 2000, to constitute publication, a design must be available to thepublic or it has been shown or disclosed to some person who is not bound to keep it secret.

Publication can occur in two types –

i) Publication in prior document.

ii) Publication by prior user.

Who is entitled to file an Application for Registration of a Design

The Proprietor can apply.

Section 5 lays down that any person who claims to be the proprietor of any new or originaldesign which is not previously published in India can apply for the registration of the design.

Section 2(j) defines who a proprietor of a new or original design is:

i) Where the author of the design, for good consideration executes the work for some otherperson, means the person for whom the design is so executed; and

ii) Where any person acquires the design or the right to apply the design to any article eitherexclusively of any other person or otherwise, means in the respect and to the extent in andto which the design or right has been so acquired, the person by whom the design or rightis so acquired; and

iii) In any other case means the author of the design; and

Where the property in or the right to apply, has devolved from the original proprietor upon anyother person, includes that other person.

In the case Vredenburg’s Registered Design, (1935) 53 RPC, it was held that if there are twopersons each of whom has produced a similar design and communicated the fact of such authorshipto the other, neither of them alone is the proprietor of a new or original design. There is jointauthorship of the design.

Procedure of Registration of a Design

The procedure for registration of a design is comparatively simple when compared to procedurefor registration of a patent or a trade mark.



Briefly, the procedure consists of the following steps:

1) Submission of application

2) Acceptance/objections/refusal

3) Removal of objections/appeal to Central Government

4) Decision of Central Government

5) Registration of the Design

Rights Granted and the Term of such Rights

The exclusive right conferred on a design is termed as ‘copyright in design’. This should not beconfused with exclusive right granted for literary and artistic work also termed a ‘copyright’ in theliterary and artistic work. There may be certain designs which can qualify for registration bothunder the Designs Act and Copyright Act. The Industrial Designs and Product Designs are coveredby the Designs Act, 2000.

Rights granted when a design is registered

i) The right to exclusive use of the design.

1) When a design is registered, the registered proprietor of the design shall, subject to theprovision of the Act of 2000, have the copyright in the design during ten years fromthe date of registration.

2) If, before the expiration of the said ten years application for the extension of the periodof copyright is made to the controller in the prescribed manner, the Controller shall, onpayment of the prescribed fee, extend the period of copyright for a second period offive years from the expiration of the original period of ten years.

ii) Right to protect the design from piracy.

Term of the copyright in design

Section 11 lays down that the term of the copyright in design is ten years form registrationwhich may be extended to further for a second period of five years. Thus the maximum period ofcopyright in design is fifteen years.

Piracy of a Registered Design

Infringement of a copyright in design is termed as “Piracy of a registered Design”. It is not

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lawful for any person during the existence of copyright to do the following acts without the consentor licence of the registered proprietor of the design. Section 22 of the Designs Act, 2000, laysdown that the following acts amount to piracy:

1) To publish or to have it published or expose for sale any article of the class in question onwhich either the design or any fraudulent or obvious imitation has been applied.

2) To either apply or cause to apply the design that is registered to any class of goods coveredby the registration, the design or any imitation of it.

3) To import for the purpose of sale any article belonging to the class in which the design hasbeen registered and to which the design or a fraudulent or obvious imitation thereof hasbeen applied.

Test to Determine Infringement

The court has to determine whether the alleged infringement has the same shape or pattern andmust eliminate the claim of similarity due to similarity of functions, e.g., similarity of functionswould result when two articles have same shape due to the inherent nature of goods, two pens willnecessarily be similar in having an ink-tube, a cap and nib for writing. This element of functionalsimilarity is to be eliminated. The Judge has to look at the two articles and check out their similaritiesand differences and through the eyes of person with average intelligence see whether the defendant’sarticle is substantially different from that of the plaintiff.

Judicial Remedy

The judicial remedy for infringement of a registered design recommended in the Act is damagesalong with an injunction. Section 22(2) stipulates remedy in the form of payment of a certain sumof money by the person who pirates a registered design. A suit in the appropriate manner forseeking the relief in the form of an injunction is also recommended.

5.5 Trade Mark

The Trade Marks Act, 1999

The Trade and Merchandise Marks Act was passed in the year 1958, since then it has beenamended several times. Moreover in view of developments in trading and commercial practices,increasing globalization of trade and industry, the need to encourage investment flows and transferof technology and the need to simplify and harmonize trade mark management systems it has beenconsidered necessary to bring out a comprehensive legislation on the subject. Accordingly the



Trade Marks Bill, 1999 was introduced in the Parliament.

Act 47 of 1999

The Trade Marks Bill, 1999 having been passed by both the Houses of Parliament received theassent of the President. It came on the Statute Book as THE TRADE MARKS ACT, 1999 (47 of1999).

Meaning of Trade Mark

A consumer is duped if he buys a commodity presuming it to have originated from a certainidentified source when actually it is not and later he finds the commodity substandard. In theprocess the reputation of trader suffers if spurious goods are sold as those originating from him.The interests of both the consumer and the trader can be saved if some definite symbol whichmarks out the origin of goods from a definite trade source is attached with the goods emanatingfrom such source. Such symbol is called trade mark.

A trade mark is a visual symbol in the form of a word, a device or a label applied to articles ofcommerce with a view to indicate to the purchasing public that they are goods manufactured orotherwise dealt in by a particular person or a particular organization as distinguished from similargoods manufactured or dealt in by others. In other words, a trade mark is a visual representationattached to goods for the purpose of indicating their trade origin.

Trade Description

“Trade Description” is defined under the 1999 Act as any description statement or otherindication, direct or indirect: -

as to the member, quantity, measure, guage or weight of any goods. Or as to the standard orquality of any goods or services, as to the fitness for the purpose of any goods being a drug, as tothe place or country where produce are provided, as to the name and address or identity of themanufacturer or provider of service, as to the mode of manufacture of goods or providing services,as to the material of which any goods are composed, as to any goods being subject of any existingpatent, privilege or copyright and includes any description which according to custom of the tradeis commonly taken as its indication and description as to any imported goods and any otherdescription which is likely to be misunderstood for any or all such matters.

Essentials of Trade Mark

A trade mark should have the following essential elements:

1. Distinctiveness of the trade mark. A trade mark would be considered a good trade mark

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when it is distinctive.

In the case of Imperial Tobacco v. Registrar, Trade Marks, AIR 1977 Cal. 413, the worddistinctiveness was held to be some quality in the trade mark which earmarked the goods markedas distinct from those of other products or such goods.

Features of Distinctiveness

Distinctiveness may be class dependent.

What is distinctive in relation to one class of goods may not be so in relation to another class ofgoods. The trade mark may be united wholly to one or more specified colors and this colorcombination may become the distinctive character of the particular work.

Trade Mark Law in India

The Trade Mark law in India is now contained in the provisions of the Trade Marks Act, 1999.

The earlier Trade and Merchandise Marks Act, 1958 has been repealed. The 1958 Act with theextensive Amendments, has become the 1999 Act. After the Act is enacted by the legislature, rulesthere under are made by the Government to facilitate and regulate the implementation of theprovisions of the Act. Rules made under an Act have the force the law. The rules have, however,to be consistent with the provisions of the Act.

How is a Trade Mark protected in India

To protect the registered Trade Mark, the following remedies can be resorted to: -

1. Civil remedies,

2. Criminal proceedings,

3. Administrative remedies.

Procedure of Registration and Duration

Submission of Application

Any person who claims to be the proprietor of a trade mark and is desirous of registration of themark shall apply to the Registrar in the prescribed manner, seeking registration of his mark.

Where the Application is to be Filed

After completing all specifications on the prescribed application form, an application shall befiled in the office of the Trade Mark Registrar “within whose territorial limits the principal place of



business in India of the applicant or in the case of the joint applicants the principal place of businessin India of the applicant whose name is first mentioned in the application, as having a place ofbusiness in India is situated.

The “Principal Place of business in India”.

It means –

1) Where a person carries on business in the goods concerned in a trade mark –

a) If the business is carried on in India only in one place, then that place.

b) If the business is carried on in India at more places than one, the place mentioned byhim as the principal place of business in India.

2) Where a person is not carrying on a business in the goods concerned in a trade mark –

a) If he is carrying on any other business in India at only one place, than that place,

b) If he is carrying on any other business in India at more places than one, the placementioned by him as the principal place of business in India, and

3) Where a person does not carry on any business in India but has a place of residence inIndia, then such a place of residence in India.

Advertisement

Soon after acceptance of the application, the application is advertised in the Trade Marks Journal.

Any person may, within three months from the date of the advertisement or re-advertisement ofthe application for registration or within such further period not exceeding one month, give noticein writing to the Registrar, of opposition to the registration.

Hearing of the Parties

The Registrar then calls up the two parties with their evidence. In case the decision goes infavour of the applicant, then the trade mark is registered in the name of the proprietor. But in casethe decision goes against the applicant then the applicant is free to appeal to the High Court.

The High Court may uphold or modify or strike down the decision of the Registrar.

Duration of Trade Mark

Section 25 of the 1999 Act provides that registration of a trade mark shall be for a period of tenyears, renewable for another period of ten years from the date of expiration of the original registration

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or the last renewal of registration, subject to payment of renewal fees and application made inprescribed manner.

Rights conferred by Registration of Trade Marks

Section 58 of the Trade Marks Act, 1999 confers on the proprietor of the trade mark, exclusiveright to use of the trade mark in relating to the goods or services in respect of which the trade markis obtained.

In addition to conferring the right of exclusive dealing, the proprietor of a trade mark also has aright to file a suit for infringement of his right and obtain

1) Injunction,

2) Damages,

3) Accounts of profits.

Injunction

An injunction is a judicial process or order restraining a person from continuing with wrongfulact. The general rules governing the grant of injunction are contained in Section 36 to 42 of theIndian Specific Relief Act, 1963 and Order XXXIX Rules 1 and 2 and Section 151 (Inherentpower of the Court) of the Code of Civil Procedure, 1908.

Where the acts of infringement are of such a nature that they are not likely to be repeated, thecourt instead of granting an injunction may pass an order that the plaintiffs having establishedinfringement of their trade mark will be at liberty to apply for an injunction, should such an occasionarise.

Injunction may be of the following types –

a) Anton Piller Order

b) Mareva Injunction

c) Interlocutory Injunction

d) Perpetual Injunction

Anton Piller Order

These are ex parte orders to inspect defendant’s premises. A court may grant such an order tothe plaintiff where there is a possibility of the defendant destroying or disposing of the incriminating



material. Such an order is for inspection of the premises of the defendant.

Mareva Injunction

In such an order the court has power to freeze defendant’s assets where there exists a probabilityof the assets being dissipated or cancelled so as to make a judgment against him worthless and un-enforceable.

Interlocutory Injunction

This form of injunction is the most commonly sought and most often granted form of injunction.It serves to take action against defendant on the basis of past infringement. The interlocutoryinjunction is an order restraining the defendant from continuance of the acts which amount toinfringement. An interlocutory injunction serves the purpose of preventing further infringement.

Perpetual Injunction

Perpetual injunction is an order restraining the defendant totally, for all times to come, fromdoing any act which infringes the rights of the proprietor of the Trade Mark. Perpetual injunctionis generally granted when the suit is finally decided. Perpetual injunction usually follows when thegrant of interim injunction against infringement was granted at the beginning of the suit. It can begranted also in cases where no interim injunction was granted.

5.6 History of Information Technology and Cyber Space

I T as it is commonly called, dates back to 5000 BC, when people started using alphabets as amedium of communication. However, its actual emergence started with the first ever use of thecomputer. A simple device for performing arithmetic calculations was the slide rule, an analoguecomputer based on mechanical architecture was invented in early 1600s by William Oughtred.This was a breakthrough as most of the modern computers later used the same basic principle usedby the slide rule. The Pascaline, an advanced mechanical computer was invented by Blaise Pascalin the mid 1600. Gottfried Wilhelm von Leibniz, a German mathematician and philosopherdeveloped a mechanical computer called Leibniz machine in the late 1600s. The real modernmechanical computer was conceived in 1822 by Charles Babbage, an English mathematician.This essentially encompassed the modern day concept of storage, a mill and a punch card. Thistechnique was also adopted in the textile industry by Joseph Marie Jacquard in early 1800s, whereinhe essentially used punch cards, binary logic and real time programming software.

Then came the electromechanical age in 1840s with the discovery of different ways to harnesselectricity and the information was converted into electric impulses. This led to the beginning of

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telecommunication and telegraphy in late 1800s. The first electro-mechanical computer wasinvented by Herman Hollerith in 1880 and they were marketed under the logo of InternationalBusiness Machines (IBM).

Although the work of these pioneers anticipated many of the features of modern computers, thetechnology of the day proved incapable of putting their ideas into practical effect and it was onlywith the invention of the electronic valve, which substituted for mechanical components, that theprogrammable computer became a practical possibility. Much pioneering work was carried outduring the Second World War in connection with the Allies’ attempts to break the cryptographicsystems employed by the Germans and Japanese by use of the computing device known as Colossus.In essence, however, Colossus was a machine designed for one specific purpose and the work ofJohn von Neumann was required to enable first computer with the capability of performing arange of tasks.

The Boolean algebra developed in the 19th century removed the numbers and made limitationfor these counting devices. This technique of mathematics invented by Boole helped to correlatethe binary digits with human readable language. For instance the values of ‘0’s are related withfalse statements and ‘1’s with the true ones. British mathematician Alan Turing made furtherprogress with the help of his theory of a computing model. In the meanwhile,, the technologyadvancement of the 1930s helped much in furthering the advancement of computing devices. In1942, Howard Aiken, a research student at Harvard University built the first generation moderncomputer named ‘Mark I’. It was 8 feet tall, 5.1 feet long, 2 feet wide, weighed 5 tons andemployed 750,000 components.

The first computer with the capability of performing a range of tasks in accordance with specificsets of instructions (programs) was the ENIAC (Electronic Numerical Integrator and Calculator)machine developed in the United States (US) in 1947. During the same time Mauchly and Eckertbegan the designing of the ‘Electronic Discreet Variable Computer’ (EDVAC). By this time, theBritishers also started catching up with the Americans and Max Newman heated up the effort atManchester University where the ‘Manchester Mark I’ went into operation in June 1948-becomingthe first stored program computer. Maurice Wilkes, a British scientist at Cambridge University,completed the designing of EDSAC (Electronic Delay Storage Automatic Calculator) in 1949.Thus, EDSAC became the first stored-program computer in general use (i.e., Eckert and Mauchlyand christened as UNIVAC (Universal Automatic Computer). Before UNIVAC, however, amachine called LEO (Lyons Electronic Office) had already gone commercial.

The next fifty years brought metaphors in the computing technology. The period is divided intofour generations. The first generation of digital computing was in the era of 1950s when thevacuum tubes the main logic elements and the data were stored externally as punch cards andinternally as rotating magnetic drums. The programs were written in assembly language andrequired compilers to transform them to the machine language. That was the first time when the



term ‘software’ was evolved. However, the revolution in the computer technology came with theadvent of solid state electronics in the late 1950s. This was called ‘second generation’ and wasdeveloped in the 1960s. In this era, the vacuum tubes were replaced by transistors. AT & T andBell labs pioneered this concept. In these devices magnetic tapes and disks replaced the externalstorage media. Magnetic cores with polarized faces strung on wire within a computer whichbecame the first internal storage device. This period also saw the development of high levellanguage (High level languages are more user friendly) like COBOL (Common Business OrientedLanguage) and FORTRAN (Formula Translation).

The ‘Third generation’ started in the mid 1960s and went up to mid 1970s, during which theindividual transistors were replaced by Integrated Circuits or ICs. The metal oxide semiconductors(MOS), like integrated circuits, became the core memory providers for the computer. It was thefirst time when Operating System (OS) term was evolved. It was during this time that a UNIXoperating system came into existence.

The ‘Fourth generation’ or better the present generation started in the mid 1970s when manyintegrated circuits were bunched together into a small unit called ‘microprocessor’. These microchipscontained memory, logic and control circuit and the entire unit was called Apple I. It had a RandomAccess Memory (RAM) of 16K and was priced approximately $ 1200. The first IBM personalcomputer was launched in 1981 with ‘Microsoft-Disk Operating System’ (MS-DOS) as theoperating system. Graphical User Interface (GUI) came in the late 1970s with UNIX and DIGITALVAX running their X WINDOWS. In the personal computers (PCs), GUI was started by Applecomputers in 1984 with their MAC OS. First MS Windows operating system debuted in 1983 butwas only taken off as WINDOWS 3.1 in 1990. The revolutionary technologies in the mid 1990smade computers powerful and in the coming years, its commercial applications were exploitedbesides computations.

5.7 Development of Internet

The Internet is a vast global network of computers for storing information on every conceivablesubject of interest to human kind. But its origin was very specific, driven by military and securityconcerns during the cold war. A need was felt for military command and control structures thatcould withstand a nuclear attack. The idea of a network of computers came from the analoguewith the transport system, which had been designed so that there were multiple paths to everypoint. The establishment of large number of interconnected computers permitted messages to berouted in multiple ways. Because the command structure had no centre with every node equivalentto all other nodes, a nuclear strike on one or many sites would not desirable the communicationsystems as a whole. In addition, information would be sent in ‘packets’ by different routes whichwould be reassembled when they arrived at the destination.

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The National Physical Laboratory in Britain, set up the first network along these principles in1968. The Pentagon followed with a larger and more ambitious project in 1969. The first nodewas established at the University of California. This mini network was named ARPANET (AdvanceResearch Project Agency NET), and its primary aim was to enable transmission of data files andlong distance computing including accessing data and research files at distant sites.

In 1972, the first electronic mail program was written to allow the distribution of messages, theintroduction of mailing lists, like minded individuals could form groups devoted to the discussionof specific subjects. In 1973, the first international connections to ARPANET were establishedwith Britain and Norway.

Within a short time, networks were established and networked through ARPANET, TELENET,a computer version of ARPANET came online in 1973. The publication of ‘Transmission ControlProgramme’ (TCP) by Cerf & Kahn was a major breakthrough in standardization and flexibility.It facilitated the rapid growth and development of the ARPANET because the software was freelyavailable in the public domain and could handle many kinds of machines. It was also realized that,just as a telephone would be of little use unless many people had one linking to the ARPANETwould allow the identification of other users. In time, ARPANET became an insignificant part ofthe internet as more and more networks were established and more and more machines becamelinked. In 1983, the military component of ARPANET became a separate network called MILNET.Just one network among many hundreds ARPANET formally expired in 1989 but its domain wasscarcely noticed because all its functions continued to be performed at hundreds of sites.

Domain name servers were introduced in 1984. Until then, each host computer had been assigneda name, there was a single integrated list of names and addresses that could easily be consulted.The new system introduced the concept of tiering in US. Internet address by providing extensionssuch as ‘edu’ (educational ), ‘com’ (commercial), ‘gov’ (government ) and ‘org’ (internationalorganization) as well as a service of country codes. This made computer host names easier toremember. Computers recognize these host names as coded sequences of numbers.

The internet grew significantly after the introduction of the WWW, though it became graphicaland interactive. The WWW is a network of sites that can be searched and retrieved by a specialprotocol known as Hypertext Transfer Protocol (HTTP). This protocol simplified the writing ofaddresses, automatically searched the internet for the address indicated and ‘called up’ the documentfor viewing. HTTP was written by Tim Berners Lee in 1989, but came online only in 1993. Oncethe dial and retrieve language had been simplified, the next system was to design on improved‘browser’, a system that would allow links to be hidden by text that could be activated by clickinga mouse button. This was done using an extremely user-friendly programming language calledHyper Text Markup Language (HTML) which allowed even comparative novices to write theirown individual ‘home page’ for external viewing. In the last few years, applications have become



available that translate documents written with word processor into HTML, so that web authorsneed to know very little about hypertext programming. In addition, browser such as Netscape,Internet Explorer and Mosaic allow users to access the internet on a global basis and reach themillions of ‘web pages’ that are currently available at the click of a mouse button. The technologyof the web with its hypertext linking allows the most unsophisticated user to surf unhindered.

Archie, the first internet search engine for locating and retrieving computer files was developedat Mc. Gill University (Montreal) in 1990. Search engines such as Altavista, Infoseek, HotBOt,Google etc., help to sift through the vast quantity of information available on any given subject onthe internet. Their utility is evident when one considers that the amount of publicly availableinformation doubles at a rate of between 18 months and 5 years. Compare that with a little knownfact that it took 1,500 years for the amount of information available publicly in 1 A.D. to double.This information explosion has much to do with the burgeoning of the internet which has grownexponentially from 1,000 host computers in 1984, 5,000 in 1986, 28,000 in 1987, 1,00,000 in1989, 3,00,000 in 1990, 3.2 million in 1994, 19.5 million in 1997 and 36.8 million in 1998. Now,anyone can imagine the growth rate for 2005 onwards.

5.8 Impact of Information Technology

The computer and network of IT have become an integral part of day-to-day life. Its area andapplication is so broad that no human activities can be said to remain untouched. Its applicationcovers almost all the manufacturing and marketing sectors viz., banking, communication, railways,tourism, education, agriculture, medical, administration etc., The advent of Home PC and internethave further reduced the whole world into a small village communicable from one part to anotherwithin seconds.

The present advanced technology of information and communication provides wide andunlimited opportunities for economic growth and human development. It can enhance variousdevelopment activities such as access to financial markets, employment generation, improvedagricultural productivity, long distance education, tele-medicine, protection of environment,checking of pollution and management of disasters. It has potential to help youth and women togrow by way of improving their capabilities and skills. It increases enormously the popularparticipation and enhances the decision making process at all levels.

The role of application of computers and networks in the human activities has increasedtremendously after the advent of internet. The little microchips are capable of storing huge valuableinformation regarding modern science and commerce. The industrial production of a companymay be dependent entirely on the functioning of data system. The e-commerce is rapidly gainingpopularity over the traditional form of business. Even in the field of medical science, I T is playing

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a lead role in diagnosis and treatment. With the help of IT, a doctor sitting in U S, can supervise asurgical operation being conducted in Delhi or a person having chest pain in his car can seekmedical advice form a cardio-physician. In brief, it can be said that almost every sector of theworld today is under substantial influence of the information technology some way or the other.

The advent of IT, however is not only boon but bane as well. The abuse of informationtechnology is its negative side. It has provided new ways of opportunities to the criminals andantisocial elements. They are more able to expand their nefarious criminal activities in the computerworld. They are now applying highly sophisticated ways and means of law breaking. They havenow abilities to perform the traditional crimes in a modern way. A terrorist, for example, sitting inPakistan can easily transmit his codified plan to Delhi with in seconds with the help of internet. Ahacker may transfer huge amount of money from one account to another or one bank to anotherwithin few seconds. There is possibility of secret information regarding nuclear energy, powerproduction, satellite communication, defense etc., being stolen by a computer expert.

5.9 Information Technology Offences

Cyber laws means in Indian context the Information Technology Act 2000 which was equippedfor quelling the cyber crimes. Some of the provisions of the Act which directly penalize the cyberoffences are given below.

The Act not only amends the Indian Penal Code to bring within its scope conventional offencescommitted electronically, but also creates a new breed of Information Technology Offences, theprevention of which are incidental to the maintenance of a secure electronic environment.

The following acts have been specifically delineated as Information Technology Offences:Sections 65-78

Source Code attacks-sec 65: Knowingly or intentionally concealing, destroying or altering orcausing another to conceal, destroy, or alter any computer source code used for a computer/network,when the computer source code is required to be kept or maintained by law for the time being inforce. This offence is punishable with imprisonment up to three years, or with fine, which mayextend up to two lakh rupees, or with both.

Hacking-sec 66: Destroying, deleting or altering any information residing in a computer resourceor diminishing its value or utility or affecting it’s injuriously by any means, with the intent to causewrongful loss or damage or to the public or any person. Hacking is punishable with imprisonmentupto three years, or with fine may extend upto two lakh rupees, or with both.

Obscenity sec-67: publishing or transmitting any material which is lascivious or appeal or appeals



to the prurient interest or if its effect is such as to tend to deprave and corrupt person who are likely,to read, see or hear the matter contained or embodies in it. This is punishable on first convictionwith imprisonment or either description for a term which may extend to five years and with finewhich may extend to one lakh rupees and in the event of a second or subsequent conviction withimprisonment of either description for a term which extend to ten years and also with fine whichmay extend to two lakh rupees.

Failure to comply with Controller’s directions sec-68: The Controller Certifying Authority maygive Certifying Authorities or their employees directions to take certain measures or cease carryingon certain activities to ensure compliance with the provisions of the Act. If any such person fails tocomply with such directions he shall be liable on conviction to imprisonment for a term not exceedingthree years or to fine not exceeding two lakh rupees or to both.

Subscriber’s failure to comply with Controller’s requirement for decryption sec 69: The ControllerCertifying Authority may, in national or public interest, require the subscriber to extend all facilitiesand technical assistance to its agent to decrypt certain encrypted information. Failure to assist suchagent to the Controller Certifying Authority is an offence and is punishable with an imprisonmentfor a term that may extend to seven years.

Accessing designated protected systems sec 70: The Government may designate any computer/network as a protected system and limit access to these by order. Any person who secures accessor attempts to secure access to such a protected system commits an offence and is punishable withimprisonment of either description for a term that may extend to ten years and shall also be liableto fine.

Misrepresentation to the Controller of Certifying Authority sec 71: If any person makes amisrepresentation or conceals material facts from the Controller of Certifying Authority in order toobtain a license or a digital signature certificate, he is guilty of an offence and is punishable withimprisonment for a term and to a fine upts one lakh rupees, or with both.

Breach of Confidentiality/Privacy sec 72: In pursuance of any of the powers conferred by theAct certain person secures access to electronic records, books, registers, correspondence, information,documents or other material: If without lawful authority and without the consent of the personconcerned this first mentioned person discloses these to any other person he commits an offence.The offender is punishable with imprisonment for a term that may extend to two years, or with finewhich may extend to one lakh rupees, or with both.

Publishing False Digital Signature Certificate sec 73: If a person knows that a Digital SignatureCertificate is erroneous in certain particulars and still goes ahead and publishes it, is guilty ofhaving contravened the Act. He is punishable with imprisonment for a term that may extend totwo years, or with fine that may extend to one lakh rupees, or with both.

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Making available Digital Signature for Fraudulent purpose sec 74: This is an offence punishablewith imprisonment for a term that may extend to two years, or with fine that may extend to onelakh rupees, or with both.

There are other crimes with regarding to the computer programmes which are not recognizedaccording to the act as offence but still if any person proves such act as tampering with computerwhich means access to data that is available to users, through a wide variety of communicationand information retrieval methods. Popular access methods are E-Mail MS exploders, news groups,chat and the World Wide Web. Via E-Mail, users can send an electronic message to another useror to, a group of users. Upon receipt of the E-Mail message, the message is stored electronically inthe user’s mail box to be read immediately or later.

A mail exploder is like an E-Mail group where subscribers can send message to a common E-Mail address. Then messages are then forwarded to each group’s subscriber.

Fraud: organized crime has used Cyber space to target Credit Card Information, personal andfinancial information for computer fraud. The sale of this information to counterfeiters of creditcards has proven to be extremely profitable. No longer do bank’s data or credit card need to bestolen for committing a fraud.

Forgery: is alteration of computerized document. Since the advent of high resolution computercolor laser copiers, a new generation of fraudulent counterfeiting has emerged. These copiers canmodify existing documents the quality of which is not distinguishable from the original withoutreferring to an expert for analysis. The perpetrators can even create false documents without thenecessity of referring to an original document

Computer Sabotage: is destruction of property or obstruction of normal operations, as by civiliansor enemy agents in time war. Treacherous action to defeat or hinder a cause or an endeavor, whichmeans deliberate subversion, kan also be construed as sabotage.

Hackers:-They may not be brought within ambit of existing laws if they are interpretedconventionally. The act of such hacker can perhaps, most appropriately, be considered in the lightof laws relating to criminal trespass. The hackers who are doing hacking may be considered as:

Code Hackers: - They Know Computer inside out. They can make the computer do nearlyanything they want it to.

Crackers: - They break into computer systems, circumventing operating systems and breakingtheir security is their favorite pastime

Cyber Punks: - They are masters of Cryptography



Preackers: - They combine their in-depth knowledge of the Internet and the masstelecommunications system to commit cyber crime.

5.10 Let Us Sum up

Modern business stands on the industrial structure for its subsistence either for product or servicemanufacturing. The laws which regulate industries are very important from the point of view ofbusiness regulation. Environmental laws are of vital importance from the view of survival of thebusiness and furtherance of the business and licensing of the business. Another important area ofdiscussion is intellectual property rights which are the back bones of the business. Trade marks,patents and designs which are the major factors which fetch profit in the business. This chaptergives an introductory view of all the above areas.

5.11 Glossary

1. Cyber = Artificial World of Communication

2. Computer = Calculating Machine but not calculator

3. Hacker = Person who steals the data on the computer

4. Injunction = Interim order of the court

5. Offence = Contravention

6. Forgery = Alteration for fraud


1. What is Patent?

2. What is Trademark?

3. Define Design.

4. What are the procedures for registering Patent?

5. What are the remedies available for infringements?

6. Write a note on Anton-piller order.

7. Write a note on Cyber Offences.

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1. Nandan Kamath, Law Relating to Internet, E-Commerce and Cyber Laws, UniversalLaw Publishing Co.

2. Information Technology Act.

3. Narayana .P, Law of Intellectual Property Rights, Uni Law Pub.

4. Ian Lloyd, Information Technology Law, Butterworth, London.


1. Write a note on cyber laws and offences and the punishments for them.

2. What is Patent?

3. What is Trademark?

4. Define Design.

5. What are the procedures for registering Patent?

6. What are the remedies available for infringements?

7. Write a note on Anton-piller order.

8. Write a note on Cyber Offences.

* * * * *



Unit 6

Law of Sale of Goods and ConsumerProtection

Unit Structure


6.2 Introduction to Consumer Protection

6.3 Provisions of the Act

6.4 Sale of Goods Act

6.5 Conditions and Warranties


6.7 Suits for breach of the contract


6.9 Let us sum up

6.10 Glossary




Unit 6 - Introduction to Transportation106

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� Learn the concept of Consumer Protection

� Know various councils working on consumer protection

� Discuss the provisions of Sale of Goods Act

� Learn the concepts of conditions and warranties

� Know the remedies for breach of contracts

6.2 Introduction to Consumer Protection

With the emergence of the welfare state concepts and industrial revolution in almost allcountries for raising standard of common man, consumer protection has assumed great

importance in modern jurisprudence. Modern life has increased the dependence of human beingsupon the industrial product.

In the early age of individualism it was taken for granted, that a buyer possesses the capacityand is able to use his care and skill while entering into transactions or in making purchases in themarket. The maxim “Caveat Emptor” that is “buyer beware”, was the rule.

Almost all the consumers find themselves helpless as the corporate sector with its vast resourcesand control over the media exploits the consumer. A number of examples can be cited where theconsumers are being cheated. It is estimated that the Indian consumer loses at least Rs.2000 croresevery year, in fact they are paying Rs.16000 crores more than they should, because of defectiveweight and measures.

Need for protecting the interest of consumers was also felt in our country and we see today thatgovernment has been playing important role in consumer awareness programmes. Several lawsfor consumer protection were already there since 1947, but the enactment of Consumer ProtectionAct 1986 and amendments made in the MRPT Act, 1969 in 1984 gave a positive role to thegovernment in this field.

It has been noticed that due to the peculiar socio-economic conditions prevailing in our country,protection available to the consumers through market forces of competition, has been possible, foronly a small group of consumers belong to a higher income group. In fact, these groups notnecessarily, depend upon the State for goods and services to satisfy its basic demands. Largelyconsumers falling in the lower income group, have to depend much upon the State for the supply

Unit 6 - Law of Sale of Goods and Consumer Protection


and acquisition of basic necessities. In Indian set up the consumers of latter category, because ofpoverty and ignorance and lack of resources, suffer from deprivation. Thus the relevance of consumerprotection, based upon western model is not much suited in India.

It has been felt since long, that the existing legal provisions, and administrative methods andjudicial forums, available to the consumers were not effectively providing redressal to the consumers.Whether it has been legislative deficiency or negligence on the part of consumers to pursue theremedy, the result has been that consumers continue to remain an exploited mass in the seller’smarket. The enactment of detailed consumer protection Act was also necessitated by the fact thatIndia too signed the Consumer Protection Resolution adopted by the General Assembly of UnitedNations Organization at international level.

6.3 Provisions of the Act

Under Section 2 of the Act various terms have been defined. Important among them are“Consumer” under Sec 2(1)(d) as “ any person buys for a consideration which has been paid orpromised or partly promised and partly paid, or under any system of deferred payment and includesany user of such goods other than the person who buys such goods for consideration paid orpromised …… when such is made with the approval of such person, but does not include a personwho obtains such goods for resale or for any commercial purpose”.

Section 2(i) defines goods as “every kind of movable property other than actionable claims andmoney, and includes stock and shares, growing crops, grass and things attached to, or formingpart of the land which are agreed to be severed before sale or under the contract of sale”. Andunder sec 2(o) services means “service of any description which is made available to potentialusers and includes but not limited to the provision of and includes the provision of facilities inconnection with banking, financing, insurance, transport, processing, supply of electrical or otherenergy, boarding or lodging or both, housing construction, entertainment, amusement, or thepurveying a news or other information, but does not include the rendering of any services free ofcharge or under a contract of personal service”.

Under section 4 the Act provides for the establishment of Central Consumer Protection Council.The minister in charge of consumer affairs will be the chairman to the council. Minister of theState will be the Vice-Chairman of the central council. Eight members of parliament-five from loksabha and three form rajya sabha, the secretary of the council for SC and ST., representatives formthe central government and autonomous organizations connected with consumer interest notexceeding twenty, Representatives of consumer organizations for consumers not less than thirtyfive, Representatives of women not less than ten, Representatives of farmers, traders and industriesnot exceeding twenty etc will all be inducted into the council at members. The term of the council

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shall be three years. It must meet when it feels necessary but at least one meeting of the councilshall be held every year. It shall meet at such time and place as the chairman thinks fit.

Objects of the central council are;

Right to safety

Right to information

Right to choose

Right to be heard

Right against exploitation

Right to consumer education

Under section 7 the Act provides for establishment of State consumer protection council. Stategovernment shall by notification establish the state council. Minister in charge of consumer affairsin State shall be the chairman for the council. Other members are appointed by the notification ifstate government. It shall meet when it feels necessary but not less than twice a year. The time andplace of the meeting will be on the decision of the chairman.

Under section 8A and B the Act provides for the establishment of District consumer protectioncouncil. Collector of the district shall be the chairman of the council. Other officials and memberswere appointed by the state government. It should meet as the chairman thinks fit.

Under section 12 the Act prescribes about the manner in which the complaint shall be madeand under section 13 the Act lays down the procedures for conducting the case on receipt of thecomplaint. Under section 19 the Act speaks about the appeals form the orders passed by thecouncils and under section 27 the Act prescribes for the penalties which may be imprisonment fora term which shall not be less than one month but extendable up to three years or with fine whichshall not be less than two thousand rupees but which may extend to rupees ten thousand or withboth.

Conclusively it can be said that the Act and its objets are very impressive but when we look atthe penalty and imprisonment imposed on the corporates it is negligible when compared to thegravity of the harm made on the society.

6.4 Sale of Goods Act, 1930

Indian Contract Act was, from Section 76 to 123 contained the sale of goods. But later it was



repealed and a separate Sale of Goods Act 1930, has been passed by union legislature. It contains66 sections and in the following chapter some important sections are mentioned.

The word business has been defined as the sale of goods and services for the purpose of earningprofit. So the entire arena of business is standing on the basis of sale of goods and services. Toregulate the sale of goods the central government passed the Sale of Goods Act, 1930. It contains66 sections. The Act speaks about formation of sale of goods contracts, effects of such contracts,performance of the contract, rights of unpaid seller and suits for the breach of contract.

Under sec 2 (1) of the Act buyer has been defined as a person who buys or agrees to buy goods.2(7) goods means every kind of movable property other than actionable claims and money; andincludes stock and shares, growing crops, gross, and things attached to or forming part of the landwhich are agreed to be severed before sale or under the contract of sale.

Under section 4 sale and agreement to sell has been defined as,

1. A contract of sale of goods is a contract whereby the seller transfers or agrees to transferthe property in goods to the buyer for a price. There may be contract of sale between onepart-owner and another.

2. A contract of sale may be absolute or conditional.

3. Where under a contract of sale, the property in the goods is transferred from the seller tothe buyer, the contract is called sale, but where the transfer or the property in the goods isto take place at a future time subject to some condition thereafter to be fulfilled, the contractis called an agreement to sell.

4. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilledsubject to which the property in the goods is to be transferred.

Under sec 5 a contract of sale is made by an offer to buy or sell goods for a price and theacceptance of such offer. The contract may provide for the immediate delivery of the goods orimmediate payment of the price or both, or for the delivery or payment by the installments, or thatthe delivery or payment or both shall be postponed.

Subject to the provisions of any law for the time being in force, a contract of sale may be madein writing or by word of mouth, or partly in writing and partly by word of mouth or may beimplied form the conduct of the parties.

Subject matter of contract

Under sec 6 the goods which form the subject of a contract of sale may be either existing goodsowned or possessed by the seller, or future goods. Under sec7 where there is contract for the sale

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of specific goods, the contract is void if the goods without the knowledge of the seller have, at thetime when the contract was made, perished or become so damaged as no longer to answer to theirdescription in the contract.

6.5 Conditions and warranties

Under sec 11 unless a different intension appears from the terms of the contract, stipulations asto time of payment are not deemed to be of the essence of a contract of sale. Whether any otherstipulation as to time is of the essence of the contract or not depends on the terms of the contract.Under section 12 a stipulation in a contract of sale with reference to goods which are the subjectthereof may be a condition or a warranty. A condition is a stipulation essential to the main purposeof the contract, the breach of which gives rise to a right to treat the contract as repudiated. Awarranty is a stipulation collateral to the main purpose of the contract, the breach of which givesrise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.

Sale by description

Under sec 15 where there is a contract for the sale of goods by description, there is an impliedcondition that the goods shall correspond with the description, and if the sale by sample as well asby description, it is not sufficient that the bulk of the goods corresponds with the sample if thegoods do not also correspond with the description.

Sale by sample

Under section 17 a contract of sale is a contract for sale by sample where there is a term in thecontract, express or implied, to that effect. In the case of a contract for sale by sample there is animplied condition that the bulk shall correspond with the sample in quality that the buyer shallhave a reasonable opportunity of comparing the bulk with the sample. That the goods shall be freefrom any defect, rendering them un-merchantable which would not be apparent on reasonableexamination of the sample.


1. Payment and delivery are concurrent conditions.

2. Delivery of goods.

3. Buyer to apply for deliver.



4. Installment deliveries.

5. Delivery to carrier or wharfinger.

6. Buyer’s right of examining the goods.

7. Acceptance.

8. Liability of buyer for neglecting or refusing delivery of goods.

6.7 Suits for breach of the contract

1. Suit for price- sec 55

2. Suit for damages of non-acceptance-sec56

3. Damages for non-delivery-sec 57

4. Specific performance-sec 58

5. Remedy for breach of warranty-sec 59

6. Repudiation of contract before due-date- sec 60

7. Interest by way of damages and special damages-sec 61.


Under sec 73 “when a contract has been broken, the party who suffers by such breach isentitled to receive, from the party who has broken the contract, compensation for any loss ordamage caused to him thereby, which naturally arose in the usual course of things from suchbreach, or which the parties knew, when they made the contract, to be likely to result from thebreach of it. Such compensation is not to be given for any remote and indirect loss or damagesustained by reason of the breach.

Damages may be classified into four categories,

1. Ordinary or general damages.

2. Special damages

3. Exemplary or vindictive damages

4. Nominal damages

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Under Sec 74, when a contract has been broken, if a sum is named in the contract as the amountto be paid in case of such breach, or if the contract contains any other stipulation by way ofpenalty, the party complaining of the breach is entitled, whether or not actual damage or loss isproved to have been caused thereby, to receive from the party who has broken the contract reasonablecompensation not exceeding the amount so named or, as the case may be, the penalty stipulatedfor.

6.9 Let us sum up

Modern day business is not only the task of sales of goods and services but also the consumerprotection laws which are the back bone of the economy. Basically a movement started in USA tocreate awareness in the minds of consumers which in turn became a prominent legislation in all thenations of the world as Consumer Protection Act. Modern day market and marketing, both areconsumer oriented and not production. So the study of this area is of very much importance.

6.10 Glossary

1. Caveat Emptor = Buyer Beware

2. Damages = Penalty payable by the infringer to the aggrieved

3. Breach = Non-performance or break

4. Repudiate = Rescind or turn off

5. Suit = Case


1. Who is consumer?

2. What is the need for Consumer protection?

3. Write a note on Different Consumer Dispute Redressal Councils.

4. What is Sale of Goods?

5. Differentiate Conditions and Warranties.

6. What are the remedies available for non-performance of the contract?




1. Consumer Protection Act.

2. Sale of Goods Act.

3. Subbarao, Law of Contracts, I and II, S. Gogia and Co.

4. R.K.Bangia, Law of Contracts, Allahabad law Agency.


1. Who is consumer?

2. What is the need for Consumer protection?

3. Write a note on Different Consumer Dispute Redressal Councils.

4. What is Sale of Goods?

5. Differentiate Conditions and Warranties.

6. What are the remedies available for non-performance of the contract?

* * * * * *

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Unit 7

Law of International Trade

Unit Structure


7.2 Introduction to International Trade

7.3 Barriers to Trade

7.4 WTO

7.5 Subsidies and Countervailing Measures

7.6 Trade in Services

7.7 Trade Related Investment Measures

7.8 CIF and FOB

7.9 Dispute Settlement

7.10 Let us sum up

7.11 Glossary




115Unit 7 - Law of International Ttrade




1. Define International Trade

2. Learn Trade Barriers

3. Know the working of WTO

4. Understand the Investment Measures

5. Learn Trade in Services

6. Know CIF and FOB Trade

7. Learn Dispute Settlement Mechanisms

7.2 Introduction to International trade

International trade is exchange of capital, goods, and services across international bordersor territories. In most countries, it represents a significant share of gross domestic product(GDP). While international trade has been present throughout much of history, its economic,

social, and political importance has been on the rise in recent centuries. Industrialization, advancedtransportation, globalization, multinational corporations, and outsourcing are all having a majorimpact on the international trade system. Increasing international trade is crucial to the continuanceof globalization. International trade is a major source of economic revenue for any nation that isconsidered a world power. Without international trade, nations would be limited to the goods andservices produced within their own borders.

International trade is in principle not different from domestic trade as the motivation and thebehavior of parties involved in a trade does not change fundamentally depending on whether tradeis across a border or not. The main difference is that international trade is typically more costlythan domestic trade. The reason is that a border typically imposes additional costs such as tariffs,time costs due to border delays and costs associated with country differences such as language, thelegal system or a different culture.

International trade uses a variety of currencies, the most important of which are held as foreignreserves by governments and central banks. Here the percentage of global cumulative reservesheld for each currency between 1995 and 2005 are shown: the US dollar is the most sought-aftercurrency, with the Euro in strong demand as well. Another difference between domestic andinternational trade is that factors of production such as capital and labor are typically more mobile

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within a country than across countries. Thus international trade is mostly restricted to trade ingoods and services, and only to a lesser extent to trade in capital, labor or other factors of production.Then trade in goods and services can serve as a substitute for trade in factors of production.Instead of importing the factor of production a country can import goods that make intensive useof the factor of production and are thus embodying the respective factor. An example is the importof labor-intensive goods by the United States from China. Instead of importing Chinese labor theUnited States is importing goods from China that were produced with Chinese labor. Internationaltrade is also a branch of economics, which, together with international finance, forms the largerbranch of international economics.

7.3 Barriers to Trade

Free trade refers to the elimination of barriers to international trade. The most common barriersto trade are tariffs, quotas, and nontariff barriers.

A tariff is a tax on imports, which is collected by the federal government and which raises theprice of the good to the consumer. Also known as duties or import duties, tariffs usually aim first tolimit imports and second to raise revenue.

A quota is a limit on the amount of a certain type of good that may be imported into the country.A quota can be either voluntary or legally enforced.

A tariff is a tax on imported goods, while a quota is a limit on the amount of goods that may beimported. Both tariffs and quotas raise the price of and lower the demand for the goods to whichthey apply. Nontariff barriers, such as regulations calling for a certain percentage of locally producedcontent in the product, also have the same effect, but not directly.

You may wonder why a nation would ever choose to use a quota when a tariff has the addedadvantage of raising revenue. The major reason is that quotas allow the nation that uses them todecide the quantity to be imported and let the price go where it will. A tariff adjusts the price, butleaves the post-tariff quantity to market forces. Therefore, it is less predictable and precise than aquota.

The effect of tariffs and quotas is the same: to limit imports and protect domestic producersfrom foreign competition. A tariff raises the price of the foreign good beyond the market equilibriumprice, which decreases the demand for and, eventually, the supply of the foreign good. A quotalimits the supply to a certain quantity, which raises the price beyond the market equilibrium leveland thus decreases demand.

Tariffs come in different forms, mostly depending on the motivation, or rather the statedmotivation. (The actual motivation is always to limit imports.) For instance, a tariff may be levied

Unit 7 - Law of International Ttrade


in order to bring the price of the imported good up to the level of the domestically produced good.This so-called scientific tariff—which to an economist is anything but—has the stated goal ofequalizing the price and, therefore, “leveling the playing field,” between foreign and domesticproducers. In this game, the consumer loses.

A peril-point tariff is levied in order to save a domestic industry that has deteriorated to thepoint where its very existence is in peril. An economist would argue that the industry should beallowed to expire. That way, factors of production used by that inefficient industry could moveinto a new one where they would be better employed.

A retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In theeyes of an economist, retaliatory tariffs make no sense because they just start tariff wars in whichno one—least of all the consumer—wins.

Nontariff barriers include quotas, regulations regarding product content or quality, and otherconditions that hinder imports. One of the most commonly used nontariff barriers are productstandards, which may aim to serve as “barriers to trade.” For instance, when the United Statesprohibits the importation of unpasteurized cheese from France, is it protecting the health of theAmerican consumer or protecting the revenue of the American cheese producer?

Other nontariff barriers include packing and shipping regulations, harbor and airport permits,and onerous customs procedures, all of which can have either legitimate or purely anti-importagendas, or both.

7.4 World Trade Organization

The World Trade Organization (WTO) is an international organization designed to superviseand liberalize international trade. The WTO came into being on 1 January 1995, and is the successorto the General Agreement on Tariffs and Trade (GATT), which was created in 1947, and continuedto operate for almost five decades as a de facto international organization.

The World Trade Organization deals with the rules of trade between nations at a near-globallevel; it is responsible for negotiating and implementing new trade agreements, and is in charge ofpolicing member countries’ adherence to all the WTO agreements, signed by the majority of theworld’s trading nations and ratified in their parliaments. Most of the issues that the WTO focuseson derive from previous trade negotiations, especially from the Uruguay Round. The organizationis currently working with its members on a new trade negotiation called the Doha DevelopmentAgenda (Doha round), launched in 2001.

The WTO has 153 members, which represents more than 95% of total world trade. The WTO

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is governed by a Ministerial Conference, which meets every two years; a General Council, whichimplements the conference’s policy decisions and is responsible for day-to-day administration;and a director-general, who is appointed by the Ministerial Conference. The WTO’s headquartersis in Geneva, Switzerland.

The WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), was establishedafter World War II in the wake of other new multilateral institutions dedicated to internationaleconomic cooperation - notably the Bretton Woods institutions known as the World Bank and theInternational Monetary Fund. A comparable international institution for trade, named theInternational Trade Organization was successfully negotiated. The ITO was to be a United Nationsspecialized agency and would address not only trade barriers but other issues indirectly related totrade, including employment, investment, restrictive business practices, and commodity agreements.But the ITO treaty was not approved by the United States and a few other signatories and neverwent into effect.

In the absence of an international organization for trade, the GATT would over the years“transform itself” into a de facto international organization.[

GATT rounds of negotiations

The GATT was the only multilateral instrument governing international trade from 1948 untilthe WTO was established in 1995. Despite attempts in the mid 1950s and 1960s to create someform of institutional mechanism for international trade, the GATT continued to operate for almosthalf a century as a semi-institutionalized multilateral treaty regime on a provisional basis.

From Geneva to Tokyo

Seven rounds of negotiations occurred under the GATT. The first GATT trade roundsconcentrated on further reducing tariffs. Then, the Kennedy Round in the mid-sixties broughtabout a GATT anti-dumping Agreement and a section on development. The Tokyo Round duringthe seventies was the first major attempt to tackle trade barriers that do not take the form of tariffs,and to improve the system, adopting a series of agreements on non-tariff barriers, which in somecases interpreted existing GATT rules, and in others broke entirely new ground. Because theseplurilateral agreements were not accepted by the full GATT membership, they were often informallycalled “codes”. Several of these codes were amended in the Uruguay Round, and turned intomultilateral commitments accepted by all WTO members. Only four remained plurilateral (thoseon government procurement, bovine meat, civil aircraft and dairy products), but in 1997 WTOmembers agreed to terminate the bovine meat and dairy agreements, leaving only two.



Principles of the trading system

The WTO establishes a framework for trade policies; it does not define or specify outcomes.That is, it is concerned with setting the rules of the trade policy games. Five principles are ofparticular importance in understanding both the pre-1994 GATT and the WTO:

1. Non-Discrimination. It has two major components: the most favoured nation (MFN)rule, and the national treatment policy. Both are embedded in the main WTO rules ongoods, services, and intellectual property, but their precise scope and nature differ acrossthese areas. The MFN rule requires that a WTO member must apply the same conditionson all trade with other WTO members, i.e. a WTO member has to grant the most favorableconditions under which it allows trade in a certain product type to all other WTO members.“Grant someone a special favour and you have to do the same for all other WTO members.”National treatment means that imported and locally-produced goods should be treatedequally (at least after the foreign goods have entered the market) and was introduced totackle non-tariff barriers to trade (e.g. technical standards, security standards et al.discriminating against imported goods).

2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise becauseof the MFN rule, and a desire to obtain better access to foreign markets. A related point isthat for a nation to negotiate, it is necessary that the gain from doing so be greater than thegain available from unilateral liberalization; reciprocal concessions intend to ensure thatsuch gains will materialize.

3. Binding and enforceable commitments. The tariff commitments made by WTO membersin a multilateral trade negotiation and on accession are enumerated in a schedule (list) ofconcessions. These schedules establish “ceiling bindings”: a country can change its bindings,but only after negotiating with its trading partners, which could mean compensating themfor loss of trade. If satisfaction is not obtained, the complaining country may invoke theWTO dispute settlement procedures.

4. Transparency. The WTO members are required to publish their trade regulations, tomaintain institutions allowing for the review of administrative decisions affecting trade, torespond to requests for information by other members, and to notify changes in tradepolicies to the WTO. These internal transparency requirements are supplemented andfacilitated by periodic country-specific reports (trade policy reviews) through the TradePolicy Review Mechanism (TPRM). The WTO system tries also to improve predictabilityand stability, discouraging the use of quotas and other measures used to set limits onquantities of imports.

5. Safety valves. In specific circumstances, governments are able to restrict trade. There are

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three types of provisions in this direction: articles allowing for the use of trade measures toattain noneconomic objectives; articles aimed at ensuring “fair competition”; and provisionspermitting intervention in trade for economic reasons….

There are 11 committees under the jurisdiction of the Goods Council each with a specific task.All members of the WTO participate in the committees. The Textiles Monitoring Body is separatefrom the other committees but still under the jurisdiction of Goods Council. The body has its ownchairman and only ten members. The body also has several groups relating to textiles.

Council for Trade-Related Aspects of Intellectual Property Rights

Information on intellectual property in the WTO, news and official records of the activities ofthe TRIPS Council, and details of the WTO’s work with other international organizations in thefield, field, are all required to help the developing countries transfer technology and seek protectionof geographical indications. The TRIPS agreement had to be in place in 1st Jan 2000 in all thedeveloping countries. It was however argued that the time given up to 1st Jan 2000 was not enough.

Council for Trade in Services

The Council for Trade in Services operates under the guidance of the General Council and isresponsible for overseeing the functioning of the General Agreement on Trade in Services (GATS).It is open to all WTO members, and can create subsidiary bodies as required.

The Service Council has three subsidiary bodies: financial services, domestic regulations, GATSrules and specific commitments.

Other committees

The General council has several different committees, working groups, and working parties.

Committees on

· Trade and Environment

· Trade and Development (Subcommittee on Least-Developed Countries)

· Regional Trade Agreements

· Balance of Payments Restrictions

· Budget, Finance and Administration



Working parties on

· Accession

Working groups on

· Trade, debt and finance

· Trade and technology transfer

Trade Negotiations Committee

The Trade Negotiations Committee (TNC) is the committee that deals with the current tradetalks round. The chair is WTO’s director-general. The committee is currently tasked with theDoha Development Round.

7.5 Subsidies and Countervailing Measures

The World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures(the SCM Agreement) deals with government subsidization.

Subsidization occurs when a government provides its producer(s) with financial contributionsthat give the producer(s) an advantage in the market place. This support may, in turn, negativelyaffect other countries’ industries and trade. The objective of the Agreement is to curb the use ofsuch government assistance.

The SCM Agreement does two things:

It defines those types of subsidies that distort trade: generally, the most ‘trade-distorting’ subsidiesare those aimed at promoting exports or displacing imports, or those given to specific industries;and

It sets out rules for trade actions that countries may take to counter such subsidization by othercountries. Trade actions may be pursued multilaterally through the WTO Dispute Settlement Body,or unilaterally through countervail action.

Description of the SCM Agreement:

The SCM Agreement’s approach to establishing disciplines on the use of subsidies is describedas a ‘traffic light’ approach:

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Subsidies that are prohibited by the Agreement (‘red light’ subsidies) are those that are consideredthe most trade-distorting. There are two types of prohibited subsidies: subsidies that are contingenton export performance and those that are contingent on the use of domestic over imported goods.

There are other subsidies, i.e. specific subsidies, that, while not prohibited, are subject to tradeaction under the Agreement (actionable or ‘amber light’ subsidies).

Non-specific (i.e. generally available) subsidies fall in the non-actionable category (‘green light’subsidies) under the Agreement. They are considered the least trade-distorting type of subsidies,and are not subject to trade action.

Countries may take action against the adverse effects of subsidy practices through the disputesettlement procedures set out under the WTO or by means of unilateral countervailing duty action.A challenge in the WTO of a prohibited subsidy, for example, seeks the elimination of the subsidyprogramme that is inconsistent with the rules of the SCM Agreement. In contrast, in a unilateralcountervail action; countervailing duties are imposed on subsidized imports to offset the injuriouseffect of the subsidy on the relevant industry in the importing country. WTO rules governing theuse of countervailing duties are similar to the WTO rules on the use of anti-dumping measures.The main difference is that anti-dumping involves an investigation of the pricing practices of privatecompanies whereas a countervailing duty investigation examines subsidy practices of governments.

The SCM Agreement applies to industrial products and to agricultural goods, except wherespecial provisions of the Agreement on Agriculture apply.

7.6 Trade in services

Trade in Services refers to the sale and delivery of an intangible product, called a service,between a producer and consumer. Trade in services takes place between a producer and consumerthat are, in legal terms, based in different countries, or economies, this is called International Tradein Services.

International trade in services is defined by the Four Modes of Supply of the General Agreementon Trade in Services (GATS).

· (Mode 1) Cross border trade, which is defined as delivery of a service from the territory ofone country into the territory of other country;

· (Mode 2) Consumption abroad - this mode covers supply of a service of one country to theservice consumer of any other country;

· (Mode 3) Commercial presence - which covers services provided by a service supplier ofone country in the territory of any other country, and



· (Mode 4) Presence of natural persons - which covers services provided by a service supplierof one country through the presence of natural persons in the territory of any other country.

A “Natural Person” is a human being, as distinct from legal persons such as companies ororganizations. Countries can freely decide where to liberalize on a sector-by-sector basis, includingwhich specific mode of supply they want to cover for a given sector.

The tourism sector, the financial services sector and the telecommunications services sector areexamples of services sectors.

During the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), the GeneralAgreement on Trade in Services was drafted, and became enshrined as one of the four pillars ofthe international treaty comprising the WTO Agreement in 1995.

Regional trade in services agreements are also negotiated and signed between regional economicgroupings such as CARICOM, North American Free Trade Agreement (NAFTA) and ASEAN.

Some examples of trade in service would be: banking, check-ups done by a doctor and IT(information technology).

7.7 Trade-Related Investment Measures

In the late 1980s, there was a significant increase in foreign direct investment throughout theworld. However, some of the countries receiving foreign investment imposed numerous restrictionson that investment designed to protect and foster domestic industries, and to prevent the outflow offoreign exchange reserves. Examples of these restrictions include local content requirements (whichrequire that locally-produced goods be purchased or used), manufacturing requirements (whichrequire the domestic manufacturing of certain components), trade balancing requirements, domesticsales requirements, technology transfer requirements, export performance requirements (whichrequire the export of a specified percentage of production volume), local equity restrictions, foreignexchange restrictions, remittance restrictions, licensing requirements, and employment restrictions.These measures can also be used in connection with fiscal incentives as opposed to requirement.Some of these investment measures distort trade in violation of GATT Article III and XI, and aretherefore prohibited. Until the completion of the Uruguay Round negotiations, which produced awell-rounded Agreement on Trade-Related Investment Measures (hereinafter the “TRIMsAgreement”), the few international agreements providing disciplines for measures restricting foreigninvestment provided only limited guidance in terms of content and country coverage. The OECDCode on Liberalization of Capital Movements, for example, requires members to liberalizerestrictions on direct investment in a broad range of areas. The OECD Code’s efficacy, however,is limited by the numerous reservations made by each of the members. In addition, there are other

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international treaties, bilateral and multilateral, under which signatories extend most-favoured-nation treatment to direct investment. Only a few such treaties, however, provide national treatmentfor direct investment. Moreover, although the APEC Investment Principles adopted in November1994 provide rules for investment as a whole, including non-discrimination and national treatment,they have no binding force.

Legal Framework

GATT 1947 prohibited investment measures that violated the principles of national treatmentand the general elimination of quantitative restrictions, but the extent of the prohibitions was neverclear. The TRIMs Agreement, however, contains statements prohibiting any TRIMs that areinconsistent with the provisions of Articles III or XI of GATT 1994. In addition, it provides anillustrative list that explicitly prohibits local content requirements, trade balancing requirements,foreign exchange restrictions and export restrictions (domestic sales requirements) that would violateArticle III:4 or XI:1 of GATT 1994. TRIMs prohibited by the Agreement include those which aremandatory or enforceable under domestic law or administrative rulings, or those with whichcompliance is necessary to obtain an advantage (such as subsidies or tax breaks). Indeed, theTRIMs Agreement is not intended to impose new obligations, but to clarify the pre-existing GATT1947 obligations. Under the WTO TRIMs Agreement, countries are required to rectify any measuresinconsistent with the Agreement, within a set period of time, with a few exceptions for the seller/exporter/manufacturer.

7.8 Cost, Insurance and Freight (CIF) vs. Free On Board (FOB)

One of the fundamental decisions of international trade is how to structure the terms of salebetween buyers and sellers. In the case of imports, Canadian and American companies can eitherallow their overseas suppliers to handle the shipping and insurance of goods or they can take theseresponsibilities on themselves. There are benefits and downsides to each, so it important tounderstand how these factors may affect your business. This overview is intended to provideclarity among these issues so that you may utilize the most advantageous method for your situation.

The following definitions are taken from the Globe Express Services Dictionary of InternationalTrade (Incoterms 2000):

1. Cost, Insurance and Freight (CIF) – An international trade term of sale in which, for thequoted price, the seller/exporter/manufacturer clears the goods past the ship’s rail at theport of shipment (not destination). The seller is also responsible for paying for the costsassociated with transport of the goods to the named port at destination. However, once thegoods pass the ship’s rail at the port of shipment, the buyer assumes responsibility for risk



of loss or damage as well as any additional transport costs. The seller is also responsiblefor procuring and paying for marine insurance in the buyer’s name for the shipment. TheCost and Freight term is used only for ocean or inland waterway transport.

2. Free On Board (FOB) – An international trade term of sale in which, for the quotedprice, the seller/exporter/manufacturer clears the goods for export and is responsible forthe costs and risks of delivering the goods past the ship’s rail at the named port of shipment.The Free On Board term is used only for ocean or inland waterway transport.

Why CIF?

Generally speaking, importers prefer CIF terms when either they’re new to international tradeor they have relatively little freight volume. These importers often find CIF simpler in that theirsuppliers are responsible for arranging freight and insurance details. Under these terms the importerrelinquishes control of choosing freight carriers, routing and other shipping specifics. For thesecompanies, convenience outweighs the need for enhanced shipment control and associated freightsavings.

Shipping CIF grows increasingly difficult as companies increase their number of overseassuppliers and overall freight volume. The greater the number of CIF shipments, the more problemscan occur with obtaining accurate shipment information. Overseas suppliers are not well positionedto handle service issues that develop in-transit. What’s more, they are not required to arrangeanything past the port of destination, so final delivery concerns, monitoring of penalty situations(demurrage, per diem), etc. are all the responsibility of the importer. Regular importers quicklygrow tired of the hassle of relying on suppliers and their freight agents for shipment information.

Why FOB?

Buying Free On Board has two major benefits over CIF, more competitive freight rates andenhanced shipment control. When shipping CIF, companies must be careful that their shippingrates are competitive since overseas suppliers are inclined to mark up their freight cost for the extraservice provided in arranging shipments. U.S. importers quickly learn that they can obtain verycompetitive shipping rates even with small to medium freight volumes. While cost is alwaysimportant, there is another major reason for buying FOB.

Increased supply chain visibility and control is a critical FOB benefit. By taking title to thegoods as they cross the ship’s rail at the overseas port of shipment, importers are better able toobtain accurate and timely shipment information by working with the third party logistics providerof their choosing. In this way, they are assured their freight partner is working in their best interest,not that of their supplier’s. The seller is also responsible for paying for the costs associated withtransport of the goods to the named port at destination. However, once the goods pass the ship’s

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rail at the port of shipment, the buyer assumes responsibility for risk of loss or damage as well asany additional transport costs. The seller is also responsible for procuring and paying for marineinsurance in the buyer’s name for the shipment. The Cost and Freight term is used only for oceanor inland waterway transport.

1. Free On Board (FOB) – An international trade term of sale in which, for the quotedprice, the seller/exporter/manufacturer clears the goods for export and is responsible forthe costs and risks of delivering the goods past the ship’s rail at the named port of shipment.The Free On Board term is used only for ocean or inland waterway transport.

7.9 Dispute Settlement

The power to settle international disputes with binding authority distinguishes the World TradeOrganization from most other intergovernmental institutions. The Understanding on Rules andProcedures Governing the Settlement of Disputes gives the WTO unprecedented power to resolvetrade-related conflicts between nations and assign penalties and compensation to the parties involved.

Dispute settlement is administered by a Dispute Settlement Body (DSB) that consists of theWTO’s General Council. The DSB has the authority to “establish panels, adopt panel and AppellateBody reports, maintain surveillance of implementation of rulings and recommendations, andauthorize suspension of concessions and other obligations.” The Dispute Settlement system aimsto resolve disputes by clarifying the rules of the multilateral trading system; it cannot legislate orpromulgate new rules.

When a Member believes that another party has taken an action that impairs “benefits accruingto it directly or indirectly” under the Uruguay Round Agreements, it may request consultations toresolve the conflict through informal negotiations. If consultations fail to yield mutually acceptableoutcomes after 60 days, Members may request the establishment of a panel to resolve the dispute.Panels typically consist of three individuals with expertise in international trade law and policy;these panelists hear the evidence and present a report to the DSB recommending a course of actionwithin six months. The panel can solicit information and technical advice from any relevant source,though it is not required to do so. Only submissions from Members are guaranteed to be heard,although in rare cases, panels have consulted submissions from interested non-governmentalorganizations. Third-party member nations may also involve themselves in the dispute settlementprocess. All deliberations and communications are confidential, and only the final panel reportsbecome part of the public record.

Once panel reports have been prepared, they are presented to the Dispute Settlement Body,which either adopts the report or decides by consensus not to accept it. Alternatively, if one of the



parties involved decides to appeal the decision, the report will not be considered for adoption untilthe completion of the appeal.

In the case of an appeal, a three-person Appellate Body chosen from a standing pool of sevenpersons will assess the soundness of the panel report’s legal reasoning and procedure. An AppellateBody report is adopted unconditionally unless the DSB votes by consensus not to accept its findingswithin 30 days of circulation to the membership.

The primary goal of dispute settlement is to ensure national compliance with multilateral traderules. Accordingly, the Dispute Settlement Body encourages Members to make their best possibleefforts to bring legislation into compliance with the panel ruling within a “reasonable period oftime” established by the parties to the dispute. If a Member does not comply with rulings, the DSBcan authorize the complainant to suspend commitments and concessions to the violating Member.In general, complainants are encouraged to suspend concessions with respect to the same sector asthe subject of the dispute; however, if complainants find this ineffective or impracticable, they maysuspend concessions in other sectors of the same Agreement or even under separate Agreements.Ecuador, for example, suspended its TRIPs commitments to the European Union in retaliationagainst the EU’s non-compliance with panel rulings in the goods-based Banana dispute.

Some groups, such as the Center for International Environmental Law, have criticized the disputesettlement process for its lack of transparency and democratic accountability, as well as for aperceived insensitivity to environmental and social standards. The increasing use of the system bydeveloping countries, however, is one indicator of its institutional success. Ultimately, the disputesettlement system is a significant milestone in the development of a rules-based multilateral tradingsystem.

7.10 Let us sum up

International trade or global trade, a concept generated by father of economics Viz, AdamSmith and later evolved as an instrument which changed the vistas of the states. There are variousdifferences in national laws and policies. Even though trade was made possible by the enormousefforts of GATT which is now called as WTO a globe wide organization to harmonize the trade

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and settle the disputes among the trading members, the future of nations, in the present scenarioseems to be dependent on the smooth running of international trade.

7.11 Glossary

CIF = Cost, Insurance and Freight

FOB = Free on Board

TRIPs = Trade Related Aspects of Intellectual Property Rights

TRIMS = Trade Related Investment Measures

GATS = General Agreement on Trade in Services

DSB = Dispute Settlement Body


1. What is International Trade?

2. Define Trade barriers.

3. Write a note on TRIMs.

4. Explain the role of WTO in World Trade.

5. What is CIF and FOB?

6. Write a note on Dispute Settlement mechanism.


1. S.R. Myneni, World Trade Organization, Asia Law house.

2. Arun Goyal, World Trade Organization and Legal Texts.



3. www. Wto.org – for all the legal texts of WTO agreement.

4. M.L. Jinghan, International Economics, Himalaya Publishing House.


1. What is International Trade?

2. Define Trade barriers.

3. Write a note on TRIMs.

4. Explain the role of WTO in World Trade.

5. What is CIF and FOB?

6. Write a note on Dispute Settlement mechanism.

7. Write a note on Subsidy and Countervailing measures.

8. Explain Tariff and Non-tariff Barriers.

* * * * *

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Unit 8

Business Ethics

Unit Structure


8.2 Introduction

8.3 An overview of Business Ethics Management

8.4 What is Business Ethics?

8.5 Relationship between Business and Ethics

8.6 Code of Ethics

8.7 Benefits of Ethics Management

8.8 Environment Protection

8.9 Let us sum up

8.10 Glossary




131Unit 8 - Business Ethics



After going through this unit you will be able to:

1. Define, interpret and analyse what is business ethics

2. Analyse the overview of business ethics and its implications

3. Make out the relationship between ethics and business

4. Analyse code of ethics

5. Construct the formalities of business ethics

6. Understand the Environmental Protection Policies

8.2 Introduction:

The profession of business ethics has long needed highly practical resources that designedparticularly for leaders and managers, those people charged to ensure ethical practicesin their organizations. Unfortunately, far too many resources about business ethics end

up being designed primarily for philosophers, academics and social critics. As a result, leaders andmanagers struggle to be really able to make use of the resources at all. Also, far too many resourcesabout business ethics contain sensationalistic stories about businesses “gone bad” or prolongedpreaching to businesses to “do the right thing”. These resources often explore simplistic ethicalquestions, such as “should jane steal from company?” The real world of leaders and managers isoften more complex than that. Therefore, ethics refers to a system of moral principles-a-sense ofright and wrong and “goodness” and “Badness” of actions, and their motives and consequences.Business ethics refers to the application of ethics to business. To be more specific, business ethicsis the study of good or bad, right and wrong and just or unjust actions of businessman. Businesspeople should not try to evolve their own principles to justify what is right and wrong. The societydoes not condone or permit such an expectation. The businessmen are bound by the some ethicalprinciples which are applicable to other sections of the society.

8.3 An Overview of Business Ethics Management

About Ethics Management Programs

Organizations can manage ethics in their workplaces by establishing an ethics managementprogram. Brian Schrag, Executive Secretary of the Association for Practical and Professional

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Ethics, clarifies. “Typically, ethics programs convey corporate values, often using codes and policiesto guide decisions and behavior, and can include extensive training and evaluating, depending onthe organization. They provide guidance in ethical dilemmas.” Rarely are two programs alike.“All organizations have ethics programs, but most do not know that they do,” wrote businessethics professor Stephen Brenner in the Journal of Business Ethics (1992, VI1, pp. 391-399). “Acorporate ethics program is made up of values, policies and activities which impact the proprietyof organization behaviors.”

Bob Dunn, President and CEO of San Francisco-based Business for Social Responsibility,adds: “Balancing competing values and reconciling them is a basic purpose of an ethics managementprogram. Business people need more practical tools and information to understand their valuesand how to manage them.”

Benefits of Managing Ethics as a Program

There are numerous benefits in formally managing ethics as a program, rather than as a one-shot effort when it appears to be needed. Ethics programs:

• Establish organizational roles to manage ethics

• Schedule ongoing assessment of ethics requirements

• Establish required operating values and behaviors

• Align organizational behaviors with operating values

• Develop awareness and sensitivity to ethical issues

• Integrate ethical guidelines to decision making

• Structure mechanisms to resolving ethical dilemmas

• Facilitate ongoing evaluation and updates to the program

• Help convince employees that attention to ethics is not just a knee-jerk reaction done to getout of trouble or improve public image

8.4 What is Business Ethics?

Let’s start With “What is ethics?” Simply put, ethics involves learning what is right or wrong,and then doing the right thing — but “the right thing” is not nearly as straightforward as conveyedin a great deal of business ethics literature. Most ethical dilemmas in the workplace are not simplya matter of “Should Bob steal from Jack?” or “Should Jack lie to his boss?”

Unit 8 - Business Ethics


The concept has come to mean various things to various people, but generally it’s coming toknow what is right or wrong in the workplace and doing what’s right- this is in regard to effectsof products/services and in relationships with stakeholders. Wallace and Pekel explain that attentionto business ethics is critical during times of fundamental change - times much like those facednow by businesses, both nonprofit and for-profit. In times of fundamental change, values thatwere previously taken for granted are now strongly questioned. Many of these values are nolonger followed. Consequently, there is no clear moral compass to guide leaders through complexdilemmas about what is right or wrong. Attention to ethics in the workplace sensitizes leaders andstaff to how they should act. Perhaps most important, attention to ethics in the workplaces helpsensure that when leaders and managers are struggling in times of crises and confusion, they retaina strong moral compass. However, attention to business ethics provides numerous other benefits;as well these benefits are listed later in this document). Note that many people react that businessethics, with its continuing attention to “doing the right thing,” only asserts the obvious (“begood,” “don’t lie,” etc.), and so these people don’t take business ethics seriously. For many of us,these principles of the obvious can go right out the door during times of stress. Consequently,business ethics can be strong preventative medicine. Anyway, there are many other benefits ofmanaging ethics in the workplace. These benefits-are explained later in this document.

Two Broad Areas of Business Ethics

1 Managerial mischief. Madsen and Shafritz, in their book “Essentials of Business Ethics”(Penguin Books, 1990) further explain that “managerial mischief includes “illegal, unethical,or questionable practices of individual managers or organizations, as well as the causes ofsuch behaviors and remedies to eradicate them.” There has been a great deal written aboutmanagerial mischief, leading many to believe that business ethics is merely a matter ofpreaching the basics of what is right and wrong. More often, though, business ethics is amatter of dealing with dilemmas that have no clear indication of what is right or wrong.

2 Moral mazes. The other broad area of business ethics is “moral mazes of management”and includes the numerous ethical problems that managers must deal with on a daily basis,such as potential conflicts of interest, wrongful use of resources, mismanagement ofcontracts and agreements, etc.

Business ethics is now a management discipline. Business ethics has come to be considered amanagement discipline, especially since the birth of the social responsibility movement in the1960s. In that decade, social awareness movements raised expectations of businesses to use theirmassive financial and social influence to address social problems such as poverty, crime,environmental protection, equal rights, public health and improving education. An increasing numberof people asserted that because businesses were making a profit


from using our country’s resources, these businesses owed it to our country to work to improvesociety. Many researchers, business schools and managers have recognized this broaderconstituency, and in their planning and operations have replaced the word “stockholder” with“stakeholder,” meaning to include employees, customers, Suppliers and the wider community.The emergence of business ethics is similar to other management disciplines. For example,organizations realized that they needed to manage a more positive image to the public and so therecent discipline of public relations was born. Organizations realized they needed to manage theirhuman resources better and so the recent discipline of human resources was born. As commercebecame more complicated and dynamic, organizations realized they needed more guidance toensure their dealings supported the common good and did not harm others — and so businessethics was born. Today ethics in the workplace can be managed through use of codes of ethics,codes of conduct, roles of ethicists and ethics committee, policies and procedures to resolve ethicaldilemmas.

8.5 Relationship between Business and Ethics

Functional Area Ethics Functional areas of business are likely to confront ethical issues.Accounting is a critical function of any business. Accounting statements reveal to the managersand owners about the financial soundness of a company. Managers, investors, regulating agencies,tax collectors and trade unions rely on accounting data to make key decisions. Honesty, integrityand accuracy are absolute requirements of the accounting function. Professional accountingorganisations have evolved generally accepted accounting standards whose purpose is to establishuniform standards for reporting accounting data. When they are followed, these standards ensurea high level of honest and ethical accounting disclosures. Rarely are they followed in practice.

Ethical dilemmas crop up in purchasing departments where strong pressures are felt to obtainthe lowest possible prices from suppliers and where suppliers too feel a similar need to bag lucrativecontracts. Bribes, kickbacks and discriminatory pricing are temptations to both the parties.

Marketing is another area of the ethics issue. Pricing, promotions, advertising, productinformation, relations between ad agencies and their clients and marketing research are potentialareas of ethical dilemmas. Then there is the area of sophisticated communication technology whichis grossly abused or misused to realize one’s ambitions.

Managing Ethics

In the past, it was assumed in most companies that ethics was a matter of individual conscience.But the scenario has changed. Today, many companies are using managerial techniques that aredesigned to encourage ethical behaviors. Some of the managerial interventions to ensure ethical


conduct are explained below, (see Box 36.2).

Top Management

It is the chief executive officer who should take initiative in ensuring ethical standards in hisorganisation. The words of J.R.D. Tata we are the recollecting in this context. In addition,management must avoid adopting business strategies, schedules and reward systems that placeunreasonable pressure on employees.

8.6 Code of Ethics

Code of ethics have become popular, codes very from book length formulations to succinctstatements which is one or two pages, express a general philosophy for managing conflicts. Nearly95 percent of fortune 500 have codes and the trend is visible in our corporate sector also. Industryassociations too have evolved codes of conduct of their own. For example, the council for fairbusiness practices established in 1966, by leading private sector industrialists in Western Indiaadopted the following code of fair business practices

� To charge only fair and reasonable prices and take every possible step to ensure that theprices to be charged to the consumer are brought to his notice.

� To take every possible step to ensure that the agents or dealers do not charge prices higherthan fixed.

� In times of scarcity, not to withhold or suppress stocks of goods with a view to hoarding orprofiteering.

� Not to produce or trade in spurious goods of standards lower that specified.

� Not to adulterate goods supplied.

� Not to publishe misleading advertisements.

� To invoice goods exported or imported at their correct prices.

� To maintain accuracy in weights and measures of goods offered for sale.

� Not to deal knowingly in smuggled goods.

� Providing after sales service where necessary or possible.

� Honoring the fundamental rights of the consumers- right of safety, right to choose, right toinformation and right to be heard.


� Discharging social responsibilities and the responsibility to protect the environment andnature’s infrastructure.

� Ensuring that the product warranty is offered in simple, unambiguous and concise language,highlighting the rights of the consumer under it.

The Federation of chamber of commerce and industry (Which excludes the MNCs,) has recentlyissued a declaration on Norms of Business Ethics consisting of ten points. The list is almostidentical to that of the CFBP. The Punjab, Haryana and Delhi chamber of commerce has alsolately formulated the codes of ethics and says that

� Business must maintain the highest standards of behaviour for the benefit of industry,employees, customers, shareholders and the society.

� Goods and services must confirm to the commitment promised to customers. Businessmust be realistic and truthful in stating claims.

� Customers must be given best possible service and treated with respect and fairness.

� Business must understand the respect, the needs, concerns and welfare of community andsociety. It should use knowledge and experience for upgrading the quality of life. Allbusiness endeavors must combine the qualities of private excellence for public good.

� The best way of promoting high standards of business practices is through self regulation.The code has been designed as an instrument of self regulation to serve as a voluntaryguideline towards better quality of life and higher standards of business practice.

Ethics Committees

Many companies have ethics committees to advice on ethical issues. Such a committee can bea high-level one comprising the board of directors, chaired by the CEO of the company. Thecommittee’s field questions from employees help the company establish policy in new or uncertainareas, advise the board of directors on ethical issues and oversee the enforcement of the code ofethics.

Ethics Hot Lines

In some companies, when employees are troubled about some ethical issue but may be reluctantto raise it with their immediate supervisor, they can place a call on the company’s ‘ethics hot line.’A member of the ethics committee receives the confidential call and then quickly investigates thesituation.

Elaborate steps are taken to protect the identity of the caller, so as to encourage more employees


to report any deviant behaviour. This technique is advantageous in as much as ethics hotlinesencourage internal whistle-blowing, which is better for a company than to have disgruntledemployees take their ethical complaints to the media.

Ethics Training Programmes

Nearly all companies which take ethics seriously provide training in ethics for their managerand employees. Such training programmes acquaint company personnel with the official companypolicy on ethical issues, and they show how those policies can be translated into the specifics ofevery day decision making. Often, simulated cases based on actual events in the company areused to illustrate how to apply ethical principles to on-the-job problems.

Formulation of Ethical Values

Depending on the size of the organization, certain roles may prove useful in managing ethics inthe workplace. These can be full-time roles or part-time functions assumed by someone already inthe organization. Small organizations certainly will not have the resources to implement each thefollowing roles using different people in the organization. However, the following functions pointout responsibilities that should be included somewhere in the organization.

1. The organization’s chief executive must fully support the program. If the chief executiveisn’t fully behind the program, employees will certainly notice — and this apparent hypocrisy maycause such cynicism that the organization may be worse off than having no formal ethics programat all. Therefore, the chief executive should announce the program, and champion its developmentand implementation. Most important, the chief executive should consistently aspire to lead in anethical manner. If a mistake is made, admit it.

2. Consider establishing an ethics committee at the board level. The committee would becharged to oversee development and operation of the ethics management program.

3. Consider establishing an ethics management committee. lt would be charged withimplementing and administrating an ethics management program, including administrating andtraining about policies and procedures, and resolving ethical dilemmas. The committee should becomprised of senior officers.

4. Consider assigning/developing an ethics officer. This role is becoming more common,particularly in larger and more progressive organizations. The ethics officer is usually trainedabout matters of ethics in the workplace, particularly about resolving ethical dilemmas.

5. Consider establishing an ombudsperson. The ombudsperson is responsible to helpcoordinate development of the policies and procedures to institutionalize moral values in the


workplace. This position usually is directly responsible for resolving ethical dilemmas by interpretingpolicies and procedures.

6. Note that one person must ultimately be responsible for managing the ethics managementprogram.

7. Review any values needed to adhere to relevant laws and regulations; this ensures yourorganization is not (or is not near) breaking any of them. (If you are breaking any of them, youmay be far better off to report this violation than to try hiding the problem. Often, a reportedviolation generates more leniency than outside detection of an unreported violation, particularlyper the new Federal Sentencing Guidelines.) Increase priority on values that will help yourorganization operate to avoid breaking these laws and to follow necessary regulations.

8. Review which values produce the top three or four traits of a highly ethical and successfulproduct or service in your area, e.g.. for accountants: objectivity. Confidentiality, accuracy, etc.identify which values produce behaviors that exhibit these traits.

9. Identify values needed to address current issues in your workplace. Appoint one or twokey people to interview key staff to collect descriptions of major issues in the workplace. Collectdescriptions of behaviors that produce the issues. Consider which of these issues is ethical innature, e.g.., issues in regard to respect, fairness and honesty. Identify the behaviors needed toresolve these issues. Identify which values would generate those preferred behaviors. There maybe values included here that some people would not deem as moral or ethical values, e.g., team-building and promptness, but for managers, these practical values may add more relevance andutility to a code of ethics.

10. Identify any values needed, based on findings during strategic planning. Review informationfrom your SWOT analysis (identifying the organization’s strengths, weaknesses, opportunitiesand threats). What behaviors are needed to build on strengths, shore up weaknesses, take advantageof opportunities and guard against threats?

11. Consider any top ethical values that might be prized by stakeholders. For example, considerexpectations of employees, client’s customers, suppliers, funders. Members of the local community,etc.

12. Collect from the above steps, the top five to ten ethical values which are high priorities inyourOrganization).

13. Examples of ethical values might include

a) Trustworthiness: honesty, integrity, promise-keeping, loyalty

b) Respect: autonomy, privacy, dignity, courtesy, tolerance, acceptance


c) Responsibility: accountability, pursuit of excellence

d) Caring: compassion, consideration, giving, sharing, kindness, loving

e) Justice and fairness: procedural fairness, impartiality, consistency, equity, equality, dueprocess

f) Civic virtue and citizenship: law abiding, community service, protection of environment

14. Compose your code of ethics; attempt to associate with each value, two example behaviorswhich reflect each value. Critics of codes of ethics assert that they seem vacuous because manyonly list ethical values and don’t clarify these values by associating examples of behaviors.

15. Include wording that indicates all employees are expected to conform to the values statedin the code of ethics. Add wording that indicates where employees can go if they have any questions.

16. Obtain review from key members of the organization. Get input from as many members aspossible.

17. Announce and distribute the new code of ethics (unless you are waiting to announce italong with any new codes of conduct and associated policies and procedures). Ensure eachemployee has a copy and post codes throughout the facility.

18. Update the code at least once a year. As stated several times in this document, the mostimportant aspect of codes is developing them, not the code itself. Continued dialogue and reflectionaround ethical values produces ethical sensitivity and consensus. Therefore, revisit your codes atleast once a year — preferably two or three times a year.

19. (Note that you cannot include values and preferred behaviors for every possible ethicaldilemma that might arise. Your goal is to focus on the top ethical values needed in your organizationand to avoid potential ethical dilemmas that seem mostly likely to occur.)

20. Examples of a code of ethics: This example code was developed by MAP for Nonprofits(http://www.mapnp.org/library/ethics/teamvalu.htm) in St. Paul. The code is geared specificallyto guiding relations among staff.

8.7 Benefits of Ethics Management

Many people are used to reading or hearing of the moral benefits of attention to business ethics.However, there are other types of benefits, as well. The following list describes various types ofbenefits from managing ethics in the workplace.

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1. Attention to business ethics has substantially improved society. A matter of decades ago,children in our country worked 16-hour days. Workers’ limbs were torn off and disabled workerswere condemned to poverty and often to starvation. Trusts controlled some markets to the extentthat prices were fixed and small businesses choked out. Price fixing crippled normal market forces.Employees were terminated based on personalities. Influence was applied through intimidationand

Harassment. Then society reacted and demanded that businesses place high value on fairnessand equal rights. Anti-trust laws were instituted. Government agencies were established. Unionswere organized. Laws and regulations were established.

2. Ethics programs help maintain a moral course in turbulent times. As noted earlier in thisdocument, Wallace and Pekel explain that attention to business ethics is critical during times offundamental change — times much like those faced now by businesses, both nonprofit and for-profit. During times of change, there is often no clear moral compass to guide leaders throughcomplex conflicts about what is right or wrong. Continuing attention to ethics in the workplacesensitizes leaders and staff to how they want to act - consistently.

3. Ethics programs cultivate strong teamwork and productivity. Ethics programs align employeebehaviors with those top priority ethical values preferred by leaders of the organization. Usually,an organization finds surprising disparity between its preferred values and the values actuallyreflected by behaviors in the workplace. Ongoing attention and dialogue regarding values in theworkplace builds openness, integrity and community — critical ingredients of strong teams in theworkplace. Employees feel strong alignment between their values and those of the organization.They react with strong motivation and performance.

4. Ethics programs support employee growth and meaning. Attention to ethics in the workplacehelps employees face reality, both good and bad — in the organization and themselves. Employeesfeel full confidence they can admit and deal with whatever comes their way. Bennett, in his article“Unethical Behavior, Stress Appear Linked” (Wall Street Journal, April 11, 1991, p. B1), explainedthat a consulting company tested a range of executives and managers. Their most striking finding:the more emotionally healthy executives, as measured on a battery of tests, the more likely theywere to score high on ethics tests.

5. Ethics programs are an insurance policy — they help ensure that policies are legal. There isan increasing number of lawsuits in regard to personnel matters and to effects of an organization’sservices or products on stakeholders. As mentioned earlier in this document, ethical principles areoften state-of-the-art legal matters. These principles are often applied to current, major ethicalissues to become legislation. Attention to ethics ensures highly ethical policies and procedures inthe workplace. It’s far better to incur the cost of mechanisms to ensure ethical practices now thanto incur costs of litigation later. A major intent of well-designed personnel policies is to ensure



ethical treatment of employees, e.g., in matters of hiring, evaluating, disciplining, firing, etc. Drakeand Drake (California Management Review, V16, pp. 107-123) note that “an employer can besubject to suit for breach of contract for failure to comply with any promise it made, so the gapbetween stated corporate culture and actual practice has significant legal, as well as ethicalimplications.”

6. Ethics programs help avoid criminal acts “of omission” and can lower fines. Ethics programstend to detect ethical issues and violations early on so they can be reported or addressed. In somecases, when an organization is aware of an actual or potential violation and does not report it to theappropriate authorities, this can be considered a criminal act, e.g.. in business dealings with certaingovernment agencies, such as the Defense Department. The recent Federal Sentencing Guidelinesspecify major penalties for various types of major ethics violations. However, the guidelinespotentially lower fines if an organization has clearly made an effort to operate ethically.

7. Ethics programs help manage values associated with quality management, strategic planningand diversity management — this benefit needs far more attention. Ethics programs identify preferredvalues and ensuring organizational behaviors are aligned with those values. This effort includesrecording the values, developing policies and procedures to align behaviors with preferred values,and then training all personnel about the policies and procedures. This overall effort is very usefulfor several other programs in the workplace that require behaviors to be aligned with values,including quality management, strategic planning and diversity management. Total QualityManagement includes high priority on certain operating values, e.g., trust among stakeholders,performance, reliability, measurement, and feedback. Eastman and Polaroid use ethics tools intheir quality programs to ensure integrity in their relationships with stakeholders. Ethics managementtechniques are highly useful for managing strategic values, e.g., expand market share, reducecosts, etc. McDonnell Douglas integrates their ethics programs into their strategic planning process.Ethics management programs are also useful in managing diversity. Diversity is much more thanthe color of people’s skin — it’s acknowledging different values and perspectives. Diversityprograms require recognizing and applying diverse values and perspectives — these activities arethe basis of a sound ethics management program.

8. Ethics programs promote a strong public image. Attention to ethics is also strong publicrelations — admittedly, managing ethics should not be done primarily for reasons of public relations.But, frankly, the fact that an organization regularly gives attention to its ethics can portray a strongpositive to the public. People see those organizations as valuing people more than profit, as strivingto operate with the utmost of integrity and honor. Aligning behavior with values is critical toeffective marketing and public relations programs. Consider how Johnson and Johnson handledthe Tylenol crisis versus how Exxon handled the oil spill in Alaska. Bob Dunn, President andCEO of San Francisco-based Business for Social Responsibility, puts it best: “Ethical values,consistently applied, are the cornerstones in building a commercially successful and socially

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responsible business.”

9. Overall benefits of ethics programs: Donaldson and Davis, in “Business Ethics? Yes, ButWhat Can it Do for the Bottom Line?” (Management Decision, V28, N6, 1990) explain thatmanaging ethical values in the workplace legitimizes managerial actions, strengthens the coherenceand balance of the organization’s culture, improves trust in relationships between individuals andgroups, supports greater consistency in standards and qualities of products, and cultivates greatersensitivity to the impact of the enterprise’s values and messages.

8.8 Environment Protection

The term environment is yet to be defined in a finer form. The difficulty in defining environmentas remarked by Caldwell that it is term that everyone understands and no one is able to define.None of the major contributions on the subject have defined the term environment with requiredprecision.

Dictionary definition on environment provides ‘some thing that environ, to the whole complexor climate edaphic and biotic factors that act upon an organisms or ecological community andultimately determine its form or survival the aggregate of social or cultural conditions that influencethe life of an individual or a community or simply surrounding objects region or circumstances.

As per Black law dictionary the term means as “the totality of physical, economic, cultural,aesthetic and social circumstances and factors which surround and affects the quality of people.

Most of the national and International conventions have defined this term to serve the immediatepurpose of the conventions or assumes that everyone understand she term. Perhaps environment iseverything other than one self.

The environment has been defined as that outer physical and biological system in which manand other organisms live as a whole. This entire system is a complicated one as it has manyinteracting components. These components of the environment generally include “its rocks, minerals,soils and waters, its lands and their present and potential vegetation, its animal life and potential forlivestock husbandry and its climate.

Environmental Policy in India

The environmental policy in India and its impact on regulation can be found from ancientIndian law. The most detailed and perceptive of these are the provisions found in Kautilya’sArthashastra written between 321 and 300 BC. Kautilya was the prime minister of the MagadhaEmpire during the reign of Chandragupta Maurya. The Arthashastra is divided into 14 books that



discuss a wide range of subjects, including administration, law, industry, commerce and foreignpolicy. Although the principal provisions dealing with the environment are in Book Two, someShlokas (stanzas) are found elsewhere in the work.

Several factors that have influenced Indian forestry have affected policy governing other naturalresources as well. Short-sighted commercial and industrial policies that have rapidly reduced theforest cover since independence, have also contributed to erosion and the decline of India’s wildlife.Moreover, the bureaucratic structure of India’s forest law, which excludes citizens (forest dwellers)from participating in the decision-making process, is characteristic of most other environmentallegislation.

The final set of readings track the Indian Government’s environmental policy since the 1970s,and stress the shift in the government’s attitude from ‘environment versus development’ to‘environment and development’.

Early Environmental Legislation

A survey of early environmental legislation indicates the nature and levels of governmentalawareness to environmental issues. Apart from forest laws, nineteenth century legislations alsopartially regulated two other aspects of India’s environment: water pollution and wildlife. Theselaws, however, had a narrow purpose and limited territorial reach.

The Shore Nuisance (Bombay and Kolaba) Act of 1853, one of the earliest laws concerningwater pollution, authorised the collector of land revenue in Bombay to order the removal of anynuisance below the high-water mark in Bombay harbor. In 1857, an attempt was made to regulatethe pollution produced by the Oriental Gas Company by imposing fines on the company andgiving a right of compensation to anyone whose water was ‘fouled’ by the company’s discharges.

The Indian Penal Code, enacted in 1860, imposed a fine on a person who voluntarily ‘fouls thewater of any public spring or reservoir’. In addition, the Code penalized negligent acts with poisonoussubstances that endangered life or caused injury and proscribed public nuisances. The IndianEasements Acts of 1882 protected riparian owners against ‘unreasonable’ pollution by upstreamusers. The Indian Fisheries Act passed in 1897, penalized the killing of fish by poisoning waterand by using explosives.

Two early post-independence laws touched on water pollution. Section 12 of the Factories Actof 1948 required all factories to make ‘effective arrangements’ for waste disposal and empoweredstate governments to frame rules implementing this directive. Second, river boards, establishedunder the River Boards Act of 1956 for the regulation and development of inter-state rivers andriver valleys, were empowered to prevent water pollution. In both these laws, prevention of waterpollution was only incidental to the principal objective of the enactment.

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The earliest laws aimed at controlling air pollution were the Bengal Smoke Nuisance Act of1905 and the Bombay Smoke Nuisance Act of 1912.

In the field of wildlife protection, early legislation was limited to specific areas and particularspecies. In 1873, Madras enacted the first wildlife statute for the protection of wild elephants. Thelaw introduced a general prohibition on the destruction of wild elephants and imposed a penaltyon those who violated the embargo. The first effort by the Central Government came six yearslater with the passing of the Elephants Preservation Act of 1879. In 1887, the Centre enacted theWild Birds Protection Act prohibiting the possession or sale of wild birds recently killed or taken,during notified breeding seasons.

In 1912, the Central Government enacted a broader Wild Birds and Animals Protection Act.Extending to most of British India, this law specified closed hunting seasons and regulated thehunting of designated species through licenses. Indeed, all the statutes related primarily to theregulation of hunting and did not regulate trade in wildlife and wildlife products.

The first comprehensive law for the protection of wildlife and its habitant was perhaps theHailey National Park Act of 1936, which established the Hailey National Park in the State of UttarPradesh.

This review suggests that early legislative efforts were piecemeal and inadequate. Not until the1970s did the Central Government begins enacting comprehensive environmental laws. The nextset of readings trace the transformation in government policy, from environmental indifference toenvironmental concern that guided India into an era of comprehensive environmental regulation.

India’s Environmental Policy in the 1970s

In the summer of 1972, Stockholm staged the first UN Conference held specifically to considerglobal environmental conditions. Heads of state and high government officials from 113 countriesparticipated in the deliberations which culminated in the adoption of a Declaration and an ActionPlan. Prime Minister Indira Gandhi, was amongst the leaders of the Third World who addressedthe conference.

Policy Since the Mid – 1980s

The continuing decline in the quality of the environment, together with the tragedy at Bhopal inwhich a leak from a pesticide factory killed more than 2,500 people and injured several thousandothers, has spurred the Central Government and a few state governments to adopt strongerenvironmental policies, to enact fresh legislation and to create, reorganize and expand administrativeagencies.

In December, 1988 the Union Ministry of Environment and Forests constituted a committee to



recommend a framework and an action plan for the conservation of resources. After assimilatingthe responses received from governmental and non-governmental organizations, the committeesubmitted a report to the Union Government in April 1990. Based on the recommendations of thecommittee, the Government of India adopted a National Conservation Strategy and Policy Statementon Environment and Development in June, 1992 (NCS). The preamble to the NCS adopts thepolicy of ‘sustainable development’ and declares the government’s commitments to re-orient policiesand action ‘in unison with the environmental perspective’.

Liberalization and Economic Approach

Since 1991 India has adopted new economic policies to spur development. In an effort tointegrate the Indian economy with global trade, the government has reduced industrial regulation,lowered international trade and investment barriers and encouraged export-oriented enterprise.Some commentators fear that liberalization will exacerbate environmental problems and increaseinequities.

Constitutional and Legislative Provisions

Indian environmental statutes chiefly employ a system of licensing and criminal sanctions topreserve natural resources and regulate their use. Civil compensation recovered through privatecitizens, suits plays a peripheral role in the overall regulatory strategy. Pollution charges, fees orother economic approaches to discourage pollution are largely untried.

Until recently, the implementation of environmental laws was the exclusive province of speciallyconstituted state agencies which issued permits and prosecuted violators in the ordinary criminalcourts. Since 1986, enforcement techniques have been strengthened. These laws now permit privateprosecution and more significantly, empower state agencies to shut down polluting industries orstop their supply of water and power.

Constitutional Provisions and the Environment

The Indian Constitution is amongst the few in the world that contains specific provisions onenvironmental protection. The directive principles of state policy and the fundamental duties chaptersexplicitly enunciate the national commitment to protect and improve the environment. Judicialinterpretation has strengthened this constitutional mandate.

In a case where the Supreme Court intervened to protect the forest wealth and wildlife from theravages of mining in and around Sariska sanctuary in the Alwar district of Rajasthan, the courtviewed its own constitutional role.

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Division of Legislative Authority

Under India’s federal system, governmental power is shared between the Union or ‘Central’Government and the 28 state governments. Part XI of the constitution governs the legislative andadministrative relation the Union and the States.

Parliament has the power to legislate for the whole country, while the State Legislatures areempowered to make laws for their respective states. Article 246 of the Constitution divides thesubject areas of legislation between the Union and the States. The Union List (List I) in the SeventhSchedule to the Constitution contains 97 subjects over which Parliament has exclusive powers tolegislate. These include defence, foreign affairs, atomic energy, interstate transportation, shipping,major ports, regulation of air traffic, regulation and development of oilfields, mines and mineraldevelopment and interstate rivers. The State Legislatures have exclusive power to legislate withrespect to 66 subjects in the State List (List II), such as public health and sanitation, agriculture,water supplies, irrigation and drainage and fisheries.

Under Concurrent List (List III), both Parliament and the State Legislature have overlappingand shared jurisdiction over 52 subject areas including forests, the protection of wildlife, minesand mineral development not covered in the Union List, population control and family planning,minor ports and factories.

The Forty – Second Amendment Act

Environmental protection and improvement were explicitly incorporated into the Constitutionby the Constitution (Forty – Second Amendment) Act of 1976. Article 48A was added to thedirective principles of state policy. Article 51A(g) in a new chapter entitled ‘Fundamental Duties’,imposes a similar responsibility on every citizen to protect and improve the natural environmentincluding forests, lakes, rivers and wild life, and to have compassion for living creatures.

The Directive Principles of State Policy

The directive principles are policy prescriptions that guide the government. Some of them arein the nature of economic rights that India could not guarantee when the Constitution was enacted,but that were expected to be realized in succeeding years. Although unenforceable by a court, thedirective principles are increasingly being cited by judges as complementary to the fundamentalrights. In several environmental cases the courts have been guided by the language of Article 48A.

Article 253 and Environmental Legislation

The Forty-Second Amendment also expanded the list of concurrent powers in the Constitution.The amendment introduced a new entry, ‘Population Control and Family Planning’, while ‘Forest’



and ‘Protection of Wild Animals and Birds’ were moved from the State List to the Concurrent List.Article 253 of the Constitution empowers Parliament to make laws implementing India’sinternational obligations as well as any decision made at an international conference, associationor other body. Parliament has used its power under Article 253 read with Entry 13 of the UnionList to enact the Air (Prevention and Control of Pollution)Act of 1981 and the Environment(Protection) Act of 1986.

Environmental Protection and Fundamental Rights

I. The Right to Wholesome Environment

Encouraged by an atmosphere of freedom and articulation in the aftermath of the Emergency,the Supreme Court entered one of its most creative periods. Specifically, the court fortified andexpanded the fundamental rights enshrined in Part III of the Constitution. In the process, theboundaries of the fundamental right to life and personal liberty guaranteed in Article 21 wereexpanded to include environmental provisions.

The Supreme Court strengthened Article 21 in two ways, First, it required laws affecting personalliberty to also pass the tests of Article 14 and Article 19 of the Constitution, thereby ensuring thatthe procedure depriving a person of his or her personal liberty be reasonable, fair and just. Second,the court recognized several unarticulated liberties that were implied by Article 21. It is by thissecond method that the Supreme Court interpreted the right to life and personal liberty to includethe right to a wholesome environment.

II. The Right to Livelihood

Another aspect of the right to life – the right to livelihood – can potentially check governmentactions with an environmental impact that threaten to dislocate poor people and disrupt their lifestyles.Conservative estimates place the figure of India’s project displaced people over the past four decadesat 16 million no more than a quarter of whom were satisfactorily rehabilitated. Deprive a person ofhis right to livelihood and you shall have deprived him of his life. The State may not by affirmativeaction, be compellable to provide adequate means of livelihood or work to the citizens.

III. The Right to Equality

Apart from Article 21, the right to equality guaranteed in Article 14 of the Constitution mayalso be infringed by government decisions that have an impact on the environment. Article 14,among other things, strikes at arbitrariness because an action that is arbitrary must necessarilyinvolve a negation of equality.

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Environmental Legislation

Although there are over two hundred central and state statutes that have some bearing onenvironmental protection, in most cases the environmental concern is incidental to law’s principalobject. For example, the Indian Fisheries Act of 1897 prohibited the destruction of fish by the useof explosives or by poisoning the water. Such scattered and piecemeal ‘environmental’ provisionsheld the field until the 1970s. Some of the important environmental legislations are as follows:

The Air (Prevention and Control of Pollution) Act of 1981

To implement the decisions taken at the United Nations Conference on the Human Environmentheld at Stockholm in June, 1972 Parliament enacted the nationwide Air Act under Article 253 ofthe Constitution.

The Water (Prevention and Control of Pollution) Act of 1974

The Water Act of 1974 was the culmination of over a decade of discussion and deliberationbetween the Centre and the States. The history and the preamble of the Water Act suggest thatonly state government can enact water pollution legislation.

The Water (Prevention and Control of Pollution) Cess Act of1977

The Water Cess Act was passed to help meet the expense of the Central and state water boards.The Act creates economic incentives for pollution control through a differential tax structure andrequires local authorities and certain designated industries to pay a cess for water consumption.

The Wild Life (Protection) Act of 1972

In 1972, Parliament enacted the Wild Life Act pursuant to the enabling resolutions of 11 statesunder Article 252(1) of the Constitution. The Wild Life Act provides for state wildlife advisoryboards, regulations for hunting wild animals and birds, establishment of sanctuaries and nationalparks, regulations for trade in wild animals, animal products and trophies, and judicially imposedpenalties for violating the Act.

The Public Liability Insurance Act of 1991

This law (PLIA) was enacted to provide immediate relief to the victims of an accident involvinga hazardous substance. To achieve this object, the Act imposes ‘no-fault’ liability upon the ownerof the hazardous substance and requires the owner to compensate the victims irrespective of anyneglect or default on her part.



Some of the other legislations to control the environmental pollutions are;

1. The National Environmental Tribunal Act of 1995.

2. The National Environment Appellate Authority Act of 1997.

3. The Mines and Minerals (Regulation and Development) Act of 1957.

4. The Indian Forest Act of 1927.

5. The Forest (Conservation) Act of 1980.

6. The Insecticides Act of 1968.

7. The Atomic Energy Act of 1962.

8. The Forest Act of 1948, and

9. The Environment (Protection) Act of 1986.

The Environment (Protection) Act, 1986

Concerns over the state of environment have grown the world over since the sixties. The declinein environmental quality has been evidenced by increasing pollution, loss of vegetal cover andbiological diversity, excessive concentrations of harmful chemicals in the ambient atmosphere andin food chains, growing risks of environmental accidents and threats to life support systems. Theworld community’s resolve to protect and enhance the environmental quality found expression inthe decisions taken at the United Nations Conference on the Human Environment held in Stockholmin 1972, Government of India participated in the conference and strongly voiced the environmentalconcerns. While several measures have been taken for environmental protection both before andafter the Conference the need for legislation further to implement the decisions of the Conferencehas become increasingly evident.

Although there are existing laws dealing directly and indirectly with several environmentalmatters, it is necessary to have a general legislation for environmental protection. Existing lawsgenerally focus on specific types of pollution or on specific categories of hazardous substances.Some major areas of environmental hazards are not covered. There also exist uncovered gaps inareas of major environmental hazards. There are inadequate linkages in handling matters of industrialand environmental safety. With control mechanisms in guard against slow and insidious build upregulatory agencies, there is need for an authority which can assume the lead role for studying,planning of implementing long term requirements of environmental safety and to give direction to,and co-ordinate a system of speedy and adequate response to emergency situations threatening theenvironment.

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Chapter I and Section of 2(a) of the Act define the term ‘environment’, includes water, air andland the inter-relationship which exists among and between water, air and land, and human beings,other living creatures, plants micro-organisms and property.

Chapter II and Section 3 of the Act explains about General Powers of the Central Government:

Subject to he provision of this Act, the Central Government shall have the power to take allsuch measures as it deems necessary or expedient for the purpose of protecting and improving thequality of the environment and preventing, controlling and abating environmental pollution.

Section 5 explains about Power to give directions – Central Government may, in exercise of itspowers and performance of its functions under this Act, issue directions in writing to any person,officer or any authority and such person, officer or authority shall be bound to comply with suchdirections.

Chapter III of the Act explains about Prevention, Control and Abatement of EnvironmentalPollution.

Chapter IV of the Act explains about Miscellaneous Provisions, that is Protection of actiontaken in good faith, Cognizance of offences, Power to make rules and such other provisions.

7.10 Let us sum up

The profession of business ethics has long needed highly practical resources that designedparticularly for leaders and managers, those people charged to ensure ethical practices in theirorganizations. Unfortunately, far too many resources about business ethics end up being designedprimarily for philosophers, academics and social critics. As a result, leaders and managers struggleto be really able to make use of the resources at all. Also, far too many resources about businessethics contain sensationalistic stories about businesses “gone bad” or prolonged preaching tobusinesses to “do the right thing”. These resources often explore simplistic ethical questions, suchas “should jane steal from company?” The real world of leaders and managers is often morecomplex than that. Therefore, ethics refers to a system of moral principles-a-sense of right andwrong and “goodness” and “Badness” of actions, and their motives and consequences. Businessethics refers to the application of ethics to business. To be more specific, business ethics is thestudy of good or bad, right and wrong and just or unjust actions of businessman. Business peopleshould not try to evolve their own principles to justify what is right and wrong. The society doesnot condone or permit such an expectation. The businessmen are bound by the some ethical principleswhich are applicable to other sections of the society.

Bob Dunn, President and CEO of San Francisco-based Business for Social Responsibility,



adds: “Balancing competing values and reconciling them is a basic purpose of an ethics managementprogram. Business people need more practical tools and information to understand their valuesand how to manage them.”

7.11 Glossary

CEO = Chief Executive Officer

Ethics = Code of Conduct and Morality

Constitution = Basic Law of the Land


1. What is Ethics?

2. What is the role of ethics in business?

3. Write a note on Code of Conduct.

4. Write a note on relationship between business and ethics.

5. What are the benefits of ethics management?


1. Sham Divan and Rosencranz, Environmental Protection: Law and Policy in India, Oxford.

2. Fransis Charuneelam, Business Ethics, TataMcGraw Hills.

3. K.D. Basava, Business Laws, Himalaya Publishing House.

4. B.S. Raman, Business Laws, Himalaya Publishing House.



1. What is Ethics?

2. What is the role of ethics in business?

3. Write a note on Code of Conduct.

4. Write a note on relationship between business and ethics.

5. What are the benefits of ethics management?

* * * * * *

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05 Business Laws and Ethics

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