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MB0051 –Legal aspects of Business
Q1.It is important for any person to know law as ignorance of law is no excuse. Modern
Indian law has been derived from some sources. Discuss the primary and secondary
sources of Indian law.
Ans. Primary sources of Indian Law
The primary sources of Indian Law are:
Judicial precedent (stare decisis)
Customs have played an important role in making law and therefore are also known as customary
laws. In the words of Keeton, customary law may be defined as “those rules of human action,
established by usage and regarded as legally binding by those to whom the rules are applicable,
which are adopted by the courts and applied as sources of law because they are generally
followed by the political society as a whole or by some part of it”. In simple words, it is a
generally observed course of conduct by people on a particular matter. When a particular course
of conduct is followed again and again, it becomes a custom.
Judicial precedent is another important source of laws. It is based on the principle that a rule of
law that has been settled by a series of decisions generally should be binding in court and
followed in similar cases. Only those rules that lay down some new rules or principles are treated
as judicial precedents. Thus, where there is a settled rule of law, it is the duty of the judges to
follow the same; they cannot substitute their opinion for the established rule of law. This is
known as the doctrine of „stare decisis‟. The literal meaning of this phrase is “standing by the
Statutory law or legislation is the main source of law. This law is created by legislation of bodies
such as the Parliament. It is called statute law because it is the writ of the state and is in written
form (jus scriptum). In India, the Constitution empowers the Parliament and state legislatures to
promulgate law for the guidance or conduct of people to whom the statute is made applicable,
either expressly or by implication. It is sometimes called enacted law because it is brought into
existence by passing acts in the legislative body.
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Many times, a point of issue between the parties to a dispute is not covered by any statute or
custom. In such cases, courts are required to apply the personal law of the parties. Thus, in
certain matters, we follow the personal laws of Hindus, Mohammedans and Christians.
Secondary sources of Indian law
The secondary sources of Indian Law are English Law and principles of Justice, Equity and
The chief sources of English law are:
Common law – This source consists of all those unwritten legal doctrines embodying customs
and traditions developed over centuries by the English courts.
Equity – The literal meaning of the term equity is natural justice. In its technical and narrower
sense, equity means a body of legal doctrines and rules emanating from the administrations of
justice, developed to enlarge, supplement or override a narrow rigid system of existing common
laws. However, like the common law, equity is also unwritten.
Statute – Statutes consist of laws passed by the legislature and is the written law. The
authority of the Parliament is supreme but is subject to limitations laid down by the Constitution.
The Parliament can pass laws as it pleases and can override its own previous acts and decisions
of courts. A statute, therefore, is superior to and can override rules of common law or equity.
Law merchant or Lex Mercatoria – It is a source of law based on customs and usage
prevalent among merchants and traders of the Middle Ages. Its evolution, like that of equity, can
be traced to the unsuitability of the common law for commercial transactions. The common law
was found to be unsatisfactory in dealing with disputes between merchants. The merchants,
therefore, developed certain rules based on customs and usages to govern their mercantile
transactions. These rules are known as Lex Mercatoria or the law merchant.
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Q2.We all enter into many contracts in a day knowingly or unknowingly. Explain the
definition of a valid contract. How are contracts classified?
Ans. Valid Contract – A contract that satisfy all the essential elements of a valid contract are
enforceable in a court of law.
According to Section 2 (h) of the Indian Contracts Act, 1872, a contract is an agreement
enforceable by law made between at least two parties as per which rights and obligations are
mutually created for both parties.
Section 2 (e) of the Contracts Act defines an agreement as every promise and every set of
promises forming a consideration for each other”. For an agreement, a promise becomes
Essentials of a contract
Section 10 of the Contracts Act provides that all agreements are contracts if they are made by
free consent of parties competent to contract for a lawful consideration with a lawful object
and are not expressly declared by law to be void.
Classification of contracts
Contracts may be classified as follows:
Classification according to formation: A contract may be made:
In writing (express)
By spoken words (implied)
Inferred from the conduct of parties or circumstances of the case.
Contracts are also classified as formal or informal on the basis of their formation. A formal
contract is one in which the law gives special effect because of formalities or special
language used in creating it.
Classification according to validity: Contracts may be classified according to their validity
Valid means that the contract possesses all the elements of a contract as mentioned in Section
10 of the Contracts Act. If one or more of the essential elements are missing, the contract is
voidable, void, illegal or non-enforceable. As per Section 2 (i), a voidable contract is one
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which may be repudiated (i.e., avoided) at the will of one or more parties, but not by others.
Q3. The parties to bailment have certain rights and duties. Discuss the
duties of both parties i.e. the bailor and bailee.
Ans. Duties of a bailor
To disclose known faults in goods (Section 150) – The bailor is bound to disclose
to the bailee, all faults in goods bailed, of which he/she is aware of. These faults
materially interfere with the use of them or expose the bailee to extraordinary risks.
To bear liability for breach of warranty as to title – The bailor is responsible to the
bailee for any loss that the bailee may sustain by reason that the bailor was not
entitled to make the bailment, or to receive goods or give directions respecting them
To bear expenses in case of gratuitous bailment – Regarding bailment under which
the bailee is to receive no remuneration, Section 158 provides that in the absence of
a contract to the contrary, the bailor must repay to the bailee all necessary expenses
incurred by him for the bailment.
To bear expenses in case of non-gratuitous bailment – In case of non-gratuitous
bailments, the bailor is responsible for bearing only extraordinary expenses.
Duties of a bailee
To take care of goods bailed (Section 151) – In all cases of bailment, the bailee is
bound to take care of the goods bailed to him as a man of ordinary prudence would,
under similar circumstances, take of his own goods of the same bulk, quality and
value as the goods bailed.
Not to make unauthorised use of goods (Section 154) – In case the bailee makes
unauthorised use of goods, i.e. uses them in a way not warranted by the terms of
bailment, he is liable to make a compensation to the bailor for any damages arising
to the goods from or during such use of them.
Not to mix bailor’s goods with his own (Sections 155-157) – If the bailee without
the consent of the bailor mixes the goods of the bailor with his own and the goods
cannot be separated or divided, the bailee shall bear the expenses of separation or
division and any damages arising from the mixture.
To return goods bailed without demand (Section 160) – It is the duty of the bailee
to return, or deliver according to the bailor‟s directions, the goods bailed without
demand, as soon as the time for which they were bailed has expired, or the purpose
for which they were bailed has been accomplished.
To return any accretion to goods bailed (Section 163) – In the absence of any
contract to the contrary, the bailee is bound to deliver to the bailor, or according to
his/her directions, any increase or profit that may have accrued from the goods
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Q4. A contract comprises of reciprocal promises. In a contract of sale who is an
unpaid seller? Discuss the remedies for breach of contract under Sale of Goods Act,
Ans. Unpaid Seller
A seller of goods is an unpaid seller when:
The entire price has not been paid or tendered.
A bill of exchange or other negotiable instrument has been received as conditional
payment and the condition on which it was received has not been fulfilled by
reason of the dishonour of the instrument or otherwise.
Remedies for Breach of a Contract
the seller has the following remedies against the buyer personally:
Suit for price (Section 55)
Damages for non-acceptance of goods (Section 56), and
Suit for interest (Section 56).
Suit for price (Section 55)
Section 55 states that where under a contract of sale the property in the goods has passed to
the buyer and the buyer wrongfully neglects or refuses to pay the price, the seller can sue
the buyer for the price of the goods. Where the property in goods has not passed to the
buyer, as a rule, the seller cannot file a suit for the price; his only remedy is to claim
Suit for damages for non-acceptance
According to Section 56, where the buyer wrongfully neglects or refuses to accept and pay
for the goods, the seller may sue him for damages for non-acceptance. Where the property
in the goods has not passed to the buyer and the price was not payable without passing of
Suit for interest
Section 61 claims that when under a contract of sale, the seller tenders the goods to the
buyer and the buyer wrongfully refuses or neglects to accept and pay the price, the seller
has a further right to claim interest on the amount of the price.
Buyer’s remedies against seller
The buyer has the following rights against the seller for breach of contract:
Damages for non-delivery (Section 57)
Right of recovery of the price
Specific performance (Section 58)
Suit for breach of condition
Suit for breach of warranty (Section 59)
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Anticipatory breach (Section 60)
Recovery of interest (Section 61)
Q5. The Companies Act, 1956 deals with the formation and transaction of
business of a company. Discuss the features of a company. Also explain the process
of formation of a company.
Ans. key features of a company are
An independent corporate existence separate from its members
Perpetual succession as a juristic person
Ability to transfer ownership by way of shares
Right to property, and
Right to seek legal relief in its own name
Formation of a company may be divided into three parts:
Promotion denotes the preliminary steps undertaken for the purpose of registration and
floatation of the company. The persons who assume the task of promotion are called
promoters. The promoter may be an individual, syndicate, association, partnership or
company. The term „promoter‟ has not been defined under the Act, although the term is
used expressly in Sections 62, 69, 76, 478 and 519.
Before the formation of a company, preliminary decisions regarding the type of
company, share capital, etc. have to be decided by the promoters, who do the work
incidental to the formation of a company. According to Section 12, seven or more
persons (two or more for a private limited company) associated for a lawful purpose
may form an incorporated company, with or without limited liability. They subscribe
their names to Memorandum of Association (MoA) and comply with other formalities
for registration. A company so formed may be limited by shares or guarantee or may be
an unlimited company.
When a company has been registered and has received its COI, it is ready for
„floatation‟, that is to say, it can go ahead with raising capital that is needed to
commence and carry on its business. Section 70 makes it obligatory for every public
company to take either of the following two steps:
Issue a prospectus in case the public is to be invited to subscribe to its capital, or
Submit a „statement in lieu of prospectus‟ in case the capital has been arranged
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privately. It must be done at least three days before allotment.
Q6. With Information Technology Act, 2000, India has a set of cyber laws to
provide legal infrastructure for e commerce. Discuss the objectives and
limitations of this Act.
Ans. Objectives of the Information Technology Act
The objectives of the Act as reflected in the preamble to the Act are:
To provide legal recognition for transactions carried out by means of
electronic data interchange and other means of electronic communication,
commonly referred to as “electronic commerce”, which involves the use
of alternatives to paper-based methods of communication and storage of
To facilitate electronic filing of documents with the government agencies
To facilitate electronic storage of data in place of paper-based methods of
storage of data
To amend the Indian Penal Code, the Indian Evidence Act, 1872, the
Banker‟s Books Evidence Act, 1891, and the Reserve Bank of India Act,
To provide for matters connected therewith or incidental thereto.
Limitations of the Information Technology Act, 2000
The Act does not cover the following aspects of e-commerce:
The Act deals only with the commercial and criminal areas of law as
affected by information technology and does not deal with certain other
issues, such as intellectual property rights, (i.e., copyright, trademarks
and patents). Thus, infringement of copyright on e-commerce will be governed by
the Copyright Act, 1957.
The Act does not address itself to internet related issues such as domain
names and cyber squatting. There have arisen many disputes about
domain names globally, including infringement, concurrent claims and
cyber squatting. In the USA, these issues are tackled by the US Anti-
Cyber Squatting Consumer Protection Act, 1999. This Act is a powerful
deterrent to cyber squatting, as it provides for the levy of damages up to
US$300,000 per mark against the guilty parties. In India, however, cyber
squatting can be opposed by relying on the provisions of the Trade Marks
The Act is not applicable to negotiable instruments, power of attorney,
trusts, testamentary dispositions (wills), contracts for sale or conveyance
of immovable property or any interest in such property. The non-
applicability of the Act to negotiable instruments would result in e-
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commerce in India being limited to payment systems that are non-
traditional or credit card-based. The banks cannot extend their services to
the online medium of payments.
The IT Act, 2000, is silent as regards taxation of goods and services
traded through e-commerce.
The IT Act makes no provision for jurisdictional aspects of electronic
contracts, i.e., jurisdiction of courts and tax authorities.
No provision has been made for payment of stamp duty on electronic