CORE COURSE XIV

LEGAL ASPECTS OF BUSINESS P16MBA14

Objectives: To provide a basic understanding of various statutory provisions that

confronts business managers while taking decisions.

Unit I
The Indian Contract Act, 1872
Introduction – Definition of contract – agreement – offer – acceptance – consideration capacity
to contract – contingent contract – Quasi contract – performance – Discharge – Remedies to
breach of contract.

Unit II
Partnership- essentials of partnership, Rights and duties of partner, types of partners.
Dissolution of partnership.
Sale of Goods Act: Sale and Agreement to sell, Conditions and Warrantees, Transfer of
property, Finder of goods, Performance of contract of sale, Rights of an unpaid seller.

Unit III
Contract of Agency- Essentials of Contract of Agency – Creation of Agency – Kinds of Agents
– Comparison Between an Agent and Servant – Comparison Between an Agent and Independent
Contractor – Relationship of Principal and Agent – Duties of an Agent – Rights of an Agent –
Duties and Rights of the Principal – Delegation of authority by an Agent – Sub Agent –
Position of Principal and Agent in relation to third Parties – Termination of Agency.

Unit IV
Company – Formation – Memorandum – Articles – Prospective Shares – debentures –
Directors – appointment – Powers and duties. Meetings – Proceedings – Management –
Accounts – audit – oppression & mismanagement – winding up.

Unit V
The Consumer Protection Act, 1986; Object – Rights of Consumers –Important Terms-
Consumer Complaint - Consumer Protection Councils – Redressal Machinery – District Forum
– State Commission - National Commission. Cyber Law -Need for Cyber laws – Cyber law In
India – Information Technology Act – 2000 – Defining Cyber Crime – Types of Cyber Crimes –
Preventing of Computer Crime.

Recommended Text books

1. Business legislation for management M.C. Kuchal and Deepa Prakash, Vikas Publish House
PVT Ltd.,
2. Legal aspects of Business, Ravinder kumar, Cengage learning.
3. Business law, Sathish B, Matur Tata Mcgraw Hill.
4. Business law, D. Chandra Bose, PHI learning PVT Ltd.,
5. Legal aspects of Business by Akhileshwar Pathak. Tata Mcgraw Hill. 6. Legal aspects of
Business by kubendran.

Suggested Readings
1. Law of Business contracts in India by Sairam Bhat, Sage, www. sagepublications.com
2. Company law, Ashok K Bagrial Vikas publishing House.
3. Business Law, chandra Bose, PHI learning India PVT Ltd.
Unit – 1
Legal Aspects of Business: Law of Contract

Learning Objectives
Legal Aspects
After completion of the unit, you should be able to: of Business:
Law of
 Explain the meaning, essentials and classification of contracts.
Contract
 Describe the eligibility for capacity to contract, provide free consent and
legality of object and consideration.
 Know the criteria for performance and discharge of contracts.
 Assess the remedial actions for breach of contract.
 Also understand the various types of special contracts like Indemnity,
Guarantee and Agency.

Structure

1.1 Introduction
1.2 Meaning & Essentials of Contract
1.3 Classification of Contracts
1.4 Proposal & Acceptance
1.5 Capacity to Contract
1.6 Free Consent
1.7 Legality of Object and Consideration
1.8 Performance and Discharge of Contracts
1.9 Remedies for Breach of Contract
1.10 Special Contracts – Indemnity, Guarantee and Agency
1.11 Let’s Sum-up
1.12 Key Terms
1.13 Self-Assessment Questions
1.14 Further Readings
1.15 Model Questions

Odisha State Open University Page 1

1.1 Introduction

Each one of us enter into varied contracts in our routine life knowingly or
unknowingly. Each contract creates certain rights and duties in an express or
implied manner. The law which provides the guidelines and principles relating
to the contractual relationships is The Indian Contract Act, 1872. The act came
into force on 1st September, 1872. The act was passed by British India and is Legal Aspects
based on the principles of English Common Law. It is applicable to all states of Business:
of India with an exception of Jammu & Kashmir. The Act deals with the Law of
formation of a contract, its performance, breach of contract and its remedies. Contract
The significant components of the act are discussed here under.

1.2 Meaning & Essentials of Contract

According to Section 2 (h), “Contract is an agreement enforceable by law”.

Agreement means a promise. It is created when a person makes an offer to
another person and other accepts it for consideration.

Agreement = Offer + Acceptance of Offer

All agreements are not contract, only those agreements which create legal right
and are enforceable by law are contracts.

The following are the essential elements of a valid contract:

1. Plurality of Parties: There must be at least two parties in a contract.

Generally they are called promisor and promisee.

2. Offer and acceptance (Agreement): One party should make offer and
other should accept it according to the conditions of offer.

3. Intention to create legal relation (Enforceable by law): Both the parties

should have an intention to create a legal relationship.

4. Contractual Capacity: Parties under contracts should be major and of

sound mind. They should not be disqualified from contracts by law.

5. Consent: It means parties should agree on the same thing and in the
same sense.

6. Free Consent: Consent is free if it is not due to coercion (force), undue

influence, fraud, misrepresentation and mistake.

7. Consideration: It means something in return whose value is in terms of

money.

8. Lawful Object: Every contract must have lawful object otherwise it is

called void ab initio. It should not be fraudulent in nature or declared
against public policy by the court.

Odisha State Open University Page 2

 9. Certainty of Meaning: Every word written in the contract should have a
certain meaning. No ambiguity should be there.
10. Possibility to Perform: Agreement should be physically and legally
possible to perform.

11. Agreement not declared void: Agreements which fulfill the conditions
Legal Aspects
of lawful contract can also be declared void by law.
of Business:
12. Compliance of legal formalities: All the legal formalities should be Law of
fulfilled. Contract

Any agreement to be enforceable by law must have above features otherwise it

will not be enforceable by law.

1.3 Classification of Contracts

Contracts may be classified on the following basis:

I According To Enforceability/Legality:

1) Valid Agreement (Contract): A valid agreement is a contract

enforceable by law. It has all essentials of contract under sec.10.

2) Void Agreement: Agreement not enforceable by law is called void.

[Sec.2 (g)]. It lacks essentials of valid agreement. Such agreements are
void ab initio (void from the beginning) and no restitution is permitted.
It means any consideration given to each other by the parties, cannot be
restored.

3) Void Contract: When a contract is valid at the time of its making but
later on due to change in circumstances or in law, it becomes
unenforceable, it is a void contract (not valid or legal). Under void
contracts restitution and the payment for part performance is allowed.

4) Voidable Contract: An agreement which is enforceable by law at the

option of one party & not at the option of other party. It means an
agreement which is voidable at the option of aggrieved party.
Aggrieved party is the party whose consent has been obtained by
coercion, undue influence, fraud or misrepresentation. Such contract
will remain valid till it is declared invalid by the aggrieved party.
Restitution or compensation can be claimed, for loss on non-fulfillment
of the contract.

5) Illegal Agreement: Agreement is illegal if it is not approved by law,

opposed to public policy, criminal or immoral in nature. Such
agreements are void ab initio and any collateral agreement will also be
void.
6. Unenforceable Contract: If a contract cannot be enforced due to some
technical defects like incomplete legal formalities, stamp, signature etc.

Odisha State Open University Page 3

 it is called unenforceable contract. As soon as technical defect is
removed, contract becomes enforceable.

II. According to Mode of Formation

1. Express Contract: Contract made in written or spoken words is express

contract. It may be on letters, telephone, e-mail etc.
Legal Aspects
2. Implied Contract: Contract made other than words is implied. It arises of Business:
from acts & conduct of the parties or by their circumstances. E.g. A Law of
calls a taxi on telephone. There is implied contract to pay if the taxi Contract
comes.

3. Quasi Contract: It is a contract imposed by the law on the parties &

gives rise to obligations similar to a valid contract. E.g. A gives B
(mad) some products. As B is mad or lunatic he cannot contract but law
can create a contract between A & B on the principle of equity in
which A can get money from B’s property.

III. According to Extent of Execution

1. Executed Contract: A contract in which all the parties have performed

their obligations, is an executed contract. E.g. X sells his car to Y for 1
lakh. X gives the car & Y makes the payment. It is executed contract.

2. Executory Contract: A contract in which the parties still have to

perform their obligations, is called executory contract.

3. Bilateral Contract: It is one in which both the parties exchange a

promise to each other. One party promises to perform some act in the
future in exchange for other party’s promise to perform some act. It is
similar to executory contract. Each party is both promisor & promisee.

4. Unilateral Contract: A contract in which one party promises to the

other to do something if he performs his desired work. E.g. A promises
to pay Rs.100 by advertisement to anyone who finds his lost horse.
Anyone can search his horse & bind A for payment. But A cannot bind
any one to search his horse.

1.4 Proposal & Acceptance

Proposal is an expression of willingness by one person to another to enter into

an agreement with a view to obtain assent of the other. Person making
proposal/offer is called ‘proposer’ or ‘offerer’. On acceptance, the person
making proposal is called ‘promisor’ & person accepting the proposal is called

the ‘promisee’ or ‘acceptor’.

Odisha State Open University Page 4

Acc. To Sec 2 (b), “When the person to whom the proposal is made
communicates his assent, the proposal is said to be accepted. It is a
communication of his intention to be bound by the terms of the offer.”

Following are not proposals: -

i) Intention to put a proposal: - It is the declaration by a person that he Legal Aspects

intends to offer something in future. It is not made to obtain assent of the
of Business:
other. E.g. advertisement for auction sale or sale of goods.
Law of
ii) Invitation to put a proposal: - It is made to receive a proposal from Contract
others. E.g. Menu Card of restaurant is an invitation to put an offer.
Time Table of railways/Roadways/Airlines is an invitation to put an
offer.

1.5 Capacity to Contract

According to Section 11, “Every person is competent to contract who is of the

age of majority, who is of sound mind & is not disqualified from contracting
by any law”.
The following persons do not have the capacity to contract:
 Minors
 Persons of Unsound Mind.
 Persons disqualified from contracting by any law

A. Minor
According to Sec. 3, “Minor is a person who has not completed 18 years of
age.”

But in the following cases, he attains majority when he completes 21 years:

* When guardians has been appointed for minor under Guardians & Wards
Act 1890.

* When superintendence of minor’s property is under court of wards.

Law relating to minor’s Agreements:

1. Agreement with minor is void ab initio.

2. No Ratification after attaining majority: Ratification means approving
a past contract. Minor’s agreements are void ab initio so they cannot be
ratified.
3. Minor can be a beneficiary or can take benefit out of a contract. He
cannot be asked to return or mortgage his property.
4. A minor can plead minority i.e. even if he does something wrong he
cannot be held responsible for it, in the court. E.g. A (minor)
fraudulently represent himself as a major & ask B to lend Rs.1000. B
lends the amount but cannot sue A for recovery.

Odisha State Open University Page 5

 5. Parents/ Guardians can contract on behalf of minor with an exception
that they cannot buy & sell fixed property on his behalf.
6. Minor cannot enter into a contract of partnership of firm but can be a
partner in profits.
7. Minor can be an agent and can bind the principal for his acts without
being personally liable.
Legal Aspects
8. Minor’s parents are not liable for contracts made by minor with an
of Business:
exception that minor act as agent of his parents.
Law of
9. Under negotiable instrument Act, minor can write, accept, endorse bills Contract
of exchange but is not liable if they are dishonoured.
10. Minor can be a shareholder for fully paid up shares.
11. For criminal act, minor is fully liable for punishment.
12. Marriage contract by minor is void even after attaining majority.

B. Persons of Unsound Mind

According to Sec. 12, a person has sound mind if:

 He is capable of understanding the contract at the time of making it.

 He is capable of making rational judgment i.e. effect of contract on his
interests.

Types of Unsound Mind Persons

Following are the persons who are considered as persons of unsound mind
under the act:

1. Idiot: He is a person who has lost his mental ability to understand even
ordinary things. It is permanent.
2. Lunatic: He is a person who is mentally affected due to strain or
personal shocks. It is temporary & can be cured. He can make valid
contract during lucid intervals.
3. Drunken or intoxicated person.
4. Hypnotized person.
5. Mental decay- There may be mental decay due to old age or poor
health and such person is not capable of making a valid contract.

C. Persons Disqualified by Law

The following persons are disqualified by law from entering into a contract:

1. Foreign Ambassadors: They have full capacity to contract in India but

they cannot be sued in our courts unless central government permits.

Odisha State Open University Page 6

 2. Alien Enemy: It means a foreign citizen living in India. Contract with
alien friend is valid subject to some restrictions. When alien is declared
alien enemy (declaration of war) he cannot contract.
3. Companies: Company can only contract through his human agents.
Company’s contractual capacity is determined by “Object Clause” of
its memorandum of association. Contract made outside its scope is
void. Legal Aspects
4. Married Women: She can enter into a contract but her personal of Business:
property (Streedhan) can be made liable but not property of her Law of
husband. A husband is liable for contract made by his wife for supply Contract
of necessaries of life. In this case, she is an agent of her husband by
necessity.
5. Convicts: While imprisonment, convict cannot enter into contract &
cannot sue on contracts made before conviction. If he gets a license i.e.
ticket of leave he can lawfully contract. After imprisonment he can
enter into contract.
6. Insolvent: Person declared insolvent cannot contract. His official
receiver appointed by court can enter into contracts, sue & be sued on
his behalf.

1.6 Free Consent

According to Sec.13, ‘When two or more persons agree on same thing in the
same sense, they are said to consent.’

‘Consensus Ad Idem’ means people agree on the same thing in the same sense
at the same time.

Consent is considered free if it is not caused by the following factors:

(i) Coercion
(ii) Undue Influence
(iii) Fraud
(iv) Misrepresentation
(v) Mistake

I. Coercion (Sec. 15)

It means threatening or use of physical force against a person to compel him to

enter into a contract. E.g. Alia Slapped Bhim & dislocated some of his teeth &
threatens to repeat the same if Bhim does not lend him Rs. 30,000. The
contract is caused by coercion.

Essential Elements:-
1) Committing or threatening to commit any act forbidden by Indian Penal
Code;- E.g. murder, theft, physical compulsion.
2) Threat of suicide is coercion.

Odisha State Open University Page 7

3) Unlawful detaining of any property or unlawful threatening to detain any
property.
4) The intention must be to compel the other person to enter into a contract.
E.g. A beats B to take revenge for his insult. This is not coercion.
5) Coercion may be from the party or from any other person/stranger.

Effects:
1) Contract becomes voidable, at the option of the party whose consent is
Legal Aspects
taken by coercion. of Business:
2) Restitution: Aggrieved party can restore the benefits given. Law of
II. Undue Influence (Sec. 16) Contract

It is a kind of moral coercion. When relation between parties are such that one
party is in a position to dominate the will of the other & use that position to
obtain advantage over the other. This is undue influence

Essential Elements: -
1) There must be close relation between the parties.
2) One party should be in the position to dominate the will. It includes
following situations: -
a. Real authority over the other like master & servant, doctor & patient.
b. When relation of trust & confidence exist between parties. E.g. father &
son, husband & wife.
c. Undue influence can be used against the person whose mental capacity is
affected by old age, illness etc.
3) The intention should be to take undue advantage.
4) Misuse of position to take advantage.

Effects:
(1) Contract is voidable at the option of aggrieved party.
(2) Benefit received is restored to the aggrieved party.

III. Fraud (Sec. 17)

Fraud means willful misrepresentation or concealment of material facts. The

intention is to deceive (cheat) the other party & induce him to enter into an
agreement. It include the following acts:
i) Suggestion of that which is not true i.e. given by person who does not
believe it to be true.
ii) Concealment of fact by one who has knowledge of it.
iii) Promise made without any intention of performing it.
iv) Such act which law declares to be fraudulent.

Essential Elements:-
1) Fraud may be done by a party to the contract or his agent.
2) There must be representation which is false. E.g. A intends to deceive B &
falsely represents that the car which he offers for sale is imported but
actually it is Indian.
3) False representation must be of material fact, not an opinion.
4) A promise made without intention to perform is a fraud.

Odisha State Open University Page 8

5) The intention must be to induce the other party to act upon false
representation.
6) The other party must have been relied upon the statement & must have been
deceived & suffered some loss.

Effects:
(1) Aggrieved party has the right to rescind (declare invalid) the contract
Legal Aspects
(voidable).
of Business:
(2) Sue for damages or loss suffered.
(3) Benefit received is restored. Law of
(4) Aggrieved party can insist for performance & ask to put him in a position in Contract
which he would have been if representation made had been true.

IV. Misrepresentation (Sec. 18)

Any innocent or unintentional false statement of fact made by one party to the
other during negotiation of contract is called misrepresentation. It includes:

1) When a person positively says that a fact is true when his information does
not justify it, although he believes to be true.
2) When there is breach of duty by a person (no intention to deceive) which
brings advantage to him & loss to the other.

Essential Elements:
1) Misrepresentation must be of fact & not mere opinion.
2) It must be made to induce other party to contract.
3) Intention should not be to deceive the other party.

Effects:
1) Contract is voidable at the option of aggrieved party.
2) Aggrieved party may insist on performance which will put him in the
position if the representation made had been true.
3) Benefits may be restored.
4) Claim for damages except in following cases: -
a. When aggrieved party has means of discovering the truth.
b. If aggrieved party gave consent in ignorance of misrepresentation
c. If party has not rescinded the contract within reasonable time.

V. Mistake (Sec. 20, 21 & 22)

Mistake means a wrong belief or misunderstanding about something.

Generally, mistake does not affect the validity of the contract. According to
Sec.20, where both the parties are under a mistake, the agreement is void.

Essential Elements:
(1) Both parties can be at mistake (bilateral mistake).
(2) Mistake can be of two types: Mistake of fact and Mistake of law. Mistake
of fact is related to the subject matter of the contract. It may be a bilateral
or unilateral mistake. If there is mistake of law, the contract is valid

Odisha State Open University Page 9

 because everyone is assumed to have knowledge of it. & ignorance of
law is no excuse.

Effects:

1) Acc. To Sec. 22., Contract is not voidable due to unilateral mistake of facts.
2) Agreement made on bilateral mistake is void. Legal Aspects
3) Mistake as to foreign law is treated as a mistake of fact & is excusable. of Business:
Law of
Contract
1.7 Legality of Object and Consideration

The word object is used distinctly to mean ‘purpose or design’ of the

agreement. The word ‘consideration’ is different from the object.
Consideration means the benefit received or suffered under an agreement.

Sec.10 implies that an agreement enforceable by law must be for a lawful

consideration and with a lawful object. Every agreement of which the object or
consideration is unlawful is void.

Unlawful Consideration or object:

Object or consideration is considered as unlawful in following cases:

1) If the act is forbidden by law. E.g. X promised Y to pay Rs.3 lakh for
murder of Z. It is unlawful.
2) If it defeats the provisions of any law: The act may not be forbidden by law.
But, if it is permitted, it will defeat the provisions of any law. E.g. P & Q
married under Mohammedan law but agreed before marriage that wife
would be allowed to live with her parents after marriage. This agreement is
void because it defeats the provisions of Mohammedan law.
3) If it is Fraudulent in nature.
4) If it involves injury to the person or property of another.
5) If Court considers it immoral: E.g. An agreement between husband and
wife for future separation is immoral.
6) If court considers it opposed to public policy: It means no person can
lawfully do something which can cause injury to public welfare. E.g.
agreement to sell seat in medical or engineering college, agreement for
getting votes in election for consideration, agreement to get a public title
like ‘Bharat Ratna’ for consideration.
7) Agreement interfering with parental rights & duties.
8) Agreements which restrict personal liberty.
9) Agreements which restricts marriage or interfere with marital duties.
10) Agreements creating monopoly.
11) Agreements not to bid in auction sale.

Odisha State Open University Page 10

1.8 Performance and Discharge of Contracts
Performance of contract means fulfillment of the terms of the contract by the
parties under the contract within the time & in the manner prescribed.
Modes of Performance
Performance may be in two ways: Legal Aspects
of Business:
a. Actual Performance i.e. by performing promises: when both parties have
Law of
fulfilled their obligations under the contract within the time & manner
prescribed. Contract
b. Attempted Performance i.e. offer or tender to perform: Promisor offers to
perform his obligations under the contract it is called tender. It is also called
attempted performance. When a promisor offers delivery of goods to
promisee, it is tender of goods. An offer to make payment is called tender
of money.

Essentials of a Valid Tender/Offer (Sec. 38)

1) It must be unconditional.
2) It must be an offer to perform in full.
3) It must be made at proper time & place.
4) Reasonable opportunity to inspect & satisfy should be given to the
promisee (applicable to tender of goods).
5) It must be in legal tender money: It means current Indian currency
notes or coins.

Discharge of Contracts

A contract is discharged when the obligation created between parties come to

an end. There are several methods of discharging the contracts namely:
1) By performance of promise
2) By mutual agreement
3) By lapse of time
4) By operation of law
5) By impossibility of performance
6) By breach of contract

I. Discharge by Performance of Promise

When parties perform their promises, then the contract comes to an end or is
discharged. It can be performed in two ways – by actual performance or by
attempted performance.

II. Discharge by Mutual Agreement

Methods of discharge of an existing contract by a fresh agreement by mutual

consent are:

Odisha State Open University Page 11

 1) Novation: It means substitution of a new contract in place of the
existing contract. It may be done in two ways:-
a. New contract with new terms with same parties.
b. New contract on same terms with one party same & one new
party.

2) Alteration: It means change in one or more terms of the contract with

the consent of all parties. A valid alteration discharges the original Legal Aspects
contract & a contract with new terms is created. of Business:
Law of
3) Rescission: It means cancellation of contract. Cancellation may be by Contract
mutual agreement of both parties or by aggrieved party if free consent
is not given.

4) Remission: It means acceptance of a lesser performance in discharge

of a whole promise made.

5) Waiver: It means intentional withdrawal of rights. When a party

entitled to claim performance releases the other party from his
obligation to perform it, it is called waiver.

6) Merger: - It means merger of two or more rights into one contract.

When an existing inferior right of party merges into newly acquired
superior right by the same party, it is merger of rights. In such case,
inferior right automatically stands discharged. E.g. A person holding a
property under a lease, buys the property in his name. His rights as a
lessee are merged into the rights of ownership.

III. Discharge by Lapse of Time

When time is fixed for the contract & a party does not perform it within that
time, the contract is discharged by lapse of time.

IV. Discharge by Operation of Law

The contract discharges by operation of law in the following cases:

1) Merger: Inferior right is discharged & not required to be enforced.

2) Insolvency: When court declares insolvent, the person is discharged
from all obligations of any contract & they are transferred to his
official receiver.
3) Death: If contract involves use of personal skills of promisor then on
his death the contract is discharged. In other cases, the obligation is
transferred to legal representatives.
4) Unauthorized material alteration in the terms of the contract, without
the knowledge & consent of other party, the contract may be
discharged by other party (voidable).
5) Where evidence of contract is lost, the contract is discharged. E.g.
document of contract is lost or destroyed & there is no other evidence
available.

Odisha State Open University Page 12

V. Discharge by Impossibility of Performance

Where contract is impossible to perform, the contract is void. According to

Sec. 56, impossibility may be of two types:

1) Existing Impossibility: It refers to the impossibility at the time of

agreement.
2) Subsequent or Supervening Impossibility: The contract becomes Legal Aspects
void when the act becomes impossible later on, in the following of Business:
conditions: Law of
a. Destruction of subject matter. Contract
b. Non-existence of a state of things necessary for performance.
E.g. P hired a room from Q for 1 day for watching King’s
procession. The procession was cancelled, contract became
impossible.
c. Change in circumstances.
d. Death or personal incapacity of the promisor.
e. Change in law
f. Outbreak of war. (Alien Enemy contract).
g. Order of the court (Court Stay)

Effects of Supervening Impossibility:

1) Contract becomes void.
2) Compensation for loss if the act known to be impossible to any one of
the parties.
3) Restitution of benefits.

VI. Discharge by Breach of Contract

It means non-fulfillment of the promise made by any of the parties to a

contract. There are two types of breach of contract:

1. Actual Breach: It takes place when a party to a contract refuses or fails

to perform his obligation when it is due.
Effects: Claim for damages & can sue in the court.

2. Anticipatory Breach: When a party disables himself or declares that it

will not perform the contract prior to the date of performance. It is also
called anticipatory or constructive breach of contract.

Effects: Promisee is excused from further performance and he can put

an end to the contract & sue other party for default. Alternatively, he
may wait till the due date of performance of contract & then avail legal
remedies against other party.

1.9 Remedies for Breach of Contract

Odisha State Open University Page 13

A remedy is the means given by the law for enforcement of right. In case of
breach of contract, the injured party or aggrieved party has one or more of the
following remedies:

I. Rescission of the Contract

Rescission means cancellation or putting an end to the contract. When
promisor makes a breach of contract, the promisee can rescind the contract.
Legal Aspects
Court may grant rescission when contract is voidable or unlawful. Court may
of Business:
refuse rescission in the following cases:
Law of
a. Where the aggrieved party has expressly or impliedly Contract
ratified the contract.
b. When there is no fault of both parties & situation arises due
to change in circumstances then the parties cannot restore
their original position.
c. When third parties has, during the subsistence of contract,
acquired rights in good faith. E.g. X fraudulent bought a
diamond bracelet from Y & pledged it to P who kept it for
value & without any notice of fraud. Y cannot rescind the
contract.

II. Suit for Damages

Damages may be of four types:

1. Ordinary or natural damages: It is the direct loss suffered by the aggrieved

party.

2. Special Damages: They include indirect loss suffered by aggrieved party.

They arise due to special circumstances. If special loss can be incurred on
breach of contract, it should be communicated to the other party, otherwise
damages will not be given.

3. Exemplary Damages: It involves very heavy amount. It happens in the

following cases:

a) Breach of contract to marry: Amount will depend upon injury to

lady’s feeling & their family reputation.
b) Dishonor of customer’s cheque by the bank without any proper
reason. Amount will depend upon loss to goodwill of customer.

4. Nominal Damages: The amount is very small like Rs. 5 or 10. It is given
when party has proved breach of contract. It is given to recognize the right of
party to claim damages.

Liquidated Damages & Penalty

The Parties decide in advance, the amount to be paid as damages in case of

breach of contract. Such amount may be

Odisha State Open University Page 14

 a) Liquidated Damages: It represents the amount of probable loss that
might result due to breach of contract. This amount is to compensate
for breach.

b) Penalty: When amount for damages decided in the contract is very

high as compared to likely damages in case of breach, it is called
penalty. Legal Aspects
of Business:
III. Quantum Meruit Law of
Quantum Meruit means as much as earned. In certain situations, the party can Contract
claim payment of such amount which he has earned. This right is available in
addition to the right of damages.

The claim for quantum meruit arises only when original contract is discharged.
A party who is not in default can only claim for quantum meruit. Claim can be
made only if contract is divisible and express or implied evidence to pay for
work is shown.
IV. Specific Performance of Contract

In case where damages are not sufficient remedy, court may ask for specific
performance as per the terms of contract. It may be done in the following
cases:

1. Where there exist no standard for finding actual damage by non-

performance.

2. Where probable amount of compensation in money cannot be

received for non-performance.

Specific performance will not be granted in cases where court cannot supervise
the performance, where damages are adequate remedy, subject matter does not
exist and where contract contains ambiguous terms.

V. Suit for Injunction

It means order of court to a party to do or not to do any particular thing. In

case of contract, injunction is the order of a court prohibiting a party from
doing a particular thing.

1.10 Special Contracts

The following contracts are special type of contracts:

 Contract of Indemnity (Sec. 124)

 Contract of Guarantee (Sec. 125)
 Contract of Agency (Sec. 126)

Odisha State Open University Page 15

Contract of Indemnity (Sec. 124)
According to Sec. 124, a contract of indemnity is ‘A contract by which one
party promises to save the other from the loss caused to him by the conduct of
the promisor himself or by the conduct of any other person.’

The person who promises to indemnify or make good the loss is called
indemnifier. The promisee or whose loss is made good is called the Legal Aspects
indemnified or indemnity holder. of Business:
Law of
Essential Elements:
Contract
1) Include all essential elements of valid contract.
2) It may be express or implied.
3) Loss may be caused by promisor or any other person or accidents.
4) The promisee has the right to recover from the promisor the actual cost
of indemnity contract.

Rights of indemnity- holder or indemnified

He has following rights against the indemnifier i.e. Promisor:

1) Right to recover damages: All damages he may be supposed to pay in

any suit to which the indemnity applies.
2) Recovery of cost: All costs which he may be made to pay in defending
the suit of indemnity.
3) Recovery of all sums paid: All sums he has paid in terms of any
compromise of any suit.

Rights of Indemnifier

1) Right of subrogation: After paying the amount of claim, indemnifier

gets all the rights of indemnified against a third party. i.e. to sue & claim
for damages & all sums paid against third party.

2) Right to refuse claim or indemnity: If loss caused is out of the scope of

the contract or indemnified has not acted prudently, then indemnifier can
refuse claim.

Contract of Guarantee (Sec. 124)

A contract of guarantee is a contract to perform the promise or discharge the

liability of a third person in case of his default.
The person who gives the guarantee is called surety. The person against which
the guarantee is given is called the principal debtor. The person to whom the
guarantee is given is called the creditor.
A guarantee may be given not only for a debt, but also where party wants to
buy goods on credit & also for good conduct of another person (Fidelity
Guarantee).

Essential Elements:
Odisha State Open University Page 16
 1) It may be written or oral.
2) 3 contracts are there:
 Between creditor & debtor
 Between surety & creditor
 Implied contract between surety & debtor.
3) Capacity to contract: The principal debtor may be a minor or a person
incapable of entering into a contract. In such cases, surety shall be
Legal Aspects
regarded as principal debtor & will be liable to pay.
4) Consideration: The consideration received by the principal debtor must of Business:
be sufficient consideration to the surety for giving guarantee. Law of
5) Surety is personally liable for default of principal debtor. Contract
6) Guarantee is given on the request of principal debtor (implied or
express).
7) Guarantee contract is not a contract of ‘Uberrimae Fidei’: A contract
uberrimae fidei is one which imposes duty on creditor to disclose all
material facts to the surety. A creditor is required to disclose only those
material facts, which he knows & are likely to affect the degree of
responsibility of surety.
8) Surety’s liability arises from the date the principal debtor commits
default & not from the date of guarantee.

Rights of surety:

After performing or discharging the liability of the principal debtor, a surety

gets various rights against creditor, principal debtor and co-sureties.

I. Right against Creditor

1) Right of exoneration (declare free from blame): When debt has become
due, surety is called to pay, he may ask the creditor to sue principal
debtor. In case of fidelity guarantee, surety may call creditor to dismiss
the employee whose honesty he has guaranteed (if dishonesty is
proved).
2) Rights on Securities: After paying the creditor, surety can ask him to
give all the securities which he has, against principal debtor.
3) Rights of Subrogation: After paying creditor, surety get all the rights of
creditor against principal debtor.
4) Rights to Set-off: Set-off means a right of counter-claim or right of
deduction from the amount of debt. This is when creditor sues surety.
He can counter-claim against any possession with creditor.

II. Right against Principal Debtor

1) Right of subrogation: After paying creditor, he gets all the rights of
creditor against principal debtor.
2) Right of Indemnity: There is implied promise by principal debtor to
indemnify the surety & surety can demand all payments from him.

III. Right against Co-Sureties

1) Right to Contribute Equally: When he has paid more than his share, he
has the right of contribution from co-sureties.

Odisha State Open University Page 17

 2) Contribution when co-sureties bound to contribute equally subject to
the limit of their obligations.

Contract of Agency

An ‘agent’ is a person employed to do any act for another or to represent

another in dealings with third person. The person for whom such act is done, Legal Aspects
or who is represented is called the ‘principal’. of Business:
Law of
Agency is the relation between an agent & his principal created by an express Contract
or implied agreement where agent is authorized by his principal to represent
him in dealing with third parties and to contract with them.

Essential Elements:

1) Express or implied by an agreement

2) Competence of the principal
3) Consideration is not necessary
4) Free consent of both parties
5) Agent is appointed to create contractual relations with third parties.

Creation of Agency

A contract of agency can be created in the following ways:

1) By Express agreement
2) By Implied agreement
i) Agency by Estoppel
ii) Agency by Holding Out
iii) Agency by Necessity
3) By Ratification
4) By Operation of Law

I. By Express agreement

When authority is given by the principal by written document or spoken

words. The written document is called ‘power of attorney’. It should be written
& stamped.

II. Agency by Implied agreement

It may be created by conduct or relation of the parties or circumstances of the

case. For e.g. X lives in Jaipur & has a shop in Delhi & he visits occasionally.
The shop is managed by Y. Y purchases goods from Z & make payment from
X’s funds with X’s knowledge. Y has implied authority from X.

Odisha State Open University Page 18

It includes following types of agencies:

1) Agency by Estoppel: The principle of estoppel is that where a person

by his words or conduct willfully made other believe that certain state of
affairs exists & other person acted on that belief, then he is stopped from
denying the truth of such statement. Eg. X tells Y in the presence of Z that
X is Z’s agent & Z does not object to this statement. Y, later enters into a
transaction with X believing that X is Z’s agent. Z is bound by this Legal Aspects
transaction. of Business:
Law of
Contract
2) Agency by Holding Out: It is the extended form of agency by
estoppel. The principal by his past positive act make third party believe that
some other person is doing act on his behalf with authority. This is agency
by holding out. For e.g. P usually sends his servant to buy goods for him on
credit from Q & P pays for them. Later, servant misuses his authority &
buys goods for his personal use. P is responsible for payment to Q as he had
held out his servant as his agent by his past positive conduct.

3) Agency by necessity: Under some circumstances, law permits a person

to act as agent of another person in the time of emergency without
instructions from the principal. Such agency is called ‘agency by
necessity’. For e.g. a ship driver can borrow money at a port where owner
of ship has no agent, to carry out necessary repairs of ship to complete the
journey. In this situation, he can act as agent but he should act for benefit
of the principal.

III. By Operation of Law

Under this case, law assumes a person to be an agent of another. For e.g. a
partner is assumed as an agent of his firm.

IV. By Ratification

Ratification means subsequent acceptance & adoption of an act by the

principal originally done by the agent without authority. For e.g. A insures B’s
goods without his authority. If B ratifies A’s act, the policy will be valid as if
A has authorized to insure the goods.

Ratification will bind the principal and the unauthorized act by agent becomes
an authorized act. It applies with retrospective effect i.e. agency arises from
the time act was done by agent & not from the date it was ratified.

I. Duties of Agent

1) Agent should work within the scope of his authority following the
instructions of the principal.
2) Carry out act with reasonable skill & honesty.
3) Duty to give proper accounts when demanded by principal.
4) Duty to communicate with the principal in case of difficulty.
5) Duty not to deal on his own accounts and pay all benefits to the principal.
Odisha State Open University Page 19
6) Duty not to delegate his authority.
7) Duty to protect the interest of the principal.

II. Rights of Agent

1) Right to retain money for expenses incurred in agency functions.

2) Right to receive remuneration if he do not misconduct.
3) Right of indemnification: agent has the right to be indemnified by the Legal Aspects
principal for injuries caused by principal’s neglect. of Business:
4) Right of stoppage of principal’s goods in transit in following conditions: Law of
a) Where he has purchased goods for principal on personal liability. Contract
b) Where he is personally liable to the principal for the price of goods sold.
This right can be exercised only when buyer becomes insolvent.

III. Duties & Rights of Principal towards Agent

The duties of agent are rights of principal & rights of agent are duties of
principal.

Termination of Agency

Termination of agency means the end of relation between principal and his
agent. All the modes of termination of agency may be classified under the
following two heads:

I. Termination by acts of the parties.

II. Termination by operation of law.

Termination by Acts of the Parties

An agency stands terminated by any of the following acts of the parties:

1. Agreement – An agency may be terminated by the mutual agreement

between the principal and the agent at any time and at any stage.

2. Revocation by principal – A principal can revoke the agent’s authority

subject to the following rules:

a. The principal cannot revoke the agency where the agent has an interest
in the subject-matter of agency.
b. Revocation is possible only when the agent has not exercised the
authority.
c. When the agency is for any fixed period of time, the principal is liable to
make compensation to the agent.
d. Principal must give a reasonable notice for revocation of agency.
e. The revocation may be expressed or implied from the conduct of the
principal.

3. Renunciation (denial) by agent – An agent may also terminate the agency

by renouncing the business of the agency subject to the following rules: -

Odisha State Open University Page 20

 a. When the agency is for fixed period, the agent will be liable to
compensate the principal.
b. A reasonable notice of renunciation must be given by the agent.
c. Renunciation may be expressed or implied from the conduct of the
agent.

Termination by Operation of Law Legal Aspects

of Business:
The relation of agency is automatically terminated by operation of law in the Law of
following cases: Contract
a. Completion of agency business
b. Death, insanity or insolvency
c. Destruction of the subject matter
d. Principal becoming an alien enemy
e. Event rendering the agency unlawful
f. Impossibility of performance

Odisha State Open University Page 21

1.11 Let’s Sum-up

The Indian Contract Act 1872, governs the contracts done within the
boundaries of India except the state of Jammu & Kashmir. Contract refers to
an agreement which is enforceable by law. There are certain essentials which
should be there in order to become a valid contract. There must be an
agreement in which one person makes an offer to the other and the latter Legal Aspects
accepts it unconditionally. A minor, a person of unsound mind and a person of Business:
disqualified by law cannot enter into contracts. The agreement should involve Law of
some consideration and the consent given by the parties should be free. There Contract
are special types of contracts vis-à-vis guarantee, indemnity and agency. If the
parties to a contract do not perform, it leads to breach of contract. There are
different remedies available to the aggrieved party in case of breach of
contract.

1.12 Key Terms

Agreement: It is a promise in which one party makes an offer and the other
party accepts it according to the conditions of the offer.

Contract: It refers to an agreement made by free consent of parties competent

to contract, with a lawful purpose and consideration, which is legally
enforceable.

Consideration: It means something in return. It is the benefit obtained by the

parties entering into a contract. There may be adequate or inadequate
consideration in a contract.

Free Consent: The consent is said to be free if it is not due to any compulsion,
pressure or mistake.

Breach of Contract: It refers to non-fulfilment of the parties under the

contract due to any reason.

Indemnity: It refers to a contract in which one party promises to make good

the loss caused to the other party due to certain specified reasons.

Guarantee: It is a contract under which one party takes the responsibility of

the fulfilment of the promise made by the other party.

Agency: Agency is the relation between an agent & his principal created by an
express or implied agreement where agent is authorized by his principal to
represent him in dealing with third parties and to contract with them.

1.13 Self-Assessment Questions

Odisha State Open University Page 22

1. Anil a minor sold a shop to Bhim an adult. Anil got the consideration but
the sale deed could not be registered as he was a minor. Bhim filed a suit
for specific performance of the agreement. Could the amount be recovered
of consideration?
2. A, a minor sold goods on credit to B, a major. Can A recover this amount
from B?
Legal Aspects
3. Amit gives guarantee to Sumit for the payment of loan due from Karan, a
of Business:
minor. On the due date, Karan fails to repay the loan. What will be the
Law of
liability of Amit for the repayment of loan?
Contract

1.14 Further Readings

 Pathak Akhileshwar, Legal Aspects of Business, Tata McGraw-Hill.

 Bulchandani K. R., Business Law, Himalaya Publishing House, New Delhi.
 Prasad G., Business and Corporate Laws, Jai Bharath Publishers, Guntur.
 Pollock & Mulla, The Indian Contract Act 1872, LexisNexis Publishers.

1.15 Model Questions

1. Discuss the various essential elements of a contract under The Indian

Contract Act, 1872.
2. What is meant by ‘Undue Influence’? ‘A’ applies to a banker for a loan at a
time where there is stringency in the money market. The banker declines to
make the loan except at an unusually high rate of interest. A accepts the
loan on these terms. Whether the contract is induced by undue influence?
Decide.
3. Discuss the different modes of discharge of a contract. Also state the
consequences under each method.
4. Differentiate between the contract of indemnity and contract of guarantee.
5. Explain the different ways to create a contract of agency.

Answers to Self-Assessment Questions

1. The agreement being void, cannot be specifically performed. So the amount

of consideration also could not be recovered.
2. Yes, A can recover the amount from B as A is a beneficiary in the
agreement.
3. This is contract of guarantee. Hence Amit is the surety or guarantor. So
Amit is liable to pay the money.

Odisha State Open University Page 23

Unit – 2
Legal Aspects of Business: Company Law

Learning Objectives

After completion of the unit, you should be able to: Legal Aspects
of Business:
 Explain the meaning and nature of company.
Company
 Describe the procedure of registration of a company and its promotion.
Law
 Know about the preparation of the essential documents vis-à-vis
memorandum of association, articles of association and prospectus.
 Also understand the role, duties and appointment of company directors
and company secretary.

Structure

2.1 Introduction
2.2 Meaning & Nature of Company
2.3 Promotion of Company
2.4 Procedure of Registration
2.5 Memorandum of Association
2.6 Articles of Association
2.7 Prospectus
2.8 Directors
2.9 Company Secretary
2.10 Let’s Sum-up
2.11 Key Terms
2.12 Self-Assessment Questions
2.13 Further Readings
2.14 Model Questions

Odisha State Open University Page 24

2.1 Introduction

The company law in India aims at synchronizing the working practices of

companies in India. The new Companies Act 2013 has replaced the old
Companies Act 1956. The Act makes comprehensive provisions to govern all
listed and unlisted companies in the country. The Companies Act 2013
implemented many new sections and repealed the corresponding sections of Legal Aspects
the Companies Act 1956. This Act offers a landmark legislation change for all of Business:
companies incorporated in India. This unit will highlight the key issues in the Company
Company Law. Law

2.2 Meaning & Nature of Company

Company is a voluntary association of persons formed & registered under

Companies Act, 2013.

Company is an artificial person having separate entity from its members, with
perpetual succession & a common seal. The capital of the company is divided
into transferable shares & shareholders are called members.

Nature of company
1. Registered Voluntary Association: It comes into existence after registration
i.e. it becomes a body corporate by the name with which it is registered.
2. Members/subscribers: Minimum 7 persons in case of public company & 2
in case of private company are required. Persons, who agree to form a
company, have to sign the memorandum of the company & these
signatories are called subscribers to the memorandum. On registration they
are called first members of the company. Maximum members in private
company may be 200 & there is no limit in public company.
3. Artificial Person: Company is created by law. It has no physical body, no
soul but it is not a fictitious person. It is a real person & have same rights
& powers like a person. It can purchase & sale property & enter into
contract through his agents.
4. Separate Legal Entity: It has its own legal existence independent of its
members. It can enter into contracts & sue & be sued by its members as
well as outsider in his own name.
5. Perpetual Succession: It never dies. It continuously exists & is not affected
by lunacy, retirement, death or insolvency of its members.
6. Common Seal: Every company is required by law to have a common seal.
The name of the company is engraved on it. When seal is affixed on any
document, it is legally binding on the company.
7. Limited Liability: In case of a company limited by shares, the liability of
members is limited to nominal value of share held by him. In a company
limited by guarantee, the liability of member is limited to the amount
guaranteed by him.
8. Share Capital: A company is required by law to have share capital.
9. Transferable Shares: The shares in public company are freely transferable
subject to conditions given in the articles. In private company, articles have
to restrict this right to transfer shares.
10. Limited Capacity to Contract: A company has capacity to contract within
the scope of memorandum of association.
Odisha State Open University Page 25
11. Management Team: A company is managed by a board of directors elected
by the members of the company. So, shareholders cannot directly
participate in the management of the company.
12. Decision taken by the rule of majority.
13. Residence: For communication purposes, the residence of the company is
the place of its registered office. For purpose of income tax Act, a
company resides where its real business is carried on.
Legal Aspects
14. Nationality: A company has nationality of the country where it is
registered. of Business:
Company
Law
2.3 Promotion of Company

Promoter

Promoter is a person or a group of persons who originates the idea of

formation of a company & takes necessary steps for its incorporation, raising
of capital & making it a going concern.

Functions of Promoters
1. Originating the idea of the company: They give an idea about the activities
that they want to carry out through proposed company.

2. Investigation & verification of the idea: They test the technical, commercial
& financial feasibility of the idea.

3. Assembling the Requirements: They take steps to translate the idea into a
reality by arranging for fully equipped office, employees, company
secretary etc.

4. Making preliminary contracts: They make preliminary contracts related to

purchase of land, securing patents, plant & machinery etc.

5. Financial Planning: They plan for immediate preliminary expenses and

decide about capital structure, method of capital issue, arrangements with
bankers, issue managers etc.

6. Compliance of legal formalities: Legal formalities include deciding the

place of registered office of company, frame the objectives and get
memorandum signed by subscribers.

7. Getting the company incorporated or registered: They apply for registration

to the registrar of companies.

8. Getting certificate of commencement of business: They fulfil all legal

formalities and obtain the certificate of commencement.

Position of Promoter

Odisha State Open University Page 26

1. Not an agent: He is not an agent because his principal (company) does not
exist at the time when he acts on his behalf.
2. Not a trustee: This is because there cannot be any trust before company
comes into existence.
3. Fiduciary relation to the company: Fiduciary relation means a relation of
trust, confidence & good faith. So his dealings should be open, fair & in
good faith. Legal Aspects
of Business:
Company
Duties of Promoter
Law
1. To disclose all material facts related to formation of company.
2. Not to make secret profit. However, he may make profit with the
knowledge & consent of company.
3. To disclose the interest in the transaction or contract done by the company.
4. Not to sell own property to the company without informing that property
belong to him.
5. Not to make unfair use of the position.

Rights of Promoters

1. Right to receive preliminary expenses.

2. Right to receive proportionate amount from co-promoters: In case

indemnity is recovered from any promoter due to misstatement in
prospectus or secret profit, the concerned promoter has the right to receive
proportional amount of damages from co-promoters.

3. Right to receive remuneration for his services.

2.4 Procedure of Registration

The process of forming into a legal organization i.e. a company involves the
following stages:

I Promotion Stage
II Registration Stage
III Capital Subscription Stage
IV Commencement of business or trading certificate

First two stages are compulsory for all types of companies including a private
company.

I. Promotion Stage

Odisha State Open University Page 27

Promotion is the process of discovery & investigation of business
opportunities, planning & organization of physical, financial & human
resources with a view to forming a company. The work of promotion is done
by promoters. Promotion stage involves all the primary activities which are
necessary for formation of company.

II. Registration or Incorporation Stage

Legal Aspects
The company comes into existence only after this stage. The following key
points should be kept in mind: of Business:
Company
1. If company wants to undertake such industrial activities which require Law
license under industries Act, 1951 then application should be made to
ministry of industries.

2. Public companies limited by shares usually get capital by public

subscriptions which cannot be possible without the issue of prospectus or
‘a statement in lieu of prospectus’ filed with the registrar of companies.

3. Filing of following documents with registrar:

a. Memorandum of Association with signatures of subscribers in
presence of at least one witness.
b. Articles of Association signed by subscribers to memorandum.
If public company adopts table A of schedule I, Articles are not
required to be filed.
c. Details & list of Directors
d. Written consent of directors to work as first director of
company & to take & pay for qualification shares.
e. Information about place of registered office.
f. Receipt of registration fee paid.
g. Statutory Declaration stating that all requirements regarding
registration are fulfilled.
4. Scrutiny of Documents: Registrar may check the documents to satisfy that
all legal formalities are fulfilled. If there is any minor defect in any
document, registrar may send it for rectification. But if there is material
defect, it may return all documents for correction. Also, it can refuse to
register a company on lawful grounds.

5. Certificate of incorporation/Registration: It is issued by registrar after

satisfaction of all legal formalities. This certificate is a proof that all the
requirements of the act have been completed with respect to registration.

III. Capital Subscription Stage

Private company does not pass through this stage. Public company with share
capital passes through this stage.

Steps
1. Filing of prospectus with registrar of companies: The registrar will register
the prospectus & affix his official seal & date on the copy of prospectus.

2. Issue of Prospectus: On the advertised date prospectus will be issued to the

public either through bankers or registered office of company.

Odisha State Open University Page 28

3. Application through bankers: Investors has to give applications for shares
along with application money to the company’s bankers who will forward the
applications received to the company.

4. Allotment of shares: The directors will consider the allotment if the capital
equal to the minimum subscription is subscribed as given in prospectus.
Legal Aspects
Company may raise capital from private sources i.e. from directors, members of Business:
& their relatives. Company
Law
IV. Commencement of Business Stages
A public company cannot commence its business unless it obtains ‘Certificate
of Commencement of Business from registrar.’ For obtaining it, a statutory
declaration is required duly verified by directors stating that:

1. Every director of company has paid the company the application &
allotment money in cash.
2. Capital equal to minimum subscription has been subscribed for.
3. Refund of application money on un-allotted shares have already been
made.
4. Permission of stock exchange to list the shares has been obtained.

2.5 Memorandum of Association

It is a fundamental document of the company which is also known as charter

of the company. It lays down the scope & object of activities & limitations on
the power of a company. It contains all the fundamental conditions upon
which a company is allowed to be incorporated.

It is signed by subscribers who on registration are called the first members of

the company. It is necessary for every company to prepare it. On registration,
it becomes a public document. It serves as a basis of contract between the
company & the outsiders. It contains the following clauses:
1. Name Clause
2. Registered office or Domicile Clause
3. Object Clause
3. Liability Clause
4. Capital Clause
5. Association or Subscribers Clause

Name Clause
It should contain the name of the proposed company. The word ‘limited’ must
be there as last word in case of public limited company & ‘private’ limited as
last word in case of private limited company.
 Name should not contain words like Government, Cooperative,
Municipality etc.

Odisha State Open University Page 29

 Name should not resemble to already existing company or to the name of
person of high reputation.
 The name of the company, which is in process of liquidation, cannot be
taken unless its consent is obtained.
 Name should be shown on sign boards outside of every place where
business of company is carried.
Legal Aspects
 Name should not be prohibited. of Business:
 Name should not resemble that company has protection from government. Company
Law
Registered Office Clause or Domicile Clause
It contains the place at which registered office is situated. The full address of
registered office of company must be communicated to registrar of companies.
 Registered office provides official place to which all communications &
notices may be lawfully addressed.
 It decides jurisdiction of registrar, police station & the court.
 It is the official place where all statutory registers & important books of the
company are required to be kept.

Object Clause
The object should be clearly & expressly defined. They should not be unlawful
or opposed to public interest. They should be comprehensive & written on
affirmative & negative basis. They should safeguard the interest of investors.
It is divided in 3 sub clauses:
 Main Objects: It refers to the important objectives for which the company is
formulated.
 Ancillary or Incidental Objects: Objects through which main objects can be
achieved.
 Other Objects: It includes the objects which are not included in main
objects like to appoint officers & employees, to pay pension to employees,
to purchase or take on lease property for office etc.
Any act beyond the object clause is considered as ultra vires & therefore void.

Liability Clause
It states the nature & extent of liability of its members.
 In case of company limited by shares, this clause should state the liability of
members is limited.
 In case company limited by guarantee, this clause will state the amount
which every member undertakes to contribute to the assets of company in
case of winding up.
 In case of unlimited company, this clause is not given in memorandum.

The limited liability becomes unlimited when the number of members fall
below the minimum specified limit or at the time of winding up, it is proved
that company carried out business for illegal purpose.

Odisha State Open University Page 30

Capital Clause
It states the amount of share capital with which the company is to be
registered. It should also give the number & face value of shares. Companies
Act has allowed only 2 classes of shares i.e. equity & preference shares. It
should state the authorized capital for both equity & preference shares.
Legal Aspects
of Business:
Association or Subscription Clause Company
This is the concluding clause. In this clause, the subscribers declare that they Law
desire to be formed into a company.
 Each subscriber should state his name, address, description & occupation.
 Each subscriber shall sign memorandum in the presence of a witness.
 Each subscriber should take at least one share.
 Each subscriber should write to his name the number of shares he takes.

2.6 Articles of Association

The Articles of Association is the document of the company which contains

the rules & regulations related to business activities to achieve the objectives
of the company as defined in memorandum of association.

Features
 It is subsidiary to the memorandum.
 It regulates the management of internal affairs of a company.
 If defines the powers & duties of the directors.
 It is a public document.
 It is alterable by following the procedure given in the law.
 It is not compulsory for a public company to have its own articles. If it does
not register its articles, the table A of schedule I of the act applies to it.

Contents
The articles of association includes the rules and regulations related to the
following issues:
 A statement whether table ‘A’ has fully or partly been adopted.
 Definition of important words & phrase used.
 Adoption of preliminary contracts.
 Rules regarding allotment of shares.
 Rules regarding issue of share certificates, forfeiture of shares etc.
 Payment of underwriting commission.
 Rules regarding calls on shares.
 Rules regarding alteration of share capital.
 Borrowing powers of the company.
 Rules regarding meetings, notices, voting etc.
 Dividends & Reserves.

Odisha State Open University Page 31

 Rules regarding appointment of directors, company secretary & their
remuneration, conditions of services, rights, duties etc.
 Rules regarding capitalization of profits by issue of bonus shares.
 Provisions regarding payment of interest out of the capital.
 Circumstances of use of common seal.
 Winding up procedure & provisions.
 Other provisions: It includes provision for giving unlimited liability to
directors, maintaining register of members abroad, and appointment of
additional or alternative director.

Difference between Memorandum of Association & Articles of

Association

Basis Memorandum Articles of

of Association Association
1.Contents Memorandum It contains rules
contains the and regulations
objects of a for management
company beyond of internal affairs
which the of the company.
company cannot
go.
2.Purpose The purpose of The purpose of
memorandum is to articles is to
State the objects provide the manner
for which the in which the
company has been company’s objects
established. are to be carried
out.
3.Necessity Every company is A company limited
required to frame an by shares need not
original frame articles for
memorandum for its its registration. If
registration. the articles are not
registered, Table A
applies to it.
4.Alteration Memorandum can be Generally , articles
altered only under can be altered by a
certain circumstances special resolution
and sometimes with the passed in the general
permission of Central meeting of the
Government or company.
Company Law Board.
5.Ultra vires Anything done beyond Anything done
acts the scope of the beyond the scope of
memorandum is said to the
be ultra vires the articles may not
company and hence ultra vires the
absolutely void. company.
6.Basis Memorandum Articles define the
of generally defines the relationship between
Odisha State Open University Page 32
 relations relations between the company and
company and the members.
outsiders.

Doctrine of Ultra Vires

‘Ultra’ means beyond ‘Vires’ means Powers. So ultra vires means acts beyond
Legal Aspects
the legal powers or objects of the company. A company is prohibited to go
beyond the memorandum by doctrine of ultra vires. An ultra vires act is void. of Business:
Also it cannot be ratified by written consent of all members of company. Company
Neither the company nor the other contracting party can sue on it. Following Law
are some of the ultra vires acts:

 Issue of unauthorized capital.

 Pay dividend out of capital.
 Pay unreasonable sums for services rendered.
 Make payments for benefit of selected shareholders.
 Subscribes to external objects of the company.
 Acts which do not fall in main, ancillary or other objects of company.

Doctrine of Constructive Notice

It states that every person dealing with the company is deemed to have notice
of the contents of memorandum & articles of the company. Also, he is
assumed to have not only read these documents but have also understood their
proper meaning.

Memorandum & Articles on registration become public documents. So, every

person dealing with the company can easily inspect & read these documents.
He can find whether or not his deal is within the powers of the company & its
directors.

Doctrine of Indoor Management

It is an exception to the ‘Doctrine of constructive notice’. Doctrine of
constructive notice protects company against outsiders & doctrine of indoor
management protects outsiders against company.

Outsiders are not deemed to have the constructive notice as regards the manner
in which the power is exercised. They are not bound to make further enquiries.
They are entitled to assume that management of internal affairs of the
company has been regular & is being carried on in accordance with the
memorandum & articles. This assumption is known as doctrine of indoor
mgmt.

2.7 Prospectus

Prospectus means any document, which is described or issued as a prospectus

by a company for any of the following purpose.
1. For inviting deposits from public.
2. For Inviting offers from public for purchase of its shares or debentures.

Odisha State Open University Page 33

Prospectus may be any notice, circular, advertisement or other document
issued for above purpose. It is a document in writing which contain the matters
specified by the provisions of the Companies Act. It is signed by the directors
of the company who authorized it to be issued.

Legal Aspects
Shelf Prospectus
It refers to prospectus filed by any public financial institution, public sector of Business:
bank or scheduled bank whose main objective is financing. Shelf prospectus Company
once filed with registrar is not required to be filed again at every stage of offer Law
of securities within the period of validity.

It is compulsory to file ‘Information Memorandum’ containing all material

facts relating to changes in financial position between first offer of securities,
previous offer of securities & succeeding offer of securities. Information
memorandum may be filed within the time prescribed by central government
prior to making next offer of securities.

Along with shelf prospectus, information memorandum should also be issued

to public with first offer of securities.

Red-Herring Prospectus
It means a prospectus which does not have complete particulars on the price of
the securities offered & the amount of securities offered.

Statement In Lieu of Prospectus

It is not necessary for every public company to invite public if the promoters
or directors are confident of obtaining required capital from their private
sources. In such case, the company is not required to issue a prospectus to the
public.

The promoters are only required to prepare & deliver a Statement in lieu of
prospectus to the registrar at least 3 days before the date of allotment of shares.

Contents of Prospectus
Section 56(I) of the Companies Act requires that every prospectus must state
the following matters specified in schedule-II of the Act. Schedule-II is
divided into two parts:
Part 1 and part 2.

I. Matters specified in Part-I of Schedule-II

1. General Information:
a. Name of company and full address of its registered office.
b. Approval of the Central Government to issue Industrial
License.
c. The name of Stock Exchange where the application for listing
has been filed.
d. Warning to apply for shares in fictitious names.

Odisha State Open University Page 34

 e. Date of opening the issue and last date of closure.
f. Name and address of auditors and under-writers.
g. Undertaking from the board of directors stating that:
i. The money to be subscribed shall be deposited in a
separate bank account.
ii. The purpose for which the money will be spent shall be Legal Aspects
shown in a separate ‘head’ in the company balance of Business:
sheet. Company
2. Capital Structure of the company: Law

a. Authorized, issued, subscribed and paid up capital of the

company.
b. Total capital of the company after the completion of the present
issue.
3. Conditions attached with the issue:
a. Conditions of payment by the allotees.
b. Method of filing of applications.
c. Special tax benefits.
4. Details regarding the issue:
a. Purpose of the issue.
b. Estimated cost.
c. Sources of funds including promoters’ contribution.
5. The company matters relating to its managerial persons:
a. History of the company, its main objects and present business.
b. Name of subsidiary company.
c. Name, address, occupation, etc. of promoters, managing
director, manager and other directors.
d. Details of plant and machinery, technology etc.
6. Details of other companies promoted under the same management:
a. Name of the company promoted.
b. Date of closure of each issue.
c. Rate of dividend paid to shareholders.
7. Details about legal proceedings pending in court:
a. Criminal matters pending against the company and its directors.
b. Mistakes committed towards outstanding loans, debentures and
fixed deposits, outstanding dividend.

II. Matters specified in Part-2 of Schedule-II

1. General Information:
a. Consent of directors, auditors, bankers and experts.

Odisha State Open University Page 35

 b. Opinion of the expert obtained.
c. Details of vacation of office of directors.
d. The procedure of allotment and issue of share certificates.
e. Name and address of company secretary.
2. Financial Information:
a. Report of the company auditors including comments on profit
and loss account, assets and liabilities.
Legal Aspects
b. The terms and conditions of loans obtained from financial
institutions. of Business:
3. Statutory and other information: Company
a. Details of expenses Law
i. The fees paid to the expert, registrar to the issue.
ii. Under-writing commission.
b. Details of public issues and right issues made in the last 5
years.
c. Shares issued with consideration other than cash.
d. Name, address, and occupation of directors, and remuneration
payable.
e. Information regarding voting rights to members and rate of
dividend paid.

Omission & Mis-Statement in Prospectus

It should not omit any relevant facts which influence the mind of the
prospective investor. A prospectus is treated as untrue in the following
situations:
1. If the statement is misleading in the form and context in which it is
included; and
2. Where the omission is to mislead.

The aggrieved shareholder has the right to claim damages from the directors
but shall not have the right of rescission of the contract.

Deemed Prospectus or Prospectus by Implication

Companies by allotting the whole of the capital of a company to an
intermediary known as an Issuing House. The Issuing House then offers the
shares to the public by means of an advertisement known as ‘Offer for Sale’
and is ‘deemed prospectus’ issued by the company.

The responsibility of the company, and its directors, and promoters is, the
same as in the case issue of prospectus directly by the company. Companies
Act names a deemed prospectus as ‘Prospectus by Implication’.

2.8 Directors

Director is a person or one of the persons through whom the company acts. He
directs the policy and manages, controls or superintends the affairs of the
company.

Minimum No. of Directors as per Section 149(1)(a):

 Three in case of Public Company.

Odisha State Open University Page 36

 Two in case of Private Company.
 One in case of One Person Company.

As per Companies Act, Board of Directors of a company must have at least

one resident director i.e. a person which has lived at least 182 days in India in
the previous calendar year.
Legal Aspects
Methods of Appointment of Directors of Business:
1. Appointment of first directors. Company
2. Appointment by the shareholders. Law
3. Appointment by Board of directors.
4. Appointment by third parties.
5. Appointment by Proportional representation.
6. Appointment by the central government.

Appointment of first director

The person so listed in the articles shall be first directors. In the absence of any
such provision subscribers to the memorandum shall be deemed to be the
director of the company. Such director shall act as directors till the directors
are duly appointed at the first general meeting after incorporation of the
company.

Appointment by shareholders
The shareholders can appoint the directors by passing a resolution in the
general meeting.

Appointment by Board of Directors

The Board of Directors can appoint the following directors:
1. Additional Directors:
a. Board may appoint additional directors if so authorized by the
company’s articles.
b. The proposed person should not have failed to get appointed as
a Director in a General Meeting.
2. Directors for filling Casual vacancies: In the absence of any provision
in the articles, such a vacancy may be filled by the board of directors.
3. Alternate Director
a. May appoint an alternate director if the board is so authorized
by its articles.
b. He shall vacate office if and when the original director returns.

Appointment by Third Parties

The articles may provide a right to the debenture-holders, financial
institutions, foreign collaborators, bankers, etc. of the company to nominate
directors on the board of the company.

Appointment by Proportional Representation

The articles of a company may provide for the appointment of directors
according to the principle of proportional representation. The appointments
shall be made once in every three years. Proportional representation may be
decided by any of the following systems:

Odisha State Open University Page 37

 1. Single transferable vote system; and
2. Cumulative transferable vote system.

1. Under the Single transferable vote system, each voter is required to

give his preference to the candidates subject to the maximum number
of directors to be elected. After voting, a quota of vote is calculated and
fixed for getting elected.
Legal Aspects
Quota = Total number of votes cast +1
Number of directors to be elected +1 of Business:
2. Under Cumulative transferable vote system, a member is entitled to Company
one vote for every share held by him for every director to be elected. If Law
a member has 100 shares and number of directors to be elected is 5, he
is entitled to 500 votes.

Appointment by Central Government

The Central Government may appoint directors on an order by Company Law
Board. The Central Government may appoint the directors for such period as it
may think fit, but exceeding three years on any one occasion. But such
directors may be removed at any time and any other person may be appointed
by the central government.

No qualification shares are required to be held. The central government may

require such directors to report to it from time to time with regards to the
affairs of the company.

Removal of Directors
1. By Shareholders
2. By Central Government
3. By Company Law Board

Removal by Shareholders
By passing an ordinary resolution at their general meeting, remove a director.
But the shareholders cannot exercise this power if director is appointed by the
Central Government. A copy of special notice is sent to the director. He shall
be entitled to be heard on the resolution at the meeting.

Removal by Central Government

The Central Government is empowered to remove a director on the
recommendation of the Company Law Board. The Central Government shall
make a reference to CLB by stating a case against the person with a request
that the CLB may inquire into the case and record its decision whether he is fit
or proper person to hold office of a director or other managerial office.

The person so removed shall not be entitled to any compensation for loss or
termination of office.

Removal by Company Law Board

Any member of a company can make an application to the CLB for prevention
of oppression and mismanagement in the company. Director removed in such
a manner shall not be entitled to claim damages for loss of office.

Odisha State Open University Page 38

Duties of Directors

A. Statutory Duties
1. To see that amount received for shares from applicants of shares are
deposited in a scheduled bank.
2. To repay the application money to the applicants of shares if the company
fails to obtain the certificate to commence business.
Legal Aspects
3. To place before the members at general meeting the profit & loss account
and balance sheet of the company. of Business:
4. To check the accuracy of the prospectus before its issue to public. Company
5. To call the annual general meeting in time. Law
6. Declaration of dividends and payment of dividends.
7. To file copies of final accounts with the registrar within 30 days after an
annual general meeting.
8. To disclose before the company about the shareholding by each director, in
other companies.
9. To disclose their interests in any of the contracts entered into by the
company.

B. General Duties of Directors

1. Duty of good faith: To act with honesty in the discharge of their duties.
2. In discharging duties a director must exercise some degree of skill and
diligence.
3. Duty to attend board meetings unless physically impossible.
4. Not to delegate powers: Directors are bound to perform personally.
5. Control on the use of funds.
6. Protect the interest of shareholders: The directors are expected to protect
the interests of the shareholders, by investing money on beneficial
schemes/projects.
7. Timely payment of call money against the shares held by them whenever
the company makes such calls on shares.
8. Work as agent and trustee of the company.

2.9 Company Secretary

A company secretary means a person who is a member of the Institute of

Company Secretaries of India. A person who possesses the requisite
qualifications and appointed to perform the duties as prescribed under the Act,
including ministerial and administrative duties is known as company secretary.

Provisions as to appointment of company secretary

1. Only an individual is eligible to be appointed as a company secretary and
not any firm, association or a body corporate.
2. In case a company fails to appoint a company secretary the person
responsible for such default shall be punished. However exemption from
fine can be granted on the grounds that (i) efforts have been made for the
appointment, but no suitable person was available, and (ii) the company is
not in a position to bear the financial burden of a company secretary.
3. The person to be appointed as company secretary shall possess the requisite
qualifications prescribed by the Central Government.

Odisha State Open University Page 39

4. A person may be appointed as a part time secretary in more than one
company provided none of them have paid up share capital (as prescribed
by the central government).

Methods of Appointment of company secretary

1. Appointment by promoters: The promoters of a company usually appoint
the first company secretary when company has not yet been registered. He
Legal Aspects
is often referred as the pro-tem secretary. The individual acting as the pro-
tem secretary may or may not be appointed as regular secretary. In case the of Business:
person who has been acting as pro-tem secretary during the promotion stage Company
of the company is considered for regular appointment, his appointment Law
shall be got confirmed at the first meeting of the board, held immediately
after the registration of the company.
2. Appointment by provision in articles: Sometimes the Articles of the
company may name a person to be appointed as secretary. But such a
person has no legal right to sue the company if he is not appointed by the
company. This is because that the articles do not create any contractual
relationship with third parties.
3. Appointment by the directors of a company: By means of a resolution
passed at the board meeting on such terms and conditions with regard to
remuneration, removal, etc.

Importance of company secretary

‘The position of company secretary is like that of a hub in bicycle wheel.’ The
entire business cycle of the company moves around the company secretary as
almost all the important functions of the company are carried on through the
secretary. The following points will illustrate the importance of company
secretary:

1. ‘While directors are brains of the company, Secretary is their ears,

eyes and hands.’ The duties of the secretary and directors are
complementary to each other; the company needs the assistance of
both.

a. Directors, the brains of the company: A company being an

artificial person with no physical existence and of brain, it acts
through the brains of directors. The board of directors
formulates plans and policies, forecast the possible profits and
losses. They enter into contracts with third parties, from time to
time, keeping in view of the interest of the company. The ways
in which the brain is sensitive to each activity of the human
body, in like manner the brains of directors are sensitive to each
activity of the company.
b. Secretary, the ears of the company: Secretary is the person who
establishes direct contracts will the shareholders, employees,
labour unions, government, etc. and transmits their ideas,
suggestions, problems, complaints, etc. to the board of
directors. Here, he acts as the ears of the company.
c. Secretary, the eyes of the company: The information he heard
through ears is reviewed and analyzed to find out the truth by
seeing through his eyes. This way he finds the reality of the

Odisha State Open University Page 40

 suggestions, complaints, etc., heard through his ears before
transmitting them to the brains of directors.
d. Secretary, the hands of the company: The Secretary is the
person who takes effective steps in implementing the policies,
programmes, and plans formulated and approved by the
directors.

2. ‘Secretary, servant as well as guide to the directors’: He acts under Legal Aspects
the direct control of the board and acts as the Chief Executive officer of of Business:
the company. All the powers are transmitted to him from the board. Company
Company secretary has no fundamental rights with regard to the Law
internal management of the company, because he is an employee
appointed by the board. Secretary is not only a servant but also a guide
to the directors. This is because that he keeps important internal and
external information about the company. While taking policy
decisions, the assistance of the company secretary is sought by the
board. He gives significant legal and statutory guidance to the board in
routine matters, namely, the allotment of shares, calls on shares.

3. Secretary, the mouth-piece of Directors: He is the person who

expresses, writes and speaks to others on behalf of the board of
directors, the purpose for which he is authorized. He expresses the
wishes of directors before the others.

Statutory duties of Company Secretary

1. Maintaining of the statutory books and registers of the company and
their safe custody.
2. Attending the various meetings of the company and recording their
proceedings.
3. Assisting directors in the matters relating to the issue allotment,
transfer, transmission, etc. of shares and debentures.
4. Keeping the common seal, title deeds, etc. in safe custody.
5. To register charges with the registrar.
6. To maintain register of members with requisite particulars.
7. To maintain register of debentures holders.
8. To file a certified copy of the statutory report with the registrar.
9. To maintain register of directors, and make arrangement for its
inspection.

He has to ensure that the documents which were issued from his office,
namely letters of allotment, share certificates, etc. are affixed with stamp
of requisite amounts. Under Income Tax Act, he is bound to deduct income
tax from the salaries of employees, officers and from dividend payable to
shareholders and deposit the same with the government in time.

Rights and powers of company secretary

1. Right to sign on documents.
2. Right to accept or write bills of exchange.
3. Right to receive notice of dismissal in case of premature termination of
service.
4. Right to claim damages.

Odisha State Open University Page 41

2.10 Let’s Sum-up

The Companies Act focuses on framing guidelines regarding working and

management of the companies. The promoters of the company work to fulfil
all the legal formalities to bring the company into existence. They prepare
Legal Aspects
various documents necessary for the incorporation of the company. The
of Business:
significant documents include prospectus, memorandum of association and
Company
articles of association. The company is run by the directors and other
Law
managerial personnel including company secretary.

2.11 Key Terms

Company: Company is an artificial person having separate entity from its

members, with perpetual succession & a common seal.

Promoter: Promoter is a person or a group of persons who originates the idea

of formation of a company & takes necessary steps for its incorporation,
raising of capital & making it a going concern.

Memorandum of Association: It is a fundamental document of the company

which is also known as charter of the company. It lays down the scope &
object of activities & limitations on the power of a company.

Articles of Association: The Articles of Association is the document of the

company which contains the rules & regulations related to business activities
to achieve the objectives of the company as defined in memorandum of
association.

Prospectus: Prospectus may be any notice, circular, advertisement or other

document issued for inviting deposits or inviting offers for the purchase of
shares and debentures from the public.

2.12 Self-Assessment Questions

1. ‘A promoter is not a trustee or agent of the company but he stands in a

fiduciary position towards it.’ Discuss.

2. The certificate of incorporation is the conclusive evidence of registration of

company. Explain.

2.13 Further Readings

 The Institute of Company Secretaries of India, A Comparative Study of
Companies Act 2013 and Companies Act 1956, Taxmann Publications.
 Kapoor G.K., Corporate Laws, Taxmann Publications.
 S.S. Gulshan & G.K.Kapoor, Business Law Including Company Law,
New Age International, New Delhi, 16th Edition.

Odisha State Open University Page 42

  Dhamija Sanjay & Dr. Kapoor G.K., Company Law & Practice,
Taxmann Publications Pvt. Ltd., 19th Edition, New Delhi.

2.14 Model Questions

1. Briefly discuss the clauses of Memorandum of Association.

Legal Aspects
2. Differentiate between Articles of Association and Memorandum of of Business:
Association. Company
3. Explain the various methods of appointment of directors in a company. Law

4. What is the procedure of registration of a company?

5. Enlist the documents required to be prepared for the incorporation of the
company.

Answers to Self-Assessment Questions

1. The role of a promoter is expressed as follows:

a) Not an agent – Promoter cannot be an agent of the company which he
promotes because his
Principal (company) does not exist at the time when he acts on its
behalf.
b) Not a trustee – A promoter is not a trustee of the company which he
intends to promote because there cannot be any trust before company
comes into existence.
c) Fiduciary relation to the company – “The promoters stand in fiduciary
relation to the company they promote and to those persons, whom they
induce to become shareholders.”
Fiduciary relation means a relation of trust, confidence and good faith.
Everything done by the promoter must, therefore, be open, fair and in
good faith.

Thus, a promoter is neither an agent, nor a trustee but he is in a fiduciary

relationship to the company just as the relationship of the principal and
agent or the trustee and a beneficiary under the trust exists.

2. Certificate is a Conclusive Evidence of Incorporation: A certificate of

incorporation in respect of any association is a conclusive evidence of the
following matters:

(i) All requirements of the act have been complied with in respect of
registration and matters precedent and incidental thereto.

(ii) The association is a company authorized to be registered and duly

registered under the Act.

(iii) The company has come into existence from the earliest moment of the day
of incorporation stated therein.

Odisha State Open University Page 43

Benefits of Incorporation:
1. Emergence of corporate personality.
2. Definite name.
3. Capacity to exercise all functions.
4. Perpetual succession.
5. Common seal.
Legal Aspects
6. Limited Liability.
7. Can sue and be sued. of Business:
8. Separate property. Company Law
9. Binding contract between company and members.
10. Validity of incorporation cannot be questioned.
11. Certificate of incorporation cannot be cancelled.

Odisha State Open University Page 44

Unit – 3
Legal Aspects of Business: Consumer Protection Act

Learning Objectives
Legal
After completion of the unit, you should be able to:
Aspects of
 Explain the meaning and objectives of Consumer Protection Act. Business:
 Describe the important terms under the Consumer Protection Act. Consumer
 Know about the consumer protection councils at district, state and central Protection
level. Act
 Understand the various dispute redressal agencies available to resolve the
consumer disputes.

Structure

3.1 Introduction
3.2 Objectives of Consumer Protection Act
3.3 Definitions of Important Terms under the Act
3.4 Consumer Protection Councils
3.5 Dispute Redressal Agencies
3.6 Let’s Sum-up
3.7 Key Terms
3.8 Self-Assessment Questions
3.9 Further Readings
3.10 Model Questions

Odisha State Open University Page 45

3.1 Introduction

The Consumer Protection Act was passed on 5th December, 1986. It received
assent of the president on 24th December, 1986. This act was amended in the
year 1991, 1993 and 2002. The act extends to the whole of India except the
state of Jammu and Kashmir. The protection of the rights of the consumers in
India is the essence of this act. There should be appropriate redressal Legal
machinery available in the country to resolve the consumer complaints Aspects of
promptly. Business:
3.2 Objectives of Consumer Protection Act Consumer
Protection
Consumer Protection Act is formulated to achieve the following objectives: Act
1. To provide for better protection of the interests of the consumers.
2. To promote and protect the rights of consumers.
3. To make provision for the establishment of consumer councils and other
authorities for the settlement of consumer disputes.
4. To setup quasi-judicial machinery at district, state and central level for
speedy and simple redressal of consumer disputes.

3.3 Definitions of Important Terms under the Act

There are several terms which are used in the Consumer Protection Act which
need to be clarified. The definitions of the important terms are stated below:

1. Appropriate Laboratory: Appropriate Laboratory means a laboratory or

organization:

(i) Recognized by the Central Government,

(ii) Recognized by a State Government, subject to such guidelines as may
be prescribed by the Central Government in his behalf; or
(iii) Any such laboratory or organization established by or under any law
for the time being in force, which is maintained, financed or aided by
the Central Government or a State Government for carrying out
analysis or test of any goods with a view to determining whether such
goods suffer from any defect.

2. Complainant: A complainant means:

(i) a consumer; or
(ii) any voluntary consumer association (registered under the Companies
Act or under any other law for the time being in force); or
(iii) the Central Government or any State Government; or
(iv) one or more consumers, where there are numerous consumers having
the same interest; who or which make a complaint;
(v) in case of death of a customer, his legal heir or representative.

Odisha State Open University Page 46

3. Complaint: Complaint means any allegation in writing made by a
complainant that:

(i) an unfair trade practice or a restricted trade practice has been adopted
by any trader or service provider;
(ii) the goods bought by him or agreed to be bought by him suffer from
one or more defects;
(iii) the services hired or availed of or agreed to be hired or availed of by
Legal
him suffer from deficiency in any respect; Aspects of
(iv) a trader or the service provider, as the case may be, has charged for Business:
the goods or for the services mentioned in the complaint, a price in Consumer
excess of the price:
Protection
(a) Fixed by or under any law for the time being in force;
(b) Displayed on the goods or any package containing such goods; Act
(c) Displayed on the price list exhibited by him by or under any law
for the time being in force;
(d) Agreed between the parties;
(v) Goods which will be hazardous to life and safety when used, are being
offered for sale to the public:
(a) in contravention of any standards relating to safety of such goods
as required to be complied with, by or under any law for the time
being in force;
(b) if the trader could have known with due diligence that the goods
so offered are unsafe to the public;
(vi) Services which are hazardous or likely to be hazardous to life and
safety of the public when used, are being offered by the service
provider which such person could have known with due diligence to
be injurious to life and safety.

4. Consumer: Act defines two types of consumers: (a) consumer of goods,

and (b) Consumer of services.

(a) Consumer of Goods: A consumer of goods means any person who buys
any goods for a consideration which has been paid or promised or partly
paid and partly promised, or under any system of deferred payment. The
term consumer also includes any user of such goods other than the
person who buys such goods for consideration paid or promised or
partly paid or partly promised or under any system of deferred payment
when such use is made with the approval of such person. But it does not
include a person who obtains such goods for resale or for any
commercial purpose.
(b) Consumer of Services: A consumer for services means a person who
hires or avails of any services for a consideration which has been paid or
promised or partly paid and partly promised or under any system of
deferred payment. The term also includes any beneficiary of such
services other than the person who hires or avails of the services for
consideration paid or promised or partly paid and partly promised or
under any system of deferred payment when such services are availed of
with the approval of the first mentioned person. But it does not include a
person who avails of such services for any commercial purpose.

Odisha State Open University Page 47

5. Consumer Dispute: Consumer dispute means a dispute where the person
against whom a complaint has been made, denies or disputes the allegations
contained in the complaint. [Sec. 2 (1) (e)]

6. Defect: Defect means any fault, imperfection or shortcoming in the quality,

Legal
quantity, potency, purity or standard which is required to be maintained by or
under any law for the time being in force or under any contract, express or Aspects of
implied or as is claimed by the trader in any manner whatsoever in relation to Business:
any goods. [Sec. (2) (1) (f)] Consumer
Protection
7. Deficiency: Deficiency means any fault, imperfection, shortcoming or Act
inadequacy in the quality, nature and manner of performance which is required
to be maintained by or under any law for the time being enforce or has been
undertaken to be performed by a person in pursuance of a contract or
otherwise in relation to any service. [Sec. 2 (1) (g)]

8. Goods: Goods means goods as defined in the Sale of Goods Act, 1930.
[Sec. 2 (1) (i)]

According to the sale of goods act, goods mean every kind of movable
property other than actionable claims and money, i.e. legal tender. It includes
shares, patent rights, copy rights, trademarks, growing crops, grass, fruits,
minerals, water, electricity etc.

9. Manufacturer: Manufacturer means a person who –

(i) makes or manufactures any goods or parts thereof; or

(ii) does not make or manufacture any goods but assembles parts
thereof made or manufactured by others; or
(iii) puts or causes to be put his own mark on any goods made or
manufactured by any other manufacturer. [Sec. 2 (1) (j)]

10. Person: Person includes-

(i) a firm whether registered or not;

(ii) a Hindu Undivided Family;
(iii) a cooperative society;
(iv) every other association of person whether registered under the
Societies Registration Act, 1860 or not. [Sec. 2 (m)]

11. Service: Service means service of any description which is made available
to potential users and includes, but not limited to, the provision of facilities in
connection with banking, financing, insurance, transport, processing, supply of
electrical or other energy, board or lodging or both, housing construction,
entertainment, amusement or the purveying of news or other information, but

Odisha State Open University Page 48

does not include the rendering of any service free of charge or under a contract
of personal service. [Sec. 2 (o)]

Thus, this definition excludes two specific types of services from its scope:

(i) the services rendered free of change, and

(ii) the services rendered under the contract of personal service. Legal
12. Restrictive Trade Practice: Restrictive trade practice means a trade Aspects of
practice which tends to bring about manipulation of price or its condition of Business:
delivery or to affect flow of supplies in the market relating to goods or services Consumer
in such a manner as to impose on the consumers unjustified costs or Protection
restrictions and shall include the following: Act
(i) Delay beyond the period agreed to by a trader in supply of such
goods or in providing the services which has led or is likely to lead
to rise in the price.
(ii) Any trade practice which requires a consumer to buy, hire or avail
of any goods or, as the case may be, services as condition precedent
to buying, hiring or availing of other goods or services.

13. Spurious goods and services: Spurious goods and services means such
goods and services which are claimed to be genuine but they are actually not
so.

14. Trader: Trader in relation to any goods means a person who sells or
distributes any goods for sale and includes the manufacturer thereof, and
where such goods are sold or distributed in package from, includes the packer
thereof. [Sec. 2 (q)]

15. Unfair Trade Practice: Unfair trade practice means a trade practice which
for the purpose of promoting the sale, use or supply of any goods or for the
provision of any service, adopts any unfair method or unfair or deceptive
practice including any of the following practices:

(1) Misleading or false representations

(2) Advertisement of bargain or bait
(3) Offering gifts or prizes with intention of not providing them
(4) Conducting promotional contests
(5) Withholding information about final results of the scheme
(6) Noncompliance of product safety standards
(7) Hoarding or destruction of goods

Rights of Consumers

The consumers possess the following rights:

1. Right to be protected or right to safety

2. Right to be informed
Odisha State Open University Page 49
3. Right to choose
4. Right to be heard
5. Right to be redressed
6. Right to consumer education
7. Right to value
8. Right to healthy environment or quality of life
3.4 Consumer Protection Councils
Legal
The Act provides for establishment of Consumer Protection councils at three Aspects of
levels: Business:
Consumer
(i) At the Central Level, the Central Consumer protection council.
(ii) At the State Level, the State Consumer Protection Council. Protection
(iii) At the District Level, the District Consumer Protection Council. Act

The Central Consumer Protection Council

The main provisions as to establishment of the Central Consumer Protection

Council are as under:

Establishing by Notification: The Central Government shall by notification,

establish with effect from such date as it may specify in such notification, a
council to be known as the Central Consumer Protection Council. [Sec. 4 (1)]

Constitution: The Central Council shall consist of the following members,

namely:

(a) The minister in-charge of the consumer affairs in the Central

Government, who shall be its Chairman, and
(b) Such number of other official or non-official members representing
such interests as may be prescribed.

Term of Office: The term of the council shall be three years. [Rule 3 (2)]

Filling the Vacancies: Any member may, by writing under his hand to the
chairman of the Central Council, resign from the council. The vacancies, so
caused or otherwise, shall be filled from the same category by the Central
Government and such person shall hold office so long as the member whose
place he fills would have been entitled to hold office, if the vacancy had not
occurred. [Rule 3 (3)]

Procedure for Meetings: The Central Council shall meet as and when
necessary, but at least one meeting of the council shall be held every year. [Sec
5 (1)]

Objects of the Central Council: The objects of the Central Council shall be
to promote and protect the rights of the consumers such as:

Odisha State Open University Page 50

 (i) The right to be protected against the marketing of goods and
services which are hazardous to life and property.
(ii) The right to be informed about the quality, quantity, potency,
purity, standard and price of goods or services, as the case may be
so as to protect the consumer against unfair trade practices.
(iii) The right to be assured, wherever possible, access to a variety of
goods and services at competitive prices.
(iv) The right to be heard and to be assured that consumer’s interests Legal
will receive due consideration at appropriate forums. Aspects of
(v) The right to seek redressal against unfair trade practices or Business:
restrictive trade practices or unscrupulous exploitation of Consumer
consumers; and
(vi) The right to consumer education. [Sec. 6]
Protection
Act

The State Consumer Protection Council

The Act contains following provisions regarding the State Consumer

Protection Council, hereinafter referred as the State Council:

Establishing the Council: The State Government shall by notification,

establish with effect from such date as it may specify in such notification, a
council to be known as the State Consumer Protection Council. [Sec. 7 (1)]

Constitution: The State Council shall consist of the following members,

namely:

(a) The minister in-charge of the consumer affairs in the State

Government, who shall be its Chairman, and
(b) Such number of other official or non-official members representing
such interests as may be prescribed by the State Government;
(c) Such number of other official or non-official members, not exceeding
ten, as may be nominated by the Central Government. [Sec.7 (2)
amended in 2002]
Meetings: The State Council shall meet as and when necessary but not less
than two meetings shall be held every year. [Sec. 7 (3)]
Time and Place of meeting: The State Council shall meet at such time and
place as the Chairman may think fit and shall observe such procedure in regard
to the transaction of its business as may be prescribed by the State
Government. [Sec. 7 (4)]

Objects: The objects of every State Council shall be to promote and protect
within the state the rights of the consumers laid down in sec. 6. It means that it
has the similar objectives to that of the Central Council as stated earlier. [Sec.
8]

The District Consumer Protection Council

The amendment made in the year, 2002 provides for establishment of a

District Consumer Protection Council. The provisions are as follows:
Odisha State Open University Page 51
Establishment: The State Government shall establish for every district, by
notification, a council to be known as the District Consumer Protection
Council with effect from such date as it may specify in such notification. [Sec.
8 A (1)]

Constitution: The District Consumer Protection Council shall consist of the

following members, namely: Legal
Aspects of
(a) The collector of the District, who shall be its Chairman; and
(b) Such number of other official or non-official members representing Business:
such interests as may be prescribed by the State Government. [Sec.8 A Consumer
(2)] Protection
Act
Meetings: The District Council shall meet as and when necessary but not less
than two meetings shall be held every year. [Sec. 8A (3)]
Time and Place of meeting: The District Council shall meet at such time and
place within the district as the Chairman may think fit and shall observe such
procedure in regard to the transaction of its business as may be prescribed by
the State Government. [Sec. 8A (4)]

Objects: The objects of every District Council shall be to promote and protect
within the district the rights of the consumers laid down in sec. 6. [Sec. 8B]

3.5 Dispute Redressal Agencies

To provide speedy and simple redressal of consumer disputes, a three-tier

quasi-judicial machinery has been set-up. This machinery includes the
following bodies:

I. The District Forum

II. The State Commission
III. The Central Commission

These quasi-judicial bodies observe the principles of natural justice, i.e.

justice, equity and good conscience.

The District Forum

The important provisions regarding the district forum are as under:

Establishment: There shall be established a consumer disputes redressal

forum to be known as the district forum by the State Government in each
district of the state by notification. The state government may, if deems fit;
establish more than one District Forum in a district. [Sec. 9 (a)]

Composition: Each district forum shall consist of the following:

(i) A person shall be its President;

Odisha State Open University Page 52

 (ii) Two other members, one of whom shall be a woman. [Sec. 10 (1)]

Qualifications: The qualifications of the president and the members of a

district forum are as follows:
(iii) The President shall be person who is or has been or is qualified to
be a District Judge.
(iv) The other members shall have the following qualifications: Legal
(a) They shall be not less than thirty-five years of age; Aspects of
(b) They shall possess a bachelor’s degree from a recognized Business:
university; Consumer
(c) They shall be person of ability, integrity and standing and
have adequate knowledge and experience of at least ten Protection
years in dealing with problems relating to economics, law, Act
commerce, accountancy, industry, public affairs or
administration. [Sec. 10 (1)]

Disqualifications: A person shall be disqualified for appointment as member

in any of the following cases:
(v) If he has been convicted and sentenced to imprisonment for an
offence which, in the opinion of the State Government, involves
moral turpitude.
(vi) If he is an undischarged insolvent.
(vii) If he is of unsound mind and stand so declared by a competent
court.
(viii) If he has been removed or dismissed from the service of the
Government or a body corporate owned or controlled by the
Government.
(ix) If he has, in the opinion of the State Government, such financial
or other interest as is likely to affect prejudicially the discharge by
him of his functions as a member.
(x) If he has such other disqualifications as may be prescribed by the
State Government.

Appointment: Every appointment of the President and members shall be

made by the State Government on the recommendation of a selection
committee consisting of the following:
(i) The President of the State Commission - Chairman.

(ii) Secretary, Law Department of the State - Member.

(iii) Secretary, in charge of the department, dealing with consumer

affairs in the State. [Sec. 10 (1A)] - Member.

Tenure of Office: Every member of the District Forum shall hold office for a
term of five years or up to the age of 65 years, whichever is earlier. [Sec.
10(2)]

Odisha State Open University Page 53

Reappointment: A member shall be eligible for reappointment for another
term of five years or up to the age of sixty-five years, whichever is earlier. Re-
appointment shall be subject to the condition that he fulfills the qualifications
and other conditions for appointment. Such re-appointment should also be
made on the basis of the recommendation of the Selection Committee.

Resignation and Filling the Vacancy: Any member may resign his office in Legal
writing under his hand addressed to the State Government. When such Aspects of
resignation is accepted, his office shall become vacant. The vacancy may be Business:
filled by the appointment of a person possessing any of the qualifications Consumer
mentioned above in relation to the category of the member who has resigned.
Protection
Act
Salary and Terms and Conditions of service: The salary or honorarium and
other allowance payable to, and the other terms and conditions of service of
the members of the District Forum shall be such as may be prescribed by the
State Government. [Sec. 10 (3)]

Jurisdiction of District Forum: Jurisdiction of the district forum may be

discussed under two heads:

A. Monetary Jurisdiction, and

B. Geographical or territorial jurisdiction.

A. Monetary Jurisdiction: The district forum enjoys the jurisdiction to

entertain complaints where the value of goods or services and the
compensation, if any, claimed does not exceed Rs. 20 Lakh. [Sec. 11 (1)]

B. Geographical or territorial jurisdiction: The Geographical Jurisdiction

of the district forum for the purpose of complaints shall be any of the
following places:
(i) In case of all the opposite parties are at one place: Complaint may be
filed at the place where the opposite party or each of the opposite
parties actually and voluntarily resides or carries on business or
personally works for gain.
(ii) In case one of the parties is at one place: In case any of the apposite
parties resides or carries on business or works for gain at a particular
place, then the complaint may be filed at that place either with the
permission of the district forum or with the acquiesce of the other
opposite parties.
(iii) Where cause of action arises: Complaint may be filed at the place
where the cause of action, wholly or in part, arises. [Sec. 11]

Procedure of Filing Complaint

The manner in which a complaint may be filed with a District Forum is as

follows:

Odisha State Open University Page 54

1. Person Entitled to File Complaint: A complaint in relation to any goods
sold or delivered or agreed to be sold or delivered or any service provided
or agreed to be provided may be filed with a district forum by any of the
following:
(i) By the customer, to whom such goods are sold or delivered or agreed
to be sold or delivered or such service provided or agreed to be
provided.
(ii) By any recognized consumer association. It is immaterial weather the Legal
consumer to whom the good sold or delivered or agreed to be sold or Aspects of
delivered or service provided or agreed to be provided is a member of
Business:
such association or not.
(iii) By one or more consumers – Where there are numerous consumers Consumer
having the same interest, with the permission of the district forum, on Protection
behalf of, or for the benefit of, all consumers so interested anyone or Act
more of such consumers can file a complaint.
(iv) By the Central Government.
(v) By the State Government.

2. Written Complaint: Every complaint made by a complainant must be in

writing. [Sec. 2 (c)]

3. Fee: Every complaint filed shall be accompanied with the amount of fee.
The amount of fee and the manner of payment shall be prescribed by the
State Government.

4. Contents of Complaint: A complaint addressed to the District Forum

must include the following facts:
(i) The name, description and the address of the complaint.
(ii) The name, description and the address of the opposite party or
parties, as the case may be, so far as they can be ascertained.
(iii) The facts relating to the complaint and when and where it arose.
(iv) Documents in support of the allegations contained in the complaint.
(v) The relief which the complaint claims.

5. Delivery of Complaint: A complaint may be delivered personally by hand

or by post.

6. Admission or Rejection: The District Forum may allow the complaint to

be admitted or rejected. The admissibility of the complaint shall ordinarily
be decided within twenty-one days from the date on which the complaint
was received. But a complaint shall be rejected only after an opportunity of
being heard has been given to the complainant.

7. Proceeding with the complaint: Where a complaint is allowed to be

proceeded with the district forum may proceed with the complaint in the
manner provided under this Act.

Odisha State Open University Page 55

8. Transfer of Complaint: Where a complaint has been admitted by the
district forum, it shall not be transferred to any other court or tribunal or
any authority setup by or under any other law for the time being in force.
[Sec. 12(4)]
Legal
Complaint Redressal Procedure Aspects of
Business:
Section 13 lays down the procedure for redressal of complaints received by the
district forum. The procedure may be discussed under two major heads:
Consumer
Protection
I. Procedure for complaints relating to goods Act
II. Procedure for complaints relating to services

I. Procedure for Complaints Relating to Goods: The district forum takes

following steps for redressing the complaints relating to goods:

(i) Reference of complaint to opposite party: The district forum

shall, on admission of a complaint refer a copy of the complaint
within 21 days from the date of its admission to the opposite party.
The district forum will direct him to give his version of the case
within a period of thirty days or such extended period not
exceeding fifteen days as may be granted by the district forum.

(ii) Settlement of dispute in case the opposite party denies or fails

to represent his case: Where the opposite party on receipt of a
complaint referred to him denies or disputes the allegations
contained in the complaint, or omits or fails to take any action to
represent his case within the time given by the district forum, the
district forum shall proceed to settle the consumer dispute in the
prescribed manner. [Sec. 13 (1) (b)]

(iii) Obtaining sample of goods: Where the complaint alleges a defect

in the goods which cannot be determined without proper analysis or
test of the goods, the district forum shall obtain a sample of the
goods from the complainant. It will seal it and authenticate it in the
manner prescribed. [Sec. 13 (1) (c)]

(iv) Referring sample to laboratory: The sample so sealed then be

referred to the appropriate laboratory along with the following
directions:

(a) For making an analysis or testing, whichever may be necessary,

with a view of finding out whether such goods suffer from any
defect alleged in the complaint or from any other defect.

Odisha State Open University Page 56

 (b) For reporting its findings thereof to the district forum within a
period of forty-five days of the receipt of the reference or
within such extended period as may be granted by the district
forum. [Sec. 13 (1) (c)]

(v) Deposit of fee: Before any sample of the goods is referred to any
appropriate laboratory, the district forum may require the Legal
complainant to deposit to the credit of the forum such fees as may Aspects of
be specified, for payment to the appropriate laboratory for carrying Business:
out the necessary analysis or test in relation to the goods in
question. [Sec. 13 (1) (d)] Consumer
Protection
Act
(vi) Remitting the fee to the laboratory: The district forum shall remit
the amount deposited to its credit to the appropriate laboratory to
enable it to carry out the analysis or test. [Sec. 13 (1) (e)]

(vii) Forwarding report to the opposite party: On receipt of the report

from the appropriate laboratory, the district forum shall forward a
copy of the report along with such remarks as the district forum
may feel appropriate to the opposite party. [Sec. 13 (1) (e)]

(viii) Requiring submission of objections: If any of the parties disputes

the correctness of the findings of the appropriate laboratory, or
disputes the correctness of the methods of analysis or test adopted
by the appropriate laboratory, the district forum shall require the
opposite party or the complainant to submit in writing his
objections in regard to the report made by the appropriate
laboratory. [Sec. 13 (1) (f)]

(ix) Hearing opportunity: The district forum shall thereafter give a

reasonable opportunity to the complainant as well as the opposite
party of being heard as to the correctness or otherwise of the report
made by the appropriate laboratory and also as to the objection
made in relation thereto. [Sec. 13 (1) (g)]

(x) Issue of order: The district forum, after giving a reasonable

opportunity of being heard to all the parties, shall issue an
appropriate order. The order will be in accordance with the
provisions of section 14. [Sec. 13 (1) (g)]

II. Procedure for Complaints Relating to Services: In case the complaint

received relates to any service, the district forum shall adopt the following
procedure:

Odisha State Open University Page 57

 (i) Reference of complaint to opposite party: The district forum on
admission of a complaint, shall refer a copy of such complaint to the
opposite party directing him to give his version of the case within a
period of thirty days or such extended period not exceeding fifteen
days as may be granted by the district forum. [Sec. 13 (2) (a)]

(ii) Procedure in case the opposite party denies allegations or fails Legal
to represent the case: Where the opposite party, on receipt of a Aspects of
copy of the complaint, referred to him denies or disputes the Business:
allegations contained in the complaint, or omits or fails to take any
action to represent his case within the time given by the district Consumer
forum, the district forum shall proceed to settle the consumer Protection
dispute. [Sec. 13 (2) (b)] Act
(iii) Settlement of dispute by the forum: If the opposite party denies
allegations or fails to represent his case, the district forum shall
proceed to settle the case in the following manner:

(a) On the basis of evidence brought to its notice by the complainant

and the opposite party, where the opposite party denies or dispute
the allegations contained in the complaint, or

(b) Ex parte on the basis of evidence brought to its notice by the

complainant where the opposite party omits or fails to take any
action to represent his case within the time given by the forum.
[Sec. 13 (2) (b)]

(iv) Where complainant fails to appear: Where the complainant fails

to appear on the date of hearing before the district forum, the district
forum may either dismiss the complaint for default or decide it on
merits. [Sec. 13 (2) (c) inserted in 2002]

Other Provisions

1. No Question on the ground of natural justice: No proceedings

complying with the procedure laid down in this section shall be called in
question in any court on the ground that the principles of natural justice
have not been complied with. [Sec. 13(3)]

2. Hearing and Decision: Every complaint shall be heard as expeditiously

as possible. Efforts shall be made to decide the complaint within a period
of three months from the date of receipt of notice by opposite party where
the complaint does not require analysis or testing of commodities. Where
it requires analysis of testing of commodities efforts shall be made to
decide within five months from the said date.

3. Adjournment: No adjournment shall be ordinarily granted by the district

forum unless sufficient cause is shown and the reasons for grant of
adjournment have been recorded in writing by the forum.
Odisha State Open University Page 58
4. Orders as to costs: The district forum shall make such orders as to the
costs occasioned by the adjournment as may be provided in the regulations
made under this act.

5. Delayed disposal of complaint: In the event of a complaint being

disposed of after the period so specified, the district forum shall record in
writing, the reasons for the same at the time of disposing of the said
Legal
complaint. Aspects of
Business:
6. Interim Order: Where it appears to the forum necessary, it may pass such Consumer
interim order as is just and proper in the facts and circumstances of the
Protection
case.
Act

Order of the District Forum

After the proceeding conducted under section 13, if the district forum is
satisfied it shall issue an order to the opposite party directing him to do one or
more of the following things:

1. Remove the defect

2. Replace the goods
3. Return to the complainant the price
4. Compensation to the consumer
5. Pay punitive damages
6. Remove the defects or deficiencies
7. Discontinue the unfair trade practice
8. Not to offer the hazardous goods
9. Withdraw the hazardous
10. Cease manufacture of hazardous goods
11. Pay such sum as may be determined a large number of consumers
12. Issue corrective advertisement to neutralize the effect
13. Provide for adequate costs

Appeal against the order

1. Within thirty days: Any person aggrieved by an order made by the

district forum may prefer an appeal against such order to the State
Commission within a period of thirty days from the date of the order,
in such form and manner as may be prescribed.

2. Extension: The State Commission may, however, entertain an appeal

after the expiry of the said period of thirty days if it is satisfied that
there was sufficient cause for not finding it within that period. [Sec. 15]

3. Deposit of amount: No appeal by a person, who is required to pay any

amount in terms of an order of the district forum, shall be entertained
by the State Commission unless the appellant has deposited in the
Odisha State Open University Page 59
 prescribed manner 50 percent of that amount or twenty five thousand
rupees, whichever is less.

Conduct of Proceedings

Following are the major provisions regarding the conduct of proceedings of

the district forum: Legal
Aspects of
1. Every proceeding referred to above shall be conducted by the President Business:
of the district forum and at least one member thereof sitting together.
Consumer
[Sec. 14(2)]
2. Where the member, for any reason, is unable to conduct the proceeding Protection
till it is completed, the President and the other member shall continue Act
the proceeding from the stage at which it was last heard by the previous
member.
3. Every order made by the district forum shall be signed by its president
and the member or members who conducted the proceeding. [Sec. 14
(2A)]
4. Where the proceeding is conducted by the president and one member
and they differ on any point or points, they shall state the point or
points on which they differ and refer the same to the other member for
hearing on such point or points and the opinion of the majority shall be
the order of the district forum.
5. Subject to the foregoing provisions, the procedure relating to the
conduct of the meeting of the district forum, its sitting and other
matters shall be such as may be prescribed by the State Government.
[Sec. 14 (3)]

Powers of the District Forum

For the purpose of setting the disputes, the district forum shall have the same
powers as are vested in a Civil Court under Code of Civil Procedure, 1908
while trying a suit in respect of the following matters, namely:

(i) Enforcing the attendance

(ii) Discovery production of any document
(iii) Evidence on affidavits
(iv) Requisitioning of the report
(v) Examination of any witness

The State Commission

The main provisions regarding the state commission are as under:

Establishment: There shall be established a consumer disputes redressal

commission to be known as the State Commission by the State Government in
the state by notification. [Sec. 9 (b)]

Composition: Each state commission shall consist of the following:

(i) A person who shall be its President;

Odisha State Open University Page 60

 (ii) At least Two and not more than such number of members as
may be prescribed, and one of whom shall be a woman.

Qualifications: The qualifications of the members of a State commission are

as follows:
(i) The President shall be person who is or has been a Judge of
a high court.
(ii) The members shall have the following qualifications: Legal
(a) They shall be not less than thirty-five years of age; Aspects of
(b) They shall possess a bachelor’s degree from a recognized Business:
university; and Consumer
(c) They shall be person of ability, integrity and standing and
have adequate knowledge and experience of at least ten
Protection
years in dealing with problems relating to economics, law, Act
commerce, accountancy, industry, public affairs or
administration.

Disqualifications: A person shall be disqualified for appointment as member

in any of the following cases:
(i) If he has been convicted and sentenced to imprisonment for an
offence which (in the opinion of the State Government involves
moral turpitude.
(ii) If he is an undischarged insolvent.
(iii) If he is of unsound mind and stand so declared by a competent
court.
(iv) If he has been removed or dismissed from the service of the
Government or a body corporate owned or controlled by the
Government.
(v) If he has, in the opinion of the State Government, such financial
or other interest as is likely to affect prejudicially the discharge
by him of his functions as a member.
(vi) If he has such other disqualifications as may be prescribed by the
State Government.

Appointment of President: The President of State Government shall be

appointed by the State Government. However, no such appointment shall be
made except after consultation with the Chief Justice of the high court. [Sec.
16 (1) (a)]

Appointment of Members: Every appointment shall be made by the State

Government on the recommendation of a selection committee consisting of the
following, namely:
(i) The President of the State Commission -
Chairman

(ii) Secretary, Law Department of the State -

Member

Odisha State Open University Page 61

 (iii) Secretary, in charge of the department dealing with consumer
affairs in the State.
- Member

Salary and Terms and Conditions of service: The State and national
commission other allowances payable to and the other terms and conditions of
service of the members of the state commission shall be such as may be Legal
prescribed by the State Government. [Sec.16 (2)]
Aspects of
Terms of Office: Every member of the State Commission shall hold office for Business:
a term of five years or up to the age of 67 years, whichever is earlier. [Sec. Consumer
16(3)] Protection
Reappointment: A member shall be eligible for reappointment for another Act
term of five years or up to the age of sixty-seven years, whichever is earlier,
subject to the condition that he fulfills the qualifications and other conditions
for appointment. Such re-appointment shall be made on the basis of the
recommendation of the Selection Committee.
A person appointed as a President of the State Commission shall also be
eligible for re-appointment in the manner provided in this section.

Resignation and Filling the Vacancy: A member may resign his office in
writing under his hand addressed to the State Government. On such
resignation being accepted, his office shall become vacant. The vacancy may
be filled by the appointment of a person possessing the qualifications in
relation to the category of the member who is required to be appointed in place
of the person who has resigned.

Jurisdiction of the State Commission: According to section 17, the

Jurisdiction of the State Commission is as follows:

A. To entertain complaints where the value of the goods or services and

compensation, if any, claimed exceeds Rs. 20 lakh but does not exceed
Rs. 1 crore.

B. To entertain appeals against the order of any district forum within the
State.

C. To entertain a complaint if the opposite party or each of the opposite

parties at the time of the institution of the complaint, actually and
voluntarily resides or carries on business or has a branch office or
personally works for again within the limits of jurisdiction of the
commission.

D. To entertain a complaint if any of the opposite parties at the time of the

institution of the complaint, actually and voluntarily resides or carries
on business or has a branch office or personally works for gain within
the jurisdiction of the commission.

Odisha State Open University Page 62

Benches of the State Commission

The jurisdiction, powers and authority of the state commission may be

exercised by its benches. The constitution and working procedure of a bench
shall be as follows:

1. Composition: A bench may be constituted by the President with one

or more members as the president may deem fit.
Legal
Aspects of
2. Process of Decision Making: If the members of a bench differ in Business:
opinion on any point, the points shall be decided according to the Consumer
opinion of the majority, if there is a majority. But if the members are
equally divided, they shall state the points on which they differ and
Protection
they shall make a reference to the president. Act

3. Circuit Benches: The state commission shall ordinarily function in the

state capital but may perform its functions at such other place as the
state government may, in consultation with the state commission,
notify in the official gazette, from time to time.

Other Provisions

1. Transfer of cases: On the application of the complainant or of its own

motion, the state commission may, at any stage of the proceeding,
transfer any complaint pending before the district forum to another
district forum within the state if the interest of justice so requires.

2. Procedure applicable to state commissions: The provisions of

sections 12, 13 and 14 and the rules made there under for the disposal
of complaints by the district forum shall with such modifications as
may be necessary be applicable to the disposal of disputes by the state
commission. [Sec. 18]

3. Appeals: Any person aggrieved by an order made by the state

commission in exercise of its powers conferred by sub-clause (i) of
clause (a) of section 17 may prefer an appeal against such order to the
national commission within a period of thirty days from the date of the
order in such form and manner as may be prescribed. [Sec. 19]

4. Hearing of Appeal: An appeal filed before the state commission or the

national commission shall be heard as expeditiously as possible and an
endeavour shall be made to finally dispose of the appeal within a
period of ninety days from the date of its admission.

The National Commission

The main provisions regarding the National Commission are as under:

Odisha State Open University Page 63

Establishment: There shall be established a National Consumer Disputes
Redressal Commission by the Central Government by notification. [Sec. 9 (c)]

Composition: The national commission shall consist of the following:

(i) A person shall be its President;
(ii) At least four and not more than such number of members as
may be prescribed by the central government. However, one
of whom shall be a woman. Legal
Aspects of
Qualifications: The qualifications of the members of a national commission Business:
are as follows: Consumer
(i) The President shall be person who is or has been a Judge of
the Supreme Court. Protection
(ii) The members shall have the following qualifications: Act
(a) They shall be not less than thirty-five years of age;
(b) They shall possess a bachelor’s degree from a
recognized university; and
(c) They shall be person of ability, integrity and standing
and have adequate knowledge and experience of at
least ten years in dealing with problems relating to
economics, law, commerce, accountancy, industry,
public affairs or administration.

Disqualifications: A person shall be disqualified for appointment as member

in any of the following cases:
(i) If he has been convicted and sentenced to imprisonment for an
offence which involves moral turpitude.
(ii) If he is an undischarged insolvent.
(iii) If he is of unsound mind and stand so declared by a competent
court.
(iv) If he has been removed or dismissed from the service of the
Government or a body corporate owned or controlled by the
Government.
(v) If he has, in the opinion of the Central Government, such financial
or other interest as is likely to affect prejudicially the discharge by
him of his functions as a member.
(vi) If he has such other disqualifications as may be prescribed by the
Central Government.

Appointment of President: The President of shall be appointed by the

Central Government. However, no such appointment shall be made except
after consultation with the Chief Justice of India.

Appointment of Members: Every appointment under this clause shall be

made by the Central Government on the recommendation of a selection
committee consisting of the following, namely:

(i) A person who is a Judge of the Supreme Court, to be nominated by

the chief justice of India
- Chairman

Odisha State Open University Page 64

 (ii) The Secretary in the Department of legal affairs in the government
of India-Member

(iii) Secretary of the Department Dealing with consumer affairs in the

Government of India-Member

Salary and Terms and Conditions of service: The Salary or honorarium and
Legal
other allowances payable to and the other terms and conditions of service of
the members of the national commission shall be such as may be prescribed by Aspects of
the Central Government. [Sec. 20 (2)] Business:
Consumer
Terms of Office: Every member of the National Commission shall hold office
Protection
for a term of five years or up to the age of 70 years, whichever is earlier. [Sec.
20(2)] Act

Reappointment: A member shall be eligible for reappointment for another

term of five years or up to the age of seventy years, whichever is earlier. Such
re-appointment shall be made on the basis of the recommendation of the
Selection Committee.
A person appointed as a President of the National Commission shall also be
eligible for re-appointment in the manner provided in this section.

Resignation and Filling the Vacancy: A member may resign his office in
writing under his hand addressed to the Central Government. On such
resignation being accepted, his office shall become vacant. The vacancy may
be filled by the appointment of a person possessing any of the qualifications in
relation to the category of the member who is required to be appointed in place
of the person who has resigned.

Jurisdiction of the National Commission: The Jurisdiction of the National

Commission is as follows:
A. To entertain complaints where the value of the goods or services and
compensation, if any, claimed exceeds Rs. 1 crore.

B. To entertain appeals against the order of any State Commission.

C. To call for the records and pass appropriate orders in any consumer
dispute which is pending before or has been decided by any State
Commission.

Power and Procedure applicable to the National commission: The

provisions of sections 12, 13 and 14 and the rules made there under for the
disposal of complaints by the district forum shall, with such modifications as
may be considered necessary by the commission, be applicable to the disposal
of disputes by the National Commission.

Power to set aside ex party Order: Where an order is passed by the national
commission ex party against the opposite party or a complainant, as the case
may be, the aggrieved party may apply to the commission to set aside the said
order in the interest of justice.

Odisha State Open University Page 65

 Transfer of cases: On the application of the complainant or of its own motion,
the national commission may, at any stage of the proceeding, in the interest of
justice, transfer any complaint pending before the district forum of one state to
a district forum of another state or before one state commission to another state
commission.

Benches of the national commission: The jurisdiction, powers and authority Legal Aspects
of the national commission may be exercised by its benches thereof. The of Business:
constitution and procedure of a bench shall be as follows: Consumer
(a) Constitution: - A bench may be constituted by the President with Protection Act
one or more members as the president may deem fit.

(b) Process of Decision Making: - If the members of a bench differ in

opinion on any point, the points shall be decided according to the
opinion of the majority, if there is a majority. But if the members are
equally divided, they shall state the point or points on which they differ
they shall make a reference to the president. The president shall either
hear the point or points himself or refer the case for hearing on such
points by one or more or the other members. Then such points shall be
decided according to the opinion of the majority of the members who
have heard the case, including those who first heard it.

(c) Circuit Benches: - The National commission shall ordinarily

function in the state capital but may perform its functions at such other
place as the central government may, in consultation with the National
Commission, notify in the official gazette, from time to time.

Appeal: Any person, aggrieved by an order made by the National commission

in exercise of its power conferred may prefer an appeal against such order of
Supreme Court within a period of thirty days from the date of the order.

A Comparative Study of District Forum, State and National Commission

Basis of District Forum State National

distinction Commission Commission
1. Establishment A District forum is A State A National
established by the Commission is Commission
State Government. established by the is established
State Government. by the Central
Government.
2. Number There can be one or There can be only There can be only
more district forums state commission one national
in a district. in a state. commission in the
country.
3. Geographical Its jurisdiction extends Its jurisdiction Its jurisdiction
jurisdiction to the district or part of extends to the extends to the
the district for which it whole state which whole of India.
is established. it is set up.

Odisha State Open University Page 66

4.Monetary District forum can State Commission National
Jurisdiction entertain all complaints can entertain all Commission can
claiming not exceeding appeals against all entertain all appeals
Rs. 20 lakh. District Forum of made against award
the state and the of all the state
complaints commissions and
claiming more than complaints claiming
Rs. 20 lakh but not exceeding Rs. 1
exceeding Rs. 1 crore.
crore.
5. Number of It consists maximum of It consists at least It consists at least
Members three members one of three members one five members one
whom shall be a woman. of whom shall be a of whom shall be a
woman. But woman. But
members cannot members cannot
exceed the number exceed the number
prescribed by the prescribed by the
Government. Government.
6. President A person who is or has A person who is or A person who is
been or is qualified to has been Judge of or has been Judge
be a District Judge, high court, may be of the supreme
may be its president. appointed its court may be its
president. president.
7. Age limit A member of district A member of state A member of
of members forum can hold office commission can national
up to the age of 65 hold his office up commission can
years. to the age of 67 hold office up to
years. the age of 70
years.
8. Salary The salary and terms For its members The salary and
and terms and conditions of also these are terms and
of Service service of its prescribed by the conditions of
members are state government. service of its
prescribed by the state members are
government. prescribed by the
Central
government.
9. Appeal This forum entertains A state National
only complaints for commission commission
claims. It cannot entertains appeals entertains
entertain appeals. against the order appeals against
made by the the orders of the
district forum. state
commissions.
Appeal against
the order of the
national
commission can
be filed in the
Supreme Court
of India.

Odisha State Open University Page 67

10. Amount Appeal against the Appeal against Appeal against
to be order of the district the order of the the order of the
deposited forum is entertained state national
for appeal when appellant has commission is commission is
deposited fifty percent entertained entertained
of the amount when appellant when appellant
specified in its order has deposited has deposited
or Rs. twenty five fifty percent of fifty percent of
thousand, whichever the amount the amount
is less. specified in its specified in its
order or Rs. order or Rs.
thirty thousand, fifty thousand,
whichever is whichever is
less. less.
11. Control The state commission The national The national
has administrative commission has commission is
control over the administrative an independent
District forum. control over the institution.
state
commission.

3.6 Let’s Sum-up

The Consumer Protection Act, 1986 was established to provide for better
protection of the interests of consumers and for that purpose to make provision
for the establishment of consumer councils and other authorities for the
settlement of consumers' disputes and for matters connected therewith.
Various consumer dispute redressal agencies has been set up at district, state
and national level to resolve the consumer complaints.

3.7 Key Terms

Consumer: A consumer of goods means any person who buys any goods or
services for a consideration which has been paid or promised or partly paid
and partly promised, or under any system of deferred payment.

Consumer Protection Council: The councils established to keep a

surveillance over the protection of consumer rights are called consumer
protection councils.

Dispute Redressal Agencies: To provide speedy and simple redressal of

consumer disputes, a three-tier quasi-judicial machinery has been set-up at
district, state and national level. These are called consumer redressal agencies.

3.8 Self-Assessment Questions

1. What are the qualifications of the members of a national commission?
2. State the objectives of the Consumer Protection Act, 1986.
3. Discuss the purpose of formulating the Central Consumer Protection
Council.
Odisha State Open University Page 68
3.9 Further Readings

 Rao K. Madhusudhana, Cases and Materials on the Consumer Protection

Act, 1986, Asia Law House.
 Singh Avatar, Consumer Protection (Law and Practice), Eastern Book
Company.
Legal
 Gupta S.P. Sen, Commentaries on Consumer Protection Act, Kamal Law Aspects of
House. Business:
 Majumdar P.K., Law of Consumer Protection in India, Orient Publishing Consumer
Company. Protection
Act
3.10 Model Questions

1. Briefly state the important provisions of Consumer Protection Act, 1986.

2. Illustrate the various consumer rights in India.
3. Explain the quasi-judicial machinery available in India, set up for the
redressal of the consumer disputes.
4. Differentiate between the working and jurisdiction of State Commission
and National Commission.
5. Discuss the procedure of filing a complaint with regards to defective goods.

Answers to Self-Assessment Questions

1. The qualifications of the members of a national commission are as

follows:
(i) The President shall be person who is or has been a Judge of
the Supreme Court.
(ii) The members shall have the following qualifications:
(a) They shall be not less than thirty-five years of age;
(b) They shall possess a bachelor’s degree from a
recognized university; and
(c) They shall be person of ability, integrity and standing
and have adequate knowledge and experience of at
least ten years in dealing with problems relating to
economics, law, commerce, accountancy, industry,
public affairs or administration.

2. Consumer Protection Act is formulated to achieve the following

objectives:

a. To provide for better protection of the interests of the consumers.

b. To promote and protect the rights of consumers.

Odisha State Open University Page 69

 c. To make provision for the establishment of consumer councils and
other authorities for the settlement of consumer disputes.
d. To setup quasi-judicial machinery at district, state and central level
for speedy and simple redressal of consumer disputes.
3. The purpose of formulating the Central Consumer Protection Council
is to promote and protect the rights of the consumers such as:
Legal Aspects
(i) The right to be protected against the marketing of goods and of Business:
services which are hazardous to life and property. Consumer
(ii) The right to be informed about the quality, quantity, potency, Protection Act
purity, standard and price of goods or services, as the case may
be so as to protect the consumer against unfair trade practices.
(iii) The right to be assured, wherever possible, access to a variety of
goods and services at competitive prices.
(iv) The right to be heard and to be assured that consumer’s interests
will receive due consideration at appropriate forums.
(v) The right to seek redressal against unfair trade practices or
restrictive trade practices or unscrupulous exploitation of
consumers.
(vi) The right to consumer education.

Odisha State Open University Page 70