BGS Entire Notes

Business Government & Society

Module 1: The Study of Business, Government and Society (BGS): Importance of BGS to Managers –Models of BGS relationships – Market Capitalism Model, Dominance Model, Countervailing Forces Model and Stakeholder Model – Global perspective – Historical Perspective.

What is the Business–Government– Society Field? Business:

Business is a broad term encompassing a range of actions and institutions. It covers management, manufacturing, finance, trade, service, investment, and other activities. The fundamental purpose of every business is to make a profit by providing products and services that satisfy human needs. needs. Like business, it encompasses a wide range of activities and institutions at many levels, from international to local. Government:

Refers to structures and processes in society that authoritatively makes and applies policies and rules. Govt. holds 3 powers 1. Legislative power 2. Executive power 3. Judicial power Society – a network of human h uman relations that includes three interacting elements:

A. Ideas: values, ideologies. B. Institutions C. Material things A.1 Ideas, or intangible objects of thought, include values and ideologies. A.2 Values are enduring beliefs about which fundamental choices in personal and social

life are correct. Cultural habits and norms are based on values.

Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society A.3 Ideologies —for example democracy and capitalism—are bundles of values that

create a certain worldview. They establish the broad goals of life by defining what is considered good, true, right, beautiful, and acceptable. Ideas shape every institution in a society. B. Institutions : is a formal pattern of relations that link people together to accomplish a

goal. They are essential to coordinate the work of individuals who have no personal relationship with each other. In modern societies, economic, political, cultural, legal, religious, military, educational, media, and familial institutions are salient. There are multiple economic institutions including financial institutions, the corporate form, and markets. Collectively, we call these businesses. C. Material things: including land, natural resources, infrastructure, and manufactured

goods. These shape and, in the case of fabricated objects, are partly products of ideas and institutions. Economic institutions, together with the extent of resources, largely determine the type and quantity quan tity of society's material goods.

Importance of BGS to Managers: 1. To succeed in meeting its objectives a business must be responsive to both its

economic and its noneconomic environment. ExxonMobil, for example, must efficiently discover, refine, transport, and market energy. Yet swift response to market forces is not always enough. There are powerful nonmarket forces to which many businesses, especially large ones, are exposed. Their importance is clear in the two dramatic episodes that punctuate ExxonMobil's history— the 1911 court-ordered. In 1911 the Supreme Court, in a decision that reflected public opinion as well as interpretation of the law, forced Standard Oil to conform to social values favoring open, competitive markets. With unparalleled managerial genius, courage, and perspicacity, John D. Rockefeller and his lieutenants had built a won- der of efficiency that spread fuel and light throughout America at lower cost than otherwise would have prevailed.

2. Recognizing that a company operates not only within markets but within a society is

critical.


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Business Government & Society 3. A basic agreement or social contract exists between the business institution and

society. a. Managers must respect and adhere to society’s expectations. b. This contract defines the broad duties that business must perform to retain society’s support, but these duties are often ambiguous.

Models of BGS relationships: The Market Capitalism Model:

Socio Political Environment Market Environment

Business

The market capitalism model, shown in Figure, depicts business as operating within a market environment, responding primarily to powerful economic forces. The market acts as a buffer between business and nonmarket forces. To appreciate this model, it is important to understand the history and nature of markets and the classic explanation of how they work. Markets are as old as humanity, but for most of recorded history they were a minor institution. People produced mainly for subsistence, not to trade. Then, in the 1700s, some economies began to expand and industrialize, division of labor developed within them, and people started to produce more for trade. As trade grew, the market, through its price signals, took on a more central role in directing the creation and distribution of goods. The advent of this kind of market economy, or an economy in which markets play a major role, reshaped human life. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society The classic explanation of how a market economy works comes from the Scottish professor of moral philosophy Adam Smith (1723–1790). In his extraordinary treatise, The Wealth of Nations, Smith wrote about what he called “commercial society” or what today we call capitalism. He never used that word. It was adopted later by the socialist philosopher Karl Marx (1818–1883), who contrived it as a term of pointed insult. But it caught on and soon lost its negative connotation.19 Smith said that the desire to trade for mutual advantage laid deep in human instinct. He noted that the growing division of labor in society led more people to try to satisfy their self-interests by specializing their work, then exchanging goods with each other. As they did so, the market's pricing mechanism reconciled supply and demand, and its ceaseless tendency was to make commodities cheaper, better, and more available. The beauty of this process, according to Smith, was that it coordinated the activities of strangers who, to pursue their selfish advantage, were forced to fulfill the needs of others. In Smith's words, each trader was “led by an invisible hand to promote an end which was no part of his intention,” the collective good of society. Through markets that harnessed the constant energy of greed for the public welfare, Smith believed that nations would achieve “universal opulence.” His genius was to demystify the way markets work, to frame market capitalism in moral terms, to extol its virtues, and to give it lasting justification as a source of human progress. The greater good for society came when businesses competed freely. In Smith's day producers and sellers were individuals and small businesses managed by their owners. Later, by the late 1800s and early 1900s, throughout the industrialized world, the type of economy described by Smith had evolved into a system of managerial capitalism. In it the innumerable, small, owner-run firms that animated Smith's marketplace were overshadowed by a much smaller number of dominant corporations run by hierarchies of salaried managers. These managers had limited ownership in their companies and worked for shareholders. This form of capitalism has now spread throughout the world. Nowhere does it work exactly like Smith's theory. Nevertheless, the market capitalism model continues to exist as an ideal against which to measure practice.


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Business Government & Society The model incorporates important assumptions. One is that government interference in economic life is slight. This is called laissez-faire, a term first used by the French to mean that government should “let us alone.” It stands for the belief that government intervention in the market is undesirable. It is costly because it lessens the efficiency with which free enterprise operates to benefit consumers. It is unnecessary because market forces are benevolent and, if liberated, will channel economic resources to meet society’s needs. It is for governments, not businesses, to correct social problems. Therefore, managers should define company interests narrowly, as profitability and efficiency. Another assumption is that individuals can own private property and freely risk investments. Under these circumstances, business owners are powerfully motivated to make a profit. If free competition exists, the market will hold profits to a minimum and the quality of products and services will rise as firms try to attract more buyers. If one enterprise tries to increase profits by charging higher prices, consumers will go to a competitor. If one producer makes higher-quality products, others must follow. In this way, markets convert selfish competition into broad social bene fits. Other assumptions include these: Consumers are informed about products and prices and make rational decisions. Moral restraint accompanies the self-interested behavior of business. Basic institutions such as banking and laws exist to ease commerce. There are many producers and consumers in competitive markets. The perspective of the market capitalism model leads to these conclusions about the BGS relationship: (1) government regulation should be limited, (2) markets discipline private economic activity to promote social welfare, (3) the proper measure of corporate performance is profit, and (4) the ethical duty of management is to promote the interests of shareholders. These tenets of market capitalism have shaped economic values in the industrialized West and, as markets spread, they do so increasingly elsewhere. There are many critics of capitalism and the market capitalism model. As promised by its defenders, capitalism has created material progress. Yet there are tradeoffs: It is argued that capitalism creates prosperity only at the cost of rising inequality. Karl Marx believed that owners of capital exploited workers and used imperialist foreign Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society policies to spread markets. Others believe that markets erode virtue. The avarice, selflove, and ruthlessness that energize them are base values that drive out virtues such as love and friendship. Another enduring fear is that markets place too much emphasis on money and material objects. Pope John Paul II, for example, cautioned against a “domination of things over people”. Critics see these problems as inherent to markets. Still other criticisms focus on the flaws that sometimes, perhaps inevitably, appear in them. Without correction they may reward conspiracies and monopoly. Also, the profit motive has led companies to pollute and plunder the earth.

Dominance Model: 1&+%,*&-'&.02 3*,4'$

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The dominance model is a second basic way of seeing the BGS relationship. It represents primarily the perspective of business critics. In it, business and government dominate the great mass of people. This idea is represented in the pyramidal, hierarchical image of society shown in Figure. Adopters of this model believe that corporations and a powerful elite control a system that enriches a few at the expense of the many. Such a system is undemocratic. In democratic theory, governments and leaders represent interests expressed by the people, who are sovereign.


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Business Government & Society Proponents of the dominance model focus on the defects and inefficiencies of capitalism. Unlike other models, the dominance model does not represent an ideal in addition to a description of how things are. For its advocates, the ideal is to turn it upside down so that the BGS relationship conforms to democratic principles. In the United States, the dominance model gained a following during the late nineteenth century when large trusts such as Standard Oil emerged, buying politicians, exploiting workers, monopolizing markets, and sharpening income inequality. Beginning in the 1870s, farmers and other critics of big business rejected the ideal of the market capitalism model and based a populist reform movement called populism on the critical view of the BGS relationship implied in the dominance model. Populism is a recurrent spectacle in which common people who feel oppressed or disadvantaged in some way seek to take power from a ruling elite that thwarts fulfillment of the collective welfare. This was an era when, for the first time, on a national scale the actions of powerful business magnates shaped the destinies of common people. The populist movement in America ultimately fell short of reforming the BGS relationship to a democratic ideal. Other industrializing nations, notably Japan, had similar populist movements. Marxism, an ideology opposed to industrial capitalism, emerged in Europe at about the same time as these movements, and it also contained ideas resonant with the dominance model. In capitalist societies, according to Karl Marx, an owner class dominates the economy and ruling institutions. Many business critics worldwide advocated socialist reforms that, based on Marx's theory, could achieve more equitable distribution of power and wealth. In the United States the dominance model may have been most accurate in the late 1800s when it first arose to conceptualize a world of brazen corporate power and politicians who openly represented industries. However, it remains popular. Ralph Nader, for example, speaks its language. In recent years fear of transnational corporations has given the dominance model new life in a global context. Running for president in 2004, Nader tried “to rescue our


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Business Government & Society public authorities from the corporate government of big business,” particularly “large multinational corporations” that are “increasingly and pervasively replacing the sovereignty of the people.”

The Countervailing Forces Model: The countervailing forces model, shown in Figure, depicts the BGS relationship as a flow of interactions among the major elements of society. It suggests complex exchanges of influence among them, attributing dominance to none. This is a model of multiple or pluralistic forces. Their strength waxes and wanes depending on factors such as the subject at issue, the power of competing interests, the intensity of feeling, and the influence of leaders. The countervailing forces model

reflects

the

BGS

relationship

in

industrialized nations with democratic traditions. It differs from the market capitalism model, because it opens business directly to influence by nonmarket forces. Many important interactions implied in it would be evaluated as negligible in the dominance model. Conclusions that can be drawn from this model are: 1. Business is deeply integrated into an open society and must respond to many

forces, both economic and noneconomic. It is not isolated from its social environment, nor is it always dominant. 2. Business is a major initiator of change in society through its interaction with

government, its production and marketing activities, and its use of new technologies. 3. Broad public support of business depends on its adjustment to multiple social,

political, and economic forces. Incorrect adjustment leads to failure. This is the social contract at work.


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Business Government & Society 4. BGS relationships continuously evolve as changes take place in the main ideas,

institutions, and processes of society.

Stakeholder Model: The stakeholder model in Figure

shows

the

corporation at the center of an array of mutual relationships persons,

with

groups,

and

entities

called

Stakeholders.

Stake-

holders are those whom the corporation benefits or burdens by its actions and those who benefit or burden the firm with their actions.

A

corporation

has

large many

stakeholders. These can be divided into two categories based on the nature of the relationship. But the assignments are relative, approximate, and inexact. Depending on the corporation or the episode, a few stakeholders may shift from one category to the other. Primary stakeholders: are a small number of constituents for whom the impact of the

relationship is immediate, continuous, and powerful on both the firm and the constituent. They are stockholders (owners), customers, employees, communities, and governments and may, depending on the firm, include others such as suppliers or c reditors. Secondary stakeholders: include a possibly broad range of constituents in which the

relationship involves less mutual immediacy, benefit, burden, or power to influence. Examples are activist groups, trade associations, and schools.


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Global Perspective: Today global capitalism animates the planetary stage, creating movements of people, money, goods, and information that, in turn, beget conflicts as some benefit more and others less or not at all. Viewing any nation's economy or businesses in isolation from the rest of the world is myopic. Every government finds its economic and social welfare policies judged by world markets. Every corporation has a home country, but as shown in Table 1.1, many large multinational corporations have more sales, assets, and employees outside its borders than within. For now, global capitalism is ascendant. It brings unprecedented wealth creation and new material comforts. But it also imposes burdens on human rights and the environment, challenges diversity of values, and creates conflict with those who are fed upon in the lively predation or who stand aloof from the free market consensus. A fitting perspective on the BGS relationship must, therefore, be global.

Historical Perspective: History is the study of phenomena moving through time. The BGS relationship is a stream of events, of which only one part exists today. Historical perspective is important for many reasons. It helps us see that today's BGS relationship is not like that of other eras; that current ideas and institutions are not the only alternative; that historical forces are irrepressible; that corporations both cause and adapt to change; that our era is not unique in undergoing rapid change; and that we are shaping the future now. When appropriate, we examine the antecedents of current arrangements.


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Module 2: Corporate Governance Introduction, Definition, Market model and control model, OECD on corporate governance, A historical perspective of corporate governance, Issues in corporate governance, relevance of corporate governance, need and importance of corporate governance, benefits of good corporate governance, the concept of corporate, the concept of governance, theoretical basis for corporate governance, obligation to society, obligation to investors, obligation to employees, obligation to customers, managerial obligation, Indian cases

1. Introduction: 1.1 Corporate Governance Definition: 1.1.a Academic point of view:

Corporate Governance is seen that one addresses “the problems that result from the separation of ownership and control.” Viewed from this p erspective it focuses on the •

Formulation of Internal structure

•

Formation of independent audit committee

•

Rules of BOD

•

Rules for disclosure of information to shareholders and creditors

•

Transparency and control of management. Corporate governance deals with the ways in which suppliers of finance to

corporations assure themselves of getting a return on their investment. •

How do the suppliers of finance get managers to return some of the profit to them?

•

How to assure that managers do not steal the capital they supply or invest it in bad projects?

•

How do suppliers of finance control managers?


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Business Government & Society From this point of view, corporate governance tends to focus on simple model: 1. Shareholders elect Directors who represent them 2. Directors vote on key matters and adopt the majority decisions 3. Decisions are made in transparent manner so that shareholders are made accountable. 4. Company adopts accounting standards for providing up of information to share and stakeholder. 5. Company policies and practices adhere to applicable national, state and local laws. 1.1. b from the angle of developed versus developing countries:

Principles underlying the concept are the same and there is no question of the norms governing it being different, the evolution of the systems and procedures that are required to implement it varies from maturity of market. the earlier definitions quoted assumed the in all societies an efficient and functioning legal system is in place, which is unfortunately, not so. American, German, Japanese and other mature and developed economies have all well functioning market systems and highly developed legal institutions, although there are considerable differences between them as there are in other features of democracy. In fact, it is these well-developed and mature institutions that have played a significant role in ushering in faster economic development of these countries. Therefore in such economies, proper checks and balances exist to ensue good corporate behavior. Even if any malpractices occur and corporate misdemeanor is noticed. Quick remedial actions are taken to arrest those practices. From the word of Patricia A Nodoushani & omid Nodoushani CG is defined as “It is a relationship among various participants in determining the direction and performance of the corporation. However CG goes beyond the simple concept of who is in charge and who has the power. Chief among the goal of CG is to increase shareholders value and supporting long term commitment to growth.”


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Business Government & Society Corporate Governance has 3 assumptions •

Primacy of shareholder

•

Diversity of Shareholder group

•

Shareholder wealth maximization

“Corporate Governance is about promoting corporate fairness, transparency and accountability.” “Corporate Governance means doing everything better to improve relations between companies and shareholders; to improve the quality of outside directors; to encourage people to think of long-term relations; information needs of all stakeholders are met and to ensure that executive management is monitored properly in the interest of shareholders.” 1.1.C Narrow Versus Broad perception of Corporate Governance “Corporate Governance is defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society.”

2. Models of CG: 2.1 Model 1:


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Business Government & Society •

Developed countries emphasize market model of corporate governance.

•

Model depicts the relationship between shareholders and corporations o

Corporations are supported by certain financial institutions

o

Corporation will comprise up of directors in which independent directors are spread in different markets.

•

Board of director’s remuneration is set by separate c ommittee of shareholder and their incentive is based on performance.

•

These Independent directors are provided with exclusive information according to their requirements.

•

Shareholders value is considered more.

•

Markets are well established and many of the brands are at maturity and saturation stage.

•

Competition is high and every body is trying to increase market value either by their own effort or by acquiring some other resources.

2.2 Model 2:


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Business Government & Society “In the second version of Mckinsey’s model called the Control model.” Governance chain is represented by •

Underdeveloped equity markets

•

Concentrated ownership

•

Less shareholder transparency

•

Inadequate protection of minority and foreign shareholders.

•

Particular model is emphasized in developing co untries.

3. OECD Principles: The organization for economic Cooperation & development is one of the earliest nongovernment organizations to work on and spell out principles and practices that should govern corporates in their goal to attain long-term shareholders value. The OECD Principles have gained universal acceptance on CG Principles. OECD Principles are as much trendsetter as the Codes of Best practice associated to the Cadbury report. First step required for transformation in CG is to look after the principles laid by the OECD OECD defines CG: Involving ‘a set of relationship between company’s management, board, its shareholders and other stakeholders’. “The system by which business corporations are directed and controlled” 3.1 OECD Elements 1. The right of Shareholder:

Protection of shareholders rights and the capability of shareholders to influence behaviour of the corporation are pillars of good corporate governance The right of shareholder incudes a set of rights to secure ownership of their shares, the right to disclosure of information, voting rights, participation in sale or modification of corporate assets, mergers and new share issues.


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Business Government & Society 2. Equitable treatment of Shareholders:

The OECD is concerned with protecting minority shareholders rights by setting up system that keeps insiders, including managers and directors, from taking advantage of their roles. •

Insider trading prohibition: a cornerstone of market integrity in developed

economies •

Self -dealing and the disclosure of potential conflicting interests: the curse of

emerging markets •

Effective redress: the possibility to seek remedies in courts for all shareholder: a

key implementation aspect •

Transparency with respect to distribution of voting rights and ways voting rights exercised

•

Beneficial ownership and the role of custodians:

3. The role of stakeholder in CG:

The OECD recognizes that there are other stakeholders in companies in addition to shareholders. Banks, bondholders and workers, for example, are important stakeholders in the way in which companies perform and make decisions. The OECD guidelines layout several general provisions for protecting stakeholder’s interest. CG framework should, apart from recognizing the rights of shareholders, allow employee representation on BOD, profit sharing, and creditor involvement in insolvency proceedings and Access to proper information.

4. Disclosure and transparency: A strong financial and non-financial disclosure regime is the heart of corporate governance. OECD lays down a number of provisions for the disclosure and communication of key facts about the company ranging from financial details to governance structures including BOD and their remuneration. The guidelines also specify that independent auditors in accordance with high quality standards should perform annual audits.


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Financial and operating results

•

Company objectives

•

Ownership and control structure

•

Board and executive information and recommendation

•

Foreseeable risk factors

•

Stakeholder information

•

Governance information

•

Independent audit and high quality dissemination channels

5. The Responsibilities of the board: Includes concerns about corporate strategy, risk management, executive compensation and performance as well as accounting and reporting systems.


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4. Issues in Corporate Governance: Corporate Governance has different meaning to different people. But to all, corporate governance is as means to an end, the end being long-term shareholder and stakeholder value. In order to identify the values of the end, some governance issues, which are crucial and critical, are set as objectives. These are: 1. Distinguishing the roles of board and management:

Many of the organizations are stressing on aspects in which business is to be manag ed “by or under the direction of” the board. In such practices, the responsibility for managing the business is delegated by the board to CEO, who in turn delegates responsibility to other senior executives. Board occupies key position between shareholder and company’s management. As per this arrangement, the board has the following functions: a) Select, decide the remuneration and evaluate on regular basis, and when necessary, change the CEO b) Check indirectly the conduct of company’s business to evaluate whether or not it is being correctly managed. c) Review and, where necessary, approve the company’s financial objectives and major corporate plans and objectives. d) Render advice and counsel top management including BOD e) Identify and recommend candidates to shareholders for electing them to BOD f) Review adequacy of system to check all laws and regulation g) All other functions required by law to be performed. 2. Composition of the board and related issues: •

A BOD is a “committee elected by shareholder of a limited company to be responsible for the policy of the company”.

•

Composition of board represents number of directors of different kinds that participate in the work of the board.


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SEBI’s Kumar mangalam Birla Committee report defined the composition of board.

•

“BOD of a company shall have optimum combination of executive and nonexecutive directors with not less than 50 % of BOD to be non-executive.

•

The number Of independent directors would depend whether the chairmen is executive or non-executive.

•

Non-executive chairmen: one third of board with independent director

•

Executive chairmen: half of the board should be independent directors

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Executive Director: is one who is executive of the company and also a member of BOD Non-executive Director: has no separate employment relationship with the company. Independent non-executive director : are those directors on the board who are free from

any business or other relationship, which could materially interfere with the exercise of their independent judgment in the process of decision making as a member of board. Affiliated Director (nominee Director): Non-executive director who has some kind of

independence, impairing relationship with the company or the company’s management. Example link with Supplier Company, he may be partner to other corporate which is providing service to the existing corporate


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Business Government & Society 3. Separation of the roles of the CEO and Chairperson:

Professionalization of family companies should commence with the composition of the board. Practice of combining the role of the chairperson with that of CEO, as is done in countries like US & India leads to conflict in decision-making and too much concentration of power in one person resulting in unhealthy consequences. In UK & Australia, the CEO is prohibited from being the c hairperson of the company. The role of CEO is to lead the senior management team in managing the enterprise, while the role of chairperson is to lead the BOD, one important role of board is to evaluate the performance of senior executive including CEO. 4. Should the board have committees? :

Many shareholders on CG single handedly recommended special committees on 1) Nomination 2) Remuneration 3) Auditing

These committee’s help in reducing the burden of board and increases the effectiveness. According to bosch report, committees, apart from having written terms of references outlining the authority and duties, “should also have clear procedures for reporting back to the board, and agreed arrangements for staffing includes access to relevant company executives and ability to obtain external advice at company’s expense.” These committees should have independent directors as representative. 5. Appointments to the board and director’s re-election:

As per the Indian Company law, Shareholders elect directors to the board. However, shareholders are a legion (former servicemen & in huge No.’s) in large companies and also scattered and to have them together to elect the directors will be expensive and time consuming. Therefore, in actual practice, the board or its specially constituted committees select and appoints the prospective director and gets the person formally “elected” by shareholders in Annual General Body meeting. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society In Indian context members of board are selected by orders of promoters who also double as CEOs and MDs. 6. Director and executive’s remuneration:

According to Cadbury committee Shareholders have full fledge power to provide present and future benefit to directors with certain measures. Some other committee suggested “pay per performance remuneration”, appointment of remuneration committee and so on “Controversy exists on certain CG but not on quantum of remuneration”. The key CG issues are: Transparency, pay for performance, process for determination, severance payments, and pensions for non-executive directors. 7. Disclosure and audit:

The OECD lays down a number of provisions for the disclosure and communication of ‘key facts” about the company to its shareholders. Cadbury report termed the annual audit as one of the cornerstones of CG. Audit provides basis for reassurance for everyone who has financial stake in the company. There are several issues and questions relating to auditing which have impact on corporate governance. Certain questions considered are •

Should board establish an audit committee?

•

If yes, how should it be composed?

•

How to ensure independence of auditor?

•

Should individual directors have access to independent resources?

These questions are to be answered with different perceptions and with different degree of emphasis.


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Business Government & Society 8. Protection of shareholders rights and their expectation:

The Cadbury committee recommends that institutional investors should maintain regular and systematic contact with companies. Apart from participation in general meeting of shareholders, use their voting rights positively, take positive interest in composition of BOD of companies in which they invest. 9. Dialogue with institutional shareholders:

This is an important governance issue, which has considerable impact on the rights and expectations of shareholders. Corporate practices vary from country to country. Certain points to be considered here are •

Should companies always adhere to one share one vote principle?

•

Should companies retain voting by a show of hands or by poll?

•

Should shareholder approval be required for all major transaction/

10. Should

investors have a say in making a company socially

responsible corporate citizen? One school based on past experience contends that institutional investors should act in best financial interest of the beneficiary. This is based on assumption of social responsible issues such as ecological problems, environmental issues. Another school of thought who asserts environment friendliness and economic gains are not contradicting goals, but on other hand they provide benefit on long run.


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5. Relevance of Corporate Governance: With globalization vastly increasing the scale of trade and the size of complexity of corporations. Following four aspects emphasizes the relevance of corporate governance: 1. Issue of Integrity:

CG talks about honesty, decency and fairness in the stakeholders of the company. The organization should work based on the integrity of different departments. 2. Bonus Culture:

The current financial crisis has brought into sharp focus the system of bonuses and remuneration operated by financial institutions. It is argued that it encouraged excessive risk taking and irresponsible lending. 3. Regulatory framework:

The relevance of CG could be restated as the importance of good management. Awarding bank and insurance company bosses generous bonuses and pension packages after government bailouts of failing institutions, apart from being a huge public relations gaff is rewarding poor management and hence poor management itself. The importance of CG in financial market is particularly topical but the solution to bad governance is universal and any system of regulation needs to strike the right balance between encouraging innovation and customer choice and enforcing a minimum set of standards. 4. Director’s training:

Focus on corporate behavior and the behavior of senior corporate employees is the attention increasingly being paid to the qualification of these senior people to carry out their responsibilities.


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6. Needs and Importance of Corporate Governance: Corporate governance is needed to business and its development. Globalization and financial market liberalization have opened-up new avenues in international market. Need for corporate governance arises due to its following importance: 1. Impact of Globalization: the world has become a small market in this age of

globalization. Significant changes are taking place in economic and business area through out the world. Corporates have to face challenges. Traditional management has taken over by professional management. Therefore, international standards have to be adopted by corporates to overcome the threats of globalization. 2. Economic Changes: Corporates have to survive in the changing economic

environment. Liberalization policies have made them to realign their priorities and ahead towards new objectives and policies 3. Changes in the structure of shareholding: The pattern of shareholding has been

undergoing a change and ownership has created new problems before the management. The importance of domestic and foreign institutional investors is increasing in capital formation. In order to increase credibility, the acceptance of corporate governance has become the need. 4. Financial Reporting and transparency: Investors are demanding more and more

information

from

the

company.

They

want

transparency,

accountability,

and

responsibility in all transactions. It is the obligation of company to protect their interest. Laws and regulations are made to protect the interest of stakeholder at large. It is felt that the directors are duty bound to show transparency in their reporting and performance. 5. Shareholders Net worth and Net Wealth: business objective is wealth maximization

of shareholders through profit. Efficient CG aims at this enhancement.


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7. Benefits of Good Corporate Governance to a Corporation: Good CG secures an effective and efficient operation of a company in the interest of all stakeholders. It provides assurance that management is acting in the best interest of corporation, thereby contributing to business prosperity through openness in disclosure and accountability. The key contributions of good corporate governance to a corporation include. 1. Creation and enhancement of corporation’s competitive advantage: •

Competitive advantage grows naturally when corporation or its service facilitates the creation of value to its buyer.

•

Creative competitive advantage requires both the vision to innovate and the strategy to manage the process of delivering value.

•

An effective board should develop flexible strategies to accommodate both opportunities and as well as threats

•

Corporations, which develop value strategies by involving all levels of employees, create widespread commitment to make strategies succeed.

2. Enabling

a

corporation

perform

efficiently

by

preventing

fraud

and

malpractices: •

The code of conduct such as policies and procedure governing the behavior of individuals in corporation form a part of corporate g overnance.

•

These codes enable a corporation to compete more efficiently in business environment and prevent fraud and malpractices.

•

Failure in management practices within corporation has lead to crisis in many instances.

•

Banks collapsing due to lending money to others and not having best practices for collection of debt.


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Business Government & Society 3. Providing Protection to shareholders interest: •

CG is a set of rules that focuses on transparency of information and management accountability.

•

Imposes fiduciary duty on management to act in the best interest of all shareholders and properly disclose operations of corporation.

•

Essential when both power and direction are in different hands.

4. Enhancing the valuation of an enterprise: •

Companies that adopted CG standards have invariably enhanced their market valuations.

•

Improved accountability, transparency automatically increases the value of corporations.

•

Companies that adopted CG standards have invariably enhanced their market valuations.

•

Improved accountability, transparency automatically increases the value of corporations.

5. Ensuring compliance of laws and regulations: •

With the development of capital markets and increasing investment by institutional shareholders and individuals in corporations that are not controlled by individual shareholders, jurisdictions have made laws for protection of investors.

8. Concept of Corporation: •

No other institution has contributed so much to the growth if market-driven capitalist economies of the world as modern corporations.

•

The joint stock company, which is also known as “corporation”, is the nucleus of all business activities in modern economies.

•

Such Company can be easily setup in “companies act”.

•

Corporations have become the most important industrial unit or business enterprise or a commercial venture.


Page 26


Only few corporations in the market enjoy the power and exercise considerable control over industrial production and sale.

•

Lawyers and economists describe corporations as “a nexus of contracts” , arguing that the corporation is nothing more than sum of all agreements leading to creation.

•

Melvin Aron Eisenberg defines corporation, as “the business corporation is an instrument through which capital is assembled for the activities of producing and distributing goods and services and making investments”.

•

John Marshall defines - A corporation as an artificial being, invisible, intangible, invisible, and existing only in the contemplation of the law. since it is the mere creature of the law it possess only those properties which the charter of its creation confers on it.

8.1 What is Corporate? •

The corporations are replacing the sole proprietor and tries to maximize its profits and accumulate capital.

•

Corporation differs from individual capital in two important aspects. 1. The life span of the corporation is much longer 2. It is more rational in decision-making.

•

A company is association of persons who accumulate money or money’s worth for the common stock and invest it in some trade or business and they share the profit and loss generated ge nerated from it. The Th e common stock is called as money or capital of the company. The people who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share and these shares are transferable.

•

A corporation is an association of persons recognized by law as having collective personality.

•

The corporation can act as if it were distinct from its members; it has “perpetual succession” and a common seal.

•

It can therefore contract quite freely- it can also be fined, but it obviously cannot be sent to prison or incur penalties which can only be applied to individuals. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

Page 27


8.2 Characteristics of corporation: •

Incorporated association: corporation is legally required to incorporated or

registered under the prevalent Companies Act of country. •

Artificial legal existence: s A joint stock company also referred to as a corporate

or corporation is entitled to a separate legal existence, apart from the persons composing it. The corporation in law is equal to natural person and has legal entity of its own. The entity of the corporation is entirely separate from that of its shareholder; it bears its own name and has seal of its own; its assets are separate and distinct from those of members; it can sue and be sued exclusively for its own purpose. •

Perpetual existence: The life of corporation is not dependent on the lives of

members; its life does not end with the exit, retirement, and insolvency. The provision of perpetual existence is preserved through transferability of shares. •

Common seal: Since a company is an artificial person, it cannot sign documents

for itself. It functions through natural persons who are usually directors. Company having legal entity is bound by those documents that are signed by the company’s CEO and carry the seal of the company. Any document bearing the common seal of the company and duly witnessed by at least two directors of the company is legally binding on the company. •

Extensive membership: There is no max limit to membership of Joint Stock

Company. As the purpose of the company is to raise large capital, shares are sold to large number of persons. •

Separation of management from ownership: The shareholders, scattered as

they are, are not in position to take part in the day-to-day administration of the company. They cannot also bind the company by their acts. The actual management is delegated to the BOD elected by them, who in turn, take major policy decisions and hand over the daily administration to salaried managers. •

Limited liability: limited liability implies that liability of the shareholders is

limited to the amount unpaid on their shares irrespective of the obligations of the Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

Page 28

Business Government & Society company. Incase of insolvency personal property of shareholder cannot be seized. This helps in eliminating the risk of investment. Transferability of shares: Shareholders of a public limited company can freely

•

transfer their shares to whomever they like without seeking permission from the company.

8.3 Types of corporates: 1. C Corporate: traditional corporate in which business structure created is

separate, distinct legal entity from its owners or shareholders 2. S Corporate: an S corporate is a corporate that is structured in such a manner as

to provide a pass through entity for tax purposes, much like a partnership whose income or losses “pass through” to the individual shareholders personal tax returns. 3. Professional Corporate: Group of professionals can form corporates known as

professional corporations eg. Group of engineers forming corporation. 4. Non-Profit Corporate: NGO

8.4 Advantages of Corporate: !

Limits liability: the primary advantage is corporate will be standing alone, which

means owners are not personally liable for the assets and debts of the business. !

Tax treatment: the standalone entity also separates tax liabilities; this means

corporate taxes are separate from personal tax liabilities. !

Everlasting: another advantage of a corporate form of business is it does not die

when owners do.

8.5 Disadvantages of Corporate: •

Costs

•

Double taxation

•

Documentation


Page 29


9. Concept of Governance: •

The concept of “governance” is as old as humanity.

•

Governance means the process of decision-making and the process by which decisions are implemented.

•

Governance can be used in several contexts such as corporate governance, international governance, national governance and local governance.

•

Analysis of governance focuses on the formal and informal players involved in decision making and implementing the decisions made and the formal and informal structures that have been set.

•

Government is one of the players in governance. Others involved in governance vary depending on level of government. In rural areas, for example, other players may include influential landlords, cooperatives, NGOs, research institutes, religious leaders.

•

All players other than government and the military are grouped together as part of “civil society”.

9.1 Types of Governance: 1. Global Governance:

Global governance denotes the regulation of interdependent relations in the absence of an overarching political authority. 2. Corporate Governance:

Consists of set of processes, customs, policies, laws and institutions affecting the way people direct, administer, or control corporate. 3. Participatory Governance:

It focuses on deepening democratic engagement through the participation of citizens in the processes of governance with the state. The idea is that citizens should play more direct role in public decision-making or at least engages more deeply with political issues.


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Business Government & Society 4. Non-Profit Governance:

It focuses primarily on the fiduciary responsibility that a board of trustees has with respect to the exercise of authority over the explicit public trust that is understood to exist between the mission of an organization and those whom the organization serve.

10. Theoretical Basis for Corporate Governance There are four broad theories to explain and elucidate (make clear) corporate governance. These are i) Agency Theory

iii) Stakeholder Theory

ii) Stewardship Theory

iv) Sociological Theory

1. Agency Theory: •

Strategic and Business policies in global world are managing with “Agency Cost Theory”

•

Agency theory is the basic foundation for Corporate Governance, which is traced back from Adam’s smith days.

•

Agency theory explains some of the information related to owner and management

•

Shareholders are the owners of any joint stock limited liability company, and are the principals .

•

Principals define the objective of the company

•

The management directly or indirectly selected by shareholder to pursue corporate objectives, are the agents.

•

Principals generally assume that agents would invariably carry out their objectives, which is often not so. In many instances the objectives of an agent varies from that of principal

•

Ex. Agent may think of expanding the production capacity at the expenses of corporate investment in order to increase his personal stature, which is not aligned with shareholders objective.


Page 31


The shareholders and stakeholders may not be able to counteract this because of inadequate disclosure about such decisions and because the principals are scattered. Such mismatch of objective is called agency problem; the cost occurred due to such problem is called agency cost.

•

The core of CG is designing and putting in place disclosure, monitoring, oversight and corrective systems that can align the objectives of 2 sets of players.

•

Agency theory specifies mechanism, which reduces agency loss. These include incentive scheme for managers, which reward them financially for maximizing shareholder’s interest. Such schemes typically include plans whereby senior executive obtain share, perhaps at reduced price, thus aligning financial interests of executives with those of shareholders.

Problems with Agency theory:

Total control of management is neither feasible nor required under this theory. Underlying assumption is the trade off that shareholders make on employing agents is that they must accept certain level of self-interested behavior in delegating responsibility to others. Another assumption is with complexities of investor-board relationship in large organization. There are two broad mechanisms that help reduce agency costs and hence improve corporate performance through better governance these are: 1. Fair and accurate financial disclosures 2. Efficient and independent BOD

2. Stewardship Theory •

Stewardship theory assumes that managers are basically trustworthy and attach significant value to their own personal reputations.

•

Theory defines situations in which mangers are not motivated by individual goals, but rather they are stewards whose motives are aligned with the objectives of principals.


Page 32


Given a choice between self-serving behavior and pro-organizational behavior, a steward’s behavior will not depart from the interest of his/her organization.

•

Control can be potentially counterproductive, because it undermines the proorganizational behavior of the steward, by lowering his/her motivation.

•

Theory emphasis on responsibility of the board to shareholders in the AngloSaxon model of CG in terms of Stewardship and trusteeship is nowhere better articulated than in the Canadian guidelines. It is stated therein: “Stewardship refers to the responsibility of the board to oversee the conduct of the business and to supervise management which is responsible for the day-to-day conduct of business”.

•

The greatest barrier, however to the adoption of stewardship mechanisms of governance lies in the risk propensity of principals. Risk taking owners will assume that executives are pro-organization and favor stewardship governance mechanisms. Where executives, investors cannot afford to extend board power.

Differences between Agency Theory and stewardship Theory: Behavioral Differences Theory

Agency

Stewardship

Managers act as

Agents

Stewards

Governance Approach

Materialistic

Sociological

&

Psychological Behavior Pattern

o

Individualistic

o

Collective

o

Opportunistic

o

Pro-organizational

o

Self-serving

o

Trustworthy

Managers motivated by

Their own objective

Principal’s objectives

Manager’s and Principal’s

Differ

Converge

Interests


Page 33


Management Structures

Monitor & Control

Facilitate and empower

Owners’ Attitude

Risk Avoidance

Risk taken

Principal – Manager

Control

Trust

Agency

Stewardship

Relationship based on Psychological Mechanisms Psychological responses

Motivation

o

Lower order needs

Higher order needs

o

Extrinsic need

Intrinsic needs

Social comparison

Compatriots

Attachment

Little

attachment

Principal to Great

attachment

to

company

company

Institutional

Personal

Situational Responses

Agency Theory

Stewardship Theory

Management Philosophy

Control oriented

Involvement oriented

While

Greater controls

Training and empowering

Power Situational Mechanisms

dealing

increasing

with

More supervisions

people Marketing jobs to be more

Uncertainty and risk

challenging and motivating Risk orientation

Through system of control

Through trust

Time frame

Short term based

Long term based


Page 34


Objective

Cost Control

Cultural differences

Individualism large power Collectivism small power distance

Improving performance

distance

3. Stakeholder Theory: Stakeholder theory of corporate governance has a lengthy history that dates back to 1930. •

The theory represents a synthesis of economics, behavioral science, business ethics and the stakeholder concept

•

The theory considers the firm as an input-output model by explicitly adding all interest groups such as employees, customers, dealers, government and society at large.

•

The theory is grounded in many normative theoretical perspectives including the ethics of care, ethics of fiduciary relationships, social contract theory, theory of property rights, theory of stakeholders as investors etc.

•

Corporations often criticize the stakeholder theory, mainly because it is not applicable in practice.

4. Sociological Theory: •

The sociological approach has focused mostly on board composition and the implications for power and wealth distribution in society.

•

Problems of interlocking directorships and the concentration of directorships in hands of privileged class are viewed as major challenges to equity and social progress.


Page 35


Obligations to Society: !

National interest

!

Political non-alignment

!

Legal compliances

!

Rule of law

!

Honest and ethical conduct

!

Corporate citizenship

!

Ethical behavior

!

Social concerns

!

Corporate social responsibility

!

Environmental friendliness

!

Healthy and safe working environment

!

Competition

!

Trusteeship

!

Accountability

!

Effectiveness and efficiency

!

Timely responsiveness

!

Corporations should uphold the fair name of the country

Obligation to investors !

Towards shareholder

!

Measures promoting transparency and informed shareholder participation.

!

Transparency.

!

Financial reporting and records.


Page 36


Obligation to customers !

Quality of Products and Services

!

Products at Affordable Prices

!

Unwavering Commitment to

!

Customer Satisfaction

Obligation to employees !

Fair Employment Practices

!

Equal-opportunities Employer

!

Encouraging Whistle Blowing

!

Humane Treatment

!

Participation

!

Empowerment

!

Equity and Inclusiveness

!

Participative and Collaborative Environment

Obligation to managers !

Protecting Company’s Assets

!

Behavior Towards Government Agencies

!

Control

!

Consensus Oriented

!

Gifts and Donations

!

Role and Responsibilities of Corporate Board and Directors

!

Direction and Management must be Distinguished

!

Managing and Whole-Time Directors


Page 37


Module 3 Public Policies: The role of public policies in governing business, Government and public policy, classification of public policy, areas of public policy, need for public policy in business and levels of public policy.

Introduction: •

Public policy may be explained as a definite course or method of action selected among alternatives to guide and determine present and future decisions of governments or public authorities.

•

In the words of Senator Patrick Moynihan: “Public policy is what government chooses to do or not do.”

•

For instance, economic policy of a government is the statement of its objectives and how these are realized through the subset of policies such as monetary policy, fiscal policy and commercial policy. Likewise, a budget is an instrument of economic policy.

Role of public policies in governing business: •

Public policy can be generally defined as course of action taken by state with regard to a particular issue.

•

“a system of course of action, regulatory measures, laws, and funding priorities concerning a given topic enacted by a government entity or its representative.

•

Public policy is an attempt by the government to address a public issue.

•

The government, whether it is city, state, or federal, develops public policy in terms of laws, regulations, decisions and actions.

•

Shaping public policy is a complex and multifaceted process.

•

Public policy is embodied in constitutions, legislative act and judicial decisions.

•

Public policies shape and affect business. National economic policies, for example, affect corporates at different levels, through its constituents – monetary, fiscal and commercial policies.


Page 38


Certain acts are said to be against public policy if they tend to promote breach of the law, of the policy behind a law or trend to harm the state or citizens.

•

Constitutional and non-democratic governments play vital role in framing the public policy.

•

Government’s key role is to create appropriate public policy that promotes economic growth.

Government and public policy: •

Policies in order to become public it should be adopted or implemented by any governmental institutions or governmental bodies.

•

There are certain different characteristics of the government pu blic policy

1. It lends legitimacy (justify) to policies. •

Government policies are regarded as those obligations, which are easily observed by citizens.

•

People regards policies as certain responsibilities and it is concerned as legal binding.

2. Government policies involve as these extend to all sections in society unlike the policies of other groups such as corporations, churches and civic-associations. 3. Government cans alone exercise coercion in society.

Kinds of public policies a government adopts: !

Constitutional Governments: policies are crafted by the elected system of

governance; elected representatives deal petitions. !

Non-Democratic Governments:

Special interest lobbying of the leadership, international pressure for change, public demonstration and civil disobedience play decisive roles in shaping public policies. Governments control media. Public is uninformed about policies


Page 39


Classification of Public Policy: Public policy can be organized along the following 5 streamlines. 1. Regulatory:

Regulation is one of the more visible types of public policy generally enforced through criminal statues which generally stipulate how people should act toward one another. 2. Distributive Policy:

Distributive policies provide for goods and services such as welfare and health to specific segment of the population. All public assistance welfare programmes are distributive in character. 3. Redistributive Policy:

Redistributive policies aim at rearranging one or more of the basic schedules of social and economic econo mic reward as in case of progressive tax policies that tax away proportionately more on the welfare of the poor. Basic alteration in productive arrangements as in socialized medicine, or provision of scholarships to poor students, old age pension and unemployment insurance are also redistributive in their rearrangement of wealth. Business and local governments also receive distributive largesse from the central government that aim at increasing the productive capacity of society’s institutions. 4. Capitalisation policies:

Capitalisation policies are not like the primary consumptive distribution of welfare programmes. They include a) Cash payments to farmers to improve agriculture, and b) Tax subsidies to encourage exploration and production in selected industries and audit subsidies. 5. Ethical policies:

In recent times, several moral and ethical issues such as death sentences, cloning of humans, euthanasia, the practice of killing hopelessly sick persons have come to the fore and created heated public debates for and against these issues.


Page 40


Areas of Public Policy: The area, extent and the reach of public policies have been increasing since the days of the great depression. While justifying the legitimacy of the government intervention in economic matters, took some time, as Adam Smith & Economist of his ilk considered capitalism as self – evolving & self- correcting system in which government intervention was unwarranted and unnecessary & even lead to the failure of the system. But once it was proved that their assumption was wrong, & that government has a role to play to maintain effective demand, competition, freedom of enterprise, & the very market economy itself, the role of government began to expand. Buchhoz, in his book business environment & Public Policy says that the major public policy areas that stemmed from the great depression where economic management, where government assumed responsibility for correcting such economic downturns, laor management relations with government support for the right of labor to bargain collectively, & the beginning of welfare system, originally designed to relieve the distress of the depression. This theory justifies the following areas of Public policies: Economic Management:

Economic problems are one of the important areas of Public Policy. Prior, to the onset of great depression, it was assumed, as explained earlier, that each economy is self correcting and moves towards the right direction & restore the nation’s economic health. But the great depression has changed this view. The so- presumed self correcting economy has been found to be totally inefficient to deal with problems of depression. Now with the emergence of stabilization measures adopted by governments to combat recession & Depression & the concept of Welfare state, it is assumed that state intervention is essential & Even inevitable in the e conomic activities. Labor Management Relations:

Labor Management Relations is one of the areas of Public policy that has came out from the great depression days. Industrial revolution has effectively challenged the outdated thinking of the management that labor is like a vendible commodity that can be bought or sold at any time.


Page 41

Business Government & Society The concept of industrial democracy is popular in all countries, which has made it imperative that a national labor policy should be adopted by the state to protect the rights of workers of Unions. In fact, in several countries such as Germany, India, etc labor is given a vital role in corporate management. The Welfare State:

The depression also has brought about a metamorphosis in the thinking of people & has lead to the emergence of another set of Public Policy measures that can be grouped loosely under the title of “Welfare”. Previously it was aligned to elevate distress. Society has now conceded that the Unemployed where not necessarily to be blamed for their plight & is willing to accept a governments responsibility to help victims of unemployment & old age. People were not allowed to strive while waiting for the market to collect itself & make Jobs available again. Now, it is believed that every man has the right to a good job, decent food, Clothing, & Shelter. It is the responsibility of the government to guarantee these rights. In fact, this philosophy has lead to a whole series of measures, such as social security, aid to families, with dependent children, education, Medicare all designed to help people whose basic needs have not been met for one reason or the other by the market system. Shaping of Public Policies affecting Corporate Sector:

Stakeholder expectations, if unmet, trigger action to transform social concern into pressure on business & government. A gap between the expected & actual performance stimulates Public Issue. We need to understand, the reason for Public Issues & how they get transformed into Public Policy in the macro environment view

Need for Public Policy in Business: As shown in the below figure, Public Policies that affect corporations are shaped by Social forces,

Economic forces,

Political forces,

Technological forces

Social force includes the size and composition of population that have definite effect on both the demand and supply of goods and services that corporate deal in; social forces


Page 42

Business Government & Society that include lifestyle and patterns of living dictate corporate strategies to cater to the whims and fancies of consumer.

Economic forces are those that shape corporate behavior as well as the reaction of government to solve the problems arising there from. Political forces have an impact on government making and how governments are prompted to shape their policies affecting corporate. Technological forces are very important as for as shaping of corporate policies are concerned. Since these allow corporations to update their products, processes, and help them meet competition. 1. To create a competitive environment: Public policies help the market to have a perfect competition by way of controlling monopolies through license or by creating a competitive market mechanism. It helps in providing a level playing field for


Page 43

Business Government & Society enterprises to operate and to encourage companies to effectively and efficiently utilize available resources. 2. To have a control on Foreign Investment: Government interferes in regulating foreign investments in certain industries which is very critical for the country, as for example, Oil industry, financial institutions. So the government tries to set some gap on these investments. Sometimes the objective is to encourage local investment when the domestic economy is doing well. To stem the flow of too much of foreign investment, government may adopt protectionist policies for the following reasons: •

To protect the growing local industries, government may enact the policies by way of preventing free flow of goods from other countries, & offering tax holidays & other benefits

•

To regulate Demand & supply, where the resources are scarce.

•

To regulate the prices in the unhealthy competitive environment through administrative pricing mechanism & to promote consumer product safety

•

To protect the environment through effluent treatment & other anti pollution measures

Levels of public policy There are different levels/layers of public policy depending on the intended geographic reach and the degree of sovereignty the authority concerned enjoys. 1. National level: at the national level, public policy is applicable across the country. For instance, the Industrial Development and Regulation Act (IDRA) and the Monopolies and Restrictive Trade Practices (MRTP) Act had an all India reach. 2. State Level: policies adopted by a state government is applicable only to the particular state as in the case of policies to protect ground water from contamination, policies to take over the wine shop in states like Tamil Nadu. 3. Regional Level: There may be certain policy perspectives that apply to certain regions such as the Common Agricultural Policy (CAP); sharing of river water among riparian states. 4. International level: Global level policies are the ones that are adopted by internal organizations with worldwide ramifications such as Intellectual Property Rights, (IPRs), Trade Related Investment Measures (TRIMS) and so on. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

Page 44


Module 4 Environmental concerns and corporations: History

of

environmentalism,

environmental

preservation-role

of

stakeholders,

international issues, sustainable development, costs and benefits of environmental regulation, industrial pollution, role of corporate in environmental management, waste management and pollution control, key strategies for prevention of pollution, environmental audit, Laws governing environment.

History of environmentalism: •

th

As early as the turn of the 20 century, the importance of natural resource conservation led to the establishment of national parks by Teddy Roosevelt’s administration. Later during the human health risks posed by pollution raised much concern in 1960’s.

•

Slowly the concept of environmentalism evolved as attitudes about human impacts on air, water, forests and other aspects of the environment

•

Public protest of air and water pollution led to the passing of many environmental laws by the US congress and to the creation of the. Environmental protection Agency (EPA’S) community led recycling programmers and protest against polluting businesses in “Not in my Backyard”(NIMBY) campaigns are two examples of how environmentalism has impacted industrial activity.

•

An enhanced perception of an impending crisis has caused in recent times a spate of law-making, technological innovation, improvisation and even bureaucratic evolution

•

During last three decades businesses had to respond to many new regulations, which have, both posed challenges and opened opportunities.


Page 45

Business Government & Society Environmental preservation: Role of stakeholders.

Public opinion-Public opinion is crucial to the resolution of environmental issues in a democratic society. Public has the power to support interest groups, elect and lobby officials, pay taxes, work for companies, buy products and support or reject policies. The effects of pro-environment public sentiment are evident in many business and government sectors. The media-Environmental advocacy groups have evolved considerably from the liberal, anti-business, anti-government periphery of past decades. While some radical groups do remain, many moderate or conservative groups are co-operating with business and government. The role of some groups is shifting from simply bringing attention to environmental issues toward working to solve problems. Corporations-Corporations had been known in the past to be traditionally unsympathetic to environmental problems. The pollution and degradation caused by th

th

industrial activities in the 19 and 20 centuries created many of these problems in the first place. As a result and of pressure from environmentalists and regulatory legislation many companies have altered their stance and innovated their policies. In fact many firms now work proactively to improve environmental q uality. Government-Effective environmental policy has been obstructed by many factorsInadequate scientific knowledge, budgetary deficiency and conflict between disparate interests. The electoral cycle and public emphasis on a sound economy force environmental issues into a political arena which does not always lend itself to timely decision –making. The environmental protection agency, for example, often has difficulty improving environmental quality when its activities are perceived to hurt the economy.

International issues: Many environmental issues are international by their nature. These include CrossBoundary pollution, common resources and economic development. Traditionally, state sovereignty and self-interest took precedence over the resolution of global problems.


Page 46

Business Government & Society In recent decades, an integrated world economy has emerged which is dominated by multinational corporations. The resulting economic interdependence of nations fosters co-operation in resolving international issues. The worldwide recognition of an ecological crisis has moved the global environment higher on the international agenda. The United Nations conference on environment and sustainable development in 1992 though not the first of its kind, was a major breakthrough for environmentalists. The meetings held in Rio were divided into three levels: Government leaders, corporations and NGOs. Each group debated issue of social justice, Property rights, North South relations, forest principles, development, biodiversity, responsibility and technology transfer. While it is significant that world leaders address global problems such as ozone depletion and common area resources, lack of funding remains as an obstacle to permanent solutions. The key success of the conference was that the environment became a priority on the global agenda.

Costs and Benefits of Environmental regulation: Environmental regulations are often criticized as being too costly for business. Certainly protecting environment quality is an expensive task for many regulated industries. Beyond higher costs for individual firms, however, many people argue that the level of environmental regulation hurts a country’s competitiveness in the world market. Some economists have countered that strict environmental regulation may actually enhance a country’s competitiveness by fostering innovation. It is evident that forward-thinking firms can turn environmental regulations to their advantage. They argue that clean business practices are more efficient and therefore profitable. Many economists feel that environmental regulations raise the price of inputs, putting businesses at a competitive disadvantage in the world economy and hindering growth. Michael Porter is the leading proponent of the pro-regulation view. He outlines his major arguments in “Green and competitive”. Regardless of the validity of either


Page 47

Business Government & Society competitiveness argument, business people should view regulations as an opportunity to gain an advantage for their individual firms.

Sustainable Development: A very significant concept underlying international and domestic environmental policy is sustainable development. Its goal is to ensure that the natural resource needs of the present are met without compromising then ability of future generations to meet their own needs. The implication is that there are limitations to the earth’s carrying capacity in the light of present levels of technology, social organization and population. The evolution of ideas about sustainable development has been substantial but the next step is to generate effective policy initiatives. William Nitze offers a contradiction of popular opinions about sustainable development in “The Economic case for sustainable development”. The author argues that sustainable practices are no more costly than current industrial processes and that the actual barriers to change are inadequate information, training and incentive. He claims that cleaner technologies are very competitive and that public development institutions should attempt to stimulate innovation, rather than dole out funds for incremental costs. st

Environmentalism in the 21 century is likely to be characterized by various efforts to implement the sustainable development agenda. International organizations, such as United States and World Bank will be integral to the development of effective global environment policy. Corporations maintain a dominant role in this issue; those that adopt a proactive stance in environmental stewardship are likely to compete well in the world economy in the rears to come.

Industrial pollution: Industrial pollution is pollution that can be directly linked with industry, in contrast to other pollution sources. This form of pollution is one of the leading causes of pollution worldwide; in the United States, for example, the Environmental Protective Agency estimates that up to 50% of the nation's pollution is caused by industry. Because


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Business Government & Society of its size and scope, industrial pollution is a serious problem for the entire planet, especially in nations, which are rapidly industrializing, like China. This form of pollution dates back to antiquity, but widespread industrial pollution accelerated

rapidly

in

the

1800s,

with

the

start

of

the Industrial revolution.

The Industrial Revolution mechanized means of production, allowing for a much greater volume of production, and generating a corresponding increase in pollution. The use of fuels like coal, which is notoriously unclean, and a poor understanding of the causes and consequences of pollution compounded the problem. There are a number of forms of industrial pollution. One of the most common is water pollution, caused by dumping of industrial waste into waterways, or improper containment

of

waste,

which

causes

leakage

into ground

water and

waterways. Industrial pollution can also impact air quality, and it can enter the soil, causing widespread environmental problems. Because of the nature of the global environment, industrial pollution is never limited to industrial nations. Samples of ice cores from Antarctica and the Arctic both show high levels of industrial pollutants, illustrating the immense distances which pollutants can travel, and traces of industrial pollutants have been identified in isolated human, animal, and plant populations as well. Industrial pollution hurts the environment in a range of ways, and it has a negative impact on human lives and health. Pollutants can kill animals and plants, imbalance ecosystems, degrade air quality radically, damage buildings, and generally degrade quality of life. Factory workers in areas with uncontrolled industrial pollution are especially vulnerable. A growing awareness of factory pollution and its consequences has led to tighter restrictions on pollution all over the world, with nations recognizing that they have an obligation

to

protect

themselves

and

their

neighbors

from pollution.

However, industrial pollution also highlights a growing issue: the desire of developing nations to achieve first world standards of living and production. As these countries industrialize, they add to the global burden of industrial pollution, triggering serious


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Business Government & Society discussions and arguments about environmental responsibility and a desire to reach a global agreement on pollution issues.

Role of corporate in Environmental Management: Industry is the world’s foremost creator of wealth, employment, trade and technology, controlling and deploying tremendous amount of human and financial resources for economic value addition. It is industrial and business processes that add value to natural resources as these transform them from raw gifts of nature into useful products. Most type of environmental problems has been attributed to industry either local or global. Problems such as global warming, depletion of the ozone layer, increase of instances of health problems, etc are claimed to be the result of rapid industrialization without a thought for environmental degradation. Industry could no longer continue to live with that damaging image of being responsible for environmental damage. Therefore industry and business process have to re-examine and re-shape their entire enterprise, right from the nature of products they made, technologies employed, raw materials used and the way they marketed their products In the modern world, the role of corporate business has extended from beyond just producing goods and services or creating jobs or even promoting industrial growth. Industry’s role is fast changing from the one that is negative to the one that is positive in all areas of socio-economic endeavor. They are now expected not only to further degrade the environment; they are to act positively towards the improvement of quality of the environment. It has been realized by industrialists that it is imperative to perform to perform their conventional tasks of production of material goods in a way so as not to impair the quality of life. The corporate business today has the responsibility towards the society, not only to render social justice, but also to promote the greatest good to the largest number of people.


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Business Government & Society The established duties of the corporate sector of diverting a portion of their profits to community purpose, production of goods and services, creation and protection of jobs has been added another one-by far the most onerous, up-to-date, zealous protection of the environment. A better choice of technology-both preventive and curative can reduce damage to environment already done and prevent further damage. The big business has already moved into a new chain of thinking in which technological dimensions are decreased and importance of social, economic, cultural and especially environmental dimensions are growing in importance. This change was first seen in the 1980’s, especially in the attitude of chemical and oil companies. By the time world leaders gathered for the Rio summit in 1992,a Business council for sustainable development (BSCD) formed under the chairmanship of stephen Schmidhering, a Swiss business man, with its 50 members, had put together guidelines for environment friendly behavior for companies.

Waste Management and Pollution Control: Environmental damage through industrial activity can be of the following two types: 1. Depletion of the natural resources : Excessive use leads to the reduction in natural

resources that are extracted or used up in the production of other goods such as minerals, fossil fuels etc. These resources are non-renewable. Once extracted they cannot be replaced. Technology must find a substitute of such raw materials if further depletion of non-renewable resources is to be prevented. Depletion is thus a quantitative concept. 2. Degradation of natural resources : Degradation refers to the deterioration of the

quality of the environment. All production creates waste and pollution right through the process of manufacturing to the disposal of final product. Wastes-air, soil and aqueous or solid-degrade the air, soil and water quality and pose health hazards. Waste management has become essential-in many cases it has been made mandatory through government regulations, but with industry and business becoming environment conscious, waste management is finding an increasingly importance place in the agenda of big corporations. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Pollution Prevention: !

Corporate management has a great deal to offer to achieve sustainable development. To implement sustainable development; it requires promotion and application of pollution prevention, whether through source reduction or cleaner technologies.

!

Pollution prevention means both management of wastes and production before their create pollution problems. In the past, environment strategy focused on pollution control-waste removal, treatment and disposal techniques etc.in manufacturing process.

!

The problem of environmental degradation is not limited to manufacturing process only. That is only the first generation problem i.e, release of waste within a plant. The problem is much more extensive, as besides manufacture, storage and transportation and use of products also contribute to pollution, waste accumulation and environmental degradation. Thus we need to differentiate waste management strategies and pollution management strategies. While former emphasis reduction in waste generation and controlling pollutants in waste, the latter seeks not only to improve manufacturing processes but also consumption of environment friendly products.

Key strategies for industrial pollution prevention : 1. A systematic reduction Audit : This will enable manufacturers to inventory and trace input chemicals and to identify how much waste is generated through specific processes. It is an extremely useful tool in diagnosing how a firm can reduce or even eliminate waste. 2. Material Balance: Identifying processes, Inputs, outputs, recycle and reuse rates, deriving a preliminary material balance and evaluating and re-fixing material balance. 3. Economic Balance : Identifying costs and reviews to achieve an economic balance. According to benefit-cost ratio, experience in the industrialized countries has proved that anti-pollution technology has been cost effective in terms of health, Property and environmental damage avoided and that it has made many industries more profitable by making them more resource use efficient.


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Business Government & Society 4. Identifying waste reduction : Opportunities and implementing them through simple process modifications such as pollution prevention measures such through goodhouse keeping, evaluating opportunities for waste reduction and recycling, designing a waste reduction strategy, implementing internal recycling for same or other use to reduce emission from the process and also to reduce the need for continued supply of raw material inputs. 5. Use of newer, Cleaner Technologies : Development of preventive technologies to benefit both now and in future, without transferring the problem from one media to another such as air, water and land which is often the case. For example-waste treatment processes produce large amounts of sludge and residue, which again need disposal programmes so as to prevent secondary pollution. The need of the day is to use technological progress for protecting the environment. From further damage and damage abatement wherever possible. Experience shows that that the technological management has reduced the adverse impact of many activities on the environment. However; the progress in environmental protection technology has failed to keep pace with the fast depletion and degradation of natural resources. 6. Life cycle Assessment: This is a process of evaluating the environmental burdens

associated with a product or activity. It addresses the entire production system, not just isolated components. It starts by identifying and quantifying energy and material used and waste released into the environment of assessing the impact of that energy and material uses and releases to the environment and of identifying and evaluating opportunities of affecting environmental improvement. The United Nations Environment Programme (UNNEP, 1998) has rightly advised corporate managements to take the following steps: •

Commit to make preventive strategy as preferred option to environmental policy.

•

Develop pollution prevention action plans and programmes with clear, quantifiable and achievable targets and time frames to minimize waste, maximize resource use and avoid risks to human health, safety and environmental quality.


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Develop and implement manufacturing processes, new products and services that are congruent with the principle of pollution prevention.

•

Improving efficiency in resource consumption, reducing use of toxic materials, reducing wastes and increasing energy and material intensity of goods and services.

•

Integrative preventive strategies into all relevant units of business and industry organizations and their management systems and a ll relevant operations.

•

Conduct pollution prevention training activity and R&D innovative methodology to overcome potential pollution prevention barriers in implementation.

•

Share pollution prevention experiences and disseminate information.

Environmental Audit: The environmental audit examines the company’s performance as against its policy and is undertaken with reference to performance personnel, technology, system and documentation and how these are related to relevant standards of practice. Therefore environmental audit is in the nature of a corporate policy audit. Objectives of environmental audit : •

Evaluation of the efficiency and efficacy of resource utilization i.e, man, machine, materials.

•

Identification of areas of risk, environmental liabilities, weakness in management system problems in complying with regulatory requirement

•

Insuring the control on waste pollutant generation.

In general there are two types of environmental audit:

1. Environment compliance audit : Checks the degree of conformance to laws and rules prescribed by the relevant ion and recycling regulatory authorities. It covers issues such as housekeeping practices followed while storing dangerous chemicals, how hazardous waste is being stored and disposed, the method followed for releasing wastewater etc. 2. Environmental management audit : It is an appraisal of the company’s internal capabilities to discharge its environment related responsibilities. Management Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society audit is more concerned with capabilities, focuses on issues such as organizational structure, accountability, training of employees to respond to the crises situation bad relationships between plant personnel and local regulatory authorities. Benefits of environmental Audit for the organizations:

1. Problems can be corrected before they are too large to fix. 2. Opportunities can be identified for cutting costs through measures such as waste. 3. Minimization and recycling. 4. Insurance costs can be reduced. 5. Employees can be persuaded and motivated to take environment issues seriously. 6. The corporate image can be improved.

Laws Governing the Environment: 1. The Environment (Protection) Act 1986-authorizes the central government to protect and a nd improve environmental e nvironmental quality, qua lity, control and reduce pollution from all sources, and prohibit or restrict the setting and /or operation of any industrial facility on environmental grounds. 2. Air (Prevention and control of pollution) act, 1981 -The Air (Prevention and Control of Pollution) Act provides for the control and abatement of air pollution.

It entrusts the power of enforcing this act to the CPCB 3. Water (Prevention and control of pollution) act, 1974 -The Water (Prevention and Control of Pollution) Act establishes an institutional structure for preventing

and abating water pollution. It establishes standards for water quality and effluent. Polluting industries must seek permission to discharge waste into effluent bodies. bodies. 4. Factories Amendment act, 1987 - Factories Act and Amendment in 1987 was the first to express concern for the working environment of the workers. The amendment of 1987 has sharpened its environmental focus and expanded its application to hazardous processes. 5. Forest and wildlife conservation: Indian Forest Act and Amendment, 1984, is one of the many surviving colonial statutes. It was enacted to ‘consolidate the law related to forest, the transit of forest produce, and the duty leviable on timber and other forest produce’ Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Module 5 Business Ethics Business Ethics: Meaning of ethics, business ethics, relation between ethics and business

ethics, evolution of business ethics, nature of business ethics, scope, need and purpose, importance, approaches to business ethics, sources of ethical knowledge for business roots of unethical behavior, ethical decision making, some unethical issues, benefits from managing ethics at workplace, ethical organizations.

“Values have gone down; ’Morals have been destroyed; ”Society is stinking; “Corruption in public life has reached scandals proportions”; Such Statements have been making newspaper headlines with frustrating regularity in recent times. Over the past 15 years, over 2/3 of the fortune 500 companies have been involved in some form of unethical behavior reputed Indian Companies too, have been questioned on Grounds of unethical practices in recent times Eg: issue of warrants to promoters, buying at inflated prices in foreign soils, under invoicing of sales, hiking equity raising sentimental issues regarding take over, switching of shares to favor relatives and friends, inflating profit figures with active support from auditors etc.

Meaning of Ethics: The word ‘ethics’ refers to principles of behavior that distinguish between good, bad; right and wrong. It is a person’s own attitude and believes concerning good behavior. Ethics reside within individuals and as such are defined separately by each individual in his own way. What may be ethical behavior to ‘X’ may be unethical to ‘Y’. Ethics in short may refer to the following: 1. Ethics are principles of personal and professional conduct 2. Ethics is broader than what is stated by law, Customs and public opinion.


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Business Government & Society Ex: accepting gifts from father-in-law might be socially acceptable but not ethical; owners pocketing profits without sharing the gains with workers might be legally permissible but not ethical. 3. Ethical behavior may differ from society to society. For example Birth control is mandatory in communist societies but not in catholic Christian societies. 4. Ethical standards of human conduct defining ethical standards are not an easy task. The word ‘ethics’ is derived from the Greek word ‘Ethikos’ meaning custom or character, guiding beliefs, standards or ideals that pervade a group, community or people. It is the science of morals describing a set of rule of behavior “There is only one ethics, one set of rule of morality, one code that of individual behavior in which same rule apply to every one alike” Peter F Drucker. Ethics is a branch of philosophy, which is the systematic study of selective choice of standards of right and wrong and by which it may be ultimately directed.

Why Ethics? Ethical considerations in business are important to managers as individual’s personal life and business life cannot be neatly separated with respect to moral judgments. Number of factors contributed for ethical considerations becoming primary concerns of today’s business managers, namely: 1. For the individual the job is center of life and its value must be in harmony with the rest of life, if is to be whole and healthy personality. 2. This is an industrial society, and its values tend to become those of the entire culture. 3. The public is insisting that business leaders are, in fact, responsible for general social welfare-that the managers responsibilities go for beyond those of running the business.


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Business Government & Society 4. Even if the manager insist on an narrow definition of his role as merely a producer of good, it is, essential that he takes these intangibles into consideration since they are the real motivational forces in an organization.

Nature of Ethics: Nature of ethics is in such a way that •

Concepts of ethics are applied to human being, as it is developed or evolved by his mind, as he can make choices among the available results.

•

It is argued that ethics is a science or an art. But experts concluded that ethics is more of science as it involves systematic knowledge about moral behavior and conduct of human being.

•

Ethics deals with human conduct, which is voluntary not forced by circumstances or humans. It can be said that at ground level, ethics deals with moral judgment regarding set directed human conduct.

•

The science of ethics is normative Science. It is search for an ideal litmus test of proper behavior. Normative science involves arriving at moral standards that regulate right and wrong conduct.

Business Ethics Meaning and Definition: Business ethics refers to the application of ethics to the business. Business ethics is the study of good and evil, right and wrong and just and unjust actions of businessmen. It may be defined as moral standards which people owning and managing business is expected to follow. Business ethics is the art and discipline of applying ethical principles to examine and solve complex moral dilemmas. Business ethics is that set of principles or reasons which should govern the conduct of business whether at individual level or at collective level. A Business or company is said to be ethical only if it tries to reach trade off between pursuing its economic objectives and its social obligation. i.e., between its Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society obligation to society where it exists and operates its obligation to its people due to whom it can even think of pursuing economic goals; to its environment. From whom it takes so much without it demanding anything back in return.

Relation Between Ethics and Business Ethics: There are definite interconnections between ethics an d business ethics. Many of theories and principles, concepts and percepts of ethics are successfully used in business ethics. In fact the definition of business ethics says that it is the practical application of theories and principles and rules of ethics. a. Ethical theories offer various concepts and percepts which are vey useful to managers in making decision, some of these concepts are 1. Deonticism 2. Utilitarianism 3. Consequentialism 4. Morality 5. Values & virtues. b. Ethical theories provide a set of analytical guidelines and moral standards. Which can be applied directly or indirectly to the problems prevailing while conducting business, so that fair and justified solution is obtained. Proper knowledge of standards and principles of ethics make a manager more analytically capable and expert in interpreting many ethical issues in business day-to-day life. c. One of the most important ways in which ethical theories can contribute to business management is by building ethical models about ethical decision making, ethical audit. This exercise helps managers to understand the structure of ethical problems in management and assist in day-to-day activities.


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Evolution of Business Ethics: The study of business ethics evolved through five distinct stages; (1) before 1960, (2) the 1960's, (3) the 1970's, (4) the 1980's, and (5) the 1990's, and continues to evolve in the twenty-first century. Before the 1960's, business ethics were discussed primarily through a religious perspective. It was in 1962 that John F. Kennedy established the Consumer's Bill of Rights, in which he outlined four basic consumer rights: the right to

safety, the right to be informed, the right to choose and the right to be heard. In the 1970's, business professors began to write and teach about social responsibility, an organization's obligation to maximize its positive impact on stakeholders and minimize its negative impact. Companies became more concerned with their public image and wanted to address ethical issues more directly. In the 1980's, centers of business ethics provided publications, courses, conferences, seminars, ethics committees, and social policy committees. The Defense Industry Initiative on Business Ethics and Conduct was developed to guide corporate support for ethical conduct. Its principals had a major impact on corporate ethics. This effort established a method for discussing best practices and working tactics to link organizational practice and policy to successful ethical compliance. In the 1990's businesses with international operations set up new ethical issues. Congress approved Federal Sentencing-Guidelines for Organizations in 1991 to reward organizations for taking actions to prevent misconduct, such as developing effective internal legal and ethical compliance programs. In 2002, Congress passed the Sarbanes-Oxley Act, which made securities fraud, a corporate offense and stiffened

penalties for corporate fraud. Top executives are now required to sign off on their firms' financial reports, and they risk heavy fines and long prison sentences if they misrepresent their company's financial position. The term ethical culture can be viewed as the character or decision-making process that employees use to determine whether their responses to an ethical issue are right or wrong.


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Nature of Business Ethics: The nature of business ethics is as follows 1. Ethical Value:

Business ethics is concerned with morality in business. In today’s world, Business community forms a large part of society and its actions are bound to have direct impact on well-being and welfare of the society. 2. Relative terms:

Ethics is a relative term, i.e., the concept of morality and immorality differs from one individual to other or society. What is moral in one society may be immoral in other. 3. Interest of society:

Business ethics implies that the business should do first good to the society and then to itself. Business is an important institution and has social responsibility to protect the interest of those entire groups like employees, shareholders, consumers who contribute to the success of business. 4. Business-Society Relationship:

Business ethics set the terms and standards to understand business – Society relationship. It indicates what society expects from business and what it thinks about business. 5. Provide Frameworks:

Like an individual, business is also bound by social rules and regulations. Business is expected to confine its activities within the limits of social, legal, cultural, economic environment.


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Need for Business Ethics: Economic liberalization announced by the government led to the deregulations. Deregulated economy provides freedom to the business to fix its own price, design the product and business principles, as it likes. Therefore the business should be ethical in order to survive and develop in long run. Application of ethical principles or values to the business operations is highly essential due to the following factors: 1. Business ethics makes the business to realize the basic objective of any economic institution i.e., human welfare 2. Business ethics is needed to convince the business to respect its competitors role in the economy 3. Business ethics force the business to respect the customers’ interest and their role in the business operations. 4. Business ethics is necessary to protect the interest of the society and to maximize the human welfare. 5. Business ethics improves the confidence of customers, employers, suppliers, bankers etc. in the process of protecting their interest 6. Business ethics regulates the roles and activities of all the players in the business activities. 7. Business ethics makes the business to discharge its role towards government more fairly. 8. Business ethics makes the business to balance its confronted roles and social issues like people-oriented management, ecology and environmental protection, Consumerism, Energy crisis, Technology development and then unemployment, resource utilization and the like.


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Scope of Business Ethics: 1. Business houses produce goods or render services of large quantities contributing to the gross domestic product. The GDP is not an end by itself. It is a means to an end, in the sense that it contributes to the satisfaction of the human needs. 2. Business managers are allocators of scares resources among various production means based on the priorities. Therefore they have to perform their activities more ethically, judicially and wisely. 3. Business people have the responsibility of the product selectivity. In the sense that they have to produce the goods and render the services which contribute to the welfare and well being of the people. 4. Business management must play the role of judicially balancing the clients of all the groups an individuals in the society based on their contribution (and their needs) towards the GDP of the economy. 5. Business must perform its activities in the framework of moral and ethical values.

Principles of Business Ethics: The Principles of business ethics developed by well known authorities like Cantt, J. S.Mill, Herbert Spencer, Plato, Thomas Garret, Woodrad, Wilson etc are as follows 1. Sacredness of means and ends: The first and most important principles of business ethics emphasize that the means and techniques adopted to serve the business ends must be sacred and pure. It means that a good end cannot be attained with wrong means, even if it is beneficial to the society. 2. Not to do any evil: It is unethical to do a major evil to another or to oneself, whether this evil is a means or an end. 3. Principle of proportionality: This principle suggests that one should make proper judgment before doing anything so that others do not suffer from any loss or risk of evils by the conducts of business. 4. Non co-operation in evils: It clearly points out that a business should with any one for doing any evil act. 5. Co-operation with others : This principles states that business should help others only in that condition when other deserves for help Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 6. Publicity: According to W. Wilson, anything that is being done or to be done, should be brought to the knowledge of everyone. If everyone knows, none gets opportunity to do an unethical act. 7. Equivalent price: According to W. Wilson , the people are entitled to get goods equivalent to the value of money that he will pay. 8. Universal value: According to this principle the conduct of business should be done on the basis of universal values. 9. Human dignity: As per this principle, man should not be treated as a factor of production and human dignity should be maintained. 10. Non violence: If businessman hurts the interests and rights of the society and exploits the

Importance of Business Ethics: A business is recognized well when it sounds ethically. An ethical image for company can build goodwill and loyalty among customers and clients.

Ethical motivation: it protects or improves reputation of the organization by creating an

efficient and productive work environment. At a time of mass corporate downsizing, one of the most effective ways to appeal to the fragile loyalty of insecure employees is to promote an ethical culture, which gives employees a greater sense of control and appreciation. Balance the needs and wishes of stakeholder: There is pressure on business to

recognize its responsibilities to society. Business ethics requires business to think about the impact of its decision on people or stakeholder who are directly or indirectly affected


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Business Government & Society by those decisions. Companies build their image by acting in accordance with their values, whatever they might be. Creating a positive public image comes from demonstrating appropriate values. Publicizing and following a company’s value allows stakeholder to understand what the company stand for, that it takes its conduct as an organization seriously. Global Challenges: Business must become aware of the ethical diversity of this world

because of increasing globalization of the economy. It must learn the values of other cultures. How to apply them to its decisions, and how to combine them with its own values. In a world where transnational corporations and their affiliates account for 2/3 of the world’s trade in goods, and employ 73million people, corporations cannot afford to ignore the reality of multicultural ethics. Ethical Pay-off: They serve to protect the organization from significant risks, and to

some degree help grow the business. Risks such as breaches of law, regulations or company standards, and damage to reputation were perceived to be significantly reduced. Employee Retention: one of the major costs in business inappropriate turnover. The loss

of valuable experience and development of new personnel is a cost companies can control. Seldom is the primary factor in losing an employee. What would a company give to retain valuable employees? With a successful program, the employees work with managers and supervisors in making decision based on company’s values. A successful business ethics program establishes a culture that rewards making the right decision. Prevention and reduction of Criminal Penalties: The United States sentencing

commission guidelines state that to receive a 40% reduction in federal penalties, a company must have “ an efficient program to detect and prevent violations of the law”. Executives cannot always be aware of everything done in company’s name. Preventing civil lawsuits: Many times employees that experience issues in the

workplace first try to resolve these issues internally. If their complaints are ignored, employees feel compelled to go to an outside advocate. That could be a private attorney, government regulator or news agency. Giving employees an internal outlet can solve problems without the event becoming public knowledge or an issue for the courts. Having the values permeate the company culture enhances the staff’s trust in senior Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society management. Why? Because with an effective program, the staff recognizes that management also operates within these appropriate values. Market Leadership: When a company fully integrates its values into its culture. Quality

rises due to the employee’s focus on values. Customers see that the employees care about the customer’s concerns. Employees reflect appropriate values in their attitude and conduct. Roy Koerner in his article Want More Profit? Try Ethical Business Practices points out that business demonstrating the highest ethical standards are also the most profitable and successful.

Approaches to Business Ethics: There are four different ways of deriving standards of business ethics 1. Profit Motive approach:

Some business people argue that there is a symbolic relation between ethics and business for profit-oriented business feels adopting good ethical policies will naturally lead to good business. In other words, good ethics results in good business. Moral business practices are profitable This has also disadvantages, which are given below: •

Moral business practices will have advantage on long run. In other words, this may not suit the short-term business and may provide little incentive for business. When competition grows, survival would be a serious problem.

•

May not be economically viable: retaining inefficient old employees.

•

Overlap between morality and profit

2. Legal Approach: Assumes that moral obligations in business are restricted to what the law requires. Moral principles are beyond the requirement of law. The unreasonableness of such moral requirement is all more evident in societies that do have strong external sources of morality.


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Business Government & Society 3. Moral Obligations Approach:

The third approach to business ethics is that morality must be introduced as a factor that is external to both profit motive and law. This is the view of most philosophers of business ethics. The most convenient way to explore this approach is to consider among five legal moral principles suggested by philosophers are: •

Harm Principle-Businesses should avoid causing unwarranted harm.

•

Fairness principle-All business practices should be fair.

•

Human rights principle-Business should respect human rights.

•

Autonomy Principle-Businesses should not infringe on the rationally reflective choices of people.

•

Veracity principle-Businesses should not be deceptive in their practices.

4. Social Approach:

This approach enables the company in to operate such a way that it actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life of a broad community

Sources of Ethical Standards: The Utilitarian Approach:

Some ethicists emphasize that the ethical action is the one that provides the most good or does the least harm, or, to put it another way, produces the greatest balance of good over harm. The ethical corporate action, then, is the one that produces the greatest good and does the least harm for all who are affected-customers, employees, shareholders, the community, and the environment. Ethical warfare balances the good achieved in ending terrorism with the harm done to all parties through death, injuries, and destruction. The utilitarian approach deals with consequences; it tries both to increase the good done and to reduce the harm done.


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Business Government & Society The Rights Approach:

Other philosophers and ethicists suggest that the ethical action is the one that best protects and respects the moral rights of those affected. This approach starts from the belief that humans have a dignity based on their human nature per se or on their ability to choose freely what they do with their lives. On the basis of such dignity, they have a right to be treated as ends and not merely as means to other ends. The list of moral rights including the rights to make one's own choices about what kind of life to lead, to be told the truth, not to be injured, to a degree of privacy, and so on-is widely debated; some now argue that non-humans have rights, too. Also, it is often said that rights imply duties-in particular, the duty to respect others' rights. The Fairness or Justice approach:

Aristotle and other Greek philosophers have contributed the idea that all equals should be treated equally. Today we use this idea to say that ethical actions treat all human beings equally-or if unequally, then fairly based on some standard that is defensible. We pay people more based on their harder work or the greater amount that they contribute to an organization, and say that is fair. But there is a debate over CEO salaries that are hundreds of times larger than the pay of others; many ask whether the huge disparity is based on a defensible standard or whether it is the result of an imbalance of power and hence is unfair. The Common Good approach:

The Greek philosophers have also contributed the notion that life in community is a good in itself and our actions should contribute to that life. This approach suggests that the interlocking relationships of society are the basis of ethical reasoning and that respect and compassion for all others-especially the vulnerable-are requirements of such reasoning. This approach also calls attention to the common conditions that are important to the welfare of everyone. This may be a system of laws, effective policy and fire departments, health care, a public educational system, or even public recreational areas.


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Business Government & Society The virtue approach

A very ancient approach to ethics is that ethical actions ought to be consistent with certain ideal virtues that provide for the full development of our humanity. These virtues are dispositions and habits that enable us to act according to the highest potential of our character and on behalf of values like truth and beauty. Honesty, courage, compassion, generosity, tolerance, love, fidelity, integrity, fairness, self-control, and prudence are all examples of virtues. Virtue ethics asks of any action, "What kind of person will I become if I do this?" or "Is this action consistent with my acting at my best?"

Framework for understanding Ethical Decision Making:

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Model of the ethical decision making process in business includes ethical issue intensity, individual factors, and organizational factors such as corporate culture and opportunity. All of these interrelated factors influence the evaluations of and intentions behind the decisions that produce ethical or unethical behavior. This model does not describe how to make ethical decisions, but it does help one to understand the factors and processes related to ethical decision making.


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Business Government & Society Ethical issue intensity:

The first step in ethical decision-making is to identify one of the best among various several actions in deciding right and wrong by individual, work group, stakeholder and organization Ethical issue intensity can be defined as the relevance or importance of an ethical issue in the eyes of the individual, work group, and/or organization. Ethical issue intensity reflects the ethical sensitivity of the individual or work group that faces the ethical decision making process. Research suggests that individuals are subject to six “spheres of influence” when confronted with ethical choices—the workplace, family, religion, legal system, community, and profession—and that the level of importance of each of these influences will vary depending on how important the decision maker perceives the issue to be. It is personal and temporal in character to accommodate values, beliefs, needs, perceptions, the special characteristics of the situation, and the personal pressures prevailing at a particular place and time. Additionally, the individual’s sense of the situation’s moral intensity increases the individual’s perceptiveness regarding ethical problems, which in turn reduces his or her intention to act unethically. Individual Factors:

When people need to resolve ethical issues in their daily lives, they often base their decisions on their own values and principles of right or wrong. They generally learn these values and principles through the socialization process with family members, social groups, and religion and in their formal education. They appear to operate in their own self-interest or in total disregard of the law and interests of society. In the workplace, personal ethical issues typically involve honesty, conflicts of interest, discrimination, nepotism, and theft of organizational resources. For example, many individuals use the company computer system for several hours of work time a day for personal reasons. Most employees limit the use of their


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Business Government & Society work time for personal use, and most companies probably overlook these as reasonable. Some employees, however, use times in excess of 30 minutes for personal Internet communications, which companies are likely to view as an excessive use of company time for personal reasons. The way the public perceives individual ethics generally varies according to the profession in question. Telemarketers, car salespersons, advertising practitioners, stockbrokers, and real estate brokers are often perceived as having the lowest ethics. Research regarding individual factors that affect ethical awareness, judgment, intent, and behavior include gender, education, work experience, nationality, age, and locus of control. !

Gender– women are generally “more ethical than men”.

!

Education or work experience

!

Nationality– Cultural appears to be significant in affect of ethical decision making

!

Age– the older you are, the more ethical you are.

!

Locus of Control– External Control vs. Internal Control.

Organizational Factors:

Ethical choices in business are most often made jointly, in work groups and committees, or in conversations and discussions with coworkers. Employees approach ethical issues on the basis of what they have learned not only from their own backgrounds but also from others in the organization. Although people outside the organization, such as family members and friends, also influence decision makers, an organization’s culture and structure operate through the relationships of its members to influence their ethical decisions. A corporate culture can be defined as a set of values, norms, and artifacts, including ways of solving problems that members (employees) of an organization share. “The more ethical employees perceive an organization’s culture to be, the less likely they are to make unethical decisions.”


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Business Government & Society An important component of corporate, or organizational, culture is the company’s ethical culture. Whereas corporate culture involves values and norms that prescribe a wide range of behavior for organizational members, the ethical culture reflects whether the firm also has an ethical conscience. Ethical culture is a function of many factors, including corporate policies on ethics, top management’s leadership on ethical issues, the influence of coworkers, and the opportunity for unethical behavior. Obedience to authority is another aspect of the influence that significant others can exercise. Obedience to authority helps to explain why many employees resolve business ethics issues by simply following the directives of a superior Those who have influence in a work group, including peers, managers, coworkers, and subordinates, are referred to as significant others. They help workers on a daily basis with unfamiliar tasks and provide advice and information in both formal and informal ways. Opportunity:

Opportunity describes the conditions in an organization that limit or permit ethical or unethical behavior. Opportunity results from conditions that either provide rewards, whether internal or external, or fail to erect barriers against unethical behavior. Examples of internal rewards include feelings of goodness and personal worth generated by performing altruistic acts. External rewards refer to what an individual expects to receive from others in the social environment. Rewards are external to the individual to the degree that they bring social approval, status, and esteem. Opportunity relates to individuals’ immediate job context—where they work, whom they work with, and the nature of the work. The immediate job context includes the motivational “carrots and sticks” that superiors use to influence employee behavior. Pay raises, bonuses, and public recognition act as carrots, or positive reinforcements, whereas demotions, firings, reprimand, and pay penalties act as sticks, the negative reinforcements.


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Business Government & Society Business Ethics Evaluations and Intentions:

Ethical dilemmas involve problem-solving situations in which decision rules are often vague or in conflict. The results of an ethical decision are often uncertain; no one can always tell us whether we have made the right decision. There are no magic formulas, nor is there computer software that ethical dilemmas can be plugged into for a solution. Even if they mean well, most businesspeople will make ethical mistakes. Thus, there is no substitute for critical thinking and the ability to take responsibility for our own decisions. An individual’s intentions and the final decision regarding what action he or she will take are the last steps in the ethical decision making process. When the individual’s intentions and behavior are inconsistent with his or her ethical judgment, the person may feel guilty. For example, when an advertising account executive is asked by her client to create an advertisement that she perceives as misleading, she has two alternatives: to comply or to refuse. If she refuses, she stands to lose business from that client and possibly her job. Other factors—such as pressure from the client, the need to keep her job to pay her debts and living expenses, and the possibility of a raise if she develops the advertisement successfully—may influence her resolution of this ethical dilemma. Because of these other factors, she may decide to act unethically and develop the advertisement even though she believes it to be inaccurate. Because her actions are inconsistent with her ethical judgment, she will probably feel guilty about her decision. The road to success depends on how the businessperson defines success. The success concept drives intentions and behavior in business either implicitly or explicitly. Money, security, family, power, wealth, and personal or group gratification are all types of success measures that people use.

Ethical organization: •

Ethical organizations are business entities that have incorporated ethics and values in the stem of the organization.

•

Code of ethics is used as major principles in their operation

•

Code of ethics is common channels for decision.


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Highly ethical organization begin with a clear vision and picture of integrity throughout organization

•

Ethical Principle requires: o

Management embodies the vision

o

Any reward system is aligned with vision

o

External & Internal policies are aligned with the vision

o

There is an understanding that every significant management decisions have ethical value dimensions.

Characteristics of ethical organization: •

Leadership:

•

Values

•

Integrity

•

Respect

•

Loyalty

•

Concern

Essentials of ethical organization:

Essential elements that makeup an ethical organization: 1. Ethical Leaders: •

Moral Persons

•

Moral Managers

2. Ethical Practices •

Recruitment & Selection

•

Orientation & Training

•

Policies and Codes

•

Rewards and punishment

•

Accountability and responsibility

•

Decision making


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Business Government & Society 3. Ethical Climate: •

Employees have lot of skill in recognizing ethical issues.

•

Success is defined not just by results, but also the way they are obtained

•

Employees continually strive to maintain high ethical standards.

•

Employees rarely feel pressured to compromise the organization’s ethical standards to achieve business objectives

Some Unethical Issues: Bribery:

Bribery is a manipulative method where one buys the power or the influence of other person in order to satisfy his selfish need. Bribes create a conflict of interest between the person receiving bribe and his/her organization. This conflict would result in unethical practices. When somebody is bribed for something his thinking and actions are oriented towards his personal goals. This direction towards personal goals always results in a mismatch between the interest of the organization and of the individual. When there is a mismatch between the goals, naturally he cannot be loyal to the organization and in turn he will indulge in unethical practices. Coercion:

“Coercion is forcing a person to act in a manner that is against the persons beliefs “It is an external force or a man-made constraint created in circumstances asking the other to act against his free will. Authority of the person who demands certain activity plays an important role i.e, blackmailing or arm-twisting an individual in an organization. This may be in the form of threat of blocking a promotion or loss of job. This sort of unethical practices in the organization will lead further unethical behavior of an individual. Insider Trading:

This is one form of misuse of official position by an individual in the organization. Here the employee leaks out certain confidential data to outsiders or to other insiders, which in turn ruin the reputation of the company. Insider trading may lead to the bad performance of the company. If the employees trade the confidential matters, the competitor may intervene and make use of opportunity. Insider traders often defend their


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Business Government & Society actions by claiming that they don’t injure anyone. Tax Evasion:

There are major unethical practices towards tax evasion. Many large corporations hire the services of professional tax consultants to take advantage of loopholes in the law and evade taxes to the extent possible. The reason their attribute for such behavior is the prevalent rate of corporate taxation, which is very high. In fact this has generated a parallel economy in spite of government’s continuous Endeavour’s to channelize this money towards legitimate purposes. Conflicts of interest:

Even the most loyal employees can find that their interests collide with that of the organization. Sometimes this clash of goals and desires can take serious form of conflicts. In an organization conflict of interest arises when employees at any level behave with their private interests that are substantial enough to interfere with their job or duties. These conflicting interests in the individual and the decisions taken may act against the desire of the employer. Pollution:

The unethical practice towards pollution affects society and population to major extent. The high levels of pollution due to the indiscriminate and improper disposal of effluents by industries have rendered the world a highly unsafe place for people. Deception:

are frauds that acts to propagate beliefs that are not true, or not the whole truth. Deception often leads to feelings of betrayal and distrust between employees. Deception violates relational rules and is considered to be negative violation of expectations. Unfair Discrimination:

implies treating the same people differently due to difference in their race, caste, color, creed, religion, etc. discrimination has increased due to increasing diversity. But diversity has increased due to globalization.


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Module 6: Corporate Social Responsibility: Types and nature of social responsibilities, CSR principles and strategies, models of CSR, Best practices of CSR, Need of CSR, Arguments for and against CSR, CSR in Indian perspective, Indian examples.

Meaning and Definition of CSR: Corporate Social Responsibility also known as social responsibility, corporate responsibility, corporate citizenship, sustainable responsible business (SRB), or corporate social performance is a form of corporate self-regulation integrated into business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its support law, ethical standards, and international norms. CSR is not just an issue for large multinational but its voluntariness, diversity and flexibility are vital to allowing all business, regardless of size or location, to consider how best they can respond to the realities of their marketplace. Social responsibility of business is an ethical concept involving notions of human welfare and improving the quality of life in society. “Corporate Social Responsibility means devising corporate strategies and b uilding a business with the society’s needs in mind”. “Social responsibility is the personal obligation of everyone as he acts for his own interests to assure that the rights and legitimate interests of all others are not impinged”. “Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”.


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Nature of CSR Nature of corporate social responsibility includes: 1. Positive approach: CSR is a positive business-driven response to the business

environment of today. CSR is not an add-on for business; it is increasingly being integrated into business operations, governance, management system and thinking. It must therefore be seen within the context of the totality of a business today. 2. Multi-Dimensional Concept: CSR is multi-dimensional concept covering social,

economic and environmental concerns, and is continually evolving within the diversity of the market. This diversity of the marketplace makes innovation a critical aspect in the development and implementation of the varied CSR initiatives. Efforts to regulate or standardize such an inherently dynamic process of voluntary action would stifle this very fundamental characteristic. 3. Not an alternative: CSR is not an alternative to regulation. Governments must be

responsible for the implementation and enforcement of n ational laws.

Scope of CSR: Brummet suggested five possible areas in which corporate social responsibility

objectives may be found. The term ‘contribution’ includes social costs as well as social benefits associated with an organization’s activities. 1. Net income contribution: The social objectives of a business by no means reduce

the importance of the income objective. Without an adequate return on investment, a business organization cannot exist. Furthermore, long-range planning for a business unit includes calculating the minimum return on shareholder’s equity. A business must contribute to the overall economic development of the society. If a business fails to recognize the social problem, its performances may be affected either in the shortrun or in the long run. This improper working condition may lead to lower productivity or causes damage to the quality of the product. Ultimately, the sales and income of the business may be affected. Therefore, the failure to plan and attain social objectives of the business may be affected. Therefore the failure to plan and


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Business Government & Society attain social objectives of a business will cause a failure in attaining the income objective of business concern. 2. Human Resource contribution: The impact f organizational activities reflect on the

people who constitute the human resources of the organization, i.e., social performance of a business directed towards the well being of employees. These activities include the following: a. Recruitment practices and training programs, b. Employee skill, knowledge, attitudes and self-actualization, c. Wages and salary level, fringe benefits, d. Experience building by job rotation, e. Job enrichment, f.

Management-trade union relationship,

g. On the job physical environment and safety, h. Congruence of employee and organizational goals, i.

Occupational health,

j.

Transfer and promotion policies,

k. Freedom from undue stress 3. Public Contribution: The impact of organizational activities on individuals or

groups of individuals generally outside the business is the topic for discussion under this area. Example include a. General Philanthropy – contributions of the organization towards educational,

charitable or cultural organizations, b. Equal opportunity employment practices, c. Employment and training of physically handicapped persons, d. Taxes and duties paid, and e. Financial or manpower support of the business for urban housing, health

services. 4. Environmental Contribution: This area involves the environmental aspects of

production. Activities directed towards alleviating or preventing environmental deterioration (pollution), ex. Air, water, noise pollution, conservation of scarce resources and the disposal of solid waste are included in this area.


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Business Government & Society The social objectives of a business concern is to make efforts for abatement of these negative external social effects of industrial production and adopt more efficient technologies to minimize the use of irreplaceable resources and the production of waste. 5. Product or Service Contribution: This area concerns the qualitative aspects of the

organizations product or service, which includes consumerism, product quality, packaging, advertising, warranty provisions, product safety. There are differences in relative importance of product and service contribution to customers and product and service contribution to society in various industries. Utilities are most involved in product and service contribution to customers as well as to society followed by retail organizations and insurance companies.

Need of CSR: Corporate social responsibility becomes a necessity for an organization due to the following reasons: 1. To provide sense of responsibility: The institution of business exists only because it

performs invaluable services for society. Society gives business its charter to exist and that charter can be amended or revoked at any time if it fails to live up to society’s expectations. Therefore, if business intends to retain its existing social role and social power it must respond to society’s needs constructively. 2. To fulfill long-run self-interest:

A business organization most sensitive to

community needs would, in its own self-interest, like to have a better community in which to conduct its business. To achieve that, it would implement special programmes for social welfare. As a result of social improvements, crime will decrease. Less money will be required to protect property. Labor recruitment will be easier. Turnover and absenteeism will be substantially reduced. 3. To improve public image: Each business organization must enhance its public

image to secure more customer, better employees, and higher profit. The public image concept may be extended to the accomplishment of various types of social goals. So, if the firm wants to capture a favorable public image, it will have to show that it also supports these social goals. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 4. To avoid government regulation or control: Regulation and control are costly to

business, both in terms of energy and money and restrict its flexibility of decisionmaking. Failure of businessmen to assume social responsibilities invites government to intervene and regulate or control their activities. By their own socially responsible behavior, they can prevent government intervention. 5. To avoid Misuse of national resources and economic power: Businessmen

command considerable power over the productive resource of the community. They are obliged to use those resources for the common good of society. They should not forget that the power to command national resources has been delegated to them by the society to generate more wealth for its betterment. They must honor social obligations while exercising the delegated economic power. 6. To avoid class conflicts: Industrial peace is precondition for the success of business.

Trade unions are becoming more and more militant and demand social welfare measures, better wages, better working conditions, etc., their demand derives its force from the fast changing social environment. Businessmen must win over the confidence of workers and avoid violent class conflicts in their own interest. 7. To convert Resistances into resources: If the innovative ability of a business is turn

to social problems, many resistance (problems) can be transformed into resources and the functional capacity of resources may be increased manifold. All problems may not be capable of being handled this way, but many of them would be solved to ultimate benefit of society. 8. To minimize Environmental damage: The effluence of many businesses positively

damages the surrounding environment. They are duty bound to repair the damage by recognizing their ecological responsibility towards society.


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CSR Principles: No universal rules of social responsibility apply to every company. However, the following broad principles are widely accepted by managers: 1. Corporations are economic institutions run for profit: corporation’s greatest

responsibility is to create economic benefits. They should be judged primarily on economic criteria and cannot be expected to meet major social objectives without financial incentives that promise long-term benefits and should seek ways to solve social problems at a profit. 2. Follow Multiple bodies of law: All firms must follow multiple bodies of law

including: a. Corporation laws and chartering provisions, b. The civil and criminal laws of nations, c. Government regulations, and d. International law. 3. Managers must act ethically: Managers must respect the law and, in addition,

conform their behavior to ethical principles. They should also setup codes, policies, and procedures to elevate behavior within the firm. 4. Corrective Adverse Social Impacts: Corporations have a duty to correct the adverse

social impacts they cause. They should internalize external costs, or costs of productions borne by society. A factory dumping toxic effluent into stream creates costs such as human and animal disease that are imposed on innocents, not on the company or its customers. 5. Social responsibly varies with company characteristics: Social responsibility

varies with company characteristics such as size, industry, products, and strategies, marketing techniques, locations, internal cultures and external demands. 6. Meet legitimate needs of stakeholders: Managers should try to meet legitimate

needs of multiple stakeholders. Although corporations have a fiduciary duty to shareholders, it is not legally required, or desirable or possible to manage solely in they’re interest. Consumers, employees, governments, communities, and other groups also have important claims on the firm.


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Business Government & Society 7. Comply with norms: Corporate behavior must comply with norms in an underlying

social contract. To understand this contract and how it changes, managers can study the direction of national policies and global norms as evident in legislation, regulations, treaties, trade agreements, declarations and public opinions. 8. Accept a measure of accountability toward society: Corporations should accept a

measure of accountability toward society and publicly report on their market, mandated, and voluntary actions. 9. Maintain high standards of integrity: Corporations should maintain high standards

of integrity. This means that one must be honest and fair in all dealings. No tolerance for engagement in bribery or other forms of corruption.

CSR Strategies: Organizations can adopt a variety of strategies to social responsibility. For example, a firm that never considers the consequences of its decisions and tries to hide its transgressions is taking an obstructionist stance. At the other extreme, a firm that actively seeks to identify areas where it can help society is pursuing a practice stance toward social responsibility. Some people advocated a larger social role for organizations and other argue that the role is already too large. Not surprisingly, organization themselves adopt a wide range of positions on social responsibility. The four stances that an organization can take concerning its obligations to society fall along continuum ranging from the lowest to the highest degree of socially responsible practices are shown below

Obstructionist stance

Defensive stance

Accommodative stance

Proactive stance

Lowest


Highest

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Business Government & Society 1. Obstructionist stance:

The few organizations that take what might be called an

obstructionist stance to social responsibility usually do as little as possible to solve social or environmental problems. When they cross the ethical or legal line that separates acceptable from unacceptable practices, their typical response is to deny or avoid accepting responsibility for their actions. 2. Defensive Stance: One step removed from the obstructionist stance is the defensive

stance, whereby the organization does everything that is required of it legally, but nothing more. This approach is most consistent with the arguments used against social responsibility. Managers in organizations that take a defensive stance insist that their job is to generate profits. For example, such a firm would install pollution control equipment dictated by law but would not install higher quality but slightly more expensive equipment even though it might limit pollution further. Tobacco companies like Philip moriss take this position in their marketing efforts. In the United States, they are legally required to include warnings to smokers on their products and to limit their advertising to prescribed media. Domestically they follow these rules to the letter of law but use stronger marketing methods in countries that have no such rules. For example, in many African countries cigarettes are heavily promoted, containing higher levels of tar and nicotine than those sold in US, and carries few or no health warning labels. Firms that take this position are alson unlikely to cover-up wrong doing and will generally admit their mistakes and take appropriate corrective actions. 3. Accommodative Stance: A firm that adopts an accommodative stance meets its legal

and ethical obligations but will also go beyond these obligations in selected cases. Such firms voluntarily agree to participate in social programmes but solicitors have to convince the organization that the programmes are worthy of its support. 4. Proactive stance: The highest degree of social responsibility that a firm can exhibit

is the proactive stance. Firms that adopt this approach take to heart the arguments in favor of socially responsibility. They view themselves as citizens in a society and proactively seek opportunities to contribute.


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Types of CSR: There are following types of corporate social responsibility: 1. Environmental Corporate Social Responsibility: People expect business to exhibit

environmentally responsible behavior, as evidenced by a price water house Coopers survey that found that the No.1 issue for companies in the future, according to U.S respondents, is carbon emissions reductions. Specific environmental issues that affect businesses include global warning, sustainable resources and pollution, businesses are being urged by environmental groups and governments to reduce their carbon footprint, to obtain their materials from sustainable sources and reduce their pollution. st 2. Human Rights Corporate Social Responsibility: the 21 century marketplace is

highly global. This means that when a product is purchased in the United States, e.g., it may have received criticism for their use of sweatshops and for sourcing resources that are harvested by unfairly treated workers. This has lead to a push for the use of strict labor standards to be applied to suppliers, and a demand for fair trade products such as chocolate and coffee. 3. Financial Corporate Social Responsibility: Financial responsibility is an important

issue in corporate social responsibility. In the wake of the accounting fraud perpetrated by Enron and Arthur Andersen and Ponzi schemes orchestrated by the like of Bernie Madoff and Satyam in India, Businesses are questioned about the accuracy of their financial reporting by increasingly skeptical shareholders and government officials, as evidenced by the Sarbanes-oxley Act. Employees are expected to act as whistle blowers in such situations, and white collar crime is seeing high-profile prosecutions like that of Martha Stewart or former Worldcom CEO Bernie Ebbers. 4. Political Corporate Social Responsibility: Trading with repressive regimes is a

difficult issue in corporate social responsibility. Some business argues that working with these regimes will help to advance them and bring rights to the countries. People and Governments have demanded that businesses stop trading with repressive regimes, which was most notably observed when several western governments launched an embargo against the partheid government in South Africa during 1980s.


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Business Government & Society Shell oil received considerable consumer backlash during the 1990s for its complicit involvement with the Nigerian government that murdered anti-oil activists. These issues make doing business with certain governments an important consideration for corporate social responsibility.

Models of CSR: 1. Ackerman and Bauer: Addressing this need to look at how organization-specific

stakeholder issues should be managed; Ackerman and Bauer argue that each social issue has a specific ‘lifecycle’ which denotes its development within the organization. Consisting of three stages – policy, learning and organizational commitment- the positioning of each stakeholder issue within the context of this lifecycle is expected to determine correspondent correspondent organizational responses.

The key contribution of this

model is the need to implement social/stakeholder issues through the regular operations of the firm so that they are not considered to be ‘external programmes’. 2. Shareholder Value Model: The shareholder value model, a perspective represented

by the Nobel laureate Milton Friedman, argues that the only social responsibility of business is to increase its profits while following legal rules. Neoclassical economist econ omist like F.A Hayek asserts that the function of business is doing business that contributes to economy and society, and its function should not be confused with other social functions performed by governments and not-for-profit organizations. Otherwise, it is not the most efficient way of allocating resources in a free market. Economists like agency theorists believe that the owners of the corporations are its shareholders, and managers as agents have fiduciary duty to serve the interest of shareholders rather than any others. Although maximizing shareholder profit is justified as the only or the most important corporate responsibility, corporate social obligations are often regarded as strategic instrument for more profit gain and corporate competitive advantage. 3. Stakeholder Model: This model has become popular since the 1990s, as a direct

challenge and alternative to the shareholder value model. It argues that the number of stakeholder pressure groups has increased rapidly since the 1960s and the influence of stakeholder forces on business should not be under estimated. Pragmatic and ethical


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Business Government & Society as it ought to be, business success must consider wider interests of stakeholders than the interests of shareholders alone. The stakeholder model emphasizes special responsibility of a corporation to the stakeholders of the corporation only, rather than any others unrelated to the corporation. Thus, CSR is interpreted as ‘company stakeholder responsibility’. 4. Business Ethics Model: This model is concerned with broader social obligation and

the moral duty business has to society. This model justifies CSR on three slightly different but interrelated ethical grounds: •

Intrinsic or eternal ethical values, often inspired by Kantian deontological ethics and expressed as some normative and universal principles like human rights, social justice and fairness.

•

Emerging and changing social expectations and social responsiveness to specific social issues.

•

Corporate citizenship, i.e., corporation as a good citizen in a society to contribute to social wellbeing. The business ethics model views CSR more as ethical and philanthropic

responsibilities rather than economic and legal responsibilities. CSR begins where legal obligation ends. 5. Environmental integrity and Community Health Model: the corporate firms have

recommended this model in recent years in the United States. There is a hidden business agenda in-built in this model. Business people believe that if the corporate sector can positively contribute to the environmental integrity and human health, there will be greater opportunities for the expansion of business in general and this will, in turn, maximize profits. Healthy people can work more and earn more. So, consumers spending this will, increase and so will the profit. Therefore in the same form CSR is beneficial for the corporate sector. What then is required is the socially responsible investment portfolio, and a good relationship with the community which is always beneficial for the business. 6. Corporate Citizenship Model: The model posits that when a business behaves in a

way that satisfies philanthropic, legal and economic responsibilities well in the


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Business Government & Society corporate world, it entitled to corporate citizenship. To be a corporate citizen, a corporate firm has to satisfy four conditions – consistently satisfactory and sustainable economic performance, ethical actions and behavior beyond the minimum requirements of law of the land, and voluntary social actions that enhance the reputation of the company. A particular firm’s commitment to corporate citizenship requires the fulfillment of certain social responsibilities. Such a citizenship stems from a particular type of philosophy, and depending on the extent to which it is followed by a firm, it may or may not qualify to have a corporate citizenship.

Best practices of CSR: There could be following seven best practices for corporate social responsibility: 1. Set measurable goals: Return on investment has always been a difficult thing to

measure. In order to accomplish this in CSR policy, Goldschein suggests implementing small changes close to home, such as improving employee policies that decreases turnover and improve recruitment. Simple steps, like minimizing waste and resources use, are changes that can be developed into a memorable story about how sustainability efforts support company’s overall corporate strategy. 2. Stakeholders Engagement: Leaving their stakeholders out of the loop is one of the

top mistakes companies make when trying to jump on the green/socially responsible bandwagon. In order for company to articulate its values, missions, strategy and implementation in the creation of CSR plan, it is important for everyone to be on the same page. Stakeholders can help by joining in the regulatory approvals process, improving relationships proactively, or solving CSR roadblocks and potential crises. One should include stakeholders from the start of the consultation process and sidestep moving forward with developments in which they would otherwise have little influence over or information about. 3. Sustainability issues Mapping: this approach uses interactive maps to help in

priorities and narrow down key issues, saving company time and money during the initial research stage. For example, Sir Geoffrey Chandler, founder and chair of Amnesty International U.K., praises sustainability issues mapping as “a most


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Business Government & Society stimulating approach. It brings together things which ought to go together, but too frequently do not”. 4. Sustainability Management Systems (SMS): Developing a framework to ensure

that environmental, social and economic concerns are considered in tandem through out organizations decision-making processes. Organizations should start by identifying and prioritizing sustainability aspects and impacts taking it one step further by looking at legal requirements related to these impacts and evaluating company’s current compliance. Collaborating with an environmental consultant can help during the process. Next, outlining company’s goals and objectives. Finally, educating and training employees on using the SMS, and also periodically running audits to ensure that it is carried-out in the most effective manner possible. 5. Lifecycle Assessment: product design is critical. Gone are the days where the

immediate product was the only thing that matters, without any given thought to its afterlife. A cradle-to-cradle approach exhibits a company’s creativity and innovation and can, consequently, improve its bottom line. Whether it is re-using their product or designing it in a manner that will keep it out of the landfill, building customer rapport and brand loyalty by taking the pressure off the disposal process for their products. 6. Sustainability/CSR Reporting: CSR reporting has increased in popularity over the

past few years, due to increasing government regulations as well as self-regulation by forward thinking companies. It is important that consumer base has easy access to an organization’s latest and greatest efforts, in a way that does not minimize what they are doing. A simple and environmentally friendly way to do this is to post CSR reports on company’s website, in an easy to download PDF file or other accessible format. This is another area to ask for feedback from company’s number one fans – their stakeholders. 7. Sustainability Branding: transparency is key in sustainability branding. For example, Clorox Green Works, when endorsed by the Sierra Club, was able to

capture 42% of the market share in their first year. The market for natural cleaning products has since increased, paving the way for smaller brands like seventh generation and method to reach to a broader customer base.


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Arguments for CSR: Arguments for social responsibility of business are as follows 1. Changed Public Expectations of Business: one of the most noted arguments for

special responsibilities is that public expectations from business have changed. It is reasoned that the institutions if the business exits only because it satisfies the valuable needs of the society. Society gave business its charter to exit, and the charter can be amended or revoked at any time that the business fails to leave up to societies expectations. Therefore, business wishes to remain viable in the long run it must respond to societies needs and give the society what it wants. 2. Better environment for Business: Social responsibility creates a better environment

for business. This concept rationalizes that a better society produces environmental conditions more favorable for business operations. The labor recruiting will be easier, and labor will be of a higher quality. Turnover and absenteeism will be reduced. 3. Public Image: Another argument in favor of social responsibility is that it improves

public image. Each individual firm seeks an enhanced public image so that it may again more customers, better employees, more responsive money markets and other benefits. A firm, which seeks better public image, should support social goal. 4. Avoidance of Government Regulation: Government is a massive institution with

long arms. It seeks to regulate business in the public interest, government regulation is costly and denies the much-needed freedom in decision-making. Before the government stretches long arms, business should discharge its obligation to society. 5. Balance of responsibility with power: another arguments for social responsibility is

that businesses responsibility should be more related to its power. It is reasoned that businessmen have vast amounts of social power. They do affect the economy, minorities and other social problems in turn, an equal amount of social responsibility is required to match their social power. 6. Business has the resources: another arguments for social responsibility is that

business has a vast pool of resource in terms of men, talents, functional expertise and money. Probably, business is without peers in respect of resources it possess. With


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Business Government & Society these resources and its command, business is in a better position to work for social goals 7. Let business try: One interesting argument for business social responsibility is a

sought of back handed one. It is that many other institutions have failed in handling social problems, so why not turn to business. Many people are frustrated with the failures of other institutions and in their frustration, they are turning to business. 8. Moral responsibility: It is stated that acceptance of CSR is the morally correct

position. This notion suggests that our modern industrial society faces many serious social problems brought on, to a large extent, by large corporations. The corporations therefore have a moral responsibility to help solve or ameliorate these problems. Corollary to this notion is that because business firms control so many of the resources in our economy, they should devote some of these resources to the overall betterment of the society. 9. Citizenship arguments: Corporations are institutional member of society. If

individual members of the society have an obligation to improve the society, then corporations also have this responsibility, after all corporations unlike citizens are created by the society. Corporations are citizens and citizens have a civic duties and responsibilities. 10. Duty of gratitude: Business units’ benefits from society. On the basis of the

community accepted principle that one owes debts of gratitude towards those who benefit us, the corporation has certain debts that it owes to the society. 11. Prevention is better than cure: The last point is that prevention is better than cure.

If business delays with social problem now, it may find itself constantly occupied with putting out social fires so that it has no time to accomplish its goal of producing goods and services. Since these social problems must be dealt with at some time, it is actually more economical to deal with them before they develop into serious social breakdowns that consumer most of the management’s time.


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Arguments against CSR: Arguments against social responsibility of business are as follows: 1. Profit Maximization: The first and the most forceful argument dis favoring social

responsibility is that business has profit maximization as its main objective. Indeed, the business is most socially responsible when it attends to its interests and leaves other activities to other institutions. Since business operates in a world of poverty and hunger, the economic efficiency of business is a matter of top priority and should be the sole mission of business. Business’s function is economic, not social and economic values should be the only criteria used to measure success. In this kind of system, managers are the agents of the stockholders and all their decisions are controlled by their desire to maximize profits for the stockholder while reasonably complying with law and social custom. 2. Society has to pay the cost: Another argument is that the costs of social

responsibility will be passed on to society and it is the society, which must bear them. 3. Lack of social skills: business managers are best at managing matters relating to

business. They are not equally good at solving social problems. Their outlook is primarily economic and that there skills are the same. They really do not feel at home in social matters. Corporates like the Lalbhais, Mafatlals and shroffs have already attempted to bring in management professionals into the social responsibility area. 4. Business has enough Power: Another argument is that business already has enough

social power, therefore, society should not take any steps which give it more power. According to this line of reasoning, business is one of the two or three most powerful institutions in society at the present time. A business influence is felt throughout society. It is felt in education, in government, in the home and in the market place. It molds many social values. The process of combining social activities with the established economic activities of business would give business an excessive concentration of power. Business is an institution, which is considered to be not so good, and giving more power to it is not advisable. 5. Social Overhead Cost: Cost on social responsibility is considered to be a social cost,

which will not immediately benefit the business. It is the heavy social overhead cost


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Business Government & Society which is one of the reasons for the miserable performance of some of our government’s undertakings. 6. Lack of Accountability: Another point off view is that the businessmen have no

direct accountability to the people; therefore, it is unwise to give businessmen responsibility for areas where they are not accountable. Accountability should always go with responsibility, and it is poor social control to allow any other kind of arrangement. Until the society can develop mechanisms, which establish direct lines of social accountability from business to the public, business must stand clear of social activities and pursue only its goal of profit where it is directly accountable through the market system. 7. Lack of Broad Support: Business involvement in social goals lack support from all

groups in society. If business does become socially involved, it will create so much friction among dissident parties that business cannot perform its social assignment. Although many persons desire business to become more socially involved, others oppose the idea. There is lack of agreement among the general public, among intellectuals, in the government and even among businessmen themselves.

CSR Indian Perspective: CSR in India has been influenced by the Hindu tradition of Philanthropy carried through the ages. But modern Indian corporate philanthropy has its roots in the colonial period when leading business patriarchs began to imitate the efforts undertaken by the corporate in the west. Thus Indian Business houses like the Tata’s, Birla’s, Godrej’s etc., played a major role in the development of a large number of educational and charitable institutions in the various parts of the country. The early 20th century was considered as the golden age of Indian Corporate Philanthropy. Big business families established trusts and endorsed a host of modern institutions such as schools, colleges, hospitals, etc, but in 1960’s and 1970s; state controlled economic policies resulted in the weakening of the philanthropic commitment of the business houses, as they remained busy safeguarding their business territory.


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Business Government & Society In 1980s the advent of liberalization resulted in the opening of Indian economy. Bringing the corporations back into the center stage and they become important players in the realm of policy-making and implementation. This, in turn, resulted in a greater expectation of both public and government to have the Indian business class a propeller of rapid business growth in all sectors In the west the concept of CSR emerged as a part of welfare capitalism following the industrial revolution. Over the period of time, a secularization of charity also took place as the actions came to be guided by universal, ethical and legal norms instead by religion, tradition and custom. Corporate philanthropy moved rapidly beyond good deeds and new ideology of social trusteeship came up. In India, corporate social responsibility is still in its nascent stage as far as the spirit and commitment are concerned. The traditional Indian business houses have failed to create an ethos of modern welfare capitalism. Thus they were largely inward looking and they were concerned with the accumulation than distribution of wealth. The basic inspiration for charity in India whether from community or the individual is religion. Though there is no concrete evidence but still a large portion of donations made by the business community is given to temples, religious trusts and other bodies. However, the scenario is rapidly changing. Professionally managed business houses are setting new trends in CSR. The new technology-based companies understand their responsibility towards satisfying their stakeholders’ demand. Another dimension to this new role of the Indian corporate is the greater privatization of the social development sector by taking it away from the government domain to private initiatives. International agencies like the World Bank, UNDP and many donor foundations are actively engaged in the privatization of the social sector and demanding greater participation of business houses and NGOs.

Indian Examples of CSR Initiatives:

“Students are expected to write at least 5 CSR of Different MNCs”. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Module 7: Business Law: Law of contract - meaning of contract, agreement, essential elements of a valid contract. Law of agency - meaning, creation and termination of agency. Bailment and Pledge - meaning, rights and duties of bailor and bailee. Negotiable Instruments Act 1881: Nature and Characteristics of Negotiable instruments,

Kinds of Negotiable Instruments – Promissory Notes, Bills of Exchange and Cheques. Discharge and Dishonour of N egotiable Instruments. Sale of Goods Act 1930: Definition of Sale, Sale v/s Agreement to Sell, Goods, Condition

and Warranties, Express and Implied Condition, “Doctrine of Caveat Emptor”, Right and duties of Unpaid Seller. Meaning, scope and objectives of - Intellectual property law, law relating to patents, law relating to copyrights, law relating to trade mark.

As a social being a man comes in contract with people in different capacities. He comes into contract with the landlord as a tenant. With government as tax payer, with customer as seller and with supplier as buyer. These contacts or associations are inevitable consequences of modern civilization. In all these conditions he is expected to observe a code of conduct or set of rules. The objective of any rules and regulation is to associate humans together for the welfare of the society.

What is law? The word law is a general term and has different conations (different philosophy) for different people. Example: 1. A citizen may think of law as a set of rules which he must obey 2. A lawyer who practices law may think of law as vocation [activity which he trained

for]


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Business Government & Society 3. A legislator may look at law something he is created. 4. A judge may think of law as guiding principle to be applied in making decisions.

The perception of the human being depends on the meaning of law, as it is a general term. If it is often preceded by an adjective it gives more precise meaning. Ex: Civil law, Criminal law, mercantile law, Industrial law, International law. Law includes all the rules and principles, which regulate over relations with other individuals and with the state. “ Law is the body of principles recognized and applied by the state in the administration of Justice”. In the words of salmond

Law represents a code of conduct, which is established by the state and enforced by the state bodies. Law is not static, as circumstances and conditions in a society change; laws are changed to fit the requirements of the society. Law prevailing in a society at any point of time must be in conformity with general sentiments, customs and aspiration of its people. It is a kind of living Phenomenon. Need for the Knowledge of law: ‘Ignorantia Juris not execusat’ is a familiar maxim, which means Ignorance of law is

no excuse. Although it is not possible for layman to learn every branch of law, yet is to the advantage of each member of the community to know something of rules and regulations by which he is governed and as such he must acquire himself with general principles of the law of country. Nature of Mercantile Law:

The term “Mercantile Law” is used to denote that branch of law which is considered with such matters as are usually the subject of what may be called mercantile


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Business Government & Society transaction i.e it deals with contractual situation and the right and obligations arising out of mercantile transactions between mercantile persons. Mercantile persons may be a single individual, a partnership or a joint stock company. Object of the law of contract:

Law of contract is that branch of law, which determines the circumstances in which promises made by the parties in contract shall be legally binding on them. Its rules defines the remedies that are available in court of law against a person who fails to perform his contract and the conditions under which remedies are available. The law of contract is contained in “Indian Contract Act 1872” Nature of the Law of Contract:

It does not lay down a number of rights & duties, which the law will enforce. It consists rather a No. of limiting principles, subject to which the parties may create rights and duties for themselves which law will uphold. Law of contract is neither the whole law of agreements nor the whole law of obligations. Therefore not contracts similarly there are certain obligations, which do not necessary spring from an agreement. Law of Contract creates jus in rem and jus in personam •

Jus in rem means right against or in respect of thing

•

Jus in Personam means a right against or in respect of specific person.

•

Jus in rem is available against the world at large, Jus in personam is available only against particular person.

Ex. A owes a certain sum of money to B. B has the right to recover his amount from A.

(Jus in Personam) X is the owner of a plot of land. He has the right to have a quiet possession and

enjoyment of the land against every member of public. Similarly every member of the


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Business Government & Society public is under an obligation not to disturb X’s possession or enjoyment. The right of X is jus in rem.

Definition of Contract: •

Contract is an agreement made between 2 or more parties which law will enforce.

•

Sec 2h defines Contract is agreement enforceable by law.

•

Every agreement and promises enforceable at law is contract.

•

Sir William Andson defines Contract as “ a legally binding agreement between two or more persons by which rights are acquired by one or more to act as forbearance (abstaining from doing something) on the part of others.

•

Selmond- Contract is a “agreement creating and defining obligations between the parties.”

Agreement and its enforceability: If we analyze the definition of contract we find contract essentially consists of two elements agreement and enforceability of law. An agreement is defined as “ every promises and every set of promises, forming consideration for each other” [Section 2(e)] A promise is defined as thus “when the person to whom the proposal is made signifies his assent therto, the proposal is said to be accepted. A proposal when accepted becomes a Promise” [Sec 2b] Agreement is an accepted proposal. Hence to form agreement there must be proposal or offer by one party and its acceptance by the other. Agreement = offer + Acceptance Consensus ad idem:

The essence of agreement is the meeting of the minds of parties in full and final agreement.


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Business Government & Society In Sec 2(e) it is stated that before there can be agreement between 2 parties, there must be consensus ad idem. Unless there is no consensus ad idem, there can be no contract. Ex . A, who own 2 horse named Rony & Sony , is selling horse Rony to B. B thinks he is

purchasing horse, Sony. There is no consensus ad idem and hence no contract. Thus if “A Says to B will you purchase my blue car for Rs 10,000?” and B Says “Yes” to it. There is consensus ad idem

Obligations: An agreement to become a contract, must give rise to legal obligations or duty The term obligation is defined a legal tie which imposes upon a definite person or persons the necessity of doing or abstaining from doing a definite act or acts. It may relate to social or legal matters. An agreement which gives rise to social obligations is not a contract. It must give rise to legal obligations in order to become a contract Ex: A agrees to sell his Car to B at Rs. 1lakh.

The agreement give rise to obligation on the part of A to deliver the car to B and on the part of B to pay Rs. 1Lakh

Agreement is a very wide term: An agreement may be social agreement or legal agreement •

A invites B to a dinner & B accepts the invitation. It is Social agreement

A social agreement does not give rise to contractual obligations & is not enforceable by law. It is only those agreements, which are enforceable in a court of law are contracts. Examples •

A invite his friend B to come and stay with him for a week. B accepts the

invitation but when he comes to A, A cannot accommodate him, as his wife had died the day before. B cannot claim compensation from A.


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A father promises to pay his son Rs.100 every week as pocket allowances. Later

he refuses to pay. The son cannot recover as it is domestic agreement and there is no intention on the part of the parties to create legal relations. Thus all contracts are agreements but all agreements are not necessarily be contracts.

Essential elements of Valid Contract: According to Sec 10 all agreements are contract if they are made by free consent of Parties, competent to contract, for lawful consideration and with lawful object and are not expressly declared to be Void. In order to become a contract Valid it should have following essentials 1. Offer and acceptance: there must be 2 parties to an agreement i.e one party making

the offer and the other party accepting it. The terms of the offer must ne definite and the acceptance of the offer must be absolute and unconditional. The acceptance must also be according to mode of prescribed and must be communicated to the offeror. 2. Intention to create a legal relationship: When the two parties enter into an

agreement, their intention must be to create a legal relationship between them. If there is no such intention on the part of the parties, there is no contract between them. Agreements of social or domestic nature do not contemplate legal relationship as such they are not contracted. Ex. A husband promised to pay his wife B a household allowance of Rs.1000 every month. Later parties separated & husband failed to pay the amount. The wife sued for allowance. Held agreement does not lead to contract. There was an agreement between R Co. & S Co. by means former was appointed as agent for later. One clause in agreement was “This agreement is not entered into as a formal or legal agreement and shall not be subjected to legal jurisdiction in the law courts” held there was no binding contract as there was no intended to create legal relationship. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society In an agreement a document contained a condition “that it shall not be attended by or give rise to any legal relationships, rights or duties or be legally enforceable or subject to litigations, but all such agreements and transactions are binding by honor only”. Held the condition was Valid and the agreement was not binding. 3. Lawful Consideration: An agreement to be enforceable by Law must be supported

by consideration. •

Consideration means advantage or benefit moving from one party to other. It is essence of bargain. In simple words “something in return”.

•

The agreement is legally enforceable only when both the parties give something and get something in return.

•

Consideration need not necessarily be in cash or kind. It may be act of abstinence or promise to do or not to do something. It may be present, past or future. But it must be real and lawful.

4. Capacity of Parties: The parties to the agreement must be capable of entering into a valid contract. Every person is competent to contract if he/she a) Is of the age of Majority b) Is of sound mind c) Is not disqualified from contracting by any law to which he is subjected (sec 11 & 12) Flaw in capacity to contract may rise from minority, lunacy, idiocy, and drunkenness. 5. Free and genuine consent: It is essential to the creation of every contract that there must be free and genuine consent of the parties to the agreement. The consent of the parties is said to be free when they are of the same mind on all material terms of contract. (Sec13) Consent is said to be free if contract is missed by coercion, undue influence, fraud, and misrepresentation. 6. Lawful object: The object of the agreement should be lawful. In other words it should not be illegal, immoral or opposed to public policy.


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Business Government & Society 7. Agreement not declared void: The agreement must not have been expressly declared void by law in force in that country. 8. Certainty and possibility of performance: The agreement must be certain and not vague or indefinite (Sec 29). If it is vague and it is not possible to ascertain its meeting, it cannot be. Example: •

A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show

what kind of oil was intended. The agreement is void or uncertainty. •

O agreed to purchase a motor van from S “ on hire-purchase terms” . The hire-

purchase price was to be paid over two years. Held, there was no contract as the terms were not certain about rate of interest and mode of payment. 9. Legal Formalities: The contract may be made by words spoken or written. As

regards the legal effects, there is no difference between a contract in writing and a contract made by word of mouth.

Law of Agency: Definition of Agent and Principal •

A person who has capacity to contract may enter into a contract with another (i) either by himself or (ii) through another person called agent.

•

An ‘agent’ is a person employed to do any act for another, or to represent another in dealing with third persons (Sec 182). The person for whom such act is done, or who s so represented is called the ‘principal’.

•

The function of an agent is to bring his principal into contractual relations with third persons.

•

He who does an act through another does it by Himself.

Creation of Agency: The relationship of principal and agent may arise 1. By express agreements or 2. By implied agreement or Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 3. By ratification, or 4. By operation of law.

1. Agency by express agreement:

The authority of an agent may be expressed or implied. Normally the authority given by principal to his agent is an express authority. The agent may, in such case, be appointed either by word of mouth or by an agreement in writing. The usual form of written agreement is power of attorney. 2. Agency by implied agreement

Implied agency arises from the conduct, situation or relationship of parties. It may be inferred from the circumstances of the case and things spoken or written or the ordinary course of dealing may be accounted as circumstance of the case (Sec 187). Examples: •

Q and P are brothers. Q lives in Delhi while P lives in Meerut. Q with the

knowledge of P leases P’s land in Delhi. He realizes the rent and remits it to P. Q is the agent of P, though not expressly appointed as such. •

A woman allowed her Son to drive a car for her, she paying all the expenses of

maintenance and operation. The Son caused an accident-injuring Neighbor. Held Neighbor could sue the Mother as the son was an implied agent of mother. A Agency by estoppel:

Doctrine of estoppel may be stated in sec 237. According to it, when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority. Example. A tells T within the hearing of P that he (A) is P’s agent. P does not object

to this statement of A. later T supplies certain goods to A , who pretends to act as an agent of P. P is liable to pay the price to T. by keeping quite, he (P) had led T to believe that A is really his agent.


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Business Government & Society B Agency by holding out:

Is a branch of the agency of estoppel: in this case, a prior positive or affirmative act on the part of the principal is required to establish agency subsequently. Example. P allows his servant habitually to purchase goods for him on credit from T ,

and pays for them. On one occasion, he pays his servant cash to purchase the goods. The servant misappropriates the money and purchases goods on credit from T. T can recover the price from P as he has held out his servant as his agent on prior occasions. C Agency by necessity:

In certain urgent circumstances the law confers an authority on a person to act as an agent for the benefit of another, there being no opportunity of communicating with that other. Such agency is called ‘agency of necessity’. It arises in following cases •

Agent exceeding his authority in an emergency: was not in a position to

communicate with the principal, had taken all reasonable and necessary steps to protect the interest of principal and has acted bona fide. Example: P consigns provisions to A at Kolkata, with directions to send them

immediately to T at Cuttack. A may sell the provision at Kolkata, if they will not bear the journey to Cuttak without spoiling. •

A person entrusted with another’s property: Example: horse was sent by a train. When it arrived at station of

destination ,

nobody took its delivery . The railway company , therefore, had to feed the horse. Held, the railway company was an agency of necessity and could recover the amount spent on feeding the horse. •

Husband and Wife:

3. Agency by ratification:

A person may act on behalf of another without his knowledge or consent. Example: •

A may act as P ’s agent though he has no prior authority from P . In such a case P

may subsequently either accept the act of A or reject it. If he accepts the act of A , Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society done without his consent, he is said to have ratified that act and it places the parties in exactly the same position in which they would have been if A had P’ s authority at the time he made the contract. Likewise. When an agent exceeds the authority bestowed upon him by the principal, the principal may ratify the unauthorized act. •

A insures P ’s goods without his authority. If P ratifies A’s act, the policy will be

as valid as if A had been authorized to insure the goods. Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done (Sec 197). Example: •

A, without P’s authority, lends P ’s money to T. Afterwards P accepts interest

from T . P ’s conduct implies a ratification of loan. •

A bought some goods on behalf of P in excess of the price authorized by P. P

objected to purchase but sold some of the goods. Held, he had ratified the purchase by selling goods Effect of ratification: The effect of ratification is to render the acts done by one person

(agent) on behalf of another (Principal), without his (principal’s) knowledge or authority, binding on the other person (Principal) as if they had been performed by his authority (Sec. 196). Ratification is tantamount to prior authority: It relates back to the date when the agent

did the act. This means the agency comes into existence from the moment the agent first acted and not from the time when the principal ratified the act. Example: A, the managing director of a company, purporting to act as agent on company’s behalf,

but without its authority, accepted an offer by T . T subsequently withdrew the offer, but the company ratified A’s acceptance. Held T was bound. The ratification related back to the time of A’s acceptance and so prevented the subsequent revocation by T


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Business Government & Society Requisites of Valid ratification: 1. The agent must purport to act as agent for a principal who is in contemplation

and is identifiable at the time of contract. Example: R was authorized by K to buy wheat at a certain price. Acting in excess of

his authority, R purchased wheat from D at a higher price in his own name. He did not profess to buy wheat on behalf of K . Subsequently K ratifies the act of R but later refused to take delivery of wheat. D brought an action against K . Held the contract could not be ratified because R did not purport to act as an agent for K 2. The Principal must be in existence at the time of contract: A company, for

example cannot ratify the contracts entered into by the promoters on its behalf before its incorporation. Example: B entered into a contract with K on behalf of a hotel company intended to

be formed. The company, when duly formed, ratified the contract. After sometime it wept into liquidation. K sued B upon the contract. B pleaded that the liability had passed to the company by ratification. Held the company was not liable by a mere ratification. “Ratification can only be by a person ascertained at the time of the act done and by a person in existence either actually or in contemplation of law…” As such B was held to be personally liable. 3. The principal must be with full knowledge of facts. No valid ratification can be

made by a person whose knowledge of facts of the case is materially defective (Sec 198). Example. A has an authority from P to buy certain goods at the market rate. He buys

at a higher rate but P accepts the purchase. Afterwards P comes to know that the goods purchased by A for O belonged to A himself. The ratification is not binding on P.

If however the alleged principal is prepared to take risk of what the purported agent has done, he can choose to ratify without full knowledge of facts. Example: A , an agent, entered into unauthorized contract for the purchase of a

property from T for P. P wrote to T assuring him that he would stand by the acts of A whatever they were. Even if he did not know what they, were. Held P was liable, as he had agreed to bear the risk of being bound by the unauthorized acts of A. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 4. The principal must have contractual capacity both at the time of the contract and at the time of ratification: If the principal was not competent to enter into

contract at the time when the contract was entered into, he cannot validate it by subsequently ratifying it at the time when he is competent to contract. 5. Ratification must be done within a reasonable time of the act purported to be ratified. It is made after the expiry of the reasonable time, it will not be valid. 6. The act to be ratified must be lawful and not void or illegal or ultra vires. In case

of a company. An agreement, which is void ab initio, cannot be ratified. 7. The whole transaction can be ratified. There can be ratification of an act in toto or

its rejection in toto. The principal cannot ratify a part of the transaction, which is beneficial to him, and reject the rest. 8. Ratification must be communicated: to the party who is sought to be bound by the

act done by the agent. 9. Ratification can be of the acts which the principal had the power to do. The acts,

which the principal is incapable of doing, cannot be ratified. A company, for example, cannot ratify the acts of the directors, which are ultra wires the powers of the company. 10. Ratification should not put a third party to damages. Ratification, which has the

effect of subjecting a third person to damages or of terminating any right or interest of a third person, cannot be made (Sec 200) , terminable on three month’s notice. A , an Example: T holds a lease from P unauthorized person, gives notice of termination to T . The notice cannot be ratified by P , so as to be binding on T. 11. Ratification relates back to the date of the act of the agent Examples: A who purports to act as agent on behalf of P but without P’s authority

accepts an offer by T. T with draws the offer before P comes to know it. P subsequently ratifies A’s acceptance. The ratification result in contract and as such T is bound by the contract.


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Business Government & Society Limitations to the doctrine of ratification. There can be no ratification •

Where an agent purports to act as an agent for a principal not in contemplation or existence.

•

Where the principal is incapable of contracting.

•

Where the principal does nit have full knowledge of facts.

•

Where the act to be ratified is void or illegal.

•

Where the whole of transaction is not ratified.

•

Where the ratification is not communicated to the person sought to be bound by the act done by the agent.

•

Where the ratification is of the acts which the principal has no power to do.

•

Where the ratification puts a third party to damage s

4. Agency by operation of law:

Sometimes an agency arises by operation of law. When a company is formed, its promoters are its agents by operation of law. A partner is the agent of the firm for the purpose of the business of the firm, and the act of partner, which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm (Sec 18 and 19 of the Indian Partnership Act, 1932). In all these cases, agency is implied by operation of law.

Termination of Agency: Sec. 201 describes the modes of termination of agency. The various modes are given below 1. Termination of agency by act of the parties:

a. Agreement: The relation of principal and agent like any other agreement may be terminated at any time and at any stage by the mutual agreement between the principal and the agent. b. Revocation by the principal: The principal may revoke the authority of the agent at any time before the agent has exercised his authority so as to bind the principal unless the agency is irrevocable. But if the act has begun, the authority can only be revoked subject to any claim, which the agent may have for breach of contract.


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Business Government & Society Where the agency is continuous one. Notice of its termination to the agent and also to the third parties is essential. c. Revocation by the Agent: An agency may also be terminated by an express renunciation by the agent after giving a reasonable notice to the principal. Example. P employs A to let P his house. Afterwards P lets it himself. This is an

implied revocation of A’ s authority. 2. Termination of agency by operation of law a. Performance of the contract: The most obvious mode of putting an end to the

agency is to do what the agent has undertaken to do. Where the agency is for a particular object, it is terminated when the object is accomplished or when the accomplishment of the object becomes impossible. b. Expiry of time: When the agent is appointed for fixed period of time, the agency

comes to an end after the expiry of that time even if the work is not complete. c. Death and insanity: When the agent or the principal dies or becomes of unsound

mind, the agency is terminated. When the termination thus takes place, the agent must take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him. d. Insolvency: The insolvency of the principal puts an end to the agency though

nothing is mentioned in Sec 201 as regards insolvency of the agent. The insolvency of the agent, it is accepted, also terminates the agency unless the act to be done by the agent is merely formal acts. e. Destruction of subject matter: An agency that is created to deal with a certain

subject matter comes to an end by the destruction of subject matter. Where for example, an agent is employed to effect an insurance on a particular house, the agency terminates if, before the insurance is effected, the house is destroyed by fire. f.

Dissolution of a company: When a company, whether principal or agent. It is

dissolved; the contract of agency with or by the company automatically comes to an end. g. Termination of sub-agent’s authority: The termination of an agent’s authority

puts an end to the sub-agent’s authority


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Business Government & Society When termination of agent’s authority takes effect: The termination of the

authority of an agent takes affect, so far as regards the agent, when it becomes known to the agent, and so far as regards the third persons, when it becomes known to them. Example: P directs A to sell goods for him, and agrees to give A 5 percent

commission on the price fetched by the goods. P afterwards, by a letter, revokes A’s authority. After the letter is sent but before A receives it, he sells the goods for Rs 1000. The sale is binding on P , and A is entitled to Rs.50 as his commission. The revocation of agency as regards the agent and as regards the agent and as regards the third parties may take effect at different points of time. If an agent knowingly enters into contract with a third party after termination of his agency and if the third party deals with him bona fide, i.e., without knowing that his authority as agent has been terminated, the agent will bind the principal by his act. Termination of Sub-agency: The sub-agency will be terminated as soon as the main

agency is terminated. Termination of substituted agency: The authority of the substituted agent will not

automatically be terminated if the authority of the agent is terminated.

Irrevocable agency: When an agency cannot be terminated or put an end to, it is said to be an irrevocable agency. An agency is irrevocable in the following cases: 1. Where the agency is coupled with interest

An agency is said to be coupled with interest when it is created for securing some benefit to the agent over and above his remuneration as agent. Where, for example, a creditor is employed as an agent to collect rents due to the principal for adjusting the amount towards his debt, the authority of the agent is coupled with interest and it is irrevocable during the subsistence of the interest. Sec 202 of the contract act provides to this effect as follows. Where the agent has himself an interest in the property that


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Business Government & Society forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Examples: P gives authority to A to sell P’s land. And to pay him , out of the

proceeds, the debt due to him from P. P cannot revoke this authority, nor can it be terminated by his insanity or death. P consigns 1000 bales of cotton to A , who has made advances to him on such cotton.

And desires A to sell the cotton and to repay himself, out of the price, the amount of his own advances. P cannot revoke this authority, nor is it terminated by his insanity or death. The above rule applies only if the agency is created for the protection of the interest of the agent. It does not apply where the interest arises after the creation of the agency. It is important that the agency is created with the object of securing a benefit to the Agent, and it is not sufficient that the agency secures a benefit to the agent incidentally. Example: P entrusted A with certain wheat to be sold on his behalf. Subsequently A

advanced a certain sum of money to P, which P failed to pay. P gave orders that the wheat was not to be sold. A nevertheless sold it to secure his advance. In an action against A, A pleaded that the agency, being coupled with interest, was irrevocable. The court, however held that this was an improper application of the rule, and A could not sell the wheat. This is because the agency is not coupled with interest 2. Where the agent has incurred a personal liability

Where an agent incurs a personal liability, the agency becomes irrevocable. The principal cannot, in such case, revoke the age ncy leaving the agent exposed to the risk of liability he has already incurred. 3. Where the agent has partly exercised the authority:

The principal cannot revoke the authority given to his agent after the authority has been partly exercised; so far as regards such acts and obligation as arise from acts already done in the agency.


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Business Government & Society Example: P authorizes A to buy 1000 bales of cotton on account of P and to pay for

it out of P’s money remaining in A’s hands. A buys 1000 bale of cotton in his own name, so as to make himself personally liable for the price. P cannot revoke A’s authority so far as regards payment for the cotton.

Bailment & Pledge The word ‘bailment is derived from French word ‘ballier’ which means ‘to deliver’ etymologically. It means kind of handing over. In legal sense it includes change of possession of goods from one person to another for some specific purpose. Sec 148 defines ‘Bailment’ as the delivery of goods by one person to another for some purpose. Upon a contract, that they shall when the purpose is accomplished be returned or otherwise disposed of according to the direction of person delivering them. The person delivering the goods is called the ‘Bailor’ and the person to whom it is delivered is called ‘Bailee’. Example: A delivers a piece of clothe to B , a tailor to be stitched into a suit. There is a contract of

bailment between A & B A lends a book to B to be returned after the examination. There is a contract of Bailment

between A & B A sell certain goods to B who leaves them in the possession of A.

Sometimes there may be bailment even without contract. Ex. When a person finds a goods belonging to another, a relationship of bailee and

bailor is automatically created between the finder and owner.

Requisites of bailment: 1. Contract: A bailment is usually created by agreements between bailor & bailee. The agreement may be express or implied, sometime created by law.


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Business Government & Society 2. Delivery of possession: Movement of goods from bailor to bailee. Basic feature of possession are control and an intention to exclude others. As such mere custody of goods does not create relationship of bailor & bailee. A servant who receives certain goods from his master to take to third party has mere custody of goods. “Possession remains with master and servant does not become a bailee. Ex:- A Lady employed a goldsmith for melting her old jewels & making new

one out of it. Every evening she received the unfinished Jewels and put into a box kept at goldsmith premises . She kept the key of box with herself . One night jewels was stolen from box. Held there was no bailment as goldsmith had re delivered to the lady the jeweler bailed with him by her. 3. For some Purpose: the delivery of goods from bailor to bailee for some purpose. If goods are delivered by mistake to a person there is no bailment. 4. Return of Specific Goods: It is agreed between the bailor and bailee that as soon as the purpose is achieved, the goods shall be returned or disposed of according to direction of bailor. Even if goods are altered and returned back as per bailor requirement there is contract of bailment. Bailment is only concerned with goods. If goods are transferred for money it is sale not bailment. Similarly when money is deposited in a bank a/c (not in safe deposit) the relationship of debtor and creditor is created, hence there is no bailment. The bank is not liable to return, when asked to do so, the very same money.

Consideration in a contract of bailment: In contract of bailment. The consideration is generally in the form of money payment either by a bailor and bailee.


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Business Government & Society Example: A gives his bicycle to B for repair [money is given to B goods (cycle) transferred to B for

repair and then returned back] A gives his car to B on hire [B uses car & return the car to A and give cash to A]

Classification of Bailment: 1. For exclusive benefit of bailor:

Delivery of some valuables to neighbor for safe custody without charge 2. For exclusive benefit of bailee:

Lending of bicycle to a friend for his use without charge. 3. For mutual benefit of bailor and bailee:

Hiring of bicycle to friend or giving watch for repair 4. Other classification

A. Gratuitous Bailment: It is a bailment where no consideration passes between bailor and bailee. Ex. A lends a book to his friend B B. Non Gratuitous Bailment: Bailment for reward

Duties & Rights of Bailor & Bailee: Duties of Bailor: 1. To disclose Known faults: It is the duty of bailor to disclose the known faults about

goods bailed to bailee. If he does not make such disclosure, he is responsible for any damage caused to bailee directly from such faults. Ex. A lends a horse, which he knows to be vicious to B. he does not disclose that horse is vicious . The horse runs away and B is thrown & injured . A is responsible to B for damaged sustained. A hires a carriage of B. The carriage is unsafe , though B is unaware of it and is . B is responsible to A for injury. injured Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society In gratuitous bailment, however the bailor is responsible only for those faults which are known to him & which are not disclosed. 2. To bare extraordinary expenses of Bailment: The bailee is bound to bear ordinary

& reasonable expenses of bailment but for any extraordinary expenses the bailor is responsible. Ex. A lends his horse to B , friend for two days. The feeding charges paid by B. but if horse met with an accident or got ill , B has paid for it , the it’s the duty of A to give

all medical expenses borne by B. Where in case of gratuitous bailment, the goods are to be kept or to be carried, or some work is to be done upon goods by bailee for bailor, the bailor must repay to bailee all necessary expenses incurred by him for the purpose of bailment. Ex. A leaves his car with B , a friend for safe custody for 2 months , B has to pay Rs 1000/month to night watch man for keeping a eye on car . It is duty of A to pay B the

necessary expenses incurred by B. 3. To indemnify bailee for loss in case of premature termination of gratuitous bailment:

Bailor can terminate a Gratuitous bailment at any time even though bailment was specified for specific time or purpose. But in such case, the loss occurring to bailee from such premature termination should not exceed the benefit he has derived out of bailment If loss exceeds benefit, the bailor should indemnify (pay loss) to bailee 4. To receive back the goods:

It is the duty of bailor to receive back the goods when bailee returns them after the expiry of term of bailment or when the purpose for which bailment was created has been accomplished. If bailor refuses to receive back the goods, the bailee is entitled to receive compensation from bailor for necessary expenses of custody.


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Business Government & Society 5. To indemnify the bailee:

Where title of bailor to goods is defective and the bailee suffers as consequence, the bailor is responsible to the bailee for any loss which bailee may sustain by reason that bailor was not entitled to make bailment.

Rights of Bailee: The duties of the bailor are the rights of bailee. As such the bailee can by suit, enforce the duties of bailor. 1. Right to know about faults in goods 2. Right to get extraordinary expenses from bailor 3. Right to take loss occurred from premature termination of bailment 4. Delivery of goods to one of several joint bailers of the goods If several joint owners of goods bail them. The bailee may deliver them back to, according to direction of one joint owner without consent of all. 5. Delivery of goods to bailor without title If the bailor has no title to the goods and bailee in good faith, deliver them back to, according to the direction of bailor, the bailee is not responsible to owner in respect of sub delivery. 6. Right to apply to court to stop delivery If a person, other than bailor, claims goods bailed, the bailee may apply to the court to stop the delivery of goods to bailor and to decide the title of goods/ 7. Right of action against trespassers: rd

If the 3 person wrongfully deprives the bailee of the use or possession og goods bailed to him, he has the right to bring an action against that party. 8. Bailee’s lien: where lawful charges of bailee in respect of goods bailed are not paid he may retain goods.


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Duties of Bailee: 1. To take reasonable care of goods bailed:

In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as man of ordinary course as his own goods The onus proof is on bailee to show reasonable care has taken when he fails to return to show reasonable care has taken when he fails to return the goods or return them in damaged condition. Ex. Certain goods of A were bailed with B. B omitted to lock goods bailed, locking up

similar goods of his own. Held was liable. 2. Not to make any unauthorized use of goods:

If the bailee use the goods bailed in manner which is inconsistent with terms of contract, he shall be liable for any loss even though he is not guilty of negligence and even if damages is result of an accident. Ex. A lends a horse to B for his riding only. B allows C , member of his family to ride

the horse. C rides with care but the horse accidently falls and is injured . B is liable to make compensation to A for the injury caused to horse. 3. Not to mix the goods bailed with his own goods.

The bailee must not mix the goods of bailor with his own goods, but must keep them separate from his own goods. If he mixes the bailor goods with his own goods a. With bailor consent, both shall have a proportionate interest in mixture thus produced b. Without bailor consent, and if the goods can be separated or divided, the bailee is bound to bear the expenses of separation or division. As well as damage arising from mixture. Ex. A bails 100 bales of cotton marked with a particular mark to B. B without A’s

consent , mixes the 100 bales with other bales of his own, bearing a different mark. A is entitled to have his 100 bales returned and B is bound to bear all expenses incurred in separation of bales and any other incidental charges. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society Without bailers consent, so that mixture is beyond separation the bailor is entitled to be compensated by bailee for loss of goods. 4. Not to set up adverse title:

The bailee must hold the goods on behalf of and for bailor. He cannot deny the right of bailor to bail goods and receive them back. If he deliver goods other than bailor than bailee should prove that such person has got right of title of goods.

Rights of Bailor: 1. Enforcement of rights: The bailor can enforce by suit all the liabilities or duties of

bailee as his right. 2. Avoidance of contract: The bailor can terminate the bailment if the bailor does, with

regard to goods bailed. Any act which is inconsistent with terms of bailment. (Sec 153) Ex. A lend horse to B , for his own riding only. B uses the horse with a carriage. A

can terminate the bailment. 3. Return of goods lent gratuitously: when goods are lent gratuitously, the bailor can

demand their return whenever he pleases even though he lent them for specified time or purpose. rd

4. Compensation from wrong-doer: if a 3 person wrongfully deprives the bailee of

the use or possession of goods bailed, or does them an injury, the bailor or bailee may rd

bring a suit against 3 person. Termination of bailment: 1. On the expiry of period: bailment for specific period, it termination on the expiry of

that period. 2. On the achievement of object: bailment terminates as specific purpose done in

contract is over or finished. 3. Inconsistent use of goods: when bailee uses the goods in a manner inconsistent with

terms of contract, the bailment terminates. 4. Destruction of subject matter: a. Subject is destroyed Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society b. By reason of a change in its nature becomes incapable of use for purpose of

bailment 5. Gratuitous Bailment 6. Death of Bailor or Bailee

Pledge: The bailment of goods as security for payment of debt or performance of a promise is called pledge. Bailor in this case called the ‘Pledgor’ or ‘Pawno r’ Bailee is called Pledgee or Pawnee A pledge is a bailment for security It is a special kind of bailment Ex. If A borrows Rs 200 from B and keeps his watch as security for payment of debt, the

bailment of watch is pledge. Any kind of movable goods, documents, valuable and even passbook of SB A/c can be pledged. But delivery is necessary to complete pledge. The delivery may be actual or constructive and symbolic. Ex. The producer of film borrowed a sum of money from financier and agreed to deliver

the final prints of film when ready. Held agreement was a pledge, there being no actual transfer of possession. Difference between Pledge and Bailment: •

Pledge is bailment of goods as security for the performance of specific promise. i.e the payment of debt or performance of promise. Bailment on the other hand is for purpose of any kind.

•

In case of default by pawnor to repay debt, the pawnee may, after giving a notice to pawnor, sell the goods pledged with him. The bailee may either retain the goods or sue for his charges.


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In case of pledge, the Pawnee has no right to use goods pledged with him. In case of bailment, the bailee may do so if the terms of bailment so provide.

Rights of Pawnee: 1. Right of retainer: The Pawnee may retain the goods pledged unless his dues are

paid. He may retain them not only for payment of debt or the performance of promise, but for •

Interest due on debt

•

All necessary expenses incurred by him in respect of possession or preservation of goods pledged.

2. Right of retainer for subsequent advance: When the Pawnee lends money to same

pawnor after date of pledge; it is presumed that right of retainer over the pledged goods extends to subsequent advances also. 3. Right to gain extraordinary expenses 4. Right against true owner when the pawnor’s title is defective: when pawnor has

obtained possession of goods pledged by him under a voidable contract but the contract has not been rescinded at time of pledge, the pawnee acquires a good title of goods, provided he acts in good faith and without notice of pawnor’s defect of title 5. Pawnee rights where pawnor makes default: where pawnor fails to redeem his

pledge, the pawnee can exercise following rights. •

He may file a suit against pawnor upon debt or promise and may retain goods pledged as collateral security.

•

He may sell the goods pledged after giving a pawnor a reasonable notice of sale.

•

He can recover from pawnor any deficiency arising on sale of goods by him. But he should hand over surplus on sale of goods to pawnor.


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Rights of Pawnor: 1. Right to get back goods: on the performance of promise or repayment of loan and interest, if any, the pawnor is entitled to get back the goods pledged. 2. Right to redeem debt: quite often time is stipulated for the payment of debt, or

performance of promise, for which pledge is made. In such case if pawnor makes default to payment of debt or performance of promise at time he may still redeem the goods pledged at any subsequent time before the actual sale of them. 3. Preservation and maintenance of goods: the pawnor has a right to see that pawnee, like bailee, preserve the goods pledged and properly maintain them. 4. Rights of an ordinary debtor : the pawnor has, in addition to above rights, the right of an ordinary debtor which is conferred on him by various statutes meant for protection of debtor.

Negotiable Instruments Act 1881: There are certain documents, which are freely used, in commercial transactions and monetary dealing. These documents, if they satisfy certain conditions, are known ae ‘negotiable instruments’ The word ‘negotiable’ means “transferable from one person to another in return for consideration” and ‘instrument’ means “written document by which a right is created in favor of some person” A Negotiable Instrument is a document which entitles a person to sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery. Sec.13 of the Indian NI Act of 1881 defines a NI as ‘a promissory note, bill of exchange or cheque payable either to order or to the bearer’. In India, the law relating to negotiable instruments (NI) is contained in Negotiable Instrument Act of 1881, which deals with promissory notes, bill of exchange and cheques, as also hundis.


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Business Government & Society The act extends to the whole India. It does not affect any local usage relating to any instrument in a vernacular language. The local usages may however be excluded by any words in the body of the instrument (Sec.1) According to Thomas, a negotiable instrument is one, which is, by a legally recognized custom of trade or by law, a) Transferable by delivery or by indorsement (formal or e xplicit approval) and delivery b) Without notice to the party liable, in such a way that the holder of it for the time being may sue upon it in his own name, and c) The property in it passes to a bona fide transferee for value free from equities and free from any defect in the title of the person from whom he obtained it. This means that person taking an instrument (1) bona fide, and (2) for value, known as a holder in due course, gets a good title even though the title of the transferor may be defective. A rough and ready test of negotiability in case of bearer instrument is: Can a good title be acquired through a thief? If yes, the instrument is negotiable.

Characteristics of a Negotiable Instrument: The characteristics of Negotiable instrument are as follows: 1. Freely transferable: The property in a negotiable instrument passes from one

person to another by delivery, if the instrument is payable to bearer, and by indorsement and delivery if it is payable to order. 2. Title of holder free from all defects: A person, taking an instrument bona fide

and for value, known as holder due course, gets the instrument free from all defects in the title of the transferor. He is not in any way affected by any defect in the title of the transferor or of any prior party. Example: S sell certain goods to B. B gives a promissory note to S for the price.

He refuses to pay the promissory note, claiming that the goods are not according to order. If S sues B on the note, B’s defense is good. But if he negotiates the note to H, a holder in due course, B’s defense will be no avail.


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Business Government & Society The above presumptions are rebuttable by evidence. If anyone challenges any of these presumptions has been obtained by any offence, fraud or unlawful consideration. 3. Recovery: The holder in due course can sue upon a negotiable instrument in his

own name for the recovery of the amount. Further he need not give notice of transfer to the party liable on the instrument to p ay. 4. Presumptions: Certain presumptions apply to all negotiable instruments, unless

contrary is proved. These presumptions are dealt with in Sec.118 and 119 and are as follows. a. Consideration. Every negotiable instrument is presumed to have been made,

drawn, accepted, indorsed, negotiated, and transferred, for consideration. This would help a holder to get a decree from court without any difficulty. b. Date. Every negotiable instrument bearing date is presumed to have been

drawn on such date. c. Time of acceptance. When a bill of exchange has been accepted, it is

presumed that it was accepted within a reasonable time of its date and before its maturity. d. Time of Transfer. Every transfer of a negotiable instrument is presumed to

have been made before its maturity. e. Order of indorsement. The indorsement appearing upon a negotiable

instrument is presumed to have been made in the order in which they appear theron. f.

Stamp. When an instrument has been lost, it is presumed that it was duly

stamped. g. Holder presumed to be holder in due course. Every holder of a negotiable instrument is presumed to be holder in due course. h. Proof of protest. In a suit upon an instrument which has been dishonored, the

court, on proof of protest, presumes the fact of dishonor, until such fact is disproved.


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Types of negotiable instruments: Negotiable instruments may be 1. Negotiable by Statue: The Negotiable instrument Act mentions only three kinds

of negotiable instruments (Sec 13). These are: Promissory Note, bill of exchange and Cheques. These instruments are negotiable by statute. 2. Negotiable by custom or usage: There are certain other instruments which have

acquired the character of negotiability by usage or custom of trade. In England, for example, the following instruments have been held to be negotiable by custom, viz., exchequer bills, bank notes, share warrants, circular notes, bearer debentures, dividend warrants, share certificates with blank transfer deeds, etc. the list of negotiable instruments thus appear to be flexible and inclusive. The Court in India usually follows the practice of English Courts in according to the character of negotiability to other instruments. Sec 137 of the transfer of Property Act also recognizes the negotiability of instruments by law or custom.

Promissory Note: : promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to order of, a certain person, or the bearer of the instrument (Sec 4). The person who makes the promi9ssory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee. Examples. A signs an instrument in the following terms:

i.

“I promise to pay B or order Rs.500”

ii.

“I acknowledge myself to be indebted to B in Rs 1000 to be paid on demand, for value received.”

iii.

“Mr. B I.O.U. Rs. 500.”

iv.

“I promise to pay B Rs. 500 and all other sums which shall be due to him.”

v.

“I promise to pay B Rs. 500, first deducting there out any money which he may owe me.”


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Business Government & Society vi.

“I promise to pay B Rs. 500 seven days after my marriage with C.”

vii.

“I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum.”

viii.

st

“I promise to pay B Rs. 500 and to deliver to him my black horse on 1 January next.” Of these only (1) and (2) are promissory notes.

Specimen of a promissory note:

Essential Elements: For an instrument to become a promissory note, it must have the following essential elements: 1. Writing: The instrument must be in must writing. Mere verbal engagement to pay is

not enough. Writing include print and typewriting and may also be in pen or ink. 2. Promise to pay. The instrument must contain an express promise to pay. A mere

acknowledgement of indebtedness or implied undertaking by the use of word ‘debt’ or ‘pronote’ is not sufficient. The following instruments signed by A are not promissory notes: a. “Mr. B, I.O.U. Rs. 100” or “Mr. B, I owe you Rs.100.” b. “I am liable to B, in a sum of Rs.500 to be paid by installments” c. “I am bound to pay the sum of Rs. 500 which I received from you.” A receipt of money, if it does not contain express promise to pay, is not a promissory note. Example: “ I of my own free will and accord approached B and borrowed from him

the sum of Rs.100 bearing interest at the rate of 2 percent per mensem. I have, Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society therefore, executed these few presents by way of a promissory note so that it may serve as evidence and be of use when needed.” Signed by A. held, the instrument is not a promissory note as it does not contain an express undertaking to pay the amount mentioned in it. But if the receipt is coupled with a promise to pay, it is a promissory note. Example: “We have received the sum of Rs. 9000 from Shri R.R Sharma. This

amount will be repaid on demand. We have received the amount in cash.” Held, this is a promissory note. 3. Definite and unconditional: The promise to pay must be definite and unconditional.

If it is uncertain or conditional, the instrument is invalid. Thus the following instruments signed by A are not promissory note. a. “I promise to pay B a sum of Rs. 500, when convenient or able.” b. “I promise to pay Rs. 500 by installments with a proviso that no payment shall be

made after my death.” c. “I promise to pay B Rs. 500 when he delivers the goods.” d. “I promise to pay B Rs.500 on D’s Death, provided D leaves me enough to pay

that sum.” However, the promise to pay may be subject6 to a condition, which according to the ordinary experience of mankind is bound to happen. Thus a promise to pay is not ‘conditional’ 1. It depends upon an event which is certain to happen though the time of its happening may be uncertain. Example: a. A promises to pay B a sum of Rs.500 after the death of C . this is not a

conditional promise for it is certain that C shall die. b. “I promise to pay Rs. 5000 to B , 30 days after his marriage with C.” signed

by A. this is not a promissory note as it is probable that B may not marry C.


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Business Government & Society 2. The promise is to pay at a particular place or after a specified time. 4. Signed by the maker. The instrument must be signed by the maker, otherwise it is

incomplete and of no effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his signature must be there. Signature means the writing of persons name in order to authenticate and give effect to contract contained in the instrument. It is, at the same time, essential that the mind of the signer must accompany the signature. An agent may sign promissory note on behalf of his trading company. 5. Certain Parties. The instrument must point out with certainty as to who the maker is

and who is the payee is. Where the maker and payee cannot be identified with certainty from the instrument itself, the instrument, even if it contains an unconditional promise to pay, is not a promissory note. The payee may sometimes be misnamed or designated by description only. In such case, the note is valid if the payee can be ascertained by evidence. 6. Certain sum of Money. The sum payable must be certain and must not be capable of

contingent additions or subtractions. The following instruments signed by A are not promissory notes (as the sum payable I not certain. a. “I promise to pay B Rs. 1200 and all other sums due to him” b. “I promise to pay B Rs. 1000 and the fine according to the rules” c. “I promise to pay B Rs.5000, first deducting there out any money which he may owe me.” The sum Payable is certain: 1. When it is payable with interest. But if the rate of interest is not stated in the instrument it is not a promissory note. 2. When it is payable at an indicated rate of exchange 3. When it is payable by installments, with a provision that on default being made in payment, the balance unpaid shall become due.


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Business Government & Society 7. Promise to pay money only. The payment to be made under the instrument must be

in the legal tender money of India. If the instrument contains a promise to pay something in addition to money, it cannot be a promissory note. Thus the following instruments signed by A are not promissory note. 1. “I promise to pay B Rs. 200 and deliver one quintal of paddy” 2. “I promise to pay B in 20 shares and 10 bonds of XY ltd.” 3. “I promise to deliver to B 100 bags of wheat” 8. Bank note or currency note is not a promissory note. This is because a bank note

or a currency note is money or a currency note is money itself. 9. Formalities like number, date, place, consideration, etc. These are usually found in

an instrument although they are not essential in law. The omission of the words “for value received’, the place where the instrument is made or where it is payable or date (if the date of execution of the instrument can be independently proved) do not invalidate the instrument. The date of a promissory note is also not necessary unless the amount is payable at a certain time after date. But it must bear the necessary stamp under the Indian Stamp Act,1899. 10. It may be payable on demand or after a definite period of time. The expression

‘on demand’ means payable immediately or forthwith. 11. It cannot be made payable to bearer on demand. The RBI Act, 1934 prohibits

issue of such promissory notes except by the RBI itself or the central government.

Bill of Exchange: A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument (Sec 5) Parties to a Bill:

There are three parties to the bill of exchange, viz., the drawer, the drawee and the payee. The person who gives the order to pay or who makes the bill is called the drawer. The person who is directed to pay is called the drawee. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society When the drawee accepts the bill, he is called the acceptor, The person to whom the payment is to be made is called the payee. Where the payee named in a bill is a fictitious or non-existing person, the bill is treated as payable to bearer. In some case, the drawer and the payee, or when a principal draws on his agent, the drawer and the drawee may be one and the same person. The drawer or the payee who is in possession of the bill is called the holder. The holder must present the bill to the drawee for his acceptance. When the holder indorses the bill, note or cheque, he is called the indorser, the person to whom the bill, note or cheque is indorsed is called the indorsee. When in the bill or in any indorsement thereon the name of any person is given in addition to the drawee to be referred to in case of need, such a person is called drawee in case of need. The drawer may give the name drawee in case of need in the bill at the time when it is drawn or by some subsequent indorser. The resort is to be had to the ‘drawee in case of need’ only when the bill is dishonored by non-acceptance or non-payment.

Specimen of a bill of exchange: Shyam of delhi buys goods on credit from krishna of Mumbai for Rs. 500 to be paid 3 months after date. Krishna buys goods from Ram of Delhi for Rs. 500 on similar terms. Now krishna may order shyam to pay sum of Rs.500 to Ram. The order will be a bill of exchange. Rs. 500

Mumbai, Mar 27 2013

D=,'' -*&.=$ 06.', 50.' <0> .* E0- *, ?,5', .=' $#- *6 6%+' =#&5,'5 ,#<''$F 6*, +02#' ,'4'%+'5 To,

Shyam 235, Subash Marg, Delhi-110006

Accepted Shyam


Stamp Krishna

Page 129


Essential Elements: 1. It must be in writing. 2. It must contain an order to pay, and not a request to pay. Example: “ Mr. Little please let the bearer have Rs 70 and oblige.” Signed by A. this

is not a bill of exchange as it contains a request and not an order. 3. The order must be unconditional, i.e., no condition should be attached to it. 4. It requires three parties i.e., the drawer, the drawee and the payee. 5. The parties must be certain 6. The maker, i.e., the drawer, must sign the order. 7. The sum payable must be certain 8. The order must be directed to a certain person who must be named or otherwise indicated with reasonable certainty. 9. The formalities relating to number, date, place and consideration, though usually found in bills, are not essential in law. But a bill must be affixed with the necessary stamp.

Distinction Between bill of Exchange and a promissory note: •

In a note there are two parties - the maker and the payee. In bills of exchange there are three parties – drawer, the drawee and the payee

•

A note contains an unconditional promise to pay. A bill contains an unconditional order to pay

•

The maker of note will be debtor and he himself undertakes to pay. The drawer of the bill will be creditor who directs the drawee to pay.

•

The maker of note corresponds in general acceptor of a bill. but the maker of note cannot undertake to pay conditionally whereas the acceptor may accept the bill conditionally because he is not the originator of bill

•

The liability of the maker of note is primary and absolute, where as the liability of drawer of bill is secondary and conditionally.


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A note cannot be made payable to maker himself, whereas in bill the drawer and payee can be one and the same person

•

A note requires no acceptance as it is signed by the person who is liable to pay. A bill payable after sight or after a certain period must be accepted by the drawee before it is presented for payment.

•

The maker of a note stands in immediate relation with the payee. The drawer of bill stands in immediate relation with acceptor and not payee

Cheque: A cheque is a bill of exchange drawn upon a specified banker and payable on demand and it include the electronic image of a truncated cheque and a cheque is in the electronic form. A cheque in the electronic form means “cheque which contains the exact mirror image of a proper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system. A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. ‘Clearing house’ means the clearing house managed by the RBI or a clearing house recognized as such by the RBI A cheque is a species of a bill of exchange; but it has the following two additional qualifications, viz., 1. It is always drawn on a specified banker, and 2. It is always payable on demand All cheques are BOE, but all BOE are not cheques, a cheque must have all the essential requisites of a bill of exchange, it must be signed by the drawer. It must contain an unconditional order on a specified banker to pay certain sum of money to or to the


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Business Government & Society order of a specified person or the bearer of the cheque. But it does not require acceptance as it is intended for immediate payment. The usual form of bank cheque is as follows. No...

Date……….. PUNJAB NATIONAL BANK Subzi mandi, Delhi-110007

Pay……………………………………………………..or bearer the sum of Rs………………………………………………………………… Rs. ……………………

Sd/-

Distinction between a bill of exchange and a cheque 1. A bill of exchange may be drawn on any person, including a banker, but a cheque is always drawn on a banker. Thus all bills are not cheques whereas all cheques are necessarily bills. 2. A bill must be accepted before the drawee can be called upon to make payment upon it. A cheque requires no acceptance. 3. A bill which is not expressed to be payable on demand is entitled to three days of grace. A cheque is not entitled to any days of grace. 4. A bill may be payable on demand or after the expiry of a certain period after date or sight. A cheque is always payable on demand. 5. A bill must be duly presented for payment to the acceptor or else the drawer of the bill will be discharged from liability. The drawer of a cheque is not necessarily discharged from his liability by delay of the holder in presenting it for payment. He is discharged only to the extent of the damage, if any, suffered by him. 6. A cheque may be crossed but not a bill 7. A cheque does not require any stamp whereas bill, except in certain cases, must be stamped. 8. The drawer may countermand the payment of a cheque but the payment of a bill cannot be countermanded. 9. A cheque is not required to be noted or protested for dishonor. A bill may be noted or protested for dishonor. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Marking of cheques: A cheque does not require acceptance in ordinary course of business as it is intended for immediate payment. the custom among bankers to mark scheques a s ‘good for payment’ does not amount to the acceptance. Marking is the writing on a cheque by the drawee banker that it would be honored when it is duly presented for payment. The effect of marking a cheque as good by the drawee banker is that it cannot be countermanded by the drawer subsequently and the payee is certain of getting the money. Cheques may be marked as good by the drawee banker at the instance of a) The drawer b) The holder c) The collecting banker. 1. Marking at drawer’s instance. When a cheque is marked good at the instance of the drawer, the drawee banker earmarks sufficient funds in the account to meet the cheque when it will be presented for payment. The drawer cannot afterwards countermand payment of such cheque. The banker is entitled to dishonor other cheques if their encashment would leave the banker with insufficient funds to meet the cheque marked good. 2. Marking at holder’s instance. When a cheque is marked good at the holder’s instance, it is intimation to the holder that at the time of marking, the banker has sufficient funds of the drawer in his hands. The banker may refuse to honor the cheque when it is subsequently presented for payment if in due course the drawer has withdrawn funds or stopped payment of the cheque. 3. Marking at collecting banker’s instance. Where a cheque is received by a collecting banker too late for inclusion in the clearing, he may, to safeguard the interest of the customer, present such cheque for marking by the drawee banker. When a cheque is marked at the collecting banker’s instance, the marking is treated, as ‘constructive payment’ because the banking custom is that such cheque shall be honored when it is presented through the next clearing.


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Crossing of cheques. There are two types of cheques, 1. Open cheques 2. Crossed cheques. Open Cheque. A cheque which is payable in cash across the counter of a bank is

called an open cheque. When such a cheque is in circulation, a great risk attends it, if its holder loses it, its finder may go the bank and get payment unless its payment has already been stopped. Crossed cheque. is one on which two parallel transverse lines with or without the

words ‘&Co.’ are drawn. The payment of such cheque can be obtained only through a banker. Thus crossing is a direction to the drawee banker to pay the amount of money on a crossed cheque generally to a banker or a particular banker so that the party who obtains the payment of the cheque can be easily traced. The crossing compels the holder to present the holder to present the cheque through “a quarter of known respectability and credit” and affords security and protection to the owner of the cheque, as the cheque is payable only through banker. Types of Crossing:

There are 3 types of crossing: General, Special and Restrictive Crossing. 1. General crossing. A cheque is said to be crossed generally where it bears across its

face an addition of a. The words ‘and company’ or any abbreviation thereof, between two parallel transverse lies, either with or without the words ‘not negotiable’; or b. Two parallel transverse lines simply, either with or without the words ‘not negotiable’

(1)

And (2) com pan y

(3)

& Co.

Not (4) Neg otia ble

Not Neg otia (5) ble & Co.


(6)

N/N & Co.

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Business Government & Society Where a cheque is crossed generally, the drawee banker shall not pay it unless a banker presents it. 2. Special Crossing. Where a cheque bears across its across its face an addition of the

name of a banker, either with or without the words ‘not negotiable’, the cheque is deemed to be crossed specially. Transverse lines are not necessary in case of special crossing. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, if any.

(1)

Ban k of Indi a

(2)

Ban k of Indi a

(3)

Can ara ban k& Co.

(4) Bank of India Not Negot

(5)

Bank of India For A/c of Payee

Where a cheque is crossed specially the banker on whom it is drawn shall pay it only to the banker on whom it is crossed, or his agent for collection. 3. Restrictive crossing. In addition to the two statutory types of crossing discussed

above, there is another type, which has been adopted by commercial, and banking usage. In this type of crossing ‘A/c payee’ are added to the general or special crossing

Ban (1) k of Indi a

Ban (2) k of Indi a

Can ara (3) ban k& Co.

The word ‘A/c Payee’ on the cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee. If he


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Business Government & Society credits the proceeds to a different account, he is prima facie guilty of negligence and will be liable to the true owner for the amount of the cheque. It should however be noted that ‘A/c Payee’ cheques are negotiable. Not negotiable crossing: the effect of the words ‘not negotiable’ on a crossed cheque is

that the title of the transferee of such a cheque cannot be better than that of its transferor. The addition of the words ‘not negotiable’ does not restrict the further transferability of the cheque. It only takes away the main feature of negotiability, which is that a holder with a defective title can give a good title to a subsequent holder in due course. Any one who takes a cheque marked ‘not negotiable’ takes it at his own risk.

Parties to Negotiable instrument: The parties to a bill of exchange, a promissory note and cheque are as follows: Parties to a bill of exchange: ( 1) Drawer, (2) Drawee, (3) Acceptor, (4) payee, (5)

Holder, (6) Indorser, (7) Indorsee, (8) Drawee in case of need and (9) Acceptor of honor. Parties to a Promissory note: ( 1) Maker, (2) Payee, (3) Holder, (4) Indorser, (5)

Indorsee. Parties to a cheque: ( 1) Maker, (2) Drawee, (3) Payee, (4) Holder, (5) Indorser, and (6)

Indorsee. Maker, Drawer. The person who makes a promissory note is called the ‘maker’. The

person who makes or draws a bill of exchange or cheque is called the ‘drawer’ (Sec.7 para1) Drawee, acceptor. The person on whom the BOE is drawn and who is directed to pay is

called the ‘drawee’ (Sec 7 Para 1). In case of cheque, the drawee is always a banker. In case of BOE, the drawee becomes the ‘acceptor’ when he accepts the bill, i.e., signs his assent upon the bill and delivers the same or gives notice of such signing to the holder or to some person on his behalf (Sec 7 Para 3). A cheque does not require acceptance as it is intended for immediate payment. Payee. The person named in the bill, note or cheque, to whom or to whose order the

money is to be paid, is called the ‘payee’ (Sec 7 Para 5). In a bill or cheque, the drawer


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Business Government & Society may himself be the payee. Where the payee named in a bill is a fictitious or non-existing person, the bill is treated as payable to bearer. Indorser. The person who indorses the bill, note or cheque to another is called the

‘Indorser’. Indorsee. The person to whom the bill, note or cheque is indorsed is called the

‘indorsee’. Drawee in case of need. When in a bill or in any indorsement thereon the name of any

person is given in addition to the drawee to be referred to in case of need, such person is called ‘drawee in case of need’ (Sec 7 Para 2). In English law, he is called a ‘referee in case of need’. The name of the drawee in case of need may be given in the bill by the drawer at the time when it is drawn or by some subsequent indorser. The resort is to be hand to the ‘drawee in case of need’ only when the bill is dishonored by non-acceptance or non-payment. Where a drawee in case of need is named in a bill of exchange or in any indorsement thereon, the bill is not dishonored until it has been dishonored by such drawee in case of need. Holder

The holder of a promissory note, bill of exchange or cheque means any person entitled in his own name (i) to the possession thereof, and (ii) to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction. Holder in due course

Any person is a ‘holder in due course’ if he fulfills the following condition That for consideration, he became The possessor of the NI if payable to bearer or The payee or indorsee thereof, if payable to order.


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Business Government & Society That he became the holder of the instrument before its maturity. If the instrument is taken after it is due, the person taking it has, as against the other parties, only the rights of his immediate transferor. That he became the holder of the instrument in good faith, i.e., without sufficient cause to believe that any infirmity in the instrument or defect existed in the title of the person from whom he derived his title.

Discharge and Dishonor of Negotiable instrument: Discharge of NI:

The term ‘discharge’ in relation to a negotiable instrument is used in two sense, viz., 1. Discharge of the instrument 2. Discharge of one or more of the parties from liability thereon.

An instrument is said to be discharged when all rights of action under it are completely extinguished and when it ceases to be negotiable. This would happen when the party who is ultimately liable on the instrument is discharged from liability. In such case, even a holder in due course does not acquire any rights under the instrument. If, on the other hand, one or more of the parties is/are discharged from liability, the instrument continues to be negotiable and the other parties continue to be liable on it. Discharge of an instrument:

The different modes of discharge of an instrument are as follows: 1. By payment in due course. This is the most obvious and the usual mode of discharge

of an instrument and of the parties to it. The instrument is discharged by payment made in due course by the party who is primarily liable to pay, or by a person who is accommodated in case the instrument must be made at or after the maturity to the holder of the instrument if the maker or acceptor is to be discharged. 2. By party primarily liable becoming holder. If the maker of a note or the acceptor of

a bill becomes its holder at or after its maturity in his own right (i.e., he has an


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Business Government & Society absolute title and does not hold it conditionally or as an agent), the instrument is discharged (Sec 90). 3. By Express waiver. When the holder of a negotiable instrument at or after its

maturity absolutely and unconditionally renounces in writing or gives up his rights against all the parties to the instrument, the instrument is discharged. The renunciation must be in writing unless the instrument is delivered up to the party primarily liable. 4. By cancellation. Where an instrument is intentionally cancelled by the holder or his

agent and the cancellation is apparent thereon, the instrument is discharged. Cancelling may take place by crossing out signature on the instrument or by physically destruction of the instrument with the intention of putting an end to the liability of the parties to the instrument. 5. By discharge as a simple instrument. A NI may be discharged in the same way as

any other contract for the payment of money. This includes, for example, discharge of an instrument by novation or rescission or by expiry of period of limitation. Discharge of Party or parties: 1. By payment. When payment on an instrument is made in due course, both the

instrument and the parties to it are discharged [Sec. 82(c)]. 2. By Cancellation. When the holder of NI or his agent cancels the name of party on the

instrument with intent to discharge him, such party and all subsequent parties, who have right of recourse against the party whose name is cancelled, are discharged from liability to holder. The subsequent parties are in the position of sureties to the prior party whose name is cancelled and discharge of the principal debtor automatically discharges the sureties. 3. By release. Where the holder of NI releases any party to the instrument by any

method other than cancellation, the party so released is discharged from liability. 4. By allowing drawee more than 48 hours. If the holder of bill of exchange allows

the drawee more than 48 hours exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder. (Sec 83 )


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Business Government & Society 5. By non-presentment of cheque. Where the holder for payment within reasonable

time of its issue does not present a cheque and the drawee suffers actual damage through the delay because of the failure of the bank, he is discharged from liability to the extent of such damages. Example: A draws a cheque for Rs.1000 and when the cheque ought to be presented,

has funds at the bank to meet the cheque. The bank fails before the cheque is presented and pays 25 paise in the Rupee. The drawer is discharged to the extent of Rs.750 b) A draws a cheque at Delhi on a bank in Kolkata. The bank fails before the cheque

could be presented in ordinary course. A is not discharged for he has not suffered any damage through any delay in presenting the cheque. 6. Cheque payable to order. Where a cheque is payable to order purports to be

indorsed by the payee, the banker is discharged by payment in due course. where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof. 7. Draft drawn by one branch on another. Where any draft drawn by one office of a

bank upon another office of the same bank for a sum of money payable to order on demand purports to be indorsed by or on behalf of the payee. The bank is discharged by payment in due course. 8. Parties not consenting discharged by qualified acceptance. If the holder of BOE

acquiesces (assents) in a qualified acceptance, all the previous parties whose consent is not obtained to such acceptance are discharged from liability. 9. By operation of law. This includes

a. By an order of Insolvency court, discharging the insolvent b. By merger. When a judgment is obtained against the acceptor, maker or indorser, the debt under the bills is merged into judgment debt c. By lapse of time 10. By material alteration. A material alteration of NI renders the same void against

persons who were parties thereto before such alteration unless they have consented to the alteration.


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Business Government & Society 11. Discharge by payment of altered instrument.

Dishonor of Negotiable Instrument: A bill may be dishonored by non-acceptance or by non-payment. A promissory note and a cheque are dishonored by non-payment only. When a negotiable instrument is dishonored, the holder must give a notice of dishonor to all prior parties in order to make them liable on the instrument. If he falls to do so, except in cases when notice of dishonor may be excused, he forfeits his right of action against the prior parties entitled to the notice of dishonor (Sec 93). Dishonor by non-acceptance (Sec.91)

A BOE is dishonored by non-acceptance in any one of the following ways: 1. If the drawee does not accept the bill within forty-eight hours from the time of presentment though it is duly presented for acceptance. 2. If there are several drawees (who are not partners) and all of them do not accept 3. When presentment for acceptance is excused, and the bill is not accepted; 4. When drawee is incompetent to contract; 5. When the drawee gives a qualified acceptance; 6. When the drawee is fictitious person or after reasonable search cannot be found If drawee in case of need is mentioned in bill is not deemed to be dishonored unless it is dishonored by such drawee in case of need also. Dishonor by non-payment:

A promissory note, bill of exchange or cheque is said to be dishonored by non payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. An instrument is also dishonored by non-payment when presentment is excused and the instrument when overdue remains unpaid.


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Sale of Goods Act 1930: Introduction: The sale of goods is the most common of all commercial contracts. Knowledge of its main principle is of the utmost importance to all classes of community. The law relating to it is contained in the sale of goods act, 1930. Prior to this act, the law of sale of goods was contained in Chapter VII of the Indian Contract Act, 1872. Contracts for the sale of goods are subject to the general principles applicable to all contracts, such as offer and its acceptance, the capacity of parties, free and real consent, consideration, and legality of the object.

Formation of Contract of sale: Contract of sale of goods:

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property to goods to the buyer for a price. There may be a contract of sale between one part owner and another [Sec. 4(1)]. A contract of sale may be absolute or conditional [Sec. 4(2)]. The term ‘contract of sale’ is a generic term and includes both a sale and an agreement to sell. Sale and agreement to sell. Where under a contract of sale, the property in the goods is

transferred from the seller to the buyer, the contract is called a ‘sale’, but where the transfer of the property in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called an ‘agreement to sell’ [Sec. 4(3)]. An agreement to sell becomes a sale when the time elapses or the conditions, subject to which the property in the goods is to be transferred, are fulfilled [Sec. 4(4)]. Transfer of property in goods for price is the vital importance of the definition of contract of sale. ‘Property’ means the general property in the goods, and not merely a special property [Sec. 2(11)]. In other words, it means ‘the right of ownership’. When we say that the property in goods has passed from the seller to the buyer. It means that the seller ceases to be, and the buyer becomes, the owner of the goods. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society Essentials of a contract of sale. The following essential elements are necessary for a

contract of sale: 1. Two Parties. There must be two distinct parties. i.e., a buyer and a seller, to effect a

contract of sale and they must be competent to contract. ‘Buyer’ means a person who buys or agrees to buy goods [Sec. 2(1)]. ‘Seller’ means a person who sells or agrees to sell goods [Sec. 2(13)]. These two terms are complimentary. Example. A partnership firm was dissolved and the surplus assets, including the

stock-in-trade, were divided among the partners, in the same form. Held, it was not a sale as the partners themselves were the joint owners of the goods and they could not be both sellers and buyers. 2. Goods. There must be some goods the property in which is or is to be transferred

from the seller to the buyer. The goods, which form the subject matter of the contract of sale, must be movable. Transfer of immovable property is not regulated by the Sale of Goods act. Example: A hotel company provided residence and food making a consolidated

charged for both the services. No rebate was allowed if food was not taken by the customer. Held, supply of food was not sale of goods but simply a service as the transaction was an indivisible contract of multiple services and did not involve any sale of food. It was observed in this case that the “Position is similar to character that of a steamship or airline company which serves food to passengers”. 3. Price. The consideration for the contract of sale, called price, must be money. When

goods are exchanged for goods, it is not a sale but barter. There is, however, nothing to prevent the consideration from being partly in money and partly in goods. Example: A agreed to exchange with B 100 quarters of barley at Rs. 2000 per

quarter for 52 bullocks valued at Rs. 200 per bullock and pay the difference in cash. Held, the contract was a contract of sale. 4. Transfer of general property: There must be a transfer of general property as

distinguished from special property in goods from the seller to the buyer. If A owns


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Business Government & Society certain goods, he has general property in the goods. If he pledges them with B, B has special property in the goods. 5. Essential elements of a valid contract. All the essential elements of a valid contract

must be present in the contract of sale.

Sale and agreement to sell-distinction: 1. Transfer of property. In a sale, the property in goods passes from the seller to buyer

immediately so that the seller is no more the owner of the goods sold. In an agreement to sell, the transfer of property in the goods is to take place at a future time or subject to certain conditions to be fulfilled. In this sense, a sale is an executed contract and an agreement to sell is an executory contract. 2. Type of goods. A sale can only be in case of existing and specific goods only. An

agreement to sell is mostly in case of future and contingent goods although in some cases it may refer to unascertained existing good s. 3. Risk of loss. In a sale, if the goods are destroyed, the loss falls on the buyer even

though the goods are in the possession of the seller. In an AGS, if the goods are destroyed, the loss falls on the seller, even though the goods are in the possession of the buyer. 4. Consequence of breach. In a sale, if the buyer fails to pay the price of the goods or if

there is a breach of contract by the buyer, the seller can sue for the price even though the goods are still in his possession, in an AGS if there us a breach of contract by the buyer, the seller can only sue for damages and not for the price even though the goods are in the possession of the buyer. 5. Right to resell. In a sale, the seller cannot resell the goods (except in certain cases, as

for example, a sale by a seller in possession after sale under Sec.30, or a sale by an unpaid seller under Sec.54). If he does so the subsequent buyer does not acquire title to the goods. In an AGS, in case of resale, the buyer, who takes the goods for consideration and without notice of the prior agreement, gets a good title. In such a case, the original buyer can only sue the seller for damages. 6. General and particular property. A sale is a contract plus conveyance, and creates

Jus in rem, i.e., gives right to the buyer to enjoy the goods against the world at large


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Business Government & Society including the seller. An AGS is merely a contract, pure and simple, and creates Jus in personam. i.e., gives a right to the buyer against the seller to sue for damages. 7. Insolvency of Buyer. In a sale, if the buyer becomes insolvent before he pays for the

goods, the seller, in the absence of lien over the goods, must return them to the official receiver or assignee. He can only claim a rateable dividend for the price of the goods. In an AGS, if the buyer becomes insolvent and has not yet paid the price, the seller is not bound to part with the goods until he is paid for. 8. Insolvency of seller. In a sale, if the seller becomes insolvent, the buyer, being the

owner, is entitled to recover the goods from the official Receiver or Assignee. In an AGS, if the buyer, who has paid the price, finds that the seller has become insolvent, he can only claim a rateable dividend and not the goods because property in them has not yet passed to him.

Goods: The subject matter of the contract of sale must be ‘goods’. Sec.2(7), “goods means every kind of movable property other than actionable claim and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.” With regard to growing crops, grass and things attached to or forming part of the land, such things are regarded as goods as soon as they are agreed to be separated from the land. Old and rare coins are regarded as goods.

Classification of Goods: The goods, which form the subject of a contract of sale, may be either existing goods, or future goods [SEC. 6 (1)], or contingent goods [Sec. 6(2)]. 1. Existing goods. These are the goods, which are owned or possessed by the seller at

the time of sale. Only existing goods can be the subjects of a sale. The existing goods may be further classified into: a. Specific goods. These are the goods which are identified and agreed upon at the time a contract of sale is made [Sec.2(14)] as, for example, a specified Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society watch, dog or horse. Goods are however, not specific merely because the source of supply is identified, e.g., “500 quintals from 1000 quintals on board”. b. Ascertained goods. Though commonly used as similar in meaning to specific goods, these are the goods which become ascertained subsequently to thee formation of a contract of sale. c. Unascertained goods. These are the goods, which are not identified and agreed upon at the time of the contract of sale. They are defined only by description and may from part of a lot. Example. A who wants to buy a television set goes to a showroom where four

sets of Janta model of Oscar television are displayed. He sees the performance of a particular set, which he agrees to buy. The set so agreed to be bought is a specific set. If after having bought one set he marks a particular set, the set so marked becomes ascertained. Till this is done, all sets are unascertained. 2. Future Goods. These are the goods which a seller does not possess at the time of the

contract but which will be manufactured or produced or acquired by him after the making of the contract of sale [Sec. 2(6)]. A contract of present sale of future goods, though expressed as an actual sale, purports to operate as agreement to sell the goods and not a sale [Sec. 6(3)]. This is because the ownership of a thing cannot be transferred before that thing comes into existence. Example: A railway administration entered into a contract for sale of coal-ash that

might accumulate during the period of contract. Held, the contract amounted to an agreement to sell. 3. Contingent goods. Though a type of future goods, these are the goods the acquisition

of which by the seller depends upon a contingency, which may or may not happen [Sec. 692)]. Example: A agrees to sell specific goods in a particular ship to B to be delivered on

the arrival of the ship. If the ship arrives but with no such goods on board, the seller is not liable, for the contract is to deliver the goods should they arrive. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 4. Contingent and Future goods. The procurement of contingent goods depends upon

a contingency whereas it is not so in case of future goods. On non-acquisition of contingent goods. The parties are discharged where as on non-acquisition or non production of future goods the parties are not discharged

Condition and Warranties: A stipulation in a contract of sale with reference to goods, which are subjected thereof, may be a condition and warranty. [Sec 12(1)] Condition: Sec 12(2) •

Condition is a stipulation, which is essential to the main purpose of a contract

•

It goes to the root of the contract

•

Its non-fulfillment upset the very basics of contract

•

Condition is also defined as an obligation of the person related to contract, missing of which may give an option to the another party in contract to repudiate the contract itself.

•

Condition is obligation, which goes so directly to the substance of contract

Example: Company X ordered DC Motor to Y Company subjected to condition such as •

DC Motor should be fire proof

•

DC Motor should be water resistant.

Breach of these conditions may give Company X to repudiate the company Y in contract. Warranty: [Sec 12(3)] •

Warrant is a stipulation that is collateral to the main purpose of contract.

•

It is not of such vital importance as a condition

•

Warranty is defined as an “obligation, which though it must be performed, is not so vital that failure to perform it goes to the substance of contact”.

•

A stipulation may be condition though called warranty in the contract. Sec 12(4)


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Distinction between condition and warranty: 1. Difference as to value: •

Condition, which is essential to the main purpose of the contract.

•

Warranty is a stipulation, which is collateral to the main purpose of the contract.

2. Difference as to Breach •

Condition: party can repudiate (cancel) the contract of sale.

•

Warranty: part can claim for damages.

3. Difference as to Treatment •

Breach of condition may be treated as breach of warranty. This would happen where the agreed party is contracted with damages only

•

Breach of warranty, however cannot be treated as breach of contract.

When Conditions to be treated as warranty: 1. Voluntary waiver of condition:

If buyer to waive certain conditions stipulated by hi to the seller or elect to treat the breach of conditions as breach warranty Sec 13(1) If buyer once decides to waive condition, he cannot afterwards insist on its fulfillment. 2. Acceptance of Goods by Buyer:

Where contract of sale is not severable and buyer has accepted the goods or part thereof the breach of any condition to be fulfilled by the seller can only treated as breach of warranty.

Express and Implied conditions and warranties Express conditions and warranties are those that are expressly provided in contract. Implied condition and warranties are those which law implies into contract unless the parties stipulate to contrary.


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Implied Conditions: 1. Condition as to title: Sec 14(a)

In a contract of sale, unless the circumstances of contract are such that as to show different intention, there is an implied condition on the part of (i) In case of sale, he has the right to sale the goods (ii) In case of Agreement to sell, he will have a right to sell the goods at time when right is to pass. Ex: R bought a car from D and used it for 4 months. D had no title to car and consequent R had to hand it over to original owner. Held R could recover price. 2. Sale by description: Sec 15

Where there is contract for the sale of goods by description, there is an implied condition that goods shall correspond with description. If the description tendered is different in an respect, it is not the article bargained for and the other party is not bound to take it. Example: N agrees to sell G some oil described as foreign refined sunflower, the oil

supplied though correspond with sample, was adulterated wit palm oil. Held the supply was not matching to description, hence buyer was entitled to reject the same. Sale of goods by description may include the following situation 1

Where the buyer has not seen the goods and relies on the description given by the seller W bought a reaping machine, which he had never seen and which, V the

seller described, “to have been new the previous year and used to cut 50 to 60 acres”. W found machine was extremely old, held W could return the machine as 2

Where the buyer has seen the goods but he relies not on what he has seen but what was stated to him and the deviation of good from description is not appa rent.


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Business Government & Society In an auction of sword, which was described as seventh century mad e. The buyer bought the set after seeing it. Subsequently he found the sword was of ninth century. Held he rejected the contract of sale. 3

Packing of goods may sometimes be a part of description. M sold to L 300 tins of coke packed in cases each containing 30 tins. M

tendered substantial portion in cases containing 24 tins. Held L could reject all tins, as the package made was not matching to description. 4

Sale by description as well as sample: Sec 15 provides that if sale is by sample as well as description, it is not sufficient that bulk of goods corresponds with sample if the goods do not correspond with description.

3. Condition as to quality or fitness: Sec 16(1) 1

Where the buyer expressly or by implication, makes known to seller the particular purpose for which he needs the goods and depends upon the skill and judgment of seller whose business is to supply goods of that description, there is an implied condition that goods shall be reasonably fit for that purpose. •

Ex: A ordered lorry to B and specifies, it is required for “heavy traffic in hilly

area”. The lorry supplied was unfit and broke down. Hence breach of condition to fitness 2

If the buyer purchasing an article for particular use is suffering from an abnormality and it is not made known to seller at time of sale, implied condition of fitness do not apply. •

Ex: G purchased a tweed coat that caused her dermatitis due to her skin

sensitiveness. Held seller is not liable, the cloth being fit for anyone with normal skin. 3

If the buyer purchases an article under its patent or other trade name, the implied condition that articles are fit for particular purpose shall not apply. •

Ex: B told M , a motorcar dealer that he wanted a comfortable car suitable

for touring purpose. M recommended Bugatti car and B there upon bought one. The car was uncomfortable and unsuitable for touring purpose. Held B


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Business Government & Society could reject the car and recover the price and mere fact that B bought the car under its trade name, did not necessarily exclude the condition of fitness. 4. Condition as to Merchantability

The goods are bought by description from a seller who deals in goods of that description, whether manufacturer or producer or not, there is an implied condition that goods are of merchantable quality. The buyer must have provided opportunity for examining goods or there must be some potential defect in goods, which would not be apparent on reasonable examination of same. Ex: The cloth supplied contained certain chemicals, which could cause skin disease

to a person wearing them next to skin. It was held that because of such defect cloth were not of merchantable quality and the buyer was entitled to reject goods 5. Conditions Implied by Custom •

An implied condition as to quality of fitness for a particular purpose may be annexed by usage of trade [Sec 16(3)]

•

In some cases, the purpose for which the goods are required may be understood by the description of the goods purchased.

•

For instance if a perambulator or bottle of milk is purchased, the purpose for which it is purchased is understood.

•

The purpose for which it is purchased is implied in the thing itself. Ex. P asked hot water bottle to L, a retail chemist, He was supplied one, which burst after few days and injured P’s wife. L was liable for breach of contract.

6. Sale by Sample: Sec (17)

A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied In case of contract for sale by sample, there is an implied condition 1

Bulk should correspond to sample in quality.


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Business Government & Society 2

Buyer shall have reasonable opportunity of comparing the bulk with sample.

3

Goods shall be free from defect.

7. Condition by wholesomeness:

In case of eatables and provisions. In addition to the implied condition as to merchantability, there is another condition that goods shall be wholesome. Ex. F bought milk from A containing germs of typhoid fever F’s wife took the milk and got infected as a result of which she died. Held F could recover damages

Implied warranties: 1. Warranty of quiet possession: Sec 14(b)

In contract of sale, unless there is a contrary intention, there is an implied warranty that buyer shall have and enjoy quiet possession of the goods. If the buyer is anyway disturbed in the enjoyment of the goods in consequence of seller’s defective title to sell. He can claim for damages. 2. Warranty of freedom from encumbrance:

In addition to previous warranty, the buyer is entitled to a further warranty that the goods are not subjected to any change or right in favor of a third party. If his possession is anyway disturbed by a reason of existence of any charge of encumbrance on the goods in favor of any third party, he shall have a right to claim damages for breach of warranty. 3. Warranty as to quality or fitness by usage of trade:

An implied warranty or fitness for a particular purpose may be annexed by usage of trade. 4. Warranty to disclose dangerous nature of goods:

Where a person sells goods knowing that goods are inherently dangerous or they are likely to dangerous to buyer and buyer is ignorant of danger. He must warn the buyer of the probable danger; otherwise he will be liable in damages.


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Business Government & Society Example: A sold a tin of disinfectant powder to C. he knew that it was likely to be

dangerous to C , if it was opened without special care being taken. C opened the tin whereupon the disinfectant powder flew into eyes, causing injury, held A was liable for damages to C, as he should have warned C of the danger.

Doctrine of Caveat Emptor: •

Means let the buyer beware.

•

In contract of sale good the seller is under no duty to reveal unflattering truth about the goods sold.

•

Therefore when a person buys the goods, he should examine them thoroughly.

•

If the goods turn out to be defective or do not suit his purpose or if he depends upon his own skill or judgment and makes a bad selection, he cannot blame anybody excepting himself.

Examples: •

H bought oats from S a sample of which had been shown to H. H erroneously

thought that oats were old. The oats were, however new. Held H could not avoid the contract. •

H sold 32 pigs to F. the pigs were suffering from swine flue, but he never disclosed to F . held there was no implied warranty by H and the sale was good and H was not

liable in damages.

Exceptions to Doctrine of Caveat Emptor: 1. Fitness for buyer purpose: Where the buyer expresses to the seller the particular

purpose for which he requires the goods and relies on seller judgment and the goods are of description one. 2. Sale under a patent or trade name: In case of contract of sale of specified article

under its patent or other trade name, there is no implied condition that goods shall be reasonably fit for any particular purpose. 3. Merchantable quality: Where goods are bought by description from a seller who

deals in goods of that description, there is an implied condition that the goods shall be merchantable quality. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 4. Usage of trade: An implied warranty or condition as to quality or fitness for a

particular purpose may be annexed by usage of trade. 5. Consent obtained from a buyer through fraud or misrepresentation

Rights of an unpaid seller: Who is an unpaid seller?

A seller of goods is deemed to be an unpaid seller when •

The whole of the price has not been paid or tendered.

•

A bill of exchange or other negotiable instrument has been received as a conditional payment, and the condition on which it was received has not been fulfilled by reason of the dishonor of the instrument or otherwise [Sec 45(1)]

The following conditions must be fulfilled before a seller of goods can be deemed to be an unpaid seller. 1. He must be unpaid and the price must be due. 2. He must have an immediate right of action for the price. 3. A bill of exchange or other negotiable instrument was received but the same has

been dishonored. I.

Rights of an unpaid seller against the goods:

Where the property in the goods has passed to the buyer, an unpaid seller has the following rights against the goods [Sec 46(1)] 1. Right of lien [ Sec 46 (1) (a) and 47 to 49]

A lien is a right to retain possession of goods until payment of the price [Sec 46 (1) (a)]. It is suitable to the unpaid seller of the goods who is in possession of them wherea) The goods have been sold without any stipulation as to credit b) The goods have been sold on credit, but the term of credit has expired c) The buyer becomes insolvent


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Business Government & Society Rules regarding lien: •

The seller may exercise his right of lien not withstanding that he is in possession of the goods as agent or bailee for the buyer [Sec. 47(2)]. If he loses the possession of the goods, he loses the right of lien also.

•

The lien depends on actual possession and not on title. It is not affected even if the seller has parted with the document capable of transferring title.

•

The possession of the goods by the seller must not expressly exclude the right of lien

•

The lien can be exercised by the unpaid seller only for the price and not for any other charges such as warehouse or dock charges.

•

Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder. He may refuse to deliver such remainder of the goods till he is paid for the goods already delivered and the goods yet to be delivered. Where, however. A part of the goods is delivered under such circumstances as to show an agreement to wave the lien, the seller cannot retain the remainder (sec 48).

•

The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained a decree for the price of the goods.

Termination of Lien[Sec 49]: The unpaid seller of goods loses his lien on the goods

whena) He delivers the goods to a carrier or other bailee for the purpose of transmission to the

buyer without reserving the right of disposal of the goods b) The buyer or his agent lawfully obtains possession of the goods as bager; Example. P Sells a lawn mover to D and: refuses to deliver it to D till he has been

paid for. But he lends it to D in order that D may cut the grass. P does not lose his lien. c) He waves the right of lien on the goods [Sec 49(1)]. He may do this either expressly

or impliedly. a. Express Waiver , When the contract of sale provides in express terms that the

seller shall not retain possession of the goods even if the price has not been paid, there is an express waiver of lien. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society , When the seller sells the goods on credit, or grants a fresh b. Implied Waiver term of credit on the expiry of the original term of credit, lien is waived until the expiry of the term of credit. The lien revives on the expiry of the term of credit. Again when the seller takes a bill for the price payable at a future date, the lien is waived during the currency of the bill. The lien revives on the dishonor of the bill. 2. Right of stoppage in transit [ Sec 46 (1)(b) and 50 to 52]

The right of stoppage in transit is a right of stopping the goods in transit after the unpaid seller has parted with the possession of the goods. He has the further right of resuming possession of the goods as long as they are in the course of transit, and retaining possession until payment or tender of the price. It is available to the unpaid seller. a) When the buyer becomes insolvent; and b) When the goods are in transit (Sec 50) The buyer is said to be ‘insolvent’ when he is ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether he has committed an act of insolvency or not [Sec 2(8)] The right of stoppage in transit is an extension of the right of lien. But it arises only on the insolvency of the buyer and when the goods are in transit [Sec 46 (1)(b)]. Duration of transit (Sec 51)

Transit is an intermediate stage. Goods are deemed to be in course of transit from the time they are delivered to a carrier, or other bailee for the purpose of transmission to the buyer, until the buyer or his agent takes delivery of them from such carrier or other bailee. The carrier may hold goodsa) As Sellers agent: in this case, seller has lien on the goods and the question of

right of stoppage in transit does not arise;


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Business Government & Society b) As buyers agent: In this case, the seller cannot exercise his right of stoppage in

transit c) In an independent capacity: it is in this case that the seller has, and can exercise.

The right of stoppage in transit. When transit comes to an end.

1. If the buyer or his agent on that behalf obtains delivery of the goods before they arrive at the appointed destination 2. If, after the arrival of the goods at the appointed destination, the carrier or other

bailee acknowledges to the buyer or his agent that he holds the goods on his behalf 3. Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer

or his agent in that behalf 4. Where part delivery of the goods has been made to the buyer or his agent in that

behalf, the remainder of the goods may be stopped in transit. However if part delivery has been given in such circumstances as to show an agreement to give up the possession of the whole of the goods. The goods cannot be stopped in transit If the buyer and the carrier reject the goods or other bailee continues to be in possession of them, the transit is not deemed to be at an end. How stoppage in Transit is affected:

The unpaid seller may exercise his right of stoppage in transit either1. By taking actual possession of the goods, or 2. By giving notice of his claim to the carrier or other bailee in whose possession the goods are. Notice of stopping the goods in transit may be given either•

To the person in actual possession of the goods, or

•

To his principal Notice to the principal, to be effectual, must be given in such manner that the

principal, by the exercise of reasonable diligence, may communicate it to his servant or agent in time to prevent delivery to the buyer.


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Business Government & Society When the seller gives notice of stoppage in transit to the carrier or other bailee in possession of the goods, the latter must re-deliver the goods to, or according to the directions of, the seller. The expenses of such re-delivery are to be borne by the seller. Liability of carrier: If the carrier, after a proper notice by the seller to him to

stop the goods in transit, delivers them to the buyer or refuses to deliver them to the seller, he is liable to the seller for conversion. If after the transit has ended and he wrongfully returns the goods to the seller, he is liable to the buyer for conversion.

Distinction between right of lien and right of stoppage in Transit: •

The unpaid sellers right to stop the goods in transit rises only when the buyer is insolvent but the right of lien can be exercised even when the buyer is able to pay but does not pay.

•

The right of lien can be exercised on goods which are in actual or constructive possession of the seller, while right of stoppage in transit can be exercised when the goods are in possession of a middle men between the seller who has parted with the possession of the goods and the buyer who has not yet acquired the possession.

•

The right of lien comes to an end when the possession of the goods is surrendered by the seller but the right of stoppage in transit commences when the goods have left the possession of the seller and continues until the buyer or his agent has acquired the possession

•

Right of lien is to retain possession, while the right of stoppage in transit is to regain or resume possession

Effect of Sub-sale or pledge by the buyer (Sec 53)

The unpaid sellers right of lien or stoppage in transit is not affected by any sale or pledge of the goods which the buyer have made unless the seller has assented to it. But the right is defeated if he has transferred a document of title to goods to the buyer and the buyer transfers its by way of sale to a person who takes it in good faith and for consideration


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Business Government & Society Examples: A bought from B a shipment of certain goods. B sent the bill of lading to A, A handed

over the bill of lading to C in return for a loan. C took the bill of lading in good faith. Subsequently A became an insolvent. B attempted to stop the goods in transit but C claimed them. Held, C had a good title to the goods which defeated D’s right of stoppage in transit. B sells and consigns certaingoods to A. B being still unpaid, A becomes insolvent while

the goods are in transit, assigns the bill of lading for cash to C , who knows that A is insolvent. The assignment not being in good faith. B may stop the goods in transit. Where the buyer transfers the document of title to the goods by way of pledge to any person who takes the document in good faith and for consideration, the unpaid sellers right of lien or stoppage in transit can only be exercised subjected to the rights of the pledgee Examples: A sells goods to B of the value of Rs. 10,000 and forwards a bill of lading to B who

deposits it with C to secure an advance of Rs. 4000. B becomes insolvent. A may exercise his right of stoppage in transit but subject to pay ing C the sum of Rs.4000 Where the transfer of the goods is by the way of pledge the unpaid seller may require the pledgee to satisfy his claim against the buyer first out of any other goods or securities of the buyer in the hands of the pledgee. 3. Right of resale [sec 46 (1)© and 54] : The unpaid seller can re-sell the goods

Where the goods are of a perishable nature; or Where he gives notice to the buyer of his intention to resell the goods and the buyer does not within a reasonable time pay or tender the price. If on a re-sale, there is a loss to the seller, he can claim it from the buyer as damages for breach of contract. If there is a surplus on the re-sale, he is not bound to hand it over to the buyer because the buyer cannot be allowed to take advantage of his own wrong. In case notice is not given, the unpaid seller is not entitled-


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Business Government & Society a. To recover any loss in the re-sale of goods, and b. To retain any surplus arising on the re-sale of the goods. The buyer is entitled to claim such surplus as his right c. Where in seller expressly reserves a right of re-sale in case the buyer should make default II.

Right of an unpaid seller against the buyer personally:

These are the rights, which an unpaid seller may enforce against the buyer personally. These rights of the seller against the buyer are called rights in personam as against the rights in rem (i.e., rights against the goods), and are in addition to his rights against the goods. The rights in personam are as follows 1. Suit for price (Sec 55)

a) Where property has passed. Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods, the seller may sue him for the price of the goods. b) Where property has not passed. Where under a contract of sale the price is

payable on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay suc price, the seller may sue him for the price. It makes no difference even if the property in the goods has not passed and the goods have not been appropriated to the contract [Sec 55(2)] 2. Suit for damages for non-acceptance (Sec. 56)

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for non-acceptance. As regards measure of damages, Sec 73 of the Indian Contract Act, 1872 applies. 3. Repudiation of contract before the due date (Sec 60)

Where the buyer repudiates the contract before the date of delivery, the seller may either a) Treat the contract as subsisting and wait till the date of delivery, or b) He may treat the contract as rescinded and sue for damages for the breach. This rule is known as the “rule of anticipatory breach of contract”


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Business Government & Society 4. Suit for interest [Sec 61 (2)(a)]

Where there is a specific arrangement between the seller and the buyer as to interest on the price of the goods from the date on which payment becomes due, the seller may recover interest from the buyer. If, however there is no specific agreement to this effect, the seller may charge interest on the price when it becomes due from such day as he may notify to the buyer. In the absence of a contract to the contrary, the court may award interest to the seller in a suit by him at such rate as it thinks fit on the amount of the price from the date of the tender of the goods or from the date on which the price was payable.

Intellectual Property Rights (IPRs) Introduction: The possession and utilization of various kinds of properties is essential for the development of trade, industry and commerce. Right from the beginning of civilization itself the concept of origin of property rights can be traced. The Indian constitution protects the right to property of an individual. Property rights are classified into 1. Tangible property: which includes a. Immovable Property: Like land, building or permanent structures. b. Movable property: Like goods and shares. 2. Intangible or Incorporeal Property: it includes any benefit other than material

thing like actionable claims, goodwill and intellectual property rights such as patents, copyrights and trademarks.

Intellectual Property: "

Intellectual Property is the property created by the intellect of the human mind.

"

It is a non-physical property which stems from, and whose value is based upon some ideas.

"

It refers to the ideas, knowledge, invention, innovation, creativity, research, etc., all being the product of human mind and is similar to any property,, whether movable or immovable, wherein the proprietor or the owner may exclusively use


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Business Government & Society his property at will and has right to prevent others from using it, without his permission. "

Rights related to Intellectual property are known as ‘Intellectual Property Rights’

"

It encompasses the protection offered by legal regimes of various types such as patent, copyright, trademark, designs, geographical indications and trade secrets. It also includes similar legal regimes like protection of plant varieties and protection of databases.

Trade related aspects of Intellectual Property Rights (TRIPS) The agreement on TRIPs is comprehensive in giving cover to all areas of technology, property, patents, trademarks, copyrights, and so on. The TRIPs encourages upon the member country’s sovereign right to frame its own legislation on intellectual property matters. This clause has been included on account of persistent demand from the developed and industrialized countries. The TRIPs agreement covers seven categories of intellectual property rights. 1. Patents 2. Copyrights 3. Trademarks 4. Geographical indication 5. Industrial designs 6. Integrated circuits, and 7. Trade secrets

Patent: Word Patent has been derived from Latin term ‘patere’, which means to ‘lay open’ or ‘available for public usage’. A patent is, ‘an exclusive right granted by a country t o the owner of an invention to make, use, manufacture and market the invention, provided the invention satisfies certain conditions stipulated in the law’.


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Business Government & Society Exclusive right implies that no one else can make use manufacture or market the invention without the consent of the patent holder. This right is available for a limited period of time. Patent is the part of the intellectual property right, which connates with all those rights which are granted to any persons for protecting its invention, process, discovery, composition or new useful development etc. from its further image without any authentication.

Characteristics of Patents: 1. If more than 2 persons have jointly applied for patent license, both will own the patent separately. 2. In spite of ownership of the rights, the use or exploitation of invention is restricted. 3. Patent in law is property right, hence it can be gifted, inherited, assigned, sold or licensed. 4. Patent right is territorial in nature and inventors/assignors will have to file separate patent applications in the countries of their interest along with necessary fees for obtaining patents in those countries. 5. As the patent is conferred by state it can be revoked by state under special circumstances even if the patent is sold out or licensed or manufactured or marketed in the mean time. 6. A new chemical process or drug molecules or an electronic circuit or new surgical instrument or a vaccine in a patentable subject-matter provided all the stipulation of the law satisfies. Patent law stipulated broad categories of what can and cannot be patented and the words of statute. Any person who “inventors or discoverers any new and useful process, machine, manufacture, composition or matter or any new and useful improvement thereof, may obtain a patent”.


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Indian Patent act, 1970: th

Patent protection was first introduced in 18 century. And these rights get varied from century to century. In India the law which govern patent right is ‘Indian patent Act, 1970’. Indian Patent Act grants an exclusive right to the inventor for his invention for limited period of time. Generally 20 years span is granted to the patent holder but incase of inventions relating to the manufacture of food, drugs or medicine is provided for 7 years from the due of patent. There is certain local procedure, which needs to be followed in order to register. There are several attorney helping inventor in patent registration by providing them best well informed language. In India patent registration can be filed individually or jointly. In case of deceased inventor his legal representative on behalf of him can do this. All required documents need to be filed along with the application form only after verification registration certificate is provided to the applicant.

Application for Patents: An application for obtaining patents can be filled at respective offices by 1. A true and first inventor 2. A person or company who is assignee of first and true inventor and 3. A legal representative of first and true inventor, in case of death of the true and first inventor.

Registration of patents: •

Patents are registered with the controller general of patents, designs and trademarks.

•

The head office is in Calcutta and branch offices are in Delhi, Mumbai, and Chennai.

•

Examiner studies patent application and specification.


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Once specification is accepted, the notice of patent is advertised in government’s official gazette. Three months time is given for opposition. The opposition is to be replied to by the application within month. Thereafter application is accepted or rejected. If application is accepted, the patent is sealed. A patent is dated as of to complete specification was filed.

•

For items as food medicines the process patent is granted for five years from the date of sealing or 7 years from date of patent. Patents can be legally assigned or merely licensed to other parties, for use in India or any part of country.

•

Besides this process, the government may on reciprocal basis, declare any other country as a “convention” country, for the purpose of fulfilling any treaty. In such case if a patent-holder abroad maker application in India within12 months of having applied for patent abroad, his patent production in India

Revocation of Patents: On a petition of any person interested, or of the central government by the appellate Board or on a counter claim in a suit for infringement of the patent by the high court, the patent may be revoked on any of the following grounds: 1. Invention Earlier Claimed: The material date as far as validity of the patent is

concerned must be the date on which the complex specification having been accepted is finally published and therefore comes to the notice of the public who are going to perform it. That the invention, so far as claimed in any claim of the complete specification, was claimed in a valid claim of earlier priority date contained in the complete specification of another patent granted in India. In order to establish prior claim, it has to be shown that the invention was distinctly claimed in the specification and not merely comprehended by the terms of the claim. 2. Patentee not Entitled to Apply: That the patent was granted on the application of a

person not entitled under the provision of this Act to apply therefore: provided that a patent granted under the Indian patents and Design Acts, shall not be revoked on the ground that the applicant was the communicators or the importer of the invention in India and therefore not entitled to make an application for the grant of a patent under this Act. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 3. Patent wrongfully Obtained: That the patent was obtained wrongfully in

contravention of the rights of the petitioner or any person under or through whom he claims. 4. Subject Claim not an Invention: That the subject of any claim of the complete

specification is not a invention within the meeting of this Act. 5. Claims not new: That the invention so far as claimed in any claim of the complete

specification is not new, having regard to what was publicly known or publicly used in India before the priority date of the claim or to what was published in India or elsewhere in any of the documents referred to in sec 13: provided that in relation to patents granted under the Indian patents and Design Act. 6. Invention is obvious and no Invention Step: That the invention so far as claimed in

any claim of the complete specification is obvious or does not involve any inventive step, having regard to what was publicly known or publicly used in India or what was published in India or elsewhere before the priority date of the claim. 7. Invention not Useful: That the invention, so far as claimed in any claim of the

complete specification, is not useful. 8. Invention not sufficiently and fairly described: That the complete specification

does not sufficiently and fairly describe the invention and the method by which it is to be performed, that is to say, that the description of the method or the instructions for the working of the invention, as contained in the complete specification are not by themselves sufficient to enable a person in India possessing average skill in, and average knowledge of, the art to which invention relates. 9. Claim not sufficiently and Clearly defined: That the scope of any claim of the

complete specification is not sufficiently and clearly defined or that any claim of the complete specification is not fairly based on the matter disclosed in the specification. A specification, which contains claims, which are not supported by the description or which are neither clear nor concise and which fail to define the matter for which the applicant seeks protection is not a specification directed to a patentable invention. It is one in respect of which patent should never have been granted. 10. False suggestion: that the patent was obtained on a false suggestion or

representation.


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Business Government & Society 11. Claims not Patentable: That the subject of any claim of the complete specification is

not patentable under this act. 12. Invention secretly used before Priority Date of Claim: That the invention so far as

claimed in any claim of the complete specification was secretly used in India, otherwise than mentioned in Sub-Section (3), before the priority date of the claim. 13. Failure to disclose information: That the applicant for the patent has failed to

disclose to the controller the information required by section 8 or has furnished information which any material particular was false to his knowledge ; 14. Contravened Secrecy: that the applicant contravened any direction for secrecy or

made or caused to be made an application for the grant of patent outside India. 15. Amendment Obtained by fraud: That leave to amend the complete specification

under section 57 or Sec 58 was obtained by fraud. 16. Wrong mentions: That the complete specification does not disclose or wrongly

mentions the source of geographical origin of biological material used for the invention. 17. Invention was Anticipated: That the invention so far as claimed in any claim of the

complete specification was anticipated having regard to the knowledge, oral or otherwise, available with any local or indige nous community in India or elsewhere. 18. Requirement of Public not specified: where in respect of a patent, a compulsory

license has been granted or the endorsement of license of rights has been made, the reasonable requirements of the public with respect to the patented invention have not been satisfied or that the patented invention is not available to the public at a reasonable price. 19. Patent Has expired: A patent, which has already expired, may be revoked. 20. Application should be made by the person interested in the process patent to seek its

revocation otherwise the application for the revocation is liable to be dismissed as a person interested must be a person who has a direct, present and tangible commercial interest or public interest which was injured or affected by the continuance of the patent on the register. 21. A patent may be revoked by the High court on the petition by Central Government


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Business Government & Society 22. An invention is said to be used for the purpose of the government if it is made, used,

exercised or vended for the purpose of the central government, a State government or a government undertaking. 23. A notice of any petition for revocation of a patent shall be served on all persons

appearing from the register to be proprietors of that patent or to have shares or interst therein. 24. An application could be filed in any High Court within whose jurisdiction interests of

the applicant are affected by the rights of the patent holder. The jurisdiction is not determined by the location of the patent office or the place of business or residence of the patentee.

Remedies for infringement/ Relieves in cases of infringements: An action for infringement may be instituted by way of a suit either in District Court or in High Court, District Court or High Court where cause of action arises shall have jurisdiction. Suit is required to be filed within three years from the date of infringing Act and not from the date of grant. Suit may be filed by patentee entered in the register of the patents as grantee or proprietor of the patent or by an assignee of the patent. The remedy for infringement, which a court may grant in any suit for infringement of a patent, includes: 1. Injunctive relief: ‘Injunction’ is a normal remedy, though discretionary on the part

or the court. It stops the infringement during the pendency of the proceedings. The Court may also order that the goods which are found to be infringing materials and implements, the predominant use of which is in the creation of infringing goods, shall be seized, forfeited, or destroyed, as the court deems fit under the circumstances of the case without payment of any compensation. 2. Damages (including Treble Damages for Willful infringement): ‘Damages’

account for the loss in money terms suffered by the owner of the patent due to infringement. In assessing damages, the sole question is what is the loss sustained by the patentee by reason of the unlawful sale of the defendant’s goods. The loss must be natural and direct consequences of the defendant’s Act.


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Business Government & Society 3. Accounts: ‘accounts’ relates to the account of net profits earned by the defendant. If

there are no Profits, ‘accounts’ is not a remedy. Damages and accounts are alternative remedies; the owner can chose only one of them, not both. In a claim of profits, it is material to ascertain how much of the invention was actually appropriated to determine what proportion of the net profits realized by the infringer was attributable to its use. 4. Otherwise: as a remedy is a general provision which authorizes the court to grant

such other relieves as it may deem necessary for complete redressal of the complain. For example, the court may order that the infringing goods or materials and implements shall be seized, forfeited or destroyed.

Grant of Patent: 1. The grant of patent under this act shall be subjected to the condition that:

I.

Any machine, apparatus, or other article in respect of which the patent is granted or any article made by using process in respect of which the patent is granted, may be imported or made by or on behalf of the government for the purpose merely of its own use.

II.

Any process in respect of which the patent is granted may be used by or on behalf of the government for the purpose merely of its own use.

III.

Any machine, apparatus, or other article in respect of which the patent is granted or any article made by the use of the process I respect of which the patent is granted, may be made or used, and any process in respect of which the patent is granted may be used, by any person, for the purpose merely of experiment or research including the imparting of instructions to pupil.

2. On the grant of patent, the Controller shall publish the fact that the patent has been

granted and thereupon the application, specification, and other documents related thereto shall be open for public inspection. 3. Every patent shall be dated as of the date on which the application for the patent was

filed. The date of every patent shall be entered in the register. No suit or other proceeding shall be commenced or prosecuted in respect of an infringement committed before the date of publication of the application


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Business Government & Society 4. Every patent shall be in the form specified in Third schedule. Every patent shall have

effect throughout India. A patent shall be granted for one invention only.

Term of Patent: 1. Patent remains in force for 20 years from the date he application was filed. During that time, no one without the permission of the patent owner can (within the geographical limits of the United stated) make, use, sell, offer to sell or import the invention described by the patent claims. To do so is an infringement of the patent, regardless of whether the infringer copied the inventor’s ideas or discovered them independently. In contrast to trademark law, which requires that the protected mark be used in business, a patent owner can choose to practice the claimed invention, license it to others or prevent its practice altogether. 2. The most common reason for a patent to come to an end is that the statutory period during which it is in-force expires. For utility and plant patents, the statutory period is 20 years after the application data. For design patents, the statutory period is 14 years from date of issuance.

Copyright: Copyright is a right, which is available for creating an original literary or dramatic or musical or artistic work. For example, Cinematographic films including sound track and video films and recordings on discs, tapes, perforated roll or other devices are covered by copyrights. Computer programs and software are covered under literary works and are protected in India under copyrights. Copyrights give protection for the expression of an idea and not for the idea itself. For example, many authors write textbooks on physics covering various aspects like mechanics, heat, optics etc. even though these topics are covered in several books by different authors, each author will have copyright on the book written by him/her, provided the book is not a copy of some other book published earlier. Copyrights are similar to patents in establishing ownership and protection for creative endeavor but they pertain to intellectual property. A copyright extends protection to authors, composers, artists and it relates to the form of expression rather than the


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Business Government & Society subject matter. This distinguishing feature is important because most intellectual proprietary information in terms of subject matter and if that property cannot be patented, the copyright only prevents duplicating and using the original matter. The probation does not prevent another person from using the “subject matter” or rewriting the material. For example, the concept of an electronic spreadsheet is not protected; however, the

software program devised to create the spreadsheet (form of expression) is protected by copyright. Object of Copyright:

Copyright ensures certain minimum safeguards of the rights of authors over their creations, thereby protecting and rewarding creativity. Creativity being the keystone of progress, no civilized society can afford to ignore the basic requirement of encouraging the same. Economic and social development of society is dependent on creativity. The protection provided by copyright to the efforts of writers, artists, designers, dramatists, musicians architects and producers of sound recordings, cinematograph and computer software, creates an atmosphere conducive to creativity, which includes them to create more and motivates others to create.

Indian Copyright Act, 1957 The Copyright Act, 1957 protects original literary, dramatic, musical and artistic works and cinematograph films and sound recordings from unauthorized uses. Unlike the case with patents, copyright protects the expression and not the ideas. There is no copyright in an idea. Classes of works for which Copyrights protection is Available in India

Section 13(1) of the copyright Act provides that copyright subsists in original literary, dramatic, musical and artistic works, Cinematograph films, and sound recording. The classes of works for which copyrights protection is available in India are as follows 1. Artistic work: Artistic work means: a. A painting, sculpture, a drawing, an engraving or photograph. It does not matter whether or not any such work possesses artistic quality, and


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Business Government & Society b. Work of architecture. ‘Work of architecture’ means any building or structure having an artistic character or design or any model for such building or structure 2. Dramatic Work: ‘Dramatic Work’ includes any piece for recitation, choreographic work or entertainment in dumb show, the scenic arrangement or acting for which it is fixed in writing or otherwise; but does not include a cinematographic film. 3. Literary Work: The term ‘literary work’ includes computer programs, tables and compilations including computer database. 4. Computer Programs: It means a set of instructions expressed in words, codes, schemes for any other form including a machine readable medium capable of causing the computer to perform a particular task or achieve a particular result. Computer includes any electronic or similar devices having information processing capabilities. Thus source codes, algorithms and the user manuals are also considered as a part of the software. 5. Musical work: ‘Musical work’ means a work consisting of music and includes any graphical notations of such work but does not include any words or any actions intended to be song, spoken or performed with the music. 6. Cinematograph film: ‘Cinematograph films’ means any work of visual recording on any medium through a process from which a moving image may be produced by any means and includes a sound recording accompanying such visual recording. 7. Sound recording: Sound recording means an aggregate of sound from which such sounds may be produced, regardless of the medium on which such recording is made or the medium by which the sounds are produced.

Term or Duration of Copyright: 1. The term of the copyright in any literary, dramatic, musical or artistic work (other than photograph) is: a. If published within the lifetime of the author until 60 years from the beginning of the calendar year, next following the year in which the author dies. b. If published anonymously or pseudonymously, until 60 years from the beginning of the calendar year next following the year in which the work is Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society first published. If, however, the identity of the author is disclosed before the expiry of said period, then copyright shall subsist as per (a) above. c. In posthumous (appearing after the death of the originator) works, until 60 years from the beginning of the calendar year next following the year in which the work is first published. 2. The term of the copyright in case of a photographs, cinematograph film, sound recording, government work, work of public undertaking and the works of an international organization, shall subsist until 60 years from the beginning of the calendar year next following the year in which the work is first published.

Registration of Patent: Registration of copyright is optional. A register of copyright is kept in the copyright office. All details of works in which registration is applied for is entered in the register. Register of copyrights is Prima facie evidence of the particular enters therein. The register is open for inspection and extracts of it can be obtained. The entries in the register can be corrected or rectified and shall be publish. A certificate of registration becomes a crucial Prima facie evidence before a court in the ownership of the material and other facts recorded therein. For registration, the office of the Registrar of Copyrights has been created. The register of copyrights is maintained in the copyright office of the Department of Education. The register contains the following six parts: Part 1: literary works other than computer programs, tables and compilations, including computer databases and Dramatic works. Part 2: Musical Works. Part 3: Artistic Works. Part 4: Cinematograph films. Part 5: Sound Recordings. Part 6: Computer programs, tables and compilations, including c omputer databases.


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Business Government & Society While applying for registration, all details of the work are to be mentioned. Published as well as unpublished work, can be registered. A copy of the work also has to be submitted. The person applying for registration has to give notice of his application to those who may have interest in the work. The registrar receives objections on the application. In addition, he examines the correctness of the information given. Upon satisfaction, he registers the work and issues a certificate of registration.

Infringement of Copyright: Some of the act which are considered as no infringement of copyright are: 1. Private use including research. 2. Criticism or review 3. Computer program-making copies for the purpose for which it was supplied or make backup copies 4. Reporting current events in a newspaper/magazine or by broadcast or in cinematograph film, or by means of photographs. 5. In any work prepared by the secretariat of a legislature exclusively for the use of its members. 6. For judicial proceedings 7. Copy made in accordance with any law 8. Reading in public of any reasonable extract from a published literary or dramatic work. 9. By a teacher or pupil in the course of instruction or as a part of question or answer in examination.

Remedies for Copyright Infringement: The owner of copyright can sue in the District court having jurisdiction and shall be entitled to remedies such as injunction, damages. A copyright owner can take legal action against any person who infringes the copyright in the work.


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Trademark: Trademark is a mark or symbol used by a trader in association with specific goods manufactures and or sold; Mark may be symbol of reputation of some kind in the goods for its origin or quality or both. The brand name, logo or label of the company can be registered as trademark. Once it is registered then it is protected against misuse by the third parties. The registered trademark is a valuable property, which can be transferred or sold or licensed to third parties. In India, the trademark Act, 1999 governs this and the law encourages registration of trademarks, as registration confers on the owner an exclusive right to use the mark. Service mark:

The trademarks Act provided the facility to register marks for services as well as goods. “Services” has been defined to mean a service of any description which is made available to potential users and includes the provision of service in connection wit business in any industrial or commercial matter, such as banking, communication, education, finance, insurance, real estate, transport, storage, material treatment, processing, supply of energy, lodging, entertainment, construction, repair, conveyance of news and advertising. Trademarks not registerable

No Trademark shall be registered in respect of any goods, descriptive of goods or services that is identical with or deceptively similar to Trademark, which is already registered. Descriptive words, surnames and geographical names are n ot registerable. Procedure for Registration:

1. The application is filed 2. Then the Trademark office examines the application and objections, if any are raised. 3. After clearing the objections, if any, the mark is advertised in Trademark Journal and is open to third party opposition period of 4 months. Shreeshaila P V, Lecturer, Jain Institute of Technology MBA programme, Davangere

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Business Government & Society 4. The registration certificate is issued in 4-6 months after the completion of opposition period, if there is no opposition by the third party during this period. 5. In case of opposition, registration certificate is issued when the opposition is dismissed Requirements for Making an Application

1. Ten representations of the trademark. 2. The name, construction (e.g. Proprietorship, partnership or limited liability company) 3. List of goods or services in respect of which the registration is sought. 4. If the mark has been used in India, the date since the mark is used. Revocation of Registration:

Where after the acceptance of an application for registration of a trademark but before its registration, the registrar is satisfied that •

The application has been accepted in error; or

•

In the circumstance of the case of the trademark should not be registered or should be registered subject to conditions or limitation or to conditions additional to or different from the conditions or limitations subject to which the application has been accepted.

Duration, Removal and Restoration and Registration •

The Registrar shall, on application made by the registered proprietor of a trademark in the prescribed manner and within the prescribed period and subject to payment of the prescribed fee, renew the registration of the trademark for a period of Ten years from the date of expiration of the original registration or of the last renewal of registration, as the case may be (which date is in this section referred to as the expiration of the last registration).

•

At the prescribed time before the explanation of the last registration of a trademark the Registrar shall send notice in the prescribed manner to the registered proprietor of the date of expiration and the conditions as to payment of fees and otherwise upon which a renewal of registration may be obtained, and if at the expiration of the time


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BGS Entire Notes

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