LEGAL ENVIRONMENT

LEGAL ENVIRONMENT
The legal environment in business is a code of conduct that
defines the boundaries of business within a legal jurisdiction.
The law has been meant to mean different things at different
periods. Given below are some definitions:
Traditionalist approach: Legal traditionalists define law as
a body of principles and rules that courts use during dispute
resolution. As per them, no matter how much society
changes its beliefs, the basic concepts of right and wrong
will remain intact.
Environmental approach: Law is a tool used to control
society. Thus, it must always demonstrate the moral
constructs of the society through the execution of rules and
regulations. This environmental approach is wider than the
traditional viewpoint.
 Social jurisprudence approach: Law is shaped by the society and its
means of enforcement. It is a way to provide a systematic, predictable system
of social order, change and legal reform.
Thus, the main objectives of the law are as follows:
Maintain peace
Deliver justice
Provide equality and uniformity
Protect individual rights
Protect minorities against injustice
Maintain social control
Maintain law and order
Resolve disputes
Provide systematic social change and legal reform
Before you learn about the different categories of the law, you
should have an idea about the terms right and duty. A right is the
ability of an individual, as provided by the law, to demand someone
else to perform or stop in a certain activity. A duty is a commitment
of an individual to perform or refrain from a certain activity. Right
and duty are correlated in that an individual cannot have a right
without having a corresponding duty to another person.
The main categories of law are:
Substantive law vs. Procedural law: Substantive law
includes all the laws that define and regulate legal rights and
duties. If a rule states that promises are enforced only if a
party gets something of value from the other party, then it is
the part of the substantive law. For example, business
contracts are substantive law. But what happens if a contract
is violated? Then, procedural law comes into play. Procedural
law is used to enforce the rights established by the
substantive law. It answers questions such as:
How should a lawsuit be filed?
What papers should be filed?
Which court should be attended?
What witnesses are required?
 Civil law vs. Criminal law: Civil law includes all
the laws that define the duties of individuals or
legal entities, such as corporations or companies.
Violations of civil law include employment violation,
contract breach, product liability and copyright
infringement. Criminal law, on the other hand, is an
act proscribed by the law to protect the public at
large. Criminal violations include when individuals
in positions of authority to commit crime against
other individuals, the company, or the consumer.
Examples include fraud, bribery, insider trading,
embezzlement, cybercrime, public corruption,
identity theft, consumer fraud and forgery.
There are three main sources of law:
Customs: Customs refer to the set practices or unwritten
rules that have become a society’s norm. These were the
primary sources of law in ancient societies. Some customs still
prevail as an important source of law. For example, Saptapadi
or ‘seven steps’ is the most important rite of a Hindu marriage
ceremony, when the newly-wed couple takes seven steps
around the fire. This custom of Saptapadi is incorporated in
Section 7 of the Hindu Marriage Act, 1955. Customs can be
divided into two classes:
Customs without sanction: These customs are not mandatory and
are followed due to public opinion.
Customs with sanction: These customs are mandatory and enforced
by the state. These include:
 Legal custom: This custom’s authority is absolute. It is recognised and enforced
by a court of law. These may be general (throughout a state) or local (restricted to
a part of the state).
 Conventional custom: These are enforced on parties on account of an
agreement. For example, an agreement between a landlord and a tenant about the
payment of rent is a conventional custom bound by the rent agreement.
Judicial precedent: This includes the
previously decided judgements of the High
Courts and the Supreme Court of India, which
judges are obliged to follow. It is a legacy from
the British-India legal system.
Legislation: This is the most important and
modern source of the law. It includes the laws
enacted and recognised by the state. There are
two main types of legislation:
Supreme legislation: This includes laws directly
enacted by the Indian Parliament. The powers of the
Parliament are regulated and controlled by the
Constitution of India.
 Subordinate legislation: This includes laws that are made by
any subordinate authority of the supreme legislation. It is further
divided into:
 Autonomous law: This is the law enacted by a group of individuals legally
recognised as an autonomous body, such as universities or incorporated
companies.
 Judicial rules: Under the Constitution of India, the Supreme Court and the
High Courts have the power to make rules for their administrative
procedures.
 Local laws: Laws enacted by local bodies like Panchayats or Municipal
Corporations are recognised as local laws under the 73 rd and 74th amendments.
 Laws made by the executive: In India, there are three organs of the state:
the legislature, the executive, and the judiciary. Each has specific functions.
The legislature (the Indian Parliament) is responsible for
making law within the Constitution of India. The executive
(the Indian government) is responsible to implement the
laws enacted by the Parliament. However, the Indian
Parliament delegates some of its law-making powers to
the executive (delegated legislation), as it is not possible
for it to go through all the details of the law.
ACTS INFLUENCING THE LEGAL
ENVIRONMENT OF BUSINESS
The legal environment of business in India mainly comprises
the legal policy, framework and laws in which businesses have
to operate. These laws are enacted to protect the interests of
both the producers and the customers. Let us discuss the main
acts:
Indian Contract Act, 1872: This act is applicable to entire India,
except Jammu and Kashmir. This act ensures that the rights and duties
arising out of a contract are honoured and that legal remedies are
available to the parties bound by the contract. It defines a contract and
an agreement, as follows:
Contract: An agreement between two or more persons/parties
subject to certain terms and conditions for legal consideration.
Thus, Contract = Agreement + Enforceability
Example: ‘A’ offers to sell his house to ‘B’ for a specified amount.
‘B’ accepts to purchase the house. Here, ‘A’ offers an
agreement. When ‘B’ accepts the offer, it becomes a contract.
Agreement: An offer that must satisfy the following three conditions:
There must be at least two parties.
There must be an offer (proposal) from one party to another.
There must be an acceptance from the other party/person. Thus, Agreement = Offer +
Acceptance
Sale of Goods Act, 1930: This act enforces the contracts relating to the
sale of goods. It also applies to entire India, except the State of Jammu and
Kashmir. The contract for the sale of goods is subject to the law relating to
the Indian Contract Act. Its features include as follows:
Transfer of ownership
Delivery of moveable goods
Rights and duties of both the buyers and the sellers
Measures against breach of contract
Terms and conditions under the contract for sale
To become effective a contract of sale, there must be a buyer and a seller.
The buyer purchases/agrees to purchase goods from the seller, who
sells/agrees to sell them. Goods must be moveable or transferrable from
the seller to the buyer. Transfer of immovable property is not regulated
under this act. Price is a necessary factor for all transactions of sale. If
there is no price, then the transfer of goods is not a sale. The price
normally means money, which can be paid fully in cash or partly paid/
partly promised to be paid in the future.
Indian Partnership Act, 1932: According to this act, a relationship between two or
more individuals where they agree to split the profits of a business is called a
partnership. The business may either be run by them directly or by one/more
person(s) acting on their behalf. This act is also applicable to the whole of India,
except Jammu and Kashmir. The partners must be the age of majority as per the law,
of sound mind and qualified for contracting. They can be an individual, firms, a Hindu
Undivided Family (HUF), a company, or trustees. The maximum number of partners in
a firm should be 20. The essential features of partnership are as follows:
Agreement: This defines the relationship between partners. If the only proprietor of
a firm dies, then although his/her heirs inherit the firm, they do not become
partners. This is because there is no agreement between them.
Profit sharing: The partners may agree to share profits, but not losses. Sharing of
losses is not necessary to form a partnership.
Business: This may include every trade, occupation, or professions that are
continued with a profit motive.
Relation between partners: The partner that conducts the business of the
partnership is called:
A principal: He is called so because he acts for himself.
An agent: He is called so because he acts for the rest of the partners too.
 

Duties of a partner: A partner conducts the business of the firm in good faith,
renders true accounts, indemnifies for loss caused due to fraud, indemnifies the firm
for wilful neglect of a partner and conducts duties carried out by the contract.
Rights of a partner: A partner can participate in the conduct and management of the
business, express the viewpoints in business matters, access all the records and
account books of the firm, share the profits, and earn interest on advance payments.
€ Companies Act, 2013: This act defines the incorporation, dissolution and running of companies in
India. It was enforced on September 12, 2013 and includes a few amendments to the previous
Companies Act, 1956. The new act has fewer sections (470) than the previous act (658). It empowers
shareholders and focuses on corporate governance. Some of its features are as follows:
Class action suits for shareholders: This is done to make shareholders and other stakeholders
more informed about their rights.
More power for shareholders: Now, approvals from shareholders are required for various key
transactions.
Women empowerment: At least one Director on the Board (for a specific class of companies) should
be a woman.
Corporate Social Responsibility (CSR): A certain class of companies must spend a specific amount
of money each year on CSR activities.
National Company Law Tribunal: The National Company Law Tribunal and the National Company
Law Appellate Tribunal replace the Company Law Board and Board for Industrial and Financial
Reconstruction.
Fast track mergers: The procedure for mergers and acquisitions for a certain class of companies has
been simplified and fast-tracked.
Cross-border mergers: Now a foreign company can merge with an Indian company and vice versa
with prior permission of the RBI.
Prohibition on forward dealings and insider trading: Directors and key managers are forbidden
from purchasing call and put options of shares of the company, if they have access to price-sensitive
information.
Increase in number of shareholders: The maximum number of shareholders in a private company
is now 200 (from 50).
One-Person Company (OPC): A new form of private company called one- person company can be
formed under the new act. It may have only one director and one shareholder.
LEGISLATION FOR UNFAIR TRADE
PRACTICES
There are two main legislations to deal with unfair trade practices:
Consumer Protection Act, 1986
Competition Act, 2002
. Section 2(1)(r) of this Act defines unfair trade practice as any
practice that:
Makes a statement (oral/written/visible) which falsely represents:
That the goods or services are of a particular standard or quality or grade
That second-hand, renovated, or old goods are new goods
That goods or services have specific sponsorship, performance, characteristics,
or benefits
Gives any false, untested warranty/guarantee of a product
Misleads the public on a warranty or guarantee of the goods/services
Gives false or misleading facts damaging the reputation of the
goods/services/ trades of another person
Offers a false gift or prize with the goods/services without the
intention of honouring them
The concept of unfair trade practice was also described in the Monopolies and
Restrictive Trade Practices (MRTP) Act, 1969. This act has now been replaced by
the Competition Act, 2002. Section 36 A of the previous MRTP Act defined unfair
trade practice as a practice to promote the sale, use, or supply of any goods or for
the provision of any services using unfair methods or deceptive practices.
Such unfair/deceptive practices may include:
Oral, written, or visible misrepresentation about the standard, quality, usefulness
and the price of goods/services
False warranty/guarantee of goods/services
False advertising
False gifts, prizes and offers in sale
Although the Competition Act, 2002 does not define unfair trade practices, it
derives their meaning from the previous MRTP Act. Section 3 of the Competition
Act restricts businesses from entering into anti-competitive agreements. These
anti-competitive agreements include any agreement:
Regarding production, distribution, or the control of goods or services, which
damages the free competition within India
That fixes the purchase or sale prices
That restricts production, supply, markets, technical development, investment, or
the provision of services

 
That fixes the sharing of the market
That causes bid rigging or collusive bidding
Section 4 of the Competition Act deals with the abuse of a dominant
position. A business abuses its dominant position in the following cases:
Unfair/discriminatory purchase of goods/services
Unfair/discriminatory pricing
Limited or restricted production of goods or services
Denial of market access
Uses its dominant position in one relevant market to enter into/protect
other relevant market
Along with the enactment of the Competition Act, 2002, the government
established a statutory body called the Competition Commission of India
(CCI) to ensure that there are no unfair trade practices in the market.
The functions of the CCI are follows:
Ensure fair competition and consumer benefits in markets
Cooperate with other regulating authorities to ensure compliance with
the Competition Act
Advocate competition by educating ministries, state governments,
regulators and other authorities about its benefits to the economy