INSTITUTE OF AERONAUTICAL ENGINEERING

(Autonomous)
Dundial, Hyderabad - 500 04

PPTS
ON

BUSINESS LAW AND ETHICS

MBA I semester

Prepared by

E SUNITHA

Assistant Professor
 UNIT – I

LAW OF CONTRACT - 1872

INTRODUCTION TO LAW

Law is a system of rules and guidelines, usually enforced

through a set of institutions. Contract law regulates everything
from buying a bus ticket to trading on derivatives markets.
Property law defines rights and obligations related to the transfer
and title of personal and real property. If the harm is
criminalised in legislation or case law, criminal law offers means
by which the state can prosecute the perpetrator.
Definitions.
•Proposal - When one person signifies to
another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent
of that other to such act or abstinence, he is said
to make a proposal.
•Promise - When the person to whom the
proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when
accepted, becomes a promise.
The person making the proposal is called the "promiser and
the person accepting the proposal is called the It promise":

Consideration - When, at the desire of the promiser, the

promisee or any other person has clone or abstained from
doing, or does or abstains from doing, or promises to do or to
abstain from doing, something, such Act or abstinence or
promise is called a consideration for the promise.

Agreement - Every promise and every set of promises,

forming the consideration for each other, is an
agreement.

•Contract - An agreement enforceable by law is a

contract.
•An agreement not enforceable by law is said to be void.
 Contracts

Contracts –
•Contract - An agreement enforceable by law is a
contract.
•All agreements are contracts if they are made by
the free consent of parties competent to contract,
for a lawful consideration and with a lawful object,
and are not hereby expressly declared to be void.
What is a contract?
Examples
•I promise to bring chocolates to the whole class. Is
there a contract?
•I promise to give you 100 Rs. if ride your bike to
Tiananmen Square and back to ICB in less than 2
hours. Is there a contract?
•I give you 2 Rs. for your Coca-Cola. Is there a
contract?
•I promise to give you a new bicycle if you agree not
to eat Chinese food for one year. Is there a contract?
Definition of a contract
•A legally binding agreement
•that means there must be some kind of
agreement between two parties
•However, not all agreements are contracts
because not all agreements are legally
enforceable
•legally enforceable means that a court will say
that an agreement is a contract
Definition of a contract (cont.)
To decide if an agreement is legally enforceable as a contract, a court will apply
the rules and principles of the law of contract

Therefore, knowing a little about these rules can help businesspeople to create
valid contracts

Essential elements of a valid contract: (Sec. 10)

•Agreement - Offer & acceptance
•Legal consequences - rights & obligations
•Capacity of the contracting parties
•Consideration
•Legal object
•Free consent
•Certainty
•Possibility of performance
•Writing & registration
Not expressly declared to be void
Offer: Sec.2(a)
An Offer Can be Defined as follows:

An expression of willingness to contract on certain terms, made with the

intention that it shall become binding as soon as it is accepted by the person
to whom it is addressed.

Essentials of offer
•It must be an expression of the willingness to do or abstain from doing
something.
«Such expression must be to another person.

•Such expression must be made with the intention to obtain the assent
of the other person to such an act or abstinence.
Communication of Offer.
•The communication of a proposal is complete when it
comes to the knowledge of the person to whom it is
made.
•E.g. - A proposes, by letter, to sell a house to B at a
certain price. The communication of the proposal is
complete when B receives the letter.
Acceptance: Sec 2(b)

Acceptance is the second „half‟ of a contract. If Bill

offers Ben a bag of sweets for 20p, and Ben says „I
accept‟, clearly a contract has been made. The law
explains that there must be evidence from both
sides of genuine agreement between parties – the
old idea of consensus ad idem, or meeting of
minds.
Acceptance can be defined as:
Agreement to all terms of an offer by words or
conduct.
Essentials of Acceptance

•Acceptance must be given only by the person to whom the

offer is made.
•Must be absolute & unqualified.
•Must be in prescribed mode or reasonable manner.
•Must be communicated.
•Within reasonable time.
•Acceptance must succeed an offer.
•Rejected offers can be accepted only if renewed.
 Communication of an
acceptance
The communication of an acceptance is complete, as against
the proposer, when it is put in a course of transmission to him,
so as to be out of the power of the acceptor; as against the
acceptor, when it comes to the, knowledge, of the proposer.

E.g. : B accepts A's proposal by a letter sent by post. The

communication of the acceptance is complete, as against A
when the letter is posted as against B, when the letter is
received by A.
Void Contracts

•In fact, these are not contracts at all

•They have no legal effect
•As we will see in later classes, there are a
number of things which can make a contract void
– e.g. mistake, illegality
•The important thing to remember is that you
cannot enforce a void contract
Void Contracts - Example

Daniel gives his students so much

homework that they decide to kill him
They pay a Russian hit man 5000 RMB
to kill Daniel
Void Contracts – Example
(cont.)
•However, the Russian simply spends all the
money in bars in Sanlitun and then goes home
•He does not kill Daniel
•J
•The students cannot claim their money back
because it is illegal to hire a hit man to kill
someone
COMPANIES ACT
Introduction
WHAT IS COMPANY:

•A company is an artificial person created by law.

•A company means a group of persons associated
With attainment of a common end, social or
theego

economic.
•Section 3(1)(i) of the Companies Act, 1956 defines
a company as: “a company formed and registered
under this Act or an existing Company”.
•Existing Company‟ means a company formed registered
under any of the earlier Company Laws.
Characteristics of a company

•Separatelegal entity
•Limited liability
•Perpetual succession
•Common seal
•Transferability of shares
•Separate property
SEPARATE LEGAL ENTITY-

•A company is in law regarded as an entity from its

members. It has an independent corporate
existence.
•Any of its member can enter into contracts with it in
the same manner as any other individual can and
he cannot be held liable for the acts of the company
even if he holds virtually the entire share capital.
•The company‟s money and property belongs to it
and not to the shareholders (although the
shareholders own the company)
LIMITED LIABILITY-
A company may be a company limited by shares or acompany limited
by guarantee. In a company limited by shares, the liability of members
is limited to the unpaid value of the shares.

PERPETUAL SUCCESSION-
Being an artificial person a company never dies, nor
does its life depend on the life of its members. Members may come
and go but the company can go on forever. It continues to exist even if
all its members are dead. The existence of company can be
terminated only by law. It means that a company‟s existence persists
irrespective of the change in the composition of its membership.
COMMON SEAL
•Act through its agents and all such contracts
entered into by its agents must be under a seal of
the company. The common seal acts as the official
signature of the company.

TRANSFERABILITY OF SHARES
These shares are, subject to certain conditions,
freely transferable, so that no shareholder is
permanently wedded to the company. When the join
stock companies were established the great object
was that the shares should be capable of being
easily transferred.
SEPARATE PROPERTY:

A s a company is a legal person distinct from its

members, it is capable of owning, enjoying and
disposing of property in its own name. Although its
capital and assets are contributed by its shareholders,
they are not the private and joint owners of its
property. The company is the real person in which all
its property is vested and by which it is controlled,
managed and disposed of.
 Statutory companies-

These are the companies which are created by a special

Act of the legislature e.g. RBI, SBI, LIC, etc. These are
mostly concerned with public utilities as railways,
tramways, gas and electricity companies and enterprises of
national level importance.

Registered companies-
These are the companies which are formed and
registered under the Companies Act,1956 .
 ON THE BASIS OF LIABILITY

1)Companies with limited liability:

LIMITED BY SHARES:

Where the liability of the members of a company is limited to

the amount unpaid on the shares ,it is known as company limited by
shares. If the shares are fully paid, the liability of the members holding
such shares is nil. It may be a public or a private company.
LIMITED BY GUARANTEE:

Where the liability of the members of a company is limited to a fixed

amount which the members undertake to contribute to the assets of a
company in the event of its being wound up, the company is called a
company limited by guarantee.
These companies are not formed for the purpose of profit but for the
promotion of art, science, charity, sports or for some similar purposes.
They may or may not have a share capital.
2) Companies with unlimited liability

Sec 12 specifically provides that any 7 or more persons may

form an incorporated company with or without limited liability. In
such case every member is liable for the debts of the company.
An unlimited company may or may not have a share capital. If it
has a share capital, it may be a public company or a private
company. It must have its own Articles of Association.
ON THE BASIS OF NUMBER OF MEMBERS

PRIVATE COMPANY-

A company which has a minimum paid-up capital of Rs 1,00,000 or

such higher paid up capital as may be prescribed, and by its articles
a. Restricts the right to transfer its shares, if any b.Limits the number
of its members to 50.
c. Prohibits any invitation to the public to subscribe for any shares in,
or debentures of, the company,
d.Prohibits any invitation or acceptance of deposits from persons
other than its members, directors or their relatives.
PUBLIC COMPANY:

A public company means a company which-

(a)has a minimum paid-up capital of Rs. 5 lakh or such
higher paid-up capital, as may be prescribed;
(b)is a privatecompany which is a subsidiary of a
company which is not a private company;
Every public company, existing on the commencement
of the Companies Act, 2000, with a paid-up capital of
less than Rs. 5 lakh, within a period of two years from
such commencement, enhance its paid-up capital to Rs. 5 lakh.
ON THE BASIS OF CONTROL

Holding companies-
A company is known as the holding company of
another company if it has the control over that other
company. A company is deemed to be the holding
company of another if, but only if, that other is its
subsidiary.
Subsidiary company-
A company is known as a subsidiary of another
company when control is exercised by the holding
company over the former called a subsidiary company.
ON THE BASIS OF OWNERSHIP

Government company -
A government company means any company in which
not less than 51% of the paid-up share capital is held
by-
•The central government, or
•Any state government, or governments, or
•Partly by central government and partly by one or
•more state government.
Foreign company

It means any company incorporated outside India

which has an established place of business in India.
Where a minimum of 50% of the paid up share
capital of a foreign company is held by one or more
citizens of India or/and by one or more bodies
corporate incorporated in India, whether singly or
jointly, such company shall comply with such provisions
as may be prescribed as if it were an Indian company.
 UNIT III

NEGOTIABLE INSTRUMENT
 UNIT IV

BUSINESS ETHICS
Business ethics?
Business ethics (also known as corporate ethics) is a form of applied ethics or
professional ethics, that examines ethical principles and moral or ethical problems that
can arise in a business environment. It applies to all aspects of business conduct and is
relevant to the conduct of individuals and entire organizations.These ethics originate from
individuals, organizational statements or from the legal system. These norms, values,
ethical, and unethical practices are what is used to guide business. They help those
businesses maintain a better connection with their stakeholders.

Business ethics refers to contemporary organizational standards, principles, sets of

values and norms that govern the actions and behavior of an individual in the business
organization. Business ethics have two dimensions, normative business ethics or
descriptive business ethics. As a corporate practice and a career specialization, the field
is primarily normative. Academics attempting to understand business behavior employ
descriptive methods. The range and quantity of business ethical issues reflects the
interaction of profit-maximizing behavior with non-economic concerns.

Interest in business ethics accelerated dramatically during the 1980s and 1990s, both
within major corporations and within academia. For example, most major corporations
today promote their commitment to non-economic values under headings such as ethics
codes and social responsibility charters.
Definition
Adam Smith said, "People of the same trade seldom meet together, even for
merriment
and diversion, but the conversation ends in a conspiracy against the public, or in
some
contrivance to raise prices." Governments use laws and regulations to point
business
behavior in what they perceive to be beneficial directions. Ethics implicitly
regulates areas
and details of behavior that lie beyond governmental control. The emergence of
large
corporations with limited relationships and sensitivity to the communities in which
they
operate accelerated the development of formal ethics regimes.
 Business Ethics and the
Changing Environment
 Businesses & governments operate in changing
technological, legal, economic, social & political
environments with competing stakeholders & power
claims.
 Stakeholders are individuals, companies, groups &
nations that cause and respond to external issues,
opportunities, and threats.
 The rate of change and uncertainty in which stake-
holders & society must make & manage business &
moral decisions have accelerated due to the impact of:
 Internet and information technologies
 Globalization
 Deregulation
 Mergers
 Wars

3
What is Business Ethics? Why Does It Matter?

•Ethical solutions to business and organizational problems may have

more than one right alternative and sometimes, no right solution may
seem available.
•We can learn from case studies, role playing, and discussions about how
our actions affect others in different situations.
•Laura Nash has defined business ethics as “the study of how personal
moral norms apply to the activities and goals of commercial enterprise,”
as dealing with three basic areas of managerial decision making:
Choices about what the laws should be and whether to follow them
Choices about economic and social issues outside the domain of
law
Choices about the priority of self-interest over the company’s
interests
Why Does Ethics Matter In Business?
•“Doing the right thing” matters to employers, employees,
stakeholders, and the public.
For companies, it means saving billions of dollars each
year in lawsuits, settlements, and theft
Tobacco industry
Dow Corning
Costs to businesses include:
Deterioration of relationships
Damage to reputation
Declining employee productivity, creativity, and loyalty
Ineffective information flow throughout the
organization
Absenteeism
Levels of Business Ethics
 Because ethical problems are not only an
individual or personal matter, it is helpful
to see the different levels at which issues
originate and how they move to other
levels.
 Five levels are:
 Individual
 Organizational
 Association
 Societal
 International
 Examination of the RU 486 story
10
Five Myths About Business
Ethics
 A myth is “a belief given uncritical
acceptance by the members of a group,
especially in support of existing or
traditional practices and institutions.”
 Myth 1: Ethics is a personal, individual
affair, not a public or debatable matter
 Myth 2: Business and ethics do not mix
 Myth 3: Ethics in business is relative
 Myth 4: Good business means good ethics
 Myth 5: Information and computing are
amoral
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 Can Business Ethics Be
Taught And Trained?
 Ethic courses should not:
 Advocate a set of rules from a single
perspective
 Not offer only one best solution to
specific ethical problems
 Not promise superior or absolute ways
of thinking and behaving in situations

14
 Can Business Ethics Be
Taught And Trained?
 Ethic courses and training can do the
following:
 Provide people with rationales, ideas, and vocabulary
 Help people make sense of their environments
 Provide intellectual weapons
 Enable employees to act as alarm systems for company
practices
 Enhance conscientiousness and sensitivity
 Enhance moral reflectiveness and strengthen moral
courage
 Increase people's ability to become morally autonomous
ethical dissenters
 Improve the firm’s moral climate

15
 Can Business Ethics Be
Taught And Trained?
 Other scholars argue that ethical
training can add value to the moral
environment of a firm and to
relationships in the workplace by:
 Finding a match between employer’s
and employee’s values
 Managing the push-back point
 Handling an unethical directive
 Coping with a performance system that
encourages unethical means
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 Stages Of Moral
Development
 Kohlberg’s 3 levels of moral development:
Level 1: Preconventional level (self-
orientation)
 Stage 1: Punishment
 Stage 2: Reward seeking
 Level 2: Conventional level (others
orientation)
 Stage 3: Good person
 Stage 4: Law and order
 Level 3: Postconventional level (universal,
humankind orientation)
 Stage 5: Social contact
 Stage 6: Universal ethical principles
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