The Foundation of an Enterprise: Basic Laws

No doubt, over the course of business there are various activities that are mandatorily being taken care of. It’s almost impossible to pin-point one major activity and focus solely on that. But every activity a business undertakes is either a trading or commercial activity. While trading only refers to the sale and purchase of goods, commercial activities include the whole package of steps undertaken to deliver goods to customers. These activities are performed with the help of certain contracts governing sale of goods and the issuance of commercial (or negotiable instruments) to secure the payment for the same. In India, three laws have been framed to promote fair play and provide for easy solutions in case of disagreements. These three laws are the Contract Act, 1872; Sales of Goods Act, 1930; and the Negotiable Instruments Act, 1881.

Without knowing the law, there’s a very small chance for any justice to be served your way.

The importance of these three laws cannot be stated in mere words. It’ll be an understatement to say that they’re the cornerstone of every business transaction. As William Markham very aptly quoted his views:

“Contract law lies at the heart of our system of laws and serves as the foundation of our entire society. This is not an exaggeration. It is a simple observation – one that too often goes unobserved.”

Here, I’d like to point out that every sale of good or every negotiable instrument is actually in the nature of a contract. Negotiable instruments are the proof that a transaction has taken place. The most common example is bill of exchange. A bill of exchange shows the sale of goods to another person where the first person is liable to pay a certain amount. We see these bills being drawn nearly every day when we purchase something. But during commercial transactions, a bill of exchange is used as proof to secure payment on a later day. There are many other negotiable instruments, but we won’t go into details. Our focus is on realising the importance of learning the law governing these negotiable instruments so that we do not land ourselves in such a situation that’d make us feel ignorant. It is very important to know which instrument is to be used where so that in case of initiation of legal proceedings, correct documents, with all necessary formalities, are present. Certain documents need to be signed by only one of the parties, and issuance of these can lead to further complications if the Court would require otherwise.

Further, the Sale of Goods Act helps protect the interest of the customer against the seller. Viewing it from the point of the seller, we see that many liabilities can be incurred in case of ignorance on part of the seller. The Act has been passed to ensure proper warranty, conformation to Industry Standards and Specifications and to prevent any fraud by either party. There is much importance attached to the presence of a written contract that acts as proof in case of legal proceedings. This also helps in establishing the duty of the customer to examine and check goods before buying them.

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Finally, we come to the importance of contract law. Since contracts make the market tick, it’s only logical to have a mechanism to make them enforceable. Contract Law serves as that mechanism. Every contract is based on good faith and is voluntarily entered into by the parties. If any of the parties refuses to fulfil its part, recourse can be taken to the law to make them liable to fulfil their obligations or repay the cost of the loss or damage incurred by the other party. Even the simplest of transactions are contracts of a certain type. For example, if I a buy coffee or a book, it will be a self-executing contract. But nonetheless, it’ll be an oral contract for the purchase of a book or coffee in consideration of money value.

Even though these transactions may seem very simple and it’ll be very hard to envision any complications occurring in the same, even the most trivial of transactions have certain complications attached to them. I’d like to quote Mr. Markham’s excellent example for the same:

“If you offer to give me $10 for a carton of tomatoes that I have sitting on a table behind me, and if I agree to accept it as payment in full for the tomatoes, we have made an oral contract that we can perform on the spot: You hand me the $10 bill, and I give you the carton. Nothing more simple or straightforward, right? But what if you discover that my tomatoes were too ripe when you bought them, and that they all go rotten within two hours of the purchase? What if I take your $10 bill, but then refuse to give the box of tomatoes, telling you to “beat it, scram, or else you’ll get hurt!” What happens if your $10 bill turns out to be counterfeit, or if you take the tomatoes but refuse to pay, or pay with a check that you later cancel or that is returned unpaid by the bank? What if the carton breaks while you are carrying it, and all the tomatoes fall to the ground and are ruined?”

This is an example of complications in the easiest of transactions. But there are contracts in which it is very hard to foresee every problem that might arise in the future. These types of contracts should be in writing to avoid complications. In case of any complications, it is necessary for the party to know its rights and apply for legal action in Court. It is the duty of the Court to interpret the contract in such a way so as to provide justice to the aggrieved party and that of the parties to plead their case before the Honourable Judge. Without knowing the law, there’s a very small chance for any justice to be served your way.

There are innumerable laws equally important to the running of a successful business. But an organization with limited resources must take recourse to understanding the laws most regularly used so that every complication can be foreseen. And no other law is more used than these three laws. Every firm must take note of these three at first because no employees dedicated for this work will be available to them in the beginning.