Category Archives: Contracts and Commercial law (Including business and partnership related law)

I need to give my apartment on rent and prepare a Rental / Lease agreement. How do I do it?

With the rapid (almost crazy) increase in real estate prices, most people are forced to rent out apartments. Buying an apartment, for long the middle class dream has become a definitely upper class fantasy.

So now that you need to rent a property, you must prepare your rental agreement with great care. A simple Rental Agreement is prepared so often by so many people that they forget how the small things matter. Like is often said, god is in the details.

What must I be clear about?

First of all, be very clear about the rent and the security deposit. Not just the amount, but also on which date the amount is to be paid and how you intend to pay it – by cash, cheque or online banking etc. Next, describe yourself and the tenant / landlord very clearly and systematically. On which date will the property be taken on rent? No, not “around the 15th” or “third week” Be precise.

Next, describe why you want the property on rent. Is it for your personal residence? Or do you also intend to run your medical practice or small shop there? This makes a big difference. Take care of the other little things. Do you intend to keep pets? Is there a building association or society? Does it need to be informed?
Finally, take care of the unpleasant part. If something goes wrong, who has to pay for the repair? What if a major repair is needed? Typically, the landlord pays for the major repairs and the tenant pays for minor repairs. Any damage caused is usually paid for by the tenant. Still, take care to put these things down in writing.

Is there anything I am forgetting?

Yes, after the agreement is prepared, it has to be printed and signed by two witnesses. Choose people who are not mentally unsound and known to you. (The Landlord or the Tenant cannot be the witnesses). Very often, people prefer to print the document on Stamp Paper. This is not strictly necessary but if you are able to, print the document on Stamp Paper. Decide on the value of the Stamp Paper in advance.

And in case things turn sour, remember to include a notice period so you cannot be unceremoniously thrown out overnight. A one month notice period for both the landlord and tenant is common. Most people also make a lease agreement for 11 months, since such an agreement need not be registered and is much easier to execute.

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I have shipped goods but have not recieved payment. Can I stop the goods in transit?

Sec. 45 of the Sale of Goods Act, 1930 defines an unpaid seller as any seller of goods under the Sale of Goods Act, 1930 to whom the whole sale price has not been paid, or when a cheque issued to pay the sale price has been dishonoured. (If this applies to you, click here)

An unpaid seller under the Act also includes an agent is directly responsible for the receiving payment for the good sold. For instance, if I am an agent for Haldiram’s snacks and I have shipped the goods to retailers, I am entitled to stop the goods in transit, despite the money eventually going to Haldiram’s and not to my pocket.

An unpaid seller also has the right of lien (not to be confused with lease) on the goods while he is in possession of them, a limited right to re-sell the goods and a right to withhold delivery of goods, but here, we shall only focus on the right to stop goods in transit.

In what cases can the goods be stopped in transit?

The four criteria where an unpaid seller gets the right under the Act to stop goods in transit, resume possession and retain them until the price is paid are listed under Sec. 50 of the Sale of Goods Act.

The right of stoppage of goods in transit is an right in equity and arises wholly from the insolvency of the buyer and is based on the principle that one man’s goods should not be applied for the settlement of another man’s debts. If this sounds technical, you can understand it as one man not using someone’s goods for his benefit, without paying for them. Further, the right of stoppage of goods in transit is limited to the goods which have been shipped but not paid for, and if the goods are defective or damaged when stopped, the right of stoppage of the goods is to that extent impaired.

Broadly, the requirements for the exercise of this right are

1. That the buyer must be insolvent, which indicates incapacity to furnish the consideration for the goods sold, for which the property in the goods has been transferred.
2. That the goods be in the course of transit (being shipped),

Condition 1: The buyer must be insolvent

The Supreme Court has held that the non-payment of even one debt, such as a bounced cheque would be sufficient evidence of the insolvency of the buyer to bring into effect the provisions of the act. What if X owes me Rs. 100 for the supply of cotton, and I want to stop the sale of jute, for which he had paid the sale price? As per law, my right is only to stop the shipment of cotton, for which X owes me and has not paid.

Condition 2: The Goods must be in transit

The right of the seller to effect the stop goods in transit depends on the seller’s possession of the goods. The construction and interpretation of the rights of the seller under the Act are defined under Sec. 46 of the Act read with Sec. 51 of the Sale of Goods Act. Under Sec. 51 of the Sale of Goods Act, 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, and until the buyer or his agent takes delivery of them from such carrier or bailee.

Another interesting situation arises when the buyer chooses to take possession of the goods before they reach their destination. This has been provided for by the Act itself, which provides under Sec. 51(2) that in such circumstances that transit will be deemed to be at end. The time of taking delivery of the goods is a prerogative of the buyer and if he takes delivery of the goods prematurely, the transit will be deemed in law to have come to an end, and the fact that the appointed destination was different is completely immaterial.

The decisions of Indian Courts are useful in determining the scope the right of the unpaid seller. In the case of Sri Krishna Commercial Society v. State of Andhra Pradesh , it was held that the right depends on real possession. The Court pronounced that the decision as to whether the transit of the goods had been completed has to rest on whether actual delivery to the buyer has taken place.

The decision in the case of Singareni Collieries v. State of Andhra Pradesh cleared another problem. The Court declared that if delivery to the buyer is ‘actual delivery’, then if the carrier or the bailee of the goods is an agent acting specifically for the buyer, then actual delivery is deemed to have ended when the goods were handed over to the buyer. The learned judges held:

“So, when the property was put on rail at the collieries itself, there was receipt of these goods by the buyer and as such the sale in all these cases was complete within the State. The petitioners transported the goods to various places outside the State as instructed by the parties and not as a condition attached to the contract of sale. The movement of the goods was subsequent to the completion of the sale in this State. After the goods were put in the wagons, there was nothing further to be done by the vendors. In cases where the Government was not the purchaser, cash was paid in advance and in cases where the Government was the purchaser, cash was realised later. As such, there was no question of the petitioners having any vendor’s lien in regard to these goods or the right of stoppage in transit.” More interesting is the observation of the court when it said “. So far as the seller is concerned, as soon as the goods are put on rail, he fades out of the picture and he is not any way responsible for the diversion. This is an extraneous factor that cannot have any bearing on the present enquiry.

Remember: The moment the buyer gets control of the goods, you lose your right!

Even the act, through specific provisions, seems to suggest that the said right of the unpaid seller is based on control. For example, under Sec. 51(3) of the Act, if on arrival of the goods at their destination, the buyer is informed of the arrival of the goods by the carrier, and the carrier continues in possession of the goods as an agent of the buyer, the period of transit is said to have been completed and it is immaterial that a further destination for the goods has been indicated by the buyer. Even when the buyer of the goods was denied access to the goods for the non-payment of the freight, the unpaid seller could not avail of the right to effect stoppage in transit and the right was deemed to have expired.

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Franchising law in India: A brief introduction

The Indian economy has really witnessed a revolution of sorts in recent times, and many ways of doing business are springing up in India. People start businesses themselves, in partnership with somebody or as companies. One difficulty people face when they start is marketing and familiarizing people with their brand. This is where ‘franchising’ becomes useful, since it gives an entrepreneur the benefit of someone else’s brand. A person starting a McDonald’s restaurant does not need to worry about marketing, for example. It also gives a young, inexperienced company the insights and experience of the company which they are franchising, instead of learning through trial and error.

It is impossible to point to any one law governing franchising in India. Laws relating to contract, agency, distribution, leasing, investments, intellectual property, companies (in most cases), property, labour and investment, and also banking and insurance, may be used. Naturally, everything depends on the situation in that case, which is why the franchise agreement between the parties needs to be framed very carefully.

Financial aspects: Royalty and taxation

Royalty payment: If both the parties are Indian, the royalty fees are decided by a contract between them. If the company is foreign but the person taking the franchise is Indian, certain FEMA (Foreign Exchange Management Act) and RBI (Reserve Bank of India) rules apply.

Tax payments by the franchisor and franchise taker (franchisee): As per law, if the franchisor charges royalty payment from the franchise, the company must pay tax on it, as income deriving from Indian soil. If either the franchisor or the franchise taker hire people and pay them salaries, tax may be deducted at source. The franchise will have to pay the local sales tax, property tax and other taxes applicable.

This was just a brief introduction to the law governing franchises in India. If you are considering starting a franchise, we recommend that you consult a lawyer. Choose ‘Contracts and Commercial’ on to find a lawyer in your city to answer your franchise related questions.

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I want to start a web-based business. What legal regulations must I keep in mind?

The last decade has witnessed the very healthy phenomenon of many young people (and not so young people) turning to entrepreneurship and starting businesses of their own. Businesses create employment and wealth, and are vital to feed our large and burgeoning population.

Whether you are receiving money through a payment gateway or a brick and mortar payment system like Cash on Delivery, a very essential legal formality is the filing of tax returns. Secondly, if you are providing content or using a logo/design, get the necessary Intellectual Property rights protection. It is very easy to copy a logo from a website, and unless you take precautions, you will have no remedy if someone copies it later.

Thirdly, even if the business exists in cyber space, the people who run it are very real. So you need to decide a suitable structure for your business. A Partnership is easier to start, needing only a registered (highly recommended) partnership deed, but your liability is unlimited. If you default on a debt, your house, car etc. can simply be taken away. If you see good prospects for your business, long term, it makes sense to create a private limited company. For this, you need to prepare necessary documentation, like the Memorandum and Articles of Association of the Company, among other formalities. The formalities are maximum in this option. Typically, your web based business may involve one ‘technical’ person, and one ‘marketing’ person, and the technical person may only bring his technical expertise to the firm, and no capital. This arrangement, if it applies to you, must be stated very clearly in writing at the outset.

Since 2009, another form of starting an enterprise has come into existence, called a ‘Limited Liability Partnership’. Here, you can enter into a Partnership, but still suffer only limited liability. If something goes wrong, only your capital contribution to the partnership will be affected. This is an interesting animal, and you must definitely explore this option.

The disadvantage is that expanding such an enterprise when business grows is a little more difficult than in a private limited company. In the latter, you can offer equity to investors and bring in funds, or ‘go public’ which means offering shares to the general public. A lot of small firms however are choosing to go the ‘Limited Liability Partnership’. If you are starting the business alone, you do not initially have to incorporate a company. Filing personal income tax returns and getting intellectual property rights protection is necessary, however.

This, it must be remembered, is just a broad outline of the process. No general prescription can be made since every case is unique, so have your situation studied by an expert before deciding the best course of action. Writing sound software code is just part of the process, your understanding and application of the legal code has to be sound, too.

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How do I create a Limited Liability Partnership in India?

As it is typically understood, a Partnership is a form of business where the partners face ‘unlimited liability’. This means that if the firm owes money, say Rs. 1 crore to creditors, but the capital of the firm is only Rs. 50 lakh, the remainder can be recovered from the personal assets (house, cars etc.) of the partner. This is as opposed to a company where the shareholders face only a ‘limited liability’, limited to the extent of their shareholding in the Company. A Limited Liability Partnership (LLP) is an entirely new animal, where people start a firm, but their liability is limited to only their capital contribution to the Partnership, and their personal assets will not be affected.

The Limited Liability Partnership Act (LLP), 2008 was published in the official Gazette of India on January 9, 2009 and came into force from 31 March 2009. The first LLP in India was incorporated in the first week of April 2009.

Logic behind a ‘Limited Liability Partnership’

A Limited Liability Partnership will be of great value to all those who want the flexibility and ease of a Partnership, with the security of a Company. Particularly, in a partnership, a partner is at risk of losing all his assets for no fault of his own. This is not the case in a LLP, where a partner will only lose the capital he contributed to the firm.

Difference between a typical Partnership and an LLP

The fundamental legal difference between the two is that a Limited Liability Partnership has to be incorporated by a written incorporation document, unlike a traditional Partnership which can even be created orally. The other critical difference is that a LLP has an independent existence. A Partner is an LLP is not affected by the wrong or illegal conduct of another partner. Moreover, he is free to deal with the LLP independently, while this is often not the case in a traditional partnership.

In fact, in many ways, an LLP is more similar to a Company. Even the documents of an LLP are registered with the Registrar of Companies, and not with the Registrar of Firms, as is the case with a Partnership firm. The Registrar of Companies is also the central administrative body, and the Ministry of Corporate Affairs regulates the law relating to LLPs. Like a Company, the death or retirement of a partner does not affect it, unlike a traditional partnership, which would dissolve.

Designated Partner

A LLP can even have a Company or a body corporate as a Partner. It would create a lot of complexity if all the members of a LLP were Companies. The law therefore states that atleast two Partners in an LLP must be individuals, and they are called ‘Designated Partners’. A company can nominate an individual to be the ‘Designated Partner’, and every such Designated Partner gets a DPIN [Designated Partner Identification Number] from Central Government.

LLPs around the world

LLP as a concept has been have borrowed from the West, and they have been commonly used for atleast a decade in UK, the USA and more recently in Japan. The other major economy, Germany, has a peculiar structure with the suffix ‘GmbH and Co. KG’, which is a partnership with limited liability, and one of its members is a limited liability company (GmbH). Many countries also require one of the partners to be a ‘general partner’, who bears unlimited liability. In fact, this system is a better mix of partnership and company forms, since it ensures that you don’t have the cake and eat it too.

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