📘 CA Foundation – Business Law Practical Questions

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Question: 1

Mr. R extended a loan to Mr. D with X, Y, and Z as sureties. Each surety executed a bond with
varying penalty amounts, X with a penalty of ` 10,000, Y with ` 20,000 and Z with ` 40,000, in the
event of Mr. D's failure to repay the borrowed money to Mr. R. Examine the liabilities of the
sureties in accordance with the Indian Contract Act, 1872, when Mr. D defaults to the tune of `
42,000. Additionally, assess the situation, if there is no contractual arrangement among the
sureties.

Answer:

Provision:

As per section 146 of the Indian Contract Act, 1872, when two or more persons are co-sureties
for the same debt either jointly, or severally and whether under the same or different contracts
and whether with or without the knowledge of each other, the co-sureties in the absence of any
contract to the contrary, are liable, as between themselves, to pay each an equal share of the
whole debt, or of that part of it which remains unpaid by the principal debtor.

Section 147 provides that the principle of equal contribution is, however, subject to the
maximum limit fixed by a surety to his liability. Co-sureties who are bound in different sums are
liable to pay equally as far as the limits of their respective obligations permit.

Analysis:

In the absence of any contractual arrangement among the sureties, their liability is determined
based on the proportion of their maximum agreed liabilities. Here, X, Y, and Z have limited their
liabilities to ₹10,000, ₹20,000, and ₹40,000 respectively, making the total capped liability
₹70,000. When Mr. D defaults to the extent of ₹42,000, the burden is shared among the sureties.

Conclusion:

In the given question, Mr. D makes a default of ` 42,000, and X, Y and Z as sureties have executed
the bond with varying penalty amounts. Hence, X is liable to pay ` 10,000, and Y and Z ` 16,000
each. In the given case, if there is no contractual arrangement among the sureties, they would be
liable for equal contribution. Hence, X, Y and Z will be liable to pay ` 14,000 each.

Question: 2

Due to urgent need of money amounting to ` 3,00,000, Pawan approached Raman and asked him
for the money. Raman lent the money on the guarantee of Suraj and Tarun. Pawan makes
default in payment and Suraj pays full amount to Raman. Suraj, afterwards, claimed
contribution from Tarun but Tarun refused to contribute on the basis that there is no contract
between Suraj and him. Examine referring to the provisions of the Indian Contract Act, 1872,
whether Tarun can escape from his liability.

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Answer:

Provision:

Equality of burden is the basis of Co-suretyship. This is contained in section 146 of the Indian
Contract Act, 1872, which states that “unless otherwise agreed, each surety is liable to
contribute equally for discharge of whole debt or part of the debt remains unpaid by debtor.

Analysis:

In this case, Suraj and Tarun both acted as co-sureties for Pawan's loan of ₹3,00,000. There is no
agreement to the contrary, and no exemption clause for Tarun. Even though there is no direct
contract between Suraj and Tarun, the law presumes an implied contract of contribution among
co-sureties.

Conclusion:

Accordingly, on the default of Pawan in payment, Tarun cannot escape from his liability. Both
the sureties Suraj and Tarun are liable to pay equally, in absence of any contract between them.

Question: 3

Rahul owns an electronics store. Pankaj visited the store to buy a water purifier priced at `
54,000/-. He specifically requested Rahul for a purifier with a copper filter. As Pankaj wanted to
buy the purifier on credit, with the intention of paying in 9 equal monthly instalments, Rahul
demands a guarantor for the transaction. Sooraj (a friend of Pankaj) came forward and gave the
guarantee for payment of water purifier. Rahul sold Pankaj, a water purifier of a specific brand.
Pankaj made payment for 4 monthly instalments and after that became insolvent. Explain with
reference to the Indian Contract Act, 1872, the liability of Sooraj as a guarantor to pay the
balance price of water purifier to Rahul.

What will be your answer, if Rahul sold the water purifier misrepresenting it as having a copper
filter, while it actually has a normal filter? Neither Pankaj nor Sooraj was aware of this fact and
upon discovering the truth, Pankaj refused to pay the price. In response to Pankaj 's refusal,
Rahul filed the suit against Sooraj, the guarantor. Explain with reference to the Indian Contract
Act, 1872, whether Sooraj is liable to pay the balance price of water purifier to Rahul?

Answer :

Provision:

As per Section 128 of the Indian Contract Act, 1872:

“The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
provided by the contract.”

A surety is liable immediately on the default of the principal debtor, and to the same extent
unless agreed otherwise.

As per Section 142 of the Indian Contract Act, 1872:

“Any guarantee which has been obtained by means of misrepresentation made by the creditor, or
with his knowledge and assent, concerning a material part of the transaction, is invalid.”

If the creditor misrepresents a material fact and the surety enters into the guarantee under such
misrepresentation, the guarantee becomes invalid.

Analysis:

Pankaj wanted to buy the purifier on credit, with the intention of paying in 9 equal monthly
instalments, Rahul demands a guarantor for the transaction. Sooraj (a friend of Pankaj) came
forward and gave the guarantee for payment of water purifier Pankaj made payment for 4
monthly instalments and after that became insolvent.

Conclusion:

(i) Sooraj is liable to pay the balance amount (5 instalments) to Rahul as per Section 128 of the
Act.

(ii) Sooraj is not liable to pay the balance price because the guarantee was obtained by
misrepresentation of a material fact by Rahul.

Question: 4

R owns an electronics store. P visited the store to buy a water purifier priced at `54,000/-. He
specifically requested R for a purifier with a copper filter. As P wanted to buy the purifier on
credit, with the intention of paying in 9 equal monthly instalments, R demands a guarantor for
the transaction. S (a friend of P) came forward and gave the guarantee for payment of water
purifier. R sold P, a water purifier of a specific brand. P made payment for 4 monthly
instalments and after that became insolvent. Explain with reference to the Indian Contract Act,
1872, the liability of S as a guarantor to pay the balance price of water purifier to R.

What will be your answer, if R sold the water purifier misrepresenting it as having a copper
filter, while it actually has a normal filter? Neither P nor S was aware of this fact and upon
discovering the truth, P refused to pay the price. In response to P's refusal, R filed the suit
against S, the guarantor. Explain with reference to the Indian Contract Act 1872, whether S is
liable to pay the balance price of water purifier to R?

Answer :

As per section 126 of the Indian Contract Act, 1872, the contract of guarantee is defined as a
contract to perform the promise or discharge the liability of a third person in case of his default.

In this case, S has given a guarantee for P's payment obligation towards R. When P defaulted
after making four monthly instalments and became insolvent, S's liability as a guarantor will
come into existence.

According to Section 128 of the Act, the liability of the surety is co- extensive with that of the
principal debtor, unless it is otherwise provided by the contract.

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Since P failed to pay the remaining instalments due to insolvency, S, as the guarantor, is liable to
pay the balance price of the water purifier to R. In the given situation, S will have to pay the
balance amount of ` 30,000 to R. [54,000-(4x6,000)]

In the second situation, R sold the water purifier misrepresenting it as having a copper filter,
while it actually has a normal filter; this changes the situation significantly.

According to Section 142 of the Act, any guarantee which has been obtained by means of
misrepresentation made by the creditor, or with his knowledge and assent, concerning a
material part of the transaction, is invalid. Here, guarantee is obtained by means of
misrepresentation made by the creditor (R), and therefore the guarantee is invalid.

Furthermore, under Section 143, any guarantee which the creditor has obtained by means of
keeping silence as to material circumstances, is invalid.

Here R misrepresented the filter type and both P and S were unaware of this fact. The creditor
(R) has obtained the guarantee by remaining silent as to material circumstances. Therefore, the
guarantee obtained from S will be considered to be invalid.

Consequently, S cannot be held liable to pay the balance price of the water purifier to R.

Question 5

Mohsin and Jaleel jointly borrowed a sum of Rs. 300,000 from Mill and Munaf jointly. On due
date, Mohsin and Jaleel defaulted in making the payment. Munaf, filed a suit against Jaleel only
the recovery of the amount due. Under the provisions of the Contract Act, 1872 briefly describe
whether Munaf would succeed in his case.

Answer:

Provision:

Any one of joint promisors may be compelled to perform – Section 43 When two or more
persons make a joint promise, the promisee may, in the absence of express agreement to the
contrary, compel any one or more of such joint promisors to perform the whole of the promise.
Each promisor may compel contribution – Each of two or more joint promisors may compel
every other joint promisor to contribute equally with himself to the performance of the
promise, unless a contrary intention appears from the contract. In other words, if one of the
joint promisors is made to perform the whole contract, he can call for a contribution from
others.

Analysis:

In this case, Mohsin and Jaleel are joint promisors who borrowed Rs. 300,000 from Mill and
Munaf. Since there is no mention of any agreement limiting the liability of Jaleel, and both have
defaulted, Munaf has the legal right under Section 43 to file a suit against Jaleel alone for the full
amount. The fact that Mill is not a party to the suit does not affect Munaf’s right to claim
repayment. Jaleel, after paying, may seek contribution from Mohsin, but that is a separate
matter.
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Conclusion:

Munaf can compel the Jaleel to paid entire amount. Later jaleel can claim compensation from
mohsin.

Question 6:

Mr. X, is employed as a cashier on a monthly salary of ` 12,000 by ABC bank for a period of three
years. Y gave surety for X’s good conduct. After nine months, the financial position of the bank
deteriorates. Then X agrees to accept a lower salary of 10,500/- per month from Bank. Two
months later, it was found that X has misappropriated cash since the time of his appointment.
What is the liability of Y?

Answer:

Provision:

According to section 133 of the Indian Contract Act, 1872, where there is any variance in the
terms of contract between the principal debtor and creditor without surety’s consent, it would
discharge the surety in respect of all transactions taking place subsequent to such variance.

Analysis:

In the instant case, the creditor has made variance (i.e. change in terms) without the consent of
surety. Thus, surety is discharged as to the transactions subsequent to the change.

Conclusion:

Hence, Y is liable as a surety for the loss suffered by the bank due to misappropriation of cash by
X during the first nine months but not for misappropriations committed after the reduction in
salary.

Question 7:

A contracts with B for a fixed price to construct a house for B within a stipulated time. B would
supply the necessary material to be used in the construction. C guarantees A’s performance of
the contract. B does not supply the material as per the agreement. Is C discharged from his
liability.

Answer:

Provision:

According to Section 134 of the Indian Contract Act, 1872, the surety is discharged by any
contract between the creditor and the principal debtor by which the principal debtor is
discharged or by any act or omission for the creditor the legal consequence of which is the
discharge of the principal debtor.

Analysis:

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In this case, A’s performance is guaranteed by C, but B fails to supply the materials, which is a
contractual obligation on B’s part. Because B’s failure prevents A from fulfilling his contractual
duty, this amounts to a default by the creditor (B)

Conclusion:

In the given case, B omits to supply the necessary construction material. Hence, C is discharged
from his liability.

Question 8:

Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two years’
contract at a monthly salary of ` 50,000. Mr. Pawan gave a surety in respect of Mr. Chetan's
conduct. After six months the company was not in position to pay 50,000 to Mr. Chetan because
of financial constraints. Chetan agreed for a lower salary of ` 30,000 from the company. This was
not communicated to Mr. Pawan. Three months afterwards it was discovered that Chetan had
been doing fraud since the time of his appointment. What is the liability of Mr. Pawan during the
whole duration of Chetan's appointment.

Answer:

Provision:

As per the provisions of Section 133 of the Indian Contract Act, 1872, if the creditor makes any
variance (i.e. change in terms) without the consent of the surety, then surety is discharged as to
the transactions subsequent to the change.

Analysis:

In the instant case, Mr. Pawan is liable as a surety for the loss suffered by ABC Constructions
company due to misappropriation of cash by Mr. Chetan during the first six months but not for
misappropriations committed after the reduction in salary.

Conclusion:

Hence, Mr. Pawan, will be liable as a surety for the act of Mr. Chetan before the change in the
terms of the contract i.e., during the first six months. Variation in the terms of the contract (as to
the reduction of salary) without consent of Mr. Pawan, will discharge Mr. Pawan from all the
liabilities towards the act of the Mr. Chetan after such variation.

Question 9:

A agrees to sell goods to B on the guarantee of C for the payment of the price of goods in default
of B. Is the agreement of guarantee valid in each of the following alternate cases:

Case 1. If A is a Minor

Case 2: If B is a Minor

Case 3: If C is a minor.

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Answer:

Case 1: The agreement of guarantee is valid because minor, being a beneficiary, can enforce the
contract of guarantee against the surety.

Case 2: The agreement of guarantee is valid because the capability of the principal debtor does
not affect the validity of the agreement of the guarantee.

Case 3: The agreement of guarantee is void because the surety is incompetent to contract.

Question 10:

Manoj guarantees for Ranjan, a retail textile merchant, for an amount of ` 1,00,000, for which
Sharma, the supplier may from time to time supply goods on credit basis to Ranjan during the
next 3 months.

After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on credit for `
40,000. Referring to the provisions of the Indian Contract Act, 1872, decide whether Manoj is
discharged from all the liabilities to Sharma for any subsequent credit supply. What would be
your answer in case Ranjan makes default in paying back Sharma for the goods already supplied
on credit i.e. ` 40,000?

Answer:

Provision:

Discharge of Surety by Revocation: As per section 130 of the Indian Contract Act, 1872, a
continuing guarantee may, at any time, be revoked by the surety, as to future transactions, by
notice to the creditor, but the surety remains liable for transactions already entered into.

Analysis:

Manoj's guarantee for ₹1,00,000 is a continuing guarantee, covering multiple future

As per Section 130, a continuing guarantee can be revoked at any time for future transactions by
giving notice to the creditor.

In this case, Manoj revoked the guarantee after 1 month, by which time Sharma had already
supplied ₹40,000 worth of goods.

Conclusion:

Yes, Manoj is discharged from liability for any goods Sharma supplies after the revocation.

No, Manoj remains liable for the ₹40,000 worth of goods already supplied before revocation, as
the liability had already accrued.

Question 11:

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'C' advances to 'B', ` 2,00,000 on the guarantee of 'A'. 'C' has also taken a further security for the
same borrowing by mortgage of B's furniture worth ` 2,00,000 without knowledge of 'A'. C'
cancels the mortgage. After 6 months 'B' becomes insolvent and 'C' 'sues ‘A’ his guarantee.
Decide the liability of 'A' if the market value of furniture is worth ` 80,000, under the Indian
Contract Act, 1872.

Answer:

Surety’s right to benefit of creditor’s securities: According to section 141 of the Indian Contract
Act, 1872, a surety is entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered into, whether the surety
knows of the existence of such security or not; and, if the creditor loses, or, without the consent
of the surety, parts with such security, the surety is discharged to the extent of the value of the
security.

Analysis:

‘C’ held an additional security (mortgage of furniture) worth ₹2,00,000 at the time the
guarantee was given. ‘A’ was unaware of this security, but under Section 141, a surety is entitled
to its benefit regardless of knowledge. By voluntarily cancelling the mortgage, ‘C’ prejudiced A’s
right to claim subrogation or recover from the security.

Conclusion:

‘A’ is not liable for the entire ₹2,00,000. He is entitled to be discharged to the extent of ₹80,000,
the value of the security lost. Therefore, ‘A’ is liable to pay only ₹1,20,000 ( ₹2,00,000 –
₹80,000) to ‘C’.

Question 12:

Arjun, a wholesaler, agrees to supply 1,000 units of packaged goods to Varun, a retailer, on
credit. Karan stands as surety for the due payment of ₹1,00,000 by Varun.

Later, without informing or seeking consent from Karan, Arjun and Varun mutually agree to
reduce the total payable amount to ₹90,000 as a seasonal discount, while keeping all other
terms (quantity, payment schedule, delivery) the same.

Varun fails to pay even the reduced amount. Arjun now sues Karan (the surety) for ₹90,000. Is
suit filed by Arjun maintainable.

Answer:

Provision:

According to Section 133 of the Indian Contract Act, 1872:

“Any variance, made without the surety’s consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to transactions subsequent to the
variance.”

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However, courts have held that not all changes lead to discharge. If the variation is:

Favourable, Risk-free, and Does not affect the core obligation, then the surety may not be
discharged.

Analysis:

In this case, the change in the contract was beneficial to Karan, the surety, because the total
payment amount was reduced from ₹1,00,000 to ₹90,000.

There was no increase in risk or change in core terms like quantity or time of payment.

Conclusion:

Karan is not discharged from his liability.

Since the change was favourable, risk-free, and did not alter any material term of the contract,
Karan remains liable to pay ₹90,000 under the guarantee.

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