CHAPTER II THE INDIAN CONTRACT ACT, 1872

UNIT – 1: NATURE OF CONTRACTS

1. “All contracts are agreements, but all agreements are not contracts”. Comment.
(Module Q)

Ans: -
An agreement comes into existence when one party makes a proposal or offer to the other
party and that other party gives his acceptance to it. A contract is an agreement enforceable
by law. It means that to become a contract an agreement must give rise to a legal obligation
i.e. duty enforceable by law. If an agreement is incapable of creating a duty enforceable by
law, it is not a contract. There can be agreements which are not enforceable by law, such as
social, moral or religious agreements. The agreement is a wider term than the contract. All
agreements need not necessarily become contracts but all contracts shall always be
agreements.

All agreements are not contracts: When there is an agreement between the parties and they
do not intend to create a legal relationship, it is not a contract.

All contracts are agreements: For a contract there must be two things (a) an agreement and
(b) enforceability by law.

Thus, existence of an agreement is a pre-requisite existence of a contract. Therefore, it is true

to say that all contracts are agreements. Thus, we can say that there can be an agreement
without it becoming a contract, but we can’t have a contract without an agreement.

2. A sends an offer to B to sell his second-car for ` 1,40,000 with a condition that if B does
not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his
proposition? (Module Q)

Ans: -
Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it is
expressly stated in the offer itself. Unless the offeree has by his previous conduct indicated
that his silence amount to acceptance, it cannot be taken as valid acceptance.

So, in the given problem, if B remains silent, it does not amount to acceptance. The
acceptance must be made within the time limit prescribed by the offer. The acceptance of an
offer after the time prescribed by the offeror has elapsed will not avail to turn the offer into
a contract.

3. Explain the type of contracts in the following agreements under the Indian Contract
Act, 1872:

Business Law Question Book 1 CA Foundation

 (i) A coolie in uniform picks up the luggage of A to be carried out of the railway station
without being asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner.
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but
before the supply is effected, the fire caught in the factory and everything was
destroyed.
(Module Q) (RTP Sept 24)

Ans: -
(i) It is an implied contract and A must pay for the services of the coolie detailed
by him.
Implied Contracts: Implied contracts come into existence by implication. Most often the
implication is by law and or by action. Section 9 of the Act contemplates such implied
contracts when it lays down that in so far as such proposal or acceptance is made otherwise
than in words, the promise is said to be implied.

(ii) Obligation of finder of lost goods to return them to the true owner cannot be said to arise
out of a contract even in its remotest sense, as there is neither offer and acceptance nor
consent. These are said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a contract. It is
created by law under certain circumstances. The law creates and enforces legal rights and
obligations when no real contract exists. Such obligations are known as quasi-contracts. In
other words, it is a contract in which there is no intention on part of either party to make a
contract but law imposes a contract upon the parties.

(iii) The above contract is a void contract.

Void Contract: Section 2 (j) states as follows: “A contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable”. Thus, a void contract is one which
cannot be enforced by a court of law.

4. Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the
shop, took a basket and after taking articles of her choice into the basket reached the
cashier for payments. The cashier refuses to accept the price. Can Shambhu Dayal be
compelled to sell the said articles to Smt. Prakash? Decide as per the provisions of the
Indian Contract Act, 1872. (Module Q)

Ans: -
Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is
the final expression of willingness by the offeror to be bound by his offer should the party
chooses to accept it. Where a party, without expressing his final willingness, proposes certain
terms on which he is willing to negotiate, he does not make an offer, but invites only the other
party to make an offer on those terms. This is the basic distinction between offer and
invitation to offer. The display of articles with a price in it in a self-service shop is merely an
invitation to offer. It is in no sense an offer for sale, the acceptance of which constitutes a
contract. In this case, Smt. Prakash by selecting some articles and approaching the cashier for

Business Law Question Book 2 CA Foundation

payment simply made an offer to buy the articles selected by her. If the cashier does not
accept the price, the interested buyer cannot compel him to sell.

5. State whether there is any contract in following cases:

(a) A engages B to do certain work and remuneration to be paid as fixed by C.
(b) A and B promise to pay for the studies of their maid’s son
(c) A takes a seat in public bus.
(d) A, a chartered accountant promises to help his friend to file his return.
(Module Q)

Ans: -
(a) It is a valid express contract
(b) It is not a contract as it is a social agreement
(c) It is an implied contract. A is bound to pay for the bus fare.
(d) It is a social agreement without any intention to create a legal relationship.

6. Miss Shakuntala puts an application to be a teacher in the school. She was appointed
by the trust of the school. Her friend who works in the same school informs her about
her appointment informally. But later due to some internal reasons her appointment
was cancelled. Can Miss Shakuntala claim for damages?
(Module Q)

Ans: -
No, Miss Shakuntala cannot claim damages. As per Section 4, communication of acceptance
is complete as against proposer when it is put in the course of transmission to him.
In the present case, school authorities have not put any offer letter in transmission. Her
information from a third person will not form part of contract.

7. A mobile phone was displayed in a shop with a price tag of `10,000 attached to the
mobile display box. As the price displayed was very less as compared to M.R.P. of the
mobile phone, Y, a customer rushed to the cash counter and asked the shopkeeper to
receive the payment and pack up the mobile phone. The shopkeeper refused to hand
over the mobile phone to Y in consideration of the price indicated in the price tag
attached to the mobile phone. Y seeks your advice whether he can sue to shopkeeper
for the above cause under the Indian Contract Act, 1872. (3 Marks PYQ Dec 23)

Ans: -
An invitation to offer is different from offer. Quotations, menu cards, price tags,
advertisements in newspaper for sale are not offer. These are merely invitations to public to
make an offer. An invitation to offer is an act precedent to making an offer.
Acceptance of an invitation to an offer does not result in the contract and only an offer
emerges in the process of negotiation.

Business Law Question Book 3 CA Foundation

In the instant case, Y reaches to shop and selects a Mobile Phone with a price tag of ` 10,000
but the shopkeeper refused to hand over the mobile phone to Y in consideration of the price
indicated in the price tag attached to the mobile phone.
On the basis of above provisions and facts, the price tag with the Mobile Phone was not offer.
It is merely an invitation to offer. Hence, it is Y who is making the offer and not the
shopkeeper. Shopkeeper has the right to reject Y’s offer. Therefore, Y cannot sue the
shopkeeper for the above cause.

8. Radha invited her ten close friends to celebrate her 25th birthday party on 1st January,
2023 at 7.30 P.M. at a well-known "Hi-Fi Restaurant" at Tonk Road, Jaipur. All invited
friends accepted the invitation and promised to attend the said party. On request of
the hotel manager, Radha deposited ` 5,000/- as non-refundable security for the said
party. On the scheduled date and time, three among ten invited friends did not turn
up for the birthday party and did not convey any prior communication to her. Radha,
enraged with the behaviour of the three friends, wanted to sue them for loss incurred
in the said party. Advise as per the provisions of the Indian Contract Act, 1872.
Would your answer differ if the said party had been a "Contributory 2023 New Year
celebration Party" organized by Radha? (4 Marks PYQ June 23)

Ans: -
As per one of the requirements of Section 10 of the Indian Contract Act, 1872, there must be
an intention on the part of the parties to create legal relationship between them. Social or
domestic agreements are not enforceable in court of law and hence they do not result into
contracts.
In the instant case, Radha cannot sue her three friends for the loss incurred in the said party
as the agreement between her and her ten friends was a social agreement, and the parties
did not intend to create any legal relationship.

If the said party organised by Radha had been a “Contributory 2023 New year celebration
party”, then Radha could have sued her three friends for the loss incurred in the said party as
the agreement between her and her friends would have legal backing; on the basis of which
Radha deposited the advance amount and the parties here intended to create legal
relationship.

9. Distinguish between Void Contract and Voidable Contract according to the Indian
Contract Act, 1872. (5 Marks PYQ June 23) (RTP May 25) (MTP May 25 Series 1)

Ans: -
The differences between void contract and voidable contract are as follows:
Basis Void Contract Voidable Contract
Meaning A Contract which ceases to be An agreement which is enforceable by law at
enforceable by law becomes the option of one or more of the parties
void when it ceases to be thereto, but not at the option of the other or
enforceable others, is a voidable contract.

Business Law Question Book 4 CA Foundation

Enforceability A void contract cannot be It is enforceable only at the option of
enforced at all. aggrieved party and not at the option of the
other party.
Cause A contract becomes void due to A contract becomes a voidable contract if
change in law or change in the consent of a party was not free.
circumstances beyond the
contemplation of parties.
Performance of A void contract cannot be If the aggrieved party does not, within
contract performed. reasonable time, exercise his right to avoid
the contract, any party can sue the other for
claiming the performance of the contract.
Rights A void contract does not grant The party whose consent was not free has
any legal remedy to any party. the right to rescind the contract within a
reasonable time. If so rescinded it becomes
a void contract. If it is not rescinded it
becomes a valid contract.

10. X agrees to pay Y ` 1,00,000/-, if Y kills Z. To pay Y, X borrows ` 1,00,000/- from W, who
is also aware of the purpose of the loan. Y kills Z but X refuses to pay. X also to repay
the loan to W. Explain the validity of the contract.
(i) Between X and Y.
(ii) Between X and W (4 Marks PYQ Nov22) (MTP Jan 25 Series 1)

Ans: -
Illegal Agreement: It is an agreement which the law forbids to be made. As an essential
condition, the lawful consideration and object is must to make the agreement valid. (Section
10). As per Section 23 of the Indian Contract Act, 1872, an agreement is illegal and void, if the
consideration and object is unlawful / contrary to law i.e. if forbidden by law. Such an
agreement is void and is not enforceable by law. Even the connected agreements or collateral
transactions to illegal agreements are also void.
In the present case,
(i) X agrees to give ` 1,00,000 to Y if Y kills Z. Thus, the agreement between X and Y is void
agreement being illegal in nature.
(ii) X borrows ` 1,00,000 from W and W is also aware of the purpose of the loan. Thus, the
agreement between X and W is void as the connected agreements of an illegal agreements
are also void.

11. Mr. Parth applied for a job as principal of a school. The school management decided
to appoint him. One member of the school management committee privately
informed Mr. Parth that he was appointed but official communication was not given
by the school. Later, the management of the school decided to appoint someone else
as a principal. Mr. Parth filed a suit against the school for cancellation of his
appointment and claimed damages for loss of salary. State with reasons, will Mr. Parth
be successful in suit filed against school under the Indian Contract Act, 1872? (RTP
June 24)

Business Law Question Book 5 CA Foundation

Ans: -
As per the rules of acceptance, the acceptance should be communicated to offeror by offeree
himself or by his authorized agent. Communication of acceptance by third person cannot be
concluded as valid acceptance.

In the instant case, Mr. Parth applied for a job as principal of a school and one member of the
school management committee privately informed Mr. Parth that he was appointed. Later,
the management of the school appointed someone else as a principal.

On the basis of the above provisions and facts, communication of appointment of Mr. Parth
should be made by the school management committee or by any authorised agent.
Communication by third person cannot be termed as communication of acceptance.
Therefore, no valid contract was formed between Mr. Parth and the school and Mr. Parth
cannot file a suit against the school for cancellation of his appointment.

12. Ashok goes to super market to buy a Air Conditioner. He selects a branded Air
Conditioner having a price tag of ` 40,000 after a discount of ` 3000. Ashok reaches at
cash counter for making the payment, but cashier says, “Sorry sir, the discount was
upto yesterday. There is no discount from today. Hence you have to pay ` 43,000.”
Ashok got angry and insists for ` 40,000. State with reasons whether under Indian
Contract Act, 1872, Ashok can enforce the cashier to sell at discounted price i.e. `
40,000. (MTP Sept 24 Series 2)

Ans: -
An invitation to offer is different from offer. Quotations, menu cards, price tags,
advertisements in newspaper for sale are not offer. These are merely invitations to public to
make an offer. An invitation to offer is an act precedent to making an offer. Acceptance of an
invitation to an offer does not result in the contract and only an offer emerges in the process
of negotiation.
In the instant case, Ashok reaches to super market and selects a Air Conditioner with a
discounted price tag of ` 40,000 but cashier denied to sell at discounted price by saying that
discount is closed from today and request to make full payment. But Ashok insists to purchase
at discounted price.
On the basis of above provisions and facts, the price tag with Air Conditioner was not offer. It
is merely an invitation to offer. Hence, it is the Ashok who is making the offer not the super
market. Cashier has right to reject the Ashok’s offer. Therefore, Ashok cannot enforce cashier
to sell at discounted price.

Business Law Question Book 6 CA Foundation

 UNIT – 2: CONSIDERATION

1. “To form a valid contract, consideration must be adequate”. Comment. (Module Q)

Ans: -
The law provides that a contract should be supported by consideration. So long as
consideration exists, the Courts are not concerned to its adequacy, provided it is of some
value. The adequacy of the consideration is for the parties to consider at the time of making
the agreement, not for the Court when it is sought to be enforced (Bolton v. Modden).
Consideration must however, be something to which the law attaches value though it need
not be equivalent in value to the promise made.

According to Explanation 2 to Section 25 of the Indian Contract Act, 1872, an agreement to

which the consent of the promisor is freely given is not void merely because the consideration
is inadequate but the inadequacy of the consideration may be taken into account by the Court
in determining the question whether the consent of the promisor was freely given.

2. Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September
2022 for ` 25 Lakhs. The Property papers mentioned a condition, amongst other
details, that whosoever purchases the land is free to use 9 acres as per his choice but
the remaining 1 acre has to be allowed to be used by Mr. Chotelal, son of the seller
for carrying out farming or other activity of his choice. On 12th October, 2022, Mr.
Sohanlal died leaving behind his son and life. On 15th October, 2022 purchaser started
construction of an auditorium on the whole 10 acres of land and denied any land to
the son. Now Mr. Chotelal wants to file a case against the purchaser and get a suitable
redressal. Discuss the above in light of provisions of Indian Contract Act, 1872 a decide
upon Mr. Chotelal’s plan of action? (Module Q)

Ans: -
Problem as asked in the question is based on the provisions of the Indian Contract Act, 1872
as contained in section 2(d) and on the principle ‘privity of consideration’. Consideration is
one of the essential elements to make a contract valid and it can flow from the promisee or
any other person. In view of the clear language used in definition of ‘consideration’ in Section
2(d), it is not necessary that consideration should be furnished by the promisee only. A
promise is enforceable if there is some consideration for it and it is quite immaterial whether
it moves from the promisee or any other person.
The leading authority in the decision of the Chinnaya Vs. Ramayya, held that the consideration
can legitimately move from a third party and it is an accepted principle of law in India.
In the given problem, Mr. Sohanlal has entered into a contract with Mr. Mohanlal, but Mr.
Chotelal has not given any consideration to Mr. Mohanlal but the consideration did flow from
Mr. Sohanlal to Mr. Mohanlal on the behalf of Mr. Chotelal and such consideration from third
party is sufficient to enforce the promise of Mr. Mohanlal to allow Mr. Chotelal to use 1 acre
of land. Further the deed of sale and the promise made by Mr. Mohanlal to Mr. Chotelal to

Business Law Question Book 7 CA Foundation

allow the use of 1 acre of land were executed simultaneously and therefore they should be
regarded as one transaction and there was sufficient consideration for it.
Moreover, it is provided in the law that “in case covenant running with the land, where a
person purchases land with notice that the owner of the land is bound by certain duties
affecting land, the covenant affecting the land may be enforced by the successor of the
seller.”
In such a case, third party to a contract can file the suit although it has not moved the
consideration.
Hence, Mr. Chotelal is entitled to file a petition against Mr. Mohanlal for execution of
contract.

3. Mr. A was running an orphanage. His friend Mr. S, a philanthropist agreed to donate `
2 lakh for treatment of a child, who was suffering from cancer. On emergency, Mr. A
incurred ` 1.5 lakh on treatment of child. Now, Mr. S refused to pay. Whether Mr. A
can claim ` 1.5 lakh from Mr. S with reference to provisions of the Indian Contract Act,
1872? (2 Marks PYQ Sept 24) (MTP Jan 25 Series 2)

Ans: -
The general rule is that an agreement made without consideration is void (Section 25 of the
Indian Contract Act, 1872).
However, in the following case, the agreement though made without consideration, will be
valid and enforceable.
Charity: If a promisee undertakes the liability on the promise of the person to contribute to
charity, there the contract shall be valid.
In the instant case, Mr. A can claim 1.5 lakh from Mr. S.

4. Explain the following statements in the light of provisions of Indian Contract Act,
1872:
(i) "Agreements made out of love and affection are valid agreements."
(ii) "Promise to pay a time barred debt cannot be enforced." (7 Marks PYQ Nov 22)
(RTP Jan 25)

Ans: -
(i) Agreements made out of love and affection are valid agreements: A written and registered
agreement based on natural love and affection between the parties standing in near relation
(e.g., husband and wife) to each other is enforceable even without consideration. The various
conditions to be fulfilled as per Section 25(1) of the Indian Contract Act, 1872:
(A) It must be made out of natural love and affection between the parties.
(B) Parties must stand in near relationship to each other.
(C) It must be in writing.
(D) It must also be registered under the law.
Hence, the agreements made out of love and affection, without consideration, shall be valid,
if the above conditions are fulfilled.

Business Law Question Book 8 CA Foundation

(ii) Promise to pay a time barred debt cannot be enforced: According to Section 25(3) of the
Indian Contract Act, 1872, where a promise in writing signed by the person making it or by his
authorised agent, is made to pay a debt barred by limitation is valid without consideration.
Hence, this statement is not correct.
Note: The above statement can be correct also on the basis of the “Discharge of Contract by
Lapse of time” as per Limitation Act, 1963, and accordingly it can be mentioned that contract
should be performed within a specified period as prescribed by the Limitation Act, 1963 and
if no action is taken by the promisee within the specified period of limitation, he is deprived
of remedy at law.

5. Mr. Sanjay Kothari was a big businessman having two sons and one married daughter.
He decided to gift his house to his daughter. For this purpose, he called his lawyer at
his house and made a written document for such gift. The lawyer advised him to get
the transfer document properly registered. When they both were going for
registration of document, they met an accident, and both died. Later, the daughter
found the document and claimed the house on the basis of that document. Explain,
whether she can get the house as gift under the Indian Contract Act, 1872? (RTP June
24) (MTP Sept 24 Series 1)

Ans: -
Section 25 of the Indian Contract Act, 1872 provides that an agreement made without
consideration is valid if it is expressed in writing and registered under the law for the time
being in force for the registration of documents and is made on account of natural love and
affection between parties standing in a near relation to each other.
In the instant case, the transfer of house made by Mr. Sanjay Kothari on account of natural
love and affection between the parties standing in near relation to each other is written but
not registered. Hence, this transfer is not enforceable, and his daughter cannot get the house
as gift under the Indian Contract Act, 1872.

6. What are the conditions need to be fulfilled to make the following agreements valid
without consideration as per the provisions of the Indian Contract Act, 1872?
(A) Agreement made based on natural love and affection
(B) Promise to pay time-barred debts (3 Marks PYQ Sept 24) (MTP Jan 25 Series 1)

Ans: -
(A) Agreement made based on natural love and affection: Conditions to be fulfilled under
section 25(1) of the Indian Contract Act, 1872

(i) It must be made out of natural love and affection between the parties.
(ii) Parties must stand in near relationship to each other.
(iii) It must be in writing.
(iv) It must also be registered under the law.

Business Law Question Book 9 CA Foundation

A written and registered agreement based on natural love and affection between the parties
standing in near relation (e.g., husband and wife) to each other is enforceable even without
consideration.

(B) Promise to pay time barred debts: Where a promise in writing signed by the person making
it or by his authorised agent, is made to pay a debt barred by limitation it is valid without
consideration [Section 25(3)].

7. Define consideration. State the characteristics of a valid consideration under the

Indian Contract Act, 1872. (MTP Sept 24 Series 2) (MTP June 24 Series 3)

Ans: -
Consideration [Section 2(d) of the Indian Contract Act, 1872]
“When at the desire of the promisor, the promise or any other person has done, or does or
abstains from doing of promises to do or abstain from doing something, such an act or
abstinence or promise is called consideration for the promise”.

The essential characteristics of a valid consideration are as follows:

(1) Consideration must move at the desire of the promisor.
(2) It may proceed from the promisee or any other person on his behalf.
(3) It may be executed or executory. It may be past, present or future.
(4) It must be real and have some value in the eyes of law.
(5) It must not be something which the promisor is already legally bound to do.
(6) It must not be unlawful, immoral or opposed to public policy.
(7) Inadequacy of consideration does not invalidate the contract. Thus, it need not be
proportionate to the value of the promise of the other.

8. As per the general rule, "Stranger to a contract cannot file a suit in case of breach of
contract". Comment and explain the exceptions to this rule as per the provisions of
the Indian Contract Act, 1872. (7 Marks PYQ June 23)

Ans: -
Under the Indian Contract Act, 1872, the consideration for an agreement may proceed from
a third party; but the third party cannot sue on contract. Only a person who is party to a
contract can sue on it.
The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity of
contract”, is however, subject to certain exceptions. In other words, even a stranger to a
contract may enforce a claim in the following cases:
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not
a party to the contract between the settler and the trustee.
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing,
the members of family who originally had not been parties to the settlement, may enforce
the agreement.
(3) In the case of certain marriage contracts/arrangements, a provision may be made for the
benefit of a person, who may file a suit though he is not a party to the agreement.

Business Law Question Book 10 CA Foundation

(4) In the case of assignment of a contract, when the benefit under a contract has been
assigned, the assignee can enforce the contract but such assignment should not involve any
personal skill.
(5) Acknowledgement or estoppel – Where the promisor by his conduct acknowledges himself
as an agent of the third party, it would result into a binding obligation towards third party.
(6) In the case of covenant running with the land, the person who purchases land with notice
that the owner of land is bound by certain duties affecting land, the covenant affecting the
land may be enforced by the successor of the seller.
(7) Contracts entered into through an agent: The principal can enforce the contracts entered
by his agent where the agent has acted within the scope of his authority and in the name of
the principal.

9. Shri Shivay Temple Trust decided to get renovation of the temple under trust. For this
purpose, the President of the trust discussed the budget with contractor. The
contractor provided the budget of ` 5,00,000. After gaining enough membership to
support the funds required renovating the temple, the committee entered in a
contract with contractor for renovation. The plans for the proposed structure were
submitted and passed. But as the membership list increased, the plans also expanded.
Hence, the expected cost of construction is increased from ` 5,00,000 to ` 7,00,000.
Now, increased amount of ` 7,00,000 stayed approved and obligated by the
committee and contractor. Renovation work was completed, and contractor
demanded the payment from committee. Meanwhile, new members who promised
to contribute did not turnup. President had filed the suit against the members who
promised to contribute. Members denied on the views that their contract with
committee to contribute was without any consideration hence invalid. State with
reason whether committee will succeed under the provisions of the Indian Contract
Act, 1872? (RTP May 25)

Ans: -
As per Section 25 of the Indian Contract Act, 1872, an agreement made without consideration
is void. However, there are certain exceptions to this rule. If a promisee undertakes the
liability on the promise of the person to contribute to charity, there the contract shall be valid
even without consideration. This was also confirmed in case of Kedarnath vs. Gorie
Mahommed.

In the instant case, the Committee of Shri Shivay Temple trust entered into contract for
renovation of temple for ` 5,00,000. Some members promised to contribute the funds and on
the basis of those promises, the committee has extended the work for which cost was
increased from ` 5,00,000 to ` 7,00,000. New members who promised to contribute did not
turn up. The committee had filed the suit against the members who promised to contribute.
But members denied the view that their contract with the committee to contribute was
without any consideration, hence invalid.
Hence, on the basis of the above facts and provisions, the promise made by members to
contribute is perfectly valid even without consideration. Therefore, the committee will
succeed, and members have to pay the promised amount.

Business Law Question Book 11 CA Foundation

Business Law Question Book 12 CA Foundation
 UNIT – 3: OTHER ESSENTIAL ELEMENTS OF A CONTRACT

1. “An agreement, the meaning of which is not certain, is void”. Discuss (Module Q)

Ans: -
Agreement - the meaning of which is uncertain (Section 29): An agreement, the meaning of
which is not certain, is void, but where the meaning thereof is capable ofbeing made certain,
the agreement is valid. For example, A agrees to sell B “a hundred tons of oil”. There is nothing
whatever to show what kind of oil was intended. The agreement is void for uncertainty. But
the agreement would be valid if A was dealer only in coconut oil; because in such a case its
meaning would be capable of being made certain.

2. “Though a minor is not competent to contract, nothing in the Contract Act prevents
him from making the other party bound to the minor”. Discuss. (Module Q)

Ans: -
Minor can be a beneficiary or can take benefit out of a contract: Though a minor is not
competent to contract, nothing in the Contract Act prevents him from making the other party
bound to the minor. Thus, a promissory note duly executed in favour of a minor is not void
and can be sued upon by him, because he though incompetent to contract, may yet accept a
benefit. A minor cannot become partner in a partnership firm. However, he may with the
consent of all the partners, be admitted to the benefits of partnership (Section 30 of the
Indian Partnership Act, 1932).

Example: A mortgage was executed in favour of a minor. Held, he can get a decree for the
enforcement of the mortgage.

3. A student was induced by his teacher to sell his brand new car to the later at less than
the purchase price to secure more marks in the examination. Accordingly, the car was
sold. However, the father of the student persuaded him to sue his teacher. State
whether the student can sue the teacher? (Module Q)

Ans: -
Yes, A can sue his teacher on the ground of undue influence under the provisions of Indian
Contract Act, 1872.

According to section 16 of the Indian Contract Act, 1872, “A contract is said to be induced by
‘undue influence’ where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and he uses that position to obtain an
unfair advantage over the other”.

A person is deemed to be in position to dominate the will of another:

(a) Where he holds a real or apparent authority over the other; or
(b) Where he stands in a fiduciary relationship to the other; or

Business Law Question Book 13 CA Foundation

(c) Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness or mental or bodily distress for example, an old
illiterate person.

A contract brought as a result of coercion, undue influence, fraud or misrepresentation would

be voidable at the option of the person whose consent was caused.

4. Explain the concept of ‘misrepresentation’ in matters of contract. Sohan induced Suraj

to buy his motorcycle saying that it was in a very good condition. After taking the
motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan
proposed to get it repaired and promised to pay 40% cost of repairs. After few days,
the motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide
giving reasons whether Suraj can rescind the contract? (Module Q)

Ans: -
Misrepresentation: According to Section 18 of the Indian Contract Act, 1872,
misrepresentation is:

1. When a person positively asserts that a fact is true when his information does not warrant
it to be so, though he believes it to be true.
2. When there is any breach of duty by a person, which brings an advantage to the person
committing it by misleading another to his prejudice.
3. When a party causes, however, innocently, the other party to the agreement to make a
mistake as to the substance of the thing which is the subject of the agreement.

The aggrieved party, in case of misrepresentation by the other party, can avoid or rescind the
contract [Section 19, Indian Contract Act, 1872]. The aggrieved party loses the right to rescind
the contract if he, after becoming aware of the misrepresentation, takes a benefit under the
contract or in some way affirms it.

Accordingly, in the given case, Suraj could not rescind the contract, as his acceptance to the
offer of Sohan to bear 40% of the cost of repairs impliedly amount to final acceptance of the
sale.

5. Mr. SAMANT owned a motor car. He approached Mr. CHHOTU and offered to sell his
motor car for ` 3,00,000. Mr. SAMANT told Mr. CHHOTU that the motor car is running
at the rate of 30 KMs per litre of petrol. Both the fuel meter and the speed meter of
the car were working perfectly. Mr. CHHOTU agreed with the proposal of Mr. SAMANT
and took delivery of the car by paying ` 3,00,000/- to Mr. SAMANT. After 10 days, Mr.
CHHOTU came back with the car and stated that the claim made by Mr. SAMANT
regarding fuel efficiency was not correct and therefore there was a case of
misrepresentation. Referring to the provisions of the Indian Contract Act, 1872, decide
and write whether Mr. CHHOTU can rescind the contract in the above ground.
(Module Q)

Business Law Question Book 14 CA Foundation

Ans: -
As per the provisions of Section 19 of the Indian Contract Act, 1872, when consent to an
agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused.

A party to contract, whose consent was caused by fraud or misrepresentation, may, if he

thinks fit, insist that the contract shall be performed, and that he shall be put in the position
in which he would have been if the representations made had been true.

Exception: If such consent was caused by misrepresentation or by silence, fraudulent within

the meaning of section 18, the contract, nevertheless, is not voidable if the party whose
consent was so caused had the means of discovering the truth with ordinary diligence.

In the situation given in the question, both the fuel meter and the speed meter of the car
were working perfectly, Mr. CHHOTU had the means of discovering the truth with ordinary
diligence. Therefore, the contract is not voidable. Hence, Mr. CHHOTU cannot rescind the
contract in the above ground.

6. Ishaan, aged 16 years, was studying in an engineering college. On 1st March, 2018 he
took a loan of ` 2 lakhs from Vishal for the payment of his college fee and agreed to
pay by 30th May, 2019. Ishaan possesses assets worth ` 15 lakhs. On due date Ishaan
fails to pay back the loan to Vishal. Vishal now wants to recover the loan from Ishaan
out of his assets. Decide whether Vishal would succeed referring to the provisions of
the Indian Contract Act, 1872. (Module Q)

Ans: -
According to Section 11 of the Indian Contract Act, 1872, every person is competent to
contract who is of the age of majority according to the law to which he is subject, and who is
of sound mind and is not disqualified from contracting by any law to which he is subject.

A person who has completed the age of 18 years is a major and otherwise he will be treated
as minor. Thus, Ishaan who is a minor is incompetent to contract and any agreement with him
is void [Mohori Bibi Vs Dharmo Das Ghose 1903].

Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a minor for the
supply of the things which are the necessaries of life to him. It says that though minor is not
personally liable to pay the price of necessaries supplied to him or money lent for the purpose,
the supplier or lender will be entitled to claim the money/price of goods or services which are
necessaries suited to his condition of life provided that the minor has a property. The liability
of minor is only to the extent of the minor’s property. Thus, according to the above provision,
Vishal will be entitled to recover the amount of loan given to Ishaan for payment of the college
fees from the property of the minor.

7. Whether the threat to commit suicide is coercion? (2 Marks PYQ Sept 24)

Business Law Question Book 15 CA Foundation

Ans: -
Whether the threat to commit suicide is coercion?
Suicide though forbidden by Indian Penal Code is not punishable, as a dead man cannot be
punished. But Section 15 of the Indian Contract Act, 1872 declares that committing or
threatening to commit any act forbidden by Indian Penal Code is coercion. Hence, a threat to
commit suicide will be regarded as coercion.

8. Explain the term Wagering agreement in the light of the Indian Contract Act, 1872.
Also, explain some transactions resembling with wagering transaction but which are
not void. (6 Marks PYQ June 24) (MTP Jan 25 Series 1)

Ans: -
Wagering agreement (Section 30 of the Indian Contract Act, 1872): An agreement by way of
a wager is void. It is an agreement involving payment of a sum of money upon the
determination of an uncertain event. The essence of a wager is that each side should stand
to win or lose, depending on the way an uncertain event takes place in reference to which
the chance is taken and in the occurrence of which neither of the parties has legitimate
interest.

Transactions resembling with wagering transaction but are not void

(i) Chit fund: Chit fund does not come within the scope of wager (Section 30). In case of a chit
fund, a certain number of persons decide to contribute a fixed sum for a specified period and
at the end of a month, the amount so contributed is paid to the lucky winner of the lucky
draw.
(ii) Commercial transactions or share market transactions: In these transactions in which
delivery of goods or shares is intended to be given or taken, do not amount to wagers.
(iii) Games of skill and Athletic Competition: Crossword puzzles, picture competitions and
athletic competitions where prizes are awarded on the basis of skill and intelligence are the
games of skill and hence such competitions are valid.
(iv) A contract of insurance: A contract of insurance is a type of contingent contract and is
valid under law and these contracts are different from wagering agreements.

9. Explain the terms “Trafficking relating to public offices and titles” and “Stifling
prosecution” as per the Indian Contract Act, 1872. (7 Marks PYQ Dec 23) (MTP Sept 24
Series 2)

Ans: -
Trafficking relating to Public Offices and titles: An agreement to trafficking in public office is
opposed to public policy, as it interferes with the appointment of a person best qualified for
the service of the public. Public policy requires that there should be no money consideration
for the appointment to an office in which the public is interested. The following are the
examples of agreements that are void since they are tantamount to sale of public offices.
(1) An agreement to pay money to a public servant in order to induce him to retire from his
office so that another person may secure the appointment is void.

Business Law Question Book 16 CA Foundation

(2) An agreement to procure a public recognition like Padma Vibhushan for reward is void.
Stifling Prosecution: An agreement to stifle prosecution i.e. “an agreement to present
proceedings already instituted from running their normal course using force” tends to be a
perversion or an abuse of justice, therefore, such an agreement is void. The principle is that
one should not make a trade of felony. The compromise of any public offence is generally
illegal.
For example, when a party agrees to pay some consideration to the other party in exchange
for the later promising to forgo criminal charges against the former is an agreement to stifle
prosecution and therefore is void.
Under the Code of Criminal Procedure, there is however, a statutory list of compoundable
offences and an agreement to drop proceeding relating to such offences with or without the
permission of the Court, as the case may be, in consideration the accused promising to do
something for the complainant, is not opposed to public policy.

10. On 1st March 2023, T Readymade Dress Garments, Shimla enters into a contract with
J Readymade Garments, Jaipur for the supply of different sizes of shirts ‘S’ (Small), ‘M’
(Medium), and ‘L’ (Large). As per the terms of the contract, 300 pieces of each
category i.e. ‘S’ @`900; ‘M’@ 1,000 and ‘L’ @ 1,100 per piece have to be supplied on
or before 31st May, 2023.
However, on 1st May, 2023, T Readymade Dress Garments, Shimla informed J
Readymade Garments, Jaipur that the firm is not willing to supply the shirts at the
above rate due to the rise of prices in the raw material cost. In the meantime, prices
for similar shirts have gone up in the market to the tune of ` 1,000; `1,100; and ` 1,200
for ‘S’, ‘M’ and ‘L’ sizes respectively.
Examine the rights of J Readymade Garments, Jaipur in this regard as per the
provisions of the Indian Contract Act, of 1872. (3 Marks PYQ Dec 23)

Ans: -
As per the provisions of Section 39 of the Indian Contract Act, 1872, when a party to a contract
has refused to perform, or disabled himself from performing, his promise in its entirety, the
promisee may put an end to the contract, unless he has signified, by words or conduct, his
acquiescence in its continuance.
J Readymade Garments in the given situation has two options, out of which he has to select
any one:
(i) Either to treat the contract as rescinded and sue T Readymade Dress Garments for damages
from breach of contract immediately without waiting until the due date of performance or
(ii) He may elect not to rescind but to treat the contract as still operative and wait for the time
of performance and then hold the other party responsible for the consequences of non-
performance.
Important Note: The answer can also be given as per Section 73 of the Indian Contract Act,
1872 which lays down that when a contract has been broken, the party who suffers by such
breach is entitled to receive from the party who has broken the contract, compensation for
any loss or damage caused to him thereby which naturally arose in the usual course of things
from such breach or which the parties knew when they made the contract to be likely to result
from the breach of it.

Business Law Question Book 17 CA Foundation

In the instant case, J Readymade Garments, Jaipur would be entitled to get the damages i.e.
difference between the contract price and the market price on the day of default from T
Readymade Dress Garments, Shimla. In other words, the amount of damages would be `
90,000 [300 piece @ ` 100 (Small), 300 piece @ ` 100 (Medium) and 300 piece @ ` 100
(Large)].

11. “Mere silence does not amount to fraud”. Explain the statement as per the provisions
contained in the Indian Contract Act, 1872. (5 Marks PYQ Dec 23)

Ans: -
Mere silence not amounting to fraud: Mere silence as to facts likely to affect the willingness
of a person to enter into a contract is no fraud; but where it is the duty of a person to speak,
or his silence is equivalent to speech, silence amounts to fraud. It is a rule of law that mere
silence does not amount to fraud. A contracting party is not duty bound to disclose the whole
truth to the other party or to give him the whole information in his possession affecting the
subject matter of the contract.
The rule is contained in explanation to Section 17 of the Indian Contract Act which clearly
states the position that mere silence as to facts likely to affect the willingness of a person to
enter into a contract is not fraud.
Exceptions to this rule:
(i) Where the circumstances of the case are such that, regard being had to them, it is the duty
of the person keeping silence to speak. Duty to speak arises when one contracting party
reposes trust and confidence in the other or where one party has to depend upon the good
sense of the other (e.g. Insurance Contract).
(ii) Where the silence is, in itself, equivalent to speech.

12. Mr. A, the employer induced his employee Mr. B to sell his one room flat to him at less
than the market value to secure promotion. Mr. B sold the flat to Mr. A. Later on, Mr.
B changed his mind and decided to sue Mr. A. Examine the validity of the contract as
per the provisions of the Indian Contract Act, 1872 (2 Marks PYQ June 23) (MTP June
24 Series 3)

Ans: -
According to section 16 of the Indian Contract Act, 1872, a contract is said to be induced by
‘undue influence’ where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and he uses that position to obtain an
unfair advantage over the other.
When consent to an agreement is caused by undue influence, the contract is voidable at the
option of the party, whose consent was so caused.

Hence, the contract between Mr. A and Mr. B is voidable at the option of Mr. B as it was
induced by undue influence by Mr. A and therefore Mr. B can sue Mr. A.

13. Mr. Y aged 21 years, lost his mental balance after the death of his parents in an
accident. He was left with his grandmother aged 85 years, incapable of walking and

Business Law Question Book 18 CA Foundation

 dependent upon him. Mr. M their neighbour, out of pity, started supplying food and
other necessaries to both of them. Mr. Y and his grandmother used to live in the house
built by his parents. Mr. M also provided grandmother some financial assistance for
her emergency medical treatment. After supplying necessaries to Mr. Y for four years,
Mr. M approached the former asking him to payback ` 15 Lakhs inclusive of ` 7 Lakhs
incurred for the medical treatment of the lady (grandmother). Mr. Y pleaded that he
has got his parent's jewellery to sell to a maximum value of ` 4 Lakhs, which may be
adjusted against the dues. Mr. M refused and threatened Mr. Y of legal suit to be
brought against for recovering the money.
Now, you are to decide upon based on the provisions of the Indian Contract Act, 1872:
(i) Will Mr. M succeed in filing the suit to recover money? Elaborate the related
provisions?
(ii) What is the maximum amount- of money that can be recovered by Mr. M?
(iii) Shall the provisions of the above act also apply to the medical treatment given to
the grandmother? (6 Marks PYQ Nov 22)

Ans: -
(i) Claim for necessaries supplied to persons incapable of contracting (Section 68 of the Indian
Contract Act, 1872):
If a person, incapable of entering into a contract, or anyone whom he is legally bound to
support, is supplied by another person with necessaries suited to his condition in life, the
person who has furnished such supplies is entitled to be reimbursed from the property of
such incapable person.
In the instant case, Mr. M supplied the food and other necessaries to Mr. Y (who lost his
mental balance) and Mr. Y’s grandmother (incapable of walking and dependent upon Mr. Y),
hence, Mr. M will succeed in filing the suit to recover money.

(ii) Supplier is entitled to be reimbursed from the property of such incapable person. Hence,
the maximum amount of money that can be recovered by Mr. M is ` 15 Lakhs and this amount
can be recovered from Mr. Y’s parent’s jewellery amounting to ` 4 Lakhs and rest from the
house of Y’s Parents. (Assumption: Y has inherited the house property on the death of his
parents)

(iii) Necessaries will include the emergency medical treatment. Hence, the above provisions
will also apply to the medical treatment given to the grandmother as Y is legally bound to
support his grandmother.

14. Paridhee, a minor, falsely representing her age, enters into an agreement with an
authorised Laptop dealer Mr. Mittal, owner of MP Laptops, for purchase of Laptop on
credit amounting ` 60,000/- on 1st August 2022. She promised to pay back the
outstanding amount with interest @ 16% p.a. by 31st July 2023. She told him that in
case she won’t be able to pay the outstanding amount, her father Mr. Ram will pay
back on her behalf. After One year, when Paridhee was asked to pay the outstanding
amount with interest she refused to pay the amount and told the owner that she is
minor and now he can't recover a single penny from her.

Business Law Question Book 19 CA Foundation

 She will be a major on 1st January 2025 and only after that agreement can be ratified.
Explain by which of the following ways, Mr. Mittal will succeed in recovering the
outstanding amount with reference to the Indian Contract Act, 1872.
(i) By filing a case against Paridhee, a minor for recovery of outstanding amount with
interest?
(ii) By filing a case against Mr. Ram, father of Paridhee for recovery of outstanding
amount?
(iii) By filing a case against Paridhee, a minor for recovery of outstanding amount after
she attains majority? (RTP Jan 25)

Ans: -
A contract made with or by a minor is void ab-initio: Pursuant to Section 11 of the Indian
Contract Act, 1872, a minor is not competent to contract and any agreement with or by a
minor is void from the very beginning.

(i) By following the above provision, Mr. Mittal will not succeed in recovering the outstanding
amount by filing a case against Paridhee, a minor.

(ii) Minor cannot bind parent or guardian: In the absence of authority, express or implied, a
minor is not capable of binding his parent or guardian, even for necessaries. The parents will
be held liable only when the child is acting as an agent for parents.

In the instant case, Mr. Mittal will not succeed in recovering the outstanding amount by filing
a case against Mr. Ram, father of Paridhee.

(iii) No ratification after attaining majority: A minor cannot ratify the agreement on attaining
majority as the original agreement is void ab initio and a void agreement can never be
ratified.
Hence, in this case also, Mr. Mittal will not succeed in recovering the outstanding amount by
filing a case against Paridhee, after she attains majority.

15. State with reason(s) whether the following agreements are valid or void as per the
Indian Contract Act, 1872:
(i) Where two courts have jurisdiction to try a suit, an agreement between the parties
that the suit should be filed in one of those courts alone and not in the other.
(ii) X offers to sell his Maruti car to Y. Y believes that X has only Wagon R Car but agrees
to buy it.
(iii) X, a physician and surgeon, employs Y as an assistant on a salary of ` 75,000 per
month for a term of two years and Y agrees not to practice as a surgeon and physician
during these two years. (RTP Jan 25)

Ans: -
(i) The given agreement is valid.
Reason: An agreement in restraint of legal proceeding is the one by which any party thereto
is restricted absolutely from enforcing his rights under a contract through a Court (Section 28

Business Law Question Book 20 CA Foundation

of the Indian Contract Act, 1872). A contract of this nature is void. However, in the given
statement, no absolute restriction is marked on parties on filing of suit. As per the agreement,
suit may be filed in one of the courts having jurisdiction.

(ii) The said agreement is void.

Reason: This agreement is void as the two parties are thinking about different subject matters
so that there is no real consent, and the agreement may be treated as void because of mistake
of fact as well as absence of consensus.

(iii) The said agreement is valid.

Reason: An agreement by which any person is restrained from exercising a lawful profession,
trade or business of any kind, is to that extent void (Section 27). But, as an exception,
agreement of service by which an employee binds himself, during the term of his agreement,
not to compete with his employer is not in restraint of trade.

16. Amit, a minor was studying in a college. On 1st July, 2023 he took a loan of ` 1,00,000
from Bhavesh for payment of his college fees and to purchase books and agreed to
repay by 31st December, 2023. Amit possesses assets worth ` 9 lakhs. On due date,
Amit fails to pay back the loan to Bhavesh. Bhavesh now wants to recover the loan
from Amit out of his (Amit’s) assets. Referring to the provisions of Indian Contract Act,
1872 decide whether Bhavesh would succeed. (RTP Sept 24)

Ans: -
According to section 68 of Indian Contract Act, 1872, if a person, incapable of entering into a
contract, or any one whom he is legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person.
In the instant case, since the loan given to Amit is for the necessaries suited to the conditions
in life of the minor, his assets can be sued to reimburse Bhavesh.
Hence, Bhavesh can proceed against the assets of Amit.

17. Mr. Shyam aged 58 years, was employed in a government department. He was going
to retire after two years. Mr. Dev made a proposal to Mr. Shyam, to apply for voluntary
retirement from his post so that Mr. Dev can be appointed in his place. Mr. Dev offered
a sum of ` 10 Lakhs as consideration to Mr. Shyam to induce him to retire.
Mr. Shyam refused at first instance but when he evaluated the amount offered as
consideration is just double of his cumulative remuneration to be received during the
tenure of two years of employment, he agreed to receive the consideration and
accepted the above agreement to receive money to retire from his office.
Whether the above agreement is valid? Explain with reference to provision of the
Indian Contract Act, 1872? (RTP Sept 24)

Ans: -

Business Law Question Book 21 CA Foundation

Section 10 of the Indian Contract Act, 1872 provides for the legality of consideration and
objects thereto. Section 23 of the said Act also states that every agreement of which the
object or consideration is unlawful is void.
The given problem talks about entering into an agreement for sale of public office, which is
opposed to public policy. Public policy requires that there should be no money consideration
for the appointment to an office in which the public is interested. Such consideration paid,
being opposed to public policy, is unlawful.
In the given case, Mr. Shyam, who was going to be retired after two years was proposed by
Mr. Dev, to apply for voluntary retirement from his post, in order that he can be appointed in
his place. In lieu of that, Mr. Dev offered Mr. Shyam a sum of ` 10 lakh as consideration. Mr.
Shyam refused initially but later accepted the said agreement to receive money to retire from
his office.
Here, Mr. Shyam’s promise to sale for Mr. Dev, an employment in the public services is the
consideration for Mr. Dev’s promise to pay ` 10 lakh. Therefore, in terms of the above
provisions of the Indian Contract Act, the said agreement is not valid. It is void, as the
consideration being opposed to public policy, is unlawful.

18. Sahil sells by auction to Rohan a horse which Sahil knows to be unsound. The horse
appears to be sound, but Sahil knows about the unsoundness of the horse. Is this
contract valid in the following circumstances under the Indian Contract Act, 1872:
(A) If Sahil says nothing about the unsoundness of the horse to Rohan.
(B) If Sahil says nothing about it to Rohan who is Sahil’s son.
(C) If Rohan says to Sahil “If you do not deny it, I shall assume that the horse is sound.”
Sahil says nothing. (MTP Sept 24 Series 1)

Ans: -
According to section 17 of the Indian Contract Act, 1872, mere silence as to facts likely to
affect the willingness of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to them, it is the duty of the person
keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

Hence, in the instant case,

(A) This contract is valid since as per section 17, mere silence as to the facts likely to affect
the willingness of a person to enter into a contract is not fraud. Here, it is not the duty of the
seller to disclose defects.

(B) This contract is not valid since as per section 17, it becomes Sahil’s duty to tell Rohan about
the unsoundness of the horse because a fiduciary relationship exists between Sahil and his
son Rohan. Here, Sahil’s silence is equivalent to speech and hence amounts to fraud.

(C) This contract is not valid since as per section 17, Sahil’s silence is equivalent to speech and
hence amounts to fraud.

19. Mr. Vikas a businessman has been fighting a long-drawn litigation with Mr. Neeraj an
industrialist. To support his legal campaign, he enlists the services of Mr. Manoj a

Business Law Question Book 22 CA Foundation

 Judicial officer stating that the amount of `10 lakhs would be paid to him if he does
not take up the brief of Mr. Neeraj. Mr. Manoj agrees but, at the end of the litigation
Mr. Vikas refuses to pay to Mr. Manoj. Decide whether Mr. Manoj can recover the
amount promised by Mr. Vikas under the provisions of the Indian Contract Act, 1872?
(MTP June 24 Series 3)

Ans: -
The problem as asked in the question is based on Section 10 of the Indian Contract Act, 1872.
This Section says that all agreements are contracts if they are made by the free consent of the
parties competent to contract, for a lawful consideration and with a lawful object and are not
expressly declared to be void. Further, Section 23 also states that every agreement of which
the object is unlawful is void.

Accordingly, one of the essential elements of a valid contract in the light of the said provision
is that the agreement entered into must not be which the law declares to be either illegal or
void. An illegal agreement is an agreement expressly or impliedly prohibited by law. A void
agreement is one without any legal effects.

The given instance is a case of interference with the course of justice and results as opposed
to public policy. This can also be called an agreement in restraint of legal proceedings. This
agreement restricts one’s right to enforce his legal rights. Such an agreement has been
expressly declared to be void under section 28 of the Indian Contract Act, 1872. Hence, Mr.
Manoj in the given case cannot recover the amount of ` 10 lakh promised by Mr. Vikas because
it is a void agreement and cannot be enforced by law.

20. Define Misrepresentation and Fraud. Explain the difference between Fraud and
Misrepresentation as per the Indian Contract Act, 1872. (MTP June 24 Series 2)

Ans: -
Definition of Fraud under Section 17 of the Indian Contract Act, 1872: 'Fraud' means and
includes any of the following acts committed by a party to a contract, or with his connivance,
or by his agent, with an intent to deceive another party thereto or his agent, or to induce him
to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be
true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent

According to Section 18, there is misrepresentation:

(1) Statement of fact, which of false, would constitute misrepresentation if the maker believes
it to be true but which is not justified by the information he possesses;
(2) When there is a breach of duty by a person without any intention to deceive which brings
an advantage to him;

Business Law Question Book 23 CA Foundation

(3) When a party causes, even though done innocently, the other party to the agreement to
make a mistake as to the subject matter.

Distinction between fraud and misrepresentation:

Basis of Fraud Misrepresentation
difference
Intention To deceive the other party by There is no such intention to deceive
hiding the truth. the other party.
Knowledge of The person making the suggestion The person making the statement
truth believes that the statement as believes it to be true, although it is not
untrue. true.
Rescission of the The injured party can repudiate The injured party is entitled to
contract and claim the contract and claim damages. repudiate the contract or sue for
for damages restitution but cannot claim the
damages.
Means to The party using the fraudulent act Party can always plead that the
discover the truth cannot secure or protect himself injured party had the means to
by saying that the injured party discover the truth.
had means to discover the truth.

21. Kashish was running a business of artificial jewellery since long. He sold his business
to Naman and promises, not to carry on the business of artificial jewellery and real
diamond jewellery in that area for a period of next one year. After two months,
Kashish opened a show room for real diamond jewellery. Naman filed a suit against
Kashish for closing the business of real diamond jewellery business as it was against
the agreement. Whether Kashish is liable to close his business of real diamond
jewellery following the provisions of Indian Contract Act, 1872? (MTP June 24 Series
1) (MTP May 25 Series 1)

Ans: -
According to Section 27 of Indian Contract Act, 1872, an agreement by which any person is
restrained from exercising a lawful profession, trade or business of any kind, is to that extent
void. But this rule is subject to the following exceptions, namely, where a person sells the
goodwill of a business and agrees with the buyer to refrain from carrying on a similar business,
within specified local limits, so long as the buyer or his successor in interest carries on a like
business therein, such an agreement is valid. The local limits within which the seller of the
goodwill agrees not to carry on similar business must be reasonable.

In the instant case, Kashish sold his running business of artificial jewellery to Naman and
promises, not to carry on the business of artificial jewellery and real diamond jewellery in that
area and for a period of nextone year but just after two months, Kashish opened a show room
of real diamond jewellery. Naman sued Kashish for closing the business of real diamond
business as it was against the agreement.

Business Law Question Book 24 CA Foundation

As exceptions to section 27 is applicable to similar business only, agreement between Naman
and Kashish will not be applicable on business of real diamond jewellery. Hence, Kashish can
continue his business of real diamond jewellery.

22. Examine the validity of the following agreements under the provisions of the Indian
Contract Act, 1872 and justify your answer:
(i) Mrs. Priya pays a sum of ` 10,000 to a marriage bureau to provide information about
the prospective grooms for her daughter's marriage.
(ii) Bharat agrees with John to sell his white bull. Unknown to both the parties, the bull
was dead at the time of agreement.
(iii) Rishabh sells the goodwill of his shop to Omkar for ` 10,00,000 and promises not
to carry on such similar business within the local limits so long as Omkar carries on like
business.
(iv) A property worth ` 2,00,000 was agreed to be sold for just ` 25,000 by a person of
unsound mind. (7 Marks) (PYQ Jan 25) (MTP May 25 Series 2)

Ans: -
(i) Under Section 10 of the Indian Contract Act, 1872, a valid contract requires free consent,
lawful consideration, and a lawful object.
In the instant case, the agreement to pay ` 10,000 in exchange for a service (providing
information about prospective grooms) is lawful.
Hence, the agreement is valid.

(ii) According to section 20, where both the parties to an agreement are under a mistake as
to a matter of fact essential to the agreement, there is a bilateral mistake. In such a case,
the agreement is void.
In the instant case, the bull's death (unknown to both parties) constitutes a bilateral mistake
regarding the subject matter of the contract.
Hence, the agreement is void.

(iii) Under Section 27, agreements in restraint of trade are void. However, an exception is
provided for contracts involving the sale of goodwill. The local limits within which the seller
of the goodwill agrees not to carry on similar business must be reasonable.
In the instant case, the restriction is limited to the local area and does not extend
indefinitely.
Hence, the agreement is valid.

(iv) According to section 12, a contract by a person who is not of sound mind is void.
In the instant case, a property worth ` 2,00,000 was agreed to be sold for just ` 25,000 by a
person of unsound mind.
Hence, the agreement is void.

23. What are the agreements which are held to be opposed to public policy under the
Indian Contract Act, 1872. Explain any 6 such agreements. (6 Marks) (PYQ Jan 25)

Business Law Question Book 25 CA Foundation

Ans: -
Some of the agreements which are held to be opposed to public policy are-
(1) Trading with enemy: Any trade with person owing allegiance to a Government at war with
India without the licence of the Government of India is void, as the object is opposed to public
policy. Here, the agreement to trade offends against the public policy by tending to prejudice
the interest of the State in times of war.

(2) Stifling Prosecution: An agreement to stifle prosecution i.e. “an agreement to present
proceedings already instituted from running their normal course using force” tends to be a
perversion or an abuse of justice; therefore, such an agreement is void. The principle is that
one should not make a trade of felony. The compromise of any public offence is generally
illegal.
Under the Indian Criminal Procedure Code, there is, however, a statutory list of
compoundable offences and an agreement to drop proceeding relating to such offences with
or without the permission of the Court, as the case may be, in consideration the accused
promising to do something for the complainant, is not opposed to public policy.

(3) Maintenance and Champerty: Maintenance is an agreement in which a person promises

to maintain suit in which he has no interest.
Champerty is an agreement in which a person agrees to assist another in litigation in-
exchange of a promise to hand over a portion of the proceeds of the action.
(a) It is unreasonable so as to be unjust to other party or
(b) It is made by a malicious motive like that of gambling in litigation or oppressing other party
by encouraging unrighteous suits and not with the bonafide object of assisting a claim
believed to be just.
(4) Trafficking relating to Public Offices and titles: An agreement to trafficking in public office
is opposed to public policy, as it interferes with the appointment of a person best qualified
for the service of the public. Public policy requires that there should be no money
consideration for the appointment to an office in which the public is interested. The following
are the examples of agreements that are void; since they are tantamount to sale of public
offices.
(1) An agreement to pay money to a public servant in order to induce him to retire from his
office so that another person may secure the appointment is void.
(2) An agreement to procure a public recognition like Padma Vibhushan for reward is void.

(5) Agreements tending to create monopolies: Agreements having for their object the
establishment of monopolies are opposed to public policy and therefore void.

(6) Marriage brokerage agreements: An agreement to negotiate marriage for reward, which
is known as a marriage brokerage contract, is void, as it is opposed to public policy.

(7) Interference with the course of justice: An agreement whose object is to induce any
judicial officer of the State to act partially or corruptly is void, as it is opposed to public policy.

Business Law Question Book 26 CA Foundation

(8) Interest against obligation: The following are examples of agreement that are void as they
tend to create an interest against obligation. The object of such agreements is opposed to
public policy.
(1) An agreement by an agent to receive without his principal’s consent compensation from
another for the performance of his agency is invalid.
(2) A, who is the manager of a firm, agrees to pass a contract to X if X pays to A ` 200,000
privately; the agreement is void.

(9) Consideration Unlawful in Part: By virtue of Section 24, if any part of a single consideration
for one or more objects, or any one or any part of any one of several considerations for a
single object, is unlawful, the agreement is void.”
This section is an obvious consequence of the general principle of Section 23. There is no
promise for a lawful consideration if there is anything illegal in a consideration which must be
taken as a whole. The general rule is that where the legal part of a contract can be severed
from the illegal part, the bad part may be rejected and the good one can be retained. But
where the illegal part cannot be severed, the contract is altogether void.

24. Explain with reference to the Indian Contract Act, 1872:

(i) When a contract is said to be induced by "undue influence".
(ii) When a party is deemed to be in a position to dominate the will of another. (6
Marks) (PYQ Jan 25)

Ans: -
(i) Undue influence (Section 16): According to section 16 of the Indian Contract Act, 1872, “A
contract is said to be induced by ‘undue influence’ where the relations subsisting between
the parties are such that one of the parties is in a position to dominate the will of the other
and he uses that position to obtain an unfair advantage over the other”.

(ii) Position to dominate the will: Relation between the parties exist in such a manner that
one of them is in a position to dominate the will of the other. A person is deemed to be in
such position in the following circumstances:

(a) Real and apparent authority: Where a person holds a real authority over the other as in
the case of master and servant, doctor and patient and etc.

(b) Fiduciary relationship: Where relation of trust and confidence exists between the parties
to a contract. Such type of relationship exists between father and son, solicitor and client,
husband and wife, creditor and debtor, etc.

(c) Mental distress: An undue influence can be used against a person to get his consent on a
contract where the mental capacity of the person is temporarily or permanently affected by
the reason of mental or bodily distress, illness or of old age.

(d) Unconscionable bargains: Where one of the parties to a contract is in a position to

dominate the will of the other and the contract is apparently unconscionable i.e., unfair, it is

Business Law Question Book 27 CA Foundation

presumed by law that consent must have been obtained by undue influence. Unconscionable
bargains are witnessed mostly in money-lending transactions and in gifts.

25. Sahil deals in pre-owned cars. Raju sold his accidental car to Sahil by fraud. Sahil could
not find that the car was accidental. Akshay, a customer visited the workshop of Sahil
with intention to purchase a pre-owned car. Akshay informed Sahil his intention with
the condition that car should be free from any accident. Sahil sold that car to Akshay
on erroneously believing that car did not face any accident. Afterward, Akshay found
that the car was actually an accidental case. He sued Sahil to avoid the contract and
also for damages for expenses suffered on car. Taking into account the provisions of
the Indian Contract Act, 1872, state whether Akshay was eligible to avoid the contract
and to claim damages from Sahil? (RTP May 25)

Ans: -
According to Section 18 of the Indian Contract Act, 1872, there is misrepresentation:
(1) Statement of fact, which of false, would constitute misrepresentation if the maker believes
it to be true but which is not justified by the information he possesses;
(2) When there is a breach of duty by a person without any intention to deceive which brings
an advantage to him;
(3) When a party causes, even though done innocently, the other party to the agreement to
make a mistake as to the subject matter.
In other words, ‘Misrepresentation’ is wrong done without intention to deceive. Further, the
aggrieved party, in case of misrepresentation by the other party, can avoid or rescind the
contract; or accept the contract but insist that he shall be placed in the position in which he
would have been if the representation made had been true. Damages can be claimed in case
of fraud not for misrepresentation.
In the instant case, Raju sold his accidental car by fraud to Sahil, a dealer in pre-owned cars.
Sahil was innocent about the car. That car was sold by Sahil to Akshay on erroneously
believing that car did not face any accident. Afterward, when Akshay knew about car, he sued
Sahil to avoid the contract also for damages for expenses suffered on car.
On the basis of the facts of the case, Sahil had no idea that the car was an accidental car, and
sale of car by Sahil to Akshay is actually affected by misrepresentation not by fraud. Contract
is voidable at the intention of Akshay. Therefore, Akshay has the right to avoid the contract,
but he cannot claim damages.

Business Law Question Book 28 CA Foundation

 UNIT – 4: PERFORMANCE OF CONTRACT

1. X, Y and Z jointly borrowed ` 50,000 from A. The whole amount was repaid to A by Y.
Decide in the light of the Indian Contract Act, 1872 whether:
(i) Y can recover the contribution from X and Z,
(ii) Legal representatives of X are liable in case of death of X,
(iii) Y can recover the contribution from the assets, in case Z becomes insolvent.
(Module Q)

Ans: -
Section 42 of the Indian Contract Act, 1872 requires that when two or more persons have
made a joint promise, then, unless a contrary intention appears from the contract, all such
persons jointly must fulfill the promise. In the event of the death of any of them, his
representative jointly with the survivors and in case of the death of all promisors, the
representatives of all jointly must fulfill the promise.

Section 43 allows the promisee to seek performance from any of the joint promisors. The
liability of the joint promisors has thus been made not only joint but “joint and several”.
Section 43 provides that in the absence of express agreement to the contrary, the promisee
may compel any one or more of the joint promisors to perform the whole of the promise.

Section 43 deals with the contribution among joint promisors. The promisors, may compel
every joint promisor to contribute equally to the performance of the promise (unless a
contrary intention appears from the contract). If any one of the joint promisors makes default
in such contribution the remaining joint promisors must bear the loss arising from such
default in equal shares.

As per the provisions of above sections,

(i) Y can recover the contribution from X and Z because X, Y and Z are joint promisors.
(ii) Legal representative of X are liable to pay the contribution to Y. However, a legal
representative is liable only to the extent of property of the deceased received by him.
(iii) Y also can recover the contribution from Z’s assets.

2. Mr. Rich aspired to get a self-portrait made by an artist. He went to the workshop of
Mr. C an artist and asked whether he could sketch the former’s portrait on oil painting
canvass. Mr. C agreed to the offer and asked for ` 50,000 as full advance payment for
the above creative work. Mr. C clarified that the painting shall be completed in 10
sittings and shall take 3 months.
On reaching to the workshop for the 6th sitting, Mr. Rich was informed that Mr. C
became paralyzed and would not be able to paint for near future. Mr. C had a son Mr.
K who was still pursuing his studies and had not taken up his father’s profession yet?
Discuss in light of the Indian Contract Act, 1872?
(i) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?
(ii) Could Mr. Rich ask Mr. K for refund of money paid in advance to his father?
(Module Q)
Business Law Question Book 29 CA Foundation
Ans: -
A contract which involves the use of personal skill or is founded on personal consideration
comes to an end on the death of the promisor. As regards any other contract the legal
representatives of the deceased promisor are bound to perform it unless a contrary intention
appears from the contract (Section 37 of the Indian Contract Act, 1872). But their liability
under a contract is limited to the value of the property they inherit from the deceased.

(i) In the instant case, since painting involves the use of personal skill and on becoming Mr. C
paralyzed, Mr. Rich cannot ask Mr. K to complete the artistic work in lieu of his father Mr. C.

(ii) According to section 65 of the Indian Contract Act, 1872, when an agreement is discovered
to be void or when a contract becomes void, any person who has received any advantage
under such agreement or contract is bound to restore it, or to make compensation for it to
the person from whom he received it.

Hence, in the instant case, the agreement between Mr. Rich and Mr. C has become void
because of paralysis to Mr. C. So, Mr. Rich can ask Mr. K for refund of money paid in advance
to his father, Mr. C.

3. Mr. JHUTH entered into an agreement with Mr. SUCH to purchase his (Mr. SUCH’s)
motor car for ` 5,00,000/- within a period of three months. A security amount of `
20,000/- was also paid by Mr. JHUTH to Mr. SUCH in terms of the agreement. After
completion of three months of entering into the agreement, Mr. SUCH tried to
contract Mr. JHUTH to purchase the car in terms of the agreement. Even after lapse
of another three month period, Mr. JHUTH neither responded to Mr. SUCH, nor to his
phone calls. After lapse of another period of six months. Mr. JHUTH contracted Mr.
SUCH and denied to purchase the motor car. He also demanded back the security
amount of ` 20,000/- from Mr. SUCH. Referring to the provisions of the Indian Contract
Act, 1872, state whether Mr. SUCH is required to refund the security amount to Mr.
JHUTH.
Also examine the validity of the claim made by Mr. JHUTH, if the motor car would have
destroyed by an accident within the three month’s agreement period. (Module Q)

Ans: -
In terms of the provisions of Section 65 of the Indian Contract Act, 1872, when an agreement
is discovered to be void or when a contract becomes void, any person who has received any
advantage under such agreement or contract is bound to restore it, or to make compensation
for it to the person from whom he received it.

Referring to the above provision, we can analyse the situation as under.

The contract is not a void contract. Mr. SUCH is not responsible for Mr. JHUTH’s negligence.
Therefore, Mr. SUCH can rescind the contract and retain the security amount since the
security is not a benefit received under the contract, it is a security that the purchaser would
fulfil his contract and is ancillary to the contract for the sale of the Motor Car.

Business Law Question Book 30 CA Foundation

Regarding the second situation given in the question, the agreement becomes void due to the
destruction of the Motor car, which is the subject matter of the agreement here. Therefore,
the security amount received by Mr. SUCH is required to be refunded back to Mr. JHUTH.

4. Mr. Murari owes payment of 3 bills to Mr. Girdhari as on 31st March, 2022. (i) ` 12,120
which was due in May 2018. (ii) ` 5,650 which was due in August 2020 (iii) ` 9,680 which
was due in May 2021. Mr. Murari made payment on 1st April 2022 as below without
any notice of how to appropriate them:
(i) A cheque of ` 9,680
(ii) A cheque of ` 15,000
Advice under the provisions of the Indian Contract Act, 1872. (Module Q)

Ans: -
If the performance consists of payment of money and there are several debts to be paid, the
payment shall be appropriated as per provisions of Sections 59, 60 and 61. The debtor has, at
the time of payment, the right of appropriating the payment. In default of debtor, the creditor
has option of election and in default of either the law will allow appropriation of debts in
order of time.

In the present case, Mr. Murari had made two payments by way of two cheques. One cheque
was exactly the amount of the bill drawn. It would be understood even though not specifically
appropriated by Mr. Murari that it will be against the bill of exact amount. Hence cheque of
`9,680 will be appropriated against the bill of ` 9,680 which was due in May 2019.

Cheque of ` 15000 can be appropriated against any lawful debt which is due even though the
same is time-barred.

Hence, Mr. Girdhari can appropriate the same against the debt of `12,120 which was due in
2016 and balance against ` 5650 which was due in August 2018.

5. What will be rights with the promisor in following cases? Explain with reasons:
(a) Mr. X promised to bring back Mr. Y to life again.
(b) A agreed to sell 50 kgs of apple to B. The loaded truck left for delivery on 15th
March but due to riots in between reached A on 19th March.
(c) An artist promised to paint on the fixed date for a fixed amount of remuneration
but met with an accident and lost his both hands.
(d) Abhishek entered into contract of import of toys from China. But due to
disturbance in the relation of both the countries, the imports from China were
banned. (Module Q)

Ans: -
(a) The contract is void because of its initial impossibility of performance.
(b) Time is essence of this contract. As by the time apples reached B they were already rotten.
The contract is discharged due to destruction of subject matter of contract.

Business Law Question Book 31 CA Foundation

(c) Such contract is of personal nature and hence cannot be performed due to occurrence of
an event resulting in impossibility of performance of contract.
(d) Such contract is discharged without performance because of subsequent illegality nature
of the contract.

6. Mr. A offered to sell 25 chairs to Mr. B @ ` 1,500 per chair on 12.02.2024. A promised
B that he would keep the offer open till 15.02.2024. However, on 13.02.2024, he sold
those chairs to Mr. C @ ` 1,700 per chair without the knowledge of B. Mr. B
communicated the acceptance of the above offer on 14.02.2024.
Advise, with reference to provisions of the Indian Contract Act, 1872 whether Mr. B
can claim damages from Mr. A? (2 Marks PYQ Sept 24)

Ans: -
In terms of Section 5 of the Indian Contract Act, 1872, a proposal can be revoked at any time
before the communication of its acceptance is complete as against the proposer.
Accordingly, an offer may be revoked by the offeror before its acceptance, even though he
had originally agreed to hold it open for a definite period of time. So long as it is a mere offer,
it can be withdrawn whenever the offeror desires.
In the instant case, B cannot claim damages from A because the offer made by A is a mere
offer and it can be withdrawn whenever A desires.

7. Woollen Garments Limited entered into a contract with a group of women in July,
2023 to supply various woollen clothes for men, women and kids like sweaters,
monkey caps, mufflers; woollen coats, hand gloves etc. before the commencement of
the winter season. The agreement expressly provides that the woollen clothes shall
be supplied by the end of October, 2023 before starting of winter season. However,
due to the prolonged strike, women group could tender the supplies in March, 2024
when the winter season was almost over. Analysing the situation and answer the
following questions in light of the provisions of the Indian Contract Act, 1872:
(A) Whether company can reject the total supply by women group?
(B) Whether company can accept the total supply on request of women group? (3
Marks PYQ Sept 24)

Ans: -
According to section 55 of the Indian Contract Act, 1872, when a party to a contract promises
to do certain thing at or before the specified time, and fails to do any such thing at or before
the specified time, the contract, or so much of it as has not been performed, becomes
voidable at the option of the promisee, if the intention of the parties was that time should be
of essence of the contract.

Effect of acceptance of performance at time other than agreed upon -

If, in case of a contract voidable on account of the promisor’s failure to perform his promise
at the time agreed, the promisee accepts performance of such promise at any time other than
agreed, the promisee cannot claim compensation for any loss occasioned by the non-

Business Law Question Book 32 CA Foundation

performance of the promise at the time agreed, unless, at the time of acceptance, he gives
notice to the promisor of his intention to do so.

In the instant case,

(A) Woollen Garments Limited is legally entitled to reject the goods due to the failure to meet
the delivery deadline, as time was a crucial term of the contract.
(B) The company cannot accept the total supply on the request of woman group but only
when the company i.e. buyer elects to do so. In that case, the company cannot claim
compensation for any loss occasioned by the non-performance of the promise (i.e. delay in
supply) at the time agreed.

8. Mr. J entered into an agreement with Mr. S to purchase his house for ` 20 lakh, within
three months. He also paid ` 50,000/- as token money. In the meanwhile, in an anti-
encroachment drive of the local administration, Mr. S's house was demolished. When
Mr. J was informed about the incident he asked for the refund of token money.
Referring to the relevant provisions of the Indian Contract Act, 1872 state whether
Mr. J is entitled to the refund of the amount paid. (4 Marks PYQ June 24) (MTP Jan 25
Series 2)

Ans: -
According to section 56 of the Indian Contract Act, 1872, an agreement to do an act
impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful: A contract to do an act which,

after the contract is made, becomes impossible, or, by reason of some event which the
promisor could not prevent, unlawful, becomes void when the act becomes impossible or
unlawful.

According to section 65 of the Indian Contract Act, 1872, when an agreement is discovered to
be void, or when a contract becomes void, any person who has received any advantage under
such agreement or contract is bound to restore it, or to make compensation for it to the
person from whom he received it.

In the instant case, Mr. J entered into a contract with Mr. S to purchase his house for ` 20 lakh,
with a token payment of ` 50,000. The agreement included a condition that the sale would be
completed within three months. Before the completion of the sale, the house was demolished
by the local administration. This event made it impossible for Mr. S to sell the house to Mr. J
as agreed.

In this situation, Mr. J is required to refund ` 50,000 token money paid to Mr. S, as the contract
to sell the house has become void due to the demolition of the house by the local
administration, as a result of which it becomes impossible to sell the house on the part of S.

9. T owes G, the following debts as per the table given below:

Amount of the Debt (in `) Position of Debt

Business Law Question Book 33 CA Foundation

 5,000 Time barred on 01st July, 2023 as
per the provisions of the
Limitation Act,1963
3,000 Time barred on 01st July, 2023 as
per the provisions of the
Limitation Act,1963
12,500 Due on 1st April, 2022
10,000 Due on 15th July, 2023
7,500 Due on 25th November, 2023
G makes payment on 1st April, 2023 mentioned as below without any notice regarding
how to appropriate the amount/ payment.
(i)A cheque of ` 12,500
(ii)A cheque of ` 4,000.
In such a situation how the appropriation of the payment is done against the debts as
per the provisions of the Indian Contract Act, 1872 by assuming that T also has not
appropriated the amount received towards any particular debt. (4 Marks PYQ Dec
23)

Ans: -
As per the provisions of Section 59 of the Indian Contract Act, 1872, where a debtor, owing
several distinct debts to one person, makes a payment to him, either with express intimation,
or under circumstances implying that the payment is to be applied to the discharge of some
particular debt, the payment, if accepted, must be applied accordingly.
As per the provisions of Section 61 of the Indian Contract Act, 1872, where neither party
makes any appropriation, the payment shall be applied in discharge of the debts in order of
time, whether they are or are not barred by the law in force for the time being as to the
limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge
of each proportionably.
In the present case, G made two payments by way of two cheques. Also, neither G nor T said
anything as to the appropriation of the amount towards any particular debt.
Since one of the issued cheques was exactly the amount of the debt due i.e. of `12,500, by
applying the provisions of Section 59 we can say that this is a circumstance indicating for
appropriation against that particular debt.
Cheque of ` 4,000 can be appropriated in terms of the provisions of Section 61 since neither
of the parties, have made any appropriation. The amount will be appropriated in discharging
of the debts in order of time against any lawful debt whether they are or are not barred by
the law in force for the time being as to the limitation of suits.
Hence cheque of ` 12,500 will be appropriated against the debt of ` 12,500 which is due on
1st April, 2022.
As per the scenario given in the question, since two debts are persisting in order of time which
were treated as time barred on 1st July 2023, the amount of ` 4,000 will be appropriated
proportionately, i.e. in proportion of 5,000:3,000. Therefore as per the provisions of the
Indian Contract Act, 1872, `2,500 will be appropriated for the first debt and ` 1,500 will be
appropriated towards the second debt.

Business Law Question Book 34 CA Foundation

 10. Mr. S promises Mr. M to paint a family picture for ` 20,000 and assures to complete
his assignment by 15th March, 2023. Unfortunately, Mr. S died in a road accident on
1st March, 2023 and his assignment remains undone. Can Mr. M bind the legal
representative of Mr. S for the promise made by Mr. S? Suppose Mr. S had promised
to deliver some photographs to Mr. M on 15th March, 2023 against a payment of `
10,000 but he dies before that day. Will his representative be bound to deliver the
photographs in this situation? Decide as per the provisions of the Indian Contract Act,
1872. (4 Marks PYQ June 23) (MTP June 24 Series 3)

Ans: -
The parties to a contract must either perform, or offer to perform, their respective promises,
unless such performance is dispensed with or excused under the provisions of this Act, or of
any other law.

Promises bind the representatives of the promisors in case of the death of such promisors
before performance, unless a contrary intention appears from the contract. (Section 37 of the
Indian Contract Act, 1872).

As per the provisions of Section 40 of the Indian Contract Act, 1872, if it appears from the
nature of the case that it was the intention of the parties to any contract that any promise
contained in it should be performed by the promisor himself, such promise must be
performed by the promisor. In other cases, the promisor or his representative may employ a
competent person to perform it.

In terms of the provisions of Section 40 stated above, in case where Mr. S has to paint a family
picture for Mr. M, Mr. M cannot ask the legal representative of Mr. S to complete the painting
work on Mr. S’s death, since painting involves the use of personal skill.

In terms of the provisions of Section 37 stated above, in case where Mr. S had promised to
deliver some photographs to Mr. M, the legal representatives of Mr. S shall be bound to
deliver the photographs in this situation.

11. Differentiate between Novation and Alteration as per the Indian Contract Act, 1872.
(5 Marks PYQ Nov 22)

Ans: -
Novation and Alteration: The law pertaining to novation and alteration is contained in
Sections 62 to 67 of the Indian Contract Act, 1872. In both these cases, the original contract
need not be performed. Still there is a difference between these two.

1. Meaning: Novation means substitution of an existing contract with a new one. But in case
of alteration the terms of the contract may be altered by mutual agreement by the
contracting parties.

Business Law Question Book 35 CA Foundation

2. Change in terms and conditions and parties: Novation may be made by changing in the
terms of the contract or there may be a change in the contracting parties. But in case of
alteration the terms of the contract may be altered by mutual agreement by the contracting
parties but the parties to the contract will remain the same.

3. Substitution of new contract: In case of novation, there is altogether a substitution of new

contract in place of the old contract. But in case of alteration, it is not essential to substitute
a new contract in place of the old contract. In alteration, there may be a change in some of
the terms and conditions of the original agreement.

12. Mr. Sohan, a wealthy individual provided a loan of ` 80,000 toMr. Mukesh on 26th
February, 2023. The borrower, Mr. Mukesh asked fora further loan of ` 1,50,000.

Mr. Sohan agreed but provided the loan in parts on different dates. He provided `
1,00,000 on 28th February, 2023 and remaining ` 50,000 on3rd March, 2023.

On 10th March, 2023 Mr. Mukesh while paying off part ` 75,000 to [Link] insisted
that the lender should adjust ` 50,000 towards the loantaken on 3rd March, 2023 and
balance as against the loan on26th February, 2023.

Mr. Sohan objected to this arrangement and asked the borrower toadjust in the order
of date of borrowal of funds.

Now you decide:

(i)Whether the contention of Mr. Mukesh correct or otherwise as perthe provisions of
the Indian Contract Act, 1872?
(ii)What would be the answer in case the borrower does not insist onsuch order of
adjustment of repayment?
(iii) What would be the mode of adjustment/appropriation of such part payment in
case neither Mr. Sohan nor Mr. Mukesh insist on any order of adjustment on their
part? (RTP Jan 25)

Ans: -
Appropriation of Payments: In case where a debtor owes several debts to the same creditor
and makes payment, which is not sufficient to discharge all the debts, the payment shall be
appropriated (i.e. adjusted against the debts) as per the provisions of Section 59 to 61 of the
Indian Contract Act, 1872.

(i) As per the provisions of 59 of the Act, where a debtor owing several distinct debts to one
person, makes a payment to him either with express intimation or under circumstances
implying that the payment is to be applied to the discharge of some particular debt, the
payment, if accepted, must be applied accordingly.
Therefore, the contention of Mr. Mukesh is correct, and he can specify the manner of
appropriation of repayment of debt.

Business Law Question Book 36 CA Foundation

(ii) As per the provisions of 60 of the Act, where the debtor has omitted to intimate and there
are no other circumstances indicating to which debt the payment is to be applied, the creditor
may apply it at his discretion to any lawful debt actually due and payable to him from the
debtor, where its recovery is or is not barred by the law in force for the time being as to the
limitation of suits.
Hence in case Mr. Mukesh fails to specify the manner of appropriation of debt on part
repayment, Mr. Sohan the creditor, can appropriate the payment as per his choice.

(iii) As per the provisions of 61 of the Act, where neither party makes any appropriation, the
payment shall be applied in discharge of the debts in order of time, whether they are or are
not barred by the law in force for the time being as to the limitation of suits. If the debts are
of equal standing, the payments shall be applied in discharge of each proportionately.
Hence in case where neither Mr. Mukesh nor Mr. Sohan specifies the manner of appropriation
of debt on part repayment, the appropriation can be made in proportion of debts.

13. (i) Mr. Ayush, the employer induced his employee Mr. Bobby to sell his one room flat
to him at less than the market value to secure promotion. Mr. Bobby sold the flat to
Mr. Ayush. Later on, Mr. Bobby changed his mind and decided to sue Mr. Ayush.
Examine the validity of the contract as per the provisions of the Indian Contract Act,
1872.
(ii) Mr. Sooraj promises Mr. Manoj to paint a family picture for ` 20,000 and assures
to complete his assignment by 15th March, 2023. Unfortunately, Mr. Sooraj died in a
road accident on 1st March, 2023 and his assignment remains undone. Can Mr. Manoj
bind the legal representative of Mr. Sooraj for the promise made by Mr. Sooraj?
Suppose Mr. Sooraj had promised to deliver some photographs to Mr. Manoj on 15th
March, 2023 against a payment of ` 10,000 but he dies before that day. Will his
representative be bound to deliver the photographs in this situation?
Decide as per the provisions of the Indian Contract Act, 1872. (RTP June 24)

Ans: -
(i) According to section 16 of the Indian Contract Act, 1872, a contract is said to be induced
by ‘undue influence’ where the relations subsisting between the parties are such that one of
the parties is in a position to dominate the will of the other and he uses that position to obtain
an unfair advantage over the other.
When consent to an agreement is caused by undue influence, the contract is voidable at the
option of the party, whose consent was so caused.
Hence, the contract between Mr. Ayush and Mr. Bobby is voidable at the option of Mr. Bobby
as it was induced by undue influence by Mr. Ayush and therefore Mr. Bobby can sue Mr.
Ayush.
(ii) The parties to a contract must either perform, or offer to perform, their respective
promises, unless such performance is dispensed with or excused under the provisions of this
Act, or of any other law.
Promises bind the representatives of the promisors in case of the death of such promisors
before performance, unless a contrary intention appears from the contract. (Section 37 of the
Indian Contract Act, 1872).

Business Law Question Book 37 CA Foundation

As per the provisions of Section 40 of the Indian Contract Act, 1872, if it appears from the
nature of the case that it was the intention of the parties to any contract that any promise
contained in it should be performed by the promisor himself, such promise must be
performed by the promisor. In other cases, the promisor or his representative may employ a
competent person to perform it.
In terms of the provisions of Section 40 stated above, in case where Mr. Sooraj has to paint a
family picture for Mr. Manoj, Mr. Manoj cannot ask the legal representative of Mr. Sooraj to
complete the painting work on Mr. Sooraj’s death, since painting involves the use of personal
skill.
In terms of the provisions of Section 37 stated above, in case where Mr. Sooraj had promised
to deliver some photographs to Mr. Manoj, the legal representatives of Mr. Sooraj shall be
bound to deliver the photographs in this situation.

14. What will be rights with the promisor in following cases under the Indian Contract Act,
1872? Explain with reasons:
(a) Sunil promised to bring back Jatin to life again.
(b) Aman agreed to sell 50 kgs of apples to Raman. The loaded truck left for delivery
on 15th March but due to riots in between reached Raman on 19th March due to
which the apples were rotten.
(c) An artist promised to paint on the fixed date for a fixed amount of remuneration
but met with an accident and lost his both hands.
(d) Abhishek entered into contract of import of toys from China. But due to
disturbance in the relation of both the countries, the imports from China were
banned. (RTP Sept 24)

Ans: -
(a) The contract is void because of its initial impossibility of performance.
(b) Time is essence of this contract. By the time apples reached Raman, they were already
rotten. The contract is discharged due to destruction of the subject matter of contract.
(c) Such contract is of personal nature and hence cannot be performed due to occurrence of
an event resulting in impossibility of performance of contract.
(d) Such contract is discharged without performance because of subsequent illegality nature
of the contract.

15. Explain any five circumstances under which contracts need not be performed with the
consent of both the parties. (RTP Sept 24) (MTP June 24 Series 1)

Ans: -
Under following circumstances, the contracts need not be performed with the consent of
both the parties:
(i) Novation: Where the parties to a contract substitute a new contract for the old, it is called
novation. A contract in existence may be substituted by a new contract either between the
same parties or between different parties, the consideration mutually being the discharge of
old contract. Novation can take place only by mutual agreement between the parties. On

Business Law Question Book 38 CA Foundation

novation, the old contract is discharged and consequently it need not be performed. (Section
62 of the Indian Contract Act, 1872)
(ii) Rescission: A contract is also discharged by recission. When the parties to a contract agree
to rescind it, the contract need not be performed. (Section 62)
(iii) Alteration: Where the parties to a contract agree to alter it, the original contract is
rescinded, with the result that it need not be performed. In other words, a contract is also
discharged by alteration. (Section 62)
(iv) Remission: Every promisee may dispense with or remit, wholly or in part, the performance
of the promise made to him, or may extend the time for such performance or may accept
instead of it any satisfaction which he thinks fit. In other words, a contract is discharged by
remission. (Section 63)
(v) Rescinds voidable contract: When a person at whose option a contract is voidable rescinds
it, the other party thereto need not perform any promise therein contained in which he is the
promisor.
(vi) Neglect of promisee: If any promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise, the promisor is excused by such
neglect or refusal as to any non-performance caused thereby. (Section 67)

16. Mr. Gaurav and Mr. Vikas entered into a contract on 1st July, 2024, according to which
Mr. Gaurav had to supply 100 tons of sugar to Mr. Vikas at a certain price strictly within
a period of 10 days of the contract. Mr. Vikas also paid an amount of ` 70,000 towards
advance as per the terms of the above contract. The mode of transportation available
between their places is roadway only. Severe flood came on 2nd July, 2024 and the
only road connecting their places was damaged and could not be repaired within
fifteen days. Mr. Gaurav offered to supply sugar on 20th July, 2024 for which Mr. Vikas
did not agree. On 1st August, 2024, Mr. Gaurav claimed compensation of ` 20,000 from
Mr. Vikas for refusing to accept the supply of sugar, which was not there within the
purview of the contract. On the other hand, Mr. Vikas claimed for refund of ` 70,000,
which he had paid as advance in terms of the contract. Analyse the above situation in
terms of the provisions of the Indian Contract Act, 1872 and decide on Mr. Vikas
contention. (MTP Sept 24 Series 2)

Ans: -
Subsequent or Supervening impossibility (Becomes impossible after entering into contract):
When performance of promise become impossible or illegal by occurrence of an unexpected
event or a change of circumstances beyond the contemplation of parties, the contract
becomes void e.g. change in law etc.
Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is
discovered to be void or when a contract becomes void, any person who has received any
advantage under such agreement or contract is bound to restore it, or to make compensation
for it to the person from whom he received it.
In the given question, after Mr. Gaurav and Mr. Vikas have entered into the contract to supply
100 tons of sugar, the event of flood occurred which made it impossible to deliver the sugar
within the stipulated time. Thus, the promise in question became void. Further, Mr. Gaurav

Business Law Question Book 39 CA Foundation

has to pay back the amount of ` 70,000 that he received from Mr. Vikas as an advance for the
supply of sugar within the stipulated time. Hence, the contention of Mr. Vikas is correct.

17. How is a contract is discharged under the Indian Contract Act, 1872 and what are the
different ways in which the obligations created by a contract can come to an end?
(MTP Sept 24 Series 1) length of answer depends on marks allotted to question

Ans: -
A contract is discharged when the obligations created by it come to an end. A contract may
be discharged in any one of the following ways:

(i) Discharge by performance

(ii) Discharge by mutual agreement
(iii) Discharge by impossibility of performance
(iv) Discharge by lapse of time
(v) Discharge by operation of law
(vi) Discharge by breach of contract
(vii) Promisee may waive or remit performance of promise
(viii) Effects of neglect of promisee to afford promisor reasonable facilities for performance
(ix) Merger of rights

18. M Ltd. contract with Shanti Traders to make and deliver certain machinery to them by
30th June 2023 for ` 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture
and deliver the machinery to Shanti Traders. Later, Shanti Traders procured the
machinery from another manufacturer for ` 12.75 lakhs. Due to this, Shanti Traders
was also prevented from performing a contract which it had made with Zenith Traders
at the time of their contract with M Ltd. and were compelled to pay compensation for
breach of contract. Advise Shanti Traders the amount of compensation which it can
claim from M Ltd., referring to the legal provisions of the Indian Contract Act, 1872.
(MTP June 24 Series 2)

Ans: -
Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of contract.
According to it, when a contract has been broken, the party who suffers by such breach is
entitled to receive from the party who has broken the contract, compensation for any loss or
damage caused to him there by which naturally arose in the usual course of things from such
breach or which the parties knew when they made the contract, to be likely to result from
the breach of it. Such compensation is not given for any remote and indirect loss or damage
sustained by reason of the breach. It is further provided in the explanation to the section that
in estimating the loss or damage from a breach of contract, the means which existed of
remedying the inconvenience caused by the non - performance of the contract must be taken
into account. Applying the above principle of law to the given case, M Ltd. is obliged to
compensate for the loss of ` 1.25 lakh (i.e. ` 12.75 minus ` 11.50 = ` 1.25 lakh) which had
naturally arisen due to default in performing the contract by the specified date. Regarding the
amount of compensation which Shanti Traders were compelled to make to Zenith Traders, it

Business Law Question Book 40 CA Foundation

depends upon the fact whether M Ltd., knew about the contract of Shanti Traders for supply
of the contracted machinery to Zenith Traders on the specified date. If so, M Ltd is also obliged
to reimburse the compensation which Shanti Traders had to pay to Zenith Traders for breach
of contract. Otherwise, M Ltd is not liable.

19. Nitesh Gupta is constructing his house. For this purpose, he entered in a contract with
M/s Baba Brick House to supply of 10,000 bricks on 12th August 2023. M/s Baba Brick
House has two Lorries of 5,000 brick capacity. On 12th August 2023, one of the Lorries
was not in working condition so M/s Baba Brick House supplied only 5,000 bricks and
promised Nitesh Gupta to supply rest 5,000 bricks on next day. Nitesh Gupta wants to
cancel the contract, as M/s Baba Brick House did not supply the bricks as per the
contract. M/s Baba Brick House gave the plea that no fault has been made from its
part, hence contract should not be cancelled. In this situation, whether Nitesh Gupta
can avoid the contract under Indian Contract Act, 1872? (MTP June 24 Series 1)

Ans: -
“Performance of Contract” means fulfilment of obligations to the contract. According to
Section 37 of Indian Contract Act, 1872, the parties to a contract must either perform, or offer
to perform, their respective promises unless such performance is dispensed with or excused
under the provisions of the Contract Act or of any other law. Further, the performance should
be for whole obligations. Part delivery cannot be considered as valid performance.
In the instant case, Nitesh Gupta contracted with M/s Baba Brick House to supply of 10,000
bricks on 12th August 2023. M/s Baba Brick House had only two Lorries of 5,000 brick
capacity. But on the agreed date one lorry was not in working condition so only 5,000 bricks
were supplied on 12th August 2023 and promised to supply rest 5,000 bricks on next day.

After taking into account the above provisions and facts, Plea of M/s Baba Brick House cannot
be considered. Performance should be for whole obligation. Hence, part performance by M/s
Baba Brick House cannot be taken as valid performance. Nitesh Gupta is right in avoiding the
contract.

20. A, B and C jointly promised to pay D a sum of ` 6,000. Examine, considering the
provisions of the Indian Contract Act, 1872 -
(i) Can D compel any of three parties A, Band C to pay him ` 6,000?
(ii) C is compelled to pay the whole of the amount to D. Can he recover anything from
A and B, when -
(1) Both A and B were solvents.
(2) A is not in a position to pay anything. (7 Marks) (PYQ Jan 25) (MTP May 25 Series
2)

Ans: -
Section 42 of the Indian Contract Act, 1872 requires that when two or more persons have
made a joint promise, then, unless a contrary intention appears from the contract, all such
persons jointly must fulfil the promise. In the event of the death of any of them, his

Business Law Question Book 41 CA Foundation

representative jointly with the survivors and in case of the death of all promisors, the
representatives of all jointly must fulfil the promise.
Section 43 allows the promisee to seek performance from any of the joint promisors. The
liability of the joint promisors has thus been made not only joint but “joint and several”.
Section 43 provides that in the absence of express agreement to the contrary, the promisee
may compel any one or more of the joint promisors to perform the whole of the promise.
Section 43 deals with the contribution among joint promisors. The promisors, may compel
every joint promisor to contribute equally to the performance of the promise (unless a
contrary intention appears from the contract). If any one of the joint promisors makes default
in such contribution the remaining joint promisors must bear the loss arising from such
default in equal shares.
In the instant case,
(i) D can compel any of three parties A, B and C to pay him ` 6,000.
(ii) (1) C can recover the contribution from A and B because A, B and C are joint promisors.
(2) A is unable to pay anything, C is compelled to pay the whole. C is entitled to receive ` 3,000
from B.

21. Rahul is manufacturer of jute bags. He contracted with Sonia to supply raw jute for
the purpose of making bags. Rahul informed Sonia that production process of jute
bags would start from 27.06.2024 but Sonia must supply raw jute till 25.06.2024 so
that quality verifications can be done in next two days. Sonia supplied the jute on
27.06.2024 and informed Rahul that she couldn’t supply on 25.06.2024 due to some
unavoidable reasons and she also assured that quality measures were not anyway
compromised in supplies. But Rahul wanted to avoid the contract as he was not given
opportunity to examine the goods. In light of provisions of Indian Contract Act, 1872,
state whether Rahul can avoid the contract? (RTP May 25)

Ans: -
“Performance of Contract” means fulfilment of obligations to the contract. According to
Section 37 of the Indian Contract Act, 1872, the parties to a contract must either perform, or
offer to perform, their respective promises unless such performance is dispensed with or
excused under the provisions of the Contract Act or of any other law. Further, the promisee
should have a reasonable opportunity to see that the things offered is the things contracted
for otherwise performance cannot considered as valid performance.
In the instant case, Rahul, a manufacturer of jute bags entered in a contract with Sonia to
supply raw jute with the instructions that he needs raw jute till 25.06.2024 so that quality
verifications can be done in next two days. But Sonia supplied the jute on 27.06.2024 with the
information that she couldn’t supply on 25.06.2024 due to some unavoidable reasons.
On the basis of the facts of the case, Rahul was not given a proper opportunity to examine
the goods at the time of performance. This cannot be considered as valid performance by
Sonia. Hence, Rahul can avoid the contract entered with Sonia.

22. (i) Give your opinion with reference to provisions of the Indian Contract Act, 1872:

Business Law Question Book 42 CA Foundation

 1. Whether Joint promisor and promisee voluntary discharge their obligation even
after death?
2. In case they won't be able to discharge their obligation, whether any of the joint
promisor may be compelled?
3. What would be the situation in case of default by any one of them?
(4 Marks)
(ii) What are the effects of Coercion? "Whether threat to commit suicide is coercion"?
Elaborate with reference to provisions of the Indian Contract Act, 1872. (2 Marks)
(PYQ May 25)

Ans: -
(i) 1. According to section 42 of the Indian Contract Act, 1872, if two or more persons have
made a joint promise, ordinarily all of them during their life-time must jointly fulfil the
promise. After death of any one of them, his legal representative jointly with the survivor or
survivors should do so. After the death of the last survivor the legal representatives of all the
original co-promisors must fulfil the promise.
Hence, the legal representative can jointly discharge the obligations of joint promisor and
promisee, after their death.
2. As per section 43, 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.
Hence, the joint promisor may be compelled.
3. If any one of two or more joint promisors makes default in such contribution, the remaining
joint promisors must bear the loss arising from such default in equal shares.

(ii) Effects of coercion under section 19 of the Indian Contract Act, 1872
(i) Contract induced by coercion is voidable at the option of the party whose consent was so
obtained.
(ii) A person to whom money has been paid or anything delivered under coercion must repay
or return it.
Threat to commit suicide – Whether it is coercion?
Suicide though forbidden by Indian Penal Code is not punishable, as a dead man cannot be
punished. But Section 15 declares that committing or threatening to commit any act
forbidden by Indian Penal Code is coercion. Hence, a threat to commit suicide will be regarded
as coercion.

Business Law Question Book 43 CA Foundation

 UNIT – 5: BREACH OF CONTRACT AND ITS REMEDIES

1. “An anticipatory breach of contract is a breach of contract occurring before the time
fixed for performance has arrived”. Discuss stating also the effect of anticipatory
breach on contracts. (Module Q) (MTP Sept 24 Series 2) (MTP June 24 Series 1)

Ans: -
An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. When the promisor refuses altogether to perform his promise and
signifies his unwillingness even before the time for performance has arrived, it is called
Anticipatory Breach. The law in this regard has very well summed up in Frost v. Knight and
Hochster v. DelaTour:

Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides
as follows: “When a party to a contract has refused to perform or disable himself from
performing, his promise in its entirety, the promisee may put an end to the contract, unless
he has signified, but words or conduct, his acquiescence in its continuance.”

Effect of anticipatory breach: The promisee is excused from performance or from further
performance. Further he gets an option:
(1) To either treat the contract as “rescinded and sue the other party for damages from breach
of contract immediately without waiting until the due date of performance; or
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the
time of performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other party
as well as his own, and the guilty party, if he so decides on re-consideration, may still perform
his part of the contract and can also take advantage of any supervening impossibility which
may have the effect of discharging the contract.

2. “Liquidated damage is a genuine pre-estimate of compensation of damages for certain

anticipated breach of contract whereas Penalty on the other hand is an extravagant
amount stipulated and is clearly unconscionable and has no comparison to the loss
suffered by the parties”. Explain. (Module Q)

Ans: -
Liquidated damage is a genuine pre-estimate of compensation of damages for certain
anticipated breach of contract. This estimate is agreed to between parties to avoid at a later
date detailed calculation and the necessity to convince outside parties.

Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable
and has no comparison to the loss suffered by the parties.

In terms of Section 74 of the Act “where a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or if the contract contains any other
stipulation by way of penalty, the party complaining of the breach is entitled, whether or not
Business Law Question Book 44 CA Foundation
actual damages or loss is proved to have been caused thereby, to receive from the other party
who has broken the contract, a reasonable compensation not exceeding the amount so
named, or as the case may be the penalty stipulated for.

Explanation to Section 74
A stipulation for increased interest from the date of default may be a stipulation by way of
penalty.

In terms of Section 74, courts are empowered to reduce the sum payable on breach whether
it is ‘penalty’ or “liquidated damages” provided the sum appears to be unreasonably high.

Sri ChunniLal vs. Mehta & Sons Ltd (Supreme Court)

Supreme Court laid down the ratio that the aggrieved party should not be allowed to claim a
sum greater than what is specific in the written agreement. But even then, the court has
powers to reduce the amount if it considers it reasonable to reduce.

3. ‘X’ entered into a contract with ‘Y’ to supply him 1,000 water bottles @ ` 5.00 per
water bottle, to be delivered at a specified time. Thereafter, ‘X’ contracts with ‘Z’ for
the purchase of 1,000 water bottles @ ` 4.50 per water bottle, and at the same time
told ‘Z’ that he did so for the purpose of performing his contract entered into with ‘Y’.
‘Z’ failed to perform his contract in due course and market price of each water bottle
on that day was ` 5.25 per water bottle. Consequently, ‘X’ could not procure any water
bottle and ‘Y’ rescinded the contract. Calculate the amount of damages which ‘X’ could
claim from ‘Z’ in the circumstances? What would be your answer if ‘Z’ had not
informed about the ‘Y’s contract? Explain with reference to the provisions of the
Indian Contract Act, 1872. (Module Q)

Ans: -
Breach of Contract-Damages: Section 73 of the Indian Contract Act, 1872 lays down that when
a contract has been broken, the party who suffers by such breach is entitled to receive from
the party who has broken the contract compensation for any loss or damage caused to him
thereby which naturally arose in the usual course of things from such breach or which the
parties knew when they made the contract to be likely to result from the breach of it.

The leading case on this point is “Hadley vs. Baxendale” in which it was decided by the Court
that the special circumstances under which the contract was actually made were
communicated by the plaintiff to the defendant, and thus known to both the parties to the
contract, the damages resulting from the breach of such contract which they would
reasonably contemplate, would be the amount of injury which would ordinarily follow from
the breach of contract under these special circumstances so known and communicated.

The problem asked in this question is based on the provisions of Section 73 of the Indian
Contract Act, 1872. In the instant case ‘X’ had intimated to ‘Z’ that he was purchasing water
bottles from him for the purpose of performing his contract with ‘Y’. Thus, ‘Z’ had the
knowledge of the special circumstances. Therefore, ‘X’ is entitled to claim from ‘Z’ ` 500/- at

Business Law Question Book 45 CA Foundation

the rate of 0.50 paise i.e. 1000 water bottles x 0.50 paise (difference between the procuring
price of water bottles and contracted selling price to ‘Y’) being the amount of profit ‘X’ would
have made by the performance of his contract with ‘Y’.

If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the amount of damages would have been the
difference between the contract price and the market price on the day of default. In other
words, the amount of damages would be ` 750/- (i.e. 1000 water bottles x 0.75 paise).

4. Mr. Chetan was travelling to Manali with his wife by bus of Himalayan Travels Pvt. Ltd.
Due to some technical default in the bus, the driver has to stop the bus in a mid-way
incold night. The driver advised the passengers to get to the shelter in the nearest
hotel which was at a distance of only one kilometer from that place. The wife of Mr.
Chetan caught cold and fell ill due to being asked to get down and she had to walk in
cold night to reach hotel. Mr. Chetan filed the suit against Himalayan Travels Pvt. Ltd.
For damages for the personal inconvenience, hotel charges and medical treatment for
his wife. Explain, whether Mr. Chetan would get compensation for which he filed the
suit under the Indian Contract Act, 1872? (Module Q) (MTP Sept 24 Series 1)

Ans: -
Section 73 of Indian Contract Act, 1872 provides that when a contract has been broken, the
party who suffers by such breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby, which naturally arose
in the usual course of things from such breach, or which the parties knew, when they made
the contract, to be likely to result from the breach of it. But such compensation is not to be
given for any remote and indirect loss or damage sustained by reason of the breach.

In the instant case, Mr. Chetan filed the suit against Himalayan Travels Pvt. Ltd. for damages
for the personal inconvenience, hotel charges and medical treatment for his wife.
On the basis of above provisions and facts of the case, it can be said that Mr. Chetan can claim
damages for the personal inconvenience and hotel charges but not for medical treatment for
his wife because it is a remote or indirect loss.

5. In case of breach of contract, the court may award compensation or damages. Explain
the circumstances when court may award ordinary damages, special damages and
liquidated damages under the provisions of the Indian Contract Act, 1872. (3 Marks
PYQ Sept 24) (MTP Jan 25 Series 1)

Ans: -
Ordinary damages: When a contract has been broken, the party who suffers by such breach
is entitled to receive, from the party who has broken the contract, compensation for any loss
or damage cause to him thereby, which naturally arose in the usual course of things from such
breach, or which the parties know, when they made the contract, to be likely to result from
the breach of it.

Business Law Question Book 46 CA Foundation

Special damages: Where a party to a contract receives a notice of special circumstances
affecting the contract, he will be liable not only for damages arising naturally and directly from
the breach but also for special damages.

Liquidated damage is a genuine pre-estimate of compensation of damages for certain

anticipated breach of contract. This estimate is agreed to between parties to avoid at a later
date detailed calculation and the necessity to convince outside parties.

6. Where a party to a contract refuses altogether to perform, or is disabled from

performing his part of it, the other party has a right to rescind it. Discuss this statement
and the effects of such refusal under the provisions of The Indian Contract Act, 1872.
(6 Marks PYQ June 24)

Ans: -
An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. When the promisor refuses altogether to perform his promise and
signifies his unwillingness even before the time for performance has arrived, it is called
Anticipatory Breach.
Anticipatory breach of a contract may take either of the following two ways:
(a) Expressly by words spoken or written, and
(b) Impliedly by the conduct of one of the parties.
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides
as follows:
“When a party to a contract has refused to perform or disable himself from performing, his
promise in its entirety, the promisee may put an end to the contract, unless he has signified,
but words or conduct, his acquiescence in its continuance.”
Effect of anticipatory breach: The promisee is excused from performance or from further
performance. Further he gets an option:
(1) To either treat the contract as “rescinded and sue the other party for damages from breach
of contract immediately without waiting until the due date of performance;
or
(2) He may elect not to rescind but to treat the contract as still operative and wait for the time
of performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other party
as well as his own, and the guilty party, if he so decides on re-consideration, may still perform
his part of the contract and can also take advantage of any supervening impossibility which
may have the effect of discharging the contract.

7. Describe in brief the rights of the buyer against the seller in case of breach of contract
of Sale. (6 Marks PYQ June 23)

Ans: -
If the seller commits a breach of contract, the buyer gets the following rights against the
seller:

Business Law Question Book 47 CA Foundation

1. Damages for non-delivery [Section 57 of the Sale of Goods Act, 1930]: Where the seller
wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller
for damages for non-delivery.

2. Suit for specific performance (Section 58): Where the seller commits breach of the contract
of sale, the buyer can appeal to the court for specific performance. The court can order for
specific performance only when the goods are ascertained or specific and where damages
would not be an adequate remedy.

3. Suit for breach of warranty (Section 59): Where there is breach of warranty on the part of
the seller, or where the buyer elects to or is forced to treat breach of condition as breach of
warranty, the buyer is not by reason only of such breach of warranty entitled to reject the
goods on the basis of such breach of warranty; but the buyer may –
(i) set up against the seller the breach of warranty in diminution or extinction of the price; or
(ii) sue the seller for damages for breach of warranty.

4. Repudiation of contract before due date (Section 60): Where either party to a contract of
sale repudiates the contract before the date of delivery, the other may either treat the
contract as:
• subsisting and wait till the date of delivery, or
• he may treat the contract as rescinded and sue for damages for the breach.

5. Suit for interest:

(1) The buyer is entitled to recover interest or special damages, or to recover the money paid
where the consideration for the payment of it has failed.
(2) In the absence of a contract to the contrary, the court may award interest at such rate as
it thinks fit on the amount of the price to the buyer in a suit by him for the refund of the price
in a case of a breach of the contract on the part of the seller from the date on which the
payment was made.

8. Rahul was a Disk Jockey at a five-star hotel. As per the contract, he issupposed to
perform every weekend. (i.e. twice a week). Rahul will bepaid ` 2,500 per day.
However, after a month, Rahul willfully absents himself from the performance. Taking
into account the provisions of the Indian Contract Act, 1872, answer the following:
(i) Does the hotel have the right to end the contract?
(ii) If the hotel sends out a mail to Rahul that they are interested to continue the
contract and Rahul accepts, can the hotel rescind the contract after a month on this
ground subsequently?
(iii) In which of the case – (termination of contract or continuance of contract) can the
hotel claim damages that it had suffered as a result of this breach? (RTP June 24)

Ans: -
By analysing Section 39 of the Indian Contract Act, 1872, it is understood that when a party
to a contract has refused to perform or disabled himself from performing his promise entirely,
the following two rights accrue to the aggrieved party (promisee):

Business Law Question Book 48 CA Foundation

(a) To terminate the contract
(b) To indicate by words or by conduct that he is interested in its continuance.

In either of the two cases, the promisee would be able to claim damages that he suffers.

In the given case,

(i) Yes, the hotel has the right to end the contract with Rahul, the DJ.
(ii) The hotel has the right to continue the contract with Rahul. But once this right is exercised,
it cannot subsequently rescind the contract on this ground subsequently.
(iii) In both the cases, the hotel (promisee) is entitled to claim damages that has been suffered
as a result of breach.

9. Seema was running a boutique in New Delhi. She has to deliver some cloth to her
friend Kiran who was putting up an exhibition in Mumbai. Seema delivered the sewing
machine and some cloth to a railway company to be delivered at a place where the
exhibition was to be held. Seema expected to earn an exceptional profit from the sales
made at this exhibition however she did not bring this fact to the notice of the
railway’s authorities. The goods were delivered to the place after the conclusion of
the exhibition. On account of such breach of contract by railways authorities, can
Seema recover the loss of profits under the Indian Contract Act, 1872? (RTP Sept 24)

Ans: -
As per Section 73 to 75 of Indian Contract Act, 1872, damage means a sum of money claimed
or awarded in compensation for a loss or an injury. Whenever a party commits a breach, the
aggrieved party can claim the compensation for the loss so suffered by him. General damages
are those which arise naturally in the usual course of things from the breach itself. (Hadley Vs
Baxendale).
Therefore, when a breach is committed by a party, the defendant shall be held liable for all
such losses that naturally arise in the usual course of business. Such damages are called
ordinary damages. However, special damages are those which arise in unusual circumstances
affecting the aggrieved party and such damages are recoverable only when the special
circumstances were brought to the knowledge of the defendant. If no special notice is given,
then the aggrieved party can only claim the ordinary damages.
In the given case, Seema was to earn an exceptional profit out of the sales made at the
exhibition, however she never informed about it to the railway authorities. Since the goods
were delivered after the conclusion of the exhibition, therefore Seema can recover only the
losses arising in the ordinary course of business. Since no notice about special circumstances
was given to railways authorities, she could not recover the loss of profits.

10. In light of provisions of the Indian Contract Act, 1872 answer the following:
(i) Mr. S and Mr. R made contract wherein Mr. S agreed to deliver paper cup
manufacture machine to Mr. R and to receive payment on delivery. On the delivery
date, Mr. R did not pay the agreed price. Decide whether Mr. S is bound to fulfil his
promise at the time of delivery?

Business Law Question Book 49 CA Foundation

 (ii) Mr. Y has given loan to Mr. G of ` 30,00,000. Mr. G defaulted the loan on due date
and debt became time barred. After the time barred debt, Mr. G agreed to settle the
full amount to Mr. Y. Whether acceptance of time barred debt Contract is enforceable
as per the Indian Contract Act, 1872?
(iii) A & B entered into a contract to supply unique item, alternate of which is not
available in the market. A refused to supply the agreed unique item to B. What
directions could be given by the court for breach of such contract? (MTP June 24 Series
2)

Ans: -
(i) As per Section 51 of the Indian Contract Act, 1872, when a contract consists of reciprocal
promises to be simultaneously performed, no promisor needs to perform his promise unless
the promisee is ready and willing to perform his reciprocal promise. Such promises constitute
concurrent conditions and the performance of one of the promise is
conditional on the performance of the other. If one of the promises is not performed, the
other too need not be performed. Referring to the above provisions, in the given case, Mr. S
is not bound to deliver goods to Mr. R since payment was not made by him at the
time of delivery of goods.

(ii) Promise to pay time-barred debts - Section 25 (3): Where a promise in writing signed by
the person making it or by his authorised agent, is made to pay a debt barred by limitation it
is valid without consideration [Section 25(3)]. In the given case, the loan given by Mr. Y to Mr.
G has become time barred. Thereafter, Mr. G agreed to make payment of full amount to Mr.
Y. Referring to above provisions of the Indian Contract Act, 1872 contract entered between
parties post time barred debt is valid so, Mr. G is bound to pay the agreed amount to Mr. Y
provided the above mentioned conditions of section 25 (3) are fulfilled.

(iii) Where there is a breach of contract for supply of a unique item, mere monetary damages
may not be an adequate remedy for the other party. In such a case, the court may give order
for specific performance and direct the party in breach to carry out his promise according to
the terms of contract. Here, in this case, the court may direct A to supply the item to B because
the refusal to supply the agreed unique item cannot be compensated through money.

11. What do you mean by Quantum Meruit and state the cases where the claim for
Quantum Meruit arises? (MTP June 24 Series 2)

Ans: -
Quantum Meruit: Where one person has rendered service to another in circumstances which
indicate an understanding between them that it is to be paid for although no particular
remuneration has been fixed, the law will infer a promise to pay. Quantum Meruit i.e. as much
as the party doing the service has deserved. It covers a case where the party injured by the
breach had at time of breach done part but not all of the work which he is bound to do under
the contract and seeks to be compensated for the value of the work done. For the application
of this doctrine, two conditions must be fulfilled:
(1) It is only available if the original contract has been discharged.

Business Law Question Book 50 CA Foundation

(2) The claim must be brought by a party not in default.
The object of allowing a claim on quantum meruit is to recompensate the party or person for
value of work which he has done. Damages are compensatory in nature while quantum merit
is restitutory. It is but reasonable compensation awarded on implication of a contract to
remunerate. Where a person orders only 12 bottles of a whiskey from a wine merchant but
also receives 2 bottles of brandy, and the purchaser accepts them, the purchaser must pay a
reasonable price for the brandy.

The claim for quantum meruit arises in the following cases:

(a) When an agreement is discovered to be void or when a contract becomes void.
(b) When something is done without any intention to do so gratuitously.
(c) Where there is an express or implied contract to render services but there is no agreement
as to remuneration.
(d) When one party abandons or refuses to perform the contract.
(e) Where a contract is divisible and the party not in default has enjoyed the benefit of part
performance.
(f) When an indivisible contract for a lump sum is completely performed but badly the person
who has performed the contract can claim the lump sum, but the other party can make a
deduction for bad work.

12. M/s Janta Machine Tools & Co. contracted with M/s Ruchi Traders to make and deliver
certain machinery by 31st July for ` 15 Lakhs. There was a labour strike in the factory
of M/s Janta Machine Tools & Co. and it could not manufacture and deliver the
machinery to M/s Ruchi Traders. Afterwards, M/s Ruchi Traders had to purchase the
machinery from another manufacturer for ` 18 Lakhs. M/s Ruchi Traders was also
prevented from performing a contract which was made with M/s Shiksha
Technologies at the time of its contract with M/s Janta Machine Tools & Co. and were
compelled to pay compensation of ` 2 Lakhs to M/s Shiksha Technologies. M/s Janta
Machine Tools & Co. was very well informed by M/s Ruchi Traders about its contract
with M/s Shiksha Technologies. M/s Ruchi Traders sued M/s Janta Machine Tools &
Co for recovery of compensation of ` 3 Lakhs (i.e. ` 18 Lakhs – ` 15 Lakhs) plus ` 2 Lakhs
given to M/s Shiksha Technologies. Advise under the provisions of the Indian Contract
Act, 1872. (RTP May 25)

Ans: -
Section 73 of the Indian Contract Act, 1872, has laid down the rules as to how the amount of
compensation is to be determined. On the breach of the contract, the party who suffers from
such a breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him by breach.
Compensation can be claimed for any loss or damage which naturally arises in the usual
course of events. Further, compensation can also be claimed for any loss or damage which
the party knew when they entered into the contract, as likely to result from the breach. That
is to say, special damage can be claimed only on a previous notice. But the party suffering
from the breach is bound to take reasonable steps to minimise the loss. No compensation is
payable for any remote or indirect loss.

Business Law Question Book 51 CA Foundation

In the instant case, M/s Ruchi Traders sued M/s Janta Machine Tools & Co. for recovery of
compensation of ` 3 Lakhs (i.e. ` 18 Lakhs – ` 15 Lakhs) plus ` 2 Lakhs given to M/s Shiksha
Technologies.
As M/s Ruchi Traders informed M/s Janta Machine Tools & Co. about its contract with M/s
Shiksha Technologies at the time of making the contract. Hence, ` 2 Lakhs is a special damage
which can be recovered with ordinary damages of ` 3 Lakhs, which is the loss, caused to it.

Business Law Question Book 52 CA Foundation

 UNIT – 6: CONTINGENT AND QUASI CONTRACTS

1. Explain the-term ‘Quasi Contracts’ and state their characteristics. (Module Q) (RTP
June 24) (MTP Jan 25 Series 1)

Ans: -
Quasi Contracts: Under certain special circumstances, obligation resembling those created by
a contract are imposed by law although the parties have never entered into a contract. Such
obligations imposed by law are referred to as ‘Quasi-contracts’. Such a contract resembles
with a contract so far as result or effect is concerned but it has little or no affinity with a
contract in respect of mode of creation. These contracts are based on the doctrine that a
person shall not be allowed to enrich himself unjustly at the expense of another. The salient
features of a quasi-contract are:
1. It does not arise from any agreement of the parties concerned but is imposed by law.
2. Duty and not promise is the basis of such contract.
3. The right under it is always a right to money and generally though not always to a liquidated
sum of money.
4. Such a right is available against specific person(s) and not against the whole world.
5. A suit for its breach may be filed in the same way as in case of a complete contract.

2. X, a minor was studying in [Link]. in a college. On 1st July, 2021 he took a loan of `
1,00,000 from B for payment of his college fees and to purchase books and agreed to
repay by 31st December, 2021. X possesses assets worth ` 9 lakhs. On due date, X fails
to pay back the loan to B. B now wants to recover the loan from X out of his (X’s)
assets. Referring to the provisions of Indian Contract Act, 1872 decide whether B
would succeed. (Module Q)

Ans: -
Yes, B can proceed against the assets of X. According to section 68 of Indian Contract Act,
1872, if a person, incapable of entering into a contract, or any one whom he is legally bound
to support, is supplied by another person with necessaries suited to his condition in life, the
person who has furnished such supplies is entitled to be reimbursed from the property of
such incapable person. Since the loan given to X is for the necessaries suited to the conditions
in life of the minor, his assets can be sued to reimburse B.

3. P left his carriage on D’s premises. Landlord of D seized the carriage against the rent
due from D. P paid the rent and got his carriage released. Can P recover the amount
from D? (Module Q)

Ans: -
Yes, P can recover the amount from D. Section 69 states a person who is interested in the
payment of money which another person is bound by law to pay, and who therefore pays it,
is entitled to get it reimbursed by the other.

Business Law Question Book 53 CA Foundation

In the present case, D was lawfully bound to pay rent. P was interested in making the payment
to D’s landlord as his carriage was seized by him. Hence being an interested party P made the
payment and can recover the same from D.

4. Rahul found a smart watch in a restaurant. He enquired about all the customers
present there but the true owner could not be found. He handed over the same to the
manager of the restaurant to keep till the true owner is found. After a week he went
back to the restaurant to enquire about the smart watch. The manager refused to
return it to Rahul, saying that it did not belong to Rahul. In the light of the Indian
Contract Act, 1872, can Rahul recover it from the Manager? (Module Q) (MTP June
24 Series 3)

Ans: -
Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A person who
finds goods belonging to another and takes them into his custody is subject to same
responsibility as if he were a bailee.

Thus, a finder of lost goods has:

(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.

In the light of the above provisions, the manager must return the smart watch to Rahul, since
Rahul is entitled to retain the smart watch found against everybody except the true owner.

5. Mr. L let out his residential house to Mr. M for ` 50,000 p.m. for a period of one year.
According to the Rent agreement, electricity bill will be paid by Mr. L. But Mr. L could
not pay electricity dues up to 5 months, due to his financial hardships. The Electricity
Board sent the notice of disconnection, if it is not paid within a week's time. To avoid
all this, Mr. M paid the electricity bill of ` 50,000 with penalty. Later on, L refused to
reimburse 50,000 and argued that he has paid bill voluntarily because of his own
interest. Decide with reference to provisions of the Indian Contract Act, 1872 whether
Mr. M is entitled to be reimbursed by Mr. L? (3 Marks PYQ Sept 24) (MTP Jan 25 Series
2)

Ans: -
According to Section 69 of the Indian Contract Act, 1872, a person who is interested in the
payment of money which another is bound by law to pay, and who therefore pays it, is
entitled to be reimbursed by the other.
In the instant case, Mr. M paid the electricity bill to avoid the disconnection that was pending
due to Mr. L's failure to fulfil his contractual obligation. Hence, Mr. M is entitled to be
reimbursed ₹ 50,000 from Mr. L.

Business Law Question Book 54 CA Foundation

 6. Raghav found gold and diamond studded wristwatch value approximately ` 1,00,000/-
on the roadside. He picked it up and then advertised in the newspaper that the true
owner thereof can take the watch after showing proper evidence. After waiting for a
certain period of time, when the true owner did not tum up, he gifted that wristwatch
to his son Mahesh. A few days later, Madhav, the true owner of watch, somehow
noticed his watch on wrist of Mahesh. He approached him to collect the same, but
Mahesh refused. In the evening, Raghav called Madhav and told him that he incurred
f 20,000 to find the true owner if he fails to reimburse him the lawful expenses
incurred on finding out the true owner, he will sue him for recovery thereof or retain
the possession of the watch with him till recovery. Even he can sell the watch for
recovery of expenses. Advise whether the following actions of Raghav were lawful
according to provisions of The Indian Contract Act, 1872:
(A) Gifting the wristwatch to his son.
(B) Warning Madhav to sue for recovery of lawful expenses incurred in finding true
owner.
(C) Retaining the possession of wristwatch till recovery of lawful expenses.
(D) Selling of wristwatch for recovery of expenses. (4 Marks PYQ Sept 24)

Ans: -
Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A person who
finds goods belonging to another and takes them into his custody is subject to same
responsibility as if he were a bailee.

Thus, a finder of lost goods has:

(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.

The right of finder of lost goods- may sue for specific reward offered [Section 168]: The finder
of goods has no right to sue the owner for compensation for trouble and expense voluntarily
incurred by him in finding the owner and preserving the goods found. But he has a right to
retain the goods against the owner until he receives such compensation.

When finder of thing commonly on sale may sell it [Section 169]: When a thing which is
commonly the subject of sale if lost, if the owner cannot with reasonable diligence be found,
or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it—
(1) when the thing is in danger of perishing or of losing the greater part of its value, or
(2) when the lawful charges of the finder in respect of the thing found amount to two-thirds
of its value.

Hence, the answers are:

(A) Gifting the wristwatch to his son Mahesh is unlawful. Raghav had no ownership rights over
the watch and could not legally transfer it to someone else.
(B) Warning Madhav to Sue for Recovery of Lawful Expenses: Raghav has no right to sue
Madhav for the expenses voluntarily incurred by Raghav in finding the owner.

Business Law Question Book 55 CA Foundation

(C) Retaining Possession of the Wristwatch Until Recovery of Lawful Expenses: Raghav’s action
of retaining the wristwatch until Madhav reimburses him for lawful expenses is valid.
(D) Selling of Wristwatch for Recovery of Expenses: the watch is not perishable, and the
expenses claimed (₹ 20,000) are far below two-thirds of the value of the watch (₹ 1,00,000).
Therefore, Raghav does not have the right to sell the watch under these circumstances, and
selling the watch would be unlawful.

7. What is the meaning of contingent contract? Write briefly its essentials. Also, explain
any three rules relating to enforcement of a contingent contract. (6 Marks PYQ June
24) (MTP Jan 25 Series 2)

Ans: -
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the happening or non-
happening of some event or condition. The condition may be precedent or subsequent.
(b) The event referred to as collateral to the contract. The event is not part of the contract.
The event should be neither performance promised nor a consideration for a promise.
(c) The contingent event should not be a mere ‘will’ of the promisor. The event should be
contingent in addition to being the will of the promisor.
(d) The event must be uncertain. Where the event is certain or bound to happen, the contract
is due to be performed, then it is a not contingent contract.

Definition of ‘Contingent Contract’ (Section 31 of the Indian Contract Act, 1872)

“A contract to do or not to do something, if some event, collateral to such contract, does or
does not happen”.

Rules Relating to Enforcement of a contingent contract:

The rules relating to enforcement of a contingent contract are laid down in sections 32, 33,
34, 35 and 36 of the Act.

(a) Enforcement of contracts contingent on an event happening: Section 32 says that “where
a contingent contract is made to do or not to do anything if an uncertain future event
happens, it cannot be enforced by law unless and until that event has happened. If the event
becomes impossible, such contracts become void”.
(b) Enforcement of contracts contingent on an event not happening: Section 33 says that
“Where a contingent contract is made to do or not do anything if an uncertain future event
does not happen, it can be enforced only when the happening of that event becomes
impossible and not before”.
(c) A contract would cease to be enforceable if it is contingent upon the conduct of a living
person when that living person does something to make the ‘event’ or ‘conduct’ as impossible
of happening.
Section 34 says that “if a contract is contingent upon as to how a person will act at an
unspecified time, the event shall be considered to have become impossible when such person
does anything which renders it impossible that he should so act within any definite time or
otherwise than under further contingencies”.

Business Law Question Book 56 CA Foundation

(d) Contingent on happening of specified event within the fixed time: Section 35 says that
Contingent contracts to do or not to do anything, if a specified uncertain event happens within
a fixed time, becomes void if, at the expiration of time fixed, such event has not happened,
or if, before the time fixed, such event becomes impossible.
(e) Contingent on specified event not happening within fixed time: Section 35 also says that -
“Contingent contracts to do or not to do anything, if a specified uncertain event does not
happen within a fixed time, may be enforced by law when the time fixed has expired, and
such event has not happened or before the time fixed has expired, if it becomes certain that
such event will not happen”.
(f) Contingent on an impossible event (Section 36): Contingent agreements to do or not to do
anything, if an impossible event happens are void, whether the impossibility of the event is
known or not to the parties to the agreement at the time when it is made.

8. Rohan found a wallet in a restaurant. He enquired all the customers present there but
the true owner could not be found. He handed over the same to the manager of the
restaurant to keep the wallet till the true owner is found. After a week, Rohan went
back to the restaurant to enquire about the wallet. The manager refused to return it
to Rohan, saying that it did not belong to him. In the light of the Indian Contract Act,
1872, can Rohan recover the wallet from the Manager? (RTP Jan 25)

Ans: -
Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A person who
find goods belonging to another and takes them into his custody is subject to same
responsibility as if he were a bailee.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
In the light of the above provisions, the manager must return the wallet to Rohan, since Rohan
is entitled to retain the wallet found against everybody except the true owner.

9. What constitutes a contingent contract under the Indian Contract Act, 1872, and what
are its essential elements? (MTP Sept 24 Series 1)

Ans: -
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the happening or non-
happening of some event or condition. The condition may be precedent or subsequent.
(b) The event referred to as collateral to the contract. The event is not part of the contract.
The event should be neither performance promised nor a consideration for a promise.
(c) The contingent event should not be a mere ‘will’ of the promisor. The event should be
contingent in addition to being the will of the promisor.
(d) The event must be uncertain. Where the event is certain or bound to happen, the contract
is due to be performed, then it is a not contingent contract.

Business Law Question Book 57 CA Foundation

Definition of ‘Contingent Contract’ (Section 31 of the Indian Contract Act, 1872)
“A contract to do or not to do something, if some event, collateral to such contract, does or
does not happen”.

10. "What do you understand by a quasi-contract? Under what circumstances does it arise
according to the Indian Contract Act, 1872?" (MTP May 25 Series 1)

Ans: -
Quasi Contracts: Under certain special circumstances, obligation resembling those created by
a contract are imposed by law although the parties have never entered into a contract. Such
obligations imposed by law are referred to as ‘Quasi-contracts’. Such a contract resembles
with a contract so far as result or effect is concerned but it has little or no affinity with a
contract in respect of mode of creation. These contracts are based on the doctrine that a
person shall not be allowed to enrich himself unjustly at the expense of another.
Under the provisions of the Indian Contract Act, 1872, the relationship of quasi contract is
deemed to have come to exist in five different circumstances. In none of these cases there
comes into existence any contract between the parties in the real sense. Due to peculiar
circumstances in which they are placed, the law imposes in each of these cases the
contractual liability.

(i) Claim for necessaries supplied to persons incapable of contracting (Section 68): If a
person, incapable of entering into a contract, or anyone whom he is legally bound to support,
is supplied by another person with necessaries suited to his condition in life, the person who
has furnished such supplies is entitled to be reimbursed from the property of such incapable
person.
To establish his claim, the supplier must prove not only that the goods were supplied to the
person who was minor or a lunatic but also that they were suitable to his actual requirements
at the time of the sale and delivery.
(ii) Payment by an interested person (Section 69): A person who is interested in the payment
of money which another is bound by law to pay, and who therefore pays it, is entitled to be
reimbursed by the other.
(iii) Obligation of person enjoying benefits of non-gratuitous act (Section 70): In term of
section 70 of the Act “where a person lawfully does anything for another person, or delivers
anything to him not intending to do so gratuitously and such other person enjoys the benefit
thereof, the latter is bound to pay compensation to the former in respect of, or to restore,
the thing so done or delivered”.
It thus follows that for a suit to succeed, the plaintiff must prove:
(i) that he had done the act or had delivered the thing lawfully;
(ii) that he did not do so gratuitously; and
(iii) that the other person enjoyed the benefit.
(iv) Responsibility of finder of goods (Section 71): ‘A person who finds goods belonging to
another and takes them into his custody is subject to same responsibility as if he were a
bailee’.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take

Business Law Question Book 58 CA Foundation

(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
(v) Money paid by mistake or under coercion (Section 72): “A person to whom money has
been paid or anything delivered by mistake or under coercion, must repay or return it”.
In all the above cases the contractual liability arose without any agreement between the
parties.

11. With reference to provisions of the Indian Contract Act, 1872 define the following
terms:
(i) Quasi-contracts and its salient features
(ii) Responsibility of finder of goods (6 Marks) (PYQ May 25)

Ans: -
Quasi- Contracts: A quasi-contract is not an actual contract, but it resembles a contract. It is
created by law under certain circumstances. The law creates and enforces legal rights and
obligations when no real contract exists. Such obligations are known as quasi-contracts. In
other words, it is a contract in which there is no intention on part of either party to make a
contract but law imposes a contract upon the parties.

Salient features of quasi contracts:

(a) In the first place, such a right is always a right to money and generally, though not always,
to a liquidated sum of money.
(b) Secondly, it does not arise from any agreement of the parties concerned, but is imposed
by the law; and
(c) Thirdly, it is a right which is available not against all the world, but against a particular
person or persons only, so that in this respect it resembles a contractual right.

(ii) Responsibility of finder of goods

As per section 71 of the Indian Contract Act, 1872, ‘A person who finds goods belonging to
another and takes them into his custody is subject to same responsibility as if he were a
bailee’.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.

Business Law Question Book 59 CA Foundation

 UNIT – 7: CONTRACT OF INDEMNITY AND GUARANTEE

1. What are the rights of the indemnity-holder when sued? (Module Q)

Ans: -
Rights of Indemnity- holder when sued (Section 125): The promisee in a contract of indemnity,
acting within the scope of his authority, is entitled to recover from the promisor—

(a) all damages which he may be compelled to pay in any suit

(b) all costs which he may have been compelled to pay in bringing/ defending the suit and
(c) all sums which he may have paid under the terms of any compromise of suit.

It may be understood that the rights contemplated under section 125 are not exhaustive. The
indemnity holder/ indemnified has other rights besides those mentioned above. If he has
incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier to
save him from the liability and to pay it off.

2. Define contract of indemnity and contract of guarantee and state the conditions when
guarantee is considered invalid? (Module Q) (MTP June 24 Series 3)

Ans: -
Section 124 of the Indian Contract Act, 1872 states that “A contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself,
or the conduct of any person”, is called a “contract of indemnity”.

Section 126 of the Indian Contract Act, 1872 states that “A contract to perform the promise
made or discharge liability incurred by a third person in case of his default” is called a
“contract of guarantee”.

The conditions under which the guarantee is invalid or void is provided in section 142, 143
and 144 of the Indian Contract Act. These include:
(i) Guarantee obtained by means of misrepresentation.
(ii) Guarantee obtained by means of keeping silence as to material circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor shall not
act upon it until another person has joined in it as co-surety and that other party fails to join
as such.

3. 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? (Module Q)

Ans: -
Business Law Question Book 60 CA Foundation
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.

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.

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.

4. 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. (Module Q)

Ans: -
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.

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

5. Mr. D was in urgent need of money amounting to ` 5,00,000. He asked Mr. K for the
money. Mr. K lent the money on the sureties of A, B and N without any contract
between them in case of default in repayment of money by D to K. D makes default in
payment. B refused to contribute, examine whether B can escape liability? (Module
Q) (MTP Sept 24 Series 1)

Ans: -
Co-sureties liable to contribute equally (Section 146 of the Indian Contract act, 1872): Equality
of burden is the basis of Co-suretyship. This is contained in section 146 which states that
“when two or more persons are co-sureties for the same debt, or duty, 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”.

Accordingly, on the default of D in payment, B cannot escape from his liability. All the three
sureties A, B and N are liable to pay equally, in absence of any contract between them.

Business Law Question Book 61 CA Foundation

 6. 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. (Module Q)

Ans: -
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.

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.

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.

7. 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. (Module Q)
Ans: -
Case 1: The agreement of guarantee is void because the creditor is incompetent to contract.

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.

8. S asks R to beat T and promises to indemnify R against the consequences. R beats T

and is fined ` 50,000. Can R claim ` 50,000 from S. (Module Q)

Ans: -
R cannot claim ` 50,000 from S because the object of the agreement was unlawful. A contract
of indemnity to be valid must fulfil all the essentials of a valid contract.

Business Law Question Book 62 CA Foundation

 9. 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? (Module Q)

Ans: -
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.

As per the above provisions, liability of Manoj is discharged with relation to all subsequent
credit supplies made by Sharma after revocation of guarantee, because it is a case of
continuing guarantee.

However, liability of Manoj for previous transactions (before revocation) i.e. for ` 40,000
remains. He is liable for payment of ` 40,000 to Sharma because the transaction was already
entered into before revocation of guarantee.

10. '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. (Module Q)

Ans: -
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.

In the instant case, C advances to B, ` 2,00,000 rupees on the guarantee of A. C has also taken
a further security for ` 2,00,000 by mortgage of B’s furniture without knowledge of A. C
cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged
from liability to the amount of the value of the furniture i.e. ` 80,000 and will remain liable for
balance `1,20,000.

Business Law Question Book 63 CA Foundation

 11. State the rights of Indemnity-holder when sued. (2 Marks PYQ Sept 24) (MTP Jan 25
Series 2)

Ans: -
Rights of Indemnity-holder when sued (Section 125 of the Indian Contract Act, 1872): The
promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor/indemnifier—
(a) all damages which he may be compelled to pay in any suit
(b) all costs which he may have been compelled to pay in bringing/ defending the suit and
(c) all sums which he may have paid under the terms of any compromise of suit.

12. Explain any four differences between Contract of Indemnity and Contract of
Guarantee. (4 Marks PYQ Sept 24)

Ans: -
Distinction between a Contract of Indemnity and a Contract of Guarantee
Point of distinction Contract of Indemnity Contract of Guarantee
Number of party/ parties to There are only two parties There are three parties-
the contract namely the indemnifier creditor, principal debtor and
[promisor] and the surety.
indemnified [promisee]
Nature of liability The liability of the indemnifier The liability of the surety is
is primary and unconditional. secondary and conditional as
the primary liability is that of
the principal debtor.
Time of liability The liability of the indemnifier The liability arises only on the
arises only on the happening of non-performance of an
a contingency existing promise or non-
payment of an existing debt.
Time to Act The indemnifier need not act The surety acts at the request
at the request of indemnity of principal debtor
holder.
Right to sue third party Indemnifier cannot sue a third Surety can proceed against
party for loss in his own name principal debtor in his own
as there is no privity of right because he gets all the
contract. Such a right would right of a creditor after
arise only if there is an discharging the debts.
assignment in his favour.
Purpose Reimbursement of loss For the security of the creditor
Competency to contract All parties must be competent In the case of a contract of
to contract. guarantee, where a minor is a
principal debtor, the contract
is still valid.

Business Law Question Book 64 CA Foundation

 13. 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?
(7 Marks PYQ June 24) (RTP Jan 25) (MTP Jan 25 Series 1)

Ans: -
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.

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.

Business Law Question Book 65 CA Foundation

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

14. Explain in brief with reference to the provisions of the Indian Contract Act, 1872, what
are the rights enjoyed by Surety against the Creditor, the Principal Debtor and Co-
Sureties? (6 Marks PYQ June 24) (MTP Jan 25 Series 2) (RTP May 25)

Ans: -
In terms of the provisions of the Indian Contract Act, 1872, the surety enjoys the following
rights:
(a) Rights against the creditor;
(b) Rights against the principal debtor;
(c) Rights against co-sureties.

Right against the Creditor

(a) Surety’s right to benefit of creditor’s securities [Section 141]: 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.
(b) Right to set off: If the creditor sues the surety, for payment of principal debtor’s liability,
the surety may have the benefit of the set off, if any, that the principal debtor had against the
creditor.
(c) Right to share reduction: The surety has right to claim proportionate reduction in his
liability if the principal debtor becomes insolvent.

Right against the principal debtor

(a) Rights of subrogation [Section 140 of the Indian Contract Act, 1872]: Where, a guaranteed
debt has become due, or default of the principal debtor to perform a guaranteed duty has
taken place, the surety, upon payment or performance of all that he is liable for, is invested
with all the rights which the creditor had against the principal debtor.
This right is known as right of subrogation. It means that on payment of the guaranteed debt,
or performance of the guaranteed duty, the surety steps into the shoes of the creditor.
(b) Implied promise to indemnify surety [Section 145]: In every contract of guarantee there is
an implied promise by the principal debtor to indemnify the surety. The surety is entitled to
recover from the principal debtor whatever sum he has rightfully paid under the guarantee,
but not sums which he paid wrongfully.

Rights against co-sureties

“Co-sureties (meaning)- When the same debt or duty is guaranteed by two or more persons,
such persons are called co-sureties”
(a) Co-sureties liable to contribute equally (Section 146): Unless otherwise agreed, each
surety is liable to contribute equally for discharge of whole debt or part of the debt remains
unpaid by debtor.

Business Law Question Book 66 CA Foundation

(b) Liability of co-sureties bound in different sums (Section 147): The principal 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.

15. Sarthak is employed as a cashier on a monthly salary of ` 50,000 by ABCbank for a

period of three years. Mohit gave surety for Sarthak’s goodconduct. After nine
months, the financial position of the bankdeteriorates. Then Sarthak agrees to accept
a lower salary of ` 40,000per month from the Bank. Two months later, it was found
that Sarthakhad misappropriated cash from the time of his appointment. What isthe
liability of Mohit taking into account the provisions of the IndianContract Act, 1872?
(RTP June 24)

Ans: -
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.

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

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

16. ‘Sooraj’ guarantees ‘Vikas’ for the transactions to be done between ‘Vikas’ & ‘Nikhil’
during the month of March 2023. ‘Vikas’ supplied goods of ` 30,000 on 01.03.2023 and
of ` 20,000 on 03.03.2023 to ‘Nikhil’. On 05.03.2023, ‘Sooraj’ died in a road accident.
On 10.03.2023, being ignorant of the death of ‘Sooraj’, ‘Vikas’ further supplied goods
of ` 40,000. On default in payment by ‘Nikhil’ on due date, ‘Vikas’ sued legal heirs of
‘Sooraj’ for recovery of ` 90,000. Describe, whether legal heirs of ‘Sooraj’ are liable to
pay ` 90,000 under the provisions of Indian Contract Act, 1872.
What would be your answer, if the estate of ‘Sooraj’ is worth ` 45,000 only? (RTP Sept
24)

Ans: -
According to section 131 of Indian Contract Act, 1872, in the absence of a contract to
contrary, a continuing guarantee is revoked by the death of the surety as to the future
transactions. The estate of deceased surety, however, liable for those transactions which
had already taken place during the lifetime of deceased. Surety’s estate will not be liable for
the transactions taken place after the death of surety even if the creditor had no knowledge
of surety’s death.
In this question, ‘Sooraj’ was surety for the transactions to be done between ‘Vikas’ &
‘Nikhil’ during the month of March, 2023. ‘Vikas’ supplied goods of ` 30,000, ` 20,000 and of

Business Law Question Book 67 CA Foundation

` 40,000 on 01.03.2023, 03.03.2023 and 10.03.02023 respectively. ‘Sooraj’ died in a road
accident, but this was not in the knowledge of ‘Vikas’. When ‘Nikhil’ defaulted on payment,
‘Vikas’ filed suit against legal heirs of ‘Sooraj’ for recovery of full amount i.e. ` 90,000.
On the basis of above, it can be said in case of death of surety (‘Sooraj’), his legal heirs are
liable only for those transactions which were entered before 05.03.2023 i.e. for ` 50,000.
They are not liable for the transaction done on 10.03.2023 even though Vikas had no
knowledge of death of Sooraj.
Further, if the worth of the estate of deceased is only ` 45,000, the legal heirs are liable for
this amount only.

17. 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. (MTP Jan 25 Series 1)

Ans: -
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.
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.

18. Ankit has taken a loan of ` 1,00,000 from Kishore on the guarantee of Sudeep at the
interest rate of 12% p.a. After some time, due to financial crises of Ankit and at his
request, Kishore reduced the interest rate to 8% and also extended the time for
repayment of loan without the consent of Sudeep. Ankit becomes insolvent. Whether
Kishore sue Sudeep for recovery of the amount under the provisions of the Indian
Contract Act, 1872? (RTP May 25)

Ans: -

Business Law Question Book 68 CA Foundation

Section 133 of the Indian Contract Act, 1872 provides 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.
Further, according to section 135, a contract between the creditor and the principal debtor,
by which the creditor makes a composition with, or promises to give time to, or promises not
to sue, the principal debtor discharges the surety, unless the surety assents to such contract.
In the instant case, Kishore advances Ankit a loan on the guarantee of Sudeep. At the request
of Ankit, Kishore reduces the interest rate and also extended the time for repayment without
the knowledge of Sudeep.
On the basis of the above provisions and facts of the case, the surety Sudeep is discharged as
variation is made in a contract of guarantee and creditor Kishore extends the time for
repayment without obtaining the consent of Sudeep.

19. Albert obtained 2 loans of ` 3,00,000 and ` 4,00,000 respectively from a reputed Bank.
Out of these 2 loans, loan of ` 3,00,000 was guaranteed by Robert. Albert sent `
2,00,000 to bank but did not intimate as to how it is to be appropriated towards the
loans. The Bank appropriated the whole of ` 2,00,000 to the loan of ` 4,00,000 (the
loan not guaranteed). Robert objected on the decision of the Bank. He argued with
bank that repayment amount should be first adjusted to the guaranteed loan. State
with reasons, whether the Bank was correct in its decision under the Indian Contract
Act, 1872? (MTP May 25 Series 1) (RTP Sept 25)

Ans: -

Section 60 of the Indian Contract Act, 1872 provides, where the debtor does not intimate and
there are no circumstances indicating to which debt the payment is to be applied, the creditor
may apply it at his discretion to any lawful debt actually due and payable to him from the
debtor. However, it cannot be applied to a disputed debt.
In the instant case, Albert obtained 2 loans of ` 3,00,000 and ` 4,00,000 respectively from a
reputed Bank of which loan of ` 3,00,000 was guaranteed by Robert. Albert sent ` 2,00,000 to
bank without intimating as to how it is to be appropriated towards the loans. The Bank
appropriated the whole of ` 2,00,000 to the loan of ` 4,00,000 (the loan not guaranteed).
Robert objected that repayment amount should be first adjusted to the guaranteed loan.
On the basis of provisions and facts of the case, it can be said that in the absence of clear
intimation about the appropriation of payment, it is the sole discretion of the Bank to which
loan it can appropriate the amount. Hence, the Bank was correct in its decision under the
Indian Contract Act, 1872.

20. "Explain the circumstances under which a surety may be discharged by revocation of
the contract of guarantee under the Indian Contract Act, 1872." (MTP May 25 Series
1)

Ans: -

Business Law Question Book 69 CA Foundation

A surety is said to be discharged when his liability as surety comes to an end. The various
modes of discharge of surety are as below:
(i) By revocation of the contract of guarantee.
(ii) By the conduct of the creditor, or
(iii) By the invalidation of the contract of guarantee.
By revocation of the Contract of Guarantee
(a) Revocation of continuing guarantee by Notice (Section 130 of the Indian Contract Act,
1872): The continuing guarantee may at any time be revoked by the surety as to future
transactions by notice to the creditors. Once the guarantee is revoked, the surety is not liable
for any future transaction however he is liable for all the transactions that happened before
the notice was given.
A specific guarantee can be revoked only if liability to principal debtor has not accrued.
(b) Revocation of continuing guarantee by surety’s death (Section 131): In the absence of
any contract to the contrary, the death of surety operates as a revocation of a continuing
guarantee as to the future transactions taking place after the death of surety. However, the
surety’s estate remains liable for the past transactions which have already taken place before
the death of the surety.
(c) By novation [Section 62]: The surety under original contract is discharged if a fresh
contract is entered into either between the same parties or between the other parties, the
consideration being the mutual discharge of the old contract.

21. According to provisions of the Indian Contract Act, 1872, define the following terms
with reference to contract of guarantee:
(i) Nature and extent of Surety's Liability
(ii) Discharge of a Contract of Surety by Invalidation of the Contract of Guarantee. (6
Marks) (PYQ May 25)

Ans: -
(i) Nature and extent of Surety’s Liability [Section 128 of the Indian Contract Act, 1872]
(A) The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract.
(B) Liability of surety is of secondary nature as he is liable only on default of principal debtor.
(c) Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
(D) A creditor may choose to proceed against a surety first, unless there is an agreement to
the contrary.

(ii) Discharge of a contract of Surety by the invalidation of the contract of guarantee.

(a) Guarantee obtained by misrepresentation [Section 142]: 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.
(b) Guarantee obtained by concealment [Section 143]: Any guarantee which the creditor has
obtained by means of keeping silence as to material circumstances is invalid.
(c) Guarantee on contract that creditor shall not act on it until co-surety joins (Section 144):
Where a person gives a guarantee upon a contract that the creditor shall not act upon it until

Business Law Question Book 70 CA Foundation

another person has joined in it as co-surety, the guarantee is not valid if that other person
does not join.

Business Law Question Book 71 CA Foundation

 UNIT – 8: BAILMENT AND PLEDGE

1. State the essential elements of a contract of bailment. (Module Q) (MTP June 24 Series
3) (MTP June 24 Series 1)

Ans: -
Essential elements of a contract of bailment: Section 148 of the Indian Contract Act, 1872
defines the term ‘Bailment’. A ‘bailment’ is the delivery of goods by one person to another
for some purpose upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering them.
The essential elements of the contract of the bailment are:

(i) Delivery of goods—The essence of bailment is delivery of goods by one person to another.

(ii) Bailment is a contract—In bailment, the delivery of goods is upon a contract that when the
purpose is accomplished, the goods shall be returned to the bailor.

(iii) Return of goods in specific—The goods are delivered for some purpose and it is agreed
that the specific goods shall be returned.

(iv) Ownership of goods—In a bailment, it is only the possession of goods which is transferred,
and the bailor continues to be the owner of the goods.

(v) Property must be movable—Bailment is only for movable goods and never for immovable
goods or money.

2. Give differences between Bailment and Pledge. (Module Q)

Ans: -
Distinction between bailment and pledge: The following are the distinction between bailment
and pledge:
(a) As to purpose: Pledge is a variety of bailment. Under pledge goods are bailed as a security
for a loan or a performance of a promise. In regular bailment the goods are bailed for other
purpose than the two referred above. The bailee takes them for repairs, safe custody etc.
(b) As to right of sale: The pledgee enjoys the right to sell only on default by the pledgor to
repay the debt or perform his promise, that too only after giving due notice. In bailment the
bailee, generally, cannot sell the goods. He can either retain or sue for non-payment of dues.
(c) As to right of using goods: Pledgee has no right to use goods. A bailee can, if the terms so
provide, use the goods.
(d) Consideration: In pledge there is always a consideration whereas in a bailment there may
or may not be consideration.
(e) Discharge of contract: Pledge is discharged on the payment of debt or performance of
promise whereas bailment is discharged as the purpose is accomplished or after specified
time.

Business Law Question Book 72 CA Foundation

 3. Examine whether the following constitute a contract of ‘Bailment’ under the
provisions of the Indian Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities. (Module Q)

Ans: -
As per Section 148 of the Act, bailment is the delivery of goods by one person to another for
some purpose, upon a contract, that the goods shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering them.

For a bailment to exist the bailor must give possession of the bailed property and the bailee
must accept it. There must be no transfer in ownership of the goods.

(i) No. Mere custody of goods does not mean possession. In the given case, since the keys of
the car are with V, Section 148, of the Indian Contract Act, 1872 shall not applicable.

(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore,
bailment exists and section 148 is applicable.

4. A hires a carriage from B and agrees to pay ` 500 as hire charges. The carriage is unsafe,
though B is unaware of it. A is injured and claims compensation for injuries suffered
by him. B refuses to pay. Discuss the liability of B. (Module Q)

Ans: -
Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 150. The section provides that if the goods are bailed for hire, the bailor
is responsible for such damage, whether he was or was not aware of the existence of such
faults in the goods bailed. Accordingly, applying the above provisions in the given case, B is
responsible to compensate A for the injuries sustained even if he was not aware of the defect
in the carriage.

5. A bails his jewellery with B on the condition to safeguard it in a bank’s safe locker.
However, B kept it in safe locker at his residence, where he usually keeps his own
jewellery. After a month all jewellery was lost in a religious riot. A filed a suit against
B for recovery. Referring to provisions of the Indian Contract Act, 1872, state whether
A will succeed. (Module Q)

Ans: -
According to section 152 of the Indian Contract Act, 1872, the bailee, in the absence of any
special contract, is not responsible for the loss, destruction or deterioration of the thing
bailed, if he has taken reasonable care as required under section 151.

Here, A and B agreed to keep the jewellery at the Bank’s safe locker and not at the latter’s
residence (i.e. B’s residence). Thus, B is liable to compensate A for his negligence to keep
jewellery at his (B’s) residence.

Business Law Question Book 73 CA Foundation

 6. R gives his umbrella to M during raining season to be used for two days during
Examinations. M keeps the umbrella for a week. While going to R’s house to return
the umbrella, M accidently slips and the umbrella is badly damaged. Who bear the loss
and why? (Module Q) (MTP Sept 24 Series 2)

Ans: -
M shall have to bear the loss since he failed to return the umbrella within the stipulated time
and Section 161 clearly says that where a bailee fails to return the goods within the agreed
time, he shall be responsible to the bailor for any loss, destruction or deterioration of the
goods from that time notwithstanding the exercise of reasonable care on his part.

7. Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising
to give ` 200 at the time of taking back the bailed goods. Srijith's employee, unaware
of this, mixed the 50 kg of sugar belonging to Amar with the sugar in the shop and
packaged it for sale when Srijith was away. This came to light only when Amar came
asking for the sugar he had bailed with Srijith, as the price of the specific quality of
sugar had trebled. What is the remedy available to Amar? (Module Q)

Ans: -
According to section 157 of the Contract Act, 1872, if the bailee, without the consent of the
bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible
to separate the goods bailed from the other goods and deliver them back, the bailor is entitled
to be compensated by the bailee for the loss of the goods.

In the given question, Srijith’s employee mixed high quality sugar bailed by Amar and then
packaged it for sale. The sugars when mixed cannot be separated. As Srijith’s employee has
mixed the two kinds of sugar, he (Srijith) must compensate Amar for the loss of his sugar.

8. Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of
making new a silver bowl out of it. Every evening she used to receive the unfinished
good (silver bowl) to put it into box kept at Mr. Y’s Shop. She kept the key of that box
with herself. One night, the silver bowl was stolen from that box. Was there a contract
of bailment? Whether the possession of the goods (actual or constructive) delivered,
constitute contract of bailment or not? (Module Q)

Ans: -
Section 148 of Indian Contract Act 1872 defines 'Bailment' as the delivery of goods by one
person to another for some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the direction of the person
delivering them.

According to Section 149 of the Indian Contract Act, 1872, the delivery to the bailee may be
made by doing anything which has the effect of putting the goods in the possession of the

Business Law Question Book 74 CA Foundation

intended bailee or of any person authorised to hold them on his behalf. Thus, delivery is
necessary to constitute bailment.

Thus, the mere keeping of the box at Y’s shop, when A herself took away the key cannot
amount to delivery as per the meaning of delivery given in the provision in section 149.
Therefore, in this case there is no contract of bailment as Mrs. A did not deliver the complete
possession of the good by keeping the keys with herself.

9. Srushti acquired valuable diamond at a very low price by a voidable contract under
the provisions of the Indian Contract Act, 1872. The voidable contract was not
rescinded. Srushti pledged the diamond with Mr. VK. Is this a valid pledge under the
Indian Contract Act, 1872? (Module Q)

Ans: -
Pledge by person in possession under voidable contract [Section 178A of the Indian Contract
Act, 1872]: When the pawnor has obtained possession of the goods pledged by him under a
contract voidable under section 19 or section 19A, but the contract has not been rescinded
at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in
good faith and without notice of the pawnor’s defect of title.

Therefore, the pledge of diamond by Srushti with Mr. VK is valid.

10. In accordance with the provisions of the Indian Contract Act, 1872, answer the
following:
(i) Rights of Bailor against any wrong doer (Third Party)
(ii) Duties of the Pawnee (6 Marks PYQ Sept 24) (MTP Jan 25 Series 2)

Ans: -
(i) Suit by bailor & bailee against wrong doers [Section 180 of the Indian Contract Act, 1872]:
If a third person wrongfully deprives the bailee of the use or possession of the goods bailed,
or does them any injury, the bailee is entitled to use such remedies as the owner might have
used in the like case if no bailment had been made; and either the bailor or the bailee may
bring a suit against a third person for such deprivation or injury.

(ii) Duties of the Pawnee

Pawnee has the following duties:
a. Duty to take reasonable care of the pledged goods.
b. Duty not to make unauthorized use of pledged goods.
c. Duty to return the goods when the debt has been repaid or the promise has been
performed.
d. Duty not to mix his own goods with goods pledged.
e. Duty not to do any act which is inconsistent with the terms of the pledge.
f. Duty to return accretion to the goods, if any.

Business Law Question Book 75 CA Foundation

 11. Examine whether the following constitute a contract of ‘Bailment’ under the
provisions of the Indian Contract Act, 1872:
(i) Vikas parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities. (RTP June 24)

Ans: -
As per Section 148 of the Indian Contract Act, 1872, bailment is the delivery of goods by one
person to another for some purpose, upon a contract, that the goods shall, when the purpose
is accomplished, be returned or otherwise disposed of according to the directions of the
person delivering them.
For a bailment to exist, the bailor must give possession of the bailed property and the bailee
must accept it.
(i) No. Mere custody of goods does not mean possession. In the given case, since the keys of
the car are with Vikas, Section 148, of the Indian Contract Act, 1872 shall not be applicable.
(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore,
bailment exists, and section 148 is applicable.

12. Mr. Stefen owns a chicken farm near Gurugram, where he breeds them and sells eggs
and live chicken to retail shops in Gurugram. Mr. Flemming also owns a similar farm
near Gurugram, doing the same business. Mr. Flemming had to go back to his native
place in Australia for one year. He needed money for travel, so he had pledged his
farm to Mr. Stefen for one year and received a deposit of ` 25 lakhs and went away.
At that point of time, the stock of live birds was 100,000 and eggs 10,000. The
condition was that when Flemming returns, he will repay the deposit and take
possession of his farm with live birds and eggs.
After one year Flemming came back and returned the deposit. At that time there were
109,000 live birds (increase is due to hatching of eggs out of 10,000 eggs he had left),
and 15,000 eggs.
Mr. Stefen agreed to return 100,000 live birds and 10,000 eggs only.
State the duties of Mr. Stefen as Pawnee and advise Mr. Flemming about his rights in
the given case. (RTP Sept 24)

Ans: -
According to section 163 of the Indian Contract Act, 1872, in the absence of any contract to
the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any
increase or profit which may have accrued from the goods bailed.
In the given question, when Mr. Flemming returned from Australia there were 1,09,000 live
birds and 15,000 eggs (1,00,000 birds and 10,000 eggs were originally deposited by Mr.
Flemming). Mr. Stefen agreed to return 1,00,000 live birds and 10,000 eggs only and not the
increased number of live birds and eggs.

In the light of the provision of law and facts of the question, following are the answers:

Business Law Question Book 76 CA Foundation

Duties of Mr. Stefen: Mr. Stefen (pawnee) is bound to deliver to Mr. Flemming (pawnor), any
increase or profit (9,000 live birds and 5,000 eggs) which has occurred from the goods bailed
(i.e. the live birds and eggs).

Right of Mr. Flemmimg: Mr. Flemming is entitled to recover from Pawnee any increase in
goods so pledged.

13. Explain the circumstances under which a contract of bailment may be terminated
under the Indian Contract Act, 1872. (MTP May 25 Series 2)

Ans: -
A contract of bailment shall terminate under the Indian Contract Act, 1872 in the following
circumstances:
1. On expiry of stipulated period: If the goods were given for a stipulated period, the contract
of bailment shall terminate after the expiry of such period.
2. On fulfillment of the purpose: If the goods were delivered for a specific purpose, a bailment
shall terminate on the fulfillment of that purpose.
3. By Notice:
(a) Where the bailee acts in a manner which is inconsistent with the terms of the bailment,
the bailor can always terminate the contract of bailment by giving a notice to the bailee.
(b) A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the
bailee. However, the termination should not cause loss to the bailee in excess of the benefit
derived by him. In case the loss exceeds the benefit derived by the bailee, the bailor must
compensate the bailee for such a loss (Sec. 159).
4. By death: A gratuitous bailment terminates upon the death of either the bailor or the
bailee.
5. Destruction of the subject matter: A bailment is terminated if the subject matter of the
bailment is destroyed or there is a change is in the nature of goods which makes it impossible
to be used for the purpose of bailment.

14. X was running a business of Car on lease. One fine day, Y came to hire a car for 10 days
for his business tour from Delhi to Amritsar. X offered him a Honda city for ` 50,000/-
for 10 days on a condition that petrol and toll expenses will be borne by him. During
the journey, engine of car was choked. Y has to spend ` 10,000/- for repair of engine.
When he was coming back from Amritsar, brakes of car were not working and a major
accident of Y happened due to this. Y was admitted to hospital and paid a bill of `
50,000 on recovery. Y asked X to compensate him charges for car repair and hospital
expenses amounting ` 60,000/-. X denied for compensation by saying that he was not
aware about the engine and brakes fault. Y filed a suit against X for recovery of
damages. Give your opinion with reference to provisions of the Indian Contract Act,
1872:
(i) Whether Y can withheld the amount of hire charges ` 50,000/- on account of non-
payment of damages?
(ii) Whether Mr. X was liable to pay Damage as he was not aware of the fact of faults
in car? (7 Marks) (PYQ May 25)
Business Law Question Book 77 CA Foundation
Ans: -
Bailment: As per Section 148 of the Indian Contract Act, 1872, bailment is the delivery of
goods by one person to another for some purpose, upon a contract, that the goods shall,
when the purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them.
Bailor’s duty to disclose faults in goods bailed in case of non- gratuitous bailment (Section
150): If the goods are bailed for hire, the bailor is responsible for such damage, whether he
was or was not aware of the existence of such faults in the goods bailed.
Duty to pay necessary expenses in case of non-gratuitous bailment [Section 158]: The bailor
is liable to pay the extraordinary expenses incurred by the bailee.
Bailor’s responsibility to indemnify losses [Section 164]: It is the duty of bailor to indemnify
all the losses and expenses, which bailee has to pay on account of defective goods.
In the instant case, Y took a car on lease from X for 10 days for ` 50,000. During the journey,
Y has to spend ` 10,000 for repair of engine and paid ` 50,000 for hospital expenses due to
accident because of fault in brakes of car. These are the extraordinary expenses and losses
and it is the bailor’s duty to bear such expenses and losses.
Therefore, the answers are:
(i) Y can withhold the hire charges of ` 50,000 on account of non-payment of damages
and claim an additional `10,000, from X.
(ii) (ii) X is liable for the full ` 60,000 (`10,000 repair + ` 50,000 hospital) as it is the bailor’s
duty to supply a car fit for the purpose for which it was hired.

Business Law Question Book 78 CA Foundation

 UNIT – 9: AGENCY

1. A appoints M, a minor, as his agent to sell his watch for cash at a price not less than `
700. M sells it to D for ` 350. Is the sale valid? Explain the legal position of M and D,
referring to the provisions of the Indian Contract Act, 1872. (Module Q)

Ans: -
According to the provisions of Section 184 of the Indian Contract Act, 1872, as between the
principal and a third person, any person, even a minor may become an agent. But no person
who is not of the age of majority and of sound mind can become an agent, so as to be
responsible to his principal. Thus, if a person who is not competent to contract is appointed
as an agent, the principal is liable to the third party for the acts of the agent. Thus, in the given
case, D gets a good title to the watch. M is not liable to A for his negligence in the performance
of his duties.

2. State with reason whether the following statement is correct or incorrect: Ratification
of agency is valid even if knowledge of the principal is materially defective. (Module
Q)

Ans: -
Incorrect: Section 198 of the Indian Contract Act, 1872 provides that for a valid ratification,
the person who ratifies the already performed act must be without defect and have clear
knowledge of the facts of the case. If the principal’s knowledge is materially defective, the
ratification is not valid and hence no agency.

3. Rahul, a transporter was entrusted with the duty of transporting tomatoes from a
rural farm to a city by Aswin. Due to heavy rains, Rahul was stranded for more than
two days. Rahul sold the tomatoes below the market rate in the nearby market where
he was stranded fearing that the tomatoes may perish. Can Aswin recover the loss
from Rahul on the ground that Rahul had acted beyond his authority? (Module Q)
(MTP Sept 24 Series 2) (MTP June 24 Series 1)

Ans: -
Agent's authority in an emergency (Section 189 of the Indian Contract Act, 1872):

An agent has authority, in an emergency, to do all such acts for the purpose of protecting his
principal from loss as would be done by a person of ordinary prudence, in his own case, under
similar circumstances.

In the instant case, Rahul, the agent, was handling perishable goods like ‘tomatoes’ and can
decide the time, date and place of sale, not necessarily as per instructions of the Aswin, the
principal, with the intention of protecting Aswin from losses.
Here, Rahul acts in an emergency as a man of ordinary prudence, so Aswin will not succeed
against him for recovering the loss.

Business Law Question Book 79 CA Foundation

 4. Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension
area. Mr. Singh bought a house for ` 20 lakhs in the name of a nominee and then
purchased it himself for ` 24 lakhs. He then sold the same house to Mr. Ahuja for ` 26
lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to recover
the excess amount paid to Mr. Singh. Is he entitled to recover any amount from Mr.
Singh? If so, how much? Explain. (Module Q)

Ans: -
The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 215 read with Section 216. The two sections provide that where an agent
without the knowledge of the principal, deals in the business of agency on his own account,
the principal may:

(1) repudiate the transaction, if the case shows, either that the agent has dishonestly
concealed any material fact from him, or that the dealings of the agent have been
disadvantageous to him.

(2) claim from the agent any benefit, which may have resulted to him from the transaction.

Therefore, based on the above provisions, Mr. Ahuja is entitled to recover ` 6 lakhs from Mr.
Singh being the amount of profit earned by Mr. Singh out of the transaction.

5. Comment on the statement ‘Principal is not always bound by the acts of a sub-agent’.
(Module Q)

Ans: -
The statement is correct. Normally, a sub-agent is not appointed, since it is a delegation of
power by an agent given to him by his principal. The governing principle is, a delegate cannot
delegate’. (Latin version of this principle is, “delegates non potest delegare”). However, there
are certain circumstances where an agent can appoint sub-agent.

In case of proper appointment of a sub-agent, by virtue of Section 192 of the Indian Contract
Act, 1872 the principal is bound by and is held responsible for the acts of the sub-agent. Their
relationship is treated to be as if the sub-agent is appointed by the principal himself.

However, if a sub-agent is not properly appointed, the principal shall not be bound by the acts
of the sub-agent. Under the circumstances the agent appointing the sub-agent shall be bound
by these acts and he (the agent) shall be bound to the principal for the acts of the sub-agent.

6. ABC Ltd. sells its products through some agents and it is not the custom in their
business to sell the products on credit. Mr. Pintu, one of the agents sold goods of ABC
Ltd. to M/s. Parul Pvt. Ltd. (on credit) which was insolvent at the time of such sale.
ABC Ltd. sued Mr. Pintu for compensation towards the loss caused due to sale of
products to M/s. Parul Pvt. Ltd. Will ABC Ltd. succeed in its claim? (Module Q)

Business Law Question Book 80 CA Foundation

Ans: -
To conduct the business of agency according to the principal’s directions (Section 211 of the
Indian Contract Act, 1872): An agent is bound to conduct the business of his principal
according to the direction given by the principal, or, in the absence of any such directions,
according to the custom which prevails in doing business of the same kind at the place where
the agent conducts such business. When the agent acts otherwise, if any loss be sustained,
he must make it good to his principal, and, if any profit accrues, he must account for it.

In the present case, Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s Parul Pvt. Ltd.
(on credit) which was insolvent at the time of such sale. Also, it is not the custom in ABC Ltd.
to sell the products on credit.

Hence, Mr. Pintu must make good the loss to ABC Ltd.

7. R is the wife of P. She purchased sarees on credit from Nalli. Nalli demanded the
amount from P. P refused. Nalli filed a suit against P for the said amount. Decide in the
light of provisions of the Indian Contract Act, 1872, whether Nalli would succeed.
(Module Q)

Ans: -
The position of husband and wife is special and significant case of implied authority. According
to the Indian Contract Act 1872, where the husband and wife are living together in a domestic
establishment of their own, the wife shall have an implied authority to pledge the credit of
her husband for necessaries. However, the implied authority can be challenged by the
husband only in the following circumstances.

(1) The husband has expressly forbidden the wife from borrowing money or buying goods on
credit.

(2) The articles purchased did not constitute necessities.

(3) Husband had given sufficient funds to the wife for purchasing the articles she needed to
the knowledge of the seller.

(4) The creditor had been expressly told not to give credit to the wife.

Further, where the wife lives apart from husband without any of her fault, she shall have an
implied authority to bind the husband for necessaries, if he does not provide for her
maintenance.

Since, none of the above criteria is being fulfilled; Nalli would be successful in recovering its
money.

Business Law Question Book 81 CA Foundation

 8. Bhupendra borrowed a sum of ` 3 lacs from Atul. Bhupendra appointed Atul as his
agent to sell his land and authorized him to appropriate the amount of loan out of the
sale proceeds. Afterward, Bhupendra revoked the agency. Decide under the
provisions of the Indian Contract Act, 1872 whether the revocation of the said agency
by Bhupendra is lawful. (Module Q)

Ans: -
According to Section 202 of the Indian Contract Act, 1872 an agency becomes irrevocable
where the agent has himself an interest in the property which forms the subject-matter of
the agency, and such an agency cannot, in the absence of an express provision in the contract,
be terminated to the prejudice of such interest.

In the instant case, the rule of agency coupled with interest applies and does not come to an
end even on death, insanity or the insolvency of the principal.

Thus, when Bhupendra appointed Atul as his agent to sell his land and authorized him to
appropriate the amount of loan out of the sale proceeds, interest was created in favor of Atul
and the said agency is not revocable. The revocation of agency by Bhupendra is not lawful.

9. 'Agent cannot personally enforce, nor be personally bound by, contracts on behalf of
the principal' however there are some exceptions to this general rule, explain. (4
Marks PYQ Sept 24) (MTP Jan 25 Series 2)

Ans: -
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal.
EXCEPTIONS: In the following exceptional cases, the agent is presumed to have agreed to be
personally bound:
(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad/foreign principal: – When an agent has entered into a contract for the sale
or purchase of goods on behalf of a principal resident abroad, the presumption is that the
agent undertakes to be personally liable for the performances of such contract.
(2) Where the agent does not disclose the name of his principal or undisclosed principal;
(Principal unnamed): when the agent does not disclose the name of the principal then there
arises a presumption that he himself undertakes to be personally liable.
(3) Non-existent or incompetent principal: Where the principal, though disclosed, cannot be
sued, the agent is presumed to be personally liable.
(4) Pretended agent – if the agent pretends but is not an actual agent, and the principal does
not rectify the act but disowns it, the pretended agent will be himself liable.
(5) When agent exceeds authority- When the agent exceeds his authority, misleads the third
person in believing that the agent he has the requisite authority in doing the act, then the
agent can be made liable personally for the breach of warranty of authority.

10. Rama directs Shyam to sell laptops for him and agrees to give Shyam eleven percent
(11%) commission on the sale price fixed by Rama for each laptop. As Government of
India put restrictions on import of Laptops, Rama thought that the prices of laptops

Business Law Question Book 82 CA Foundation

 might go up in near future and he revokes Shyam's authority for any further sale.
Shyam, before receiving the letter at his end sold 5 laptops at the price fixed by Rama.
Shyam asked for 11% commission on the sale of 5 Laptops for ` 1 lakh each. Explain
under the provisions of the Indian Contract Act, 1872:
(1) Whether sale of laptops after revoking Shyam's authority is binding on Rama?
(2) Whether Shyam will be able to recover his commission from Rama, if yes, what will
be the amount of such commission? (3 Marks PYQ June 24) (MTP Jan 25 Series 2)

Ans: -
When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208 of the Indian Contract Act, 1872]: The termination of the authority of an agent
does not, so far as regards the agent, take effect before it becomes known to him, or, so far
as regards third persons, before it becomes known to them.

In the instant case,

(1) The revocation of Shyam's authority becomes effective only when it is communicated to
and received by Shyam. Since Shyam had not received the revocation letter at the time of
selling the laptops, his authority to sell on behalf of Rama was still valid. Hence, the sale of
laptops conducted by Shyam is binding on Rama.

(2) Shyam is entitled to receive his commission for the sales made while he still had the
authority to sell. Since he sold the laptops before receiving the revocation, he is entitled to
his commission as per the initial agreement with Rama.

Amount of Commission: Shyam sold 5 laptops at the price fixed by Rama, which is `1 lakh
each. The total sales amount to `5 lakh. The agreed commission rate is 11% i.e. ` 55,000.

11. Rama directs Shyam to sell laptops for him and agrees to give Shyam eleven percent
(11%) commission on the sale price fixed by Rama for each laptop. As Government of
India put restrictions on import of Laptops, Rama thought that the prices of laptops
might go up in near future and he revokes Shyam's authority for any further sale.
Shyam, before receiving the letter at his end sold 5 laptops at the price fixed by Rama.
Shyam asked for 11% commission on the sale of 5 Laptops for ` 1 lakh each. Explain
under the provisions of the Indian Contract Act, 1872:
(i) Whether sale of laptops after revoking Shyam's authority is binding on Rama?
(ii) Whether Shyam will be able to recover his commission from Rama, if yes, what will
be the amount of such commission? (RTP Jan 25)

Ans: -
When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208 of the Indian Contract Act, 1872]: The termination of the authority of an agent
does not, so far as regards the agent, take effect before it becomes known to him, or, so far
as regards third persons, before it becomes known to them.

In the instant case,

Business Law Question Book 83 CA Foundation

(i) The revocation of Shyam's authority becomes effective only when it is communicated to
and received by Shyam. Since Shyam had not received the revocation letter at the time of
selling the laptops, his authority to sell on behalf of Rama was still valid. Hence, the sale of
laptops conducted by Shyam is binding on Rama.

(ii) Shyam is entitled to receive his commission for the sales made while he still had the
authority to sell. Since he sold the laptops before receiving the revocation, he is entitled to
his commission as per the initial agreement with Rama.

Amount of Commission: Shyam sold 5 laptops at the price fixed by Rama, which is `1 lakh
each. The total sales amount to `5 lakh. The agreed commission rate is 11% i.e. ` 55,000.

12. Who is considered as an agent under the Indian Contract Act, 1872, and what are the
duties and obligations associated with this role? (MTP Sept 24 Series 1) (MTP May 25
Series 2)

length of answer depends on marks allotted to question

Ans: -
The Indian Contract Act, 1872 does not define the word ‘Agency’. However, section 182 of
the Indian Contract Act, 1872 defines Agent and Principal as:

Agent means a person employed to do any act for another or to represent another in dealing
with the third persons and

The principal means a person for whom such act is done or who is so represented.

Duties and obligations of an Agent

(i) Duty to follow instructions or customs
(ii) Duty of reasonable care and skill
(iii) Duty to render proper accounts [Section 213]
(iv) Agent’s duty to communicate with principal
(v) Duty not to deal on his own account
(vi) Duty not to make secret profits
(vii) Duty not to delegate
(viii) Agent’s duty to pay sums received for principal
(ix) Duty not to use any confidential information received in the course
of agency against the principal.

13. Explain whether the agency shall be terminated in the following cases under the
provisions of the Indian Contract Act, 1872:
(i) A gives authority to B to sell A's land, and to pay himself, out of the proceeds, the
debts due to him from A. Afterwards, A becomes insane.

Business Law Question Book 84 CA Foundation

 (ii) A appoints B as A's agent to sell A's land. B, under the authority of A, appoints C as
agent of B. Afterwards, A revokes the authority of B but not of C. What is the status of
agency of C? (MTP June 24 Series 2)

Ans: -
(i) According to section 202 of the Indian Contract Act, 1872, where the agent has himself an
interest in the property which forms the subject matter of the agency, the agency cannot, in
the absence of an express contract, be terminated to the prejudice of such interest.

In other words, when the agent is personally interested in the subject matter of agency, the
agency becomes irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay himself, out of the
proceeds, the debts due to him from A. As per the facts of the question and provision of law,
A cannot revoke this authority, nor it can be terminated by his insanity.

(ii) According to section 191 of the Indian Contract Act, 1872, a “Sub - agent” is a person
employed by, and acting under the control of, the original agent in the business of the agency.

Section 210 provides that, the termination of the authority of an agent causes the termination
(subject to the rules regarding the termination of an agent’s authority) of the authority of all
sub-agents appointed by him.

In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a sub-
agent.

Thus, when A revokes the authority of B (agent), it results in termination of authority of sub-
agent appointed by B i.e. C (sub-agent).

14. What are the conditions to be satisfied for an "Agent's authority in an emergency"
under the provisions of The Indian Contract Act, 1872?(6 Marks)

OR

Both a sub-agent and a substituted agent are appointed by the agent, however, there
are some points of distinction between the two. Elaborate any 6 points. (6
Marks) (PYQ Jan 25)

Ans: -
Agent’s authority in an emergency [Section 189 of the Indian Contract Act, 1872]: An agent
has authority, in an emergency, to do all such acts for the purpose of protecting his principal
from loss as would be done by a person of ordinary prudence, in his own case, under similar
circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied:
(i) Agent should not be in a position or have any opportunity to communicate with his
principal within the time available.

Business Law Question Book 85 CA Foundation

(ii) There should have been actual and definite commercial necessity for the agent to act
promptly.
(iii) the agent should have acted bonafide and for the benefit of the principal.
(iv) the agent should have adopted the most reasonable and practicable course under the
circumstances, and
(v) the agent must have been in possession of the goods belonging to his principal and which
are the subject of contract.

OR

Under the Indian Contract Act, 1872, both a sub-agent and a substituted agent are appointed
by the agent. But, however, the following are the points of distinction between the two.

[Link]. Sub Agent Substituted Agent

1. A sub-agent does his work under the A substituted agent works under the
control and directions of agent. instructions of the principal.
2. The agent not only appoints a sub-agent The agent does not delegate any part of
but also delegates to him a part of his his task to a substituted agent.
own duties.
3. There is no privity of contract between Privity of contract is established between
the principal and the sub-agent. a principal and a substituted agent.
4. The sub-agent is responsible to the A substituted agent is responsible to the
agent alone and is not generally principal and not to the original agent
responsible to the principal. who appointed him
5. The agent is responsible to the principal The agent is not responsible to the
for the acts of the sub-agent. principal for the acts of the substituted
agent.
6. The sub-agent has no right of action The substituted agent can sue the
against the principal for remuneration principal for remuneration due to him.
due to him.
7. Sub-agents may be improperly Substituted agents can never be
appointed. improperly appointed.
8. The agent remains liable for the acts of The agent's duty ends once he has named
the sub-agent as long as the sub-agency the substituted agent.
continues.

15. Nitin appointed Shiv as his agent to transport apples from Shimla to Delhi. Due to
heavy rain in near Shimla, Shiv was stranded for more than seven days. Shiv was not
in position to contact with Nitin. To save Nitin from loss, Shiv sold all the apples in the
nearby market below the market rate where he was stranded. Explain with reference
to the Indian Contract Act 1872, can Nitin recover the loss from Shiv as Shiv had acted
beyond his authority? (MTP May 25 Series 1)

Ans: -

Business Law Question Book 86 CA Foundation

Section 189 of the Indian Contract Act, 1872 provides an agent has authority, in an
emergency; to do all such acts for the purpose of protecting his principal from loss as would
be done by a person of ordinary prudence, in his own case, under similar circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied.
(i) Agent should not be in a position or have any opportunity to communicate with his
principal within the time available.
(ii) There should have been actual and definite commercial necessity for the agent to act
promptly.
(iii) The agent should have acted bonafide and for the benefit of the principal.
(iv) The agent should have adopted the most reasonable and practicable course under the
circumstances, and
(v) The agent must have been in possession of the goods belonging to his principal and which
are the subject of contract.

In the instant case, Nitin appointed Shiv as his agent to transport apples from Shimla to Delhi
but due to heavy rain in near Shimla, he has to stop for more than seven days. Shiv sold all
the apples in the nearby market below the market rate where he was stranded in fear that
the apples may perish.

From the above facts, it is clear that an agency by necessity has come into existence between
Shiv and Nitin because there was an actual and definite necessity for Shiv to act on behalf of
Nitin. Shiv sold the apples at the rate lower than market rate to protect the Nitin from heavy
loss. Hence, Shiv is not liable to Nitin for loss.

16. ABC Infrastructure Ltd. was running business successfully from several years. P was
the purchase manager of company. He authorized his agent Q to buy Raw Material on
his behalf for construction of Roads in Delhi. He instructed Q to buy only Mazboot
Brand of Cement @ ` 2,000 – 2,500 per ton to maintain quality of Roads in Delhi.
However, Q bought 1,000 tons of Mazboot Brand of cement from Mr. R a very well-
known vendor of ABC Infrastructure Ltd. @ `3,500/- per ton. Mr. Q has not disclosed
the fact to R that he was buying cement for ABC Infrastructure Ltd. When P discovered
this aspect, he refused to pay Mr. R and rejects the cement bought by Q on the ground
that Q has exceeded the authority. Mr. R suffered a huge loss on account of this
transaction. Give your opinion in accordance with provisions from the Indian Contract
Act, 1872:
(i) Whether P was bound to pay Mr. R for cement purchased by his agent Mr. Q?
(ii) On the other hand, Q being agent refused to accept any liability to compensate
R. In this situation, Whether Mr. R can file a suit against Q? (7 Marks) (PYQ
May 25)

Ans: -
Principal’s liability when agent exceeds authority [Section 227 of the Indian Contract Act,
1872]: When an agent does more than he is authorised to do, and when the part of what he
does, which is within his authority, can be separated from the part which is beyond his

Business Law Question Book 87 CA Foundation

authority, so much only of what he does as is within his authority is binding as between him
and his principal.
Principal not bound when excess of agent’s authority is not separable [Section 228]: Where
an agent does more than he is authorized to do, and what he does beyond the scope of his
authority cannot be separated from what is within it, the principal is not bound to recognize
the transaction.
When the agent exceeds his authority, misleads the third person in believing that the agent
has the requisite authority in doing the act, then the agent can be made liable personally for
the breach of warranty of authority.
When the agent does not disclose the name of the principal then there arises a presumption
that he himself undertakes to be personally liable.
In the instant case, Q violated the instructions of P by buying cement at ` 3,500 per ton, which
is beyond the authorized price limit. Furthermore, Q did not disclose to R that he was buying
cement for ABC Infrastructure Ltd.
Therefore, the answers are
(i) No, P was not bound to pay Mr. R, as the agent Q exceeded his authority, and the deviation
was inseparable from the authorized act.
(ii) Yes, Mr. R can file a suit against Q, as Q is personally liable for the contract made without
disclosing about the ABC Infrastructure Ltd. and exceeding the authority given by the
principal.

Alternative Answer
In the light of the given facts in the question, P, the Purchase Manger of the ABC Infrastructure
Ltd., authorised Q his agent to buy raw material on his behalf for construction of roads in
Delhi. He instructed Q to buy only Mazboot brand of cement @ ` 2000-2,500 per ton.
However, Q, violated the instructions of P by buying cement at `3,500 per ton. Furthermore,
he did not disclose to R that he was buying cement for ABC Infrastructure Ltd.
The stated issue marked in the question is related to the undisclosed principal and exceeding
of his authority. Given situation can be dealt with the provisions under section 230, 231 & 233
of the Indian Contract Act.
According to the provision stated in section 230, an agent cannot personally enforce contracts
entered into by him on behalf of his principal, nor is he personally bound by them. He can
neither sue nor be sued on contracts made by him on his principal’s behalf.
However, there are exceptions where the agent is presumed to have agreed to be personally
bound.
Where the agent does not disclose the name of his principal or undisclosed principal (Principal
unnamed), then there arises a presumption that he himself undertakes to be personally liable.
Also, when the agent exceeds his authority, misleads the third person in believing that the
agent has the requisite authority in doing the act. In that case the agent can be made liable
personally for the breach of warranty of authority.
Further section 231 of the Indian Contract Act specifies rights of third parties to a contract
made by undisclosed agent.
As per the provision, if an agent makes a contract with a person who neither knows, nor has
reason to suspect, that he is an agent, his principal may require the performance of the

Business Law Question Book 88 CA Foundation

contract; but the other contracting party has, as against the principal, the same right as he
would have had as against the agent if the agent had been the principal.
Section 233 gives the option to a third person to sue the Agent or the Principal. In cases where
the agent is personally liable, a person dealing with him may hold either him or his principal,
or both of them, liable.

Therefore, the following are the answers:

(i) No, P was not bound to pay Mr. R for purchase of the cement @ ` 3500/- per ton, as the
agent Q does not disclose the name of his principal and also exceeded his authority, thus
making himself to be personally bound and liable for the doing of said transaction.
(ii) Yes, in the light of the section 233, Mr. R is given an option to sue the agent or the Principal
or both. Yes, R can file a suit against Q, as Q is personally liable for the contract made without
disclosing about the ABC Infrastructure Ltd. and exceeding the authority given by the P
(principal).

17. Explain the following terms with reference to the Indian Contract Act, 1872:
(i) Pledge by mercantile agent
(ii) Pledge by person in possession under voidable contract (6 Marks) (PYQ May 25)

Ans: -
(i) Pledge by mercantile agent: According to section 178 of the Indian Contract Act, 1872, a
mercantile agent, who is in the possession of goods or document of title, with the consent of
owner, can pledge them while acting in the ordinary course of business as a Mercantile Agent.
Such Pledge shall be valid as if were made with the authority of the owner of goods. Provided,
Pawnee acted in good faith and had no notice that Pawnor has no authority to pledge.

(ii) Pledge by person in possession under voidable contract

According to section 178A of the Indian Contract Act, 1872, When the pawnor has obtained
possession of the goods pledged by him under a contract voidable under section 19 or section
19A (contracts where consent has been obtained by fraud, coercion, misrepresentation,
undue influence), but the contract has not been rescinded at the time of the pledge, the
pawnee acquires a good title to the goods, provided he acts in good faith and without notice
of the pawnor’s defect of title.

Business Law Question Book 89 CA Foundation