This Discharge of a Contract – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Discharge of a Contract – CA Foundation Business Law Study Material

Question 1.
What are the instances for discharge of contract by mutual agreement?
Answer:
Discharge by mutual agreement: By agreement of all parties, a contract may be canceled or its terms altered or a new agreement substituted for it. Whenever any of these things happen, the old contract is terminated. “If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.”Sec. 62.

Termination by mutual agreement may occur in any one of the following ways:

• NOVATION: Novation occurs when a new contract is substituted for an existing contract either between the same parties or between different parties. The consideration for the new contract is the discharge of the old contract.
• To effect a novation, there must be a valid enforceable new substituted contract.
• Consent of all parties is necessary for novation.
• Novation should take place before the breach or expiry of the old contract.
• ALTERATION: Alteration of a contract means a change in one or more of the terms of a contract. Alteration is valid if it is done with the consent of all the parties to the contract.
  In alteration, there is a change in the terms of the contract but no change of the parties to it. In novation, there may be a change of parties.
• REMISSION: Remission means acceptance of a lesser amount or lesser degree of performance than what was contracted for in full discharge of the contract.
  According to sec. 63 a party may:
  (a) Dispense with or remit performance wholly or in part; or
  (b) Extend the time for performance; or
  (c) Accept any other satisfaction instead of performance
  For such a release or promise there is no need for consideration or new agreement.

Example: A owes B ? 5,000. A pays to B and B accepts in full satisfaction for the whole debt t 2,000. The old debt is discharged. A promise by the promisee to give concession to the promisor in one or the other form is binding even if without consideration. In Gopala v. Venkata, it was stated that after the remission has been communicated to the promisor and accepted by him, the promisee cannot claim the remitted (sacrificed) amount.

• RESCISSION: Rescission occurs when the parties to a contract agree to dissolve the contract. In the case of rescission, only the old contract is canceled and no new contract comes to exist in its place. The parties come out of the contract by mutual agreement.
• WAIVER: Waiver means the abandonment of a right. A party to a contract may relinquish (waive) his rights under the contract. Thereupon the other party is released from his obligations. For example, waiver of farmers’ bank loan by the Government. In such a case the banks give up their claim on the loan.
• MERGER: When an existing inferior right of a party, in respect of a subject matter merges into a newly acquired superior right of the same person, in respect of the same subject matter, then the previous contract conferring the inferior right stands discharged by way of merger.

Question 2.
What are the instances for discharge by operation by law?
Answer:
Discharge by operation of law: A contract terminates by operation of law in case of death insolvency, and merger.

(1) Death: In contracts involving personal skill or ability, death terminates the contract. In other cases, the rights and liabilities pass on to the legal representatives of the dead man.

(2) Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his adjudication. Upon insolvency, the rights and liabilities of the insolvent are, with certain exceptions, transferred to an officer of the court, known as the Official Assignee/Receiver.

(3) Merger: Means coinciding and meeting of inferior and superior rights in one and the same person. In such a case, the inferior right available to a party under the contract will automatically vanish.

(4) Lapse of time: Contracts may be terminated by lapse of time. In civil suits, the obligations and liabilities in contracts are barred by limitation. The provisions of the law are stated in the Limitation Act. For example, money suits should be hied within 3 years. Otherwise, they become time-barred.

(5) Unauthorised material alteration: If the terms of a contract are materially altered by a party to the contract without the consent of the other parties, the contract is discharged and cannot be enforced anymore.

Question 3.
What is meant by supervening impossibility? When is a contract said to be discharged by virtue of supervening impossibility?
Answer:
A contract, which at the time was entered into, was capable of being performed may subsequently become impossible to perform or unlawful. In such cases the contract becomes void. This is known as the doctrine of Supervening Impossibility. It is also known as the Doctrine of Frustration. Frustration occurs where it is established that due to subsequent change in circumstances, the contract has become impossible to perform or it has been deprived of its commercial purpose.
Supervening impossibility may occur in many ways, some of which are explained below:

(1) Destruction of the subject matter of contract
On the destruction of the subject matter, a contract is discharged and no party is liable to perform.

(2) Change of Law
The performance of a contract may become unlawful by a subsequent change of law. In such cases, the original contract becomes void.

(3) Non-concurrence of circumstances
When a contract is entered into on the basis of the continued existence of a certain state of things, the contract is discharged if the state of things changes.

• Illustration: A & B contract to marry each other. Before the time is fixed for the marriage, A goes mad. The contract becomes void.

(4) Death or incapacity for personal services
Where the personal qualification of a party is the basis of the contract the contract is discharged in cases of death or personal incapacity.

(5) Failure of the ultimate purpose of contracts :
Where the circumstances surrounding a contract change. Such that they result in a failure or the defeat of the ultimate purpose of contract, for which it had been performed, then the contract stands discharged.

(6) Outbreak of war
A contract entered into during war with an alien enemy is void ab initio. A contract entered into before the war commenced, between citizens of countries subsequently at war, generally becomes void.

Question 4.
State the grounds upon which a contract may be discharged under the provision of the Indian Contract Act, 1872.
Answer:
Grounds for discharge of contract:-
A contract can be discharged in any of the following ways:-
1. Discharge by Performance A contract may be discharged by Actual Performance or Attempted Performance. Actual Performance is said to
have taken place when each of the contracting parties has done what he had agreed to do under the contract. When the promisor offers to give his performance under the contract, but the promisee refuses to accept the same, then it amounts to discharge by attempted performance.

2. Discharge by Mutual Agreement:- The contracting parties may mutually agree to discharge the existing contract in any of the following ways:-

• Rescission
• Alteration
• Novation
• Remission
• Waiver
• Merger

3. Discharge by Operation of Law A contract shall stand discharged by operation of law in the event of any of the following

• Death or incapacity of the promisor in case of personal services (it) Insolvency
• Rights and Liabilities vest with the same person [Merger of Rights & Liabilities]
• Unauthorized Material Alteration.
• Loss of sole evidence of the contract

4. Discharge by Lapse of Time: – Where a contract is required to be performed within a specific period of time prescribed, the failure of the party to perform the same results in the discharge of contract on account of lapse of time.

5. Discharge by Supervening ImpossibilityA contract which was valid at the time of formation may subsequently become impossible or unlawful to perform and shall thereby stand discharged. A contract becomes void due to supervening impossibility in any of the following instances

• Destruction of subject matter
• Change of Law
• Non-concurrence of circumstances
• Death or incapacity for personal services
• Outbreak of war
• Failure of the ultimate purpose of the contract.

6. Discharge by BreachWhen a contracting party refuses or fails to give a performance or disables himself from giving a performance or makes the performance of the contract impossible by his conduct, then the contract is said to be discharged by the breach. A contract can be discharged by Actual Breach or by Anticipatory Breach. When the party commits default on the due date of performance, it amounts to an Actual breach, whereas when the default is committed before the due date of performance, it amounts to Anticipatory Breach.

Question 5.
What are the exceptional cases when a contract is not discharged by supervening impossibility?
Answer:
The doctrine of frustration or supervening impossibility does not apply in the following cases i.e. in these cases the contract is not discharged:-

1. Difficulty of performance
Sometimes the performance of a contract becomes difficult on account of some unanticipated events such as disruption of transport services etc. Such difficulty makes the performance hard but does not result in the discharge of the contract.

2. Commercial Impossibility
Commercial Hardships make the performance of the contract unprofitable or economically unviable. Thus commercial hardship on account of an increase in the price of inputs (raw materials) or overhead costs shall not result in the discharge of the contract.

3. Strikes, lock-outs, civil disturbances, and riots
These events do not terminate contracts unless there is a clause in the ‘ contract providing that in such cases the contract is not be performed or that the time of performance is to be extended.

4. Failure of one of the objects
When there are several purposes for which a contract is entered into, failure of one of the objects does not terminate the contract.

5. Impossibility due to failure of the third party
Where the performance of a contract by a party depends on the performance of a third party, the contract shall not be discharged by the failure or default of the third party.

6. Self-induced impossibility
A contract is not discharged on account of self-induced impossibility by either of the party.

Question 6.
What is meant by anticipatory breach of contract? State the rights of the promisee in case of such breach?
OR
“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.
Answer:
Anticipatory breach of contract occurs :

• when a party before the time for performance is due announces that he is not going to perform the contract, or
• when a party by his own act disables himself from performing the contract.

When an anticipatory breach occurs, the aggrieved party can take the following steps:

(A)May treat the contract as discharged-

• He can treat the contract as discharged so that he is no longer bound by any obligations under the contract; &
• He can immediately adopt the legal remedies available to him for breach of contract, viz, file a suit for damages or specific performance or injunction.

(B)May not treat the contract as discharged-
Anticipatory breach, by itself, does not discharge the contract. The contract is discharged, when the aggrieved party chooses to treat it as discharged. The aggrieved party may decide not to rescind the contract but to treat the contract as alive and operative and wait for the time of performance. In such a case the consequences are as follows:

• The contract will be operative for the benefit of both parties. The contract will continue to exist and may even be performed by the other party.
• If the contract is not rescinded and subsequently an event happens which discharges the contract legally (e.g. a supervening impossibility) the aggrieved party loses his right to sue for damages.

Question 7.
What are the instances when the discharge of a contract by the operation of law takes place?
Answer:
A contract terminates by operation of law in case of death insolvency, and merger.

A. Death
In contracts involving personal skill or ability, death terminates the contract. In other cases, the rights and liabilities pass on to the legal representatives of the dead man.

B. Insolvency
When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his adjudication. Upon insolvency, the rights and liabilities of the insolvent are, with certain exceptions, transferred to an officer of the court, known as the Official Assignee/Receiver.

C. Merger of Rights & Liabilities
When the rights & liabilities under a contract vest with the same person then no further performance under the contract is required since it stands discharged.

D. Lapse of time
Contracts may be terminated by lapse of time. In civil suits, the obligations and liabilities in contracts are barred by limitation. The provisions of the law are stated in the Limitation Act.

E. Unauthorised material alteration
If the terms of a contract are materially altered by a party to the contract without the consent of the other parties, the contract is discharged and cannot be enforced anymore.

F.Loss of Evidence of contract
In case of loss of sole evidence as to the existence of a contract, the contract stands discharged due to operation of law.

Question 8.
What is meant by Suit for Specific Performance? What are the instances in which specific performance shall not be granted?
Answer:
There are cases where the damage or loss suffered cannot be measured in terms of money. The court, may, in such cases where the ordinary remedy by a claim for damages is not adequate compensation, direct the defaulting party to perform the contract specifically. (Under Sec. 12 of the Specific Relief Act, 1-963). Specific performance is an order of the Court directing the defendant to fulfill his obligations under the contract. Specific performance is a discretionary remedy and is only available where damages are not an adequate remedy.
Some of the cases where specific performance is ordered by the court are:

• Where the act itself is such that monetary relief for its non-performance is not adequate.
• Where no standard is available to ascertain the value of the actual damage caused by non-performance.
• Where it is not probable that the compensation money will be available. Examples: The specific performance is granted in contracts connected with land, buildings, rare articles, and unique goods having special value, etc. because the injured party will not be able to get an exact substitute in the market.

Specific performance is not allowed in the following cases:

• Where monetary compensation is an adequate relief.
• Where the contract is of personal nature, e.g. a contract to marry or a contract to paint a picture, or
• Where it is not possible for the court to supervise the performance of the contract e.g. a building contract.
• Where one of the parties to the contract is not competent to contract like a minor.

Question 9.
What Is meant by Suit for Quantum Meruit? What are the instances in which quantum meruit is granted?
Answer:
Quantum Meruit means ‘as much as merits’ or ‘as much as deserves or earns’. In a legal sense, it means ‘payment in proportion to the work done. In other words, quantum meruit means that a person can recover compensation in proportion to the work done or service rendered by him. It is a quasi-contractual remedy.
The claim on quantum meruit arises in the following cases:-

1. Where there is a breach of the contract
Where a party performs a part of the contract, but the other party breaks it in between, then the injured party can claim compensation for the work done or the service rendered.

2. When an agreement is discovered to be void
Where some work has been done and accepted under a contract that is subsequently discovered to be void, then the person who has performed the part of the contract is entitled to recover the amount for the work done. (Sec. 65)

3. When something has been done non-gratuitously
When something has been done non-gratuitously: Tue., has been done with the intention of getting payment. (Sec. 70)

4. Where work has been done by the person guilty of breaking the contract
In such a case defaulting party would be liable for consequences of breach, but for the work done by him he may be entitled to get payment in the following circumstances:

(a) Where the work to be done was divisible. A contract is divisible and a party performs a part of it and refuses to perform the remaining part, the defaulting party can claim reasonable compensation for the part performed, on the basis of quantum meruit. Thus two conditions should exist:

(a)If the contract is divisible, and

(b)If the party not at fault has enjoyed the benefit of part performance.

On the other hand, if the contract is not divisible, ie., it requires complete performance as a condition for payment, the party in default cannot claim payments for work done, on the basis of quantum meruit.

5. When the indivisible contract is performed substantially/fully
If a lump sum is to be paid for the completion of the entire work and the work has been completed in full, though badly, the person who has performed the contract can claim the lump sum; but the other party can also claim a deduction for bad work.

Question 10.
What are the types of damages that can be awarded as a remedy for breach under section 73 of the Indian Contract Act, 1872?
Answer:
According to Section 73 of the Indian Contract Act, 1872, damages are the monetary compensation allowed by a Court of Law to the aggrieved party for the loss/injury sustained by him on account of breach of contract by the other party. Damages are compensatory in nature and are granted in accordance with the following rules

1. Ordinary Damages are recoverable – The damages which are the natural and probable consequence of breach i.e. which naturally arise in the usual course of things from such breach can be recovered by the aggrieved party from the defaulting party.

2. Special Damages are recoverable only if the parties knew about them: These are those damages which are recoverable, in respect of losses that arise on account of the existence of some special or unusual circumstances provided the existence of the said circumstances was brought to the knowledge of the defaulting party at the time of formation of the contract. Thus these damages cannot be claimed as a matter of right by the plaintiff. They are not recoverable unless the special circumstances were brought to the knowledge of the defendant so that the possibility of the special loss was in the contemplation of the parties.

3. Remote or indirect damages are not recoverable able sine e these damages are not reasonably foreseeable and are not sustained by reason of the breach.

4. Nominal Damages for no loss sustained: Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages recoverable by him are nominal. These damages are granted by the court to merely acknowledge that the plaintiff has proved his case & won.

5. Vindictive or exemplary damages are allowed only in specific instances Usually damages are awarded to compensate the aggrieved party and not with a view to punishing. However, in case of (a) Breach of a promise to marry & (b) Dishonour of a cheque by a banker wrongfully, the court may award exemplary damages.

6. The aggrieved party can also be granted damages for inconvenience, discomfort, mental agony etc. A further cost of the suit may also be allowed as damages by the Court.

Question 11.
Differentiate between liquidated damages & penalties.
Answer:

Question 12.
Mr. Ramaswamy of Chennai placed an order with Mr. Shah of Ahmedabad for the supply of urad dal on 10.11.2006 at a contracted price of ₹ 40 per kg. The order was for the supply of 10 tonnes within a months’ time viz., before 09.12.2006. On 04.12.2006 Mr. Shah wrote a letter to Mr. Ramaswamy stating that the price of urad dal was skyrocketing to t 50 Per. Kg. and he would not be able to supply as per the original contract. The price of urad dal rose to ₹ 53 on 09.12.06. Advise Mr. Ramaswamy citing the legal position.
Answer:
Hint: Increase in the price of urad dal does not amount to supervening impossibility (Sec. 56). Mr. Shah committed a breach of contract. If Ramaswamy waits till 09.12.2006 – Mr. Shah shall be liable to pay damages to Mr. Ramaswamy. The number of damages shall be 10 tons @ ₹ 13 per kg (i.e., the difference between the contract price and price as of 09.12.2006), ie., ₹ 1,30,000. However, if some supervening impossibility arises before 09.12.2006 (e.g., imposition of ban on trading in urad dal by the Government), the contract shall become void, and consequently, Mr. Shah shall not be liable to pay any damages. If Ramaswamy repudiates the contract on 04.12.2006 Mr. Shah shall be liable to pay damages to Mr. Ramaswamy. The number of damages shall be 10 tons (a ₹ 10 per kg (ie., the difference between the contract price and price as of 04.12.2 006), i.e., t 1,00,000.

Question 13.
A contracted with B to supply him (B) 500 tons of iron steel @ ₹ 5,000 per ton, to be delivered at a specified time. Thereafter, A contracts with C for the purchase of 500 tons of iron-steel @ ₹ 4,800 per ton, and at the same time told C that he did so far the purpose of performing his contract entered into with B. C failed to perform his contract in due course, consequently, A could not procure any iron-steel and B rescinded the contract. What would be the number of damages which A could claim from C in the circumstances? Explain with reference to the provisions of the Indian Contract Act, 1872.
Answer:
Hint: A can recover ₹ 1 lakh as special damages from C as it was within C’s knowledge that breach of contract by him(C) would result in non-performance of a contract between A and B resulting in loss of ₹ 1 lakh (ie., the difference between ₹ 5,000 per ton and ₹ 4,800 per ton for 500 tons) to A (Sec. 73).

Question 14.
M Ltd. contracts with Shanti Traders to make and deliver certain machinery to them by 30.6.2004 for ₹ 11.50 lakhs. Due to a labor 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. 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.
Answer:
Hint: Labour strike does not amount to supervening impossibility (Sec. 56). Hence, non-delivery of machinery by M Ltd. results in a breach of contract by M Ltd. is liable to compensate the loss incurred by Shanti Traders, i.e. to pay ordinary damages of ₹ 1.25 lakhs (i.e., the difference between ₹ 12.75 lakhs and ₹ 11.50 lakhs) (Sec. 73). M Ltd. is not liable to pay any compensation for loss caused to Shanti Traders due to non-performance of the contract entered into with Zenith Traders; since special circumstances, viz. contract between Shanti Traders and Zenith Traders were not brought to the knowledge of M Ltd.

Question 15.
S, a singer, contracts with M, the manager of a theatre, to sing at the letter’s theatre for two evenings every week during the next two months. M engages to pay her ₹ 300 for each evening’s performance. On the seventh evening, S wilfully absents herself from the theatre. M, in consequence, wants to rescind the contract and claim compensation for the loss suffered by him through the non-fulfilment of the contract by S. Advise.
Answer:
Hint: M shall be entitled to rescind the contract and claim compensation from S because of breach of contract on the part of S. (Sec. 75 of the Indian Contract Act).

Question 16.
X borrows ₹ 1,000 from Y and agrees to repay the amount with interest at 12% at the end of six months. The contract further provides that in case of default in repayment, the interest will be payable at the rate of 70% from the date of default. What is the nature of this stipulation, and what is the right of Y.
Answer:
Hint: This stipulation is the nature of penalty. Y is entitled only to recover such compensation as the Court considers reasonable (but not exceeding 70% of interest).

Question 17.
A bank wrongfully dishonored a cheque of ₹ 1,000 belonging to Dhanna Seth (a Millionaire). He says that his credit has come down to the level of Moffat Lai (a person having only a few thousand rupees) as his cheque of Ek Hazar, i.e., one thousand has been dishonored wrongfully by the bank. Advise Dhanna Seth.
Answer:
Hint: Dhanna Seth can claim exemplary damages from the bank for the wrongful dishonor of the cheque. The smaller the amount of the cheque dishonoured the greater shall be the value of damages in this case.

Question 18.
A enters into a contract with B for supplying 800 tonnes of iron ore within 4 months. A fails to make the delivery in time owing to the difficulty in transport. But he admitted the availability of iron ore in the market at a higher price. Can A lake the plea of the impossibility of performance? Give reasons.
Answer:
Hint: No. The difficulty of performance should be distinguished from the impossibility of performance. Section 56 of the Indian Contract Act only declares those contracts void which becomes impossible of execution. Thus A is not discharged on grounds of the impossibility of performance.

Question 19.
‘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 the 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 number of damages which ‘X’ could claim from ‘Z’ in the circumstances? What would be your answer if ‘Z’ had not been informed about ‘ Y’s contract? Explain with reference to the provisions of the Indian Contract Act, 1872.
Answer:
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 v. 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 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 number of damages would have been the difference between the contract price and the market price on the day of default. In other words, the number of damages would be ₹ 750/- (ie. 1000 water bottles X 0.75 paise).

Question 20.
Mr. JHUTH entered into an agreement with Mr. SUCH to purchase his (Mr. SUCII’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 contact 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 contacted Mr. SUCH and denied purchasing 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 been destroyed by an accident within the three-month’s agreement period.
Answer:
Hint: Breach of contract, the aggrieved party has a right to rescind the contract & claim restitution & damages if any. Further where any security deposit has been made under the contract, the same shall stand forfeited in case of breach of contract. Thus in the given case, Mr. JHUTH is responsible for breach of contract. Mr. SUCH, the aggrieved party can claim damages if any sustained by him. However, Mr. JHUTH is not entitled to a refund of ₹ 20,000/- since the same was given as a security deposit which shall now stand forfeited on account of his failure to fulfill the contract.

However, if the car had been destroyed by an accident within 3 months agreement period, then the contract would have been discharged by supervening impossibility due to destruction of subject matter and in such a case JHUTH would have been entitled to refund of security amount, (since the security amount can be forfeited only when a contract is not fulfilled on account of breach by a party.)

Question 21.
Mr. X and Mr. Y entered into a contract on 1st August 2018, by which Mr. X had to supply 50 tons of sugar to Mr. Y at a certain price strictly within a period of 10 days of the contract. Mr. Y also paid an amount of ₹ 50,000 towards advance as per the terms of the above contract. The mode of transportation available between their places is roadway only. A severe flood came on 2nd August 2013 and the only road connecting their places was damaged and could not be repaired within fifteen days. Mr. X offered to supply sugar on 20th August 2018 for which Mr. Y did not agree. On 1st September 2018, Mr. X claimed compensation of ₹ 10,000 from Mr. Y for refusing to accept the supply of sugar, which was not there within the purview of the contract. On the other hand, Mr. Y claimed a refund of ₹ 50,000, which he had paid in an advance in terms of the contract. Analyze the above situation in terms of the provisions of the Indian Contract Act, 1872, and decide on Y’s contention.
Answer:
When the performance of a contract is required within a specified period of time and the same becomes impossible by the occurrence of an unexpected event or a change of circumstances beyond the contemplation of parties, the contract becomes void & the contracting parties stand discharged from their obligation to perform the contract. Further 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 case the contract between Mr. X and Mr. Y becomes void subsequently on 2nd Aug. 2018, when it becomes impossible to perform it within the stipulated time period due to floods. As a consequence both the parties are discharged. Thus, applying the above-stated provisions it can be concluded that the contract is discharged due to subsequent impossibility and Mr. X cannot claim damages from Mr. Y. However, Mr. Y is entitled to claim a refund of ₹ 50000/ – which was paid as an advance. Thus only restitution of benefits to Mr. Y shall be granted.

Question 22.
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 Rs. 50,000 as a 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 the workshop for the 6th sitting, Mr. Rich was informed that Mr. C became paralyzed and would not be able to paint for the 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?

(1) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?
(2) Could Mr. Rich ask Mr. K for a refund of money paid in advance to his father?

Answer:
According to the provisions of section 56 of the Indian Contract Act, 1872 supervening impossibility results in the discharge of a contract. When the act required to be performed under the contract, becomes impossible subsequently without any fault of the contracting party, then the contract becomes void & the parties stand discharged from their obligations. Contracts of a personal nature, which require the exercise of personal skill or ability of a party, stand discharged on death or incapacity of the person. Similarly, non-concurrence of a particular state of things that was naturally contemplated for performance shall result in the discharge of the contract.

A contract discharged on the grounds of supervening impossibility becomes void & ceases to be enforceable. Further restitution shall be granted by the contracting party who has received any benefits & he shall be bound to restore the same back to the other party. Compensation shall not be granted in such a case. Thus applying the above-stated provisions to the given case it can be concluded that –

(1) Since the contract is of a personal nature, requiring the exercise of skill of Mr. C, it shall stand discharged on grounds of supervening impossibility on account of Mr. C’s incapacity. Further Mr. Rich cannot ask Mr. K to complete the artistic work in lieu of his father Mr. C since it is a contract of personal nature & hence cannot be performed by his legal representative.

(2) Mr. Rich can claim the refund of money paid in advance since the remedy of restitution is granted in the event contract becoming void & discharged on account of supervening impossibility.

Question 23.
On 20th September X agreed to sell to Y of 10 tons of a particular chemical to be manufactured in his factory @ Rs. 8,000 per ton to be delivered on 20th October. Calculate the number of damages that could be recovered by Y from X in each of the alternative cases:
Case (a): The chemical could not be manufactured because of a strike by the workers and X failed to supply the said chemical to Y on 20th October when the price of that chemical was Rs. 12,000 per ton.

Case (b) On 1st October, X informed Y that he was not going to supply the goods since the price of that chemical rose to Rs. 10,000 per ton on 1st October. The price of that chemical further rose to Rs. 12,000 per ton on 20th October.
I decided to rescind the contract on 1st October.

Case (c) On 1st October, X informed Y that he was not going to supply the goods since the price of that chemical rose to Rs. 10,000 per ton on 1st October. The price of that chemical further rose to Rs.12,000 per ton on 20th October.
I decided not to rescind the contract on 1st October and to wait til! 20th October. On 19th October, the entire chemical in the factory was destroyed by fire without the fault of either party.
Answer:
According to the provisions of Section 56 of The Indian Contract Act, 1872, a contact stands discharged on account of supervening impossibility if after the formation of the contract but before its performance, some event takes place which renders the performance of the contract impossible. In such a case both the parties stand discharged from their respective obligations and the contract becomes void subsequently. However in certain instances, such as those following, the contract is not discharged and is treated as subsisting and if the parties fail to perform the contract it shall amount to breach:

Case (a) Usually failure to perform on account of strikes by workers, does not amount to discharge by supervening impossibility unless a contract to the contrary is expressly made. Thus is in the given case when X fails to supply chemicals on account of a strike by workers, the contract is not discharged on account of supervening impossibility. The failure to supply the chemical amounts to breach and therefore X shall be bound to pay damages of Rs. 40,000 (12,000-8,000= 4,000 X 10) to Y

Case (b) Further, commercial hardships also do not result in the discharge of the contract on the grounds of supervening impossibility. Failure to perform the contract on the grounds that the contract has become less profitable or unprofitable due to changes in the prices, shall not amount to discharge by supervening impossibility. Instead, failure to perform in such a case amounts to a breach of contract and the defaulting party shall be bound to compensate the aggrieved party for the loss sustained by him.

Thus in the given case when X informs Y about his failure to perform on the grounds of an increase in the price of the chemical it amounts to a breach and X shall be bound to pay Rs. 20,000 (10,000-8,000=2,000 X 10) as damages to Y

Case (c) When a contracting party, before the due date of performance, refuses to perform the contract, it amounts to an anticipatory breach of contract. In such a case the contract is voidable at the option of the aggrieved party. The aggrieved party has the option to rescind the contract immediately without waiting for the due date of performance and sue for damages. Conversely, the aggrieved party can choose to continue with the contract and wait for the performance up to the due date and inform of his intention of doing so the defaulting party. In such a case the contract shall be treated as subsisting between them. Now if any event takes place during the waiting time period which renders the performance impossible then the contract stands discharged on the grounds of supervening impossibility.

Thus in the given case when Y decides to wait for the performance up to 20th October and the entire chemical in the factory is destroyed on 19th October, then the contract stands discharged on the grounds of supervening impossibility and Y now loses his right to claim any damages from X.

This Note Making – BCR CA Foundation Study Material is designed strictly as per the latest syllabus and exam pattern.

Note Making – BCR CA Foundation Study Material

Question 1.
Stress is a body reaction to any demands or changes in its internal and external environment. Whenever there is a change in the external environment such as temperature, pollutants, humidity, and working conditions, it leads to stress. In these days of competition when a person makes up his mind to surpass what has been achieved by others, leading to an imbalance between demands and resources, it causes psycho-social stress. It is a part and parcel of everyday life. Stress has a different meaning, depending on the stage of life you are in. The loss of a toy or a reprimand from the parents might create a stress shock in a child. An adolescent who fails an examination may feel as if everything has been lost and life has no further meaning.

In an adult, the loss of his or her companion, job, or professional failure may appear as if there is nothing more to be achieved. Such signs appear in the attitude and behavior of the individual as muscle tension in various parts of the body, palpitation and high blood pressure, indigestion, and hyperacidity. Ultimately the result is self-destructive behavior such as eating and drinking too much, smoking excessively, relying on tranquilizers. There are other signs of stress such as trembling, shaking nervous blinking, dryness of throat and mouth, and difficulty in swallowing. The professional under stress behaves as if he is a perfectionist. It leads to depression, lethargy, and weakness. Periodic mood shifts also indicate the stress status of the students, executives, and professionals.
Answer:
STRESS
1. Change in environment
1.1 Temperature
1.2 Pollution
1.3 Humidity

2. Competition
2.1 Imbalance between demand and supply

3. Impact of stress
3.1 High blood pressure
3.2 Indigestion
3.3 Hyperacidity
3.4 Depression

4. Signs of stress
4.1 Trembling
4.2 Dry mouth

Question 2.
Read the passage & make notes, using headings, sub-headings & abbreviations wherever necessary.
Anything printed and bound in a book size can be called a book, but the quality of mind distinguishes the value of it.

What is a book? This is’ how Anatole France describes it: “A series of little printed signs essentially only that. It is for the reader to supply himself the forms and colors and sentiments to which these signs correspond. It will depend on him whether the book is dull or brilliant, hot with passion or cold as ice. Or if you prefer to put it otherwise each word in a book is a magic finger that sets a fiber of our brain vibrating like a hard string and so evokes a note from the sounding board of our soul No matter how skillful, how inspired the artist’s hand, the sound it makes depends on the quality of the strings within ourselves”

Until recently books were the preserve of a small section of the urban upper classes. Some, even today, make it a point to call themselves intellectuals. It would be a pity if books were meant only for intellectuals and not for housewives, farmers, factory workers, artisans and, so on.

In India, there are first-generation learners, whose parents might have been illiterate. This poses special challenges to our authors and to those who are entrusted with the task of disseminating knowledge. We need much more research in the use of language and the development of techniques by which knowledge can be transferred to these people without transmission loss. Publishers should initiate campaigns to persuade people that a good book makes a beautiful present and that reading a good book can be the most relaxing as well as absorbing of pastimes. We should aim at books of quality no less than at quantitative expansion in production and sale. Unless one is constantly exposed to the best, one cannot develop a taste for the good.
Answer:
Value of Books

(A) Value of Books as per Anatole France
(1) series of printed signs
(2) reader fills in
(i) colors
(it) forms
(m) senti.
(a) bks. inter or boring
(b) impression on soul depends on reader

(B) Bks. target which sec. of society
(1) until recently Books were read by intell.
(2) must also be meant for hws. farmers etc.

(C) Bks. for 1st gen. learners (whose parents are illiterate)
(1) challenge for authors
(2) research in the use of lang. req.
(3) devel. of teaching tech, to ensure trans. of knowledge w/o loss

(D) Publisher’s duty to
(1) run campaigns
(0 to promote bks. as gd. presents
(n) reading – relax pt.

(2) make efforts for qual. & quant, exp. in prod. & sale.
Key:

1. bks. = books
2. senti. = sentiments
3. inter. – interesting
4. sec. = section
5. hws. = housewives
6. gen. = generation
7. lang. = language
8. req. = required
9. intell. = intellectuals
10. devel. = development
11. tech. = techniques
12. trans. = transmission
13. w/o = without
14. gd. = good
15. relax = relaxing
16. pt. = pastime
17. qual. = qualitative
18. quant. = quantitative
19. exp. = expansion
20. prod. = production

Question 3.
Read the passage & make notes, using headings, sub-headings & abbreviations wherever necessary.
A good business letter is one that gets results. The best way to get results is to develop a letter that in its appearance, style and content, conveys information efficiently. To perform this function, a business, the letter should be concise, clear, and courteous. The business letter must be concise, don’t waste words.

Little introduction or preliminary chat is necessary. Gel to the point, make the point and leave it. It is safe to assume that your letter is being read by a very busy person with all kinds of papers to deal with. Re-read and revise your message until the words and sentences you have used are precise. This takes time but is a necessary part of a good business letter.

A short business letter that makes its point quickly has much more impact on a reader than a long-winded, rambling exercise in creative writing. This does not mean that there is no place for style and even, on occasion, humor in the business letter. While it conveys a message in its contents, the letter also provides the reader with an impression of you, its author, the medium is part of the message. The business letter must be clear. You should have a very firm idea of what you want to say, and you should let the reader know it. Use the structure of the letter – the paragraphs, topic sentences, introduction, and conclusion- to guide the reader point by point from your thesis, through your reasoning, to your conclusion.

Paragraph often, to break up the page and to lend an air of organization to the letter. Use an accepted business letter format. Re-read what you have written from the point of view of someone who is seeing it for the first time, and be sure that all explanations are adequate, all information provided (including reference numbers, dates, and other identification). A clear message, clearly delivered, is the essence of business communication.

The business letter must be courteous. Sarcasm and insults are ineffective and can often work against you. If you are sure you are right, point that out as politely as possible, explain why you are right, and outline what the reader is expected to do about it. Another form of courtesy is taking care of your writing and typing of a business letter. Grammatical and spelling errors (even if you call them typing errors) tell a reader that you don’t think enough of him or can lower the reader’s opinion of your personality faster than anything you say, no matter how idiotic. There are excuses for ignorance; there are no excuses for sloppiness. The business letter is your custom-made representative. It speaks for you and is a permanent record of your message. It can pay big dividends on the time you invest in giving it a concise message, a clear structure, and a courteous tone.
Answer:
Writing a Good Business Letter
(A) A gd. bus. letter
(1) gets results
(2) conveys info, efficiently if:
(i) concise

• brief intro.
• to the point
• read & revise until the precise
• short letter has more impact on the reader

(it) clear

• clarity of idea to be commu.
• proper use of stru./format of letter
• guide the reader point by point from thesis, thru, a reason to concl.
• re-read from point of view of the reader
• all adeq. info, to be present

(Hi) courteous

• Polite expr. of msg.
• explain reason for your position
• avoid gramm. & spel. errors
• tk. care in writing & typing

(B) Bus. letter also
(1) provides a reader with impr. about author
(2) letter is author’s custom-made repre.
(3) is a perma. record of msg.
(4) rewardg. if time invest, in writing bus. letters.

Key :

1. gd. = good
2. info. = information
3. bus. = business
4. intro. = introduction
5. commu. = communication
6. stru. = structure
7. thru. = through
8. reason. = reasoning
9. concl. = conclusion
10. adeq. = adequate
11. expr. = expression
12. msg. = message
13. gramm. = grammatical
14. spel. = spelling
15. tk. = take
16. impr. = impression
17. repre. = representative
18. perma. = permanent
19. rewardg. = rewarding
20. invest. = invested

Question 4.
Read the passage, make notes, using headings, sub-headings and abbreviations wherever necessary In most sectors of the economy, it is the seller who attempts to attract a potential buyer with various inducements of price, quality arid utility and it is the buyer who makes the decision. Where circumstances permit the buyer no choice because there is effectively only one seller and the product is relatively essential, the government usually asserts monopoly and places the industry under price and other regulations. Neither of these conditions prevails in most of the healthcare industry; In the healthcare industry, the doctor-patient relationship is the mirror image of the ordinary relationship between producer and consumer. Once an individual has chosen to see a physician and even then there may be real choice-it is the physician who usually makes all significant purchasing decisions whether the patient should return “next Wednesday;” whether X-rays are needed, whether drugs should be prescribed, etc. It is a rare and sophisticated patient who will challenge such professional decisions or raise in advance questions about price, especially when the ailment is regarded as serious.

This is particularly significant in relation to hospital care. The physician must certify the need for hospitalization, determine what procedures will be performed, and announce when the patient may be discharged. The patient may be consulted about some of these decisions; but in the main it is the doctor’s judgment that are final Little wonder then that in the eyes of the hospital it is the physician who is the real “consumer.” As a consequence, the medical staff represents the “power centre” in hospital policy and decision-making, not the administration;

Although usually there are in this situation four identifiable participants the physician, the hospital, the patient, and the payer the physician makes the essential decisions for all of them. The hospital becomes a extension of the physician; the payer generally meets most of the bona fide, a bill generated by the physician/hospital; and for the most part the patient plays a passive role. In routine or minor illnesses, or just plain worries, the patient’s options are, of course, much greater with respect to use and price. In illnesses that are of some significance, however such choices tend to evaporate or away: DISAPPEAR “my despair evaporated J F. Wharton”, and it is for these illnesses that the bulk of the healthcare dollar, is spent. We estimate that about 75-80 per cent of health-care expenditures are determined by physicians, not patients; For this reason, economy measures directed at patients or the general publics are relatively ineffective.
Answer:
Economic challenges in health care industry
(A) Buyer and Seller’s relatshp. in diff. sectors.

1. usually seller attempts to attract buyer
2. buyer decision – maker
3. in circum. of monopoly govt, imposes regu.
4. health care indu. unique

(B) Relatshp. in Health-care indu.

1. Dr. – Pt. = producer – consumer
2. After Pt. chooses Dr., all pur. decisions made by Dr.
3. Pt. rarely challenges decisions of Dr.
4. Even in hosp. – care, Dr. makes all signi. decisions, pt. may only be infod. or consult.
5. Dr. decision final

(C) Part.in HC indu.

1. Dr., Hosp., Pt. & Payer — 4 players
2. Dr. makes all decisions regarding procedures, duration of hospzton., discharge etc.
3. Hosp. – ext. of Dr.; Dr. – power centre
4. Pt. – passive role
5. Payer – pays bills

(D) Role/Power of Pt.

1. in minor illnesses – Pt.’s options are greater
2. in major illnesses – Pt.’s choices insig.
3. 75-8096 of exp. on HC indu. on account of major illnesses.
4. these exp. deter, by Dr. thus any relief measures directed at Pt. are in-effective.

Key :

1. Relatshp. — relationship
2. diff. = different
3. circum. = circumstances
4. govt. = government
5. regu. = regulations
6. indu. = industry
7. Dr. = Doctor
8. Pt. = Patient
9. pur. = purchasing
10. hosp. = hospital
11. signi. = significant
12. infod. = informed
13. consult. = consulted
14. parti. = participants.
15. hospzton. = hospitalization
16. ext. = extension
17. HC = Health – Care
18. insig. = insignificant
19. exp. = expenditure
20. deter. = determined

PRACTICE QUESTIONS
Question 1
Knowledge can be of different kinds—tacit knowledge and explicit knowledge. Tacit knowledge is highly invisible and confined in the mind of a person. It is hard to formulate and, therefore, difficult to communicate to others. Tacit knowledge is essentially personal in nature. It is difficult to explain with the help of language. Individual skills, intuition, intelligence, and knowledge constitute tacit knowledge. On the other hand, explicit knowledge is visible information available in the form of literature, reports, etc. It can be embedded in objects, rules, systems, etc. It can be communicated through language and other forms of communication.

As it is difficult to articulate tacit knowledge owned by an individual, organizations have to find ways to get it shared by others in the organization. Explicit knowledge can be expressed in words and numbers and easily shared but tacit knowledge is hard to formalize and communicate. Thus, organizational knowledge is available at both the physical level and intellectual level. Personal knowledge and organizational knowledge need to be merged seamlessly to ensure success in organizations. This happens only when knowledge is driven through a learning organization.

Knowledge management involves both tactical and strategic processes. The day-to-day use of knowledge to meet customer expectations or opportunities in the marketplace can be called the tactical process. The more long-range process of matching organizational knowledge assets to strategic requirements can be called the strategic process. The tactical process involves the get, use, learn and contribute phases of knowledge management. The assess, build and sustain phases constitute the strategic process of knowledge management.

Question 2
A crisis is a turning point and a time of danger. In this turbulent era, turning points and dangerous moments arise quite frequently. An organizational crisis may be defined as an event that threatens the viability of the organization. A crisis is an unexpected problem that can lead to disaster if not resolved quickly and appropriately. A crisis means something that will extract a major financial or medical cost from a company. It may wreck its reputation or may even cause the company to go out of existence as happened in the case of Enron. It may be sabotage, a terrorist attack, executive kidnappings, industrial disasters and the like. Normal crisis or accidents happen due to complex technologies. Many things can go wrong with their design, operation or maintenance. Major catastrophes like Bhopal Gas Tragedy are literally built into technologies. In a normal crisis there is a breakdown of a complex system. However, Enron, Anderson like crises are due to intentional breakup of systems. In other words,

breakdowns arc normal accidents and breakups are abnormal accidents. There are seven types of crisis economic, physical, personal, criminal, informational, reputation and natural disasters. As companies are made up of human beings, crisis will continue to occur.

Each crisis is different and needs to be handled in its own way. Managers waste a lot of time denying that something went wrong. Man-made factors (human errors and cussedness) are more common causes of the crisis. In an ideal world, there should be no crisis. All problems could be foreseen and steps taken to deal with them. But in real life, Murphy’s Law holds good. According to this law, “If anything can go wrong it will.”

A company cannot prevent a crisis but it can experience fewer crisis, recover faster and gain a competitive advantage if it is crisis prepared. At best 10 to 15 percent of companies are crisis prepared. The rest are merely reactive. Generally, companies do not accept a crisis unless there is pressure from outside. There are three biggest blocks to crisis prevention strategies fear, anxiety and denial. People do not like thinking about planes crashing into tall buildings before 9/11? A good company integrates crisis management with total quality management and environmental management because there is a lot of overlap between these programs. For example, when Cadbury was hit by the worms-in-the-chocolate controversy in 2003, the company addressed the problem directly where the infestation might have come from and invested substantially in new packaging. A company has to control the crisis and not be overwhelmed by it.

There are three parts to crisis management. What the company does before a crisis, which is proactive; how it acts when the crisis actually happens, which is reactive; and then, what it learns at the end of the crisis.

This Consideration – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Consideration – CA Foundation Business Law Study Material

Question 1.
Define consideration. What are the legal rules/essentials regarding consideration? (C.A. Foundation MTP May 2019)
Answer:
Section 2(d) of the Contract Act define consideration as follows:
(a) “When, at the desire of the promisor,
(b) the promisee or any other person,
(c) has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something,
(d) such an act or abstinence or promise is called a consideration for the pro¬mise. ”

1. Consideration must move at the desire of the promisor
The act of abstinence must be done at the desire of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it is no consideration.
However, consideration need not be to the benefit of the promisor.

2. Consideration may move from the promisee or any other person
Consideration may be supplied by the promisee or any other person.

3. Consideration may be an act or abstinence
A person may promise to do something or not to do something for a promise. To do or not to do something in return is a consideration.

4. Consideration may be past, present or future
When the consideration of one party was given before the date of the promise, it is said to be passed. Past consideration means the consideration for a promise given by a party before the promise is made. Such a consideration given by a party must be at the desire of the promisor. The consideration which moves simultaneously with the promise is called present or executed consideration. When the consideration is to move at a future date, it is called future or executory consideration.

5. Consideration need not be adequate
Consideration need not be adequate nor equivalent to promise.

6. Consideration must be real and not illusory
Consideration must be real or of some value in the eyes of law. It should not be physically impossible or illegal or illusory.

7. Consideration must be lawful
Consideration given for an agreement must be a lawful one. Consideration must not be illegal, immoral or opposed to public policy.

8. Consideration must not be a pre-existing obligation or duty.
Consideration must not be something, which a person is already bound by law to do. Discharging of pre-existing obligations is no consideration.

Question 2.
State exceptions to the rule “An agreement without consideration is void.”
OR
What are the exceptions to the rule “No consideration no contract”?
OR
“No consideration No contract”. Discuss
Answer:
The general rule is “an agreement made without consideration is void” However, sec. 25 also mentions some exceptions to the general rule. These exceptions are given below:
1. Agreement made on account of natural love and affection
An agreement made without consideration is enforceable if it is

1. made on account of natural love and affection,
2. between parties standing in a near relation to each other,
3. expressed in writing, and
4. registered under the law.

2. Agreement to compensate for past voluntary service [sec. 25(2)]
A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do. The following two situations are covered by this section:

(A) Voluntary Services: When there is a voluntary act by one party and there is a subsequent promise to pay compensation to the former. E.g. A finds B’s purse. B promises to give him ? 500 this promise is enforceable.

(B) Legally Compellable Duty: Another situation covered by the exception is where the promisee has done something for the promisor, “which the promisor was legally compellable to do”. A subsequent promise to pay for such an act is enforceable.

3. Agreement to pay a time-barred debt [sec. 25(3)]
Where there is an agreement,

• made in writing and
• signed by the debtor, or by his authorised agent,
• to pay wholly or in part a debt barred by the law of limitation, the agree¬ment is valid even though it is not supported by any consideration.

4. Completed Gift
A gift is the transfer of property without consideration. In order to be valid, a gift does not require consideration. Promise for a donation is not a gift. As such a promise for a donation is invalid for want of consideration.

5. Contract of Agency
Sec. 185 of the Contract Act lays down that no consideration is necessary to create an agency.

6. Bailment
Sec. 148 of the Contract Act lays down that no consideration is necessary in case of a gratuitous bailment.

7. Remission.
Sec. 63 of the Contract Act lays down that where a person agrees to receive less than what is due to him, such an agreement is said to be an agreement of remission. No consideration is required for a contract of remission.

8. Guarantee
Sec. 127 of the Contract Act lays down that under the contract of guarantee, no consideration is received by the surety, even then the contract of guarantee is valid.

9. Charity
If the promise undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid as held in Kedarnath v. Gorie Mohammad.

Question 3.
Explain the doctrine of privity of contract. What are the exceptions to this rule?
OR
A stranger to a contract cannot sue. However, in certain cases, a stranger to a contract may even enforce a claim. Explain. (C.A. Foundation RTPMay 2018)
Answer:
The doctrine of Privity of Contract: According to the doctrine of privity of contract only a party to a contract is entitled to enforce a right created by the contract. No one is entitled to or bound by the terms of a contract to which he is not an original party. A third party (stranger to contract) has no locus stand a contract, he is debarred from interfering with the contractual rights or obligations of the parties. Only a person who is a party to a contract can sue on it. The doctrine of privity of contract prevents the imposition of contractual obligations upon a person without his consent.

Exceptions – There are certain exceptions to the rule that a stranger to the contract cannot sue upon it. They are as follows:

1. Beneficiaries in the case of a trust
An agreement to create a trust can be enforced by the beneficiary even though he was not a party to the contract between the settlor and the trustee.

2. Family settlement
When family disputes are settled by mutual agreement and the terms of the settlement are written down in a document it is called a Family Set¬tlement. Such agreements can be enforced by members of the family who were not originally parties to the settlement.

3. Assignee of contract
In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract.

4. Provision for marriage or maintenance.
At the time of partition of the property of a joint family, the male members may agree that a certain portion of property shall be kept aside for the benefit of, for example, some elderly person or the education and marriage of a female child. Such beneficiaries may not be a party to the arrangement. But, they have been held entitled to enforce the agreement for their benefit.

5. Contracts entered into through an agent
The principal can enforce the contracts entered into by his agent pro¬vided the agent acts within the scope of his authority and in the name of the principal.

6. Acknowledgement
The person who becomes an agent of a third party by acknowledgement or otherwise can be sued by such a third party. If the promisor acknowl¬edges his liability to the third person, then such a third person can file a suit to recover the benefit.

7. Covenants attached with the land
In the case of a covenant running with the land, the person who purchases land with the notice that the owner of the land is bound by certain duties affecting the land, the covenant affecting the land may be enforced by the successor of the seller.

Question 4.
“A stranger to contract cannot sue but a stranger to consideration can sue”. Comment.
Answer:
According to the doctrine of privity of contract, a contract is a private matter only between the contracting parties and therefore only the parties to contract can sue each other to enforce their respective rights under the contract. Thus generally only contracting parties can sue & enforce the contract & a stranger to the contract cannot sue.

Under the Law of Contracts, consideration can be furnished by the promisee or any other person, provided it is at the desire of the promisor. Thus a person who has not furnished consideration himself, under a contract, can also sue on the contract & enforce his rights provided he is a party to contract. Therefore a stranger to consideration can sue provided he is a contracting party.

For example, A contract between P & Q cannot be enforced by R, who is a stranger to the contract. On the other hand where a contract between P & Q, R agrees to pays money to Q for delivering goods to P, which can be enforced by P, although he did not pay any part of the consideration. Thus stranger to .consideration can sue to enforce it provided he is a party to the contract.

Question 5.
X transferred his house to his daughter M by way to gift. The gift deed, executed by X, contained a direction that M shall pay a sum of ₹ 5,000 per month to N (the sister of the executant). Consequently, M executed an instrument in favour of N agreeing to pay the said sum. Afterwards, M refused to pay the sum to N saying that she is not liable to N because no consideration had moved from her. Decide with reasons under the provisions of the Indian Contract Act, 1872 whether M is liable to pay the said sum to N.
Answer:
Hint: Yes, There can be a stranger to consideration, consideration may be supplied by the promisee or any other person [Chinnaya v. Rammaya].

Question 6.
S bought tyres from Dunlop Rubber Co. Ltd. and sold them to D, a sub-dealer, who agreed not to sell them below Dunlop’s list price & to pay the Dunlop Co. $5 as damages on every tyre D undersold. D sold two tyres at less than the list price and thereupon Dunlop Co. Ltd. sued him for the breach.
Answer:
Hint: Stranger to a contract cannot sue. Dunlop Co. is not entitled to sue and therefore cannot claim any damages from D, the sub-dealer, since it is not a party to the contract between S & D.

Question 7.
Mr. X was in need of money & offered to sell his casio to Z for ₹ 6000. Z refused to buy the same at the stated price. X gradually reduced the quoted price until 2000 was reached, which Z accepted. Before the casio was delivered, X received ail offer from Mr. A for the purchase of his casio for ₹ 4500 and X refused to carry out his contract with Z on the grounds that the consideration was inadequate. Is Mr. X liable to pay damages to Mr. Z for the failure to perform the contract?
Answer:
Hint: Consideration may or may not be adequate. Thus inadequacy of the consideration has no effect on the validity of the contract. Mr. X is liable under the contract to Mr. Z.

Question 8.
R & S two brothers entered into a contract for the division of the family property between them and agreed to contribute ₹ 20000 each, per month towards the maintenance of their mother. Can the mother enforce the contribution under the contract?
Answer:
Hint: Generally stranger to contract cannot sue. However, in certain exceptional cases such as in the case of a contract for marriage settlement, the partition of the property of family arrangements, the beneficiaries under the contract are entitled to use and enforce the contract. Thus the mother is entitled to sue on the contract and enforce her rights against R & S.

Question 9.
A received certain goods from B promising to pay ₹ 1,00,000. Later on, A, expressed his inability to make payment. C, who is known to A, makes payment of ₹ 60,000 to B on behalf of A. However A was not aware of the payment. Now B is intending to sue A for the amount of ₹ 1,00,000. Discuss whether the contention of B is right?
Answer:
Hint: Consideration can even proceed from a stranger to a contract. When the promisee for consideration receives & accepts the same, from a third party i.e. a person other than the promisor, then it shall discharge the promisor from his obligation to furnish the consideration irrespective of the fact whether the promisor has authorized or ratified the act of the third party or not. Thus A is discharged from his obligation to pay t 60,000 and is now liable to B only for ₹ 40,000. A shall however be bound to compensate C for his past voluntary payment which was the legal obligation of A.

Question 10.
Mr. Ramesh promised to pay ₹ 50,000 to his wife Mrs. Lali so that she can spend the sum on her 30th birthday. Mrs. Lali insisted her husband to make a written agreement if he really loved her. Mr. Ramesh made a written agreement and the agreement was registered under the law. Mr. Ramesh failed to pay the specified amount to his wife Mrs. Lali, Mrs. Lali wants to file a suit against Mr. Ramesh and recover the promised amount. Referring to the applicable provisions of the Indian Contract Act, 1872, advise whether Mrs, Lali will succeed. (C.A. Foundation Nov. 18)
Answer:
Generally, an agreement made without consideration is void. A contract is enforceable only when consideration is present. However, the Indian Contract Act, 1872 provides for certain exceptions to this rule. One of the exceptional cases where a contract/agreement though made without consideration is valid and enforceable is when an agreement is made out of natural love affection. The Act expressly provides that an agreement without consideration shall be legally enforceable provided the following conditions duly comply

1. The agreement must be made on grounds of natural love and affection.
2. Parties must be standing in near relation to each other
3. It must in writing &
4. It must be registered under the Law.

Thus a written and registered agreement based on natural love and affection between the parties standing in near relation (e.g. husband & wife) to each other, shall be enforceable even without consideration. In the given case, a written agreement is executed and registered by Mr. Ramesh, the husband, in favour of Mrs. Lali, the wife. Since all the abovementioned conditions comply, the agreement is legally enforceable even without consideration. Thus Mrs. Lali can successfully enforce the said agreement against Mr. Ramesh.

Question 11.
Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September 2018 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 Oct. 2018, Mr. Sohanlal died leaving behind his son and wife. On 15th Oct. 2018 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 the provision of the Indian Contract Act, 1872 and decide upon Mr. Chotelal’s plan of action?
Answer:
According to the Doctrine of Privity of Contract under the provisions of the Indian Contract Act, 1872, a contract is a private matter between the contracting parties and can be enforced only by them against each other. However, in certain exceptional cases, the law permits the enforcement of a contract even by a stranger.

Where a contract creates a trust or charge on a specific property in favour of a beneficiary, then the same can be enforced by him under the contract even though he is not a party to the contract. However the beneficiary must be clearly mentioned in the agreement and the charge must be created on a specific property in his favour.

In the given case Sohanlal sold his agricultural land to Mohanlal under a contract, which specified that 1 acre of the land was to be left out of the total area of 10 acres for the purpose of commercial activity by Chotelal, son of the seller. Mohanlal subsequently denies the right to any land to the son, after the death of Sohanlal. Thus applying the above-stated provisions, it can be concluded that Chotelal being a beneficiary under the contract can sue Mohanlal for his right to use of the land of 1 acre.