Contract Act, 1872 – Economic, Business and Commercial Laws Important Questions

Contract Act, 1872 – Economic, Business and Commercial Laws Important Questions

Question 1.
Arun has two cars – one of white color and another of red color; He offers to sell one of the cars to Basu thinking that he is selling the car which has white color. Basu agrees to buy the car thinking that Arun is selling the car which has red in color. Will this agreement become a valid contract? Give reasons. [June 2005 (5 Marks)]
Answer:
The parties who enter into an agreement must agree upon the subject matter in the same sense and at the same time, ie. there must be consensus ad idem. In the given problem, the agreement between Arun and Basu will not become a valid contract because there is no consensus ad idem

Question 2.
X promised to pay ₹ 10,000 per month to his wife Mrs. X who was living in Mumbai. On receiving information that she was unfaithful to him, he stopped paying ₹ 10,000 to Mrs. X. Mrs. X approaches you to file a case against Mr. X. Advise her with reference to the Indian Contract Act, 1872. [Dec. 2013 (5 Marks)]
Answer:
An agreement may be a social agreement. A social agreement is that which does not give rise to legal consequences. In case of its breach, the parties cannot go to the Law Court to enforce a right.

Agreement between husband and wife is a social agreement and does not create any binding legal relations. Hence, Mrs. X cannot file suit against her husband for non-payment of ₹ 10,000 to her every month.

Question 3.
Write a short note on e-Contract [June 2014 (3 Marks)]
Answer:
Electronic contracts are not paper-based but rather in electronic form are born out of the need for speed, convenience, and efficiency. In the electronic age, the whole transaction can be completed in seconds, with both parties simply affixing their digital signatures to an electronic copy of the contract.

The conventional law relating to contracts is not sufficient to address all the issues that arise in electronic contracts. The Information Technology Act, 2000 solves some of the particular issues that arise in the formation and authentication of electronic contracts. As in every other contract, an electronic contract also requires fulfilling the essential element of the contract laid down in a section of the Indian Contract, 1872

Question 4.
Rain employed in Mumbai promised to pay ₹ 8,000 per month to his wife Sunila. She was living in Delhi. On receiving information that she has become unfaithful to him, Ram stopped the payment of ₹ 8,000 to Sunita. Sunita approaches to file a case against Ram. Advise her with reference to the Indian Contract Act, 1872. [June 2019 (4 Marks)]
Answer:
An agreement may be a social agreement. A social agreement is that which does not give rise to legal consequences. In case of its breach, the parties cannot go to the Law Court to enforce a right.

Agreement between husband and wife is a social agreement and does not create any binding legal relations. Hence, Mrs. X cannot file suit against her husband for non-payment of ₹ 10,000 to her every month.

Question 5.
Discuss the essential elements of a valid contract? [Dec. 2013 (5 Marks)]
Answer:
What agreements are contracts [Section 10]: All agreements are contracts, if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void.

Essential elements of a valid contract are as follows:

  • There must be an agreement. This involves two parties, one party making the offer and the other party accepting it.
  • The parties must intend to create a legal relationship.
  • The parties must be capable of entering into an agreement as regards age and understanding. Thus, a person making a contract should not be a minor, idiot, or lunatic.
  • The agreement must be supported by consideration on both sides.
  • The consent of the parties must be free and genuine.
  • The object of the agreement must be lawful.
  • The terms of the agreement must be certain and capable of performing.
  • The agreement must not have been expressly declared as void.

Question 6.
Distinguish between: Offer & An invitation to offer [Dec. 2011 (5 Marks)]
Answer:
Following are the main points of distinction between an offer and an invitation to offer:

Points Offer An invitation to offer
Meaning A person is said to have made a proposal, when he signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence. Something by which a person is invited to make an offer is known as an invitation to make an offer.
Defined ‘Offer’ is defined in section 2(a) of the Contract Act, 1872. ‘An invitation to offer is not defined in the Contract Act, 1872.
Effect Offer when accepted become agreement. An invitation to offer when responded results in the offer.
Example Kiran says to Gopal, “Will you purchase my motorbike for ₹ 15,000”. In this case, Kiran is making offers to Gopal as Kiran signifies his willingness to Gopal to sell his motorbike for ₹ 15,000. Display of goods by a shopkeeper in his window, with prices marked on them, is not an offer but merely an invitation to the public to make an offer.

Question 7.
What are the various modes of revocation of the offer as per the Contract Act, 1872? [Dec. 2014 (3 Marks)]
Answer:
Offer may lapse or come to an end by various modes as given below:

  • Offer may come to an end by communication of notice of revocation by the offeror at any time before acceptance.
  • If the offeree does not accept the offer within a given time or if no time is given, then within a reasonable time.
  • If condition precedent is not fulfilled then the offer may come to an end.
  • Offer may come to an end by the death or insanity of the offeror.
  • When a counteroffer is made original offers come to an end.
  • If an offer is not accepted according to the prescribed mode.
  • Offer may come to an end due to a change in the law.

Question 8.
State the difference in rules of making offer and acceptance when the mode of making the same varies from post to telephone and e-mail as governed by the Information Technology Act, 2000. [Dec. 2016 (3 Marks)]
Answer:
Contracts by Post: Contracts by post are subject to the same rules as others, but because of their importance, these are stated below separately:

  1. An offer by post may be accepted by post unless the offeror indicates anything to the contrary.
  2. An offer is made only when it actually reaches the offeree and not before, i.e., when the letter containing the offer is delivered to the offeree.
  3. An acceptance is made as far as the offeror is concerned, as soon as the letter containing the acceptance is posted, to the offeror’s correct address; it binds the offeror, but not the acceptor. An acceptance binds the acceptor only when the letter containing the acceptance reaches the offeror. The result is that the acceptor can revoke his acceptance before it reaches the offeror.
  4. An offer may be revoked before the letter containing the acceptance is posted. An acceptance can be revoked before it reaches the offeror.

Contracts over the Telephone: Contracts over the telephone are regarded the same in principle as those negotiated by the parties in the actual presence of each other. In both cases, an oral offer is made and an oral acceptance is expected. It is important that the acceptance must be audible, heard, and understood by the offeror. If during the conversation the telephone lines go ‘dead’ and the offeror does not hear the offeree’s word of acceptance, there is no contract at the moment. If the whole conversation is repeated and the offeror hears and understands the words of acceptance, the contract is complete. [Kanhaiyala. lv. Dineshwarchandra]

Question 9.
A young boy ran away from his father’s home. His father issued a pamphlet offering a reward of ₹ 5 lakh to anybody who would bring the boy home. Arun saw the boy at a railway station and sent an e-mail to the boy’s father.
(i) Is Arun entitled to a reward?
(ii) In the light of the above case, explain the rules governing offer, [Dec. 2016 (5 Marks)]
Answer:
The communication of the offer may be general or specific. Where an offer is made to a specific person it is called a specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer.

In Harbhajan Lai v. Harcharan Lai, a young boy ran away from his father’s home. The father issued a pamphlet offering a reward of 1500 to anybody who would bring the boy home. The plaintiff saw the boy at a railway station and sent a telegram to the boy’s father. It was held that the handbill was an offer open to the world at large and was capable of acceptance by any person who fulfilled the conditions contained in the offer. The plaintiff substantially performed the conditions and was entitled to the reward offered.

The same rule will also apply for a reply through e-mail

Question 10.
A invites B to stay with him during winter vacation at his residence. ! B accepts the invitation and informs A accordingly. When ‘B’ reaches A’s house, he finds it locked and he has to stay in a hotel. Can B claim damages from A? [June 2017 (3 Marks)]
Answer:
Section 2(b) says that when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted and a proposal when accepted becomes a promise. In a broad sense, therefore, a contract is an exchange of promises by two or more persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is recognized and enforced by law.

An agreement between two persons to go together to the cinema, or for a j walk, does not create a legal obligation on their part to abide by it. Similarly, if I promise to buy you a dinner and break that promise, I do not expect to be liable to legal penalties. There cannot be any offer and acceptance to hospitality.

Keeping in view of the above discussion, it can be concluded that there is no contract if Mr. A invites Mr. B to stay with him during winter vacation f at his residence as it is a social contract, and offer and acceptance to hospitality do not create a contract.

Question 11.
Aman hired a room in a hotel and paid a week’s rent in advance. After registering, he went up to occupy the room. Aman found a notice on the wall that “The proprietor will not be responsible for articles lost or stolen unless handed over to the manager of the hotel for safe custody.” Owing to the negligence of the hotel staff, a thief gained access to the room j and stole some goods from Aman. State whether the proprietor of the hotel is liable for the loss caused to Aman? State also which type of contract it J is? [June 2017 (5 Marks)]
Answer:
Where any special terms are to be included in a contract, these must be duly brought to the notice of the offeree at the time when the proposal j is made. If it is not done and if the contracts subsequently entered into, the offeree will not be bound by them. Also, these terms should be presented in such a manner that a reasonable man can become aware of them before he enters into a contract.

Example: A hotel put a notice in the bedroom, exempting the proprietor from liability for the loss of the client’s goods. Held, the notice was not effective as it came to the knowledge of the client only when the contract to take a room had already been entered into. [Olley v. Marlborough Court Ltd.] As per facts given in the case, the hotel has failed to bring to the notice of Aman special term that the hotel will not be responsible for article lost or stolen in j hotel at the time of entering into a contract and hence hotel cannot escape its liability as special terms in the contract should be presented in such a manner that a reasonable man can become aware of them before he enters into a contract.

Question 12.
Gamaxo Ltd. offered a reward of ₹ 10,000 by advertisement to anyone who infected influenza after using their smoke ball in a specified manner. Mr. Upma uses a smoke ball in a specified manner, but still infected by influenza. She claims the reward. Decide the case with the help of leading case laws and related sections of the Contract Act, 1872. [June 2018 (5 Marks)]
Answer:
The communication of the oiler may be general or specific. Where an offer is made to a specific person it is called a specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer.

The leading case on the subject is Carlill v. Carbolic Smoke Ball Co. The company offered by advertisement, a reward of ₹ 100 to anyone who contacted influenza after using their smoke ball in a specified manner. Mrs. Carlill did use the smoke ball in a specified manner but was attacked by influenza.

She claimed the reward and it was held that she could recover the reward as a general offer can be accepted by anybody. Since this offer is of a continuing nature, more than one person can accept it and can even claim the reward. But if the offer of a reward is for seeking some information or seeking the restoration of a missing thing, then the offer can be accepted by one individual who does it first of all. The condition is that the claimant must have prior knowledge of the reward before doing that act or providing that information.

Question 13.
ABZ company offered by an advertisement, a reward of ₹ 1,000 to anyone who contacted influenza after using the smoke ball in the specified ( manner. Amita used the smoke ball in a specified manner but was attacked by influenza. She filed a suit against ABZ company and claimed the reward. Decide whether the suit is maintainable. [Dec. 2018 (5 Marks)]
Answer:
The communication of the oiler may be general or specific. Where an offer is made to a specific person it is called a specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer.

The leading case on the subject is Carlill v. Carbolic Smoke Ball Co. The company offered by advertisement, a reward of ₹ 100 to anyone who contacted influenza after using their smoke ball in a specified manner. Mrs. Carlill did use the smoke ball in a specified manner but was attacked by influenza.

She claimed the reward and it was held that she could recover the reward as a general offer can be accepted by anybody. Since this offer is of a continuing nature, more than one person can accept it and can even claim the reward. But if the offer of a reward is for seeking some information or seeking the restoration of a missing thing, then the offer can be accepted by one individual who does it first of all. The condition is that the claimant must have prior knowledge of the reward before doing that act or providing that information.

Question 14.
A advertises in the newspaper that he will pay ₹ 1,000 to anyone who brings to him his lost son. B without knowing of this reward finds A’s lost son and restores him to A. Can B claim for the reward under the provisions of the Indian Contract Act, 1872? [Dec. 2019 (4 marks)]
Answer:
Facts of Case: A advertises in the newspaper that he will pay ₹ 1,000 to anyone who brings to him his lost son. B without knowing of this reward j finds A’s lost son and restores him to A.

Provision: An offer can be accepted only by a person who knows about 1 it. In the case of a general offer, it could be accepted by anyone, provided the j person was aware of the offer. B restored A’s son but knew nothing [ about the offer of reward.

Conclusion: He, therefore, could not have been accepted it and hence he j cannot claim the reward.

Question 15.
“Gratuitous promises are not enforceable by law.” Explain the statement. [June 2005 (5 Marks)]
Answer:
A promise to contribute to charity, though gratuitous, would be enforceable if on the faith of the promise, the promise is put to some detriment and the promisor was aware of the fact. In such a case, the promisor is liable to pay the promised amount of the subscription. [KedarNathv. Gorie Mohan]

Question 16.
Anurag promises to pay ₹ 11,000 to the management committee of a school by way of a donation. The management committee, on the basis of Anurag’s promise, gets a Water Purifier System (Aquaguard) installed in the school at a cost of ₹ 8,000 on credit. Now, Anurag refuses to pay the donation. What is the remedy available to the management committee of the school? Give reasons. [Dec. 2005 (5 Marks)]
Answer:
In the case of a charitable subscription, if a person (promisor) promises to pay a certain amount and on the basis of that promise, another person (promise) incurs liability, then the promisor is bound to pay the amount promised, even if there is the absence of consideration.

The contract is binding on Anurag because the management committee has undertaken liability on the faith of Anurag’s promise.

Question 17.
No Consideration, no contract; subject to certain exceptions. Explain briefly. [Dec. 2015 (3 Marks)]
Answer:
Consideration is one of the essential elements of a valid contract. Without consideration, there is a contract. Contract without consideration is known as nudum pactum.

No consideration, no contract [Section 25]: In the following cases even if there is no consideration contracts are valid.

  • Agreement made on account of natural love and affection. If they are written and duly registered.
  • Compensation for voluntary services.
  • Promise to pay time-barred debt made in writing and signed by the person liable to pay the amount.
  • Completed gifts.
  • No consideration is required to make an agency.
  • In the case of a charitable subscription, if a person (promisor) promises to pay a certain amount and on the basis of that promise, other people (promise) incur liability, then the promisor is bound to pay the amount promised, even if there is an absence of consideration.

Question 18.
X and Y are husband and wife, respectively. X, by a registered document, after referring to quarrels and disagreement between himself and his wife Y, promised to pay his wife, a sum of money for her maintenance and separate residence.
Whether this document is a contract enforceable by law? Give reasons with reference to decided case law, if any. [Dec. 2015 (5 Marks)]
Answer:
Consideration is one of the essential elements of a valid contract. Without consideration, there is a contract. Contract without consideration is known as nudum pactum. However, there is a certain exception to the rule that “no consideration, no contract”.

One of the exceptions is “agreement made on account of natural love and affection which are written and duly registered”.

As per facts given in the case, the husband had promised to pay the wife a sum of money for her maintenance and separate residence which is duly registered but frequent quarrels between them show the absence of natural love and affection, and hence it is not valid contract enforceable by law.

Question 19.
What is meant by ‘privity of contract’? Discuss briefly State the exception to privity of contract. [Dec. 2015 (5 Marks)]
Answer:
Privity of contract means the only party to a contract can sue each other or only party to contract to impose an obligation on each other. In other words as per the doctrine of privity of contract third party i.e. stranger to a contract cannot sue a party to a contract.

The exception to the rule that a stranger to a contract cannot sue: In the following cases stranger to a contract can sue the parties to the contract.

  1. The beneficiary in trust: A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party to it, for the enforcement of the trust so as to get the trust executed for his benefit.
  2. Assignee: An assignee under an assignment made by the parties, or by
    the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, title, and interest. But a mere nominee (ie. the person for whose benefit another has insured his own life) cannot sue on the policy because the nominee is not an assignee.
  3. The beneficiary in case of family arrangements or settlements: In cases of family arrangements or settlements between male members of j a Hindu family which provide for the maintenance or expenses for 4 marriages of female members, the latter though not parties to the contract, possess an actual beneficial right which places them in the position of beneficiaries under the contract, and can, therefore, sue.
  4. Agency: Principal can sue in case of a contract entered through agent,

Question 20.
“Contract cannot confer rights or impose obligations arising under [ it on any person or agent except the parties to the contract”. Critically analyze this statement. [June 2018 (5 Marks)]
Answer:
When a contract is created between two or more person it confers rights or imposes obligation under it on the person executing the contract, j A contract never bins a third party. It is binding the only party to contract.

A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract.
In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd., D supplied tires to a wholesaler X, on condition that any retailer to whom X re-supplied the tires should promise X, not to sell them to the public below D’s list price.

X supplied tires to S upon this condition, but nevertheless, sold the tires below the list price.

Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for the promise to X nor was he party to the contract between D and X.

Thus, a person who is not a party to a contract cannot sue upon it even though the contract is for his benefit.

A, who is indebted to B, sells his property to C, and C the purchaser of the I property, promises to pay off the debt to B. In case C fails to pay B, B has no right to sue C for there is no privity of contract between B and C. The leading English case on the point is Tweddle v. Atkinson.

In this case, the father of a boy and the father of a girl who was to be married to the boy agreed that each of them shall pay a sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband) sued the executors of his father-in-law upon the agreement between his father-in-law and his father.

Held: The suit was not maintainable as the boy was not a party to the contract.

Question 21.
Explain, with suitable examples, the circumstances under which a minor’s estate is liable to reimburse for necessaries supplied to him. [Dec. 2005 (5 Marks)]
Answer:
A minor is liable to pay out of his property for “necessaries” supplied to him. It is to be noted that the minor is not personally liable, but what is liable is – his ‘property.

Necessaries: The term ‘necessaries’ is not defined in the Contract Act, 1872. The English Sale of Goods Act, 1893, defines it in section 2 as, “goods suitable to the condition in life of such infant or other people, and to his actual requirement at the time of sale and delivery.” Such goods need not necessarily belong to a class of useful goods, but they must be:

  • Suitable to the position and financial status of the minor.
  • Necessaries both at the time of sale and at the time of delivery.

Necessaries include:
1. Necessary Goods: Necessary goods are not restricted to articles, which are required to maintain a bare existence, such as bread and clothes, but include articles, which are reasonably necessary to the minor having, regard to his station in life. A watch and a bicycle may well be considered to be necessary. An engagement ring may be necessary, but not a vanity bag bought for the minor’s fiancee.

2. Services rendered: Certain services rendered to a minor have been held to be necessary. These include:

  • Education
  • Training for a trade
  • Medical advice
  • Legal advice
  • Provision of a funeral for deceased husband of a minor widow
  • A house was given to a minor on rent for the purpose of living and continuing his studies.

As regards contracts that are for the supply of necessaries and which are beneficial to the minor, the private estate of the minor is liable.

Loans incurred to obtain necessaries: A loan is taken by a minor to obtain j necessaries also binds him and is recoverable by the lender as if he himself j had supplied the necessaries. But the minor is not personally liable. It is only his estate, which is liable for such loans.

Question 22.
Write a short note on Person disqualified from entering into a contract [June 2009 (5 Marks)]
Answer:
As per Section 10 of the Contract Act, 1872, one of the essential elements of a valid contract is that the parties must be competent to contract. Capacity to contract means competence of persons to enter into a valid contract. is Who are competent to contract [Section 11]: Every person is competent to contract if he fulfills all following three qualifications:

  • He is a major.
  • He is of sound mind.
  • He has not been disqualified to contract under any law.

Any person who does not fulfill the conditions laid down in section 11 is j disqualified from entering into a contract.

Question 23.
John, who is a known minor, fraudulently overstates his age and takes delivery of a motor car after executing a promissory note in favor of the dealer for its price. He does not knowingly honor his promissory note; that is to say, he does not pay the price of the said motor car. What j is the remedy available to the motor car dealer in the above situation? Advise. [June 2018 (5 Marks)]
Answer:
An agreement with or by a minor is void and in-operative rhinitis, Where the loan was obtained by fraudulent representation by the minor j or some property was sold by him and the transactions are set aside as j being void, the Court may direct the minor to restore the property to the other party. For example, a minor fraudulently overstate his age and takes j delivery of a motor car after executing a promissory note in favor of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the Court on equitable grounds may order the minor to return the car to the trader if it is still with the minor.

Question 24.
A minor fraudulently overstated his age and purchased a motor car after executing a promissory note in favor of the owner of the motor j car for its price. The car owner compelled the minor to pay the amount of the promissory note. Whether the car owner will succeed? Examine it with reference to the Indian Contract Act, 1872 and the Specific Relief Act, 1963. [June 2019 (4 Marks)]
Answer:
An agreement with or by a minor is void and in-operative ab initio. Where the loan was obtained by fraudulent representation by the minor or some property was sold by him and the transactions are set aside as being void, the Court may direct the minor to restore the property to the other party.

For example, a minor fraudulently overstate his age and takes delivery of a motor car after executing a promissory note in favor of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the Court on equitable grounds may order the minor to return the car to the trader if it is still with the minor.

Thus, the motor car dealer cannot recover the amount of promissory note but can recover the motor car if is still with the minor.

Question 25.
K, who is trying to sell an unsound horse, forges a Veterinary Surgeon’s certificate stating the horse to be sound and pins it on the stable door. P comes to examine the horse but the certificate goes unnoticed by him. He buys the horse and finds later on the horse to be unsound. He wants to avoid the agreement under the plea that he has defrauded. Will he succeed? [June 2006 (5 Marks)]
Answer:
P will not succeed for though K attempted to defraud by putting up the surgeon’s forged certificate as to the soundness of the horse, P was not influenced by it. P bought the horse after his examination and not I on the basis of the certificate. Section 17 says that an attempt at deceit that does not deceive is not a fraud. Hence P will not be able to set aside the purchase of a horse.

Question 26.
Avdesh contracts to sell a piece of silk to Bhupesh. Bhupesh thinks it is Chinese silk. Avdesh knows that Bhupesh thinks so, but Avdesh knows that it is English silk. Avdesh does not correct Bhupesh’s impression. Subsequently, Bhupesh discovers that it is not Chinese silk. Can he repudiate the contract? Discuss. [June 2009 (5 Marks)]
Answer:
When in a contract only one of the parties is a mistake it is called a unilateral mistake. A unilateral mistake is not allowed as a defense in avoiding a contract. Hence, Bhupesh cannot repudiate the contract.

Question 27.
Distinguish between: Misrepresentation and Fraud [Dec. 2009 (5 Marks)]
Answer:
Following are the main points of distinction between fraud and misrepresentation.

Points Fraud Misrepresentation
Meaning Fraud means and includes any act committed by a party to a contract with the intent to deceive another part or induce him to enter into a tire contract. Misrepresentation is a false statement which the person making it honestly believes to be true.
Intention to deceive Fraud is deliberate or wilful. There is a clear intention to deceive the other party. It is an innocent wrong, without any intention to deceive.
Belief The person making the false statement does not believe it to be true. The person making the statement believes it to be true or does not know that it is false.
Remedy It entitles the aggrieved party to claim damages in addition to the right to rescinding the contract. It only gives a right to avoid the contract without any claim for damages.
Punishment In certain cases, it may lead to prosecution for an offense of cheating under the Indian Penal Code, 1860. It is not a criminal act, and hence not punishable.

Question 28.
Mention the main flaws of Inacontract. [June 2015 (3 Marks)]
Answer:
There may be the circumstances under which a contract made under these rules may still be bad because there is a flaw or error somewhere.

The chief flaws in contract arc:

  • Incapacity
  • Mistake
  • Misrepresentation
  • Fraud
  • Undue Influence
  • Coercion
  • Illegality
  • Impossibility.

Question 29.
Discuss the concept of ignorant Juris non-excusat. [Dec. 2016 (5 Marks)]
Answer:
A mistake in the nature of miscalculation or error of judgment by one or both parties has no effect on the validity of the contract. To be operative so as to render the contract void, the mistake must be:
(a) of fact, and not of law or opinion;
(b) the fact must be essential to agreement i,e. so fundamental as to negative the agreement;
(c) must be on the part of both the parties. Thus, where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. [Section 20]

Mistakes are of two kinds: (i) mistake of law, and (ii) mistake of fact. If there is a mistake of law of the land, the contract is binding because everyone is deemed to have knowledge of law of the land, and ignorance of the law is no excuse (Ignorantia Juris non-excusat).

Question 30.
Amit promises to procure employment for Bima! in a government department and Bimal promises to pay ₹ 5,000 to Amit for the same. Amit gets the said job for Bimal. However, Bimal refuses to pay the promised money to Amit who files a suit in the court of law to recover t 5,000 from Bimal. Will Amit succeed? Give reasons. [Dec. 2007 (5 Marks)]
Answer:
Amit’s promise to procure employment for Bimal in a government department is an agreement opposed to public policy and unlawful, hence void. Thus, Amit will not succeed to recover ₹ 5,000.

Question 31.
There was an agreement to lend ₹ 5 lakh to Bimla in consideration of her getting a divorce and marrying Govind, the lender. Is the agreement enforceable? Give reasons. [Dec. 2008 (5 Marks)]
Answer:
The agreement which involves interfering with marital duties is opposed to public policy and unlawful, hence void. Hence, it is not enforceable.

Question 32.
Amrit’s wife Barkha paid ₹ 5,000 to Chandan to be given as a bribe to a jailor for procuring the release of her husband from jail. The jailor failed to procure the release. Can Barkha recover the amount? Give reasons. [June 2009 (5 Marks)]
Answer:
The agreement which interferes with the administration of justice is opposed to public policy and unlawful and hence void. Thus, Barkha cannot recover the amount of ₹ 5,000 paid to Chandan given as a bribe to a jailor for procuring the release of her husband from jail.

Question 33.
Every agreement by which anyone is restrained from exercising a j lawful profession, trade, or business of any kind, is to that extent void. Discuss. [June 2014 (5 Marks)]
Answer:
Agreement in restraint of trade, void [Section 27]: Every agreement, by which, anyone is restrained from exercising a lawful profession, trade ‘ or business of any kind, is to that extent void.

The exception to the agreement in restraint of trade: That is to say in following g cases agreement even though in restraint of trade are valid:
1. Employment Agreement: An agreement of employment under which, the employee agrees to serve a certain employer for a certain duration, and that he will not serve anybody else during such period is a valid agreement.

2. Sale of goodwill: Where the seller of the goodwill of a business undertakes not to compete with the purchaser of the goodwill, the contract j is enforceable provided the restraint appears to be:

  • Reasonable as to territorial limits, and
  • The length of time.

Example: N was an inventor and a manufacturer of guns and ammunition. He sold his worldwide business to M and promised not to manufacture guns anywhere in the world for 25 years. The House of Lords held that the restraint was reasonable as it was necessary for the protection of the company. [Nordenfelt v. Maxim Nordenfelt Guns & Co.]

3. Restriction on the existing partner: Section 11(2) of the Partnership Act, 1932 provides that a partner shall not carry on any business other than that of the firm while he is a partner.

Restriction on an outgoing partner: Section 36(2) and section 54 of the Partnership Act, 1932 provide that a partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within the specified period or within specified limits. Such agreements are valid if the restrictions are reasonable.

Question 34.
“Every agreement in which anyone is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.” Discuss. [June 2016 (5 Marks)]
Answer:
The agreement which interferes with the administration of justice is opposed to public policy and unlawful and hence void. Thus, Barkha cannot recover the amount of ₹ 5,000 paid to Chandan given as a bribe to a jailor for procuring the release of her husband from jail.

Question 35.
Distinguish between: Void Contract and Voidable Contract [June 2008 (5 Marks)]
Answer:
Following are the main points of distinction between void and voidable contract:

Points Void Contract Voidable Contract
Meaning When a contract ceases to be enforceable at law, it becomes a void contract. A contract that is enforceable by law at the option of one party, but not at the option of the other is known as a voidable contract.
Status Avoid contracts cannot create any legal rights. It is a total nullity. The avoidable contract takes its full and proper legal effect unless it is disputed and set aside by the person entitled to do so.
Nature Avoid contract is valid when it is made. But subsequently, it becomes void due to one reason or the other. A contract may be voidable from the very beginning or may subsequently become voidable.
Rights Avoid a contract does not provide any legal right to the parties to the contract. The avoidable contract gives the right to the aggrieved party to rescind the contract and claim the damages, etc. in certain cases.
Effect When a contract is void because of illegality its collateral transactions also become void. The avoidable contract does not affect the collateral transactions.

Question 36.
Distinguish between: Illegal Agreement and Void Agreement [June 2010 (5 Marks)]
Answer:
Following are the main points of distinction between illegal and void agreement:

Question 37.
Difference between Void agreement and illegal Agreement [Dec. 2019 (3 marks each)]
Answer:
Following are the main points of distinction between void and voidable contract:

Points Void Contract Voidable Contract
Meaning When a contract ceases to be enforceable at law, it becomes a void contract. A contract that is enforceable by law at the option of one party, but not at the option of the other is known as a voidable contract.
Status Avoid contracts cannot create any legal rights. It is a total nullity. The avoidable contract takes its full and proper legal effect unless it is disputed and set aside by the person entitled to do so.
Nature Avoid contract is valid when it is made. But subsequently, it becomes void due to one reason or the other. A contract may be voidable from the very beginning or may subsequently become voidable.
Rights Avoid a contract does not provide any legal right to the parties to the contract. The avoidable contract gives the right to the aggrieved party to rescind the contract and claim the damages, etc. in certain cases.
Effect When a contract is void because of illegality its collateral transactions also become void. The avoidable contract does not affect the collateral transactions.

Question 38.
“An agreement to do an act impossible itself is void”. Explain. [June 2015 (3 Marks)]
Answer:
Agreement to do impossible acts [Section 56]: An agreement to do an act impossible in itself is void.

A contract to do an act which becomes impossible after the contract is made by reason of some event which the promisor could not prevent then such contract becomes void when the act.

Where one person has promised to be something which he knew to be impossible and the promisee did not know to be impossible, such promisor must make compensation to such promisee for any loss which the promisee | may sustain through the non-performance of the promise.

Illustrations:

  • A agrees with B to discover treasure by magic. The agreement is void.
  • A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.

Question 39.
Ajay agrees to sell his old car to Bijoy for ₹ 1,00,000 or ₹ 80,000. Is it a valid contract? Give reasons. [June 2006 (5 Marks)]
Answer:
As per Section 29 of the Contract Act, 1872, if the meaning of the 1 agreement is not certain, such agreements are void. Thus, agreements must be in clear words.

In this case, there is nothing to show which of the two prices is to be taken into consideration. Hence, the agreement is void.

Question 40.
Discuss briefly whether an agreement by way of wager is a voidable contract. [Dec. 2007 (5 Marks)]
Answer:
Agreements by way of wager, void [Section 30]: A wagering agreement is an agreement between two parties by which one promises to pay money or money’s worth on the happening of some uncertain event in consideration of the other party promise to pay if the event does not happen. Wagering agreements are void.

Example: Rohit agrees to pay ₹ 500 to Sachin if Indian wins a cricket match with Pakistan and Sachin agrees to pay ₹ 500 if Pakistan wins. This is a wagering agreement and is void.

Essentials of a wagering agreement:

  • There must be a promise to pay money or money’s worth.
  • The event must be uncertain.
  • Each party must stand to win or lose.
  • Neither party should have any control over the event.
  • Neither party should have any other interest (ie. other than the sum or stake to be win or lose) in the event.

A lottery is a wagering agreement. However, a lottery authorized by State Government is not a wagering agreement.

Question 41.
Explain the meaning of the contingent contract and state the rules relating to such contracts. [June 2003 (5 Marks)]
Answer:
Contingent Contract [Section 31]: It is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

Example 1: Arun sends goods to Tarun on a ‘sale or return basis. This is a contingent contract depending on the act of the Tarun to accept or reject the goods.

Example 2: When someone takes a fire insurance policy it is a contingent contract as a liability of the insurance company arises when damages to the house by fire.

Rules relating to contingent contracts are as follows:
1. Enforcement of contracts contingent on an event happening [Section 32]: Contingent contracts to do or not to do anything in an uncertain future event happens, cannot be enforced by law unless and until that event has happened.

Example: A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.

2. Enforcement of contract contingent on an event not happening [Section 33]: Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before.

Example: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.

3. When event on which contract is contingent to be deemed impossible if it is the future conduct of a living person [Section 35]: If the future event on which a contract is a contingent is the way in which a person will act at an unspecified time, the event shall be considered to 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.

Example: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die and that C may afterward marry B.

4. Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void if the event does not happen or its happening becomes impossible before the expiry of that time. [Section 35]

Example: A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.

Example: A promise to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.

5. Agreements contingent on impossible events, void [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.

Example: A agrees to pay B ₹ 1,000 if two straight lines should enclose a space. The agreement is void.

Example: A agrees to pay B ₹ 1,000 if B will marry A’s daughter, C. C was dead at the time of the agreement. The agreement is void.

Question 42.
Avanti took out motor car insurance from Healthy Trip Insurance Company. A cheque was issued under a contract of insurance of motorcar by the insured for the payment of premium of the policy. However, the cheque was dishonored for want of funds in the account. Meanwhile, the car met with an accident and badly damaged, killing the insured owner. The claim for the insured amount was repudiated by the company.
Decide:
(i) Whether the contract of insurance has been performed? Analyze the provisions of the Indian Contract Act, 1872 in this respect?
(ii) Whether the claim of the insured amount may be recovered from Healthy Trip Insurance Company? [Dec 2019(4 marks)]
Answer:
In National Insurance Co. Ltd. v. Seema Malhotra, a cheque was issued under a contract of insurance of motor car by the insured for payment of premium to the policy. However, the cheque was dishonored for want of funds in the account. Meanwhile, the car met with an accident and badly damaged, killing the insured owner. The claim for the insured amount was repudiated by the company.

The Supreme Court held that applying the principles envisaged under sections 51, 52, and 54 of the Indian Contract Act, 1872 relating to reciprocal promises, the insurer need not perform his part of the promise when the other party fails to perform his part and thus not liable to pay the insured amount.

Question 43.
X lent three sums to Y of ₹ 10,000, ₹ 20,000, and ₹ 50,000. Y sent a sum of ₹ 10,000 asking X to appropriate this money towards the third debt of ₹ 50,000. X wants to appropriate this money to the first loan. Can he do so?
Answer:
As per Section 59 of the Contract Act, 1872, where a single payment is made by a debtor who owes several sums to the same creditor, the debtor has the primary right to specify the manner of appropriation.

Where the debtor does indicate such a manner, the creditor must do so, or else he should refuse to accept the payment.
Since X has indicated to adjust the amount of ₹ 10,000 against the third debt of ₹ 50,000, X must do so; he cannot adjust it against the first debt.

Question 44.
Write a short note: Anticipatory breach of contract [June 2007 (4 Marks)]
Answer:
Breach of contract means breaking or non-fulfillment of an obligation under a contract. Anticipatory breach of contract: When a party to executory contract declares his intention of not performing the contract, it is known as anticipatory breach of contract.

An executory contract is a contract in which the promises of both parties have yet to be performed.

The anticipatory breach may take place in any of the following ways:
(a) Express Repudiation: When one of the parties to the contract expressly declares that he is not going to perform his part.

Example: A contracts to supply 100 bags of rice on 31-12-2018 to B. On 15-12-2018 he shows his unwillingness to supply the rice. This is known as anticipatory breach of contract, by express repudiation.

(b) Implied Repudiation: Party does some act which is against the performance of his promise.
Example: X agrees to sell his car to ”Y” on 30-12-2018. On 15-12-2018, X sells his car to Z. There is an anticipatory breach by implied conduct of X.

Question 45.
What are the ways of discharging a contract? [Dec. 2014 (5 Marks)]
Answer:
Termination of the contractual relationship between the parties is known as the discharge of the contract. A contract may be discharged by:

  • Performance
  • Agreement or consent
  • Impossibility
  • Lapse of time
  • Operation of law
  • Breach of contract

Question 46.
How does a valid contract gel discharged by the impossibility of performance? [June 2016 (5 Marks)]
Answer:
The impossibility that arises subsequent to the formation of a contract is called a post-contractual or supervening impossibility. In England, the doctrine of frustration is the parallel concept of “supervening impossibility”.

A contract is discharged by supervening impossibility in the following case:
1. Accidental destruction of the subject matter of the contract: After formation of the contract if the subject matter is destroyed without any fault of either party, the contract is discharged.

2. Change in a particular state of things.
Example: Anil promises to marry Madhuri. Before marriage, Madhuri becomes mad. The contract is discharged, as it becomes void due to a change in a particular state of thing.

3. Serious illness or death or incapacity of party: Where a contract depends on the personal skill or qualification of a party.
Example: A agreed with B to perform a dance show on a particular date. Before the date of the show, A was seriously ill. Here contract between A & B is discharged.

4. Change in law or stepping in of a person with statutory authority. Example: A agreed to sell certain land to B. Before the sale is effected, the land was compulsorily acquired by the Government. Here, the contract is discharged due to Government action.

5. The contract becomes void when war is declared and hence discharged.
In the following cases, a contract is not discharged on the ground of supervening impossibility:

  1. The difficulty of performance: A contract is not discharged by the mere fact that it has become more difficult of performance due to some uncontemplated events or delays.
  2. Commercial impossibility: A contract is not discharged merely because the expectation of higher profits is not realized, or the necessary raw material is available at a higher price because of the outbreak of war, or there is a sudden depreciation of the currency.
  3. Impossibility due to failure of a third person: Where a contract could not be performed because of the default by a third person on whose work the promisor relied, it is not discharged.
  4. Strikes, lock-outs & civil disturbances: Such events do not discharge a contract unless the parties have specifically agreed in this regard at the time of formation of the contract.
  5. Failure of one of the objects: When a contract is entered into for several objects, the failure of one of them does not discharge the contract.

Question 47.
A agreed to supply B certain goods to be produced from Indonesia. The goods could not be produced due to riots and civil disturbances in Indonesia. Decide, whether the non-performance of the contract may be excused? [Dec. 2017 (5 Marks))
Answer:
The impossibility of performance is not an excuse for non-performance. Ordinarily, when a person undertakes to do something, he must do it unless its performance becomes absolutely impossible. However, events like strikes, lock-outs & civil disturbances do not discharge a contract unless the parties have specifically agreed in this regard at the time of formation of the contract.

As per facts given in the case, A agreed to supply B certain goods to be produced from Indonesia. However, goods could not be produced due to riots and civil disturbances in Indonesia. As discussed above such events do not discharge a contract unless the parties have specifically agreed in this regard at the time of formation of the contract. Thus, non-performance of the contract by A cannot be excused and he will have to perform the contract as agreed otherwise B may claim damages/compensation from A for non-performance of the contract.

Question 48.
Explain the concept of quantum meruit. [June 2010 (5Marks)]
Answer:
Quantum meruit literally means ‘as much earned’ ie. in proportion to the extent of work done. Sometimes a contract cannot be completed; in that case, if one party has already executed some work, then he is entitled to get a proportional amount to extent of work done. In case of breach of contract aggrieved party can claim ‘Quantum Meruit’ plus damages. Quantum meruit is available only if the original contract has discharged.

In the following cases, a claim for quantum meruit may arise.
1. When an agreement is discovered to be void /when a contract becomes void:
Example: K hired a godown from L for 12 months and paid the rent in advance. After about 7 months the godown was destroyed by fire without the fault of either party. Here, the contract has become void due to distraction of godown, and hence K can recover rent for the unexpired period from L.

2. No agreement as to remuneration: In a contract to render services, if there is no express or implied intention to provide remuneration, the party rendering services can sue upon quantum merit for reasonable remuneration.

3. When one party prevents the other from completing of contract.

In the following cases, even the party at fault can claim payment on quantum meruit.
(a) Divisible contracts partly performed: Generally, no remedy is available to default party, but even defaulting party may be entitled to get payment on quantum meruit if the following conditions are satisfied

  • The contract is divisible.
  • The contract is partly performed.
  • The party not in default has enjoyed the benefit of the part of the performances.

If the above conditions are satisfied, a defaulting party may be entitled to get a proportionate amount after deducting compensation for loss/damage.

(b) Indivisible contract performed completely but badly: In such case party who has performed the contract can claim the lump sum, but another party can make a deduction for bad work.

Example: A agrees to repair the swimming pool of B for ₹ 50,000. The payment is to be made by B on the completion of the repair of the swimming pool. A carried the repair in a defective way. A can recover ₹ 50,000 less a deduction for bad work.

Question 49.
A jay finds a mobile phone lying on a table in a Coffee House. He hands over the mobile phone to Bijay, the manager of the Coffee House so that the true owner can claim it back. However, no one claims the mobile phone. After some time, Ajay goes to Bijay, the manager, and requests him to return the mobile phone to him. On Bijay’s refusal, Ajay files a suit against him for the recovery of the mobile phone. Will Ajay succeed? Give reasons. [June 2008 (5 Marks)]
Answer:
A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee. He is bound to take care of such goods as a man of ordinary prudence. He is treated as an owner against the whole world except the true owner.

In the given case, Ajay can recover the mobile phone from Bijay because in absence of a real owner Ajay will be treated as the owner.

Question 50.
The position of the finder of lost goods is that of the bailee. [June 2014 (5 Marks)]
Answer:
Finder of goods [Section 71]: A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee. He is bound to take care of such goods as a man of ordinary prudence. He is treated as an owner against the whole world except the true owner.

Example: A finds a diamond in B’s shop. He hands it to B to keep until the true owner is found. The true owner did not appear even advertisement in newspaper. A claims the diamond from B, who refuses to return. ”B” is bound to return the diamond to A as A is owner against the whole world except the true owner.

Question 51.
Mohit finds a ring of Shardha and sells it to a third person Prachi who purchases it for value and in good faith. Whether Shardha can file a suit to recover the ring? Advise with cogent reasons. [Dec. 2018 (5 Marks)]
Answer:
As per Section 71 of the Contract Act, 1872, a person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee. He is bound to take care of such goods as a man of ordinary prudence. He is treated as an owner against the whole world except the true owner.

In the given case sale by Mohit to third-person Prachi is not valid as Mohit has no title. Shardha can recover the ring from Prachi and Prachi can recover damages from Mohit for breach of “implied condition as to title” as per the Sales of Goods Act, 1930.

Question 52.
Distinguish between: Contract of indemnity & contract of guarantee [Dec. 2008 (5 Marks)]
Answer:
Following are the main points of distinction between indemnity and contract of guarantee:

Points Contract of Indemnity Contract of Guarantee
Meaning 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 other person is called a contract of indemnity. It is a contingent contract. A contract of guarantee is a contract to perform the promise made or discharge liability incurred by a third person in case of his default.
Parties There are two parties to the contract of indemnity viz.

  • Indemnifier
  • Indemnity holder
There are three parties to the contract of guarantee viz.

  • Principal debtor,
  • Surety,
  • Creditor
No. of contracts There is only one contract in case of indemnity. There are three contracts in the contract of guarantee.
Liability The liability of the indemnifier is primary and independent. The liability of the surety is collateral or secondary. Primary liability is that of the principal debtor.
Nature of liability The promise of the indemnifier is to save the person indemnified from a contingent risk. The surety undertakes to discharge the liability of the principal debtor, which is not contingent but is subsisting.
Example A and B go into a shop. A says to the shopkeeper, Let B have the goods, I will SCC you paid.” A and B go into a shop. A says to the shopkeeper, let B have the goods and if he does not pay, I will.

Question 53.
Amar guarantees to Bimal the payment of a bill of exchange by Chirag, the acceptor. The bill is dishonored by Chirag. What is the extent of liability of Amar? [Dec. 2009 (5 Marks)]
Answer:
As per Section 128 of the Contract Act, 1872, the liability of a surety is co-extensive with that of the principal debtor. Hence, Amar is liable to pay the amount of the bill as well as noting charges and interest.

Question 54.
What is meant by contracts ‘uberrimae fidei’? Which contract? are in general may be treated as contracts ‘uberrimae fidei? [June 2017 (5 Marks))
Answer:
uberrimae fidei means ‘utmost good faith’/’disclosure of all material facts.

The creditor is under obligation to disclose all the material facts in respect of creditworthiness of principal debtor to surety even if surety does not specifically ask.

Example: C engaged P as a clerk to collect money. P misappropriated some of C’s receipts. This sum was made good by P’s relation and C agreed to retain P in his employment on fidelity guarantee. S gave his guarantee for P’s duly accounting. C did not inform S of P’s previous dishonesty. The guarantee could not be enforced against owing to non-disclosure of P’s previous dishonesty.

Contracts Uberrimae fidei: There are contracts that require the utmost good faith. There is a special duty to disclose all the material facts and the failure to disclose such information gives a right to rescind the contract at the option of the other party.

The following contracts are contracts uberrimae fidei
(a) Contracts of insurance of all kinds: It is the duty of the assured per- j son to disclose all the material information or fact to the insurance I company, affecting the risk covered. Concealment of a material fact j will render the contract void.

(b) Company prospectus: It is the duty on the part of every company j to disclose each and every material information in the prospectus, j When it invites the public to subscribe for its shares in or debentures of. The contract to buy shares or debentures is voidable at the option of the purchaser where there is a false statement or non-disclosure in the prospectus.

(c) Contracts of family arrangements: It is the duty of every member of the family to make full disclosure of every material fact within his knowledge. Such a contract is not binding if either party has been misled by any concealment of material facts.

(d) Contract for sale of land: It is the duty of the vendor to show good title | to the land that he has contracted to sell to the purchaser.

Question 55.
Mr. X in consideration, that Mr. Y will employ Mr. Z in collecting the rent of Zamindari, promises to Mr. B to be responsible for the amount of ₹ 10,000 for the due collection and payment by Mr. Z of these rents. Decide, whether it is a contract or a guarantee? Which type of guarantee it is? When such a guarantee may be revoked? [Dec. 2017 (5 Marks)]
Answer:
As per Section 129 of the Contract Act, 1872, when a guarantee extends to a series of transactions it is called a continuing guarantee. The liability of the surety in case of a continuing guarantee extends to all the transactions until the revocation of the guarantee.

Example: C employs P for collecting rent of C’s Zamindari. S gives a guarantee for good work and honesty of P. This is continuing guarantee.
Example: S guarantees payment to C for ₹ 10,000 for any goods C may supply to P from time to time. This is continuing guarantee.

Revocation of a continuing guarantee [Section 130]: Surety may revoke at any time, a continuing guarantee as to future transactions, by giving j a notice to the creditor. A continuing guarantee cannot be revoked for the transaction which has already taken place.

As per facts given in the case, Mr. X in consideration, that Mr. Y will employ Mr.

Z in collecting rent of Zamindari, promises to Mr. Y to be responsible for the amount ₹ 10,000 for due collection and payment by Mr. Z of this rent is a continuing guarantee as it extends to series of transaction. Thus, Mr. X will be liable to Mr. Y if Mr. Z makes any default up to the amount of ₹ 10,000.

Mr. X may revoke such continuing guarantee as to future transactions, by j giving notice to Mr. Y.

Question 56.
Distinguish between: Contract of indemnity & contract of guarantee [Dec. 2018 (3 Marks)]
Answer:
A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee. He is bound to take care of such goods as a man of ordinary prudence. He is treated as owner against the whole world except the true owner.

In the given case, Ajay can recover the mobile phone from Bijay because in absence of a real owner Ajay will be treated as the owner.

Question 57.
“Goods can be pledged by the owner only.” Discuss. State the circumstances in which the goods can be pledged by non-owners. [Dec. 2006 (5 Marks)]
Answer:
The general rule is that only the owner can create a valid pledge. However, in the following situation even a non-owner can create a valid pledge:

1. Pledge by mercantile agent [Section 178]:

  • A mercantile agent who is in possession of goods or of document of title to goods, with the consent of the owner, can pledge them while acting in the ordinary course of business as a mercantile agent.
  • The pledge shall be valid only if the pawnee acts in good faith, and has no notice at the time of pledge that the pawnor had no authority to pledge.

2. Pledge by a person in possession under voidable contract [Section 178A]:
When the pawnor has obtained possession of goods under a voidable contract by way of fraud, coercion hut the contract is not rescinded at the time of pledge, it is a valid pledge. The pawnee obtains a good title to such goods provided that he acts in good faith and had no notice of the defective title of the pawnor.

3. Pledge where pawnor has limited interest [Section 179]: Where the pawnor has only limited interest in the goods pledge shall be valid only to the extent of such interest.

4. Pledge by seller or buyer in passion after-sale: A seller in possession of goods after the sale and a buyer in possession of goods before a sale can create a valid pledge provided the pawnee acts in good faith and has no notice of prior sale.

Example: A sells 10 bags of sugar to B on a stipulation that delivery and payment be made in next month. Before goods are delivered to B, A pledges goods with C, who acts in good faith and has no notice of prior sale. The pledge is valid.

5. Pledge by co-owner in possession: If co-owner is in possession of goods with the consent of other co-owner then co-owner in possession can create a valid pledge.

Question 58.
Ajay found a defective video camera lying in a park. He pledged it with Vijay for ₹ 3,000. Mohan, the real owner, came to know about it. Mohan sued Vijay to recover his camera. Vijay had incurred ₹ 500 on repair to make the camera operational. Can Mohan recover his camera? [June 2007 (5 Marks)]
Answer:
Mohan can recover his camera but only paying ₹ 500 to Vijay. As j per Section 179, where the pawnor has only limited interest in the goods pledge shall be valid only to the extent of such interest.

Question 59.
Distinguish between: General Lien & Particular Lien [June 2011 (5 Marks)]
Answer:
Following are the main points of distinction between general and particular lien:

Points General Lien Particular Lien
Meaning It is a right to retain all the goods or any property of another until all the claims of the holder are satisfied. This is a right to retain the property of another for a general balance of accounts. It is a right to retain those goods in respect of which bailee has rendered some service involving the exercise of labor or skill.
Persons entitled Right of general lien can be exercised by bankers, factor, wharfingers, attorneys of High Court, and policy brokers. Right of particular lien can be exercised by any bailee who has rendered some service by the exercise of his skill and labor in respect of the goods bailed.
Condition Bailee is unpaid and Bailee need not have worked upon the goods bailed. Bailee has worked upon the goods and remuneration remains unpaid.

Question 60.
Write short notes on Sub-agent [Dec. 2006 (5 Marks)]
Answer:
“Sub-agent” defined [Section 191]: A sub-agent is a person employed by, and acting under the control of, the original agent in the business of the agency.

Appointment of sub-agent: The general rule is that delegates cannot further delegate. Hence, a sub-agent may be appointed only where:

  • Expressly permitted by the principal or inferred from the conduct of the principal.
  • The ordinary customs of trade permits the delegation of authority by an agent.
  • The nature of agency is such that it is necessary to appointment a subagent.
  • The nature of the job assigned to an agent is purely clerical and does not involve the exercise of discretion.
  • In an unforeseen emergency.

Relationship between principal and agent:

  • There is no privity of contract between the sub-agent and the principal.
  • Sub-agent cannot sue the principal for remuneration.
  • The principal cannot sue the sub-agent for any amounts of money due from him.
  • The principal has a concurrent right to proceed against the agent and sub-agent when the sub-agent is guilty of fraud or wilful wrong.

Representation of principal by sub-agent duly appointed [Section 192]: A sub-agent properly appointed can represent principal and bind him by his acts as if he were an agent originally appointed by the Principal.

Agent’s responsibility for sub-agent appointed without authority [Section 193]:

  • Where an agent, without having authority to do so, has appointed a sub-agent, he becomes the principal for such sub-agent.
  • The sub-agent cannot represent the original principal or make the original principal responsible for his acts.
  • Sub-agent can only bind the agent, who appointed him, by contracts entered into with third parties.
  • The original agent of the principal is responsible to both the principal and third parties for any act of the sub-agent.

Termination subagent’s authority [Section 210]: The termination of authority of an Agent causes termination of authority of all sub-agents appointed by him.

Question 61.
Write a short note on Irrevocable agency [June 2007 (5 Marks)]
Answer:
Irrevocable Agencies: An agency that cannot be revoked is called an irrevocable agency. The following agencies are irrevocable:
(a) When the agency is coupled with interest [Section 202]: 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.

Example: 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. A cannot revoke this authority, nor can it be terminated by his insanity or death.

(b) When the agent has incurred a personal liability.

(c) Where the agent has exercised his authority partly.

Question 62.
Write a short note on Agency by ratification [June 2009 (5 Marksj]
Answer:
Ratification means confirm or accept or give consent after the act or event. As per Section 197 such ratification may be express or implied in the conduct of the principal. After ratification, the principal is liable for all the act consequences of the act and also gets all rights under the contract, from the date of the action of an agent.

Example: A without authority, buys goods for B, later B sells them to C on his own account, B’s conduct implies a ratification of purchase made for him by A.

Example: P, without Q’s authority, lends money to R. Afterwards Q accepts interest on the money from R. Q’s conduct implies a ratification of the loan.

Requisites to a valid ratification:

  • The agent must purport to act as an agent for a principal who is in contemplation and is identifiable at the time of contract.
  • The principal must be in existence at the time of the contract. For example, the company cannot ratify the contracts entered by promoters prior to incorporation.
  • The principal should have contractual capacity both at the time of contract and at the time of ratification. A minor on whose behalf a contract is made, cannot ratify it on attaining majority.
  • Ratification must be made within a reasonable time. What is a reasonable time depends on the circumstances of each case.
  • Ratification is valid only when the principal who ratifies has full knowledge of the facts. Ratification should be done within a reasonable time.
  • The act to be ratified must be a lawful one. Ratification of an illegal act or an act, which is void ab initio, is not possible.
  • Ratification can be made of the whole contract. The principal cannot ratify in part what is beneficial to him and leave the rest. Ratification must be communicated to the party who is sought to be bound by an act done by the principal.
  • Ratification should not put third parties to damages.
  • Ratification relates back to the date of the act or agent.

Question 63.
Suresh, an agent, has authority from his principal Bhupesh to sell goods on credit. Suresh sells goods on credit to Chandan without making proper inquiries about Chandan’s financial status. At the time of sale, Chandan was insolvent. Is Suresh under a liability to compensate his principal Bhupesh? Why? [June 2010 (5 Marks)]
Answer:
As per Section 212 of the Contract Act, 1872, the agent is bound to act with reasonable diligence and use the skill he possesses to the proper conduct of the business.

Suresh, an agent sells goods on credit to Chandan without making proper inquiries about Chandan’s financial status. Hence, Suresh has not acted with reasonable diligence and he is liable for loss to his principal.

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