The Indian Contract Act, 1872 – CA Inter Law Study Material

The Indian Contract Act, 1872 – CA Inter Law Study Material is designed strictly as per the latest syllabus and exam pattern.

The Indian Contract Act, 1872 – CA Inter Law Study Material

Contract of Indemnity (Secs. 124 and 125)

Question 1.
What are the rights of the indemnity-holder when sued? [MTP-March 18]
Answer:
Rights of Indemnity-holder when sued:
As per Sec. 125 of the Indian Contract Act, 1872, the promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:

1. all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;
2. all costs which he may be compelled to pay in bringing or defending any suit provided
   (a) he acted under the authority of indemnifier and
   (b) he acted in such a way as a prudent man would act in his own case;
3. all sums which he may have paid under the terms of any compromise of any such suit provided
   (a) the compromise was not contrary to the orders of the promisor, and
   (b) he acted in such a way as a prudent man would act in his own case.

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

Question 2.
S asks R to beat T and promises to indemnify R against the consequences. R beat T and is fined ₹ 50,000. Can R claim ₹ 50,000 from S.
Answer:
Requirements in a contract of indemnity:
A contract of indemnity to be valid must fulfil all the essentials of a valid contract which includes:
(a) Offer and acceptance
(b) Intention to create legal obligation
(c) Consideration
(d) Competency to contract
(e) Free consent
(f) Lawful object
(g) The agreement must not be expressly declared to be void, e.g. an agreement in restraint of trade/ marriage etc.
(h) The terms of the agreement must not be vague or uncertain
(i) The agreement must be capable of performance- An agreement to do an impossible act is void.
(j) Legal formalities
In the given case, object of the agreement was unlawful. Hence R cannot claim from S.

Question 3.
Define ‘Contract of Indemnity’ as per the Indian Contract Act, 1872. What are the parties to a contract of indemnity? Give an example to explain the contract of indemnity. [MTP-Aug. 18]
Answer:
Contract of Indemnity:
As per Sec. 124 of the Indian Contract Act, 1872, a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity.”

There are two parties in this form of contract. The party who promises to indemnify/save the other party from loss is known as ‘indemnifier’, where as the party who is promised to be saved against the loss is known as ‘indemnified’ or indemnity holder.

Example: A may contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a sum of ₹ 5000 advanced by C to B. In consequence, when B who is called upon to pay the sum of money to C fails to do so, C would be able to recover the amount from A as provided in Sec. 124.

Contract of Guarantee (Secs. 126,127,129 and 142 to 144)

Question 4.
Define contract of indemnity and contract of guarantee and state the conditions when guarantee is considered invalid? [MTP-April 19, Oct. 19, Nov. 21]
Answer:
Contract of indemnity and contract of guarantee:
As per Sec. 124 of the Indian Contract Act, 1872, “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or the conduct of any person”, is called a “contract of indemnity”.

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

Conditions when guarantee is considered invalid:
Conditions under which the guarantee is invalid or void are covered u/ss 142, 143 and 144 of the Indian Contract Act. These include:

1. Guarantee obtained by means of misrepresentation.
2. Guarantee obtained by means of keeping silence as to material circumstances.
3. When contract of guarantee is entered into on the condition that the creditor shall not act upon it until another person has joined in it as co-surety and that other party fails to join as such.

Question 5.
A agrees to sell goods to B on the guarantee of C for the payment of the price of goods in default of B. Is the agreement of guarantee valid in each of the following alternate cases:
Case 1. If A is a Minor
Case 2: If B is a Minor
Case 3: IfC is a minor
Answer:
Validity of Agreement of guarantee:

• Case 1: The agreement of guarantee is void because the creditor is incompetent to contract.
• Case 2: The agreement of guarantee is valid because the capability of the principal debtor does not affect the validity of the agreement of the guarantee.
• Case 3: The agreement of guarantee is void because the surety is incompetent to contract.

Question 6.
Distinguish between a contract of Indemnity and a contract of Guarantee as per the Indian Contract Act, 1872. [Nov. 20 (4 Marks)]
Answer:
Distinguish between a contract of Indemnity and a contract of Guarantee

Point of distinction	Contract of Indemnity	Contract of Guarantee
Number of parties	There are only 2 parties namely the indemnifier (promisor) and the indemnified (promise).	There are three parties creditor, principal debtor and surety.
Nature of liability	The liability of the indemnifier is primary and unconditional	The liability of the surety is secondary and conditional as the primary liability is that of the principal debtor.
Time of liability	The liability of the indemnifier arises only on the happening of a contingency.	The liability arises only on the non­performance of an existing promise or non-payment of an existing debt.
Time to Act	The indemnifier need not act at the request of indemnity holder.	The surety acts at the request of principal debtor.
Right to sue 3rd party	Indemnifier cannot sue a 3rd party for loss in his own name as there is no privity of contract. Such a right would arise only if there is an assignment in his favour.	Surety can proceed against principal debtor in his own right because he gets all the right of a creditor after discharging the debts.
Purpose	Reimbursement of loss	For the security of the creditor
Competency to contract	All parties must be competent to contract	In the case of a contract of guarantee, where a minor is a principal debtor, the contract is still valid.

Question 7.
Paul (minor) purchased a smart phone on credit from a mobile dealer on the surety given by Mr. Jack, (a major). Paul did not pay for the mobile. The mobile dealer demanded the payment from Mr. Jack because the contract entered with Paul (minor) Is void. Mr. Jack argued that he is not liable to pay the amount since Paul (Principal Debtor) Is not Hable. Whether the argi ment Is correct under the Indian ContractsAct, 1872?

What will be your answer if Jack and Paul both are minor? [July 21 (4 Marks)]
Answer:
Validity of Agreement of guarantee:

• In the case of a contract of guarantee, where a minor is a principal debtor, the contract is still valid.
• In the given situation, the contract is a valid contract and Jack (major) shall be liable to pay the amount even if Paul (Principal debtor) is not liable (as Paul is minor).
• If both Jack and Paul are minors then the agreement of guarantee is void because the surety as well as the principal debtor are incompetent to contract.

Question 8.
Enumerate the following as per the provisions of the Indian Contract Act, 1872: [MTP-March 22]
(i) Meaning of contract of guarantee
(ii) Parties to a contract of guarantee.
Answer:
(i) Contract of guarantee:
As per the provisions of section 126 of the Indian Contract Act, 1872, a contract of guarantee is a contract to perform the promise made or discharge the liability, of a third person in case of his default.

(ii) Parties to a contract of guarantee:
Three parties are involved in a contract of guarantee:
Surety: person who gives the guarantee;
Principal debtor: person in respect of whose default the guarantee is given
Creditor: person to whom the guarantee is given.

Discharge of a Surety

Question 9.
M advances to N ₹ 5,000 on the guarantee of P. The loan carries interest at the rate 10% per annum. Subsequently, N becomes financially embarrassed. On N’s request, M reduces the interest to 6% per annum and does not sue N for one year after the loan becomes due. N becomes insolvent Can M sue P? [MTP-Aug. 18]
Answer:
Discharge of surety by variance in terms of contract:
As per Sec. 133 of the Indian Contract Act, 1872, where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

In the given situation, M cannot sue P, because a surety is discharged from liability when, without his consent, the creditor makes any change in the terms of his contract with the principal debtor, no matter whether the variation is beneficial to the surety or does not materially affect the position of the surety.

Question 10.
Mr. X, is employed as a cashier on a monthly salary of ₹ 2,000 by ABC bank for a period of 3 years. Y gave surety for X’s good conduct After 9 months, the financial position of the bank deteriorates. Then X agrees to accept a lower salary of ₹ 1,500 per month from Bank. Two months later, it was found that X has misappropriated cash since die time of his appointment What is the liability of Y? [MTP-March 18]
Answer:
Discharge of surety by variance in terms of contract: .
As per Sec. 133 of the Indian Contract Act, 1872, where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

In the given situation, Y is liable as a surety for the loss suffered by the bank due to misappropriation of cash by Mr. X during the first 9 months but not for misappropriations committed after the reduction in salary.

Question 11.
A contracts with B for a fixed price to construct a house for B within a stipulated time. B would supply the necessary material to be used in the construction. C guarantees A’s performance of the contract B does not supply the material as per the agreement Is C discharged from his liability. [RTP-Nov. 18; MTP-March 19, May 20]
Answer:
Discharge of Surety:
As per Sec. 134 of the Indian Contract Act, 1872, the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is discharged or by any act or omission for the creditor the legal consequence of which is the discharge of the principal debtor.

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

Question 12.
Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a 2 years contract at a monthly salary of ₹ 50,000. Mr. Pawan gave a surety in respect of Mr. Chetan’s conduct. After 6 months the company was not in position to pay ₹ 50,000 to Mr. Chetan because of financial constraints. Chetan agreed for a lower salary of ₹ 30,000 from the company. This was not communicated to Mr. Pawan. Three months afterwards it was discovered that Chetan had been doing fraud since the time of his appointment What is the liability of Mr. Pawan during the whole duration of Chetan’s appointment [RTP-Nov. 19, Nov. 18 (3 Marks)]
Answer:
Discharge of surety by variance in terms of contract:
As per Sec. 133 of the Indian Contract Act, 1872, where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

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

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

Question 13.
Mano( guarantees for Ranjan, a retail textile merchant, for an amount of ₹ 1,00,000, for which Sharma, the supplier may from time to time supply goods on credit basis to Ranjan during the next 3 months.

After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on credit for ₹ 40,000. Referring to the provisions of the Indian Contract Act, 1872, decide whether Manoj is discharged from all the liabilities to Sharma for any subsequent credit supply. What would be your answer in case Ranjan makes default in paying back Sharma for the goods already supplied on credit i.e. ₹ 40,000? [May 19 (4 Marks); RTP-Nov. 20]
Answer:
Discharge of Surety by Revocation:
As per Sec. 130 of the Indian Contract Act, 1872, a continuing guarantee may, at any time, be revoked by the surety, as to future transactions, by notice to the creditor, but the surety remains liable for transactions already entered into.

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

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

Question 14.
Explaining the provisions of the Indian Contract Act, 1872, answer the following: C, the holder of an over due bill of exchange drawn by A as surety for B, and accepted by B, contracts with X to give time to B. Is A discharged from his liability? [RTP-Nov. 18; MTP-March 19, May 20]
Answer:
Agreement made with 3rd person to give time to principal debtor:

• As per Sec. 136 of the Indian Contract Act, 1872, where a contract to give time to the principal debtor is made by the creditor with a 3rd person and not with the principal debtor, the surety is not discharged.
• In the given question the contract to give time to the principal debtor is made by the creditor with X who is a third person. X is not the principal debtor. Hence, A is not discharged.

Question 15.
‘A’ gives to ‘M’ a continuing guarantee to the extent of ₹ 8,000 for the fruits to be supplied by ‘M’ to ‘S’ from time to time on credit Afterwards ‘S’ became embarrassed and without the knowledge of ‘A‘, ‘M’ and ‘S’ contract that ‘M’ shall continue to supply ‘S’ with fruits for ready money and that payments shall be applied to the then existing debts between ‘S’ and ‘M‘. Examining the provision of the Indian Contract Act, 1872, decide whether ‘A’ is liable on his guarantee given to M. [RTP-May 19]
Answer:
Discharge of surety by variance in terms of contract:
As per Sec. 133 of the Indian Contract Act, 1872, where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

In the given situation, ‘M’ and ‘S’ entered into arrangement by entering into a new contract without knowledge of the Surety ‘A’.

Conclusion: Since, the variance made in the contract is without the surety’s consent in the existing . contract, ‘A’ is not liable on his guarantee for the fruits supplied after this new arrangement. The reason for such a discharge is that the surety agreed to be liable for a contract which is no more there now and he is not liable on the altered contract because it is different from the contract made by him.

Question 16.
Mr. Ram was employed as financer in “Swaraj Ltd” on the surety of his good conduct, given by Mr. janak, a good friend of the director of the company. Mr. Ram was kept on the salary of ₹ 45,000 per month. After 3 years , the company went into losses and so company decided for the cost cutting by retrenching of many employees and reducing the salaries of the employees. Mr. Ram was also proposed either to quit the job or continued with the lower salary of ₹ 35,000 per month . He accepted and continued with the job. After few months, it was reported by accounts department of the company that Mr. Ram manipulated with the funds of the company.

As per the provisions of the Indian Contract Act, 1872, analyse the legal positions of Mr. Janak, in the given situations:
(i) Mr. Ram has manipulated the funds of the company since the time of his appointment.
(ii) Mr. Ram has manipulated the funds of the company since from few months before when he
accepted to continue the job on lower salary. [MTP Oct. 18]
Answer:
Discharge of surety by variance in terms of contract:
As per Sec. 133 of the Indian Contract Act, 1872, where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent it would discharge the surety in respect of all transactions taking place subsequent to such variance.

Conclusion: Based on the provisions of Sec. 133 as stated above following conclusions may be drawn:
(i) In case where, Mr. Ram has manipulated the funds of the company since the time of his appointment: In this case Mr. ]anak is liable as a surety for the loss suffered by the Swaraj Company due to manipulation of the funds by Mr. Ram during the three years of his service.

(ii) In case where, Mr. Ram has manipulated the funds of the company since from few months before when he accepted to continue the job on lower salary: In this case, variance in the terms of the contract (i.e., to work on lower salary) was made without surety’s consent. For all the transactions taking place subsequent to such variance, shall discharge the surety for the loss suffered by the Swaraj Ltd.

Question 17.
(i) Mr. CB was invited to guarantee an employee Mr. BD who was previously dismissed for dishonesty by the same employer. This fact was not told to Mr. CB. Later on, the employee embezzled funds. Whether CB is liable for the financial loss as surety under the provisions of the Indian Contract Act, 1872?
(ii) Mr. X agreed to give a loan to Mr. Y on the security of four properties. Mr. A gave guarantee against the loan. Actually Mr. X gave a loan of smaller amount on the security of three properties. Whether Mr. A is liable as surety in case Mr. Y Called to repay the loan? [Nov. 20 (2+2=4 Marks)]
Answer:
(i) Invalid Guarantee:
As per Sec. 143 of the Indian Contract Act, 1872, any guarantee which the creditor has obtained by means of keeping silence as to material circumstances, is invalid.

In the given situation, Mr. CB was invited to give guarantee of an employee Mr. BD to the same employer who previously dismissed Mr. BD for dishonesty. This fact was not told to Mr. CB.

Conclusion: Keeping silence as to previous dismissal of Mr. BD for dishonesty is a material fact and if Mr. BD later embezzled the funds of the employer, Mr. CB will not be held liable for the financial loss as surety since such a contract of guarantee entered is invalid in terms of the above provisions.

(ii) Discharge of surety by variance in terms of contract:
As per Sec. 133 of the Indian Contract Act, 1872, any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

In the given situation, the actual transaction was not in terms of the guarantee given by Mr. A. The loan amount as well as the securities were reduced without the knowledge of the surety. Conclusion: Mr. A is not liable as a surety in case Y failed to repay the loan.

Question 18.
Satya has given his residential property on rent amounting to ₹ 25,000 per month to Tushar. Amit became the surety for payment of rent by Tushar. Subsequently, without Amtt’s consent, Tushar agreed to pay higher rent to Satya. After a few months of this, Tushar defaulted in paying the rent.
(i) Explain the meaning of contract of guarantee according to the provisions of the Indian Contract
(ii) State the position of Amit in this regard. [Jan. 21 (4 Marks)]
Answer:
(i) Contract of guarantee:
As per Sec. 126 of the Indian Contract Act, 1872, a contract of guarantee is a contract to perform the promise made or discharge the liability, of a third person in case of his default. Three parties are involved in a contract of guarantee:

• Surety: The person who gives the guarantee;
• Principal debtor: The person in respect of whose default the guarantee is given; and
• Creditor: The person to whom the guarantee is given.

(ii) Discharge of surety by variance in terms of contract:
As per Sec. 133 of the Indian Contract Act, 1872, where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

In the instant case, Satya (Creditor] cannot sue Amit (Surety), because Amit is discharged from liability when, without his consent, Tushar (Principal debtor) has changed the terms of his contract with Satya (creditor). It is immaterial whether the variation is beneficial to the surety or does not materially affect the position of the surety.

Question 19.
Rahul is the owner of electronics shop. Priyanka reached the shop to purchase an air conditioner whose compressor should be of copper. As Priyanka wanted to purchase the air conditioner on credit, Rahul demand a guarantor for such transaction. Mr. Arvind ( a friend of Priyanka) came forward and gave the guarantee for payment of air conditioner. Rahul sold the air conditioner of a particular brand, misrepresenting that it is made of copper while it is made of aluminium. Neither Priyanka nor Mr. Arvind had the knowledge of fact that it is made of aluminium. On being aware of the facts, Priyanka denied for payment of price. Rahul filed the suit against Mr. Arvind.

Explain with reference to the Indian Contract Act 1872, whether Mr. Arvind is liable to pay the price of air conditioner? [RTP-Nov. 21]
Answer:
Guarantee obtained by means of misrepresentation:
As per Sec. 142 of the Indian Contract Act, 1872, where the guarantee has been obtained by means of misrepresentation made by the creditor concerning a material part of the transaction, the surety will be discharged.

As per Sec. 134 of the Indian Contract Act, 1872, the surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

In the given situation, Priyanka wants to purchase air conditioner whose compressor should be of copper, on credit from Rahul. Mr. Arvind has given the guarantee for payment of price. Rahul sold the air conditioner of a particular brand on misrepresenting that it is made of copper while it is made of aluminium of which both Priyanka & Mr. Arvind were unaware. After being aware of the facts, Priyanka denied for payment of price. Rahul filed the suit against Mr. Arvind for payment of price.

Conclusion: On the basis of above stated provisions and facts of the case, it can be concluded that Mr. Arvind will not be liable as guarantee was obtained by Rahul by misrepresentation of the facts. Arvind will be discharged from liability.

Question 20.
Y advances Z a loan of ₹ 10,000 on the guarantee of X, at an interest of 10%. Subsequently, as Z was having some financial problems, Y reduced the rate of interest to 7% and also extended time for repayment of loan without the consent of X. Z becomes insolvent Can Y sue X for recovery of amount? [MTP-Oct. 21]
Answer:
Discharge of surety by variance in terms of contract:
As per Sec. 133 of the Indian Contract Act, 1872, where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

Conclusion: Y cannot sue X, because a surety (X) is discharged from liability when, without his consent, the creditor makes any change in the terms of his contract with the principal debtor (Z), no matter whether the variation is beneficial to the surety or does not materially affect the position of the surety.

Question 21.
Alpha Motor Ltd. agreed to sell a bike to Ashok under hire-purchase agreement on guarantee of Abhishek. The terms were: hire-purchase price ₹ 96,000 payable in 24 monthly Instalments of ₹ 8,000 each. Ownership to be transferred on the payment of last Instalment State whether Abhishek is discharged in each of the following alternative cases under the provisions of the Indian Contract Act, 1872:
(i) Ashok paid 12 instalments but failed to pay next two instalments. Alpha Motor Ltd. sued Abhishek for the payment of arrears and Abhishek paid these two instalments Le. 13th and 14th. Abhishek then gave a notice to Alpha Motor Ltd. to revoke his guarantee for the remaining
(ii) If after 15 Months, Abhishek died due to COVID-19. [Dec. 21 (S Marks)]
Answer:
Discharge of Surety Liability:

• A surety is said to be discharged when his liability as surety comes to an end.
• As per Sec. 130 of the Indian Contract act, 1872, the continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditors. Once the guarantee is revoked, the surety is not liable for any future transactions, however, he is liable for all the transactions that happened before the notice was given.
• Guarantee for Hire purchase transactions may be covered within the meaning of continuing guarantee as ownership of the goods to be transferred on the payment of last Instalment.
• As per Sec. 131 of the Indian Contract Act, 1872, in the absence of any contract to the contrary, the death of surety operates as a revocation of a continuing guarantee as to the future transactions
  taking place after the death of surety.
• However, the surety’s estate remains liable for the past transactions which have already taken place before the death of the surety.

Conclusion: Based on the facts of the questions and provisions of Secs. 130 and 131 as stated above following conclusions may be drawn:

1. Abhishek is discharged for the further instalments.
2. Surety estate remains liable for the past transactions which have already taken place before the death of surety.

Question 22.
‘Surendra’ guarantees ‘Virendra’ for the transactions to be done between ‘Virendra’ & ‘Jitendra’ during the month of March, 2022. ‘Virendra’ supplied goods of ₹ 30,000 on 01.03.2022 and of ₹ 20,000 on 03.03.2022 to ‘Jitendra’. On 05.03.2022, ‘Surendra’ died in a road accident. On 10.03.2022, being ignorant of the death of ‘Surendra’, ‘Virendra’ farther supplied goods of ₹ 40,000. On default in payment by ‘Jitendra’ on due date, ‘Virendra’ sued on legal heirs of ‘Surendra’ for recovery of ₹ 90,000.

Describe, whether legal heirs of ‘Surendra’ are liable to pay 7 90,000 under the provisions of Indian Contract Act 1872.
What would be your answer, if the estate of’Surendra’ is worth of % 45,000 only? [RTP-May 22]
Answer:
Revocation of Contract of guarantee:
As per Sec. 131 of Indian Contract Act 1872, in the absence of a contract to contrary, a continuing guarantee is revoked by the death of the surety as to the future transactions. The estate of deceased surety, however, liable for those transactions which had already taken place during the lifetime of deceased. Surety’s estate will not be liable for the transactions taken place after the death of surety even if the creditor had no knowledge of surety’s death.

In the given situation, ‘Surendra’ was surety for the transactions to be done between ‘Virendra’ & ‘Jitendra’ during the month of March 2022. ‘Virendra’ supplied goods of ₹ 30,000, ₹ 20,000 and of ₹ 40,000 on 01.03.2021, 03.03.2022 and 10.03.02022 respectively. ‘Surendra’ died in a road accident but this was not in the knowledge of ‘Virendra’. When ‘Jitendra’ defaulted in payment, ‘Virendra’ filed suit against legal heirs of‘Surendra’ for recovery of full amount i.e. ₹ 90,000.

Conclusion: Based on the above discussion, it can be said in case of death of surety (‘Surendra’), his legal heirs are liable only for those transactions which were entered before 05.03.2022 i.e. for ₹ 50,000. They are not liable for the transaction done on 10.03.2022 even though Virendra had no knowledge of death of Surendra. Further, if the worth of the estate of deceased is only ₹ 45,000, the legal heirs are liable for this amount only.

Rights of Surety

Question 23.
Mir. D was in urgent need of money amounting to ₹ 5,00,000. He asked Mr. K for the money. Mr. K lent the money on the sureties of A, B and N without any contract between them in case of default in repayment of money by D to K. D makes default in payment. B refused to contribute, examine whether B can escape liability [May 18 (4 Marks); MTP-April 19, Oct 20, Oct. 21]
Or
Due to urgent need of money amounting to ₹ 3,00,000, Pawan approached to Raman and asked him for the money. Raman lent the money on the guarantee of Sura], Tarun and Usha. However, there is no contract between Suraj, Tarun and Usha, Pawan makes default in payment and Sura) pays full amount to Raman. Sura), afterwards, claimed contribution from Tarun and Usha. Tarun refused to contribute on the basis that there is no contract between Sura] and him. Examine referring to the provisions of the Indian Contract Act, 1872, whether Tarun can escape from his liability. [Dec. 21 (4 Marks)]
Answer:
Liabilities of Co-sureties:
As per Sec. 146 of the Indian Contract Act, 1872 “when two or more persons are co-sureties for the same debt, or duty, either jointly, or severally and whether under the same or different contracts and whether with or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor”.

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

Question 24.
‘C’ advances to ‘B’, ₹ 2,00,000 on the guarantee of ‘A’. ‘C has also taken a further security for the same borrowing by mortgage of B’s furniture worth ₹ 2,00,000 without knowledge of ‘A’. ‘C cancels the mortgage. After 6 months ‘B’ becomes insolvent and ‘C sues ‘A’ his guarantee. Decide the liability of ‘A’. If the market value of furniture is worth 180,000, under the Indian Contract Act, 1872. [Nov. 19(4 Marks)]
Answer:
Surety’s right to benefit of creditor’s securities:
As per Sec. 141 of the Indian Contract Act, 1872, a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

In the instant case, C advances to B, ₹ 2,00,000 on the guarantee of A. C has also taken a further security for ₹ 2,00,000 by mortgage of B’s furniture without knowledge of A. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee.

Conclusion: A is discharged from liability to the amount of the value of the furniture i.e. ₹ 80,000 and will remain liable for balance ₹ 1,20,000.

Contract of Bailment

Question 25.
State the essential elements of a contract of bailment. [May 18 (4 Marks)]
Answer:
Essential elements of a contract of bailment:
Sec. 148 of the Indian Contract Act, 1872 defines the term ‘Bailment’. A ‘bailment’ is the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The essential elements of the contract of the bailment are:

1. Delivery of goods: The essence of bailment is delivery of goods by one person to another.
2. Bailment is a contract: In bailment, the delivery of goods is upon a contract that when the purpose is accomplished, the goods shall be returned to the bailor.
3. Return of goods in specific: The goods are delivered for some purpose and it is agreed that the specific goods shall be returned.
4. Ownership of goods: In a bailment, it is only the possession of goods which is transferred and the bailor continues to be the owner of the goods.
5. Property must be movable: Bailment is only for movable goods and never for immovable goods or money.

Question 26.
Examine whether the following constitute a contract of’Bailment’ under the provisions of the Indian Contract Act; 1872:
(i) V paries bis car at a parking tot, locks it, and keeps the keys with himself.
(ii) Seizure ofgoods by customs authorities.
Answer:
Contract of Bailment:
Sec. 148 of the Indian Contract Act, 1872, defines the term ‘Bailment’. A ‘bailment’ is the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.

(i) Mere custody of goods does not mean possession. For a bailment to exist the bailor must give possession of the bailed property and the bailee must accept it There must be a transfer in ownership of the goods. In the given case, since the keys of the car are with V, Sec. 148 of the Indian Contract Act, 1872, shall not applicable.

(ii) In case of seizure of goods, possession of the goods is transferred to the custom authorities. Therefore, bailment exists and Sec. 148 is applicable.

Question 27.
Mrs. A delivered her old silver jewellery to Mr, Y a Goldsmith, for the purpose of making new a silver bowl out of it Every evening she used to receive the unfinished good (silver bowl) to put it into box kept at Mr. Ys Shop. She kept the key of that box with herself, One night, the silver bowl was stolen from that box. Was there a contract of bailment? Whether the possession of the goods (actual or constructive) delivered, constitute contract of bailment or not? [MTP-May 20, March 21, Nov. 21]
Answer:
Contract of Bailment:
Sec. 148 of Indian Contract Act, 1872, defines ‘Bailment’ as the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them.

As per Sec. 149 of the Indian Contract Act, 1872, the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf. Thus, delivery is necessary to constitute bailment

Conclusion: Mere keeping of the box at Y’s shop, when Mrs. A herself took away the key cannot amount to delivery. Therefore, in this case there is no contract of bailment as Mrs. A did not deliver the complete possession of the good by keeping the keys with herself.

Question 28.
On the basis of reward, what are various categories of bailment? [MTP-Oct 21]
Answer:
Categories of Bailment:
On the basis of reward, bailment can be classified into two types:

1. Gratuitous Bailment: The word gratuitous means free of charge. So, a gratuitous bailment is one when the provider of service does it gratuitously i.e. free of charge. Such bailment would be either for the exclusive benefits of bailor or bailee.
2. Non-Gratuitous Bailment: Non-gratuitous bailment means where both the parties get some benefit i.e. bailment for the benefit of both bailor & bailee.

Duties and Rights of Bailer and Bailee

Question 29.
A hires a carriage from B and agrees to pay i 500 as hire charges. The carriage is unsafe, though B is unaware of it. A is injured and claims compensation for injuries suffered by him. B refuses to pay. Discuss the liability of B. [RTP-May 18, MTP-Oct 18]
Answer:
Bailor’s duties to disclose faults in goods:
As per Sec. 150 of the Indian Contract Act, 1872, if the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed.

Conclusion: B is responsible to compensate A for the injuries sustained even if he was not aware of the defect in the carriage.

Question 30.
A baits his jewellery with B on the condition to safeguard it in a bank’s safe locker. However, B kept it in safe locker at his residence, where he usually keeps his own Jewellery. After a month all jewellery was lost in a religious riot A filed a suit against B for recovery. Referring to provisions of the Indian Contract Act, 1872, state whether A will succeed. [MTP-Aug. 18]
Answer:
Bailee when not liable for loss, etc., of thing bailed:
As per Sec. 151 ofthe Indian Contract Act, 1872, in all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed.

As per Sec. 152 of the Indian Contract Act, 1872, the bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in section 151.

Conclusion: B is liable to compensate A for his negligence to keep jewellery at his residence as A and B agreed to keep the jewellery at the Bank’s safe locker and not at the latter’s residence.

Question 31.
Aiuit lends a horse to Bimal for his own riding only. However, Bimal allows Chinku, a member of his family to ride the horse. Chinku rides the horse with care, but tihe horse falls and is injured. As per the provisions of the Indian Contract Act, 1872, analyse the liability of Bimal in the given situation. [MTP’-Oct 18]
Answer:
Duties of a Bailee:
As per Sec. 154 of the Indian Contract Act, 1872, if the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them.

In the given situation, Amit lends a horse to Bimal for his own riding only. However, Bimal allows Chinku, a member of his family to ride the horse. Chinku rides the horse with care, but the horse falls and is injured.

Conclusion: Bimal is liable to make compensation to Amit for the injury done to the horse.

Question 32.
Amur bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising to give ₹ 200 at the time of taking back Hite baited goods. Srijith’s employee, unaware of Ibis, mixed the 50 kg of sugar belonging to Amar with the sugar in Hie shop and packaged it for sale when Srijith was away. This came to light only when Amar came asking for the sugar he had bailed with Srijith, as Hie price of the specific quality of sugar had trebled. What is Hie remedy available to Amar? [Nov. 18 (3 Marks), MTP-Oct 20]
Answer:
Dudes of a Bailee:
As per Sec. 157 of the Contract Act, 1872, if the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.

In the given question, Srijith’s employee mixed high quality sugar bailed by Amar and then packaged it for sale. The sugars when mixed cannot be separated.

Conclusion: As Srijith’s employee has mixed the two kinds of sugar, he (Srijith) must compensate Amar for the loss of his sugar.

Question 33.
What is the liability of a bailee making unauthorized use of goods bailed? [May 19 (2 Marks)]
Answer:
Liability of bailee making unauthorised use of goods bailed:
As per Sec. 154 of the Indian Contract Act, 1872, if the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them.

Question 34.
Mr. Dhannaseth delivers a rough blue sapphire to a Jeweller, to be cut and polished . The jeweller carries out the job accordingly. However, now Mr. Dhannaseth refuses to make the payment and wants his blue sapphire back. The jeweller denies the delivery of goods without payment. Examine whether the jeweller can hold blue sapphire. Give your answer as per the provisions of the Contract Act, 1872 [MTP-Oct. 19]
Answer:
Right of particular lien for payment of services:
As per Sec. 170 of the Indian Contract Act, 1872, where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.

Thus, in accordance with the purpose of bailment if the bailee by his skill or labour improves the goods bailed, he is entitled for remuneration for such services. Towards such remuneration, the bailee can retain the goods bailed if the bailor refuses to pay the remuneration. Such a right to retain the goods bailed is the right of particular lien. He however does not have the right to sue.

Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the bailor. In such a case the particular lien may be waived. The particular lien is also lost if the bailee does not complete the work within the time agreed.

Conclusion: The jeweller is entitled to retain the stone till he is paid for the services he has rendered.

Question 35.
R gives his umbrella to M during raining season to be used for two days during Examinations. M keeps the umbrella for a week. While going to R’s house to return the umbrella, M accidently slips and the umbrella is badly damaged. Who bear the loss and why? [RTP-Nov.20]
Answer:
Duties of Bailee:
As per Sec. 161 of the Indian Contract Act, 1872, if, by the default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time notwithstanding the exercise of reasonable care on his part.

In the given situation, R gives his umbrella to M during raining season to be used for two days during Examinations. M keeps the umbrella for a week. While going to R’s house to return the umbrella, M accidently slips and the umbrella is badly damaged.

Conclusion: M shall have to bear the loss since he failed to return the umbrella within the stipulated time.

Question 36.
Megha lends a sum of ₹ 20,000 to Bhtm, on the security of two shares of a Prema Limited on 1st April 2021. On 15th june, 2021, the company issued two bonus shares. Bhim returns the loan amount of ₹ 20,000 with interest but Megha returns only two shares which were pledged and refuses to give the two bonus shares. Advise Bhim in the light of the provisions of the Indian Contract Act, 1872. [MTP-April 21]
Answer:
Bailee’s Duties and Liabilities:

• As per Sec. 163(4) of the Indian Contract Act, 1872, in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, any increase or profit which may have accrued from the goods bailed.
• In the given situation, Megha received 2 bonus shares on the 2 pledged shares of Prema Limited. Bonus shares are an increase on the shares pledged by Bhim to Megha.

Conclusion: Megha is liable to return the shares along with the bonus shares. Hence Bhim the bailor, is entitled to receive the original shares as well as bonus shares (after he has repaid the loan amount).

Question 37.
Mr. Truth deposited 100 bags of ground-nut in the factory of Mr, False for safe keeping. Mr. False mixed the ground-nut bags with the other ground-nut bags in the factory with the consent of Mr. Truth and consumed it to produce edible oiL
(i) Whether Mr. Truth is entitled to claim his share in the edible oil produced under the provisions of the Indian Contact Act, 1872?
(ii) What will be the consequences in case the ground-nut bag was mixed without the consent of Mr. Truth under die above said Act? [May 22 (4 Marks)]
Answer:
Bailee Duties not to mix the goods:
(i) Bailor claim in case of mixing of goods:
As per Sec. 155 of the Indian Contract Act, 1872, if the Bailee, mixes the goods bailed with his own goods, with the consent of the bailor, both the parties shall have an interest in proportion to their respective shares in the mixture thus produced.
Hence, Mr. Truth is entitled to claim his share in the edible oil produced.

(ii) Consequences if goods are mixed without the consent of bailor:
As per Sec. 156 of the Indian Contract Act, 1872, if the bailee, without the consent of the bailor, mixes the goods bailed with his own goods and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expense of separation or division and any damage arising from the mixture.

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

Finder of Lost Goods

Question 38.
What are the rights available to the finder of lost goods under Sec. 168 and Sec. 169 of the Indian Contract Act, 1872. [Nov. 18 (3 Marks)]
Answer:
Rights available to the finder of lost goods u/ss 168 & 169 of the Indian Contract Act, 1872:
(i) The finder of goods has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him to preserve the goods and to find out the owner. But Tinder of lost goods’ can ask for reimbursement for expenditure incurred for preserving the goods and also for searching the true owner. If the real owner refuses to pay compensation, the ‘finder’ cannot sue but retain the goods so found.

Further, where the real owner has announced any reward, the finder is entitled to receive the reward. The right to collect the reward is a primary and a superior right even more than the right to seek reimbursement of expenditure.

(ii) The finder though has no right to sell the goods found in the normal course; he may sell the goods if the real owner cannot be found with reasonable efforts or if the owner refuses to pay the lawful charges subject to the following conditions:
(a) When the article is in danger of perishing and losing the greater part of the value or
(b) When the lawful charges of the finder amounts to two-third or more of the value of the article found.

General Lien and Particular Lien

Question 39.
Radheshyam borrowed a sum of ₹ 50,000 from a Bank on the security of gold on 1.07.2021 under an agreement which contains a clause that the bank shall have a right of particular lien on the gold pledged with it. Radheshyam thereafter took an unsecured loan of ₹ 20,000 from the same bank on 1.08.2021 for three months. On 30.09.2021 he repaid entire secured loan of ₹ 50,000 and requested the bank to release the gold pledged with it The Bank decided to continue the lien on the gold until the unsecured loan is fully repaid by Radheshyam. Decide whether the decision of the Bank is valid within the provisions of the Indian Contract Act, 1872 ? [Jan. 21 (4 Marks)]
Answer:
General lien of bankers:
As per Sec. 171 of the Indian Contract Act, 1872, bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain, as a security for a general balance of account any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to the effect.

Sec. 171 empowers the banker with general right of lien in absence of a contract whereby it is entitled to retain the goods belonging to another party, until all the dues are discharged. Here, in the first instance, the banker under an agreement has a right of particular lien on the gold pledged with it against the first secured loan of ₹ 50,000, which has already been fully repaid by Radheshyam. Accordingly, Bank’s decision to continue the lien on the gold until the unsecured loan of ₹ 20,000 (which is the second loan) is not valid.

Contract of Pledge (Secs. 172 to 182)

Question 40.
Mr. Avinash wanted a loan for expanding his business, from ABC Bank. Mr. Avinash has pledged the stock of his business to obtain the loan from bank. However, the expansion of business did not reap the desired results and Mr. Avinash was not able to repay the loan. Now, ABC bank wants to retain the stock for adjustment of their loan. Advise, ABC Bank whether they can retain the stock for the adjustment of their loan and also for payment of interest Give your answer as per the provisions of the Contract Act, 1872. [RTP-Nov. 18]
Answer:
Pawnee Right to retain the pledged goods:
As per Sec. 173 of the Indian Contract Act, 1872, the pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest, of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

Hence, ABC Bank can retain the stock of business of Mr. Avinash, not only for adjustment of the loan but also for payment of interest.

Question 41.
Give four differences between Bailment and Pledge. [May 18 (4 Marks)]
Answer:

Basis of Distinction	Bailment	Pledge
Meaning	Transfer of goods by one person to another for some specific purpose is known as bailment	Transfer of goods from one person to another as security for repayment of debt is known as the pledge.
Terms Applicable	The person delivering the goods under a contract of bailment is called as “Bailor”. The person to whom the goods are delivered under a contract of bailment is called as “Bailee”.	The person who delivers the good as security is called the “Pawnor”. The person to whom the goods are delivered as security is called the “pawnee”.
Purpose	Bailment may be made for any purpose (as specified in the contract of bailment, e.g.: for safe custody, for repairs, for processing of goods).	Pledge is made for the purpose of delivering the goods as security for payment of a debt, or performance of a promise.
Consideration	Bailment may be made for consideration or without consideration.	Pledge is always made for a consideration.
Right to sell the goods	The bailee has no right to sell the goods even if the charges of bailment are not paid to him. The bailee’s rights are limited to suing the bailor for his dues or to exercise lien on the goods bailed.	The pawnee has right to sell the goods if the pawnor fails to redeem the goods.
Right to use of goods	Bailee can use the goods only for a purpose specified in the contract of bailment and not otherwise.	Pledgee or Pawnee cannot use the goods pledged.

Question 42.
(i) Srushti acquired valuable diamond at a very low price by a voidable contract under the provisions of the Indian Contract Act, 1872. The voidable contract was not rescinded. Srushti pledged the diamond with Mr. VK. 1$ this a valid pledge under the Indian Contract Act, 1872? [MTP-April 22]
(ii) Whether a Pawnee has a right to retain the goods pledged. [Nov. 19 (4 Marks)]
Answer:
(i) Pledge by person in possession under voidable contract
As per Sec. 178A of the Indian Contract Act, 1872, when the pawnor has obtained possession of the goods pledged by him under a contract voidable u/s 19 or 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

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

(ii) Right of retainer
As per Sec. 173 of the Indian Contract Act, 1872, the pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest, of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

Question 43.
As per the Indian Contract Act, 1872, answer the following:
(i) Definition of Pledge, pawnor and pawnee
(ii) Essential characteristics of contract of pledge. [MTP-April 21]
Answer:
(i) Meaning of Pledge, Pawnor and Pawnee:

• The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”.
• The bailor in this case is called the “pawnor”.
• The bailee is called the “pawnee”.

(ii) Essential characteristics of contract of pledge:
Since Pledge is a special kind of bailment, all the essential of bailment are also essentials of Pledge. Apart from that, the characteristics of the pledge are:

1. There shall be a bailment of security against payment or performance of the promise.
2. The subject matter of pledge is goods.
3. Goods pledged for shall be in existence
4. There shall be delivery of goods from pledger to pledgee

Question 44.
Mr. Stefen owns a chicken firm near Gurgaon, where he breeds them and sells eggs and live chicken to retail shops in Gurgaon. Mr. Flemming also owns a similar firm near Gurgaon, doing the same business. Mr. Flemming had to go back to his native place in Australia for one year. He needed money for travel so he had pledged his firm to Mr. Stefen for one year and received a deposit of ₹ 25 lakhs and went away. At that point of time, stock of live birds were 100,000 and eggs 10,000. The condition was that when Flemming returns, he will repay the deposit and take possession of his firm with live birds and eggs.

After one year Flemming came back and returned the deposit At that time there were 109,000 live birds (increase is due to hatching of eggs out of 10,000 eggs he had left), and 15,000 eggs.

Mr. Stefen agreed to return 100,000 live birds and 10,000 eggs only.
State die duties Mr. Stefen as Pawnee and advise Mr. Flemming about his rights in the given case. [July 21(4 Marks)]
Answer:
Return an accretion from the Goods:
As per Sec. 163 of the Indian Contract Act, 1872, in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed.

In the given situation, when Mr. Flemming returned from Australia there were 1,09,000 live birds and 15,000 eggs (1,00,000 birds and 10,000 eggs were originally deposited by Mr. Flemming). Mr. Stefen agreed to return 1,00,000 live birds and 10,000 eggs only and not the increased number of live birds and eggs.

Conclusion: Based on the provisions of Sec. 163, following conclusion may be drawn:
Duties of Mr. Stefen: Mr. Stefen (pawnee) is bound to deliver to Mr. Flemming (pawnor), any increase or profit (9,000 live birds and 5,000 eggs) which has occurred from the goods bailed (i.e the live birds and eggs).

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

Question 45.
Shyam, at the request of Govind, sells goods which were, in the possession of Govind. However, Govind had no right to dispose of such goods. Shyam did not know this and handover the proceed of the sale to Govind. Afterwards, Manohar, who was the true owner of the goods, sued Shyam and recovered the value of the goods. In the light of the provisions of the Indian Contract Act, 1872, answer the following questions:
(i) Is Govind liable to identify to Shyam for his payment to Manohar?
(ii) What will be the liability of Govind if the goods is a prohibited drug? [Dec. 21 (4 Marks}]
Answer:
Pledge by Mercantile Agent:
As per Sec. 178 of the Indian Contract Act, 1872, where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the Pawnor has no authority to pledge.

It is also to be noted that:
(a) The possession of goods must be with the consent of the owner. If possession has been obtained dishonestly or by a trick, a valid pledge cannot be effected.
(b) The pledgee should have no notice of the pledger’s defect of title. If the pledgee knows that the pledger has a defective title, the pledge will not be valid.

In the given situation, Shyam had no notice of the Govind’s defect of title. He acted in ordinary course of business of a mercantile agent considering Govind as owner of the good and genuinely handed over the proceed of the sale to him. Therefore, said transaction is invalid.

Conclusion: Based on the above discussion, following conclusions may be drawn:

1. Govind shall be liable to indemnify Shyam for his payment to Manohar.
2. Govind shall not be liable to indemnify Shyam as selling of prohibited drugs is a prohibited act and against the public policy.

Question 46.
Examine the validity of the following statements under the provisions of the Indian Contract Act, 1872. [May 22 (4 Marks)]

1. Creditor should proceed legal action first against the Principal Debtor and later against the surety.
2. A guarantee which extends to a single debt/specific transaction is called continuing Guarantee.
3. Variation which is not material and beneficial to the surety will not discharge him of his liability.
4. If the bailee does not use the goods according to the terms and conditions of bailment, the contract of bailment becomes void.

Answer:

1. Statement is not valid. The creditor has a right to sue the surety directly without first proceeding against principal debtor.
2. Statement in not valid. A guarantee which extends to a single debt/specific transaction is called a specific guarantee. A guarantee which extends to a series of transaction is called a continuing guarantee
3. Statement is valid. Variation which is not substantial or material or which is beneficial to the surety will not discharge him of his liability.
4. Statement is not valid. A contract of bailment is voidable at the option of the bailor, if the bailee does not use the goods according to the terms and conditions of bailment.

Contract of Agency

Question 47.
A appoints M, a minor, as bis agent to sell his watch for cash at a price not less than ₹ 700. M sells it to D for ₹ 350. Is the sale valid? Explain the legal position of M and D, referring to the provisions of the Indian Contract Act; 1872. [MTP-March 19, Nov. 21]
Answer:
Contract of Agency:
As per Sec. 184 of the Indian Contract Act, 1872, as between the principal and a third person, any person, even a minor may become an agent. But no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal.

Thus, if a person who is not competent to contract is appointed as an agent, the principal is liable to the third party for the acts of the agent.

Conclusion: In the given situation, D gets a good title to the watch. M is not liable to A for his negligence in the performance of his duties.

Question 48.
Explain the following as per the provisions of the Indian Contract Act, 1872 (i) What is the meaning of ‘Agent’ and ‘Principal’? (ii) Who can appoint an agent [MTP-April 22]
Answer:
(i) Meaning of Agent and Principal:
Agent: means a person employed to do any act for another or to represent another in dealing with the third persons.
Principal: means a person for whom such act is done or who is so represented.

(ii) Who may employ an agent:
As per Sec. 183 of the Indian Contract Act, 1872, “any person who has attained majority according to the law to which he is subject, and who is of sound mind, may employ an agent.” Thus, a minor or a person of unsound mind cannot appoint an agent.

Creation of Agency

Question 49.
State with reason whether the following statement is correct or incorrect: Ratification of agency is valid even if knowledge of the principal is materially defective.
Answer:
Ratification of Agency:

• Statement that ratification of agency is valid even if knowledge of the principal is materially defective is incorrect.
• As per Sec. 198 of the Indian Contract Act, 1872 for a valid ratification, the person who ratifies the already performed act must be without defect and have clear knowledge of the facts of the case. If the principal’s knowledge is materially defective, the ratification is not valid and hence no agency.

Question 50.
Mr. Navin owns a big car and has leased his car to Mrs. Susie. The lease agreement is terminable on 3 month’s notice. Mr. Bhalla, not being authorised by Mr. Navin, demands on behalf of Mr. Navin, the delivery of the car and gives a notice of termination of lease agreement to Mrs. Susie who was in possession of the car at that time. Examine whether Mr. Navin can ratify the notice sent by Mr. Bhalla. Give your answer as per the provisions of the Contract Act, 1872. [MTP-Aug. 18]
Answer:
Ratification of Agency:
As per Sec. 200 of the Indian Contract Act, 1872, an act done by one person on behalf of another, without such other person’s authority, which, if done with authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect. In other words, when the interest of third parties is affected, the principle of ratification does not apply. Ratification cannot relate back to the date of contract if third party has in the intervening time acquired rights.

In the given situation, Mr. Navin owns a big car and has leased his car to Mrs. Susie. The lease agreement is terminable on 3 month’s notice. Mr. Bhalla, not being authorised by Mr. Navin, demands on behalf of Mr. Navin, the delivery of the car and gives a notice of termination of lease agreement to Mrs. Susie who was in possession of the car at that time.

Conclusion: Notice cannot be ratified by Navin, so as to be binding on Susie.

Question 51.
What is the meaning of ‘Agency by estoppel’? What are the essential conditions for creation of an agency by estoppel? Give your answer with respect to the provisions the Indian Contract Act, 1872. [MTP-March 21]
Answer:
Agency by Estoppel:
An agency by estoppel is based on the principle of estoppel. The principle of estoppel lays down that “when one person by declaration (representation], act or omission has intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, he shall not be allowed to deny his previous statement or he shall be stopped to deny his previous statement or conduct”.

The agency by Estoppel is provided u/s 237 of the Indian Contract Act. Sec. 237 which states that “when an agent has without authority done acts or incurred obligations to third persons on behalf of his principal; the principal is bound by such acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority”.

Essential conditions for creation of an agency by estoppel: As per Sec. 237, an agency by estoppel may be created when following essentials are fulfilled:

1. The principal must have made a representation;
2. The representation may be express or implied;
3. The representation must state that the agent has an authority to do certain act although really he has no authority;
4. The principal must have induced the third person by such representation; and
5. The third person must have believed the representation and made the contract on the belief of such representation.

Question 52.
A rented his house to B on lease for 3 years. The lease agreement is terminable on 3 months notice by either party. C, the son of A, being in need of a separate house to live, served a notice on B, without any authority, to vacate the house within a month and requested his father A to ratify his action. Examine whether it shall be valid for A to ratify the action of C taking into account the provisions of the Indian Contract Act, 1872? [July 21 (4 Marks)]
Answer:
Ratification of Agency:
As per Sec. 200 of the Indian Contract Act, 1872, an act done by one person on behalf of another, without such other person’s authority, which, if done with authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect. In other words, when the interest of third parties is affected, the principle of ratification does not apply. Ratification cannot relate back to the date of contract if third party has in the intervening time acquired rights.

In the given situation, A rented his house to B on lease for 3 years. The lease agreement was terminable on three months’ notice. C, son of A, gives notice of termination to B, without any authority, to vacate the house within a month. Also requested A to ratify his action. Here by the act of C, the interest of B is affected, therefore the principle of ratification does not apply.

Conclusion: It is not valid for A to ratify the action of C, thereby causing the notice to be binding on B.

Question 53.
Ranra has given authority to Prem to buy certain goods at die market rate. Prem buys the goods at a higher rate than die market rate. However, Ramu accepted the purchase inspite of higher rate. Afterwards, Ramu comes to know that the goods purchased belonged to Prem himself. Decide, whether, Ramu is bound by ratification done? [May 22 (2 Marks)]
Answer:
Ratification of Agency:
As per Sec. 198 of the Indian Contract Act, 1872, for a valid ratification, the person who ratifies the already performed act must have clear knowledge of the facts of the case. If the principal’s knowledge is materially defective, the ratification is not valid and hence no agency.

In the given case, Ramu has given authority to Prem to buy certain goods at the market rate. Prem buys the goods at a higher rate than the market rate. However, Ramu accepted the purchase inspite of higher rate. Afterwards, Ramu comes to know that the goods purchased belonged to Prem himself.

Conclusion: Ramu is not bound by ratification done.

Extent of Agent’s Authority

Question 54.
Rahul, a transporter was entrusted with the duty of transporting tomatoes from a rural farm to a city by Aswin. Due to heavy rains, Rahul was stranded for more than 2 days. Rahul sold the tomatoes below the market rate in the nearby market where he was stranded fearing that the tomatoes may perish. Can Aswin recover the loss from Rabid on the ground that Rahul had acted beyond his authority? [May 18 (3 Marks); RTP-May 18; MTP-Oct 19, April 21]
Answer:
Agent’s authority in an emergency:
As per Sec. 189 of the Indian Contract Act, 1872, an agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

In the given situation, Rahul, the agent, was handling perishable goods like ‘tomatoes’ and can decide the time, date and place of sale, not necessarily as per instructions of the Aswin, the principal, with the intention of protecting Aswin from losses.

Conclusion: Rahul acts in an emergency as a man of ordinary prudence, so Aswin will not succeed
against him for recovering the loss.

Question 55.
Aarthi is the wife of Naresh. She purchased some sarees on credit from M/s Rainbow Silks, Jaipur. M/s Rainbow Silks, Jaipur demanded the amount from Naresh. Naresh refused. M/s Rainbow Silks, Jaipur filed a suit against Naresh for the said amount Decide in the light of provisions of the Indian Contract Act, 1872, whether M/s Rainbow Silks, Jaipur would succeed? [May 19 (4 Marks)]
Answer:
Agency created by a legal presumption:
An agency may be created by a legal presumption; in a case of co-habitation by a married woman (i.e. wife is considered as an implied agent of her husband}. If wife lives with her husband, there is a legal presumption that a wife has authority to pledge her husband’s credit for necessaries. But the legal presumption can be rebutted in the following cases:

1. Where the goods purchased on credit are not necessaries.
2. Where the wife is given sufficient money for purchasing necessaries.
3. Where the wife is forbidden from purchasing anything on credit or contracting debts.
4. Where the trader has been expressly warned not to give credit to his wife.

If the wife lives apart for no fault on her part, wife has authority to pledge her husband’s credit for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv) above.

Conclusion: Applying the above conditions in the given case M/s Rainbow Silks will succeed. It can recover the said amount from Naresh if sarees purchased by Aarthi are necessaries for her.

Question 56.
What is agent’s authority in case of an emergency. What are the essential conditions to be satisfied to constitute a valid emergency. Give your answer as per the provisions of the Indian Contract Act, [MTP-March 19]
Answer:
Agent’s authority in an emergency:
As per Sec. 189 of the Indian Contract Act, 1872, an agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

To constitute a valid agency in an emergency, following conditions must be satisfied.

1. Agent should not be in a position or have any opportunity to communicate with his principal within the time available.
2. There should have been actual and definite commercial necessity for the agent to act promptly.
3. The agent should have acted bona fide and for the benefit of the principal.
4. The agent should have adopted the most reasonable and practicable course under the circumstances, and
5. The agent must have been in possession of the goods belonging to his principal and which are the subject of contract

Question 57.
Mr. Yadav, a cargo owner, chartered a vessel to carry a cargo of wheat from a foreign port to Chennai. The vessel got stranded on a reef in the sea 300 miles from the destination.

The ship’s managing agents signed a salvage agreement for Mr. Yadav. The goods (wheat) being perishable, the salvors stored it at their own expense. Salvors intimated the whole incident to the cargo owner. Mr. Yadav refuse to reimburse the Salvor, as it is the Shipowner, being the bailee of the cargo, who was liable to reimburse the salvor until the contract remained unterminated. Referring to the provision of the Indian Contract Act 1872, do you acknowledge or decline the act of Salvor, as an agent of necessity, for Mr. Yadav. Explain? [RTP-Nov. 21]
Answer:
As per Sec. 189 of the Indian Contract Act, 1872:
As per Sec. 189 of the Indian Contract Act, 1872, an agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

In certain circumstances, a person who has been entrusted with another’s property may have to incur unauthorized expenses to protect or preserve it. This is called an agency of necessity.

In the given situation, the Salvor had implied authority from the cargo owner to take care of the cargo. They acted as agents of necessity on behalf of the cargo owner. Cargo owner were duty bound towards salvor.

Conclusion: Salvor is entitled to recover the agreed sum from Mr. Yadav and not from the ship owner, as a lien on the goods.

Sub Agent and Substituted Agent

Question 58.
Comment on the statement ‘Principal is not always bound by the acts of a sub-agent’. [MTP-May 20]
Answer:
Liability of Principal for acts of sub-agent:

• The statement that “Principal is not always bound by the acts of a sub-agent” is correct. Normally, a sub-agent is not appointed, since it is a delegation of power by an agent given to him by his principal.
• The governing principle is “a delegate cannot delegate”, based on lating maxim “delegates non potest delegare”. However, there are certain circumstances where an agent can appoint sub-agent.
• In case of proper appointment of a sub-agent, by virtue of Sec. 192 of the Indian Contract Act, 1872 the principal is bound by and is held responsible for the acts of the sub-agent. Their relationship is treated to be as if the sub-agent is appointed by the principal himself.
• However, if a sub-agent is not properly appointed, the principal shall not be bound by the acts of the sub-agent. Under the circumstances the agent appointing the sub-agent shall be bound by these acts and he (the agent) shall be bound to the principal for the acts of the sub-agent.

Question 59.
Mr. Bhaila instructs Aman, a merchant, to buy a ship for him. Aman employs a ship surveyor of good reputation to choose a ship for Mr. Bhaila. The surveyor makes die choice negligently and the ship turns out to be unseawortby and is lost Now, Mr. Bhaila holds Aman responsible for the same. Examine as per the provisions of the Contract Act 1872, whether Aman is responsible to Mr. Bhaila. [MTP-March 18]
Answer:
Relation Between Principal and Person Duly Appointed by Agent to Act in Business of Agency:
As per Sec. 194 of the Indian Contract Act, 1872, where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him.

Further, as per Sec. 195, in selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected.

Thus, in the present case, Aman is not, but the surveyor is, responsible to Mr. Bhaila.

Question 60.
Azar consigned electronic goods for sale to Aziz. Aziz employed Rahim a reputed auctioneer to sell the goods consigned to him through auction. Aziz authorized Rahim to receive the proceeds and transfer those proceeds once in 45 days. Rahim sold goods on auction for ₹ 2,00,000 but before transferring the proceeds of the auction, became insolvent Assess the liability of Aziz according to the provisions of the Indian Contract Act, 1872. [Nov. 18 (3 Marks)]
Answer:
Agent’s Duty in Naming Such Person:
As per Sec. 195 of the Contract Act, 1872, in selecting an agent (substituted) for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected.

Thus, while selecting a “substituted agent” the agent is bound to exercise same amount of diligence as a man of ordinary prudence and if he does so he will not be responsible for acts or negligence of the substituted agent.

Hence, if Aziz has exercised same amount of diligence as a man of ordinary prudence would, he shall not be responsible to Azar for the proceeds of the auction

Question 61.
Hari, authorises Bharat, a merchant in Mumbai, to recover dues from Bankey & Co. Bharat instructs Deepak, a solicitor, to take legal proceedings against Bankey & Co. for recovery of the money. Explain the legal position of Deepak, referring provisions of the Indian Contract Act, 1872, related to agency. [May 22 (2 Marks)]
Answer:
Relation between Principal and person duly appointed by Agent to act in business of Agency:
As per Sec. 194 of the Indian Contract Act, 1872, where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him.

In the given case, Hari, authorises Bharat, a merchant in Mumbai, to recover dues from Bankey & Co. Bharat instructs Deepak, a solicitor, to take legal proceedings against Bankey & Co. for recovery of the money.

Conclusion: Deepak is not a sub-agent, but is a solicitor for Hari.

Duties and Obligations of an Agent

Question 62.
Mr. Ahu$a of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr. Singh bought a house for ₹ 20 lakhs in the name of a nominee and then purchased it himself for ₹ 24 lakhs. He then sold the same house to Mr. Ahufa for ₹ 26 lakhs. Mr. Ahu}a later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to Mr. Singh- Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain. [RTP-May 18, MTP-April 19, May 20]
Answer:
Duty to Avoid Conflict of Interest:

• Sec. 215 of the Indian Contract Act, 1872, read with Sec. 216 provide that where an agent without the knowledge of the principal, deals in the business of agency on his own account, the principal may:
  1. repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any material fact from him, or that the dealings of the agent have been disadvantageous to him.
  2. claim from the agent any benefit, which may have resulted to him from the transaction
• Based on the above provisions, Mr. Ahuja is entitled to recover ₹ 6 lakhs from Mr. Singh being the amount of profit earned by Mr. Singh out of the transaction.

Question 63.
ABC Ltd. sells its products through some agents and it is not the custom in their business to sell the products on credit. Mr. Pinto, one of the agents sold goods of ABC Ltd. to M/s. Parol Pvt. Ltd. (on credit) which was insolvent at the time of such sale. ABC Ltd. sued Mr. Pintu for compensation towards the loss caused due to sale of products to M/s. Parol Pvt Ltd. Will ABC Ltd. succeed in its claim? [May 18 (4 Marks)]
Answer:
Agent’s duty to follow Instructions or Customs:
As per Sec. 211 of the Indian Contract Act, 1872, an agent is bound to conduct the business of his principal according to the direction given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it.

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

Conclusion: Mr. Pintu must make good the loss to ABC Ltd.

Question 64.
Pankaj appoints Shruti as his agent to sell his estate. Shruti, on looking over the estate before selling . it, finds the existence of a good quality Granite-Mine on the estate, which is unknown to Pankaj. Shruti buys the estate herself after informing Pankaj that she (Shruti) wishes to buy the estate for herself but conceals the existence of Granite-Mine. Pankaj allows Shruti to buy the estate, in ignorance of the existence of Mine. State giving reasons in brief the rights of Pankaj, the principal, against Shruti, the agent. Give your answer as per the provisions of the Contract Act, 1872.

What would be your answer if Shruti had informed Pankaj about the existence of Mine before she purchased the estate, but after 2 months, she sold the estate at a profit of ₹ 10 lakhs? [MTP-May 20]
Answer:
Agent’s duty to disclose all material circumstances & his duty not to deal on his own account Without principal’s consent:
As per Sec. 215 of Indian Contract Act, 1872, if an agent deals on his own account in the business of the agency, without obtaining the consent of his principal and without acquainting him with all material circumstances, then the principal may repudiate the transaction.

Further, Sec. 216 provide that, if an agent, without the knowledge of his principal, acts on his own account in the business of the agency, then the principal may claim any benefit which may have accrued to the agent from such a transaction.

Conclusions: Based on the above stated provisions, following conclusions may be drawn:
In the first instance, though Pankaj had given his consent to Shruti permitting the latter to act on his own account in the business of agency, Pankaj may still repudiate the sale as the existence of the mine, a material circumstance, had not been disclosed to him.

In the second instance, Pankaj had knowledge that Shruti was acting on her own account and also that the mine was in existence; hence, Pankaj cannot repudiate the transaction u/s 215. Also, u/s 216, Pankaj cannot claim any benefit from Shruti as he had knowledge that Shruti was acting on her own account in the business of the agency.

Liability of Principals and Agents of 3^rd Party

Question 65.
An agent is neither personally liable nor can he personally enforce the contract on behalf of the principal. Comment [May 19 (2 Marks)]
Answer:
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
As per Sec. 230 of the Indian Contract Act, 1872, in the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.

Thus, an agent cannot personally enforce, nor be bound by, contracts on behalf of principal.

Presumption of contract to the contrary:
But, such a contract shall be presumed to exist in the following cases:

1. Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad/foreign principal;
2. Where the agent does not disclose the name of his principal or undisclosed principal; and
3. Where the principal, though disclosed, cannot be sued.

Question 66.
X has made an agency agreement with Y to authorize him to purchase goods on the behalf of X for the year 2020 only. The agency agreement was signed by both and it contains all the terms and conditions for the agent, it has a condition that Y is allowed to purchase goods maximum upto the value of ₹ 10 lakhs only. In the month of April 2020, Y has purchased a single item of ₹ 12 lakhs from Z as an agent of X The market value of the item purchased was ₹ 14 lakhs but a discount of ₹ 2 lakhs was given by Z. The agent Y has purchased this item due to heavy discount offered and the financially benefit to X.

After delivery of the item Z has demanded the payment from X as Y is the agent of X. But X denied to make the payment stating that Y has exceeded his authority as an agent therefore he is not liable for this purchase. Z has Hied a suit against X for payment.

Decide whether Z will succeed in his suit against X for recovery of payment as per provisions of The Indian Contract Act, 1872. [Nov. 20 (3 Marks)]
Answer:
Principal’s Liability:
An agent does all acts on behalf of the principal but incurs no personal liability. The liability remains that of the principal unless there is a contract to the contrary. An agent also cannot personally enforce contracts entered into by him on behalf of the principal.

As per provisions of Sec. 226 of the Indian Contract Act, 1872, Principal is considered to be liable for the acts of agents which are within the scope of his authority.

As per Sec. 228 of the Indian Contract Act, 1872, where an agent does more than he is authorised to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognise the transaction.

In the given situation, the agency agreement was signed between X and Y, authorizing Y to purchase goods maximum upto the value of ₹ 10 lakh. But Y purchased a single item of ₹ 12 lakh from Z as an agent of X at a discounted rate to financially benefit to X. On demand of payment by Z, X denied saying that Y has exceeded his authority therefore he is not liable for such purchase. Z filed a suit against X for payment. .

As said above, liability remains that of the principal unless there is a contract to the contrary. The agency agreement clearly specifies the scope of authority of Y for the purchase of goods, however he exceeded his authority as an agent.

Conclusion: Since the transaction is not separable, X is not bound to recognize the transaction entered between Z and Y, and therefore may repudiate the whole transaction. Hence, Z will not succeed in his suit against X for recovery of payment.

Revocation of Authority

Question 67.
Bhupendra borrowed a sum of ₹ 3 lakhs from Atul. Bhupendra appointed Atul as his agent to sell his land and authorized him to appropriate the amount of loan out of the sale proceeds. Afterward, Bhupendra revoked the agency.

Decide under the provisions of the Indian Contract Act, 1872 whether the revocation of the said agency by Bhupendra is lawful. [Nov. 19 (4 Marks)]
Answer:
Revocation of Authority:
As per Sec. 202 of the Indian Contract Act, 1872 an agency becomes irrevocable where the agent has himself an interest in the property which forms the subject-matter of the agency, and such an agency cannot, in the absence of an express provision in the contract, be terminated to the prejudice of such interest.

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

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

Conclusion: Revocation of agency by Bhupendra is not lawful.

Question 68.
Akash is a famous manufacturer of leather goods. Me appoints Prashant as his agent Prashant is entrusted with the work of recovering money from various traders to whom Akash sells leather goods. Prashant is paid a monthly remuneration of ₹ 15,000. Prashant during a particular month recovers ₹ 40,000 from traders on account of Akash. Prashant gives bade ₹ 25,000 to Akash, after deducting his salary.

Examine with reference to relevant provisions of the Indian Contract Act, 1872, whether act of Prashant is valid. [RTP-May 21]
Answer:
Agency coupled with interest:
As per Sec. 202 of the Indian Contract Act, 1872 an agency becomes irrevocable where the agent has himself an interest in the property which forms the subject-matter of the agency, and such an agency cannot, in the absence of an express provision in the contract, be terminated to the prejudice of such interest.

In the given situation, Akash appointed Prashant as his agent to recover money from various traders to whom Akash sold his leather goods, on a monthly remuneration of K 15,000. Prashant during a month recovers ₹ 40,000 from traders on account of Akash. Prashant after deducting his salary give the rest amount to Akash.

Conclusion: Interest was created in favour of Prashant and the said agency is not revocable, therefore, the act of Prashant is valid.

Question 69.
Explain whether the agency shall be terminated in the following cases under the provisions of the Indian Contract Act, 1872:
(i) A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A’s agent to sell A’s land. B, under the authority of A, appoints C as agent of B. Afterwards, A revokes the authority of B but not of C. What is the status of agency of C ? [jan. 21 (4 Marks)]
Answer:
Termination of Agency:
(i) As per Sec. 202 of the Indian Contract Act, 1872, where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. In other words, when the agent is personally interested in the subject matter of agency, the agency becomes irrevocable.

In the given situation, A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him from A.

As per the facts of the question and provision of law, A cannot revoke this authority, nor it can be terminated by his insanity

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

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

In the given situation, B is the agent of A, and C is the agent of B. Hence, C becomes a sub- agent. Thus, when A revokes the authority of B (agent), it results in termination of authority of sub-agent appointed by B i.e. C (sub-agent).

Question 70.
Shiva appoints Ganesh as Shiva’s agent to sell Shiva’s land. Ganesh, under the authority of Shiva, appoints Gauri as agent of Ganesh. Afterwards, Shiva revokes the authority of Ganesh but not of Gauri. What is the status of agency of Gauri? Advise whether the said agency shall be terminated as per the provisions of the Indian Contract Act, 1872. [MTP-March 22]
Answer:
Sub-Agency and Termination of sub-Agent’s authority:
As per Sec. 191 of the Indian Contract Act, 1872, a “Sub-agent” is a person employed by, and acting under the control of, the original agent in the business of the agency.

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

In the given situation, Ganesh is the agent of Shiva, and Gauri is the agent of Ganesh. Hence, Gauri becomes a sub- agent. Thus, when Shiva revokes the authority of Ganesh (agent), it results in termination of authority of sub-agent appointed by Ganesh i.e. Gauri (sub-agent).