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Indian Contract Act, 1872

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Page 1
Aman contracts to indemnify Megha against the consequences of any proceedings
which Chandar may take against Megha in respect of a sum of 15000/ advanced by
Chandar to Megha. Now, Megha who is called upon to pay the sum of money to
Chandar but she fails to do so. Now, as per the provisions of the Indian Contract Act,
1872, advise the future course of action to be taken by Chandar.
a) Chandar can recover the amount only from Megha
b) Chandar can recover the full amount from Aman
c) Chandar cannot recover the amount from Aman
d) Chandar can recover at least 10% of the total amount from Megha (RTP
May’ 19)

The date of maturity of a bill payable hundred days after sight and which is presented
for sight on 4th
May, 2017, is (as per the provisions of the Negotiable Instruments Act, 1881) :
a) 13 August, 2017
b) 14 August, 2017
c) 15 August, 2017
d) 16 August, 2017 (MT Mar’ 19)

Answer: B
Answer: B

Page 2
A guarantee obtained by a creditor by keeping silence as to material circumstances
is: (MT May’ 20)
a) Valid
b) Voidable
c) Unenforceable
d) Invalid

Answer: D

Page 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. (MT Aug’ 18)

A contract of indemnity is a contract whereby 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.

Parties : The person making the promise is called the indemnifier. The party to whom the
promise is made is called the indemnified or indemnity holder.

Example: A makes a contract with B to indemnify B against the consequences of any

proceedings which C may take against B for a loan advanced by C to B.

Page 4
 Define contract of indemnity and contract of guarantee and state the conditions when
guarantee is considered invalid ? (MT May’ 20)

Section 124 of the Indian Contract Act,1872 says that “A contract by which one
party promises to save the other from loss caused to him by the conduct of the promisor
himself, or the conduct of any person”, is called a “contract of indemnity”.
Section 126 of the Indian Contract Act says that “A contract to perform the promise made or
discharge liability incurred by a third person in case of his default.” is called as “contract of
guarantee”.

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

Page 5
 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)

According to section 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.
In the above case Avinash took a loan from the bank against the security of his stock. Later
Avinash was unable to repay the loan and so the bank wants to sell the stock to recover the
principal and interest. As the Act gives the pawnee the right to recover the interest amount
also from the goods pledged the bank can retain the stock for the principal and interest.
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.

Page 6
 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 Ac t, 1872, decide whether ‘A’ is liable on his guarantee given to M. (RTP
May’ 19)/ (Nov’ 17)
OR
Star gives to Sun a continuing guarantee to the extent of 15000 for the groceries to be
supplied by Sun to Moon from time to time on credit. Afterwards, Moon became
embarrassed, and without the knowledge of Star, Moon and Sun contract that Sun
shall continue to supply Moon with groceries for ready money, and that the payments
shall be applied to the then existing debts between Moon and Sun.
Examining the provision of the Indian Contract Act, 1872, decide whether Star is
liable on his guarantee given to Sun. (RTP May’ 18)

As per section 133 of the Indian Contract Act, 1872 any variance made without the
surety’s consent in the terms of the contract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the variance.
In the above case A gives continuing guarantee to M for any fruits supplied by M to S on
credit subject to a max of 8,000. S becomes embarrassed and without A’s knowledge M and S
contract that M will supply fruits for cash to S and the payment shall be applied for payment of
existing debt. Since, the variance made in the existing contract is without the surety’s so ‘A’ is
not liable on his guarantee for the fruits supplied after this new arrangement.
Thus A is not liable for the guarantee given by him for the fruits supplied after the variation to
the contract.

Page 7
 Shambhu becomes guarantor for Aman for the amount which may be given to him by
Naveen within 6 months. The maximum limit of the said amount is 1 lakh. After two
months Shambhu withdraws his guarantee. Up to the time of revocation of guarantee,
Naveen had given to Aman 20,000.
i. Whether Shambhu is discharged from his liabilities to Naveen for any
subsequent loan.
ii. Whether Shambhu is liable if Aman fails to pay the amount of 20,000 to
Naveen?. (RTP May’ 18)/ (RTP May’ 20)
OR
Ramesh’ and ‘Suresh’ were engaged in business having same nature. ‘Ramesh’ stands
surety for ‘Suresh’ for any amount which ‘Kamlesh’ may lend to ‘Suresh’ from time to
time during the next 6 months subject to a maximum of 85,000. 3 months later,
‘Ramesh’ revokes the guarantee, when ‘Kamlesh’ had lent to ‘Suresh’ 35,000. Decide
whether ‘Ramesh’ is discharged from all the liabilities to ‘Kamlesh’ for any subsequent
loan under the provisions of the Indian Contract Act, 1872. Would your answer differ
in case ‘Suresh’ makes a default in paying back to ‘Kamlesh’ the money already
borrowed i.e. 35,000? (Nov’ 17)/(Nov’ 19)

As per section 130 of the India Contract Act, 1872, when the guarantee moves over
a series of transactions it is a continuing guarantee. A continuing guarantee may at any time be
revoked by giving a notice. The revocation shall be for future transactions. For transactions
already entered into the guarantee cannot be revoked.
In the above case Shambhu becomes a guarantor for Aman for any loan that Naveen may give
him in the next 6 months subject to a maximum of 1 lac. After 2 months however Shambhu
withdraws his guarantee. By that time Naveen had already given 20,000 to Aman. Sambhu by
giving notice is no longer liable however he shall continue to be liable for the loan already
given within the 2 months.
Thus
i. Shambhu is discharged for all the subsequent loans as he has given a notice of
revocation.
ii. Shambhu is liable for payment of 20,000 to Naveen if Aman fails as the notice for
revocation is only for the future transactions and the transactions already entered the
surety shall continue to be liable.

Page 8
 Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two
years contract at a monthly salary of 50,000. Mr. Pawan gave a surety in respect of
Mr. Chetan's conduct. After six months the company was not in position to pay 50,000
to Mr. Chetan because of financial constraints. Chetan agreed for a lower salary of
30,000 from the company. This was not communicated to Mr. Pawan. Three months
afterwards it was discovered that Chetan had been doing fraud since the time of his
appointment. What is the liability of Mr. Pawan during the whole duration of Chetan's
appointment? (Nov’ 18)/ (RTP Nov’ 19)/ (Nov’ 19)
OR
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 Rs. 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 Rs. 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.(MT Oct’ 18)

As per the provisions of Section 133 of the Indian Contract Act, 1872, if the creditor
makes any variance (i.e. change in terms) without the consent of the surety, then surety is
discharged as to the transactions subsequent to the change.
In the instant case, Mr Chetan was appointed by ABC Construction Company for a salary of
50,000 on the surety of Mr. Pawan. After 6 months due to financial constraints the company
was unable to pay 50,000 and Chetan agreed to a lower salary of 30,000. However this was not
communicated to Pawan. It was found that Chetan was doing fraud since the time of
appointment. As Pawan had given surety he shall be liable but his liability shall absolve for all
the acts done after the change in the terms of the contract.
Hence, Mr. Pawan, will be liable as a surety for the act of Mr. Chetan before the change in the
terms of the contract i.e., during the first six months. Variation in the terms of the contract (as
to the reduction of salary) without consent of Mr. Pawan, will discharge Mr. Pawan from all
the liabilities towards the act of the Mr. Chetan after such variation
Page 9
 Mr. D was in urgent need of money amounting 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)

As per section 146 of the Indian Contract act, 1872 “when two or more persons are
co-sureties for the same debt 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”.
In the above case D who was in urgent need of money took a loan of 5,00,000 from K on the
surety of A, B and N. D defaults in the payment of the debt. If the debtor fails to pay the debt
the co sureties must contribute their shares. So B being one of the co sureties is also liable to
contribute and cannot escape liability.
Thus B is liable to contribute and cannot escape liability.

Page 10
 Megha advances to Nisha Rs. 5,000 on the guarantee of Prem. The loan carries
interest at 10% per annum. Subsequently, Nisha becomes financially embarrassed. On
Nisha’s request, Megha reduces the interest to 6% per annum and does not sue Nisha
for one year after the loan becomes due. Nisha becomes insolvent. Can Megha sue
Prem? Decide your answer in reference to the provisions of the Contract Act, 1872.
(MT Aug’ 18)
OR
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? (Nov’ 18)

According to section 133 of the Indian Contract Act, 1872, where there is any
variance in the terms of contract between the principal debtor and creditor without surety’s
consent, it would discharge the surety in respect of all transactions taking place subsequent to
such variance.
In the given case Megha gave a loan of 5000 to Nisha on the guarantee of Prem. The loan was
carrying a rate of interest @ 10%. Later on Nisha’s request Megha reduced the rate of interest
to 6%. However Prem was not informed of this. Any variation whether beneficial to the surety
or not shall discharge the surety and so Prem is discharged of his liability.
Thus Megha cannot sue Prem because Prem is discharged of his liability.

Page 11
 'C' advances to 'B', 2,00,000 on the guarantee of 'A'. 'C' has also taken a further security
for the same borrowing by mortgage of B's furniture worth 2,00,000 without
knowledge of 'A'. C' cancels the mortgage. After 6 months 'B' becomes insolvent and
'C' 'sues ‘A’ his guarantee. Decide the liability of 'A' if the market value of furniture is
worth 80,000, under the Indian Contract Act, 1872. (Nov’ 19)

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

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

Thus A shall be liable for 1,20,000.

.

Page 12
 Distinguish between ‘Contract of Indemnity’ and ‘Contract of Guarantee’. (Nov’
17)

Indemnity Guarantee
There are only two parties indemnifier There are three parties principal debtor,
and indemnified. creditor and surety.
The liability of indemnifier is primary. The liability of surety is secondary and
conditional.
The liability arises only on the happening The liability is already in existence but
of a contingency. crystallizes only when the principal
debtor fails to make the payment.
Indemnifier cannot sue the third party for Surety can take action against principal
loss in his own name. Such right shall debtor in his own right as he gets all the
arise only if there is an assignment in his rights of the creditor after discharging the
favour. debts.
All parties must be competent to contract In a contract of guarantee, the principal
debtor, if he is a minor, still the contract
is valid.
There is only one contract. There are three contracts
➢ Principal debtor and creditor
➢ Principal debtor and surety
➢ Creditor and surety

Page 13
 Ramesh hires a carriage of Suresh and agrees to pay 1500 as hire charges. The
carriage is unsafe, though Suresh is unaware of it. Ramesh is injured and claims
compensation for injuries suffered by him. Suresh refuses to pay. Discuss the liability
of Suresh. (RTP May’ 18)
OR
Shree hires a carriage of Jagdish and agrees to pay 500 as hire charges. The carriage is
unsafe, though Jagdish is unaware of it. Shree is injured and claims compensation for
injuries suffered by her. Jagdish refuses to pay. Discuss the liability of Jagdish. (RTP
May’ 18)/ (MT Oct’ 18)

As per section 150 of the Indian Contract Act, 1872 if the goods are bailed for hire,
the bailor is responsible for any damage suffered by the bailee on account of th goods being
defective. Even if the bailor is not aware of these defects he shall be liable for the damages.
In the above case Ramesh hires a carriage from Suresh on a rent of 1,500. The carriage was
unsafe which was not known to Suresh. Ramesh is injured. Suresh even though he is not aware
of the defects shall be liable.
Thus Suresh is liable to compensate Ramesh for the damages.

Page 14
 M lends a sum of 5,000 to B, on the security of two shares of a Limited Company on
1st April 2016. On 15th June, 2016, the company issued two bonus shares. B returns
the loan amount of 5,000 with interest but M returns only two shares which were
pledged and refuses to give the two bonus shares. Advise B in the light of the
provisions of the Indian Contract Act, 1872. (RTP May’ 17)

As per section 163of 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.” So while the goods are with the bailee if there is any
increase or profit to the goods the same shall be returned to the bailor along with the goods.
In the above case M lends to B against the security of his shares a sum of 5,000. While the
shares are in M’s possession the company declares bonus on the shares. On repayment of
5,000 along with interest M gives back the shares but refuses to handover the bonus shares. As
the shares belong to B any profit to the shares shall also belong to B.
Thus B the bailor is entitled to the bonus shares.

Page 15
 What are the rights available to the finder of lost goods under Section 168 and
Section 169 of the Indian Contract Act, 1872. (Nov’ 18)

As per the provisions of section 168 and 169 of the Indian Contract Act, 1872,
1. Rights of lien: The finder of the goods has a right of lien over the goods for the
expenses that he has incurred on the goods. He can retain the goods against the owner
till he does not receive the compensation from the owner.
2. Right to sue for reward: The finder can sue for any specific award offered by the
owner for return of goods. He may retain the goods till he receives the award.
3. Right of sale: A finder may sell the goods found if:
i. The owner cannot be found with reasonable diligence
ii. If the goods are in the danger of perishing
iii. The owner is found but he refuses to give the lawful charges and the lawful
charges are 2/3rd or more of the goods.

Page 16
 Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop,
promising to give 200 at the time of taking back the bailed goods. Srijith's employee,
unaware of this, mixed the 50 kg of sugar belonging to Amar with the sugar in the
shop and packaged it for sale when Srijith was away. This came to light only when
Amar came asking for the sugar he had bailed with Srijith, as the price of the specific
quality of sugar had trebled. What is the remedy available to Amar? (Nov’ 18)

According to section 157 of the Contract Act, 1872, if the bailee, without the
consent of the bailor, mixes the goods of the bailor with his own goods, in such a manner that
it is impossible to separate the goods bailed from the other goods and deliver them back, the
bailor is entitled to be compensated by the bailee for the loss of the goods.
In the above case Amar bailed his high quality sugar with Srijith. Srijith’s employee mixed
the high quality sugar bailed by Amar with Srijith’s sugar and then packaged it for sale. The
sugars when mixed could not be separated and so Amar is entitled to be compensated.
Thus Amar has a right to recover the value of the sugar from Srijith.

Page 17
 Ashley bails his jewelry with Barn on the condition to safeguard in bank’s safe
locker. However, Barn kept it in safe locker at his residence, where he usually keeps
his own jewelry. After a month all jewelry was lost in a religious riot. Ashley filed a
suit against Barn for recovery. Referring to provisions of the Indian Contract Act,
1872, state whether Ashely will succeed. (MT Aug’ 18)

According to section 151 of the 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. According to section 152
of the Indian Contract Act, 1872, the bailee, in the absence of any special contract, is not
responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the
amount of care of it described in section 151. However when the bailor gives specific
instruction as to how the goods should be taken care of and the bailee has taken reasonable
care but not as per the specification of the bailor he shall be liable for any loss to the goods for
non fulfillment of the specific conditions.
In the above case Ashley bails his jewelry with Barn o the condition that the jewelry be kept in
the bank locker. Barn kept it in his locker at his residence from where the jewelry was stolen.
Though barn had taken reasonable care of the goods he did not fulfill the condition specified
by the bailor and so the bailee shall be liable.
Thus, Barn is liable to compensate Ashley for his negligence to keep jewelry at his residence.

Page 18
 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. As per the provisions of the Indian Contract Act,
1872, analyse the liability of Bimal in the given situation. (MT Oct’ 18)

According to section 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 above case Amit lends his horse to Bimal specifying that only Bimal could ride it. Bimal
lets Chinku a family member ride it. Chinku rides carefully but the horse falls and is injured.
As Bimal had made an inconsistent use of the goods he shall be laible to the bailor.
Hence, Bimal is liable to make compensation to Amit for the injury done to the horse.

Page 19
 Mr. Dhannaseth delivers a rough blue sapphire to a jeweller, to be cut and polished.
The jeweler 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 jeweler can hold blue sapphire. Give
your answer as per the provisions of the Contract Act, 1872. (RTP Nov’ 19)/ (MT
May’ 20)

According to section 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. Such a right to retain the goods bailed is the right of particular
lien. 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.
In the given case Mr. Dhannaseth delivers a blue sapphire to a jeweler to be cut and polished.
Mr Dhannaseth refuses to make the payment and the jeweler refuses to hand over the stone.
Thus the jeweler is entitled to retain the stone till he is paid for the services he has rendered.

Page 20
 What is the liability of a bailee making unauthorized use of goods bailed? (Nov’ 19)

According to section 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.

Page 21
 Give four differences between Bailment and Pledge. (May’ 18)

The following are the distinction between bailment and pledge:

Bailment Pledge
Bailment can be for any reason Goods are pledged as a security for loan
or for performance of a contract.
The bailee generally does not have a right The pledgee has a right to sell on default
to sell. He can retain the goods or sue for of the pledgor to repay the debt.
non-payment
Bailee can use the goods only if specified Pledge has a right to use the goods
in the contract
Bailment may either be gratuitous or non- Pledge is always for consideration
gratuitous
In case of gratuitous bailment the goods Pledge is not bound to return the goods
can be demanded back at any time unless the debt is repaid or promise is
performed.

Page 22
 Ram, the bailor, pledges a cinema projector and other accessories with Movie
Association Co-operative Bank Limited, the bailee, for a loan. Ram requests the bank
to allow the pledged goods to remain in his possession and promises to hold the same
in trust for the bailee and also further promises to handover the possession of the
same to the bank whenever demanded. Examining the provisions of the Indian
Contract Act, 1872 decide, whether a valid contract of pledge has been made between
Ram, the bailor and Bank, the bailee? (May’ 17)

As per section 149 of the Indian Contract Act, 1872 the delivery of the goods 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.
Delivery may be actual or constructive or delivery by attornment to the bank. In such a case
there is change in the legal character of the possession of goods though not in the actual or
physical custody. Though the bailor continues to be in possession of the goods, it is the
possession of the bailee.
In the above case Ram the bailor pledges a cinema projector and other accessories with the
bank. Ram requests the bank to allow the pledged goods to remain in his possession and agrees
to handover the possession of the same to bank whenever demanded. Here the delivery of the
goods is constructive i.e. delivery by attornment to the bailee (pawnee) and the possession of
the goods by Ram, the bailor is construed as possession by bailee (pawnee), the Bank.
The transaction was, therefore, a valid pledge.

Page 23
 Srushti acquired valuable diamond at a very low price by a voidable contract under the
provisions of the Indian Contract Act, 1872. The voidable contract was not rescinded.
Srushti pledged the diamond with Mr. VK. Is this a valid pledge under the Indian
Contract Act, 1872?

Whether a Pawnee has a right to retain the goods pledged. (Nov’ 19)

As per section 178A of the Indian Contract Act, 1872]: When the pawnor has
obtained possession of the goods pledged by him under a contract voidable under section 19
or section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee
acquires a good title to the goods, provided he acts in good faith and without notice of the
pawnor’s defect of title.
In the above case Srushti acquired valuable diamond at a very low price under a voidable
contract. Before the contract was rescinded she pledged the diamond with Mr. VK. As Mr.
VK has acted in good faith the ledge is valid.
Therefore, the pledge of diamond by Srushti with Mr. VK is valid.

Right of retainer: under section 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.

Page 24
 R instructed S, a transporter, to send a consignment of apples to Chennai . After
covering half the distance, Suresh found that the apples will perish before reaching
Chennai. He sold the same at half the market price. R sued S. Decide will he
succeed? (RTP May’ 18)
OR
Mridul, a transporter was entrusted with the duty of transporting tomatoes from a
rural farm to a city by Akshat. Due to heavy rains, Mridul was stranded for more
than two days. Mridul sold the tomatoes below the market rate in the nearby market
where he was stranded fearing that the tomatoes may perish. Can Akshat recover the
loss from Mridul on the ground that Mridul had acted beyond his authority? (RTP
Nov’ 18)/ (May’ 18)

An agent has the authority in an emergency to do all such acts as a man of ordinary
prudence would do for protecting his principal from losses which the principal would have
done under similar circumstances. Any acts done by the agent in such a case shall bind the
principal if:
i. There was a real emergency
ii. The agent has acted as a man of ordinary prudence
iii. The agent was not in a position to communicated with the principal.
In the above case R instructs S to send apples to Chennai. While the goods were in transit S
found that the apples will perish and to protect P he sold half the apple there only to R at
market price. As he had acted as a man of ordinary prudence and there was a real emergency
the act of S shall bind P.
Thus S had acted in an emergency situation and hence, R will not succeed against him.

Page 25
 Mr. A of Delhi engaged Mr. S a s his agent to buy a house in Noida Extension area.
Mr. S bought a house for 50 lakhs in the name of a nominee and then purchased it
himself for 60 lakhs. He then sold the same house to Mr. A for 80 lakhs. Mr. A later
comes to know the mischief of Mr. S and tries to recover the excess amount paid to
Mr. S. Discuss whether he is entitled to recover any amount from Mr. S? If so, how
much? (RTP May’ 18)
OR
Mr. A of Alwar engaged Mr. S as his agent to buy a house. Mr. S bought a house for
40 lakhs in the name of a nominee and then purchased it himself for 44 lakhs. He
then sold the same house to Mr. A for 46 lakhs. Mr. A later comes to know about the
mischief of Mr. S and tries to recover the excess amount paid to Mr. S. Is he entitled
to recover any amount from Mr. S? If so, how much? Explain.(May’ 16)

As per section 215 read with 216 of the Indian Contract Act, 1872 where an agent
without the knowledge of the principal, deals in the business of agency on his own account, the
principal may:
i. Cancel the transaction, if the agent has dishonestly concealed any material fact from
him, or that the dealings of the agent have been disadvantageous to him.
ii. Claim from the agent any benefit, which may have resulted to him from the transaction.
In the above case Mr. A engaged Mr. S as his agent to purchase a house for him. Mr. S
purchased the property in the name of a nominee for 50 lacs, purchased the property himself
for 60 lacs and finally sold it to his principal for 80 lacs. He made a total profit of 30 lac from
his principal.
Therefore Mr. A is entitled to recover 30 lakhs from Mr. S being the amount of profit earned
by Mr. S out of the transaction.

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 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? (Nov’ 19)

As per the provisions of the Indian Contract Act, 1872 an agency may be created by
a legal presumption 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:
i. Where the goods purchased on credit are not necessaries.
ii. Where the wife is given sufficient money for purchasing necessaries.
iii. Where the wife is forbidden from purchasing anything on credit or contracting debts.
iv. Where the trader has been expressly warned not to give credit to his wife.
In the above case Aarthi purchased sarees on the credit of her husband. M/s Rainbow Silks
Jaipur, the seller, filed a case against Naresh for the money of the sarees.
Thus Naresh is liable if the sarees are necessaries.

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 Explaining the provisions of the Indian Contract Act, 1872, answer the following:
i. 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?
ii. C, the holder of an overdue 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)/ (MT Mar’ 19)

According to Section 134 of the Indian Contract Act, 1872, the surety is discharged
by any contract between the creditor and the principal debtor, by which the principal debtor is
released or by any act or omission of the creditor, the legal consequence of which is the
discharge of the principal debtor. As the liability of the surety is coextensive with the liability
of the principal debtor and if the principal debtor is discharged the surety is automatically
discharged.
In the above case A contracts with B to construct a house for B for which B would supply the
material. C gives guarantee for the contract. B does not supply the material to A. as the
contract’s performance depends upon B supplying material to A which B fails to do A is
discharged. On release of A C is automatically discharged.
Thus C is discharged from liability.

ii. According to Section 135 of the Indian Contract Act, 1872, where the principal debtor and
the creditor make a contract giving an extension of time to the debtor for the payment of the
debt without informing the surety, the surety is discharged. However as per section 136 where
a contract to give time to the principal debtor is made by the creditor with a third person and
not with the principal debtor, the surety is not discharged.
In the above case C was the holder of an overdue bill. This bill was drawn by A as a surety for
B. C contracts with X to give time to B. as the extension of time was made between the
creditor C and the third party X the surety A shall not be discharged.
Thus A is not discharged from liability.

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 Ashish appoints Megha, a minor, as his agent to sell his watch for cash at a price
not less than 1700. Megha sells it to Diwan for 1200. Is the sale valid? Explain the
legal position of Megha and Diwan, referring to the provisions of the India Contract
Act, 1872. (RTP May’17)
OR
A appoints M, a minor, as his agent to sell his watch for cash at a price not less than
Rs. 700. M sells it to D for Rs. 350. Is the sale valid? Explain the legal position of M
and D, referring to the provisions of the Indian Contract Act, 1872. (MT Mar’ 19)

According to the provisions of Section 184 of the Indian Contract Act, 1872, as
between the principal and a third person, any person may become an agent if he has a
contractual capacity and is of a sound mind. So to be an agent the person must have the
authority to contract. However a minor can be an agent as an agent brings about a contractual
relationship between the principal and third persons and therefore his contractual capacity is
immaterial. 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.
In the above case Ashish appoints Megha, a minor, to sell his watch on his behalf for 1,700.
Megha sells the watch to Diwan for 1,200. Generally if the agent acts outside his authority the
agent is liable but if the agnet is a minor and such agent acts outside his authority the principal
cannot hold him liable and shall be bound by the contract.
Thus, in the given case, Diwan gets a good title to the watch. Megha is not liable to Ashish for
her negligence in the performance of her duties.

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 ABC Ltd. sells its products through some agents and it is not the custom in their
business to sell the products on credit. Mr. Pintu, one of the agents sold goods of ABC
Ltd. to M/s. Parul Pvt. Ltd. (on credit) which was insolvent at the time of such sale.
ABC Ltd. sued Mr. Pintu for compensation towards the loss caused due to sale of
products to M/s. Parul Pvt. Ltd. Will ABC Ltd. succeed in its claim? (May’ 18)

As per section 211 of the Indian Contract Act, 1872 an agent is bound to conduct
the business of his principal according to the direction given by the principal, or, in the
absence of any such directions, according to the custom which prevails in doing business of
the same kind at the place where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit
accrues, he must account for it.
In the above case ABC Ltd. sells its products through some agents but not on credit. One of
the agents Mr. Pintu sold goods to M/s Parul Pvt. Ltd. on credit. M/s Parul Pvt. Ltd. was
insolvent at the time of sale. The agent has acted outside the custom of ABC Ltd. as it never
sold goods on credit ad so the agent shall be liable to the principal.
Thus Mr. Pintu must make good the loss to ABC Ltd.

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 Mr. Navin owns a big car and has leased his car to Mrs. Susie. The lease agreement
is terminable on three 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. (MT Aug’ 18)

According to section 200 of the Indian Contract Act, 1872, an act done by one
person on behalf of another, without such other person's authority, which has the effect of
subjecting a third person to damages, or of terminating any right or interest of a third person,
cannot be ratified. Ratification cannot relate back to the date of contract if third party has in
the intervening time acquired rights.
In the above case Navin leased his car to Susie on terms that the contract is terminable on
three months’ notice. Mr Bhalla without being authorized by Navin gives a notice for
termination of the lease. As the notice terminates the rights of a third party it cannot be
ratified.
Thus, in the instant case the notice cannot be ratified by Navin, so as to be binding on Susie.

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 Comment on the following:
“Principal is not always bound by the acts of a sub –agent”. (MT Oct’ 18)

The statement is correct.

A sub-agent is a person employed by and acting under the authority of the original agent. The
relation of the sub-agent and the agent is that of principal and agent.

A contract of agency being fiduciary in nature the agent cannot delegate the work given to
him by the principal. The governing principle is, a delegate cannot delegate’. However, there
are certain circumstances where an agent can appoint sub-agent.
The agent can appoint a sub-agent in the following cases:
i. The appointment would be valid if the appointment is as per the terms of the original
contract.
ii. Where in the course of the agent’s employment some emergency srises which makes it
necessary for him to appoint a sub-agent.
iii. It is the custom of trade to appoint a subagent.
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.

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 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 two months, she sold the estate at a profit of
10 lac? (RTP May’ 20)

According to Section 215 of the 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. On the other hand, section 216 provides 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.

In the above case Pankaj appoints Shruti as his agent to sell his estate. On knowing that the
estate has a granite mine which is unknown to Pankaj, Shruti buys the estate herself and
Pankaj agrees to sell it to Shruti. Though Pankaj had given his consent to Shruti, Pankaj may
still repudiate the sale as the existence of the mine, a material circumstance, had not been
disclosed to him.

Thus Pankaj can repudiate the contract.

On the other hand if Pankaj had knowledge that Shruti was acting on her own account and
also that the mine was in existence Pankaj cannot repudiate the transaction nor can he claim
any benefit from Shruti as he had knowledge that Shruti was acting on her own account in the
business of the agency.

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 Bhupendra borrowed a sum of 3 lacs from Atul. Bhupendra appointed Atul as his agent
to sell his land and authorized him to appropriate the amount of loan out of the sale
proceeds. Afterward, Bhupendra revoked the agency. Decide under the provisions of
the Indian Contract Act, 1872 whether the revocation of the said agency by Bhupendra
is lawful. (Nov’ 19)

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

In the instant case, Bhupendra appointed Atul to sell his land to pay off the debt that
Bhupendra owes Atul. Bhupendra later revokes the agency.The agency being agency coupled
with interest shall not come to an end even on death, insanity or the insolvency of the
principal.

Thus, the revocation of agency by Bhupendra is not lawful.

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 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, 1872. (MT Mar’ 19)

An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary prudence, in his
own case, under similar circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied.
i. There should be a real necessity to act
ii. He should not be in a position to communicate with the principal
iii. He must have acted as a man of ordinary prudence
iv. The agent should have adopted the most reasonable and practicable course under the
circumstances, and
v. The agent must have been in possession of the goods belonging to his principal and
which are the subject of contract.

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