Master Test series – 1 26/08/2023

The Indian Contract Act. 1872

Time Allowed - Two Hours Maximum Marks - 60
GENERAL INSTRUCTIONS TO CANDIDATES
Question No. 1 is Compulsory
Answer any FOUR questions out of the remaining FIVE questions.

Hints and Solution

1. (H & S)
(a) Explanation: As per Section 51 of the Indian Contract Act, 1872, when a contract consists of reciprocal promises
to be simultaneously performed, no promisor needs to perform his promise unless the promisee is willing to
perform his reciprocal promise. Such promises constitute concurrent conditions and the performance of one of
the promises is conditional on the performance of the other. If one of the promises is not performed, the other too
need not be performed.
In the given case, Salman khan and Elvish Yadav made contract where Salman khan agreed to deliver a T-shirt
manufacture machine to Elvish Yadav and to receive the payment on delivery. On the delivery date, Elvish Yadav
didn't pay the agreed price.
Therefore, As per the above provisions Salman khan is not bound to deliver goods to Elvish Yadav since payment
was not made by him at the time of delivery of goods.

(b) The Indian Contract Act, 1872 defines Consideration as, "When at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstain
from doing something, such an act or abstinence or promise is called consideration for the promise."
The Legal Rules regarding consideration are
• Consideration must move at the desire of the promisor: An act or abstinence is said to be consideration only if it
moves at the desire of the promisor and not any other person.
• Consideration may not be adequate: It is not necessary in a contract that consideration should match the value of
the reciprocal promise but it must be something which the law would regard as having some value.
• Performance that a person is legally bound to perform: An act which is the duty of a person is not a consideration
for a contract. Hence, a promise to pay money under such agreement is void.
• Consideration must be something which has some values in the eyes of law. If the law does not attaches any value
to it, it is not considered valid consideration.
• Consideration may move from the promisee or any other person who may or may not be a party to the contract
i.e. stranger to a consideration
• Executed and executory consideration: A consideration, the obligation of which is fulfilled by the performance
of an act is said to be executed. When it is still pending, it is said to be executory.
• Consideration should not be unlawful, immoral, or opposed to public policy. Mere presence of consideration is
not enough for a contract, it must be lawful also.
• Consideration may be past, present or future: It is a general principle that consideration is given and accepted in
exchange for the promise. The consideration, if past, may be the motive but cannot be the real consideration of a
subsequent promise. But in the event of the services being rendered in the past at the request or the desire of the
promisor, the subsequent promise is regarded as an admission that the past consideration was not gratuitous.
 (c)
Basis of difference Void Agreement Illegal Agreement
Scope
A void agreement is not necessarily An illegal agreement is always
illegal. void.
Nature Not forbidden under law. Are forbidden under law.
Punishment
Parties are not liable for any punishment Parties to illegal agreements are
under the law. liable for punishment
Collateral Agreement It’s not necessary that agreements Agreements collateral to illegal
collateral to void agreements may also agreements are always void.
be void. It May be valid also.

2. (H & S)
(a) Minor is liable to pay for the necessaries supplied to him: This statement is incorrect. The case of necessaries
supplied to a minor or to any other person whom such minor is legally bound to support is governed by section
68 of the Indian Contract Act, 1872. When necessaries are supplied to a minor, the contract is legally
enforceable, on condition that following conditions are satisfied:
• The contract should be to supply necessaries.
• Such necessaries should be essential for maintaining the standard of Living of the class to which the minor
belongs.
• Also the minor should not have sufficient supply of necessaries already.
But a minor is not liable for any price that he may promise and never for more than the value of the necessaries.
There is no personal liability of the minor, but only his property is liable.
(b) Definition of Acceptance: In terms of Section 2(b) of the Indian Contract Act, 1872 the term acceptance is
defined as “When the person to whom the proposal is made signifies his assent thereto, proposal is said to be
accepted. The proposal, when accepted, becomes a promise”.
Legal Rules regarding a valid acceptance
(1) Acceptance can be given only by the person to whom offer is made. In case of a specific offer, it can be
accepted only by the person to whom it is made. In case of a general offer, it can be accepted by any
person who has the knowledge of the offer.
(2) Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance is valid only when
it is absolute and unqualified and is also expressed in some usual and reasonable manner unless the
proposal prescribes the manner in which it must be accepted. If the proposal prescribes the manner in
which it must be accepted, then it must be accepted accordingly.
(3) The acceptance must be communicated: To conclude a contract between the parties, the acceptance must
be communicated in some perceptible form. Further when a proposal is accepted, the offeree must have
the knowledge of the offer made to him. If he does not have the knowledge, there can be no acceptance.
The acceptance must relate specifically to the offer made. Then only it can materialize into a contract.
(4) Acceptance must be in the prescribed mode: Where the mode of acceptance is prescribed in the proposal,
it must be accepted in that manner. But if the proposer does not insist on the proposal being accepted in
the manner prescribed after it has been accepted otherwise, i.e., not in the prescribed manner, the proposer
is presumed to have consented to the acceptance.
(5) Time: Acceptance must be given within the specified time limit, if any, and if no time is stipulated,
acceptance must be given within the reasonable time and before the offer lapses.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be implied from the silence of the
offeree or his failure to answer, unless the offeree has in any previous conduct indicated that his silence
is the evidence of acceptance.
(7) Acceptance by conduct/ Implied Acceptance: Section 8 of the Act lays down that “the performance of
the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may
be offered with a proposal, constitutes an acceptance of the proposal. This section provides the acceptance
of the proposal by conduct as against other modes of acceptance i.e. verbal or written communication.
 Therefore, when a person performs the act intended by the proposer as the consideration for the promise
offered by him, the performance of the act constitutes acceptance.

3. (H & S)
(a) The contracts do not necessarily have to be carried out with the agreement of both parties under the following
circumstances:
(i) Novation: Where the parties to a contract substitute a new contract for the old, it is called novation. A new
contract may replace an existing one between the same parties or between different parties, with the
discharge of the prior agreement serving as the mutual consideration. Novation can take place only by mutual
agreement between the parties. The old contract is discharged upon novation, and as a result, it is no longer
required to be completed in accordance with Section 62 of the Indian Contract Act, 1872.
(ii) Rescission: This method also discharges a contract. When the parties to a contract agree to rescind it, the
contract need not be performed. (Section 62)
(iii) Alteration: Where the parties to a contract agree to alter it, the original contract is rescinded, with the result
that it need not be performed. In other words, a contract is also discharged by alteration. (Section 62)
(iv) Remission: Every promisee may dispense with or remit, wholly or in part, the performance of the promise
made to him, or may extend the time for such performance or may accept instead of it any satisfaction which
he thinks fit. In other words, a contract is discharged by remission. (Section 63)
(v) Rescinds voidable contract: When a person at whose option a contract is voidable rescinds it, the other party
thereto need not perform any promise therein contained in which he is the promisor.
(vi) Negligence of promisee: The promisor is exempted from any failure to fulfill as a result of any promisee's
neglect or refusal to provide appropriate facilities for the fulfillment of the promise. (Section 67)

(b) As per section 40 of the Indian Contract Act, 1872, the promise under a contract may be performed, as the
circumstances may permit, by the promisor himself, or by his agent or his legal representative.
(i) Promisor himself: If there is something in the contract to show that it was the intention of the parties that the
promise should be performed by the promisor himself, such promise must be performed by the promisor.
This means contracts which involve the exercise of personal skill or diligence, or which are founded on
personal confidence between the parties must be performed by the promisor himself.
(ii) Agent: Where personal consideration is not the foundation of a contract, the promisor or his representative
may employ a competent person to perform it.
(iii) Legal Representatives: A contract which involves the use of personal skill or is founded on personal
consideration comes to an end on the death of the promisor. As regards any other contract the legal
representatives of the deceased promisor are bound to perform it unless a contrary intention appears from the
contract. But their liability under a contract is limited to the value of the property they inherit from the
deceased.
(iv) Third persons: As per Section 41 of the Indian Contract Act, 1872, when a promisee accepts performance of
the promise from a third person, he cannot afterwards enforce it against the promisor. That is, performance
by a stranger, accepted by the promisee, produces the result of discharging the promisor, although the latter
has neither authorised nor ratified the act of the third party.
(v) Joint promisors: When two or more persons have made a joint promise, then unless a contrary intention
appears by the contract, all such persons must jointly fulfill the promise. If any of them dies, his legal
representatives must, jointly with the surviving promisors, fulfill the promise. If all of them die, the legal
representatives of all of them must fulfill the promise jointly
4. (H & S)
(a) (i) As per Section 20 of the Indian Contract Act, 1872, an agreement under by mistake of fact are void. In this
case, there is mistake of fact as to the existence of the subject- matter, i.e., with respect to the selling of horse
which was dead at the time of the agreement. It is unknown to both the parties. Therefore, it is a void
agreement.
(ii) As per Section 27 of the Indian Contract Act, 1872, an agreement in restraint of trade is void. However, a
buyer can put such a condition on the seller of goodwill, not to carry on same business, provided that the
conditions must be reasonable regarding the duration and place of the business. Since in the given case,
restraint to carry on business was forever and anywhere in India, so the agreement in question is void.
 (iii) As per section 2(j) of the Contract Act, “A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable”. In the present case, Mr. William shakespeare agrees to write a book with
a publisher. After few days, William shakespeare dies in an accident. Here the contract becomes void due
to the impossibility of performance of the contract.
(b) An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance
has arrived. When the promisor refuses altogether to perform his promise and signifies his unwillingness
even before the time for performance has arrived, it is called Anticipatory Breach. The law in this regard
has very well summed up in Frost v. Knight and Hochster v. DelaTour:
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as follows:
“When a party to a contract has refused to perform or disable himself from performing, his promise in its
entirety, the promisee may put an end to the contract, unless he has signified, but words or conduct, his
acquiescence in its continuance.”
Effect of anticipatory breach: The promisee is excused from performance or from further performance.
Further he gets an option:
• To either treat the contract as “rescinded and sue the other party for damages from breach of contract
immediately without waiting until the due date of performance; or
• He may elect not to rescind but to treat the contract as still operative, and wait for the time of
performance and then hold the other party responsible for the consequences of non- performance. But
in this case, he will keep the contract alive for the benefit of the other party as well as his own, and
the guilty party, if he so decides on re-consideration, may still perform his part of the, contract and
can also take advantage of any supervening impossibility which may have the effect of discharging
the contract.

5. (H & S)
(a) Explanation: Liquidated damage is a genuine pre-estimate of compensation for damages of certain anticipated
breach of contract. This estimate is agreed between parties to avoid detailed calculation at a later date and the
necessity to convince outside parties.
On the other hand, Penalty is an extravagant amount stipulated and is clearly unconscionable and has no
comparison to the loss suffered by the parties. As per Section 74 of the Indian Contract Act, 1872,“ where a
contract has been breached and either a sum is named in the contract as the amount to be paid in case of such
breach, or the contract contains any other stipulation by way of penalty, then the party complaining of the breach
is entitled to receive from the other party who has broken the contract, a reasonable compensation not exceeding
the amount so named, or as the case may be the penalty stipulated, whether or not actual damages or loss is
proved to have been caused as a result.
A stipulation for increased interest from the date of default may be a case of stipulation by way of penalty.
As per Section 74, courts are empowered to reduce the sum payable on breach whether it is in the form of penalty
or liquidated damages provided that the sum appears to be unreasonably high.
Sri Chunni Lal vs. Mehta & Sons Ltd (Supreme Court)
The Supreme Court laid down the ratio that the aggrieved party should not be allowed to claim an amount greater
than what is specified in the written agreement. But even then, the court has powers to reduce that amount, if it
considers it reasonable to reduce.

(b) Compensation on Breach of Contract: Section 73 of the Indian Contract Act, 1872 provides that when a contract
has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the
contract, compensation for any loss or damage caused to him thereby which naturally arose in the usual course of
things from such breach or which the parties knew when they made the contract, to be likely to result from the
breach of it.
Such compensation is not given for any remote and indirect loss or damage sustained by reason of the breach. The
explanation to the section further provides that in estimating the loss or damage from a breach of contract, the means
which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into
account.
 (c) Where there is a breach of contract for supply of a unique item, mere monetary damages may not be an adequate
remedy for the other party. In such a case, the court may give order for specific performance and direct the party
in breach to carry out his promise according to the terms of contract.
Here, in this case, the court may direct Nirav Modi to supply the item to Bablu because the refusal to supply the
agreed unique item cannot be compensated through money.

6. (H & S)
(a) Definition of Fraud under Section 17: 'Fraud' means and includes any of the following acts committed by a party
to a contract, or with his connivance, or by his agent, with an intent to deceive another party thereto or his agent,
or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Mere silence will amount to fraud: This statement is incorrect as per the Indian Contract Act, 1872. A party to the
contract is under no obligation to disclose the whole truth to the other party. ‘Caveat Emptor’ i.e. let the purchaser
beware is the rule applicable to contracts. There is no duty to speak in such cases and silence does not amount to
fraud. Similarly, there is no duty to disclose facts which are within the knowledge of both the parties.

(b)
Basis of differences Contracts of Insurance Wagering Agreement
Meaning It is a contract to indemnify the It is a promise to pay money or money’s
loss. worth on the happening or non-
happening of an uncertain event.
Consideration The crux of insurance contract is There is no consideration between the two
the mutual consideration (premium parties. There is just gambling for money.
and compensation amount).

Insurable Interest Insured party has insurable interest There is no property in case of wagering
in the life or property sought to be agreement.
insured. There is betting on other’s life and
properties.
Contract of Except life insurance, the contract Loser has to pay the fixed amount on the
Indemnity of insuranceindemnifies the insured happening of uncertain event.
person against loss.

Enforceability It is valid and enforceable It is void and unenforceable agreement.

Premium Calculation of premium is based on No such logical calculations are required
scientific and actuarial calculation in case of wagering agreement.
of risks.
Public Welfare They are beneficial to the society They have been regarded as against the
public welfare.

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