INDIAN CONTRACT ACT QUESTION DISCUSSION

1. X, a guardian, on behalf of Y, a minor, entered into a contract with Z for the

purchase ofa movable property for the benefit of the minor. Is the contract valid
( guardian can enter into contract for minor for his benefits , even they can buy
movable property not immovable)

2. D, a minor, borrowed a sum from M by executing a mortgage of his property in

favour of M. Subsequently, D sued for setting aside the mortgage. Is mortgage valid?
Can M recover the sum advanced to D (here minor is not beneficiary , it is void)

3. X, on attaining majority, gave a promissory note in the satisfaction of one executed

by him for money borrowed when he was a minor. Is this promissory note valid (
ratification not allowed , void)

4. X gifted ` 50,000 to Y his neighbour's wife by executing a registered gift deed without
any consideration. There is no near relation between X and Y. Is this gift valid (
completed gift is valid)
5. X supports Y's infant son without being asked to do so. Y promises to pay X 10,000
for doing so. Later, Y refuses to pay. Can X recover the promised amount from Y? (
promise to pay compensation for voluntary act is valid )

6. X, a client promises to pay Y, his advocate ` 10,000 in addition to his fees if he

succeeds.X succeeds but refuses to pay ` 10,000. Can Y recover from X ( invalid as it
is more that legally bound to do)

7. X owes Y ` 10,000 but this debt is time barred. In a birthday party of Z, who is a
friend of X and Y, X promises Y to pay this debt. Later, X refuses to Y. Can Y recover
the promisedamount from X ( it should be written promise)

8. X beats Y and compels him to sell his house for ` 1,00,000. Y agrees to sell his
house to Y. Y signs the necessary documents for the sale of house and receives the
payment. Later on, Y wants to avoid the contract? Will he succeed? ( coercion ,
voidable , party can accept or reject )

9. X, by a threat to commit suicide induced Y, his wife, and Z, his son, to execute a
release deed in favour of his brother in respect of certain property. Are Y and Z
bound by such release deed? ( coercion , voidable , party can accept or reject )

CA SESHADRI 7
 10. X gave an advertisement on newspaper about auction sale which is to be held on
9th August at Town Hall Palakkad. Y seeing this notice came to town hall on 9th
August. on reaching there Y understood that auction sale was cancelled. Can Y
claim damages from X. (invitation to offer , cannot sue)

11. XYZ Ltd. agreed to lease the land to Mr. A for indefinite years ( uncertain agreements
, void)
12. Mr Kumar has a software shop/he uses his personal computer in this shop for his
business purpose. Due to COVID 19 he was unable to continue his business thus he
stopped doing his business. He took his computer from the shop to his house. Is it a
sale. ( there should be two different parties)

Question – 1:
ABC Infrastructure Ltd. was running business successfully from several years. P was the
purchase manager of company. He authorized his agent Q to buy Raw Material on his behalf
for construction of Roads in Delhi. He instructed Q to buy only Mazboot Brand of Cement @ `
2,000 – 2,500 per ton to maintain quality of Roads in Delhi. However, Q bought 1,000 tons of
Mazboot Brand of cement from Mr. R a very well -known vendor of ABC Infrastructure Ltd.
@`3,500/ - per ton. Mr. Q has not disclosed the fact to R that he was buying cement for ABC
Infrastructure Ltd. When P discovered this aspect, he refused to pay Mr. R and rejects the
cement bought by Q on the ground that Q has exceeded the authority. Mr. R suffered a huge
loss on account of this transaction. Give your opinion in accordance with provisions from the
Indian Contract Act, 1872:
(i) Whether P was bound to pay Mr. R for cement purchased by his agent Mr. Q?
(ii) On the other hand, Q being agent refused to accept any liability to compensate R. In
this situation, Whether Mr. R can file a suit against Q? (7 Marks)

Answer:
Principal’s liability when agent exceeds authority [Section 227 of the Indian Contract Act,
1872]: When an agent does more than he is authorised to do, and when the part of what he
does, which is within his authority, can be separated from the part which is beyond his
authority, so much only of what he does as is within his authority is binding as between him
and his principal.
Principal not bound when excess of agent’s authority is not separable [Section 228]: Where
an agent does more than he is authorized 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 recognize the
transaction.

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When the agent exceeds his authority, misleads the third person in believing that the agent has
the requisite authority in doing the act, then the agent can be made liable personally for the
breach of warranty of authority.

When the agent does not disclose the name of the principal then there arises a presumption
that he himself undertakes to be personally liable.

In the instant case, Q violated the instructions of P by buying cement at 3,500 per ton, which is
beyond the authorized price limit. Furthermore,
Q did not disclose to R that he was buying cement for ABC Infrastructure Ltd. Therefore, the
answers are

(i) No, P was not bound to pay Mr. R, as the agent Q exceeded his authority, and the
deviation was inseparable from the authorized act.
(ii) Yes, Mr. R can file a suit against Q, as Q is personally liable for the contract made
without disclosing about the ABC Infrastructure Ltd. and exceeding the authority given
by the principal.

Question - 2:
According to provisions of the Indian Contract Act, 1872, define the following terms with
reference to contract of guarantee:
(i) Nature and extent of Surety's Liability
(ii) Discharge of a Contract of Surety by Invalidation of the Contract of Guarantee.
(6 Marks)
Answer:
(i) Nature and extent of Surety’s Liability [Section 128 of the Indian Contract Act, 1872]
A. The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract.
B. Liability of surety is of secondary nature as he is liable only on default of principal
debtor.
C. Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
D. A creditor may choose to proceed against a surety first, unless there is an agreement to
the contrary.
(ii) Discharge of a contract of Surety by the invalidation of the contract of guarantee.

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 a) Guarantee obtained by misrepresentation [Section 142]: Any guarantee which has
been obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
b) Guarantee obtained by concealment [Section 143]: Any guarantee which the creditor
has obtained by means of keeping silence as to material circumstances is invalid.
c) Guarantee on contract that creditor shall not act on it until co-surety joins (Section
144): Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co-surety, the guarantee is not valid if
that other person does not join.

Question - 3:
X was running a business of Car on lease. One fine day, Y came to hire a car for 10 days for his
business tour from Delhi to Amritsar. X offered him a Honda city for ` 50,000/- for 10 days on
a condition that petrol and toll expenses will be borne by him. During the journey, engine of
car was choked. Y has to spend ` 10,000/- for repair of engine. When he was coming back
from Amritsar, brakes of car were not working and a major accident of Y happened due to
this. Y was admitted to hospital and paid a bill of ` 50,000 on recovery. Y asked X to
compensate him charges for car repair and hospital expenses amounting ` 60,000/-. X denied
for compensation by saying that he was not aware about the engine and brakes fault. Y filed
a suit against X for recovery of damages. Give your opinion with reference to provisions of the
Indian Contract Act, 1872:
(i) Whether Y can withheld the amount of hire charges ` 50,000/- on account of non-payment
of damages?
(ii) Whether Mr. X was liable to pay Damage as he was not aware of the fact of faults in car?
(7Marks)
Answer:
Bailment: As per Section 148 of the Indian Contract Act, 1872, bailment is the delivery of goods
by one person to another for some purpose, upon a contract, that the goods shall, when the
purpose is accomplished, be returned or otherwise disposed of according to the directions of
the person delivering them.
Bailor’s duty to disclose faults in goods bailed in case of non-gratuitous bailment (Section
150): 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.
Duty to pay necessary expenses in case of non-gratuitous bailment [Section 158]: The bailor is
liable to pay the extraordinary expenses incurred by the bailee.
Bailor’s responsibility to indemnify losses [Section 164]: It is the duty of bailor to indemnify all
the losses and expenses, which bailee has to pay on account of defective goods.

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In the instant case, Y took a car on lease from X for 10 days for ` 50,000. During the journey, Y
has to spend ` 10,000 for repair of engine and paid ` 50,000 for hospital expenses due to
accident because of fault in brakes of car. These are the extraordinary expenses and losses and
it is the bailor’s duty to bear such expenses and losses.

Therefore, the answers are:

(i) Y can withhold the hire charges of ` 50,000 on account of non-payment of damages and
claim an additional `10,000, from X.
(ii) X is liable for the full ` 60,000 (`10,000 repair + ` 50,000 hospital) as it is the bailor’s duty
to supply a car fit for the purpose for which it was hired.

Question - 4:
Give your opinion with reference to provisions of the Indian Contract Act, 1872:
1. Whether Joint promisor and promisee voluntary discharge their obligation even after
death?
2. In case they won't be able to discharge their obligation, whether any of the joint promisor
may be compelled?
3. What would be the situation in case of default by any one of them? (4 Marks)

Answer:
1. According to section 42 of the Indian Contract Act, 1872, if two or more persons have made
a joint promise, ordinarily all of them during their life-time must jointly fulfil the promise.
After death of any one of them, his legal representative jointly with the survivor or survivors
should do so. After the death of the last survivor the legal representatives of all the original
co-promisors must fulfil the promise. Hence, the legal representative can jointly discharge
the obligations of joint promisor and promisee, after their death.
2. As per section 43, each of two or more joint promisors may compel every other joint
promisor to contribute equally with himself to the performance of the promise, unless a
contrary intention appears from the contract. Hence, the joint promisor may be compelled.
3. If any one of two or more joint promisors makes default in such contribution, the remaining
joint promisors must bear the loss arising from such default in equal shares.

Question - 5:
What are the effects of Coercion? "Whether threat to commit suicide is coercion"? Elaborate
with reference to provisions of the Indian Contract Act, 1872. (2 Marks)

Answer:

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Effects of coercion under section 19 of the Indian Contract Act, 1872
(i) Contract induced by coercion is voidable at the option of the party whose consent was so
obtained.
(ii) A person to whom money has been paid or anything delivered under coercion must repay
or return it.

Threat to commit suicide – Whether it is coercion?

Suicide though forbidden by Indian Penal Code is not punishable, as a dead man cannot be
punished. But Section 15 declares that committing or threatening to commit any act forbidden
by Indian Penal Code is coercion. Hence, a threat to commit suicide will be regarded as
coercion.

Question - 6:
With reference to provisions of the Indian Contract Act, 1872 define the following terms:
(i) Quasi-contracts and its salient features
(ii) Responsibility of finder of goods (6 Marks)

Answer:
(i) Quasi- Contracts: A quasi-contract is not an actual contract, but it resembles a contract. It
is created by law under certain circumstances. The law creates and enforces legal rights and
obligations when no real contract exists. Such obligations are known as quasi-contracts. In
other words, it is a contract in which there is no intention on part of either party to make a
contract but law imposes a contract upon the parties.

Salient features of quasi contracts:

a. it does not arise from any agreement of the parties concerned, but is imposed by the law;
and
b. it is a right which is available not against all the world, but against a particular person or
persons only, so that in this respect it resembles a contractual right.
(ii) Responsibility of finder of goods
As per section 71 of the Indian Contract Act, 1872, ‘A person who
finds goods belonging to another and takes them into his custody is
subject to same responsibility as if he were a bailee’.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.

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Question – 7:
Examine the validity of the following agreements under the provisions of the Indian Contract
Act, 1872 and justify your answer:
(i) Mrs. Priya pays a sum of ` 10,000 to a marriage bureau to provide information about the
prospective grooms for her daughter's marriage.
(ii) Bharat agrees with John to sell his white bull. Unknown to both the parties, the bull was
dead at the time of agreement.
(iii) Rishabh sells the goodwill of his shop to Omkar for ` 10,00,000 and promises not to carry
on such similar business within the local limits so long as Omkar carries on like business.
(iv) A property worth ` 2,00,000 was agreed to be sold for just ` 25,000 by a person of
unsound mind. (7 Marks)

Answer:
(i) Under Section 10 of the Indian Contract Act, 1872, a valid contract requires free
consent, lawful consideration, and a lawful object.

In the instant case, the agreement to pay ` 10,000 in exchange for a service
(providing information about prospective grooms) is lawful.

Hence, the agreement is valid.

(ii) According to section 20, where both the parties to an agreement are under a mistake as
to a matter of fact essential to the agreement, there is a bilateral mistake. In such a
case, the agreement is void.

In the instant case, the bull's death (unknown to both parties) constitutes a bilateral
mistake regarding the subject matter of the contract.

Hence, the agreement is void.

(iii) Under Section 27, agreements in restraint of trade are void. However, an exception is
provided for contracts involving the sale of goodwill. The local limits within which the
seller of the goodwill agrees not to carry on similar business must be reasonable.

In the instant case, the restriction is limited to the local area and does not extend
indefinitely.

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 Hence, the agreement is valid.

(iv) According to section 12, a contract by a person who is not of sound mind is void.

In the instant case, a property worth ` 2,00,000 was agreed to be sold for just ` 25,000
by a person of unsound mind.

Hence, the agreement is void.

Question – 8:
What are the agreements which are held to be opposed to public policy under the Indian
Contract Act, 1872. Explain any 6 such agreements. (6 Marks)

Answer:
Some of the agreements which are held to be opposed to public policy are-
1) Trading with enemy: Any trade with person owing allegiance to a Government at war
with India without the licence of the Government of India is void, as the object is
opposed to public policy. Here, the agreement to trade offends against the public policy by
tending to prejudice the interest of the State in times of war.
2) Stifling Prosecution: An agreement to stifle prosecution i.e. “an agreement to present
proceedings already instituted from running their normal course using force” tends to
be a perversion or an abuse of justice; therefore, such an agreement is void. The
principle is that one should not make a trade of felony. The compromise of any public
offence is generally illegal.
Under the Indian Criminal Procedure Code, there is, however, a statutory list of
compoundable offences and an agreement to drop proceeding relating to such
offences with or without the permission of the Court, as the case may be, in consideration
the accused promising to do something for the complainant, is not opposed to public
policy.

3) Maintenance and Champerty: Maintenance is an agreement in which a person

promises to maintain suit in which he has no interest.
Champerty is an agreement in which a person agrees to assist another in litigation in-
exchange of a promise to hand over a portion of the proceeds of the action.
a) It is unreasonable so as to be unjust to other party or
b) It is made by a malicious motive like that of gambling in litigation or oppressing other
party by encouraging unrighteous suits and not with the bonafide object of
assisting a claim believed to be just.

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4) Trafficking relating to Public Offices and titles: An agreement to trafficking in public office
is opposed to public policy, as it interferes with the appointment of a person best
qualified for the service of the public. Public policy requires that there should be no
money consideration for the appointment to an office in which the public is interested.
The following are the examples of agreements that are void; since they are tantamount to
sale of public offices.
(1) An agreement to pay money to a public servant in order to induce him to retire from
his office so that another person may secure the appointment is void.
(2) An agreement to procure a public recognition like Padma Vibhushan for reward is
void.
5) Agreements tending to create monopolies: Agreements having for their object the
establishment of monopolies are opposed to public policy and therefore void.
6) Marriage brokerage agreements: An agreement to negotiate marriage for reward, which
is known as a marriage brokerage contract, is void, as it is opposed to public policy.
7) Interference with the course of justice: An agreement whose object is to induce any
judicial officer of the State to act partially or corruptly is void, as it is opposed to public
policy.
8) Interest against obligation: The following are examples of agreement that are void as they
tend to create an interest against obligation. The object of such agreements is opposed to
public policy.
(1) An agreement by an agent to receive without his principal’s consent compensation
from another for the performance of his agency is invalid.
(2) A, who is the manager of a firm, agrees to pass a contract to X if X pays to A `
200,000 privately; the agreement is void.
9) Consideration Unlawful in Part: By virtue of Section 24, if any part of a single
consideration for one or more objects, or any one or any part of any one of several
considerations for a single object, is unlawful, the agreement is void.”
This section is an obvious consequence of the general principle of Section 23. There is no
promise for a lawful consideration if there is anything illegal in a consideration which must
be taken as a whole. The general rule is that where the legal part of a contract can be
severed from the illegal part, the bad part may be rejected and the good one can be
retained. But where the illegal part cannot be severed, the contract is altogether void.

Question – 9:
Explain with reference to the Indian Contract Act, 1872:
(i) When a contract is said to be induced by "undue influence".
(i) When a party is deemed to be in a position to dominate the will of another.
(6 Marks)

CA SESHADRI 15
Answer:
(i) Undue influence (Section 16): According to section 16 of the Indian Contract Act, 1872,
“A contract is said to be induced by ‘undue influence’ where the relations subsisting
between the parties are such that one of the parties is in a position to dominate the will
of the other and he uses that position to obtain an unfair advantage over the other”.
(ii) Position to dominate the will: Relation between the parties exist in such a manner that
one of them is in a position to dominate the will of the other. A person is deemed to be in
such position in the following circumstances:
(a) Real and apparent authority: Where a person holds a real authority over the other
as in the case of master and servant, doctor and patient and etc.
(b) Fiduciary relationship: Where relation of trust and confidence exists between the
parties to a contract. Such type of relationship exists between father and son,
solicitor and client, husband and wife, creditor and debtor, etc.
(c) Mental distress: An undue influence can be used against a person to get his consent
on a contract where the mental capacity of the person is temporarily or permanently
affected by the reason of mental or bodily distress, illness or of old age.
(d) Unconscionable bargains: Where one of the parties to a contract is in a position to
dominate the will of the other and the contract is apparently unconscionable i.e.,
unfair, it is presumed by law that consent must have been obtained by undue
influence. Unconscionable bargains are witnessed mostly in money-lending
transactions and in gifts.

Question – 10:
What are the conditions to be satisfied for an "Agent's authority in an emergency"
under the provisions of The Indian Contract Act, 1872? (6 Marks)

Answer:
Agent’s authority in an emergency [Section 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:
(i) Agent should not be in a position or have any opportunity to communicate with
his principal within the time available.
(ii) There should have been actual and definite commercial necessity for the agent to act
promptly.
(iii) the agent should have acted bonafide and for the benefit of the principal.
(iv) the agent should have adopted the most reasonable and practicable course under the

CA SESHADRI 16
 circumstances, and
(v) the agent must have been in possession of the goods belonging to his principal and which
are the subject of contract.

Question – 11:
Both a sub-agent and a substituted agent are appointed by the agent, however, there are
some points of distinction between the two. Elaborate any 6 points. (6 Marks)

Answer:
Under the Indian Contract Act, 1872, both a sub-agent and a substituted agent are appointed
by the agent. But, however, the following are the points of distinction between the two.
S.No. Sub Agent Substituted Agent
1. A sub-agent does his work A substituted agent works under the
under the control and instructions of the principal.
directions of agent.
2. The agent not only appoints a The agent does not delegate any part of his task
sub-agent but also delegates to a substituted agent.
to him a part of his own
duties.
3. There is no privity of contract Privity of contract is established between a
between the principal and the principal and a substituted agent.
sub-agent.
4. The sub-agent is responsible A substituted agent is responsible to the
to the agent alone and is not principal and not to the original agent who
generally responsible to the appointed him
principal.
5. The agent is responsible to The agent is not responsible to the principal for
the principal for the acts of the acts of the substituted agent.
the sub-agent.
6. The sub-agent has no right of The substituted agent can sue the principal for
action against the principal remuneration due to him.
for remuneration due to him.
7. Sub-agents may be Substituted agents can never be improperly
improperly appointed. appointed.
8. The agent remains liable for The agent's duty ends once he has named the
the acts of the sub-agent as substituted agent.
long as the sub-agency
continues.

CA SESHADRI 17
Question – 12:
R owns an electronics store. P visited the store to buy a water purifier priced at `54,000/-.
He specifically requested R for a purifier with a copper filter. As P wanted to buy the
purifier on credit, with the intention of paying in 9 equal monthly instalments, R demands a
guarantor for the transaction. S (a friend of P) came forward and gave the guarantee for
payment of water purifier. R sold P, a water purifier of a specific brand. P made payment for
4 monthly instalments and after that became insolvent. Explain with reference to the
Indian Contract Act, 1872, the liability of S as a guarantor to pay the balance price of
water purifier to R.

What will be your answer, if R sold the water purifier misrepresenting it as having a copper
filter, while it actually has a normal filter? Neither P nor S was aware of this fact and upon
discovering the truth, P refused to pay the price. In response to P's refusal, R filed the suit
against S, the guarantor. Explain with reference to the Indian Contract Act 1872,
whether S is liable to pay the balance price of water purifier to R? (7 Marks)

Answer:
As per section 126 of the Indian Contract Act, 1872, the contract of guarantee is defined as a
contract to perform the promise or discharge the liability of a third person in case of his
default.

In this case, S has given a guarantee for P's payment obligation towards R. When P defaulted
after making four monthly instalments and became insolvent, S's liability as a guarantor will
come into existence.

According to Section 128 of the Act, the liability of the surety is co- extensive with that of
the principal debtor, unless it is otherwise provided by the contract.

Since P failed to pay the remaining instalments due to insolvency, S, as the guarantor, is
liable to pay the balance price of the water purifier to R. In the given situation, S will
have to pay the balance amount of ` 30,000 to R. [54,000-(4x6,000)]

In the second situation, R sold the water purifier misrepresenting it as having a copper filter,
while it actually has a normal filter; this changes the situation significantly.

According to Section 142 of the Act, any guarantee which has been obtained by means of
misrepresentation made by the creditor, or with his knowledge and assent, concerning a

CA SESHADRI 18
material part of the transaction, is invalid. Here, guarantee is obtained by means of
misrepresentation made by the creditor (R), and therefore the guarantee is invalid.

Furthermore, under Section 143, any guarantee which the creditor has obtained by means of
keeping silence as to material circumstances, is invalid.

Here R misrepresented the filter type and both P and S were unaware of this fact. The
creditor (R) has obtained the guarantee by remaining silent as to material circumstances.
Therefore, the guarantee obtained from S will be considered to be invalid.

Consequently, S cannot be held liable to pay the balance price of the water purifier to R.

Question – 13:
Explain in brief with reference to the provisions of the Indian Contract Act, 1872, what are
the rights enjoyed by Surety against the Creditor, the Principal Debtor and Co-Sureties?
(6 Marks)
Answer:
In terms of the provisions of the Indian Contract Act, 1872, the surety enjoys the
following rights:
(a) Rights against the creditor;
(b) Rights against the principal debtor;
(c) Rights against co-sureties.
Right against the Creditor
(a) Surety’s right to benefit of creditor’s securities [Section 141]: 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.
(b) Right to set off: If the creditor sues the surety, for payment of principal debtor’s
liability, the surety may have the benefit of the set off, if any, that the principal
debtor had against the creditor.
(c) Right to share reduction: The surety has right to claim proportionate reduction in his
liability if the principal debtor becomes insolvent.

Right against the principal debtor

Rights of subrogation [Section 140 of the Indian Contract Act, 1872]: Where, a guaranteed
debt has become due, or default of the principal debtor to perform a guaranteed duty has

CA SESHADRI 19
taken place, the surety, upon payment or performance of all that he is liable for, is invested
with all the rights which the creditor had against the principal debtor.
This right is known as right of subrogation. It means that on payment of the guaranteed
debt, or performance of the guaranteed duty, the surety steps into the shoes of the creditor.
Implied promise to indemnify surety [Section 145]: In every contract of guarantee there
is an implied promise by the principal debtor to indemnify the surety. The surety is
entitled to recover from the principal debtor whatever sum he has rightfully paid under the
guarantee, but not sums which he paid wrongfully.

Rights against co-sureties

“Co-sureties (meaning)- When the same debt or duty is guaranteed by two or more
persons, such persons are called co-sureties”
(a) Co-sureties liable to contribute equally (Section 146): Unless otherwise agreed, each
surety is liable to contribute equally for discharge of whole debt or part of the debt
remains unpaid by debtor.
(b) Liability of co-sureties bound in different sums (Section 147): The principal of equal
contribution is, however, subject to the maximum limit fixed by a surety to his liability.
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of
their respective obligations permit.

Question – 14:
Mr. J entered into an agreement with Mr. S to purchase his house for ` 20 lakh, within
three months. He also paid ` 50,000/- as token money. In the meanwhile, in an anti-
encroachment drive of the local administration, Mr. S's house was demolished. When Mr. J
was informed about the incident he asked for the refund of token money. Referring to the
relevant provisions of the Indian Contract Act, 1872 state whether Mr. J is entitled to
the refund of the amount paid. (4 Marks)

Answer:
According to section 56 of the Indian Contract Act, 1872, an agreement to do an act
impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful: A contract to do an act

which, after the contract is made, becomes impossible, or, by reason of some event which the
promisor could not prevent, unlawful, becomes void when the act becomes impossible or
unlawful.

According to section 65 of the Indian Contract Act, 1872, when an agreement is discovered

CA SESHADRI 20
to be void, or when a contract becomes void, any person who has received any advantage
under such agreement or contract is bound to restore it, or to make compensation for it
to the person from whom he received it.

In the instant case, Mr. J entered into a contract with Mr. S to purchase his house for `
20 lakh, with a token payment of ` 50,000. The agreement included a condition that the
sale would be completed within three months. Before the completion of the sale, the
house was demolished by the local administration. This event made it impossible for Mr.
S to sell the house to Mr. J as agreed. In this situation, Mr. J is required to refund `
50,000 token money paid to Mr. S, as the contract to sell the house has become void due
to the demolition of the house by the local administration, as a result of which it becomes
impossible to sell the house on the part of S.

Question – 15:
Rama directs Shyam to sell laptops for him and agrees to give Shyam eleven percent (11%)
commission on the sale price fixed by Rama for each laptop. As Government of India put
restrictions on import of Laptops, Rama thought that the prices of laptops might go up in
near future and he revokes Shyam's authority for any further sale. Shyam, before receiving
the letter at his end sold 5 laptops at the price fixed by Rama. Shyam asked for 11%
commission on the sale of 5 Laptops for ` 1 lakh each. Explain under the provisions of the
Indian Contract Act, 1872:
1. Whether sale of laptops after revoking Shyam's authority is binding on Rama?
2. Whether Shyam will be able to recover his commission from Rama, if yes, what will
be the amount of such commission? (3 Marks)

Answer:
When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208 of the Indian Contract Act, 1872]: The termination of the authority of an
agent does not, so far as regards the agent, take effect before it becomes known to
him.

In the instant case,

1) The revocation of Shyam's authority becomes effective only when it is communicated
to and received by Shyam. Since Shyam had not received the revocation letter at the
time of selling the laptops, his authority to sell on behalf of Rama was still valid. Hence,
the sale of laptops conducted by Shyam is binding on Rama.
2) Shyam is entitled to receive his commission for the sales made while he still had the
authority to sell. Since he sold the laptops before receiving the revocation, he is entitled

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 to his commission as per the initial agreement with Rama.
Amount of Commission: Shyam sold 5 laptops at the price fixed by Rama, which is `1 lakh
each. The total sales amount to `5 lakh. The agreed commission rate is 11% i.e. ` 55,000.

Question – 16:
Where a party to a contract refuses altogether to perform, or is disabled from
performing his part of it, the other party has a right to rescind it. Discuss this
statement and the effects of such refusal under the provisions of The Indian Contract
Act, 1872. (6 Marks)

Answer:
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.
Anticipatory breach of a contract may take either of the following two ways:
a) Expressly by words spoken or written, and
b) Impliedly by the conduct of one of the parties.
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:
1) 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
2) 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.

Question – 17:
Explain the term Wagering agreement in the light of the Indian Contract Act, 1872.
Also, explain some transactions resembling with wagering transaction but which are not

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void.
(OR)
What is the meaning of contingent contract? Write briefly its essentials. Also, explain
any three rules relating to enforcement of a contingent contract. (6 Marks)

Answer:
Wagering agreement (Section 30 of the Indian Contract Act, 1872): An agreement by way
of a wager is void. It is an agreement involving payment of a sum of money upon the
determination of an uncertain event. The essence of a wager is that each side should
stand to win or lose, depending on the way an uncertain event takes place in reference to
which the chance is taken and in the occurrence of which neither of the parties has legitimate
interest.
Transactions resembling with wagering transaction but are not void
(i) Chit fund: Chit fund does not come within the scope of wager (Section 30). In case
of a chit fund, a certain number of persons decide to contribute a fixed sum for a
specified period and at the end of a month, the amount so contributed is paid to the
lucky winner of the lucky draw.
(ii) Commercial transactions or share market transactions: In these transactions in which
delivery of goods or shares is intended to be given or taken, do not amount to wagers.
(iii) Games of skill and Athletic Competition: Crossword puzzles, picture competitions and
athletic competitions where prizes are awarded on the basis of skill and intelligence
are the games of skill and hence such competitions are valid.
(iv) A contract of insurance: A contract of insurance is a type of contingent contract and is
valid under law and these contracts are different from wagering agreements.
OR

Essentials of a contingent contract

a) The performance of a contingent contract would depend upon the happening or non-
happening of some event or condition. The condition may be precedent or subsequent.
b) The event referred to as collateral to the contract. The event is not part of the contract.
The event should be neither performance promised nor a consideration for a promise.
c) The contingent event should not be a mere ‘will’ of the promisor. The event should be
contingent in addition to being the will of the promisor.
d) The event must be uncertain. Where the event is certain or bound to happen, the
contract is due to be performed, then it is a not contingent contract.

Definition of ‘Contingent Contract’ (Section 31 of the Indian Contract Act, 1872)

“A contract to do or not to do something, if some event, collateral to such contract, does or

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does not happen”.

Rules Relating to Enforcement of a contingent contract:

The rules relating to enforcement of a contingent contract are laid down in sections 32,
33, 34, 35 and 36 of the Act.
a) Enforcement of contracts contingent on an event happening: Section 32 says that
“where a contingent contract is made to do or not to do anything if an uncertain future
event happens, it cannot be enforced by law unless and until that event has happened.
If the event becomes impossible, such contracts become void”.
b) Enforcement of contracts contingent on an event not happening: Section 33 says that
“Where a contingent contract is made to do or not do anything if an uncertain future
event does not happen, it can be enforced only when the happening of that event
becomes impossible and not before”.
c) A contract would cease to be enforceable if it is contingent upon the conduct of a living
person when that living person does something to make the ‘event’ or ‘conduct’ as
impossible of happening.
Section 34 says that “if a contract is contingent upon as to how a person will act at
an unspecified time, the event shall be considered to have become impossible when
such person does anything which renders it impossible that he should so act within any
definite time or otherwise than under further contingencies”.
d) Contingent on happening of specified event within the fixed time: Section 35 says
that Contingent contracts to do or not to do anything, if a specified uncertain event
happens within a fixed time, becomes void if, at the expiration of time fixed, such event
has not happened, or if, before the time fixed, such event becomes impossible.
e) Contingent on specified event not happening within fixed time: Section 35 also says that
- “Contingent contracts to do or not to do anything, if a specified uncertain event does
not happen within a fixed time, may be enforced by law when the time fixed has
expired, and such event has not happened or before the time fixed has expired, if it
becomes certain that such event will not happen”.
f) Contingent on an impossible event (Section 36): Contingent agreements to do or not to
do anything, if an impossible event happens are void, whether the impossibility of the
event is known or not to the parties to the agreement at the time when it is made.

Question – 18
Mr. A offered to sell 25 chairs to Mr. B @ ` 1,500 per chair on 12.02.2024. A promised
B that he would keep the offer open till 15.02.2024. However, on 13.02.2024, he sold
those chairs to Mr. C @` 1,700 per chair without the knowledge of B. Mr. B communicated

CA SESHADRI 24
the acceptance of the above offer on 14.02.2024. Advise, with reference to provisions of the
Indian Contract Act, 1872 whether Mr. B can claim damages from Mr. A? (2 Marks)

Answer:
In terms of Section 5 of the Indian Contract Act, 1872, a proposal can be revoked at any
time before the communication of its acceptance is complete as against the proposer.

Accordingly, an offer may be revoked by the offeror before its acceptance, even though he
had originally agreed to hold it open for a definite period of time. So long as it is a mere
offer, it can be withdrawn whenever the offeror desires.

In the instant case, B cannot claim damages from A because the offer made by A is a mere
offer and it can be withdrawn whenever A desires.

Question – 19:
In case of breach of contract, the court may award compensation or damages. Explain the
circumstances when court may award ordinary damages, special damages and liquidated
damages under the provisions of the Indian Contract Act, 1872. (3 Marks)

Answer:
Ordinary damages: 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 cause to him thereby, which naturally arose in the usual course of things from such
breach, or which the parties know, when they made the contract, to be likely to result from the
breach of it.
Special damages: Where a party to a contract receives a notice of special circumstances
affecting the contract, he will be liable not only for damages arising naturally and directly
from the breach but also for special damages.
Liquidated damage is a genuine pre-estimate of compensation of damages for certain
anticipated breach of contract. This estimate is agreed to between parties to avoid at a later
date detailed calculation and the necessity to convince outside parties.

Question – 20:
Raghav found gold and diamond studded wristwatch value approximately ` 1,00,000/- on
the roadside. He picked it up and then advertised in the newspaper that the true owner
thereof can take the watch after showing proper evidence. After waiting for a certain
period of time, when the true owner did not tum up, he gifted that wristwatch to his son

CA SESHADRI 25
Mahesh. A few days later, Madhav, the true owner of watch, somehow noticed his watch on
wrist of Mahesh. He approached him to collect the same, but Mahesh refused. In the evening,
Raghav called Madhav and told him that he incurred f 20,000 to find the true owner if he
fails to reimburse him the lawful expenses incurred on finding out the true owner, he will
sue him for recovery thereof or retain the possession of the watch with him till recovery.
Even he can sell the watch for recovery of expenses. Advise whether the following actions of
Raghav were lawful according to provisions of The Indian Contract Act, 1872:
(A) Gifting the wristwatch to his son.
(B) Warning Madhav to sue for recovery of lawful expenses incurred in finding true owner.
(C) Retaining the possession of wristwatch till recovery of lawful expenses.
(D) Selling of wristwatch for recovery of expenses. (4 Marks)

Answer:
Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A person who
finds goods belonging to another and takes them into his custody is subject to same
responsibility as if he were a bailee.
Thus, a finder of lost goods has
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.

The right of finder of lost goods- may sue for specific reward offered [Section 168]: The finder
of goods has no right to sue the owner for compensation for trouble and expense voluntarily
incurred by him in finding the owner and preserving the goods found. But he has a right to
retain the goods against the owner until he receives such compensation.
When finder of thing commonly on sale may sell it [Section 169]: When a thing which is
commonly the subject of sale if lost, if the owner cannot with reasonable diligence be
found, or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may
sell it—
(1) when the thing is in danger of perishing or of losing the greater part of its value, or
(2) when the lawful charges of the finder in respect of the thing found amount to two-
thirds of its value.

Hence, the answers are:

(A) Gifting the wristwatch to his son Mahesh is unlawful. Raghav had no ownership rights
over the watch and could not legally transfer it to someone else.
(B) Warning Madhav to Sue for Recovery of Lawful Expenses: Raghav has no right to sue
Madhav for the expenses voluntarily incurred by Raghav in finding the owner.

CA SESHADRI 26
(C) Retaining Possession of the Wristwatch Until Recovery of Lawful Expenses: Raghav’s
action of retaining the wristwatch until Madhav reimburses him for lawful expenses is
valid.
(D) Selling of Wristwatch for Recovery of Expenses: the watch is not perishable, and the
expenses claimed (₹ 20,000) are far below two-thirds of the value of the watch (₹
1,00,000). Therefore, Raghav does not have the right to sell the watch under these
circumstances, and selling the watch would be unlawful.

Question – 21:
Answer the following as per the provisions of the Indian Contract Act, 1872:
'Agent cannot personally enforce, nor be personally bound by, contracts on behalf of the
principal' however there are some exceptions to this general rule, explain. (4 Marks)

Answer:
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal.
EXCEPTIONS: In the following exceptional cases, the agent is presumed to have agreed to be
personally bound:
(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad/foreign principal: – When an agent has entered into a contract for the
sale or purchase of goods on behalf of a principal resident abroad, the presumption is
that the agent undertakes to be personally liable for the performances of such contract.
(2) Where the agent does not disclose the name of his principal or undisclosed principal;
(Principal unnamed): when the agent does not disclose the name of the principal then there
arises a presumption that he himself undertakes to be personally liable.
(3) Non-existent or incompetent principal: Where the principal, though disclosed, cannot be
sued, the agent is presumed to be personally liable.
(4) Pretended agent – if the agent pretends but is not an actual agent, and the principal
does not rectify the act but disowns it, the pretended agent will be himself liable.
(5) When agent exceeds authority- When the agent exceeds his authority, misleads the third
person in believing that the agent he has the requisite authority in doing the act, then
the agent can be made liable personally for the breach of warranty of authority.

Question – 22:
State the rights of Indemnity-holder when sued. (2 Marks)

Answer:

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Rights of Indemnity-holder when sued (Section 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/indemnifier—
a) all damages which he may be compelled to pay in any suit
b) all costs which he may have been compelled to pay in bringing/ defending the suit and
c) all sums which he may have paid under the terms of any compromise of suit.

Question – 23:
Explain any four differences between Contract of Indemnity and Contract of
Guarantee. (4 Marks)

Answer:
Distinction between a Contract of Indemnity and a Contract of Guarantee
Point of distinction Contract of Indemnity Contract of Guarantee
Number of party/ parties There are only two parties namely There are three parties-
to the contract the indemnifier [promisor] and the creditor, principal debtor
indemnified [promisee] and surety.
Nature of liability The liability of the indemnifier is The liability of the surety is
primary and unconditional. secondary and conditional
as the primary liability is
that of the principal debtor.
Time of liability The liability of the indemnifier The liability arises only on
arises only on the happening of a the non- performance of an
contingency. existing promise or non-
payment of an existing
debt.
Time to Act The indemnifier need not act at the The surety acts at the
request of indemnity holder. request of principal debtor.

Right to sue third party Indemnifier cannot sue a third party Surety can proceed against
for loss in his own name as there is principal debtor in his own
no privity of contract. Such a right right because he gets all
would arise only if there is an the right of a creditor after
assignment in his favour. discharging the debts.
Purpose Reimbursement of loss For the security of the
creditor

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