Contract & Allied (Contract, Sale of Goods, Partnership) · Subject Test 2
Contract & Allied (Contract, Sale of Goods, Partnership) Test 2 — Questions & Solutions
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A husband threatened to commit suicide to make his wife execute a deed transferring property to his brother. On whether this is coercion under Section 15 (per the majority in Chikkam Ammiraju v. Chikkam Seshamma), which statement reflects the majority view?
aIt is coercion because a threat to commit an act forbidden (though unpunishable) by the IPC, causing prejudice, suffices.
bIt is not coercion because suicide is not punishable under the IPC.
cIt is undue influence, not coercion.
dIt is neither, because the threat was directed at the man himself, not the wife.
Answer: A
The majority held suicide, though escaping punishment, is 'forbidden' by the IPC (abetment and attempt being punishable); a threat to commit it to procure an agreement is coercion within Section 15 (Chikkam Ammiraju v. Chikkam Seshamma).
A grandfather gifted a substantial part of his property to his grandson; other relatives sought to set the gift aside as procured by undue influence. Per Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib and Section 16, who must first prove what?
aThe donee must first prove the gift was fair, simply because the parties were related.
bThe person seeking to set aside must first establish that the donee was in a position to dominate his will.
cUndue influence is presumed from near relationship alone, shifting the burden to the donee.
dThe court presumes undue influence whenever the donor is old.
Answer: B
Mere near relationship or old age raises no presumption; the party challenging the transaction must first establish a position to dominate the will, and only then, on an unconscionable bargain, does the burden shift under Section 16(3) (Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib).
A cane grower is free under a State Act whether or not to offer his sugarcane, but if he offers, the factory occupier is bound by law to accept. The grower later claims the resulting agreement was caused by coercion. Following Andhra Sugars Ltd. v. State of A.P., is the consent free?
aNo, because the occupier was compelled by law to contract, which is coercion under Section 15.
bNo, because compulsion of any kind vitiates free consent under Section 14.
cYes, because compulsion of law is not coercion, and the agreement is freely made in the eye of the law.
dYes, but only because the grower, not the occupier, was the party complaining.
Answer: C
'Compulsion of law is not coercion' within Section 15; despite the statutory obligation to accept, the consent is free under Section 14 and the agreement is neither void nor voidable (Andhra Sugars Ltd. v. State of A.P.).
An airline displays on a billboard: 'Fly Mumbai to Delhi for Rs 3,200. Call our airline.' A customer calls and demands a ticket at that fare; the airline refuses. Which statement is legally correct?
aThe billboard is an offer which the customer accepted by calling, so a contract is formed.
bThe contract is formed the moment the advertisement is published to the world at large.
cThe billboard is a standing offer that cannot be revoked once a customer responds.
dThe billboard is only an invitation to offer; the customer's call is the offer, which the airline may accept or reject.
Answer: D
An advertisement of this kind is an invitation to offer, not an offer, because the advertiser cannot intend to bind itself to an unlimited number of respondents; the intending passenger makes the offer, which the airline may accept or reject (Sec. 2(a); Partridge v. Crittenden).
In a self-service store, a customer picks an item off the shelf and puts it in the trolley, then changes his mind at the counter. Following Pharmaceutical Society of Great Britain v. Boots Cash Chemists, at what point is the contract formed?
aWhen the customer offers the goods at the cash counter and the store accepts by taking the price.
bWhen the customer picks the item off the shelf, that being acceptance of the store's offer.
cWhen the item is placed in the trolley, completing acceptance.
dWhen the customer enters the store, as display of goods is a continuing offer.
Answer: A
The display of goods on shelves is only an invitation to offer; the customer makes the offer at the cash counter and the store accepts it there (Pharmaceutical Society of Great Britain v. Boots Cash Chemists).
A shop displays a flick knife in its window with a price ticket, in a jurisdiction where it is an offence to 'offer for sale' such knives. On the principle in Fisher v. Bell, is the shopkeeper guilty of offering it for sale?
aYes, displaying a priced article in a shop window is an offer for sale.
bNo, the display with a price tag is merely an invitation to treat, not an offer for sale.
cYes, because the price ticket shows definite willingness to be bound.
dNo, but only because the article was a prohibited weapon.
Answer: B
Per Fisher v. Bell, display of an article with a price in a shop window is in law merely an invitation to treat, not an offer for sale, so no offence of 'offering for sale' was committed.
A store advertised: '3 Fur Coats Worth $100, First Come First Served, $1 Each.' L was the first to reach the counter and tendered $1; the store refused, citing an unpublished 'house rule' that only women qualified. On the reasoning in Lefkowitz v. Great Minneapolis Surplus Store, what is the legal position?
aThe advertisement was a mere invitation to offer, so the store may refuse.
bThe store could impose the house rule because an advertiser may modify the offer at any time.
cThe advertisement was clear, definite and explicit, became an offer accepted by L, and the store could not add a new condition after acceptance.
dNo contract arose as advertisements can never amount to offers.
Answer: C
Where an advertisement is clear, definite and explicit and leaves nothing open for negotiation, it is an offer; once L accepted by being first and tendering the price, the store could not impose a new arbitrary condition not in the published offer (Lefkowitz v. Great Minneapolis Surplus Store).
Which of the following best states the 'objective' approach to interpreting communications in contract formation, as expressed by Lord Denning?
aA man can escape a contract by proving he privately did not intend to contract.
bThe court ascertains the actual subjective intention in the maker's mind before binding him.
cOnly written communications are interpreted objectively; oral ones go by subjective intent.
dThe court looks at what the party said and did; intention is found in the outward expression, not the secret mind.
Answer: D
The objective test asks what an ordinary, reasonable person would understand from the words and conduct; one cannot escape a contract by claiming a private contrary intention (per Lord Denning, Storer v. Manchester City Council).
A finds and returns B's lost wallet purely on his own, without any prior announcement. Afterwards, B, pleased, promises to pay A Rs 500 but later refuses. Under common law as in Roscorla v. Thomas / In Re McArdle, is the promise enforceable?
aNo, because the act was wholly past and unconnected to any bargain, so consideration is past and the promise is unsupported.
bYes, because returning the wallet is good consideration for B's promise.
cYes, because B made an express promise after receiving the benefit.
dNo, because the promise was not registered.
Answer: A
An act done before and independent of any promise is past consideration and cannot support a later promise at common law (Roscorla v. Thomas; In Re McArdle).
Under Section 2(d) of the Indian Contract Act, in which respect does Indian law on consideration depart from the common law?
aConsideration must always be adequate and commensurate with the promise.
bConsideration may move from 'any person', not necessarily from the promisee, and past acts done at the promisor's desire are valid consideration.
cConsideration can only move from the promisee and never from a stranger.
dAn agreement is enforceable even without any consideration in all cases.
Answer: B
Section 2(d) allows consideration to move from the promisee 'or any other person' and treats acts already done 'at the desire of the promisor' as good consideration, both departures from English law.
Durga Prasad built a market at the request of the District Collector, then took agreements from shopkeepers to pay him commission. The court refused to enforce these. What was the reason in Durga Prasad v. Baldeo?
aThe agreements were not registered under Section 25(1).
bCommission agreements are void as against public policy.
cThe expense was incurred at the desire of the Collector, not of the shopkeepers, so there was no consideration moving at the promisors' desire.
dThe shopkeepers were minors and incapable of contracting.
Answer: C
The work was done at the Collector's desire, not the shopkeepers'; since nothing was done 'at the desire' of the promisors (shopkeepers) nor 'for' them under Sec. 25(2), there was no consideration (Durga Prasad v. Baldeo).
A subscriber put his name down for Rs 100 toward building the Howrah Town Hall, after which the trust engaged a contractor and incurred liability. When he refused to pay, the court held him bound. What distinguished this from a bare charitable promise in Kedar Nath Bhattacharji v. Gorie Mohamed?
aThe subscription was registered under Section 25(1).
bCharitable subscriptions are always enforceable as contracts.
cThe subscriber had received a personal benefit from the town hall.
dOn the faith of the subscriptions the trust undertook an obligation to the contractor, which was consideration for the subscriber's promise.
Answer: D
Because, relying on the subscriptions, the commissioners incurred a liability to the contractor, that undertaking furnished consideration, turning the promise into an enforceable contract (Kedar Nath Bhattacharji v. Gorie Mohamed).
A delivers cloth to B, a tailor, to be made into a coat. B, exercising his lawful charge for the work done, retains the coat until A pays. A tenders only part of the price and demands the coat. Which is correct?
aB has a particular lien entitling him to retain the coat until paid for the labour expended on that very coat
bB has a general lien entitling him to retain the coat for any debt A owes
cB has no lien because he supplied no materials
dB must deliver the coat and sue separately for his charges
Answer: A
Section 170 gives a bailee who has by his labour or skill improved the goods a particular lien to retain those goods until remunerated for that work; it differs from the general lien of bankers, factors, etc. under s.171.
A pledges goods with B as security for a loan. On the due date A defaults. Before selling, what must B the pawnee do, and what are his remedies on default?
aB may sell the goods immediately without any notice and keep any surplus
bB may either sue for the debt retaining the goods as collateral, or sell the goods after giving the pawnor reasonable notice of sale
cB's only remedy is to retain the goods; he can never sell them
dB may sell without notice but must hand over the entire sale proceeds
Answer: B
Under s.176 the pawnee may either sue for the debt retaining the pledged goods as collateral, or sell the goods after giving the pawnor reasonable notice of sale; a sale without such notice is void (Prabhat Bank v. Babu Ram).
A, a minor, pledges goods to B to secure a loan. B advances money and takes possession. Later B seeks to enforce the pledge. What is the legal effect?
aThe pledge is voidable at B's option only
bThe pledge is valid and B may sell the goods on default
cThe pledge by the minor is void, being a contract by a person incompetent to contract
dThe pledge is valid if it was for the minor's necessaries
Answer: C
A contract by a minor is void ab initio (Mohori Bibee v. Dharmodas Ghose); a pledge by a minor is accordingly void, as expressly recognised (Kolipakam Panchalu Varada Rao v. Chitoor Mahadeviah).
A mercantile agent is, with the consent of the owner, in possession of goods. The agent pledges the goods to C, who acts in good faith and without notice of any want of authority. The owner had in fact forbidden the pledge. Can C enforce the pledge?
aNo, because an agent in possession can never pledge against the owner's express prohibition
bNo, because only the true owner can create a valid pledge
cYes, but only if the owner ratifies it
dYes, a pledge by a mercantile agent in possession with the owner's consent, made in the ordinary course of business to a bona fide pledgee without notice, is valid
Answer: D
Under s.178, a pledge by a mercantile agent who is, with the owner's consent, in possession of the goods is valid if made in the ordinary course of business to a pledgee acting in good faith without notice of want of authority.
P appoints A as his agent to sell goods and, for extra commission, A guarantees that the buyers introduced by him will pay. A buyer defaults. What is the nature and consequence of A's engagement?
aA is a del credere agent who, for additional commission, is liable to the principal for the buyer's default
bA is an ordinary agent with no personal liability for the buyer's solvency
cA becomes the principal in the transaction and is solely liable
dA's guarantee is void for want of consideration
Answer: A
A del credere agent, in consideration of extra commission, guarantees to his principal the solvency of buyers he introduces and is liable if they default, occupying a position analogous to a surety.
P, a principal, allows A to act in a manner that leads third parties reasonably to believe A is authorised to contract on P's behalf. A, exceeding his actual authority, contracts with T, who deals in good faith relying on the appearance of authority. Is P bound?
aP is not bound because A exceeded his actual authority
bP is bound under the doctrine of ostensible (apparent) authority created by P's own conduct
cP is bound only if he later ratifies the contract
dT's only remedy is against A personally
Answer: B
Under s.237, where a principal by his words or conduct induces a belief that the agent's acts are within his authority, the principal is bound by acts done within that ostensible authority as against third persons dealing in good faith.
An up-country constituent employs a pucca adatia at Bombay to buy goods. The adatia substitutes his own goods, charges the constituent as a principal, and there is no privity between the constituent and the Bombay seller. How is the pucca adatia's legal position best described?
aHe is a pure agent of the constituent and creates privity between the constituent and the third party
bHe is a del credere agent guaranteeing the seller's performance
cHe acts as a principal qua his constituent, not as a mere disinterested middleman bringing two principals together
dHe is a gratuitous bailee of the goods
Answer: C
A pucca adatia is not the agent of his constituent but acts as a principal as regards the constituent, with no privity between constituent and the up-market seller (Shivanarayan Kabra v. State of Madras).
A car owner entrusts his car to a mercantile agent to sell at not less than a fixed reserve price. The agent, intending to cheat, sells it below the reserve price to a bona fide buyer and pockets the money. The owner sues the buyer for conversion, arguing the agent's fraud destroyed his consent to possession. Which is correct?
aThe buyer gets no title because the agent breached the reserve-price authority
bThe buyer gets no title because larceny by trick always nullifies the owner's consent
cThe owner can recover the car as the agent committed larceny as a bailee
dThe buyer gets a good title, as a consent induced by fraud is real (though not free) and the agent had possession as a mercantile agent
Answer: D
Folkes v King [(1923) 1 KB 282], under the proviso to Sec. 27 SOGA: where a mercantile agent has possession with the owner's consent, a consent induced by fraud is real though not free, so the bona fide buyer obtains a good title despite breach of the reserve-price limit.
Q21Sale of Goods Act, 1930
A woollen merchant orders 'indigo blue cloth' from a cloth manufacturer without stating any specific purpose; the merchant intended it for making liveries for tailors. The cloth is unsuitable for that specific use. Is the manufacturer liable for breach of the implied condition of fitness under S.16(1)?
aNo, because the particular purpose was not made known and the cloth had many possible uses
bYes, because a manufacturer is presumed to know all uses of his cloth
cYes, because reliance on the seller's skill is always presumed
dNo, because indigo cloth is a specified article under a trade name
Answer: A
Jones v Padgett (1890) 24 QBD 650 — where the special purpose is not communicated and the goods have many ordinary uses, the seller is not liable under S.16(1); supplying cloth generally fit suffices.
Q22Sale of Goods Act, 1930
Buses are ordered as 'Fiat Motor Omnibus', the buyer making known they are required for heavy passenger traffic and relying on the seller's skill; the buses suit only touring. The seller invokes the proviso to S.16(1) (sale under a trade name). Which is correct?
aThe proviso applies because the buses were ordered by the name 'Fiat Omnibus'
bThe proviso does not apply because 'Fiat Omnibus' was not yet an established trade name and the buyer relied on the seller's skill
cCaveat emptor applies and the seller is not liable
dThe case falls squarely within S.16(2) merchantable quality
Answer: B
Bristol Tramways v Fiat Motors Ltd. (1910) 2 KB 831 — a trade name must be acquired by user; as it was not yet established and the buyer relied on the seller's skill for the disclosed heavy-traffic purpose, the case fell within S.16(1) and not its proviso.
Q23Sale of Goods Act, 1930
A buyer asks for and buys a bottle of ginger wine from a dealer; while the buyer is opening it, the bottle breaks due to a defect and cuts his hand. Under which provision is the seller liable?
aSection 16(1) fitness for a particular purpose disclosed by the buyer
bSection 14(b) quiet possession
cSection 16(2) implied condition of merchantable quality on a sale by description
dNo liability, as caveat emptor applies
Answer: C
Morelli v Fitch & Gibbons (1928) 2 KB 636 — it was a sale by description and the bottle was not of merchantable quality, so the seller was liable under S.16(2).
Q24Sale of Goods Act, 1930
A seller takes the buyer to a godown and offers to open the casks of glue for inspection, but the buyer, pressed for time, declines to have any cask opened. The glue turns out to be of unmerchantable quality due to a defect that opening a cask would have revealed. Can the buyer rely on the implied condition of merchantability?
aYes, because the buyer did not actually examine the goods
bYes, because merchantability cannot be excluded by mere opportunity to inspect
cNo, because all glue sales are subject to caveat emptor
dNo, because the seller gave a full opportunity to examine and the defect would have been revealed by such examination
Answer: D
Thornett & Fehr v Beers & Sons (1919) 1 KB 486 — the proviso to S.16(2) is satisfied when the seller gives a full opportunity to examine; whether the buyer uses it is immaterial, so the condition as to patent defects is excluded.
Q25Sale of Goods Act, 1930
A retailer buys toy catapults by sample and tests them by pulling the elastic, finding no defect. One catapult later breaks in a child's hands due to a latent defect present equally in the sample. Is the seller liable in a sale by sample under S.17?
aYes, because the goods had a latent defect rendering them unmerchantable, not discoverable on reasonable examination of the sample
bNo, because the retailer's examination revealed no defect
cNo, because the same defect was in the sample, so the bulk corresponded
dYes, but only because the bulk failed to match the sample
Answer: A
Godley v Perry (1960) 1 All ER 36 — under S.17(2) the goods must be free from defects rendering them unmerchantable that are not apparent on reasonable examination of the sample; a latent defect present in the sample still makes the seller liable.
Q26Sale of Goods Act, 1930
A sells goods to B by sample with two parcels, one of 700 bushels and one of 1400 bushels of wheat. B is allowed to inspect the smaller parcel but refused inspection of the larger. What is B's right?
aB must accept the parcel he was allowed to inspect
bB is entitled to refuse to take any of the wheat
cB may only claim damages, not refuse delivery
dB must take both parcels and inspect after delivery
Answer: B
Lorymer v Smith (1822) 1 B & C 1 — under S.17(2) the buyer must have a reasonable opportunity to compare the bulk with the sample; denial of inspection of part entitles the buyer to refuse the whole.
Q27Sale of Goods Act, 1930
A lady takes furniture on terms that the price is payable in two instalments, with the owner entitled to retake the goods if an instalment is unpaid; she has NO option to return the goods. Before the last instalment, she sells the furniture to D, a good-faith buyer. Does D get a good title?
aNo, because she was a mere hirer who could not pass title
bNo, because retaking-on-default clauses defeat any transfer
cYes, because she was a person who had 'agreed to buy' the goods, not a hirer with an option to return
dYes, because every possessor of goods can pass good title
Answer: C
Lee v Butler (1893) 2 QB 318 — without an option to return, the transaction is an agreement to buy, not hire-purchase; the buyer in possession could pass good title (contrast Helby v Mathews where an option to return made the person a mere hirer).
A agrees to pay B Rs. 1,000 if B will marry A's daughter C; but C was already dead at the time of the agreement. Under Section 36, the agreement is:
aVoidable at the option of B
bValid and enforceable when the impossibility is discovered
cVoid only if both parties knew C was dead
dVoid, whether or not the impossibility was known to the parties when the agreement was made
Answer: D
Under Section 36, a contingent agreement to do something if an impossible event happens is void, whether or not the impossibility of the event was known to the parties at the time the agreement was made.
In Gherulal Parakh v. Mahadeodas Maiya, two persons entered into a partnership to enter into wagering contracts and one partner sued the other for his share of the loss. What did the Supreme Court hold regarding the partnership's enforceability?
aThough a wager is void under Section 30, it is not forbidden by law, so a collateral partnership to carry on wagering transactions is not unlawful under Section 23
bThe partnership was void as wagers are forbidden by law under Section 23
cThe partnership was illegal and tainted with immorality
dThe collateral agreement was voidable at the option of the losing partner
Answer: A
In Gherulal Parakh v. Mahadeodas Maiya (AIR 1959 SC 781), the Court held that although a wager is void and unenforceable under Section 30, it is not forbidden by law, so the object of a collateral partnership to carry on wagering transactions is not unlawful under Section 23.
Which of the following best states the distinguishing feature of a wagering agreement as explained in the book (Carlill/Carbolic Smoke Ball reasoning) and Section 30?
aOne party can only win and never lose under the contract
bNeither party has any interest in the event other than the sum or stake he will win or lose, and each may either win or lose
cEach party has an insurable interest in the event apart from the stake
dThe agreement is enforceable only if registered with a recognised body
Answer: B
A wagering contract requires that each party may either win or lose depending on an uncertain event, with neither party having any interest other than the stake; if a party can only win or only lose, it is not a wager (Section 30).
Under Section 28, which of the following clauses in a contract is VALID and not void as being in restraint of legal proceedings?
aA clause reducing the period of limitation for filing a suit below that prescribed by the Limitation Act
bA clause that liquidated damages assessed by the purchaser shall be final and not challengeable in any court or arbitration
cA clause confining jurisdiction to one among two or more courts that are competent to try the suit
dA clause conferring jurisdiction on a court that has no jurisdiction under the Code
Answer: C
Under Section 28, agreements absolutely restraining legal proceedings or shortening the limitation period are void, but an agreement limiting jurisdiction to one among several competent courts is valid (parties cannot, however, vest jurisdiction in a court that otherwise has none).
An agreement in restraint of the marriage of a person is dealt with by Section 26. Such an agreement is void EXCEPT where:
aThe restraint is partial and reasonable
bThe restraint is for a fixed period only
cBoth parties consent to the restraint in writing
dThe person restrained is a minor
Answer: D
Section 26 declares void every agreement in restraint of the marriage of any person other than a minor; the sole exception is where the person whose marriage is restrained is a minor.
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is, under Section 19:
aVoidable at the option of the party whose consent was so caused
bVoid ab initio
cVoidable at the option of either party
dValid but unenforceable
Answer: A
Under Section 19, where consent is caused by coercion, fraud or misrepresentation the agreement is a contract voidable at the option of the party whose consent was so caused (undue influence is similarly dealt with under Section 19A).
Q34Performance, discharge & frustration
In Alopi Parshad and Sons Ltd. v. Union of India (AIR 1960 SC 588), suppliers of ghee already delivered claimed extra payment because of an abnormal wartime price rise. The Supreme Court held:
aAn abnormal rise in prices automatically frustrates the contract under Section 56
bMere onerousness or an uncontemplated rise in prices does not affect the bargain; frustration cannot apply to a contract already performed
cCourts have a general liberty to absolve a party where performance becomes merely onerous
dThe suppliers could claim a higher rate on the ground of equity
Answer: B
The Court held that an abnormal rise in prices does not by itself discharge the bargain and there is no general liberty to absolve a party merely because performance became onerous; further, frustration applies only to executory, not executed, contracts.
Q35Performance, discharge & frustration
A lease of land was duly executed and the lessee obtained an interest in the property; following partition the lessee could not enjoy the land and pleaded frustration. On the authority of Raja Dhruv Dev Chand v. Raja Harmohinder Singh (AIR 1968 SC 1024), the correct position is:
aSection 56 applies to a completed lease, so the lessee is discharged
bBoth lease and an agreement to lease are governed by Section 56 alike
cSection 56 does not apply to a completed conveyance; events that discharge a contract do not invalidate a concluded transfer
dA completed lease is frustrated automatically on any supervening impossibility
Answer: C
The Supreme Court distinguished a completed conveyance from an executory contract; Section 56 does not apply once there is a completed transfer (lease), as the rights then rest under the Transfer of Property Act, not in contract.
Q36Performance, discharge & frustration
Under Sections 40 and 41 of the Indian Contract Act, which statement is INCORRECT?
aA promise to paint a picture for B must be performed personally by the promisor
bWhere personal skill is not intended, the promisor or his representatives may employ a competent person to perform
cA promise to pay a sum of money may be performed by the promisor personally or through another
dIf a promisee accepts performance from a third person, he can still later enforce the promise against the original promisor
Answer: D
Section 41 provides that when a promisee accepts performance from a third person, he cannot afterwards enforce it against the promisor; option (c) reverses this rule, making it incorrect.
Q37Performance, discharge & frustration
A, B and C jointly promise to pay D Rs 3,000. C is compelled to pay the whole; A is insolvent but his estate can pay one-half of his debts. Under Section 43, how much is C entitled to recover, and from whom?
aRs 500 from A's estate and Rs 1,250 from B
bRs 1,000 each from A's estate and from B
cRs 1,500 from B only, nothing from A's estate
dRs 750 from A's estate and Rs 750 from B
Answer: A
Per the illustration to Section 43, C recovers Rs 500 from A's insolvent estate (half of A's Rs 1,000 share) and Rs 1,250 from B, so that the loss from A's default is shared equally between the solvent promisors.
Q38Performance, discharge & frustration
Two or more persons made a joint promise to the promisee, who then released one of them. Under Section 44 of the Indian Contract Act, the effect of such release is that:
aThe release discharges all the joint promisors
bThe other joint promisors are NOT discharged, and the released promisor still remains liable to contribute to them
cThe released promisor is freed from contributing to his co-promisors
dThe contract becomes void for want of a complete set of promisors
Answer: B
Section 44 provides that release of one joint promisor by the promisee neither discharges the other joint promisors nor frees the released promisor from his responsibility to contribute to the others (applied in Devilal v. Himat Ram).
Q39Performance, discharge & frustration
Regarding time being 'of the essence' under Section 55 of the Indian Contract Act, which proposition is correct?
aIn a contract for sale of immovable property, there is a presumption that time IS of the essence
bIn ordinary commercial contracts, time is presumed not to be of the essence
cIn a contract for renewal of a lease, stipulations as to time are treated as of the essence even if not expressly so stated
dFailure to perform at the fixed time always renders the whole contract void
Answer: C
Per Caltex (India) Ltd. v. Bhagwan Devi Marodia, time-stipulations for renewal of a lease are of the essence even if not expressed so; by contrast, in commercial contracts time is ordinarily of the essence and in sale of immovable property there is a presumption against it (Chand Rani v. Kamal Rani).
Q40Breach & remedies, damages (S73–75)
In A.T. Brij Paul Singh v. State of Gujarat, the State illegally rescinded a works contract on which the contractor had executed part of the work. On the contractor's claim for loss of profit, the Supreme Court held:
aLoss of profit can never be claimed in a works contract, only actual expenditure
bThe contractor must prove the exact profit to the rupee or recover nothing
cOnly the security deposit could be refunded, not any profit
dA reasonable expectation of profit is implicit in a works contract and is recoverable as damages where the other party is guilty of breach
Answer: D
A.T. Brij Paul Singh v. State of Gujarat, AIR 1984 SC 1703: a reasonable expectation of profit is implicit in a works contract; on the State's wrongful rescission the contractor is entitled to damages for loss of profit (here assessed at 15% of contract value).
Q41Breach & remedies, damages (S73–75)
In Anglia Television Ltd v. Reed, the actor repudiated the contract before filming, and the company, unable to prove what its profits would have been, claimed wasted expenditure including sums spent before the contract was concluded. Lord Denning held that the plaintiff:
aMust elect between loss of profit and wasted expenditure, and may include pre-contract expenditure reasonably in the parties' contemplation as likely to be wasted
bMay claim both loss of profit and wasted expenditure cumulatively
cCan recover only expenditure incurred after the contract was concluded
dCan recover nothing, since the film's profitability was speculative
Answer: A
Anglia Television Ltd v. Reed, (1971) 3 All ER 690: the plaintiff must elect between loss of profit and reliance (wasted) expenditure; claiming the latter, he may include pre-contract expenditure that the defendant must have contemplated would be wasted on breach.
Q42Breach & remedies, damages (S73–75)
In C. & P. Haulage v. Middleton, the licensee was wrongly excluded from premises ten weeks early, but during those weeks he returned rent-free to his own garage, so awarding his claimed expenditure would leave him better off than full performance. The court held that:
aReliance interest is always recoverable regardless of whether the contract was a bad bargain
bA plaintiff cannot use the reliance measure to escape a bad bargain and be put in a better position than if the contract had been performed
cThe plaintiff was entitled to the full expenditure as wasted reliance loss
dDamages for mental distress were also recoverable for the exclusion
Answer: B
C. & P. Haulage v. Middleton, (1983) 3 All ER 94: the reliance (wasted-expenditure) measure cannot be used to escape a bad bargain; since performance would have left the plaintiff no better off, he recovered only nominal damages of £10.
Q43Breach & remedies, damages (S73–75)
The general rule is that no damages are awarded for mental distress on breach of contract. In Jarvis v. Swans Tours Ltd, the disappointing holiday case, the exception recognised was that damages for disappointment and distress ARE recoverable where:
aThe breach is of any ordinary commercial contract
bThe plaintiff also suffered some financial loss
cThe very object of the contract is to provide pleasure, relaxation or peace of mind
dThe contract was for the carriage of goods
Answer: C
Jarvis v. Swans Tours Ltd, (1973) 1 All ER 71 (and Watts v. Morrow): the exception to the no-distress-damages rule applies where the very object of the contract is to provide pleasure, relaxation, peace of mind or freedom from molestation.
Q44Breach & remedies, damages (S73–75)
Section 74 of the Indian Contract Act, where a sum is named in the contract as payable on breach or a stipulation by way of penalty is made, entitles the aggrieved party to:
aThe whole sum named, automatically, whether or not any loss is shown
bActual damages even if they exceed the sum named in the contract
cNothing unless actual loss is strictly proved in every case
dReasonable compensation not exceeding the sum named, whether or not actual damage is proved
Answer: D
S. 74: on breach where a sum is named or a penalty stipulated, the party is entitled to reasonable compensation not exceeding the amount named, whether or not actual damage is proved; the section abolishes the penalty/liquidated-damages distinction and caps recovery at the named sum.
Q45Breach & remedies, damages (S73–75)
In Fateh Chand v. Balkishan Dass, a contract for sale of immovable property provided that on the buyer's default Rs 24,000 already paid (apart from Rs 1,000 earnest) would be forfeited. The buyer defaulted but the seller proved no loss. The Supreme Court held that:
aA stipulation for forfeiture of an amount already paid is a penalty within Section 74, and only reasonable compensation may be retained; with no loss proved, the sum had to be refunded
bThe Rs 24,000 was earnest money and could be forfeited in full
cSection 74 does not apply to sums already paid, only to sums to be paid
dThe seller could forfeit the amount as a genuine pre-estimate without proving loss
Answer: A
Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405: S. 74 covers forfeiture of money already paid as well as sums to be paid; only reasonable compensation (here, none, as no loss was proved) may be retained, so the forfeited Rs 24,000 was returned.
Q46Indian Partnership Act, 1932 (+ LLP basics)
A father admits his minor son to the benefits of an existing partnership firm by a deed which makes the minor liable for losses and requires him to contribute capital equally and contract debts as a full partner. Following Dharam Vir v Jagan Nath and CIT v Dwarkadas Khetan, what is the legal effect of such a deed?
aThe deed is fully valid as a minor can be a full partner with the guardian's consent
bThe deed is invalid to the extent it makes the minor a full-fledged partner and cannot be enforced even against the other partners
cThe deed is valid but the minor's liability for losses is automatically capped at his share
dThe deed binds only the major partners and the minor's portion is severed and enforced separately
Answer: B
Under Sec. 30 a minor can only be admitted to the benefits of partnership, not made a full partner; a deed making him a full-fledged partner (liable for losses, etc.) is invalid to that extent and unenforceable, as enforcing it severed would require rewriting the contract (Dharam Vir v Jagan Nath).
Q47Indian Partnership Act, 1932 (+ LLP basics)
M/s Prayagchand Hanumanmal is a registered partnership firm. The question arose whether this firm, as such, could itself be a partner in another firm, M/s Mahabir Cold Storage. Following Mahabir Cold Storage v CIT, which statement is correct?
aA firm can be a partner in another firm because it is a legal person under the Act
bA firm can be a partner only if it is registered under the Partnership Act
cA firm cannot itself be a partner in another firm, though its partners may join in their individual capacity
dA firm can be a partner provided all its partners consent in writing
Answer: C
In Mahabir Cold Storage v CIT the Supreme Court held that a partnership firm is not a person or a legal entity but only a collective name for the partners; hence a firm as such cannot be a partner in another firm, though its partners may be partners in another firm in their individual capacity.
Q48Indian Partnership Act, 1932 (+ LLP basics)
In Uduman v Aslam, the partnership deed contained a clause that the partnership would continue 'so long as there are two partners' and would not be determined while two partners existed. The respondents claimed it was a partnership at will dissolvable by notice. The Supreme Court held that the partnership was:
aA partnership at will, since any partner could withdraw by notice
bA particular partnership for a single adventure under Sec. 8
cVoid for uncertainty as no fixed term in years was specified
dNot a partnership at will, because the deed expressly provided for its duration
Answer: D
In Uduman v Aslam the Court held that where the deed expressly provides the duration ('till there are two partners'), it is not a partnership at will; the essence of a partnership at will (Sec. 7) is that it has no provision for its duration or determination.
Q49Indian Partnership Act, 1932 (+ LLP basics)
Three partners A, B and C jointly executed an overdraft agreement with a bank. Later B and C retired without any public notice under Sec. 32(3), claiming the fourth partner had taken over all liabilities. The bank sued all of them for the pre-retirement debt. Following Syndicate Bank v R.S.R. Engg. Works, the retiring partners B and C are:
aStill liable, because there was no tripartite agreement with the creditor discharging them from the pre-existing liability
bDischarged, because retirement automatically ends liability for firm debts
cDischarged, because the continuing partner agreed to take over the liability
dDischarged only if public notice of retirement had been given
Answer: A
Under Sec. 32(2), a retiring partner is discharged from liability to a third party only by an agreement between the retiring partner, the reconstituted firm, and the third party; absent such an agreement the bank may proceed against all defendants (Syndicate Bank v R.S.R. Engg. Works).
Q50Indian Partnership Act, 1932 (+ LLP basics)
An outgoing partner's capital and share continued to be used by the reconstituted firm. The earlier deed allowed 12% interest on capital brought in. Under Sec. 37, what is the outgoing partner entitled to claim, following K.S. Rao v K. Venkateshwarlu?
aInterest at 12% per annum as provided in the earlier partnership deed
bEither 6% per annum interest on the amount, OR such share of profits attributable to the use of his share
cOnly the return of his capital with no interest
dA full continuing one-half share in all future profits of the firm
Answer: B
Under Sec. 37, where an outgoing partner's share is used by the continuing firm without final settlement, he may claim, at his option, either interest at 6% p.a. on his share or such share of profits as is attributable to the use of his share; he cannot claim the higher contractual 12% (K.S. Rao v K. Venkateshwarlu).
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