Contract & Allied (Contract, Sale of Goods, Partnership) · Subject Test 5
Contract & Allied (Contract, Sale of Goods, Partnership) Test 5 — Questions & Solutions
Every question from this subject test with the correct answer and a detailed, source-backed solution. Free to read. Want the real exam feel — a timer, instant scoring, and a topic-wise weakness report? Take it as a test.
50
Questions
7
Topics
+ solutions
Every question
Take this as a timed mock test — instant score + subject-wise analytics. First mock free, then ₹999/year for unlimited.
Persons subscribed to the Howrah Town Hall fund knowing that, on the faith of the subscriptions, the trust would incur liability to a contractor for construction. In Kedar Nath Bhattacharji v. Gorie Mohamed, the subscriber's promise was held:
aEnforceable, the consideration being the undertaking incurred by the fund to pay the contractor on the faith of the subscription
bUnenforceable as a mere promise of charity without consideration
cEnforceable only because it was registered
dVoid as an agreement to make a gift
Answer: A
In Kedar Nath v. Gorie Mohamed, because the fund undertook a liability to the contractor on the faith of subscriptions, that undertaking was good consideration making the subscription enforceable, unlike an ordinary donation.
Durga Prasad built a market at the request of the Collector and later got shopkeepers to agree to pay him a commission. In Durga Prasad v. Baldeo, the agreement with the shopkeepers was held unenforceable because:
aThe agreement was not in writing
bThe expense was not incurred 'at the desire' of the shopkeepers, so it was no consideration moving from them
cConsideration cannot consist of construction work
dA commission can never be valid consideration
Answer: B
In Durga Prasad v. Baldeo, the market was built at the Collector's desire, not the shopkeepers'; since the act was not done at the promisors' desire under Section 2(d), there was no consideration for their promise.
A mother gifted a zamindari to her daughter by registered deed, conditioned on the daughter paying an annuity to the mother's brothers; the daughter executed a separate kararnama in the brothers' favour but then refused to pay. In Chinnaya v. Venkataramaya the brothers could sue because:
aThe brothers were parties to the deed of gift
bPrivity of contract does not apply to family arrangements
cThe deed of gift and the agreement were one transaction and consideration may move from any person under Section 2(d)
dThe daughter had received no consideration at all
Answer: C
In Chinnaya v. Venkataramaya, the gift deed and the kararnama were treated as one transaction; under Section 2(d) consideration (the gift moving from the mother) can move from any person, so the brothers could enforce the daughter's promise.
B and C agree that B will deliver goods to C, and C will pay Rs 1 lakh to A; B delivers but C refuses to pay A. A sues C. Following Tweddle v. Atkinson and Dunlop v. Selfridge, A's claim fails primarily because:
aNo consideration moved from any person
bThe agreement was not registered
cSection 2(d) does not permit consideration to move from a third party
dA is a stranger to the contract (privity of contract), the rule of which still applies in India
Answer: D
While Section 2(d) allows consideration to move from any person, the doctrine of privity of contract (Tweddle v. Atkinson; Dunlop v. Selfridge) still applies in India, so A, being a stranger to the contract, cannot sue.
A husband threatened to commit suicide unless his wife executed a deed transferring property to his brother. In Chikkam Ammiraju v. Chikkam Seshamma the majority held the threat amounted to coercion under Section 15 on the reasoning that:
aAlthough suicide goes unpunished, the act is 'forbidden' by the IPC, and 'forbidden' is wider than 'punishable'
bCommitting suicide is expressly punishable under the IPC
cThreat of suicide is always undue influence, not coercion
dThe threat caused no prejudice to any person
Answer: A
In Chikkam Ammiraju, the majority held the term 'forbidden by the IPC' is wider than 'punishable'; a person who commits suicide escapes punishment only by being beyond the law's reach, so the act is forbidden and the threat is coercion under Section 15.
Under the Andhra Pradesh Sugarcane Act, the factory occupier was bound by law to accept a cane-grower's offer of sale. In Andhra Sugars Ltd v. State of AP, the Supreme Court held the occupier's consent was:
aCaused by coercion under Section 15
bFree consent, since compulsion of law is not coercion
cCaused by undue influence under Section 16
dNo consent at all, making the agreement void
Answer: B
In Andhra Sugars Ltd v. State of AP, the Supreme Court held that 'compulsion of law is not coercion' under Section 15; despite the legal obligation to contract, the consent is treated as free under Section 14.
Regarding the sequence for applying Section 16(3) on undue influence, Raghunath Prasad v. Sarju Prasad lays down that the FIRST matter a court must consider is:
aWhether the bargain is unconscionable
bOn whom the burden of proof lies
cWhether the relations were such that one party was in a position to dominate the will of the other
dWhether the rate of interest was exorbitant
Answer: C
In Raghunath Prasad v. Sarju Prasad, the Privy Council held that the unconscionableness of the bargain is not first; the court must first determine whether the relations put one party in a position to dominate the will of the other.
In Smith v. Land and House Property Corporation, a vendor described a tenant in arrears as a 'most desirable tenant'. The court held this statement of opinion amounted to misrepresentation because:
aAny statement of opinion is automatically a statement of fact
bThe statement was a guarantee that the tenant would keep paying rent
cOpinion can never give rise to relief in any circumstances
dWhere facts are not equally known, an opinion by the party who knows the facts best implies he knows facts justifying that opinion
Answer: D
In Smith v. Land and House Property Corporation, the court held that where facts are within one party's special knowledge, his statement of opinion implies he knows facts justifying it, making the 'most desirable tenant' description a misrepresentation of fact.
A vendor of farmland with no sheep-farming history told an experienced buyer that the land 'would carry two thousand sheep' as his 'idea'. In Bisset v. Wilkinson, this was held NOT actionable because:
aBoth parties were equally able to form an opinion on carrying capacity, so it was a mere honest opinion, not a representation of fact
bIt was fraud, which the buyer failed to prove
cThe buyer had not relied on the statement
dCarrying capacity is always a matter of pure fact
Answer: A
In Bisset v. Wilkinson, since the land had never been a sheep-farm and both parties could equally form an opinion on its capacity, the seller's statement was a mere honest expression of opinion, not an actionable misrepresentation of fact.
A minor mortgaged his houses to a moneylender who advanced money with full knowledge of the minority. In Mohori Bibee v. Dharmodas Ghose, the Privy Council held that a contract with a minor is:
aVoidable at the minor's option, with restitution under Section 64
bVoid ab initio, so Sections 64 and 65 do not apply to enable the lender's restitution
cValid but unenforceable against the minor
dVoidable, with the lender entitled to recover under Section 65
Answer: B
In Mohori Bibee v. Dharmodas Ghose, the Privy Council held a minor's agreement is void ab initio; Sections 64 and 65 presuppose a contract between competent parties and so do not apply, and the lender could not recover the advance.
A guardian entered into a contract on behalf of and for the benefit of a minor daughter to employ her as an artist; the contract was signed by both father and daughter. In Raj Rani v. Prem Adib, the agreement was held unenforceable because:
aA guardian can never contract for a minor under any circumstances
bThe contract was not registered
cThe only promise (the minor's promise of service) was invalid, so the agreement was not supported by consideration
dContracts of service are expressly void under the Apprentices Act
Answer: C
In Raj Rani v. Prem Adib, since no consideration moved from the father and the minor's promise of service was itself invalid (a minor cannot contract), the agreement lacked consideration and was unenforceable.
A person, having attained majority, executed a money bond promising to repay a loan plus interest taken while he was a minor. In Suraj Narain Dube v. Sukhu Aheer, the bond (for the loan alone) was held unenforceable because:
aThe loan to a minor was a valid past consideration under Section 2(d)
bThe loan was 'voluntarily done' and so fell within Section 25(2)
cA promise made on attaining majority can never be enforced
dThe past loan was neither valid past consideration under Section 2(d) nor a 'voluntary' act under Section 25(2), as it was part of a void contract
Answer: D
In Suraj Narain Dube v. Sukhu Aheer, the loan to the minor was part of a void contract: it was not valid past consideration under Section 2(d) nor 'voluntarily done' under Section 25(2), so the later bond for it alone was unsupported by consideration.
Heap sold his lorry to D, then took it back from D on a hire-purchase basis; while in that possession he sold the lorry to P, falsely claiming ownership, and later defaulted, whereupon D seized the lorry (Staff Motors Guarantee Ltd. v British Wagon). Can P recover the lorry from D?
aNo, because Heap held the lorry merely as a bailee under hire-purchase, not as a mercantile agent, so he could pass no good title to P
bYes, because P purchased from a mercantile agent in possession
cYes, because Heap was a buyer in possession under S.30(2)
dNo, because P did not act in good faith
Answer: A
A hire-purchaser holds goods as a bailee, not as a mercantile agent and not as one who has 'agreed to buy'; Heap could therefore pass no title, so P's claim failed and D's seizure stood (Staff Motors Guarantee Ltd. v British Wagon, exceptions to S.27).
A sells goods to B, who for his own convenience leaves them with A. A then fraudulently pledges the goods to C, who takes them in good faith and without notice of the earlier sale. Whose claim prevails?
aB's, because property had already passed to him and A had no right to deal with the goods
bC's, because under S.30(1) a seller continuing in possession after sale can pass good title by sale or pledge to a bona fide transferee
cB's, because a pledge by a non-owner is always void
dC's, only if A had been expressly authorised by B to pledge the goods
Answer: B
Section 30(1), Sale of Goods Act, protects a bona fide transferee where the seller continues in possession; A's pledge to C operates as if A were authorised by B, so C's pledge prevails over the true owner B.
Regarding 'buyer in possession' under S.30(2), Sale of Goods Act, which statement is correct?
aA person who takes goods on hire-purchase has 'agreed to buy' and can pass good title under S.30(2)
bA buyer who has only conditionally agreed to buy cannot pass any title
cEven if the buyer obtained possession with the seller's consent, no title passes unless the original seller himself had the right to sell the goods
dThe transferee from such a buyer gets title even with notice of the seller's lien
Answer: C
Under S.30(2) the original seller must have had a right to sell; if he was a thief or finder, neither the buyer in possession nor any subsequent purchaser gets title (National Employee's Mutual Gen. Ins. v Jones). A hire-purchaser has not 'agreed to buy' (Helby v Matthews).
M induced a bank manager to hand over share certificates by promising to fetch a pay order, but instead bolted away with the papers despite the manager's protest; M then pledged the shares to a bona fide pledgee (Central National Bank v United Industrial Bank). Is the pledge valid under S.30(2)?
aYes, because consent obtained even by fraud is still real consent
bYes, because the pledgee acted in good faith and without notice
cNo, because shares can never be the subject of a valid pledge
dNo, because the manager never intended to give delivery at all, so M obtained possession without consent — the act amounted to theft
Answer: D
S.30(2) requires real consent to possession; here the manager had no intention to deliver and M took the shares against his protest, which was theft, so the buyer-in-possession exception did not apply and the pledge was invalid.
One of several joint owners of goods is, with the permission of the co-owners, in sole possession of the goods and sells them to a buyer who acts in good faith without notice of the seller's lack of authority. Under the Sale of Goods Act, the buyer:
agets a good title under S.28
bgets no title, because a co-owner cannot sell the whole of jointly owned goods
cgets title only to the selling co-owner's undivided share
dgets title only if the other co-owners later ratify the sale
Answer: A
Section 28, Sale of Goods Act, provides that where one of several joint owners is in sole possession with the permission of the others, his sale conveys good title to a good-faith buyer without notice of the want of authority.
Under the Indian Partnership Act, on the principle that partnership is an extension of the law of agency, which provision declares that each partner is the agent of the firm for the purpose of contracting debts and obligations in the usual course of business?
aSection 19
bSection 18
cSection 22
dSection 25
Answer: B
Section 18 of the Partnership Act states that each partner is the agent of the firm for the purposes of the business of the firm; the act of any partner in the usual course thereby binds the whole firm (mutual agency).
Concerning a partner's 'implied authority' as agent of the firm under the Partnership Act, which statement is correct regarding the power to borrow money or pledge firm property?
aEvery partner in every firm has implied authority to borrow and pledge firm property
bNo partner ever has implied authority to borrow; express authority is always required
cA partner in a non-trading firm (e.g. a solicitors' firm or an auctioneer) generally has no implied authority to borrow or pledge so as to bind co-partners
dImplied authority to borrow is confined exclusively to trading firms and can never exist in a non-trading firm
Answer: C
Under S.19 the scope of implied authority depends on the nature of the business; in a trading firm a partner may borrow and pledge, but in a non-trading firm (solicitor, auctioneer) he cannot — though even there it may exist if borrowing is usual for that business (Bank of Australasia v Breillat).
A bargains to indemnify a public officer against the consequences of seizing certain property; the seizure is, on the facts known to both parties, necessarily tortious. Under the law relating to contracts of indemnity, the bargain is:
avalid, because indemnity for any act is enforceable once consideration exists
bvalid, because the officer acted in his official capacity
cvoidable at the option of the officer only
dvoid, because a bargain to save a person harmless from the consequences of an act necessarily unlawful is itself invalid
Answer: D
A contract to indemnify against the consequences of an act necessarily unlawful on facts known to the parties is invalid as tending to promote illegal acts; only where illegality depends on extrinsic facts unknown to the parties is the indemnity valid (Arnold v Clifford; cf. S.23).
Q21Sale of Goods Act, 1930
An owner gave his car to a mercantile agent to sell subject to a reserve price. The agent sold it below the reserve to a bona fide purchaser and misappropriated the proceeds. In Folkes v King (1923), the purchaser:
aGot a good title, because he bought in good faith from a mercantile agent in possession with the owner's consent
bGot no title, since the sale below reserve was outside the agent's authority
cGot no title, the owner's consent having been nullified by the agent's fraud
dGot no title, as a mercantile agent cannot exceed the price fixed by the owner
Answer: A
Under the proviso to Sec. 27, a mercantile agent in possession with the owner's consent who sells in the ordinary course to a good-faith buyer passes a good title, even contrary to the owner's instruction on price (Folkes v King).
Q22Sale of Goods Act, 1930
A fraudulent person obtained a ring from a jeweller by impersonating a respectable man and paying with a worthless cheque; before the fraud was discovered he pledged the ring to a bona fide pledgee. In Phillips v Brooks (1919), the pledgee:
aGot no title, because the contract was void for mistake as to identity
bGot a good title, since the contract was voidable for fraud and had not been rescinded before the pledge
cGot no title, as a pledge is not a 'sale' within Sec. 29
dGot a good title only because the jeweller failed to give notice of rescission
Answer: B
Under Sec. 29, where goods are obtained under a contract voidable for fraud and not yet rescinded, a good-faith transferee for value gets a good title; the contract here was voidable (not void), so the pledgee was protected (Phillips v Brooks).
Q23Sale of Goods Act, 1930
A buyer purchases tins of condensed milk which the seller has full ownership of, but the tins bear labels that infringe the registered trade mark of a third party, leading customs to detain the goods until the labels are removed. On these facts, which statement is correct?
aThe seller is not liable because he had full ownership and could pass good title to the buyer
bOnly the implied warranty of quiet possession is broken; no condition is breached because property could pass
cThe seller has broken the implied condition that he had a right to sell the goods, the 'right to sell' being wider than mere power to pass property
dThe buyer's sole remedy is under the law of torts against the third-party trade-mark owner
Answer: C
On the facts of Niblett Ltd. v Confectioners' Materials Co., the seller broke the implied condition under Sec.14(a) that he has a right to sell; 'right to sell' is wider than the power to pass property, so a seller who can be stopped by process of law from selling has no right to sell.
Q24Sale of Goods Act, 1930
Goods are sold by sample as well as by description. The bulk delivered exactly matches the sample shown, but does not answer to the description in the contract. What is the buyer's position?
aThe buyer cannot reject because correspondence with the sample is conclusive of due performance
bThe buyer may reject only if the deviation from the sample is also proved
cThe buyer must accept the goods and is confined to damages, the breach being merely of warranty
dThe buyer may reject the goods, because under Sec.15 it is not sufficient that the bulk corresponds with the sample if the goods do not also correspond with the description
Answer: D
Sec.15 provides that in a sale by sample as well as description it is not enough that the bulk corresponds with the sample if the goods do not also correspond with the description; on this principle, in Nichol v Godts the adulterated rape oil matching the sample but not the description was rejectable.
Q25Sale of Goods Act, 1930
A seller sells goods 'with all faults'. The goods supplied do not answer to the contractual description. Relying on the rule of correspondence with description under Sec.15, which statement is correct?
aThe goods must answer to the description even where sold 'with all faults', and the buyer may reject for non-correspondence despite such a clause
bThe exemption clause 'with all faults' bars rejection, since the buyer agreed to take the goods as they were
cCorrespondence with description is a warranty, so the buyer can only claim damages
dThe clause converts the condition as to description into a mere representation outside the contract
Answer: A
The requirement of correspondence with description under Sec.15 is strict: goods must answer to the description even where sold 'with all faults', and no exemption clause can compel a buyer to take a thing different from what he contracted to buy.
Q26Sale of Goods Act, 1930
An unpaid seller delivers goods to the buyer's shipping agents, who load them on board a ship. The goods are then returned to the seller for repacking, and while still with the seller on that errand the buyer becomes insolvent. The seller, still unpaid, refuses to deliver, claiming a lien. Is the claim good?
aYes, because possession has come back to the seller, his lien automatically revives
bNo, because having lost his lien by delivery to the shipping agents, taking the goods back for a purpose other than stoppage in transit does not revive it
cYes, because the buyer's insolvency entitles the seller to retain the goods until paid
dNo, but the seller may instead exercise the right of stoppage in transit
Answer: B
On the facts of Valpy v Gibson, lien lost by delivery to the carrier/agent does not revive where the seller regains possession for a purpose (repacking) other than exercising stoppage in transit; hence the refusal to deliver was wrongful (Sec.49).
Q27Sale of Goods Act, 1930
An unpaid seller, after the buyer's default, gives the buyer notice and resells two cars; he finds a buyer for only one. He then sues for the price of the unsold car plus advertising expenses and the shortfall on the sold car. What is the legal position on resale under Sec.54?
aHe may recover the full price of the unsold car because property had already passed to the original buyer
bHe may recover neither the shortfall nor the expenses, as resale extinguishes all claims against the buyer
cOn resale the contract is rescinded and the goods revest in the seller, so he cannot recover the unsold car's price but may recover the shortfall on the sold car and the advertising expenses
dBecause no right of resale was expressly reserved, the resale itself was wrongful and gives the seller no remedy
Answer: C
On the facts of R.V. Ward Ltd. v Bignall under Sec.54, a valid resale rescinds the contract and revests the goods in the seller; he cannot recover the unsold car's price but may recover the shortfall on the car actually resold together with the advertising expenses.
A bank guarantee that permits the creditor to invoke it upon the happening of an uncertain future event is, under the Contract Act:
aA void agreement as it stakes money on an uncertain event
bAn absolute obligation enforceable irrespective of any event
cA wagering agreement and hence unenforceable
dA contingent contract under Sec. 31 that cannot be enforced until the event happens (Sec. 32)
Answer: D
Such a guarantee is a contingent contract under Sec. 31, and by Sec. 32 cannot be enforced unless and until the uncertain future event occurs (Western Coalfields Ltd. v. Rajesh).
A partnership is formed to carry on wagering transactions. Is the partnership agreement itself unlawful under Sec. 23?
aNo, because though a wager is void and unenforceable under Sec. 30, it is not forbidden by law
bYes, because a wager is forbidden by law and so is its object
cNo, but only if no actual wager is in fact placed
dYes, because anything void under Sec. 30 is also forbidden under Sec. 23
Answer: A
A wager is void and unenforceable under Sec. 30 but is not 'forbidden by law'; hence a collateral partnership to carry on wagering is not unlawful under Sec. 23 (Gherulal Parakh v. Mahadeodas).
Under Sec. 68 of the Contract Act, where necessaries suited to his condition in life are supplied to a minor (a person incapable of contracting), the liability is:
aA personal liability of the minor enforceable like any contract debt with interest
bA quasi-contractual liability limited to reimbursement out of the minor's property
cNo liability at all since a minor's agreement is void
dEnforceable for whatever price the minor agreed to pay
Answer: B
Under Sec. 68, the minor is not personally liable; only his property is liable for necessaries, and never for more than their value—a quasi-contractual obligation (Mohori Bibee v. Dharmodas Ghose).
Where consent to an agreement is caused by coercion (Sec. 15) or undue influence (Sec. 16), the resulting contract is:
aVoid ab initio in all cases
bValid and binding, the remedy being only in damages
cVoidable at the option of the party whose consent was so caused
dVoidable at the option of either party
Answer: C
An agreement induced by coercion or undue influence is voidable at the option of the party whose consent was so caused; only where consent is wholly absent is the contract void.
Both parties to an agreement are under a mistake as to a matter of fact essential to the agreement. Under the Contract Act, the agreement is:
aVoidable at the option of the mistaken parties
bValid, because mistake of fact does not affect a contract
cVoidable only if the mistake was caused by the other party
dVoid (Sec. 20)
Answer: D
Under Sec. 20, where both parties are under a mistake as to a matter of fact essential to the agreement, the agreement is void; a unilateral mistake of fact (Sec. 22) does not by itself make a contract voidable.
A executes a deed reciting that he has 'sold' his land to B for Rs. 100, the sale to be void if A repays Rs. 100 with interest within two months, failing which the sale becomes absolute. This was construed as:
aA contingent sale under Chapter III—void if A pays in time, enforceable as a sale if he does not
bA wagering agreement void under Sec. 30
cAn absolute sale not affected by the repayment clause
dA void agreement for uncertainty of consideration
Answer: A
The deed was held to evidence a contingent sale: under Sec. 35 the sale would be void if A paid within the time, and would become enforceable if he did not (Asvath Narayan Astaputre v. Chimabai).
Q34Performance, discharge & frustration
A, B and C jointly promise to pay D Rs 3,000. C is compelled to pay the whole sum. A is insolvent but his estate can pay one-half of his debts. Under Section 43 of the Indian Contract Act, what can C recover by way of contribution?
aRs 1,000 each from A's estate and from B
bRs 500 from A's estate and Rs 1,250 from B
cRs 1,500 from B only, nothing from A
dNothing, as joint promisors are only jointly and not severally liable
Answer: B
Per Illustration (b) to Section 43, each joint promisor's equal share is Rs 1,000; since A is insolvent and his estate pays half his debts, C recovers Rs 500 from A's estate, and the deficiency is shared, so C recovers Rs 1,250 from B.
Q35Performance, discharge & frustration
Two or more persons make a joint promise to a promisee. The promisee releases one of the joint promisors. Under Section 44 of the Indian Contract Act, what is the effect of that release?
aAll the joint promisors are discharged
bThe released promisor alone remains liable for the whole
cThe release does not discharge the other joint promisors, nor does it free the released promisor from liability to contribute to his co-promisors
dThe contract becomes voidable at the option of the remaining promisors
Answer: C
Section 44 provides that a release of one joint promisor by the promisee does not discharge the other joint promisors, nor does it free the released promisor from his responsibility to the other joint promisors (applied in Devilal v. Himat Ram).
Q36Performance, discharge & frustration
Regarding when time is treated as of the essence of a contract, which of the following correctly states the position summarised by the Supreme Court (Chand Rani v. Kamal Rani; Caltex (India) Ltd. v. Bhagwan Devi Marodia; China Cotton Exporters)?
aTime is of the essence in sale of immovable property but not in commercial contracts
bTime is always of the essence unless the parties expressly state otherwise
cTime is never of the essence unless the contract is for sale of immovable property
dTime is presumed of the essence in commercial contracts, presumed NOT of the essence in sale of immovable property, but is of the essence in an option for renewal of a lease
Answer: D
The cases establish that in commercial contracts time is ordinarily of the essence; in sale of immovable property there is a presumption against time being of the essence; and stipulations for renewal of a lease are construed as of the essence even if not expressly stated.
Q37Performance, discharge & frustration
Under a sale agreement, the seller (Nathulal) had to first get his brother's name removed from the revenue records, after which the buyer (Phoolchand) would pay the balance by a fixed date. The seller never removed the brother's name but terminated the contract when the buyer did not pay by the date. In Nathulal v. Phool Chand, the Supreme Court held:
aWhere obligations are to be performed in sequence, the seller could not demand payment without first performing his own earlier obligation; the buyer was not in breach
bThe buyer was in breach because the time for payment had been fixed
cBoth parties were equally in breach, so neither could terminate
dThe termination was valid because time was of the essence
Answer: A
In Nathulal v. Phool Chand, applying the rule on order of reciprocal promises (Section 52), the Court held that since the seller's obligation came first in sequence and he had not performed it, he could not require payment, and the willing buyer was not in breach.
Q38Performance, discharge & frustration
An insured paid the first premium by cheque and received a cover note; the car was damaged in an accident, after which the cheque was dishonoured for want of funds. The insurer repudiated the claim. In National Insurance Co. Ltd. v. Seema Malhotra, the Supreme Court, applying Sections 51, 52 and 54, held that:
aThe insurer must pay because the cover note created an absolute liability
bIssuing a cheque towards premium creates reciprocal promises; on dishonour the insurer need not perform and the insured cannot claim, so repudiation was justified
cThe policy could only be cancelled prospectively, so the insurer remained liable for the accident
dThe insured could enforce the policy because the accident preceded the cheque's dishonour
Answer: B
In National Insurance Co. Ltd. v. Seema Malhotra, the Court treated the cheque towards premium as a reciprocal promise; on dishonour the insurer was absolved from performing and the insured could not claim, so the repudiation was legally justified.
Q39Performance, discharge & frustration
A builder failed to give possession of a flat and entered a fresh agreement to instead pay the buyer Rs 9,51,000 in instalments, the agreement providing that the rights under the original contract would stand extinguished only on payment of the entire amount. The builder did not pay. In Lata Construction v. Dr. Rameshchandra Shah, the Supreme Court held:
aThe original contract was fully novated and discharged the moment the second agreement was signed
bThere was no consideration for the second agreement, so it was void
cSince the original rights were to be extinguished only on full payment and payment was not made, the original contract subsisted and the buyer could enforce it
dNovation discharged the buyer's right to approach the consumer forum
Answer: C
In Lata Construction v. Dr. Rameshchandra Shah, the Court held novation under Section 62 requires complete substitution; here the original rights were to extinguish only upon full payment, which never occurred, so the original contract subsisted and the buyer could claim deficiency in service.
Q40Breach & remedies, damages (S73–75)
The general rule is that no damages are awarded for mental distress or disappointment on breach of contract. The recognised exception, applied where a holiday fell far short of the brochure's promises, is that damages for distress are awarded where:
athe breach was deliberate and in bad faith
bthe plaintiff is a consumer rather than a trader
cthe contract is for the sale of land
dthe very object of the contract is to provide pleasure, relaxation, peace of mind or freedom from molestation
Answer: D
Jarvis v. Swans Tours Ltd, (1973) 1 All ER 71 (and Watts v. Morrow, (1991) 1 WLR 1421): mental-distress damages lie in the exceptional class of contracts whose very object is to provide pleasure, relaxation or peace of mind.
Q41Breach & remedies, damages (S73–75)
Under Section 74, when a sum is named in the contract as payable on breach or a penalty is stipulated, the party complaining of breach is entitled to receive:
areasonable compensation not exceeding the amount named or the penalty stipulated, whether or not actual damage is proved
bthe named sum in full, as the parties' agreed pre-estimate, in every case
cthe named sum only if actual loss exceeding it is strictly proved
ddouble the named sum where the breach is wilful
Answer: A
Section 74: the court awards reasonable compensation not exceeding the stipulated sum, whether or not actual damage is proved; the stipulated amount is only a ceiling (Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405).
Q42Breach & remedies, damages (S73–75)
In Fateh Chand v. Balkishan Dass, the buyer in default of registration was to forfeit Rs 24,000 already paid (beyond the Rs 1,000 earnest). The Supreme Court held that the words "any other stipulation by way of penalty" in Section 74:
aapply only to sums yet to be paid, not to amounts already paid and liable to forfeiture
bcomprehensively cover every covenant involving a penalty, including forfeiture of money already paid, so the court awards only reasonable compensation
cpermit forfeiture of any deposit regardless of proof of loss
dexclude forfeiture clauses, which are governed by the Specific Relief Act
Answer: B
Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405: Section 74 covers forfeiture of money already delivered as much as sums to be paid; as no loss was shown, the forfeited Rs 24,000 was ordered refunded.
Q43Breach & remedies, damages (S73–75)
In Maula Bux v. Union of India the government forfeited security deposits for breach of supply contracts without proving loss. The Supreme Court held that the words "whether or not actual damage or loss is proved" in Section 74 mean that:
athe stipulated sum is always payable irrespective of proof of loss
bsecurity deposits can never be forfeited
cwhere loss can be assessed, the claimant must prove it; the dispensation from proof applies mainly where the court cannot assess compensation and the sum is a genuine pre-estimate
donly earnest money, not security deposits, is governed by Section 74
Answer: C
Maula Bux v. Union of India, AIR 1970 SC 1955: where loss is ascertainable the party must prove it; the "whether or not" clause aids cases where the court cannot assess compensation and the named sum is a genuine pre-estimate. As no loss was shown, the deposits were refunded.
Q44Breach & remedies, damages (S73–75)
In ONGC v. SAW Pipes Ltd, refining the position in Maula Bux, the Supreme Court held that where the contract clearly and unambiguously stipulates liquidated damages as a genuine pre-estimate agreed by experts:
athe aggrieved party must still always prove actual loss before recovering anything
bthe clause is void as it ousts the court's jurisdiction
conly nominal damages are recoverable irrespective of the clause
dsuch compensation may be awarded without proof of actual loss, and the burden shifts to the party in breach to show the stipulated amount is unreasonable or a penalty
Answer: D
ONGC v. SAW Pipes Ltd, AIR 2003 SC 2629: Section 74 read with 73 allows award of a clearly stipulated genuine pre-estimate without proof of loss, unless the party in breach shows it is unreasonable or a penalty.
Q45Breach & remedies, damages (S73–75)
Distinguishing earnest money from liquidated damages in Hanuman Cotton Mills v. Tata Air Craft Ltd, the Supreme Court laid down that earnest money, to be such, must among other things:
abe given at the moment the contract is concluded as a guarantee of performance, form part of the price if the deal goes through, and be liable to forfeiture on the buyer's default
balways equal a fixed percentage of the price set by statute
cbe returnable with interest even where the buyer defaults
dbe paid only after part-performance has begun
Answer: A
Hanuman Cotton Mills v. Tata Air Craft Ltd, AIR 1970 SC 1986: earnest is given at conclusion of the contract as a guarantee, is adjusted toward price on completion, and is forfeited on the buyer's default; forfeiture of a reasonable earnest does not amount to a penalty under Section 74.
Q46Indian Partnership Act, 1932 (+ LLP basics)
A partner transfers his entire interest in the firm to an outsider by way of an absolute assignment. During the continuance of the firm, which right does the transferee acquire under Sec. 29(1)?
aThe right to interfere in the conduct of the business
bOnly the right to receive the share of profits of the transferring partner, accepting the account of profits agreed by the partners
cThe right to require accounts and inspect the books of the firm
dThe right to become a partner in the firm in place of the transferor
Answer: B
Under Sec. 29(1), during the continuance of the firm the transferee cannot interfere in business, require accounts, or inspect books; he is entitled only to receive the transferring partner's share of profits and must accept the partners' agreed account of profits.
Q47Indian Partnership Act, 1932 (+ LLP basics)
A partnership deed places a restriction on a partner's authority to borrow money. One partner, exceeding this internal limit but doing an act otherwise within his implied authority, borrows from a third party who has no knowledge of the restriction. As regards the firm's liability to that third party, which statement is correct?
aThe firm is not bound, since the partner breached an express restriction
bThe firm is not bound, because borrowing is one of the statutory restrictions under Sec. 19(2)
cThe firm is bound, because a Sec. 20 restriction does not bind a third party who has no knowledge of it
dThe firm is bound only if the third party later obtains ratification from the other partners
Answer: C
Per Sec. 20 and Motilal v Unnao Commercial Bank, a restriction by contract among partners does not bind a third party unless he has actual knowledge of it; the firm therefore remains liable to a third party ignorant of the restriction.
Q48Indian Partnership Act, 1932 (+ LLP basics)
With consent of all partners, a minor is admitted to the benefits of an existing firm, the guardian agreeing on his behalf to contribute capital and to share profits, but the minor is not made liable for losses. The Department challenged the firm's validity. Which proposition is correct?
aA deed making the minor a full-fledged partner liable to losses is valid
bA guardian can never accept benefits of partnership on a minor's behalf
cA minor cannot be admitted to the benefits of partnership in any circumstances
dSo long as the deed only confers benefits and does not make the minor a full partner, it is valid; a guardian may do all that is necessary to secure the benefits, including agreeing to contribute capital
Answer: D
Per CIT v Shah Mohandas (AIR 1966 SC 15) and Sec. 30, a deed that merely admits a minor to benefits (without making him a full partner liable to losses) is valid; a guardian may scrutinise terms and do all necessary to secure the benefits, including agreeing to contribute capital.
Q49Indian Partnership Act, 1932 (+ LLP basics)
Regarding the liability of partners for the obligations of the business, which statement correctly distinguishes a traditional partnership from a Limited Liability Partnership?
aIn a partnership each partner is jointly and severally liable (Sec. 25), whereas in an LLP a partner is not personally liable for the LLP's obligations or for another partner's wrongful acts, except in case of fraud
bIn both, partners are jointly and severally liable to the full extent of their personal assets
cIn an LLP partners have unlimited liability while in a partnership liability is limited to capital contributed
dIn both, liability is limited strictly to the partner's agreed contribution
Answer: A
Under Sec. 25 of the Partnership Act partners are jointly and severally liable; under the LLP Act, 2009 (Secs. 27-28) a partner is not personally liable for the LLP's obligations or for another partner's wrongful acts, except where fraud is involved (Sec. 30), in which case liability is unlimited.
Q50Indian Partnership Act, 1932 (+ LLP basics)
Concerning a Limited Liability Partnership under the LLP Act, 2009, which statement is INCORRECT?
aAn LLP is a body corporate and a legal entity separate from its partners, with perpetual succession
bThere is a statutory upper limit of twenty partners in an LLP, as in an ordinary partnership
cEvery LLP must have at least two designated partners who are individuals, at least one of whom is resident in India
dA partner is the agent of the LLP and not of the other partners
Answer: B
Unlike an ordinary partnership (max. 20 partners), there is no upper limit on the number of partners in an LLP (Sec. 3 read with the basic characteristics); the other three statements correctly state the LLP Act position.
Practiced enough reading? Attempt Contract & Allied (Contract, Sale of Goods, Partnership) mocks under real exam conditions and track your weak subjects.
Law Mock is an independent preparation resource and is not affiliated with any High Court, Public Service Commission, or government body. All exam information is sourced from official notifications and is updated periodically.
