Question bank by Ashmeet Singh ( )

Transcription

1 Question bank by Ashmeet Singh ( ) Questions are taken from ICAI study material(sm), practice manual of old course (PM), past exams questions, we could not get much questions on General clauses act so only SM questions are added. For interpretation of statutes we have also added questions of CA Final(PM) since it used to be a part of CA Final syllabus earlier. While preparing for your exam students please read each questions carefully as most of the times questions are repeated. After reading these you need not refer any other questions bank/ scanner. You may find in negotiable some answers in question bank do not agree with ICAI solutions. BAILMENT AND PLEDGE 2.1 BAILMEMT AND ESSENTIALS Question 1 What is Bailment? (2 marks PM) Answer As per sec 148, Bailment is the delivery of goods by one person to another for some purpose upon a contract that they shall when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. Question 2 Examine whether the following constitute a contract of Bailment under the provisions of the Indian Contract Act, 1872: (i) V parks his car at a parking lot, locks it, and keeps the keys with himself. (ii) Seizure of goods by customs authorities. (4 marks CA PE-II may 07)/ (SM) Answer (i) V parks his car at a parking lot, locks it, and keeps the keys with himself. Comment-it is not a bailment Reason - Mere custody of goods does not mean possession. For a valid bailment bailee should be given absolute possession of the goods whereas in this V kept keys of the car himself. (ii) Seizure of goods by customs authorities. Comment- it is a bailment Reason since Ultimate possession of the goods is with custom authorities and goods will be returned only if all the dues of customs are paid off. Question 3 Choose the correct answer from following: The delivery of goods by one person to another for some specific purpose and time is known as: (a) Mortage (b) Pledge (c) Bailment (d) Charge (1 marks MAY 11) Answer (c) Bailment Question 4 State the essential elements of a contract of bailment. Distinguish between the 'contract of bailment' and 'contract of pledge'. (PM 4 marks)/ (SM)

2 Answer 4 As per Section 148. A bailment is the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The essential elements of the contract of the bailment are:- 1. Delivery of goods The essence of bailment is delivery of goods by one person to another. 2. Bailment is a contract In bailment, the delivery of goods is upon a contract that when the purpose is accomplished, the goods shall be returned to the bailor. 3. Return of goods in specific - The goods are delivered for some purpose and it is agreed that the specific goods shall be returned. 4. Ownership of goods In a bailment, it is only the possession of goods which is transferred and the bailor continues to be the owner of the goods. 5. Property must be movable Bailment is only for movable goods and never for immovable goods or money. Difference between contract of bailment and contract of pledge:- 1. Right of sale In case of pledge, the pawnee (pledgee) can sell the goods and recover his debt, if pawnor (pledger) does not pay while in bailment the bailee can retain the goods and sue for damages, but he has no authority to sell the goods. 2. Purpose Pledge is specifically for securing a debt, while bailment may be for any purpose e.g. for repairs, safe custody etc., 3. Right to use the goods In case of pledge, pawnee cannot use the goods pledged but bailee can use the bailed goods if contract so provides. 2.2 PLEDGE AND ESSENTIALS Question 1 A, the bailor, pledges a cinema projector and other accessories with Cine Association Co-operative Bank Limited, the bailee, for a loan. A requests the bank to allow the pledged goods to remain in his possession and promises to hold the same in trust for the bailee and also further promises to handover the possession of the same to the bank whenever demanded. Examining the provisions of the Indian Contract Act, 1872 decide, whether a valid contract of pledge has been made between A, the bailor and Bank, the bailee? [CA PCC JUNE 2009] (5 marks) Answer 1. The given problem relates to the provisons of section 149 of Indian Contract Act, The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorized to hold them on his behalf. 3. In the given problem A pledges his cinema projector with Cine Association Co-operative Bank Limited for a loan and he requested the bank to allow the pledged goods to remain in his possession and promises to hold the same in trust for the bailee and he also further promises to handover the possession of the same to the bank whenever demanded. 4. On the basis of above explanation it can be concluded that it is a valid pledge made between A and Cine Association Co-operative Bank Limited wherein delivery of goods is constructive or by attornment.

3 Question 2 What do you mean by Pledge? What is Pawnor's right to redeem? (PM 4 marks ) Answer 2 1. As per section 172 The bailment of goods as security for payment of a debt or performance of a promise is called pledge. 2. Following are the parties to bailment Pawnor: The person delivering the goods to another for the purpose of security is called the pawnor. Pawnee: The person with whom the goods are deposited for the purpose of security is called the pawnee. 3. Pawnor's right to redeem: As per the provision laid down under Section 177 of the Indian Contract Act, 1872 if a time is stipulated for the payment of the debt or performance of the promise; for which the pledge is made, and the pawnor makes default, he may redeem the goods pledged at any subsequent time before the goods are sold, but in that case, he must pay, in addition, any expenses occasioned by the default. Question 3 Ravi sent a consignment of goods worth ` 60,000 by railway and got railway receipt. He obtained an advance of ` 30,000 from the bank and endorsed and delivered the railway receipt in favour of the bank by way of security. The railway failed to deliver the goods at the destination. The bank filed a suit against the railway for ` 60,000. Decide in the light of provisions of the Indian Contract Act, 1872, whether the bank would succeed in the said suit? [CA PE II MAY 2008] X sent a consignment of mobile phones worth ` 60,000 to Y and obtained a railway receipt therefore. Later,he borrowed a loan of ` 40,000 from Star Bank and endorsed the railway receipt in favour of the Bank as security. In transit the consignment of mobile phones was lost. The Bank files a suit against the railway for a claim of ` 60,000, the value of the consignment. The railway contended that the Bank is entitled to recover the amount of loan i.e. ` 40,000 only. Examining the provisions of the Indian Contract Act, 1872, decide, whether the contention of the railway is valid.. [CA IPCC NOV. 2010] OR X sent a consignment of goods worth ` 2,90,000 by railway and got railway receipt for the same. He obtained an advance of ` 2,60,000 from the bank and endorsed and delivered the railway receipt in favour of the bank by way of security for the advance. The railway failed to deliver the goods at the destination. The bank filed a suit against the railway for ` 2,90,000. Decide in the light of provisions of the Indian Contract Act, 1872, whether the bank would succeed in the said suit? [CA Inter.(IPC) NOV. 2014] OR

4 Answer 3 1. The given problem relates to the provisions of section 172 of Indian Contract Act,1872 as well as facts of Morvi Mercantile Bank Ltd. vs. Union of India case 2. The bailment of goods as security for payment of a debt or performance of a promise is called pledge. Delivery of goods can be actual, or symbolic by submitting tittle deed or may be constructive as u/s149. Under Railway Act railway has a responsibility as a bailee to take care of the goods in its possession and will be laible for any loss during transit. In Morvi Mercantile Bank Ltd. vs. Union of India, the Supreme Court held that the (pledgee) was entitled to recover not only the amount of the advance due to it, but the full value of the consignment from the Railway. 3. In the given problem Ravi sent a consignment of goods worth ` 60,000 by railway and got railway receipt. He obtained an advance of ` 30,000 from the bank and endorsed and delivered the railway receipt in favour of the bank by way of security. The railway failed to deliver the goods at the destination. The bank filed a suit against the railway for ` 60, On the basis of above explanation it can be concluded that bank can recover from railway but the amount over and above his interest(i.e 30000) is to be held by him in trust for the pledgor and to be returned to pledger(ravi).

5 2.3 DUTIES AND RIGHTS OF BAILOR AND BAILEE Questions 1 What are the duties and rights of bailor? (8 marks) (PM) Answer 1 Duties of bailor 1. Duty to disclose faults. Sec 150 The bailor must disclose to the bailee any faults or defects in the goods which can harm to him. A gratuitous bailor is bound to disclose to the bailee all those faults in the goods bailed of which he is aware and if he fails to do so, he will be liable to pay such damages to the bailee as may have resulted directly from faults. A Non gratitous bailor is responsible for all defects in the goods bailed whether he is aware of the defects or not. 2. Duty to pay necessary expenses Sec 158 In case of gratuitous bailment In case of gratuitous bailment the bailor is liable to reimburse to bailee : all the necessary expenses incurred by bailee ; and Any extraordinary expenses incurred by the bailee. In case of non-gratuitous bailment In case of non gratuitous bailment, the bailor is liable to reimburse to bailee any extraordinary expenses incurred by the bailee 3. Duty to indemnify bailee Sec 164 A bailor is also bound to indemnify the bailee for any loss suffered by the bailee by reason of fact that the bailor was not entitled to bail the goods because of his defective title. 4. Duty to receive back the goods Sec. 164 It is the duty of the bailor to receive back the goods when the bailee returns them after the time of bailment has expired or the purpose of bailment has been accomplished. If the bailor refuses to take delivery of goods when it is offered at the proper time the bailee can claim compensation for all necessary expenses incurred for the safe custody. 5. Duty to compensate in case of premature termination sec.159 Sec 159 states that if the bailor terminates a gratuitous bailment prematurely causing loss to the bailee he will compensate the bailee for the loss caused, which is in excess of the benefit received. Rights of bailor 1. Right to enforce bailee s duties The duties of the bailee are the rights of the bailor. The bailor can enforce by suit all the duties of the bailee as his rights. 2. Right to terminate bailment Bailor in entitled to terminate bailment even before expiry of the specified time or completion of the purpose if bailee does any act with regard to the goods which is inconsistent with the terms of bailment (Sec 153). 3. Right of premature termination In case of gratuitous bailment of goods, bailor is entitled to demand their return even before the expiry of the specified time or completion of purpose. But if this premature return causes loss to bailee, the bailor has to compensate bailee for this loss. The measurement of damages for bailee would be the excess of loss caused by the premature return of goods over the benefits already derived from such goods. 4. Right to sue wrongdoer If a third party has caused some damage to the bailed goods while they are in the bailee s possession, bailor may file a suit against the third party i.e. the wrong-doer for compensation and will have a right to share the proceeds available according to their interests.

6 Question 2 A bails his jewelry with B on the condition to safeguard in bank s safe locker. However, B kept in safe locker at his residents, where he usually keeps his own jewelry. After a month all jewelry was lost in a religious riot. A filed a suit against B for recovery. Referring to provisions of the Indian Contract Act, 1872, state whether A will succeed. (PM 4marks)/ (SM) Answer 2 1. The given problem relates to the provisions of section 151,152 of Indian Contract Act, As per section 151, in all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quantity and value as the goods bailed. As per section 152, bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in section In the given problem A bails his jewelry with B on the condition to safeguard in bank s safe locker. However, B kept in safe locker at his residents, where he usually keeps his own jewelry. After a month all jewelry was lost in a religious riot 4. On the basis of above explanation it can be concluded that since A and B agreed to keep the jewelry at the Bank s safe locker not at the B s residence so B will be liable to A for his loss and A will succeed. Question 3 Sunil delivered his car to Mahesh for repairs. Mahesh completed the work, but did not return the car to Sunil within reasonable time, though Sunil repeatedly reminded Mahesh for the return of the car. In the meantime a big fire occurred in the neighborhood and the car was destroyed. Decide whether Mahesh can be held liable under the provisions of the Indian Contract Act, [CA PE II NOV. 2003] (4 marks) Answer 3 1. The given problem relates to the provisions of section 160,161 of Indian Contract Act, As per section 160, it is the duty of the bailee to return, or deliver according to the bailor's directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. As per section 161, If by the fault of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time 3. In the given problem Sunil delivered his car to Mahesh for repairs. Mahesh completed the work, but did not return the car to Sunil within reasonable time, though Sunil repeatedly reminded Mahesh for the return of the car. In the meantime a big fire occurred in the neighborhood and the car was destroyed 4. On the basis of above explanation it can be concluded that since Mahesh fails to deliver the car to sunil on the accomplishment of purpose so, Mahesh is liable to Sunil for the loss.

7 Question 4 M lends a sum of ` 5,000 to B, on the security of two shares of a Limited Company on 1st April On 15th June, 2007, the company issued two bonus shares. B returns the loan amount of ` 5,000 with interest but M returns only two shares which were pledged and refuses to give the two bonus shares. Advise B in the light of the provisions of the Indian Contract Act, [CA PE II NOV. 2008] (4marks) Answer 4 1. The given problem relates to the provisions of section 151,152 of Indian Contract Act, As per section 160, The bailee has a basic duty to return or deliver according to the bailor s direction i.e. the purpose for which they were bailed has been accomplished. As per section 163, bailee, It is the duty of the bailee to deliver to the bailor any natural increase or profit accruing from the goods bailed unless there is a contract to contrary. 3. In the given problem M lends a sum of ` 5,000 to B, on the security of two shares of a Limited Company on 1st April On 15th June, 2007, the company issued two bonus shares. B returns the loan amount of ` 5,000 with interest but M returns only two shares which were pledged and refuses to give the two bonus shares. 4. On the basis of above explanation it can be concluded that it is the duty of M to return the accretion to goods in the form of Bonus share to B. Question 5 R gives his umbrella to M during raining season to be used for two days during Examinations. M keeps the umbrella for a week. While going to R s house to return the umbrella, M accidently slips and the umbrella is badly damaged. Who bear the loss and why? (PM 4marks) /(SM) Answer 5 1. The given problem relates to the provisions of section 160,161 of Indian Contract Act, As per section 160, it is the duty of the bailee to return, or deliver according to the bailor's directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. As per section 161, If by the fault of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time 3. In the given problem R gives his umbrella to M during raining season to be used for two days during Examinations. M keeps the umbrella for a week. While going to R s house to return the umbrella,m accidently slips and the umbrella is badly damaged. 4. On the basis of above explanation it can be concluded that since M fails to deliver the umbrella to R after the expiry of prescribed period of 2 days so M shall bear the loss.

8 Question 6 A hires a carriage of B and agrees to pay ` 500 as hire charges. The carriage is unsafe, though B is unaware of it. A is injured and claims compensation for injuries suffered by him. B refuses to pay. Discuss the liability of B. [CA PE II MAY 2005] (4 marks)/ (SM)/(RTP May18) Answer 6 1. The given problem relates to the provisons of section 150 of Indian Contract Act, As per sec 148, Bailment is the delivery of goods by one person to another for some purpose upon a contract that they shall when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. As per section 150 The bailor must disclose to the bailee any faults or defects in the goods which can harm to him. If he fails to disclose the he is responsible for all defects in the goods bailed whether he is aware of the defects or not. 3. In the given problem A hires a carriage of B and agrees to pay ` 500 as hire charges. The carriage is unsafe, though B is unaware of it. A is injured 4. On the basis of above explanation it can be concluded that since it is a non gratuitous bailment so bailor will be liable to bailee of any loss whether he is aware of the defects or not. Hence B shall be liable to A for his injuries. Question 7 State whether the following statements are correct or incorrect: Bailee has no right to mix the goods bailed with his own goods without the consent of the bailor. (1 marks NOV 14) Answer 7 Correct Short questions (1 or 2 marks) 1. A gives his old jewellery to a jeweler for making a new jewellery. He defaults in paying the service charges to jeweler. Can jeweler exercise lien for this? [Hint: Yes, the jeweler is entitled to exercise particular lien till he is paid] 2. A takes a mobile by fraud from owner. Before owner avoids the contract, A pledges the mobile with C, who takes it in good faith, Can owner recover the mobile from C? [Hint: Yes, but only after paying the loan taken by A] 3. M had taken the car from N for use for three days. M keeps it for seven days. Then in spite of his utmost care, the car is damaged. Is M liable for damages to N? [Hint: Yes, under section 161, when bailee fails to return in time, he is liable for any loss to the goods.] 4. Is depositing of money in a bank is a bailment? And why or why not? [Hint: No-the money cannot be goods] 5. Is depositing of ornaments in a bank locker bailment? [Hint: No- the absolute possession is not given to bank] 6. X bails his ornament to Y and Y keeps this ornament in his own locker at his house along with his own ornaments and if all the ornament are lost, whether Y is responsible for the loss to X? [Hint: No- he has exercised with ordinary prudence] 7. In bailment the bailee cannot sell the goods, he can either retain the goods or sue for nonpayment of dues. What is the position in the case of pledge? [Hint: He enjoys the right to sell after giving the notice]

9 AGENCY 3.1 AGENCY AND ESSENTIALS Question 1 State the meaning of Agency and its silent features. (4 marks PM) Answer 1 The problem is based on the provisions of section 182,183,184, The term agency denotes a relationship between two persons wherein one is called a principal and the other an agent. 2. An agent is a person employed 1. to do any act for another. or 2. to represent another in dealing with third parties. (Section 182) 3. The person for whom -: 1. such act is done, or 2. who is so represented is called the principal. (Section 182) 4. Salient features of agency Following are the four salient features of agency (i) Basis-The basic essence of agency is that the principal is bound by the acts of the agent and is answerable to third parties. (ii) Consideration not necessary- Section 185 provides that no consideration is necessary to create an agency (iii) Capacity to employ an agent- According to Section 183 any person who is of the age of majority according to the law to which he is subject and who is of sound mind, may employ an agent. (iv) Capacity to be an agent- According to Section 184 any person may become an agent even a minor or a person of unsound mind can become an agent. However, if the agent is a minor or a person of unsound mind he is not liable to the principal. Question 2 State with reason whether the following statement is correct or incorrect. No consideration is necessary to create an Agency (1 marks May 10) Answer 2 Comment correct Reason - Section 185 provides that no consideration is necessary to create an agency. It means that an agent may work for principal without receiving any consideration. Question 3 R is the wife of P. She purchased some sarees on credit from Q. Q demanded the amount from P. P refused. Q filed a suit against P for the said amount. Decide in the light of provisions of the Indian Contract Act, 1872, whether Q would succeed? (4 marks May 08)

10 Answer 3 Problem on Agency: 1. The given problem relates to modes of agency under Indian Contract Act, Agency may be created by a legal presumption; wife is considered as an implied agent, of her husband. If wife lives with her husband, there is a legal presumption that a wife has authority to pledge her husband s credit for necessaries. But the legal presumption can be rebutted in the following cases: Where the goods purchased on credit are not necessaries. Where the wife is given sufficient money for purchasing necessaries. Where the wife is forbidden from purchasing anything on credit or contracting debts. Where the trader has been expressly warned not to give credit to his wife. 3. In the given problem R is the wife of P. She purchased some sarees on credit from Q. Q demanded the amount from P. P refused. 4. On the basis of above explanation it can be concluded that Q will succeed. He can recover the said amount from P if sarees purchased by R are necessaries for her. Question 4 A appoints M, a minor, as his agent to sell his watch for cash at a price not less than ` 700. M sells it to D for ` 350. Is the sale valid? Explain the legal position of M and D, referring to the provisions of the Indian Contract Act, (4 marks PM)/ (SM) Answer 4 1. The given problem relates to the provisions of section 184 under Indian Contract Act, The term agency denotes a relationship between two persons wherein one is called a principal and the other an agent. According to Section 184 any person may become an agent even a minor or a person of unsound mind can become an agent. However, if the agent is a minor or a person of unsound mind he is not liable to the principal. 3. In the given problem A appoints M, a minor, as his agent to sell his watch for cash at a price not less than ` 700. M sells it to D for ` On the basis of above explanation it can be concluded that a minor can be agent and therefore sale by minor Agent (M) to Third party (D) is valid. M being a minor doesnot incur any liability towards third party or principal. Therefore principal (A) will be liable for the act of agent(m).

11 3.2 MODES OF CREATION OF AN AGENCY Question 1 Briefly explain different modes of creation of an agency relationship. (8marks PM) Answer 1 1. An agency relationship can emerge between two persons in several ways as explained below. Agency by express agreement or express agency. Agency implied from circumstances or implied agency. Agency by operation of law. Agency by ratification. 2. Agency by express agreement Express agreement agent may be appointed either by words of mouth or by an agreement in writing. 3. Agency implied from circumstances (a). Agency by estoppel This doctrine in the present context would mean that when a person has led another person to believe by his words or conduct that a certain person is his agent, then he is precluded or stopped from denying the truth of this fact even if it is wrong and he is bound by the acts of the agent. (b). Agency by holding out Agency by holding out means creation of agency by presenting a person as agent without actual words to that effect. (c). Agency by necessity the conditions which enable a person to act as an agent of necessity of another are as follows: There should be a real necessity for acting on behalf of the principal. If should be impossible to communicate with the principal within the time available. The agent should act bonafide in the interests of the principal 4. Agency by operation of law Sometimes an agency arises by operation of law.example partners are agent and principal of each other as per Indian partnership act, Agency by ratification Ratification means the subsequent adoption and acceptance of an act originally done without instruction or authority. Thus, where a principal adopts the unauthorized act of his agent, he is said to have ratified that act and there comes into existence an agency by ratification retrospectively. Questions 2 R of New Delhi sends his agent M to purchase certain goods from Global Enterprise, Mumbai on credit for him. Later on R pays the amount for the goods purchased. On another occasion, he again sends M to purchase goods but this time pays sufficient cash to M for the purpose. M, However again purchases the goods from Global Enterprises but on credit and soon thereafter he dies. Global Enterprise files a suit against R for recovery of the said amount. Decide whether Global Enterprise would be given any relief by the Court under the provisions of the Indian Contract act, [CA PE II JUNE 2009]

12 Answer 2 1. The given problem relates to the provisions of agency by estoppels under Indian contract act An agency may emerge by the application of the doctrine of estoppels. This doctrine in the present context would mean that when a person has led another person to believe by his words or conduct that a certain person is his agent, then he is precluded or stopped from denying the truth of this fact even if it is wrong and he is bound by the acts of the agent. 3. In the given case R of New Delhi sends his agent M to purchase certain goods from Global Enterprise, Mumbai on credit for him. Later on R pays the amount for the goods purchased. On another occasion, he again sends M to purchase goods but this time pays sufficient cash to M for the purpose. M, However again purchases the goods from Global Enterprises but on credit and soon thereafter he dies. Global Enterprise files a suit against R for recovery of the said amount. 4. On the basis of above explanation it cane concluded that global enterprises can recover from R because global enterprise presumed based on 1 st transaction that 2 nd transaction was also on credit therefore on the basis of agency by estoppels R will be liable. Question 3 Ramesh instructed Suresh, a transporter, to send a consignment of apples to Mumbai. After covering half the distance, Suresh found that the apples will perish before reaching Mumbai. He sold the same at half the market price. Ramesh sued Suresh. Will he succeed? (4 marks PM) / (SM) /(RTP May 18) Answer 3 1. The given problem relates to the provisions of section 189 under Indian Contract Act, Agency may be created expressly, impliedly in case of emergency As per section 189 An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss and would be done by a person or ordinary prudence, in his own case, under similar circumstances. 3. In the given problem Ramesh instructed Suresh, a transporter, to send a consignment of apples to Mumbai. After covering half the distance, Suresh found that the apples will perish before reaching Mumbai. He sold the same at half the market price. 4. On the basis of above explanation it can be concluded that since apples were perishing so Suresh acted prudently so as to save loss of Ramesh. Hence Suresh action is valid and Ramesh can t sue Suresh for his act.

13 2.3 AGENCY BY RATIFICATION Question 1 What is Agency by Ratification? (1 marks PM) Answer 1 1. Ratification means the subsequent adoption and acceptance of an act originally done without instruction or authority. 2. Thus, where a principal adopts the unauthorized act of his agent, he is said to have ratified that act and there comes into existence an agency by ratification retrospectively. 2. Ratification has got retrospective effect. By ratifying the unauthorized act of the agent the principal becomes bound by the act as if it had been originally done by his authority. Thus ratification tantamounts to prior authority. It relates back to the original making of the contract. Question 2 State with reason whether the following statement is correct or incorrect Ratification of agency is valid even if knowledge of the principal is materially defective. (4 marks May 10) / (SM) Answer 2 Comment incorrect Reason - As per section 198 Ratification should be based on knowledge of all relevant facts. If the agent conceals from the principal some vital information while seeking ratification, such ratification by the principal shall not bind him. Question 3 Pick out the correct answer from the following and give reason: A without B s authority let outs B s flat to C. Afterwards B accepts rent of the flat from C. It is an agency by : 1. holding out 2. Estoppel 3. ratification 4. necessity (1 marks May 10) Answer 3 Answer - agency by ratification Reason- Ratification means the subsequent adoption and acceptance of an act originally done without instruction or authority. Since B accepts Rent of the Flat so it is impled ratification by B for the Act of A. Question 4 The relationship of principal and agent (i.e. Agency) may be constituted by subsequent ratification by the principal. Examine the validity of the statement and state the requisites of a valid ratification in the light of the provisions of the Indian Contract Act, [CA PE II NOV. 2006]

14 Answer 4 1. The statement is valid. agency can be created by ratification. 2. Ratification means the subsequent adoption and acceptance of an act originally done without instruction or authority.. Thus, where a principal adopts the unauthorized act of his agent, he is said to have ratified that act and there comes into existence an agency by ratification retrospectively. 3. Followings are the essentials of ratification The agent must expressly contract as an agent for a principal in the knowledge of third parties. Ratification shall be valid only if the principal doing it was in existence at the time when the act was done and the date of ratification The principal must have contractual capacity both at the time of the contract and at the time of ratification Ratification should be based on knowledge of all relevant facts. If the agent conceals from the principal some vital information while seeking ratification, such ratification by the principal shall not bind him. Ratification must be done within a reasonable time, of the act to be ratified The act to be ratified must be a lawful one. There can be ratification of an act in total. The principal cannot ratify a part of the transaction which is beneficial to him and reject the rest Ratification cannot be effective when its effect is to subject a third person to damages or terminate any right or interest of a third person. The acts which the principal is incapable of doing cannot be ratified.

15 2.4 DUTIES OF AGENT Question 1 P appoints A as his agent to sell his estate. A, on looking over the estate before selling it, finds the existence of a good quality Granite-Mine on the estate, which is unknown to P. A buys the estate himself after informing P that he (A) wishes to buy the estate for himself but conceals the existence of Granite-Mine. P allows A to buy the estate, in ignorance of the existence of Mine. State giving reasons in brief the rights of P, the principal, against A, the agent. What would be your answer if A had informed P about the existence of Mine before he purchased the estate, but after two months, he sold the estate at a profit of ` 1 lac? (4 marks may 08) Answer 1 1. The given problem relates to the provisions of section 215 under Indian contract act Agency is a fiduciary relationship. The agent must always maintain good faith for the principal. This give rise to several expectations from the agent. One such is that he must not deal on his own account in the business of agency. This means that he must not deal with the principal on account of himself i.e. make himself a third party in relation to the principal without informing him of all relevant facts & seeking his consent. If he violates this duty the principal may repudiate the transaction made by the agent if either any material fact has been dishonestly concealed from him by the agent or the dealings of the agent have been disadvantageous to him. 3. In the given problem P appoints A as his agent to sell his estate. A, on looking over the estate before selling it, finds the existence of a good quality Granite-Mine on the estate, which is unknown to P. A buys the estate himself after informing P that he (A) wishes to buy the estate for himself but conceals the existence of Granite- Mine. P allows A to buy the estate, in ignorance of the existence of Mine. 4. On the basis of above explanation it can be concluded that - In the first case principal has a right to repudiate the contract with agent. - In the second case principal will not have any right against agent because principal was aware of the existence of mine. Question 2 Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr. Singh bought a house for ` 20 lakhs in the name of a nominee and then purchased it himself for ` 24 lakhs. He then sold the same house to Mr. Ahuja for ` 26 lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to Mr. Singh. Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain.(4 marks Nov 05) / (SM)/(RTP May 18) Answer 1. The given problem relates to the provisions of section 216 under Indian contract act Agency is a fiduciary relationship. The agent must always maintain good faith for the principal. This give rise to several expectations from the agent. One such is that he must not deal on his own account in the business of agency. This means that he must not deal with the principal on account of himself i.e. make himself a third party in relation to the principal without informing him of all relevant facts & seeking his consent. If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account to his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. 3. In the given problem Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr. Singh bought a house for ` 20 lakhs in the name of a nominee and then purchased it himself for ` 24 lakhs. He then sold the same house to Mr. Ahuja for ` 26 lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to Mr. Singh. 4. On the basis of above explanation it can be concluded that Mr. Ahuja is entitled to recover from Mr. singh the benefit earned by him which is 6 lac.

16 2.5 KINDS OF AGENT Question 1 Briefly explain the positions of sub-agent and substituted agent under the law of agency. (4 marks PM) Answer 1 Sub-agent Meaning A subagent is a person employed by; and Acting under the control of the original agent in the business of the agency. When the appointment is proper Section 192 provides following consequences in such a case: Principal is liable to third parties for the acts of sub agent since the latter s acts becomes the acts of his own principal i.e. the agent and the agents act are the acts of the principal. The agent is responsible to the principal for the acts of sub-agent. So, if the principal has to make any recoveries from the sub agent, he can sue only the agent and not the sub agent because there is no privity of contract between the principal & the sub-agent. The sub-agent is directly liable not to the principal for his negligence or breach of duty but to has own principal i.e. the agent. The sub agent cannot hold the principal liable for any claims such as his commission. He can sue his own principal, i.e., the agent only. When the appointment is improper Section 193 provides for following consequences when the appointment of sub-agent is improper. The principal is not liable to third parties for sub-agent s act who does not represent him. The agent is liable to the third parties and also to the principal for acts of the sub-agent. The sub-agent is not liable to the principal at all, even for his fraud or willful wrong. He is liable only to the agent. Substituted agent When an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him. In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts of negligence of the agent so selected. Question 2 Comment on the following: Principal is not always bound by the acts of a sub-agent. (1marks PM) / (SM) Answer 2 Comment -The statement is correct. Reason - principal will be liable for the act of sub- agent only when appointment of sub-agent is proper example trade custom.

17 2.6 PRINCIPAL AND AGENT S LIABILITY Question 1 Briefly explain the circumstances under which an agent may be held personally liable. (4 marks may 05) Answer 1 Personal liability of an agent: The general rule is that only the principal can enforce, and can be held liable on, a contract entered into by the agent except when there is a contract to the contract. However, in the following cases an agent is personally held liable: (i) When the contract expressly provides for his personal liability. (ii) When the agent acts for a principal. (iii) When he acts for an undisclosed principal. (iv) When he acts for a principal who cannot be sued, e.g., minor. (v) Where he signs a contract in his own name. (vi) Where he acts for a principal not in existence e.g., promoter of a company under formation. (vii) Were he is liable for breach of warranty. (viii) Where he receives or pays money by mistake or fraud. (ix) Where the agency is coupled with interest. Question 2 Briefly explain when the principal is liable for the acts of an agent and state under what circumstances an agent is personally liable. (4 marks PM) Answer 2 Principal s liabilities for Agents acts 1. When the agent exceeds his authority principal is liable for such acts. 2. Principal is bound by notice given to agent in the course of business. 3. A principal is liable where he has by words or conduct induced a belief in the contracting party that the act of the agent was within the scope of his authority. 4. The principal is liable for misrepresentation or fraud of his agent acting within the scope of his actual or apparent authority during the course of the agency business. Agent is personally liable (i) When the contract expressly provides for his personal liability. (ii) When the agent acts for a principal. (iii) When he acts for an undisclosed principal. (iv) When he acts for a principal who cannot be sued, e.g., minor. (v) Where he signs a contract in his own name. (vi) Where he acts for a principal not in existence e.g., promoter of a company under formation. (vii) Were he is liable for breach of warranty. (viii) Where he receives or pays money by mistake or fraud. (ix) Where the agency is coupled with interest.

18 2.7 IRREVOCABLE AGENCY Question 1 Choose the correct answer from the following: An agency in which the agent himself has interest in the subject matter of agency is called: (a) Agency by estoppel (b) Agency by holding out (c) Agency by necessity (d) Agency coupled with interest (1 marks May 11) Answer 1 (d) Agency coupled with interest Question 2 A, who owes B ` 10,000, appoints B as his agent to sell his landed property at Delhi and after paying himself (B) what is due to him, to hand over the balance to A. Can A revoke his authority delegated to B? (4 marks PM) Answer 2 According to Section 202 of the Indian Contract Act, Where the agent has himself an interest in the subject matter of agency, the agency is said to be coupled with interest. An agency coupled with interest cannot be terminated to the extent of such interest Therefore, A cannot revoke the authority delegated to B. Question 3 Sunil borrowed a sum of ` 3 lakh from Rajendra. Sunil appointed Rajendra as his agent to sell his land and authorized him to appropriate the amount of loan out of the sale proceeds. Afterwards, Sunil revoked the agency. Decide under the provisions of the Indian Contract Act, 1872 whether the revocation of the said agency by Sunil is lawful? (4 marks May 14) Answer 3 1. The given problem relates to the provisions of section 202 under Indian contract act Where the agent has himself an interest in the subject matter of agency, the agency is said to be coupled with interest. An agency coupled with interest cannot be terminated to the extent of such interest. In other words where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot be terminated to the prejudice of such interest. However, the contract of agency may provide otherwise. 3. In the given problem Sunil borrowed a sum of ` 3 lakh from Rajendra. Sunil appointed Rajendra as his agent to sell his land and authorized him to appropriate the amount of loan out of the sale proceeds. Afterwards, Sunil revoked the agency 4. On the basis of above explanation it can be concluded that since rajendra has personal interest in agency to the extent of 3lac so agency is irrevocable and hence revocation by sunil is unlawful.

19 Exercise 1. A agrees to work as an agent of B without remuneration. Later A refuses to work. Can B hold him guilty of breach of contract? 2. D engaged E, an auctioneer, to sell some property for a commission of ` 15,000. E however received secretly ` 1,500 also as commission from purchaser. Discuss the rights of D and E. 3. P without Q s authority, lends Q s money to R. Later Q accepts interest on money from R. Discuss the rights of Q. [Hint: Loan contract is valid. Acceptance of interest by Q amounts to implied ratification.] 4. A person appointed by the original agent to act in the business of agency, but under the control of original agent, is known as [Hint: Sub-agent] 5. Which of the following agency is irrevocable? (a) agency for fixed period. (b) agency for single transaction. (c) agency coupled with interest. (d) continuing agency. [Hint: Option (c)]

20 INDEMNITY AND GUARANTEE CONTRACT OF INDEMNITY SECTION 124 Question 1 Pick out the correct answer from the following and give reason: (1 marks Nov 09) A contracts to save B against the consequences of any proceedings, which C may take against B in respect of a certain sum of 500 rupees. This is a: (1)Contract of guarantee (2)Quasi contract (3)Contract of indemnity (4)Void contract. Answer Comment- Contract of Indemnity : Reason As per section 124 A Contract of indemnity is a Contract by which one party promises to save or indemnify the other from loss caused to him by the promisor himself or by the conduct of any other person RIGHTS OF INDEMNITY HOLDER SECTION 125 Question 1 What are the rights of the indemnity-holder when sued? (4 marks PM/SM) Answer 1 The problem relates to the provisions of section 125. Following are the rights of indemnity holder when sued-. He can recover from indemnifier (1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (2) all costs which he may be compelled to pay in any such suit, if in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit. (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit. CONTRACT OF GUARANTEE SECTION 126 Question 1 Choose the correct answer from the following and give reason: : (1 marks Nov 10) In a Contract of Guarantee there is/are : (a) One contract (b) Two contracts (c) Three contracts (d) Four contracts.

21 Answer Comment- Three contracts Reason In a Contract of Guarantee there are three contracts arising between the Creditor & Principal debtor, Creditor and Surety and Principal debtor and Surety CONTINUING GUARANTEE SEC 129 Question 1 A gives to C a continuing guarantee to the extent of ` 5000 for the vegetables to be supplied by C to B from time to time on credit. Afterwards, B became embarrassed, and without the knowledge of A, B and C contract that C shall continue to supply B with vegetables for ready money, and that the payments shall be applied to the then existing debts between B and C. Examining the provision of the Indian Contract Act, 1872, decide whether A is liable on his guarantee given to C. (4 marks Nov 08) Answer 1 1. The given problem relates to the provisions of section 133 of Indian contract As per section 133 Any variance, made without the surety s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. 3. In the given problem A gives guarantee to C for supplying vegetables on credit to B upto However after sometime B became embarrassed, and without the knowledge of A, B and C contract that C shall continue to supply B with vegetables for ready money, and that the payments shall be applied to the then existing debts between B and C 4. On the basis of above explanation it can be concluded that since surety s (A) consent was not obtained so A is discharged for all transaction after variations. Question 2 Ravi becomes guarantor for Ashok for the amount which may be given to him by Nalin within six months. The maximum limit of the said amount is ` 1 lakh. After two months Ravi withdraws his guarantee. Upto the time of revocation of guarantee, Nalin had given to Ashok ` 20,000. (i) Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan. (ii) Whether Ravi is liable if Ashok fails to pay the amount of ` 20,000 to Nalin? (4 marks may 06) Answer-2 1. The given problem relates to the provisions of section 130 of Indian contract a. As per section 129 A guarantee that extends to a series of transactions, is called, a continuing guarantee. b. Section 130 provides that a continuing guarantee may, at any time, be revoked by surety, as to future transactions, by notice to the creditor. Thus the surety may terminate his continuing guarantee as regards transactions entered into after the notice. He continues to be liable for transaction entered into prior to the notice. 3. In the given problem Ravi becomes guarantor for Ashok for the amount which may be given to him by Nalin within six months upto 1lakh. However after 2 months Ravi withdraw his guarantee and till that time Nalin had given to Ashok 20, On the basis of above explanation it can be concluded that Ravi is discharged from his liabilities to Nalin for any subsequent loan. However Ravi is liable if Ashok fails to pay the amount of ` 20,000 to Nalin.

22 RIGHTS OF SURETY Question 1 What are the rights of a surety against the principal debtor and as against co-sureties? (4 marks PM) Answer Rights of a surety against the Principal Debtor: 1. Right of subrogation Subrogation mean substitution of one person by another, or stepping into the shoes of another. A surety would acquire all the rights against the principal debtor which the creditor possessed after he (the surety) fulfils his obligation towards the creditor in total 2. Right to claim indemnity In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety and the surety is entitled to recover from the principal debtor whatever sum he has paid under the guarantee Right of surety against co-sureties: 1. Right to claim contribution Where two or more persons are co-sureties for the same debt the co-sureties, are liable, as between themselves, to pay equal share of debt. 2. Right to share benefit of securities If any one co-surety has received security from the principal debtor, all the other co-sureties shall be entitled to share the benefit of such security. DISCHARGE OF SURETY FROM LIABILITY Question 1 M advances to N ` 5,000 on the guarantee of P. The loan carries interest at ten percent per annum. Subsequently, N becomes financially embarrassed. On N s request, M reduces the interest to six per cent per annum and does not sue N for one year after the loan becomes due. N becomes insolvent. Can M sue P? : (4 marks PM/SM) Answer 1. The given problem relates to the provisions of section 133 of Indian contract As per section 133 Any variance, made without the surety s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. 3. In the given problem M advances to N ` 5,000 at 10%pa on the guarantee of P. however Subsequently, N becomes financially embarrassed and on his request M reduce his interest to 6%pa without informing P. 4. On the basis of above explanation it can be concluded that since surety(p) consent was not obtained so P is discharge and hence M cant sue P Question 2 Point out the circumstances in which a surety is discharged from liability by the conduct of the creditor. (4 marks PM )