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CMA Inter Paper 5: Business Laws and Ethics study materials
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CMA Inter Paper 5: Business Laws and Ethics practice questions

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Question 1Indian Contract Act, 1872 - General Principles of Contract

Under the Indian Contract Act, 1872, an agreement enforceable by law is defined as which of the following?

  1. A proposal
  2. An acceptance
  3. A contract Correct answer.
  4. A promise

Explanation

Section 2(h) defines a contract as an agreement enforceable by law, and Section 2(e) defines an agreement as every promise or set of promises forming the consideration for each other. A promise alone, or a proposal or acceptance, is only a building block and does not by itself create enforceable obligations.

Question 2Indian Contract Act, 1872 - General Principles of Contract

A agrees to sell his car to B, but the agreement is silent on price and the parties never intended a reasonable price to be implied. Which essential element of a valid contract is most directly missing?

  1. Capacity of parties
  2. Lawful consideration
  3. Free consent
  4. Certainty of terms Correct answer.

Explanation

Section 29 provides that agreements whose meaning is not certain, or capable of being made certain, are void. Where price is left undetermined and no mode of determination is agreed, the agreement is void for uncertainty rather than merely unenforceable.

Question 3Indian Contract Act, 1872 - General Principles of Contract

Which of the following agreements is expressly declared void under the Indian Contract Act, 1872?

  1. An agreement to sell goods at a price to be fixed by a named valuer
  2. An agreement to pay a time-barred debt
  3. An agreement to indemnify against future loss
  4. An agreement in restraint of marriage of a major Correct answer.

Explanation

Section 26 declares every agreement in restraint of the marriage of any person, other than a minor, void. Agreements to pay a time-barred debt are valid under Section 25(3), and price-fixing by a named third party is a recognised mode of making a term certain.

Question 4Indian Contract Act, 1872 - General Principles of Contract

P, aged 17, borrows money from Q and executes a promissory note. Which statement correctly states the legal position?

  1. The agreement is voidable at P's option on attaining majority
  2. The agreement is valid because a promissory note was executed
  3. The agreement is void only if Q knew of P's minority
  4. The agreement is void ab initio and P is not personally liable on it Correct answer.

Explanation

Section 11 requires a party to be of the age of majority, and Mohori Bibee v. Dharmodas Ghose settled that an agreement with a minor is void ab initio. The minor's personal liability does not arise merely because a negotiable instrument was executed.

Question 5Indian Contract Act, 1872 - General Principles of Contract

Which of the following best describes the requirement of consideration under the Indian Contract Act, 1872?

  1. It must be adequate and of fair market value
  2. It must be real, lawful and may move from a third party Correct answer.
  3. It must be in money and paid at the time of contract
  4. It must move only from the promisee and be past

Explanation

Section 2(d) requires consideration to be real and lawful, and the Explanation to Section 25 permits consideration to move from a person other than the promisee. Adequacy of consideration is not a statutory requirement, though it may be relevant to free consent.

Question 6Indian Contract Act, 1872 - General Principles of Contract

S promises to maintain T's child, and T agrees to pay S an annual sum plus a sum in proportion to T's earnings. Is the agreement valid?

  1. Invalid, because it is a wagering agreement
  2. Valid, only if the child attains majority
  3. Invalid, because the sum is uncertain
  4. Valid, because the sum is capable of being made certain Correct answer.

Explanation

Section 29 voids only agreements whose meaning is not certain or capable of being made certain. A sum calculated in proportion to a person's earnings is mathematically ascertainable and therefore sufficiently certain.

Question 7Indian Contract Act, 1872 - General Principles of Contract

An offer made to the world at large, such as a reward advertisement, is best described as which type of proposal?

  1. A standing offer
  2. A specific offer
  3. A general offer Correct answer.
  4. A counter-offer

Explanation

A general offer is addressed to the public at large and is accepted by anyone who performs the stipulated condition, as in Carlill v. Carbolic Smoke Ball Co. A specific offer, by contrast, is made to a determinate person and can be accepted only by that person.

Question 8Indian Contract Act, 1872 - General Principles of Contract

A proposes by letter to sell his house to B. Before B receives it, A posts a telegram revoking the proposal. B receives the letter but not the telegram, and accepts. Which statement is correct?

  1. Acceptance is void because the proposal was revoked
  2. Acceptance is complete and revocation is ineffective against B Correct answer.
  3. Revocation is effective because it was posted before acceptance
  4. The agreement is voidable at B's option

Explanation

Under Section 4, revocation of a proposal is complete against the acceptor only when it comes to the acceptor's knowledge. Since B accepted without knowing of the revocation, a binding contract arises.

Question 9Indian Contract Act, 1872 - General Principles of Contract

Which of the following is a valid mode of acceptance under the Indian Contract Act, 1872?

  1. Silence of the offeree where the offer so prescribes
  2. Acceptance by a person who has no authority to accept
  3. Performance of the conditions of a general offer Correct answer.
  4. Acceptance of an offer after the offeror's death, unknown to the offeree

Explanation

Section 8 provides that performance of the conditions of a proposal, or acceptance of any consideration for a reciprocal promise offered with a proposal, constitutes acceptance. Silence cannot be treated as acceptance unless the offeree's conduct makes it clear.

Question 10Indian Contract Act, 1872 - General Principles of Contract

X sends an offer by messenger requiring acceptance by post. Y sends acceptance by post but it is delayed and reaches X after the stated period. Which statement reflects the position under the Act?

  1. Acceptance is complete when Y posts it, so a contract arises
  2. Acceptance is complete only when it reaches X, so no contract arises Correct answer.
  3. Acceptance is complete when X reads the letter
  4. Acceptance is complete when Y writes the letter

Explanation

Where the offer prescribes a mode of acceptance, the acceptor must follow that mode, and acceptance communicated in a different manner matures only when it reaches the offeror. Since the postal mode was not the prescribed one, the acceptance binds X only on receipt, which occurred late.

Question 11Indian Contract Act, 1872 - General Principles of Contract

Which of the following agreements is valid despite lacking consideration?

  1. A promise to pay for services already rendered voluntarily
  2. A written and registered promise to gift land to a relative Correct answer.
  3. An oral promise to gift a car to a friend
  4. A promise by a father to pay his son's debt to a shopkeeper

Explanation

Section 25(1) preserves a written promise, made on account of natural love and affection between parties standing in a near relation, and registered. All three conditions must be satisfied cumulatively.

Question 12Indian Contract Act, 1872 - General Principles of Contract

A contract is said to be voidable under the Indian Contract Act, 1872 when consent is caused by which of the following?

  1. Want of registration of a document requiring registration
  2. Failure of a condition precedent
  3. Coercion, undue influence, fraud, misrepresentation or mistake Correct answer.
  4. Frustration of the object of the contract

Explanation

Section 19 and Section 19A make agreements voidable where consent is obtained by coercion, undue influence, fraud, misrepresentation or mistake, at the option of the party whose consent was so caused. Frustration and want of registration render the contract void, not voidable.

Question 13Indian Contract Act, 1872 - General Principles of Contract

A threatens to prosecute B for a criminal offence unless B agrees to sell A a plot of land at a low price. B agrees. Which ground vitiates B's consent?

  1. Fraud
  2. Undue influence
  3. Coercion Correct answer.
  4. Mistake

Explanation

Section 15 treats the threat of an act forbidden by the Indian Penal Code, or an unlawful detainer of property, as coercion when it causes the party to enter into an agreement. A threat of criminal prosecution to extract property falls squarely within this definition.

Question 14Indian Contract Act, 1872 - General Principles of Contract

Which of the following most accurately describes the relationship required for undue influence to be established?

  1. Any commercial relationship between the parties
  2. A fiduciary relationship alone, irrespective of unfair advantage
  3. A relationship of employer and employee only
  4. A relationship where one party is in a position to dominate the will of the other and uses it to obtain an unfair advantage Correct answer.

Explanation

Section 16 requires both a position to dominate the will of another and the use of that position to obtain an unfair advantage. A mere relationship, even a fiduciary one, is not enough without the element of unfair advantage.

Question 15Indian Contract Act, 1872 - General Principles of Contract

A party who has been induced to enter a contract by fraud discovers the truth and continues to enjoy benefits under the contract. Which remedy is now available?

  1. Rescission of the contract with full restitution
  2. Specific performance with no compensation
  3. Damages only, since the right to rescind is lost Correct answer.
  4. No remedy, since fraud is not actionable

Explanation

The right to rescind is lost where the party, after discovering the fraud, affirms the contract by continuing to take benefits under it. The party is then confined to damages for the deceit.

Question 16Indian Contract Act, 1872 - General Principles of Contract

An agreement entered into by parties under a mutual mistake as to a matter of fact essential to the agreement is which of the following?

  1. Valid, because both parties were mistaken
  2. Void Correct answer.
  3. Voidable at the option of either party
  4. Valid but unenforceable

Explanation

Section 20 provides that where both parties are under a mistake as to a matter of fact essential to the agreement, the agreement is void. The rationale is that there is no genuine consensus on the essential subject matter.

Question 17Indian Contract Act, 1872 - General Principles of Contract

An agreement whose object is to commit a crime or which is opposed to public policy is best described as which of the following?

  1. Voidable at the option of the aggrieved party
  2. Enforceable if the parties consent
  3. Valid but illegal in performance
  4. Void Correct answer.

Explanation

Section 23 makes agreements whose object or consideration is unlawful, immoral or opposed to public policy void. Such agreements cannot be enforced by either party, and no action lies on them.

Question 18Indian Contract Act, 1872 - General Principles of Contract

An agreement by which two traders divide the market between them so that each will not compete in the other's territory is most likely to be struck down on which ground?

  1. Uncertainty under Section 29
  2. Restraint of trade under Section 27 Correct answer.
  3. Wagering under Section 30
  4. Restraint of marriage under Section 26

Explanation

Section 27 voids every agreement by which a person is restrained from exercising a lawful profession, trade or business. A market-sharing arrangement that eliminates competition falls foul of this provision.

Question 19Indian Contract Act, 1872 - General Principles of Contract

Which of the following agreements is enforceable in India in view of the exception to the rule against restraint of trade?

  1. A clause restraining a partner from carrying on a competing business during the partnership term Correct answer.
  2. A clause restraining a trader from all future business activity
  3. A clause restraining an employee from competing for five years after resignation
  4. A clause restraining a seller of goodwill from ever working in any business

Explanation

Section 27 itself saves a partner's agreement not to compete during the subsistence of the partnership, and Section 36 of the Indian Partnership Act permits a similar restraint after dissolution within limits. Post-employment restraints are generally void.

Question 20Indian Contract Act, 1872 - General Principles of Contract

A wagering agreement under Section 30 of the Indian Contract Act, 1872 is which of the following?

  1. Illegal, and collateral transactions are void
  2. Valid but voidable
  3. Void and unenforceable Correct answer.
  4. Valid and enforceable

Explanation

Section 30 makes agreements by way of wager void, but not illegal, so collateral transactions such as loans to finance a wager remain enforceable. The distinction between void and illegal is central to this provision.

Question 21Indian Contract Act, 1872 - General Principles of Contract

A contract for the sale of a specific horse which, unknown to both parties, died before the agreement was made is which of the following?

  1. Valid, because the seller promised to deliver
  2. Void for mutual mistake of fact Correct answer.
  3. Illegal, because the seller concealed the death
  4. Voidable at the buyer's option

Explanation

Section 20 voids an agreement where both parties are under a mistake as to a matter of fact essential to it. The existence of the subject matter is essential, and neither party knew it had perished.

Question 22Indian Contract Act, 1872 - General Principles of Contract

Which of the following is a recognised exception to the rule that a stranger to a contract cannot sue upon it?

  1. A beneficiary of a trust created by the contract Correct answer.
  2. A person who is in the same trade as the promisor
  3. A person who merely overhears the contract
  4. A person who is a friend of the promisee

Explanation

Indian law recognises exceptions such as a beneficiary under a trust, a person for whose benefit a family arrangement is made, and the holder of a charge on immovable property. A mere stranger or friend has no standing.

Question 23Indian Contract Act, 1872 - General Principles of Contract

A and B enter into a contract in which A promises to pay C a sum of money, and B is to supply goods to A. C seeks to enforce A's promise. Which statement is correct under the Indian Contract Act, 1872?

  1. C can sue if the contract is in writing
  2. C can sue as a beneficiary of the trust
  3. C can sue because he is the intended payee
  4. C cannot sue, but A's promise may be enforced by B Correct answer.

Explanation

Under the privity rule, only a party to a contract can enforce it, so C cannot sue on the contract between A and B. B, as the promisee, may enforce A's promise, and C's remedy lies outside the contract.

Question 24Indian Contract Act, 1872 - General Principles of Contract

Which of the following describes a quasi-contract under the Indian Contract Act, 1872?

  1. A contract that is voidable at the option of one party
  2. An agreement supported by past consideration
  3. An obligation imposed by law independent of any agreement between the parties Correct answer.
  4. A contract implied from the conduct of the parties

Explanation

Sections 68 to 72 impose restitutionary obligations, such as the duty to repay money had and received or to compensate for necessaries supplied, irrespective of any agreement. These are often called quasi-contracts.

Question 25Indian Contract Act, 1872 - General Principles of Contract

A, a minor, borrows money from B and spends it on necessaries suited to his condition in life. Which statement correctly states the position?

  1. B cannot recover anything because the agreement is void
  2. A is liable only after attaining majority
  3. A's estate is liable to reimburse B for the necessaries supplied Correct answer.
  4. A is personally liable to repay the entire loan

Explanation

Section 68 provides that a person supplying necessaries to a minor is entitled to reimbursement from the minor's property, not from the minor personally. The claim is against the estate, which reflects the void nature of the agreement.

Question 26Indian Contract Act, 1872 - General Principles of Contract

Under the Indian Contract Act, 1872, which of the following best describes the legal effect of a counter-offer made by the offeree in response to an offer?

  1. It operates as an acceptance if it is made within a reasonable time of the original offer
  2. It converts the original offer into an invitation to treat that either party may withdraw at will
  3. It keeps the original offer alive while negotiations on the new terms continue
  4. It rejects the original offer and destroys it, so the original offer can no longer be accepted unless renewed Correct answer.

Explanation

A counter-offer is a new offer made by the offeree on fresh terms, and in law it operates as a rejection of the original offer, which is thereby extinguished. The original offer cannot afterwards be accepted unless the original offeror renews it. This is the settled position reflected in the classic illustration of a request for different terms in place of acceptance.

Question 27Indian Contract Act, 1872 - General Principles of Contract

P, a trader, agrees to sell to Q "100 tonnes of oil" without specifying whether it is coconut oil, mustard oil or some other oil, and the parties never settle the kind. What is the status of this agreement?

  1. It is valid because a reasonable quantity and quality will be implied by the court
  2. It is enforceable as an agreement to agree, binding once oil is delivered
  3. It is void because the essential term of subject matter is uncertain Correct answer.
  4. It is voidable at the option of Q alone because Q is the buyer

Explanation

Section 29 provides that agreements the meaning of which is not certain, or capable of being made certain, are void. Where the very commodity is left undetermined and no standard exists to fix it, the agreement is void for uncertainty. The court does not supply a subject matter that the parties never agreed upon.

Question 28Indian Contract Act, 1872 - General Principles of Contract

S, who is heavily indebted, transfers his only house to his nephew for a price far below its market value and continues to live there rent-free. In a suit by creditors to set aside the transfer, which ground is most directly engaged?

  1. The transfer is void because consideration was inadequate
  2. The transfer is voidable because the nephew occupied a fiduciary position
  3. The transfer is valid because a transferee in good faith for value takes a good title
  4. The transfer is intended to defeat or delay creditors and is therefore voidable under Section 53 Correct answer.

Explanation

Section 53 makes a transfer of property voidable at the instance of creditors if it is made with intent to defeat or delay them. Inadequacy of price combined with the transferor's continued enjoyment and insolvency is strong evidence of such intent. The creditors may therefore have the transfer set aside.

Question 29Indian Contract Act, 1872 - General Principles of Contract

Which of the following correctly states the position of a contract entered into by a person who, at the time of contracting, was of unsound mind but who later recovers and ratifies the transaction?

  1. The agreement is voidable at the option of the person who was of unsound mind
  2. The agreement becomes valid from the date of ratification only
  3. The agreement is void under Section 11 and cannot be validated by subsequent ratification Correct answer.
  4. The agreement becomes enforceable if the other party also ratifies it after recovery

Explanation

Section 11 requires that the parties be of the age of majority and of sound mind when contracting. An agreement by a person of unsound mind is void, and because it never existed in law, later ratification by the recovered person cannot breathe life into it. This parallels the position of a minor's agreement.

Question 30Indian Contract Act, 1872 - General Principles of Contract

R agrees to sell his car to K if K's son passes his final examination, and K promises nothing in return but hopes to buy the car later. Which element is missing so that K cannot enforce the arrangement?

  1. Consideration moving from the promisee at the promisor's desire Correct answer.
  2. Certainty of the terms of the arrangement
  3. Free consent of the parties
  4. Lawful object of the agreement

Explanation

Section 2(d) defines consideration as an act, abstinence or promise made at the desire of the promisor. A condition that benefits only the promisor's own wish, with nothing done at R's desire, is no consideration for R's promise. Without consideration the agreement is nudum pactum and cannot be enforced.

Question 31Indian Contract Act, 1872 - General Principles of Contract

An agreement is expressly declared to be void by the Indian Contract Act, 1872 when it restrains a person from exercising a lawful profession, trade or business. Which of the following is the statutory exception to this rule?

  1. A seller of the goodwill of a business agreeing not to carry on a similar business within specified local limits Correct answer.
  2. A trader agreeing never to trade in any commodity in any part of the world
  3. An employer restraining an employee from joining any competitor anywhere in India for life
  4. Two firms agreeing to fix prices and share the market between them

Explanation

Section 27 voids agreements in restraint of trade but expressly saves the sale of goodwill, where the buyer may restrain the seller from carrying on a similar business within specified local limits so long as the buyer or his successor carries on a like business. The limits must be reasonable.

Question 32Indian Contract Act, 1872 - General Principles of Contract

M owes N Rs. 50,000. N's servant, without N's authority, threatens to reveal damaging personal information about M unless M pays N an extra Rs. 10,000. M pays the extra amount out of fear. Which statement is correct?

  1. M can recover only if M can prove that the information was false
  2. M can recover only if N personally authorised the servant's threat
  3. M cannot recover anything because payment was voluntary and completed
  4. M can recover the extra amount as money paid under coercion, since the threat was made by N's servant in connection with the demand Correct answer.

Explanation

Coercion under Section 15 includes committing or threatening any act forbidden by the Indian Penal Code with the intention of causing a person to enter into an agreement. A threat of criminal intimidation to extract money is coercion, and money so paid can be recovered under Section 72. The truth of the information is irrelevant to the coercive character of the threat.

Question 33Indian Contract Act, 1872 - General Principles of Contract

A contract is discharged by accord and satisfaction when the parties agree that the original obligation will be replaced by a new obligation which is then performed. Which statement correctly describes the effect?

  1. The original contract is discharged by the substituted agreement once the new obligation is performed Correct answer.
  2. The original contract remains fully enforceable in addition to the new obligation
  3. The substituted agreement is void for want of consideration
  4. The original contract revives automatically if the new obligation is breached

Explanation

Where parties agree to substitute a new contract for the old one, the original obligation is discharged by accord and satisfaction once the substituted promise is performed. The new agreement is supported by the mutual giving up of the old rights. After discharge, the original contract cannot be sued upon.

Question 34Indian Contract Act, 1872 - General Principles of Contract

B holds a lease of premises from L. With L's consent, B agrees with C that C will pay the rent directly to L and B will vacate. C later fails to pay rent, and L sues C. Which principle best supports L's claim?

  1. The arrangement creates a privity of contract between L and C through L's consent, making C liable to L Correct answer.
  2. Consideration for C's promise is past consideration and therefore void
  3. L is a stranger to the contract between B and C and cannot sue under any circumstances
  4. C's promise is unenforceable because B gave no consideration to C

Explanation

Where a contract is made between two parties and a third party is brought into the arrangement with the consent of the promisee, a privity may arise enabling the third party to enforce the obligation. The recognised exception covers arrangements such as a lessee's covenant to pay rent to the lessor through the tenant's direct promise. L's consent to the arrangement supports the direct liability.

Question 35Indian Contract Act, 1872 - General Principles of Contract

A contract in which the parties agree that a dispute between them will be referred to arbitration is generally regarded as which of the following?

  1. Void, because parties cannot exclude the jurisdiction of civil courts
  2. Voidable at the option of either party
  3. A valid agreement because it ousts the jurisdiction of courts only as to the forum and not the right itself Correct answer.
  4. Void for uncertainty because the arbitrator is not named

Explanation

An arbitration clause is valid because it does not take away the substantive right to enforce a claim; it merely provides a different forum for its resolution. The Arbitration and Conciliation Act, 1996 recognises such agreements. Naming the arbitrator is not essential, since the appointment machinery can supply one.

Question 36Indian Contract Act, 1872 - General Principles of Contract

G agrees to pay H Rs. 1,00,000 if H's horse wins a race, and H agrees to pay G Rs. 1,00,000 if it loses. What is the correct legal position of this agreement?

  1. It is a wagering agreement and is void, though collateral transactions are not affected Correct answer.
  2. It is voidable at the option of the party who loses the bet
  3. It is a valid contingent contract enforceable by the winner
  4. It is an illegal agreement for which both parties may be prosecuted

Explanation

Section 30 declares agreements by way of wager void. A wager involves reciprocal promises to pay on the determination of an uncertain event in which neither party has any interest other than the stake. Although void, such agreements are not illegal, so collateral transactions remain enforceable.

Question 37Indian Contract Act, 1872 - General Principles of Contract

K appoints A as his agent to sell land and gives A authority to accept a deposit. A, without K's knowledge, agrees with the buyer that K will also pay for repairs to the boundary wall. Which statement is correct?

  1. K is bound because an agent's acts within the ordinary course of business always bind the principal
  2. K is bound only if A acted in good faith
  3. K is not bound by the collateral promise because A exceeded the authority conferred Correct answer.
  4. K is bound because the promise relates to the same land

Explanation

An agent can bind the principal only to the extent of the authority actually or apparently conferred. A promise to bear the cost of repairs is outside the authority to sell and accept a deposit, and the third party dealing with an agent is expected to ascertain the extent of authority. Good faith of the agent does not enlarge his authority.

Question 38Indian Contract Act, 1872 - General Principles of Contract

Under the Indian Contract Act, 1872, a proposal is said to be revoked by the proposer in which of the following ways?

  1. By the proposer making a fresh offer to a different person on the same subject
  2. By notice of revocation reaching the acceptor before the acceptance is put in a course of transmission so as to be out of the acceptor's power Correct answer.
  3. By the proposer's death, in every case, whether or not the acceptor knows of it
  4. By the proposer publishing the revocation in a newspaper without communicating it to the acceptor

Explanation

Section 5 permits revocation of a proposal at any time before the communication of acceptance is complete as against the proposer. That point is reached when the acceptance is posted so as to be beyond the acceptor's power. Revocation must be communicated to the acceptor to be effective.

Question 39Indian Contract Act, 1872 - General Principles of Contract

A agrees to let a hall to B for a concert on a fixed date, but the hall is destroyed by an accidental fire before the date. Neither party was at fault. Which statement correctly describes the position?

  1. The contract remains valid and A must arrange an alternative hall of equal quality
  2. The contract is voidable at A's option because A cannot perform
  3. The contract becomes void and the parties are discharged because performance has become impossible by an event beyond their control Correct answer.
  4. B must pay the rent because the risk of fire lies with the hirer

Explanation

Section 56 provides that a contract to do an act which, after the contract is made, becomes impossible by reason of an event which the promisor could not prevent, becomes void when the act becomes impossible. Accidental destruction of the subject matter without fault discharges both parties. The loss of rent already paid may be recoverable under the law of restitution.

Question 40Indian Contract Act, 1872 - General Principles of Contract

Which of the following correctly distinguishes a contract of indemnity from a contract of guarantee under the Indian Contract Act, 1872?

  1. In indemnity there are always three parties, while in guarantee there are only two
  2. In indemnity the promisor is liable only after the creditor exhausts remedies against a third party
  3. In indemnity the promisor's liability is primary and contingent on loss, while in guarantee the surety's liability is secondary and arises on the principal debtor's default Correct answer.
  4. In guarantee the surety's liability arises immediately and independently of the principal debtor's default

Explanation

Section 124 defines indemnity as a promise to save another from loss caused by the conduct of the promisor or any other person, and the indemnifier's liability is primary. Section 126 defines guarantee as a promise to discharge the liability of a third person in case of his default, so the surety's liability is secondary and collateral to the principal debtor's.

Question 41Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

Under the Indian Contract Act, 1872, a contract of indemnity is defined as a contract by which one party promises to save the other from loss caused by the conduct of the promisor himself or of any other person. Which section contains this definition?

  1. Section 126
  2. Section 148
  3. Section 172
  4. Section 124 Correct answer.

Explanation

Section 124 defines a contract of indemnity as a promise by one party to save the other from loss caused by the conduct of the promisor or of any other person. Section 126 deals with guarantee, section 148 with bailment and section 172 with pledge, so only section 124 fits.

Question 42Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

In a contract of guarantee, the person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is the principal debtor, and the person to whom the guarantee is given is the:

  1. Bailee
  2. Indemnifier
  3. Creditor Correct answer.
  4. Pledgee

Explanation

Section 126 states that the person to whom the guarantee is given is the creditor. The three parties in a guarantee are therefore the surety, the principal debtor and the creditor. An indemnifier or bailee belongs to different special contracts.

Question 43Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

Which of the following is an essential feature of a contract of bailment under Section 148?

  1. An authority given to act on behalf of another
  2. A promise to pay a debt on default of a third person
  3. Delivery of goods by one person to another for some purpose Correct answer.
  4. Transfer of ownership of goods to the bailee

Explanation

Section 148 defines bailment as delivery of goods by one person to another for some purpose, upon a contract that the goods shall be returned or disposed of according to directions. Ownership is not transferred; only possession and custody move to the bailee. Guarantee and agency are covered by different chapters of the Act.

Question 44Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

A pledge is defined under Section 172 as the bailment of goods as security for payment of a debt or performance of a promise. The bailor in a pledge is known as the:

  1. Surety
  2. Pawnee
  3. Pawnor Correct answer.
  4. Agent

Explanation

In a pledge the bailor is called the pawnor and the bailee is called the pawnee. The pawnor deposits goods as security for a debt or promise. Surety and agent are terms used in guarantee and agency respectively.

Question 45Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

An agent who is employed to do an act in an emergency for the protection of the principal's interests, in circumstances where the principal cannot be communicated with, is called an agent:

  1. By ratification
  2. By holding out
  3. By estoppel
  4. By necessity Correct answer.

Explanation

An agent by necessity arises where an emergency requires immediate action to protect the principal's property and prior instructions cannot be obtained. The authority rests on necessity rather than on consent, estoppel or later ratification. The other categories arise from conduct, subsequent adoption of an act, or representation.

Question 46Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

Under Section 128, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. This means the creditor may:

  1. Compel the surety to pay only after the principal debtor is adjudged insolvent
  2. Recover from the surety only half of the principal debt
  3. Recover the guaranteed amount from the surety without first proceeding against the principal debtor Correct answer.
  4. Recover from the surety only after exhausting remedies against the principal debtor

Explanation

Because the surety's liability is co-extensive with the principal debtor's, the creditor may proceed directly against the surety without first suing the principal debtor. The creditor is not required to exhaust remedies against the debtor or await insolvency. Any limitation to the contrary must be expressly agreed.

Question 47Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

A contract of guarantee in which the surety undertakes to pay only if the principal debtor defaults, and the surety's obligation is collateral to the principal debt, is distinguished from a contract of indemnity because in guarantee:

  1. The surety's liability is primary and independent
  2. There are only two parties
  3. The surety has no right of subrogation
  4. There are three parties and the surety's liability is secondary Correct answer.

Explanation

A guarantee involves three parties and the surety's liability is secondary, arising only on the debtor's default. An indemnity usually involves two parties and the indemnifier's liability is primary. The presence of three parties and secondary liability is the classic distinguishing feature.

Question 48Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

A surety who has paid the debt of the principal debtor is invested with all the rights which the creditor had against the principal debtor. This right is known as:

  1. Right of contribution
  2. Right of subrogation Correct answer.
  3. Right of lien
  4. Right of set-off

Explanation

Section 140 confers the right of subrogation, under which the surety steps into the creditor's shoes on payment. The surety then holds all the rights the creditor had against the principal debtor. Contribution concerns sharing among co-sureties, while lien and set-off belong to other doctrines.

Question 49Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

Two persons stand as co-sureties for the same debt of a principal debtor, each undertaking to pay the entire amount. The debtor defaults and one co-surety pays the whole debt. What right does the paying co-surety have against the other?

  1. A right to recover the entire amount from the principal debtor only
  2. A right of contribution to share the burden equally Correct answer.
  3. No right, because each had undertaken to pay the entire amount
  4. A right to be exonerated by the creditor

Explanation

Section 146 provides that co-sureties are liable to contribute equally to the amount paid in excess of their share, unless the terms of their contracts fix different limits. The paying surety can therefore recover the other's proportionate share. The fact that each undertook the whole debt does not eliminate contribution among them.

Question 50Indian Contract Act, 1872 - Special Contracts (Indemnity, Guarantee, Bailment, Pledge, Agency)

A continuing guarantee given to a firm for a series of transactions is revoked by the surety by notice to the creditor. What is the effect of such revocation under Section 130?

  1. It operates prospectively, discharging the surety only for future transactions Correct answer.
  2. It discharges the surety only if the creditor also agrees
  3. It has no effect unless the principal debtor consents
  4. It discharges the surety from all past and future transactions

Explanation

Under Section 130, revocation of a continuing guarantee may be effected at any time by notice to the creditor, but it operates only for future transactions. Liability already incurred in respect of earlier transactions is not affected. Consent of the debtor or creditor is not required for such prospective revocation.