Mumbai University

3 Years LLB- Semester IV (June 2023),

Contract II
Questions & Answers complied by RK

Contract of Indemnity & Guarantee

Q1) What is contract of Indemnity? Who is indemnifier and who is
indemnity holder?
➢ Section 124 of the Indian Contract Act, 1872 defines a contract of
indemnity as "A contract by which one party promises to save the other
from loss caused to him by the conduct of the promiser himself, or by
the conduct of any other person, is called a "contract of indemnity".
➢ Example: A contracts to indemnify B against the consequences of any
proceedings which C may initiate against B in respect of a certain Sum
of Rs. 50,000. This is a contract of indemnity.
➢ It may be noted that, the person who promises to make' good the loss
(caused by third party i.e. C in the above said illustration) is called
the 'indemnifier' and the person to whom the loss is to be made good
is called the 'indemnity holder'. Thus, in the above said example, A is
the indemnifier (the promiser) and B is the indemnity holder (the
promisee) and the contract between A and B is the contract of
indemnity.

Q2) What are the rights of Indemnity Holder?

➢ The Indemnity holder, acting within the scope of his authority, is
entitled to recover from the promiser:
➢ all damages which he may be compelled to pay" in any suit in respect
of any matter to which the promise to indemnify applies,
➢ all costs which he may be compelled to pay in any such suit in bringing
or defending it, provided he did not contravene the orders of the
promiser and acted in a prudent manner as he would have acted in the
 Contract II Q & A.

absence of any contract of indemnity or if the promiser authorized him

to bring or defend the suit;
➢ 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
promiser 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 promiser
specifically authorized him to compromise the suit.

Q3) What is contract of Guarantee?

➢ Section 126 of the Indian Contract Act, 1872 defines a contract of
guarantee as "A contract to perform the promise or discharge the
liability of a third person in case of his default.

Q4) What is continuing Guarantee? Explain with illustration?

➢ A guarantee which extends to a series of transaction, is called, a
"continuing guarantee".
➢ A guarantees payment to B, a tea-dealer, to the amount of Rs.100,
for any tea he may from time to time supply to C. B supplies C with
tea to above the value of Rs. 100, and C pays B for it. Afterwards,
B again supplies C with tea to the value of Rs 200. C fails to pay. The
guarantee given by A was a continuing guarantee, and he is accordingly
liable to B to the extent of Rs.100.

Q5) How continuing guarantee can be revoked?

➢ The provisions relating to Revocation of continuing Guarantee are given
under S 130-131 of Indian Contract Act 1872. The continuing
guarantee is revoked in the following circumstances:
➢ continuing guarantee revocation by notice (S. 130): A continuing
guarantee may at any time be revoked by the surety as to future
transactions, by “Notice to the Creditor".

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 Contract II Q & A.

➢ Revocation by death of the surety: A continuing guarantee is

automatically revoked by the death of the surety as regards for future
transactions unless there is a contract to the contrary.
➢ Revocation by variance in the continuing guarantee: A continuing
guarantee is revoked when there is any variance made in the terms of
the contract between the Principal debtor and the creditor without the
consent of the surety. The surety is discharged from his liability as
regards to transactions subsequent to the variance.
➢ Discharge of Principal Debtor: The surety is discharged by any contract
between the creditor and the principal debtor, by which the principal
debtor is released, or by any act or omission of the creditor the legal
consequence of which is the discharge of the principal debtor.
➢ If the creditor does any act which is inconsistent with the rights of
the surety; or omits to do any act which his duty to the surety requires
him to do; and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged.

Q6) Explain Rights & Liabilities of surety?

➢ Rights of Surety are as follows:
Against Principal Debtor:
a) Rights of surety on payment or performance (Sec 140):
Where a guaranteed debt has become due, or default of the
principal debtor to perform a guaranteed duty has taken place, the
surety upon payment or performance of all that he is liable for, is
invested/entitled with all the rights which the creditor had against
the principal debtor.
b) Implied promise to indemnify surety (Sec 145): 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 rightfully paid under the
guarantee, but no sums which he has paid wrongfully.

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 Contract II Q & A.

Rights against Creditors:

a) Surety's right to benefit of creditors securities (Sec 141): A surety
is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of
suretyship is entered into, whether the surety knows of the
existence of such security or not and if the creditor loses or without
the consent of the surety, parts, with such security, the surety is
discharged to the extent of the value of the security.
b) Right to set-off: The surety is entitled to the right to set-off. In
a situation where the creditor sues the surety for the given
guarantee, the surety can claim for set-off against any due by the
creditor against the principal debtor. It means that the surety has
a right to deduction in the amount of his guarantee to the extent
of any dues of the creditor towards the principal debtor in any
different contract or agreement.
c) Right to require the creditor to sue the principal debtor: After the
guarantee debt becomes due and before the surety is required to
pay such guaranteed debt, the surety has right to require the
creditor to sue the principal debtor subjecting indemnifying the
creditor for any loss or expenses to be incurred by the creditor in
doing so.
Rights against Co-sureties:
a) Right of the surety to make the co-sureties liable to contribute
equally (S.146): Where two or more persons are co-sureties for the
same debt or duty, either jointly or severally and whether same or
under different contracts, whether with or without the knowledge
of each other, the co-sureties, in the absence of any contract to
the contrary, are liable, as between themselves, to pay each an
equal share of the whole debt, or of that part of it which remains
unpaid by the principal debtor.
b) Right of the surety to make the co-sureties bound in different sums
(S. 147): Co-sureties who are bound in different sums are liable to

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 Contract II Q & A.

pay in proportionality as far as the limits of their respective

obligations permit.

Q7) What are the modes of discharge of surety under contract of

guarantee?
➢ A surety is discharged when his liability ends. A surety is discharged in
the following circumstances and in the following ways:
A. Surety is discharged by revocation:
➢ By notice (S.130): A surety is discharged by revocation by giving
notice to the creditor. A continuing guarantee may be revoked by
the surety at any time as to the future transaction by giving notice
to the creditor.
➢ By death of surety (S. 131): Surety's death is instrumental in the
revocation of continuing guarantee, so far as the future transactions
are concerned and in the absence of any contract to the contrary.
➢ By novation (S. 62): A surety is discharged by revocation on account
of novation or rescission and alteration of the contract.
B. Surety is discharged by the conduct of the creditor
➢ By variance in the terms of contract (S-133): A surety may be
discharged by variance in the terms of contract made without taking
the consent of the surety, and such variance is made with regard to
the terms of the contract between the principal debtor and the
creditor.
➢ Discharge of the principal debtor (S. 134): A surety is discharged
by the conduct of the creditor by discharge of the principal debtor.
If there is a contract between the principal debtor and creditor, by
which the principal debtor is discharged, such discharge of principal
debtor also discharges the surety.
➢ Discharge of surety by creditor's act or omission resulting into the
impairing surety's eventual remedy (S. 139): A surety is discharged
when the eventual remedy of the surety is impaired by any act of

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the creditor which is inconsistent with the rights of the surety or

any omission on the part of the creditor.
➢ Loss or parting with security (S.141): A surety is discharged, when
there is loss or parting with the security by the creditor without
the knowledge of the surety. The surety is discharged to the extent
of the value of the security.
C. Surety is discharged by invalidation of contract
➢ Guarantee obtained by misrepresentation (S-142): A surety is
discharged by invalidation of contract when the guarantee is
obtained by misrepresentation. When guarantee is obtained by
misrepresentation, it renders the contract invalid.
➢ Guarantee obtained by concealment(S- 143): A surety is discharged
by invalidation of contract when the guarantee is obtained by
concealment of material facts.

Q8) Distinguish between Contract of Guarantee and Contract of

Indemnity?
Contract of Indemnity Contract of Guarantee
There are two parties i.e. the There are three parties i.e. the
indemnifier and indemnity holder. creditor, principal debtor and
This a direct contract surety. This is a consequential
contract.
The person giving indemnity has The person giving guarantee has no
some interest in the transaction interest in the transaction
itself.
The liability on the part of the The liability on the part of the
indemnifier is primary principal debtor is primary, and.
the liability of the guarantor is
secondary.

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 Contract II Q & A.

Q9) What is a principal debtor?

➢ Section 126 of the Indian Contract Act, 1872 defines a principal
debtor as "The person in respect of whose default the guarantee is
given, is called the principal debtor".

Q10) Who is an 'Indemnifier' and 'Indemnity Holder'

A person who promises to indemnify, is known as 'Indemnifier'; and the
person in whose favour such a promise is made, is known as 'Indemnified'
or 'Indemnity Holder'

Q11) Who is surety ?

Surety is a person who undertakes to be liable towards the creditor if
the Principal Debtor makes a default.

Q12) What is Co-surety? What are the rights of Co-sureties?

Meaning of Co-surety
➢ When the same debt or duty is guaranteed by two or more persons,
such persons are called as 'co-sureties'
Rights of Co-sureties.
➢ Co-sureties liable to contribute equally (Section 146): Equality of
burden is the basis of Co-suretyship. When two or more persons are
co-sureties for the same debt, or duty, either jointly, or severally and
whether under the same or different contracts and whether with or
without the knowledge of each other, the co-sureties in the absence
of any contract to the contrary, are liable, as between themselves, to
pay each an equal share of the whole debt, or of that part of it which
remains unpaid by the principal debtor”. Example: A, B and C are
sureties to D for the sum of 3,00,000 rupees lent to E. E makes
default in payment. A, B and C are liable, as between themselves, to
pay 1,00,000 rupees each.
➢ Liability of co-sureties bound in different sums (Section 147) : The
principal of equal contribution is, however, subject to the maximum limit

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fixed by a surety to his liability. Co-sureties who are bound in different

sums are liable to pay equally as far as the limits of their respective
obligations permit. Example: A, B and C, as sureties for D, enter into
three several guarantee contracts, each in a different penalty, namely,
A in the penalty of Rs.1,00,000, B in that of Rs.2,00,000, C in that
of Rs.4,00,000, conditioned for D’s duly accounting to E. D makes
default to the extent of Rs.4,00,000. A is liable to pay Rs.1,00,000
and B and C Rs.1,50,000 each.
➢ Right to Claim Contribution: If a co-surety pays more than his
proportionate share of liability, he has a right to claim contribution
from the other co-surety or co-sureties.
➢ Right to Share the Security: If a co-surety obtains any security of
principal debtor, the other co-surety (or co-sureties) has (or have) a
right to share such security.

Q13) What are the circumstances when guarantee becomes invalid?

Sections 142 to 144 state the circumstances in which the contract of
guarantee becomes invalid. They are as under:
➢ When guarantee is obtained by means of misrepresentation made by
the creditor;
➢ When guarantee is obtained by concealment or keeping silence as to
material facts;
➢ When a guarantee is given on a contract that creditor shall not act on
it until co-surety joins.

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Bailment

Q14) Define 'bailment'?

➢ As per section 148 of the Indian Contract Act, 1872,
➢ 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 off according to the directions of the
person delivering them.
➢ Example: A tailor getting a piece of cloth for the purpose of stitching
a pant/shirt is the example of bailment.

Q15) Who is a bailee?

➢ Section 148 of the Indian Contract Act, 1872 defines "bailee" as the
person to whom the goods are delivered for specific purpose is called
the bailee.

Q16) What is gratuitous bailment ?

➢ Gratuitous bailment means, the bailment of goods without reward or
consideration or charges.

Q17) Who is a bailor?

➢ A bailor is a person who temporarily gives the possession of goods or
property for certain purpose but not the ownership under the bailment.

Q18) State different kinds of bailment?

Different kinds of Bailment are:
➢ Gratuitous Bailment or Comodatum bailment: A Bailment made without
any consideration for the benefit of the bailor or for the benefit of
the bailee is called Gratuitous Bailment. In simple words A bailment
with no consideration is Gratuitous bailment.

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 Contract II Q & A.

➢ Non Gratuitous bailment is a bailment for reward. It is for the benefit

of both the bailor and bailee.
➢ Bailment for carriage: In this kind of bailment, the goods are delivered
by one person to another for carrying them from one place to another.
This work of carrying the goods is rewarded. In other words, the
reward (eg. money) is payable to the person who carried them (i.e. the
bailee).
➢ Bailment for repairs: In this kind of bailment, the goods are delivered
from one person to another for the purpose of repairing them. The
work of repairing is rewarded. In other words, the reward is payable
to the person who repairs it (i.e. the bailee).
➢ Bailment for safe custody: In this kind of bailment, the goods are
delivered from one person to another for the purpose of keeping them
in safe custody with such person, and such work of keeping the goods
in safe custody is rewarded. In other words, the reward is payable to
the person who keeps them in his safe custody (i.e. the bailee).
➢ Bailment for hire: In this kind of bailment, the goods are delivered
from one person to another for the purpose of hire. The hiring of goods
is meant for the use and benefit of the bailee. The person who hires
the goods is required to make payment and such payment as hiring
charges are payable to the Bailer.
➢ Bailment for pledge: In this kind of bailment, the goods are delivered
from one person to another as security for the payment of the amount
of loan borrowed by the bailer (the person who delivers the goods 'as
security). Pledge is also known as Pawn.

Q19) What are the duties & Liabilities of Bailor?

The following are the duties of Bailor:
a) It is the duty of a bailor to disclose all faults. If bailor fails to disclose
such faults then he will be responsible for the damage caused to goods
or loss suffered by the bailee.

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b) Also, the bailor is under the duty to pay the extraordinary expenses
incurred by the bailee for such bailment.
c) It is the duty of the bailor to accept the goods after the purpose for
which such goods were bailed is accomplished.
d) It is the duty of the bailor to indemnify the bailee for the cost incurred
due to the defective title of goods bailed to the bailee.

Q20) What are the duties & Liabilities of Bailee?

The duties of bailee are as under:
➢ Take proper care of goods: It is the duty of a bailee to take care of
goods bailed to him. Bailee should take care of these goods as an
ordinary man will take care of his own goods of the same value, quality,
and quantity. Thus, if the bailee takes due care of goods then he will
not be liable for any loss, deterioration of such goods. Also, the bailee
needs to take the same degree of care of goods whether the bailment
is for reward or gratuitous.
➢ Not to make unauthorized use: The Bailee shall not make any
unauthorized use of goods bailed. In case he makes any unauthorized
use, then bailor can terminate the bailment. Further, Bailor can also
claim for damages caused to goods bailed due to unauthorized use.
➢ Keep goods separate: The bailee needs to keep the bailed goods
separately from his own goods. He should not mix the goods under
bailment with his own goods. In case bailee mixes the goods with his
own goods without the consent of the bailor, then (i) Bailor shall also
have an interest in the mixture. (ii) If the goods can be separated or
divided, the property in the goods remains with both the parties. But,
the bailee bears the expenses of separation or any damages arising
from the mixture. (iii) If it is not possible to separate the goods, the
bailee shall compensate the bailor for the loss of goods.

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➢ Return Goods: It is the duty of the bailee to return the goods without
demand on the accomplishment of the purpose or the expiration of the
time period. In case of his failure to do so, he shall be liable for the
loss, destruction, deterioration, damages or destruction of goods even
without negligence.
➢ Return increase or profits: A bailee shall return the goods along with
any increase or profit accruing to the goods to the bailor, in the
absence of any contract to the contrary.

Q21) What are the rights of Bailee?

The rights of bailee are as under:
➢ Right to recover charges: If the bailment is non-gratuitous, Bailee has
right to recover agreed charges. If charges are not fix or agreed.
Then Bailee can recover reasonable charges or charge which is charged
by other bailee.
➢ Right to return the goods in cases of joint bailers: If several joint
owners of goods bail them, the bailee may deliver them back to or
according to the directions of, one joint owner without the consent of
all, in the absence of any agreement to the contrary.
➢ Right of Compensation: The bailor is responsible to the bailee for any
loss which the bailee may sustain by reason that the bailor was not
entitled to make the bailment or to receive back the goods or to give
directions in respect of goods bailed. Thus, bailee can recover the
amount of loss which he has suffered due to defective title of Bailor.
➢ Right to apply to the court: If a person, other than the bailor, claims
goods bailed, he may apply to the Court to stop the delivery of the
goods to the such a person and to decide the title to the goods.
➢ Right against wrong does: If a third person wrongfully deprives the
bailee of the use or possession of the goods bailed, or does them any
injury, the bailee is entitled to use such remedies as the owner might
have used in the like case if no bailment had been made; and either
the bailor or the bailee may bring a suit against a third person for
such deprivation or injury.
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➢ Right of lien [S.170, 117]: Bailee can retain the possession goods
belong to bailor until the charges due to the bailor are paid.

Q22) What is a Lien? Write a short note on Bailee’s Right of Lien?

What is right of Lien:
➢ The right of lien is a right to detain goods belonging to another, by a
person in possession, until the sum claimed or other demand of the
person in possession is satisfied.
➢ Rights of Lien can be of two types
➢ Particular Lien: A lien which can be exercised only on goods in respect
of which some payment is due is called particular lien. When the bailee,
in accordance with the purpose of agreement has rendered any service
involving the exercise of labour or skill, to the goods bailed, and his
lawful payments are not made by the bailor, then the bailee has a right
to retain unless there is a contract to the contrary, the goods bailed,
until he received his remuneration for the services rendered by him.
This right to retain goods is known as bailee's lien (Section 170).
➢ General Lien: The right of general lien, as provided for in Section 171,
means the right to hold the goods bailed as security for a general
balance of account. Whereas right of particular lien entitles a bailee
to detain only that particular property in respect of which charges are
due. Right of general lien entitles the bailee to detain any, goods bailed
to him for any amount due to him whether in respect of these goods
or any other goods. The right of general lien is privilege and is specially
conferred by Section 171 on certain kinds of bailees only. They are
bankers, factors, wharfingers, attorneys of a high court, and policy
brokers

Q23) Who is finder of Goods? What are his rights and obligations?
➢ According to section 71 of the Indian Contract Act, 1872, a person
who comes across the goods that are unclaimed or whose actual owner
is not known and takes them into his custody is known as 'Finder of
Goods'.

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➢ Duties of Finder of Lost Goods:

➢ Under Section 71 of the Contract Act, a finder of goods has same
duties with regards the goods found, as that of a bailee. Hence, 1)
The finder should take reasonable care of the goods found. 2) He
should not put the goods for his personal use. 3) He should not mix the
goods found with his own goods. 4) It is the duty of the finder of
goods to find the real owner of the goods and then to entrust the
goods to him.
Rights of Finder of Lost Goods:
➢ The right of Lien: According to section 168 of the Indian Contract
Act, 1872, finder of the lost goods can exercise his right of particular
lien if the actual owner refuses to make the payment of the expenses
incurred to preserve those goods or to find the actual owner. But finder
of the lost goods cannot sue him for the same.
➢ The right of Claiming the Award, if announced by the owner: According
to section 168 of the Indian Contract Act, 1872 finder of lost goods
cannot sue the actual owner for expenses incurred by him. But he can
sue him for the award that is announced by the owner and he refuses
to pay the same.
➢ Right to Sell the goods under certain cases: As per provisions of Sec
169 of ICA, if the good is of the nature that is commonly sold and
after sufficient and reasonable searching, the owner cannot be found,
the finder may sell it. The same stands for if the owner is found but
does not agree to pay the demanded legally recognised charges incurred
by the finder. The sale, however, can only proceed if it fulfils the
following criteria: (a) The goods are of perishable nature or at risk of
losing the greater part of their value, or (b) The legally recognised
cost of finding the owner surpasses two-thirds of the value of the
found goods themselves.

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Pledge.
Q24) Define Pledge or Pawn?
➢ Section 172 of the Indian Contract Act, 1872 defines pledge as the
bailment of goods as security for payment of a debt ot performance
of a promise is called pledge.
➢ Pledge is also known as Pawn.

Q25) Distinguish between bailment and Pledge?

Bailment Pledge
Transfer of goods from one person Transfer of goods from one person
to another for a specific purpose is to another as security for
known as the bailment repayment of debt is known as the
pledge
It is defined under section 148 of It is defined under section 172 of
the Indian Contract Act, 1872 the Indian Contract Act, 1872
The person who delivers the bailed The person who delivers the
goods is known as Bailor and the pledged goods is known as Pledger
person receiving such goods is or Pawnor and the person receiving
known as Bailee such goods is known as Pledgee or
Pawnee
The consideration may or may not Consideration is always there
be present
Bailee has no right to sell the goods Pledgee or Pawnee has the right to
bailed sell the goods
Bailee can use the goods only for a Pledgee or Pawnee cannot use the
specific purpose only and not goods pledged
otherwise

Q26) What are the rights of pledgee?

The rights of the pledgee or pawnee are as under:
➢ Right to retain the goods: If the Pawnor fails to make the payment of
a debt or does not perform as per the promise made, the Pawnee has

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the right to retain the goods pledged as security. Moreover, Pawnee

can also retain goods for non payment of interest on debt or non-
payment of expenses incurred. But Pawnee cannot retain goods for any
other debt or promise other than that agreed for in the contract.
(Section 173-174). For example, X pledges his gold jewelry for some
loan from a bank. In such a case bank has all the rights to retain the
gold jewelry not only for adjustment of loan amount but also for
payment of interest accrued on such loan amount.
➢ The right of suit to procure debt: On the failure to make repayment
to Pawnee of the debt, the Pawnee has two rights: either to initiate
suit proceedings against him or sell the goods. In the former case, the
Pawnee retains the goods with himself as collateral security and initiate
the court proceedings. He need to provide reasonable notice of such
proceedings to the Pawnor
➢ Sale of pledged goods:. The Pawnee can also sell the goods after giving
due notice of sale to the Pawnor. If the amount received from the sale
of goods is less than the amount due then the rest amount can be
recovered from Pawnor thorugh a suit filed in court, and if the Pawnee
gets more amount than the due amount then such surplus is to be given
back to Pawnor. (Section 176). However, the pawnee cannot sell the
goods to himself. If he does so the sale is void and the pawnor can
take back the goods after paying the amount due.

Q27) State 2 points of distinction between pledge and lien.

➢ Pledge is the right to retain the goods or property bailed as security
for payment of debts or for performance of a promise; Lien is the
right to retain the goods or property of another peron as a security
for certain claims arising from the goods or property bailed; .
➢ Pledge is the creation of the contract between the parties; Lien is the
creation of the law.

Q28) Why pledge is called as a special kind of Bailment?

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 Contract II Q & A.

➢ In a Pledge, the goods are kept as a security, therefore, the Pledge

is called a special kind of Bailment.

Q29) State the circumstances by which a non owner can make a valid
pledge?
➢ The general rule is that, the goods must be pledged by true owner of
the goods; But, there are certain cases in which even a non-owner
(who is not true owner) of the goods can pledge the goods and can
create valid pledge on the goods. These certain cases or certain
situations are called exceptions to the general rule "no one can make a
valid pledge who is not the owner of the goods".
➢ Mercantile Agent: A mercantile agent who is in the possession of the
goods or the documents to the title of the goods with the consent of
the owner can pledge these goods while acting in the ordinary course
of business. This pledge is valid, if the owner of the goods expressly
authorizes him to do so. But, this pledge is valid only when the Pawnee
acts in good faith and at the time of pledge is unaware of the fact
that the mercantile agent did not have the authority to pledge.
➢ Possession under a voidable contract: A person may get the possession
of the goods under a contract that is voidable at the option of the
lawful owner. The contract is voidable on the grounds of fraud,
misrepresentation, etc. The pledge by the person in possession of goods
is valid until the contract is void.
➢ Limited Interest: According to Sec 179 of ICA, when the pawnor not
being the owner of the goods and having limited interest pledges the
goods, the pledge is valid only to the extent of such limited interest.
➢ Pledge by a co-owner: When a co-owner in possession of the goods with
the assent of all the other co-owners pledges them, it is a valid pledge.
➢ Pledge by seller or buyer in possession of goods after the sale: A pledge
by a seller who is in the possession of the goods after the sale is valid
only when the Pawnee acts in good faith and at the time of pledge is
unaware of the sale of goods to the buyer.

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Law of Agency.
Q30) What is the contract of agency?
Ans) The contract of Agency is a relationship which exists where one
individual (the principal) approves another (the agent) to act for his sake
or on his behalf and the agent consents to do as such as per the terms
of contract. Since it is a contract, both the principal and agent should be
competent to enter into contract.

Q31) Define Agent?

➢ An agent is a person, employed to do any act for another or to
represent another in dealings with third person

Q32) Write short note on sub agent?

➢ Sub Agent is appointed and works under the control of Agent,
ordinarily, Agent has no power to delegate the works which has been
given (delegated) to him by Principal. Sec- 190 prohibits agent to
appoint sub Agent. However, under certain exceptional circumstances
wherein Agent has power to appoint sub agent and delegate his power
to sub agent. As S. 190 provides that, An agent cannot lawfully employ
another to perform acts which he has expressly or impliedly undertaken
to perform personally, unless by the ordinary custom of trade, a sub-
agent may, or, from the nature of the agency, a sub-agent must, be
employed.
➢ According to S. 191 of ICA 1972; A "Sub-agent" is a person employed
by and acting under the control of the original agent in the business of
the agency.
➢ S.194 provides that where 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.

18
 Contract II Q & A.

➢ Where an agent, without having an authority to do so, has appointed a

person to act as a sub-agent, under such circumstances, the agent is
responsible for the acts of such sub-agent to both principal and the
third parties.
➢ "The sub-agent is responsible for his acts to the agent, but not to the
principal, except in case of fraud or willful wrong.
➢ In selecting such sub-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 or negligence of the sub-agent
so selected.

Q33) Write a note on agency coupled with interest?

➢ The provisions relating to agency coupled with interest are given in Sec
202 of ICA 1972.
➢ Where the agent has, himself an interest in the property which forms
the subject matter of the agency, the agency cannot, in the absence
of an express contract, be terminated to the prejudice of such
interest. Such an agency is known as an agency coupled with interest.
➢ In other words, in this case, when any amount are due and payable to
the agent by the principal, the agency cannot be terminated by the
principal.

Q34) What is the conclusive test of an Agency ?

➢ It is the essential element of contract of agency that, there must be
intention of the agent to act on behalf of another i.e. the principal.

Q35) Who is Del Credere Agent ?

➢ Del Credere agent is a mercantile agent, who for an extra commission
(i.e delcredere commission), guarantees the' solvency 'of the person
with whom he enters into contract. He undertakes the responsibility
of other party to perform the contract.

19
 Contract II Q & A.

Q36) What are the modes of creation of Agency?

➢ Agency by Express Agreement: Section 186 of ICA, 1872 defines that
the authority of an agent may be expressed or implied. Therefore, an
express contract of agency can be made orally or in writing. In this
context, an authority is said to be express when it is given by words
spoken or written.
➢ Implied authority - According to Section 187, an authority is said to
be implied when it is to be inferred from the circumstances of the
case. Implied agency arises when there is any conduct, the situation of
parties or is necessary for the case. Implication (implied) is when an
agent is not directly appointed but his appointment can be inferred
from the circumstances, an agency by implication is created. Implied
agreements are unexpressed agreement. Implied agreements/agency
arises from the conduct, situation or relationship of the parties. It
may be inferred from circumstances of the case.
➢ Necessity– In a situation of necessity, one person can act on behalf of
another to save the person from any loss or damage, without expressly
being appointed as an agent. This creates an agency out of necessity.
➢ Estoppel (Section 237)– An agency can also be created by estoppel. In
a situation where one person behaves in such a manner in front of a
third person, as to make someone believe he is an authorized agent on
behalf of someone, an agency by estoppel is created. Principal allows
third party to believe agent has power/authority to act on its behalf.
Agent has apparent (also called “ostensible”) authority. The principal is
estopped (prevented) from denying that agent had not authority. A
court will uphold a contract where there is apparent authority.
➢ Holding out -This may arise from the relation of employer and
employee. A manager is an agent of the company. The agency that is
held due to any kind of business relationship is known as agency by
holding out.

20
 Contract II Q & A.

➢ Ratification– When an act of a person, who acted as another person’s

agent (on his behalf) without his knowledge is later ratified by that
person, this creates an agency by ratification between the two.

Q37) What are the modes of termination of agency?

➢ Mode of termination of Agency are mentioned in Sec. 201 of ICA. Sec
201 provides that an agency is terminated by the Principal revoking his
authority or a by the agent renouncing the business, or by the business
of the agency being completed or by either the principal or agent dying
or becoming of unsound mind; or by the principal being adjudicated an
insolvent under the provisions of any Act for the time being in force
for the relief of insolvent debtors.
➢ By agreement: By mutual agreement between Principal and Agent, the
agency can be terminated at any time or any stage.
➢ Revocation by the Principal:- Agency can be terminated by the Principal
revoking the Agent's authority. The Principal can revoke only his
agent's authority when it has not been exercised by the Agent.
Reasonable notice must be given for such revocation. Revocation may
be express or implied.
➢ Renunciation by Agent- Agency can be renunciated by the agent in the
same manner in which the principal can revoke the agent's authority.
Reasonable notice must be given for such renunciation.
➢ Completion of Business or Expiry of time: - When the business of
agency is completed, the relationship between Principal and agent also
comes to an end automatically.
➢ Death of the Principal or Agent: When either the principal or the agent
dies, the agency relationship is automatically terminated.
➢ Insanity of Principal or agent: When either the principal or his agent
becomes unsound mind, the agency relationship is automatically
terminated.
➢ Insolvency of the Principal: When the Principal is declared as an
insolvent, the agency relationship is terminated.

21
 Contract II Q & A.

➢ Subsequent impossibility: Agency is also terminated when after the

creation of the agency. (i) the subject matter of the agency business
is destroyed: (ii) Business of the agency becomes unlawful.

Q38) Define the term 'agent'?

➢ An agent is a person, employed to do any act for another or to
represent another in dealings with third person

22
 Contract II Q & A.

Sale of Goods Act 1930.

Q39) Define contract of sale of goods.

➢ A contract of sale is that contract in which the seller transfers or
agrees to transfer the property in goods to the buyer for a price. The
term ‘contract of sale’ includes both a sale and an agreement to sell.

Q40) Define 'Goods' under the Sale of Goods Act, 1930.

➢ Goods means every kind of movable property other than actionable
claims and money; and includes stock and shares, growing crops, grass
and things attached to or forming part of the land which are agreed
to be severed before sale or under the contract of sale

Q41) What are the essential features of Contract of Sale of goods?

The five essential features of a contract of sale are as under:
➢ Two parties: there must be 2 distinct parties i.e. a buyer and a seller,
to affect a contract of sale and they must be competent to contract.
‘Buyer’ means a person who buys or agrees to buy goods [Sec. 2(1)].
‘Seller’ means a person who sells or agrees to sell goods.
➢ Subject matter to be goods: there must be some goods, the property
in which is or is to be transferred from the seller to the buyer. The
goods which form the subject-matter of the contract of sale must be
movable. Transfer of immovable property is not regulated by the Sale
of Goods Act.
➢ Transfer of ownership of Goods: There must be transfer of ownership
or an agreement to transfer the ownership of goods from the seller to
the buyer – not the transfer of mere possession or limited interest as
in the case of pledge, lease or hire purchase agreement). If goods
remain in possession of seller after sale transaction is over, the
‘possession’ is with seller, but ‘ownership’ is with buyer.
➢ Consideration is Price: Price is an essential ingredient for all
transactions of sale and in the absence of the price or the

23
 Contract II Q & A.

consideration, the transfer is not regarded as a sale. The transfer by

way of sale must be in exchange for a price. It has been held that
price normally means money considerations for a sale of goods sec 2
(10). When goods are exchanged for goods, it is a contract of barter
or exchange.
➢ Essential elements of a valid contract: All essential elements of a valid
contract must be present in the contract of sale. viz., competent
parties, free consent, legal object and so on. The transfer of
possession and ownership under the Act has to be voluntary and not be
tainted with fraud or duress

Q42) Define goods as per SOG Act ?

➢ ‘goods’ is defined in Section 2(7) of SOG Act 1930. It states that
‘goods’ “means every kind of movable property other than actionable
claims and money; and includes stock and shares, growing crops, grass
and things attached to or forming part of the land which are agreed
to be severed before sale or under the contract of sale”.

Q43) Distinguish between Contract of Sale and Agreement to Sell?

Contract to Sale Agreement to Sell
It is an executed contract It is an executory contract
The property in the goods sold The property passes when it
passes to the buyer at the time of becomes sale on the expiry of
contract. It passes immediately prescribed time or the fulfilment of
certain conditions. It takes place
at a future time or subject to
fulfilment of conditions
It creates a right in rem – a right It creates a right in personam –
to enjoy the goods against the right against the seller
whole world including the seller
The transfer of risk takes place There is no transfer of risk of loss
immediately. It is related to of goods as ownership is not

24
 Contract II Q & A.

ownership and when ownership is transferred. The loss will be borne

transferred, the risk also passes to by the seller even though the goods
the person. If there is loss of are in possession of the buyer
goods, it will fall on the buyer even
though the goods maybe in the
possession of the seller
Since the property has passed to The seller can only sue for
the buyer, the seller can sue the damages, unless the price was
buyer for price of the goods payable at a particular date.
In case of insolvency of Seller, In case of insolvency of Seller,
Buyer can claim the goods from the Buyer cannot claim the goods but
Official assignee or Receiver only a rateable dividend for the
money paid.

Q44) What is the meaning of Auction Sale?

➢ According to Section 64 of the Sale of Goods Act, 1930, a sale by
auction, is a sale, where various intending buyers make their offers to
purchase the goods by making successive bids'. Then goods are usually
sold to the highest bidder.

Q45) What is Condition? What is the implied condition?

➢ As per Sale of Goods Act 1930, A condition is a stipulation essential
to the main purpose of the contract, the breach of which gives rise to
a right to treat the contract as repudiated.
➢ a condition is a foundation of the entire contract and integral part for
performing the contract. The breach of the conditions gives the right
to the aggrieved party to treat the contract as repudiated. In other
words, if the seller fails to fulfil a condition, the buyer has the option
to repudiate the contract or refuse to accept the goods. If the buyer
has already paid, he can recover the prices and also claim the damages
for the breach of the contract.

25
 Contract II Q & A.

➢ The condition may be express or implied. Implied conditions presumes

certain conditions of the contract exist, even if it is not clearly stated,
and that both parties understand these conditions exist before entering
into the contract. The following are different kinds of implied
conditions:
a) Implied condition as to title: In each contract of the sale, except
otherwise specifically provided, there is an implied condition with
respect to the seller that in the event of sale, he has a privilege to
sell the goods and on account of agreement to sell, he will have right
to sell merchandise when the property in them is about to pass.
b) Implied Condition in sale by description: When the merchandise is sold
by the description there is an implied condition that the supplied
merchandise corresponds with the description.
c) Sale by Sample: when a contract of sale is a contract for sale by
sample, such sample works as implied condition in a contract of sale
that (a) the bulk should correspond with the sample in quantity; (b) The
buyer should have reasonable opportunity to compare the bulk with the
quantity; (c) that the goods should be free from any defect.
d) Implied condition in sale by sample as well as description: If the sale
is by both sample as well as by description, it isn't adequate that the
greater part of the merchandise relates with the sample if the
merchandise does not correspond with description.
e) Implied condition as to quality or fitness: Where the purchaser,
explicitly or by implication, makes known to the vendor the specific
reason for which the products are required, in order to show that the
purchaser depends on the seller's aptitude or judgment, and the
merchandise are of a description which it is over the span of the
merchant's business to supply (regardless of whether he is the producer
or manufacturer or not), there is an implied condition that the products
will be sensibly fit for such reason

Q46) Who is an Unpaid Seller?

26
 Contract II Q & A.

➢ According to Section 45 (I) of the Sale of Goods Act; a person is called

"unpaid seller;
➢ i) when the whole of the price has not been paid or tendered or
➢ il) when a bill of exchange or other negotiable instrument is received
for the payment of goods and such bill instrument is dishonored.

Q47) What are the rights and duties of Unpaid seller?

As per the provisions of Sec 46 of Sale of goods Act 1930, the rights of
an unpaid seller can be of two types:
Right against the goods:
➢ Right to a lien which means the seller has the right on the possession
over the goods.
➢ Right to stoppage in transit which means the seller can call up the
carrier transporter and tell not to deliver the goods.
➢ Right to resale means the seller can again sell the goods as he has the
possession of the goods.
Right against the Buyer:
➢ The seller has the right to sue the buyer for the price if the seller
has already sold the goods and the buyer hasn’t paid the sum.
➢ The seller has the right to sue for the damages, for e.g. if the seller
has sent the carrier for the delivery and the buyer isn’t available to
receive the delivery and the goods returned back by the carrier to the
seller then he can sue the buyer for damages like the packing of goods,
transportation charges and so many.
➢ If the buyer hasn’t paid the price of the goods to the seller after the
delivery within a stipulated time period as given in the contract, then
the seller can sue for the interest on the buyer.
➢ Right of Lien: an unpaid seller, who is in possession of the goods can
retain their possession until payment.

Q48) Name any two rights of unpaid seller?

27
 Contract II Q & A.

➢ Rights of the Unpaid Seller against the goods includes the following
rights a) Right of lien; b) Right of stoppage in transit c) Right' of re-
sale d) Right of withholding delivery.
➢ Right of the Unpaid Seller against the buyer personally includes: i) Suit
for price; ii) Suit for damages for non acceptance; iii). Suit for
repudiation of contract before due date; iv) Suit for interest by way
of damages and special damages.

Q49) What is document of title to goods?

➢ As per Section 2(4) of Sale of Goods Act, Document of the title to
goods includes a bill of lading, dock-warrant, warehouse keeper’s
certificate, railway receipt, multimodal transport document, warrant or
order for the delivery of goods.
➢ It also includes any other documents that are used in the ordinary
course of business proving the possession or control of goods or which
proves the authority of the possessor to transfer or receive the goods.

Q50) What is Caveat Emptor in relation to Sale of goods Act?

➢ The doctrine of Caveat Emptor is an integral part of the Sale of
Goods Act. It translates to “let the buyer beware”. This means it
lays the responsibility of their choice on the buyer themselves. It
is specifically defined in Section 16 of the act “there is no implied
warranty or condition as to the quality or the fitness for any
particular purpose of goods supplied under such a contract of sale“
➢ A seller makes his goods available in the open market. The buyer
previews all his options and then accordingly makes his choice. Now
let’s assume that the product turns out to be defective or of inferior
quality.
➢ This doctrine says that the seller will not be responsible for this.
The buyer himself is responsible for the choice he made. So the
doctrine attempts to make the buyer more conscious of his choices.
It is the duty of the buyer to check the quality and the usefulness

28
 Contract II Q & A.

of the product he is purchasing. If the product turns out to be

defective or does not live up to its potential the seller will not be
responsible for this. However, the buyer can shift the responsibility
to the seller if the three following conditions are fulfilled; (a) if the
buyer shares with the seller his purpose for the purchase; (b) the
buyer relies on the knowledge and/or technical expertise of the
seller and; (c) the seller sells such goods.

Q51) Define "insolvent" as per Sale of Goods Act.

➢ A person is said to be insolvent who has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become
due, whether he has committed an act of insolvency or not.
➢

29
 Contract II Q & A.

Indian Partnership Act 1932.

Q52) Define Partnership.

As per Section 4 of the Partnership Act , Partnership means the relation
between persons who have agreed to share profits of business carried on
by all or any of them acting for all.

Q53) Give various types of partners.

Various types of partners are :
a) Actual/Active or Ostensible partner: An active partner is also known as
Ostensible Partner. As the name suggests he takes active participation
in the firm and the running of the business. He carries on the daily
business on behalf of all the partners. This means he acts as an agent
of all the other partners on a day to day basis and with regards to all
ordinary business of the firm.
b) Sleeping or Dormant partner: This is a partner that does not participate
in the daily functioning of the partnership firm, i.e. he does not take
an active part in the daily activities of the firm. He is however bound
by the action of all the other partners. He will continue to share the
profits and losses of the firm and may even bring in his share of capital
like any other partner. If such a dormant partner retires he need not
give a public notice of the same.
c) Nominal partner: This is a partner that does not have any real or
significant interest in the partnership. So, in essence, he is only lending
his name to the partnership. He will not make any capital contributions
to the firm, and so he will not have a share in the profits either. But
the nominal partner will be liable to outsiders and third parties for acts
done by any other partners.
d) Partner-in-profit only: This partner will only share the profits of the
firm, he will not be liable for any liabilities. Even when dealing with

30
 Contract II Q & A.

third parties he will be liable for all acts of profit only, he will share
none of the liabilities
e) Partner by Estoppel or Partner by Holding Out: If a person holds out
to another that he is a partner of the firm, either by his words,
actions or conduct then such a partner cannot deny that he is not a
partner. This basically means that even though such a person is not a
partner he has represented himself as such, and so he becomes partner
by estoppel or partner by holding out.
f) Minor partner: A minor cannot be a partner of a firm according to the
Contract Act. However, a partner can be admitted to the benefits of
a partnership if all partner gives their consent for the same. He will
share profits of the firm but his liability for the losses will be limited
to his share in the firm. Such a minor partner on attaining majority
(becoming 18 years of age) has six months to decide if he wishes to
become a partner of the firm. He must then declare his decision via a
public notice. So whether he continues as a partner or decides to
retire, in both cases he will have to issue a public notice

Q54) Explain 'Partnership at Will?

➢ Where no provision is made by contract between the partners for the
duration of their partnership or for the determination of their
partnership, the partnership is called as Partnership at Will.

Q55) What is the true test of Partnership?

➢ For there to be a partnership between two or more persons there has
to be an agreement of partnership between them. The partnership
cannot arise family status or any operation of law. There has to be a
specific agreement between the partners.
➢ The truest test of a partnership is the existence of a Mutual Agency.
There are other instances where the sharing of profit exists but there
is no conclusive evidence of partnership. But if an agency exists

31
 Contract II Q & A.

between the parties who run a business together and share profits it
will be deemed that a partnership exists.

Q56) Who is 'holding out' partner ?

When a person represents himself to be a partner of a firm, and thereby
induces other to give credit to the partnership firm, is known as 'partner
by holding out’.

Q57) Give any four general duties of partners.

➢ It is a duty of a partner
➢ to carry on the business of the firm to the: greatest common advantage
and not to act detriment to the interest of the other partners or to
the business of the firm.
➢ to indemnify for fraud or for any loss caused to the firm due to his
fraud;
➢ to attend diligently to his duties in the conduct of the business of the
firm;
➢ to use his knowledge, skill and experience to the common advantage of
all the partners.

Q58) What are the rights of Partners?

Following are the rights of Partners as per Partnership Act:
➢ Right to participate in business: Each partner has an equal right to
take part in the conduct of their business. Partners can curtail this
right to allow only some of them to contribute to the functioning of the
business if the partnership deed states so.
➢ Right to express opinions: Each partner can express his opinion to
decide business matters pertaining to partnership. Partners, by a
majority can determine differences with respect to ordinary matters
connected with the business.

32
 Contract II Q & A.

➢ Right to access books and accounts: Each partner can inspect and copy
books of accounts of the business.
➢ Right to share profits: Partners generally describe in their deed the
proportion in which they will share profits of the firm. However, they
have to share all the profits of the firm equally if they have not agreed
on a fixed profit sharing ratio.
➢ Right to be indemnified: Partners can make some payments and incur
liabilities through their decisions in the course of their business. They
can claim indemnity from each other partners for these decisions.
➢ Right to interest on capital and advances: Partners generally do not get
an interest on the capital they contribute. In case they decide to take
an interest, such payment must be made only out of profits. They can,
however, receive interest of 6% p.a. for other advances made
subsequently towards the business.

Q59) What is Registration of Firm?

➢ While the English Law makes registration of firms compulsory and
levies a fine for non-registration, the Indian Partnership Act, 1932
has no such compulsions for firm registration and no fines for non-
registration either.
➢ However, under Section 69 of the Act, certain disabilities are
imposed on non-registered firms. These disabilities have a
persuasive pressure on firms for registration.
➢ For the purpose of registration, an application form has to be filed
to the Registrar of Firms of the State in which the firm is situated
along with prescribed fees. The registration application has to be
signed and verified by all the partners or their agents

Q60) What are the effects of Non-Registration of Firm?

As per Sec 69 of Indian Partnership Act 1932, the effects of non
registration of firm are:

33
 Contract II Q & A.

a) No suit can be filed against third party: If the firm registration is

not done, then the firm or any other person on its behalf cannot
file a suit against a third party for breach of contract which the
firm has entered into.
b) No suit for Claim or Set-off can be filed: Without firm registration,
any action brought against the firm by a third party having a value
of more than Rs. 100 cannot be set-off by the firm or any of its
partners.
c) An aggrieved partner cannot bring legal action against other partner
or the firm: A partner of the firm or any person on his behalf
cannot bring legal action against the firm or against any partner (or
alleged to be a partner) if firm registration is not done. However,
if the firm is dissolved, then such a person can sue the firm for
dissolution it accounts and realization of his share in the firm’s
property.
d) A third party can sue the firm: Even if the firm registration is not
done a third party can bring legal action against the firm

Q61) Distinguish between partnership and Company?

Partnership Company
Partnership Firm is a mutual Company is an association of
agreement between two or more persons with a common objective of
persons to run the business and providing goods and services to
share profit and loss mutually customers.
Partnership is governed by Indian Company in India are governed by
Partnership Act, 1932 Indian Companies Act, 2013
Minimum 2 members are required Minimum 7 members are required
for a partnership firm for a Limited Company and 2
members are required for a private
limited company.

34
 Contract II Q & A.

Maximum members in a partnership Maximum 200 members for a

can be 100 members Private Limited, unlimited members
for a Public Limited.
Partnership Deed required for the Memorandum of Association and
creation of a partnership firm article of association is mandatory
for incorporating a company.
Partnership is not considered as a A Company is considered as a
separate legal entity distinct from separate legal entity distinct from
its members/partners. its members/shareholders.

Q62) Who is 'holding out' partner ? .

➢ When a person represents himself to be a partner of a firm, and
thereby induces other to give credit to the partnership firm, is known
as “partner by holding out”.

Q63) Write a short note on Minor Partner?

➢ As per section 11 of Indian Contract Act 1872 minor is not capable of
entering into a contract, an agreement by or with a minor is void ab-
initio (Mohni Bibi v. Dharamdas Ghosh). Partnership is a result of an
agreement, a minor cannot enter into a partnership agreement. As
such, a minor cannot be a partner of a firm according to the Contract
Act.
➢ However, as per provision of Sec 30 of Indian Partnership Act 1932,
a minor can be admitted as a partner to the benefits of existing
partnership firm if all partner gives their consent for the same.
➢ He shall have a right to share profits of the firm but his liability for
the losses will be limited to his share in the firm. He has the right to
have access to, and inspect and copy, any of the accounts of the firm.
➢ He has a right to file a suit for his share of profits or the property
of the firm when he is not given his due share of profits. However, he
can exercise this right only when he decides to sever his connections
with the firm.

35
 Contract II Q & A.

➢ He is liable only to the extent of his share in the profits and the
property of the firm. He is not personally liable to third parties.
➢ Such a minor partner on attaining majority (becoming 18 years of age)
has six months to decide if he wishes to become a partner of the firm.
He must then declare his decision via a public notice. So whether he
continues as a partner or decides to retire, in both cases he will have
to issue a public notice. If he fails to give a public notice, he is deemed
to have become a partner in the firm on the expiry of the said six
months and shall have rights and liabilities as a normal major partner
in a partnership firm.

Q64) When does compulsory dissolution of a partnership firm become

unavoidable?
Firm may be required to be compulsorily dissolved due to following:
➢ By the adjudication of all the partners, but one as insolvent, or
➢ By the happening of any event which makes it unlawful for the business
of the firm to be carried on or' for the partners to carry it on in
partnership.

Q65) Give any four general duties of partners.

➢ It is a duty of a partner:
a) to carry on the business of the firm to the: greatest common
advantage and not to act detriment to the interest of the other
partners- or to the business of the firm;
b) to indemnify for fraud or for any loss caused to the firm by his
fraud:
c) to attend diligently to his duties in the conduct of the business of
the firm:
d) to use his knowledge, skill and experience to the common advantage
of all the partners.

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 Contract II Q & A.

Q66) Define "dissolution of a firm" and discuss the different modes of

dissolution of a partnership firm?
➢ According to Section 39, Dissolution of a firm means the dissolution
of partnership between all the partners of a firm. In such a situation,
the business of the firm is discontinued, its assets are realized, the
liabilities are paid off and the surplus (if any) is distributed among the
partners according to their rights.
➢ There is a difference between dissolution of partnership and dissolution
of firm, Dissolution of a partnership firm merely involves a change in
the relation of partners; whereas the dissolution of firm amounts to
a complete closure of the business. When any of the partners dies,
retires or become insolvent but if the remaining partners still agree to
continue the business of the partnership firm, then it is dissolution of
partnership not the dissolution of firm. Dissolution of partnership
changes the mutual relations of the partners. But in case of dissolution
of firm, all the relations and the business of the firm comes to an end.
Modes of Dissolution:
➢ A firm may be dissolved in the following ways:
a) Dissolution by mutual agreement [Section 40]: A firm may be
dissolved by mutual agreement among all the partners. Even a firm
for a fixed duration may be dissolved by mutual agreement.
b) Compulsory dissolution [Section 41]: A firm is compulsorily dissolved
in the following two circumstances: (i) If all the partners, or all but
one partner of the firm are declared insolvent or; (ii) If some event
takes place which makes it unlawful for the firm's business to be
carried on.
c) Dissolution on the happening of contingent event (S.42): A firm may
be dissolved on the happening of any of the following contingent
event like expiry of the fixed period or on achievement of the
specific task for which the partnership is formed.
d) Death of Partner: When the deed of partnership did not provide
that the death of a partner would not dissolve the partnership, the

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 Contract II Q & A.

partnership stood dissolve on the death of a partner. Firm, stands

dissolved automatically on death of one partner.
e) Insolvency of Partner : In the absence of a contract to the contrary,
the insolvency of any of the partner may dissolve the firm.
f) Dissolution by notice: In case of partnership at will, a partner can
dissolve it by giving written notice of dissolution to other partners
duly signed by him.
g) Dissolution by Court: The court may order for the dissolution of the
firm on account of Insanity of Partner, Incapacity of Partner;
Misconduct of Partners.

Q67) Explain 'Partnership at Will’?

➢ Where no provision is made by contract between the partners for the
duration of their partnership or for the determination of their
partnership, the partnership is 'Partnership at Will’.

Q68) Write a note on Public notice under Indian Partnership Act 1972?
➢ As per Sec 72 of Indian Partnership Act 1972, A public notice is
required to be given in the following three cases:
a) on the retirement or expulsion of a partner, or
b) on the dissolution of the firm, or
c) on the election to become or not to become a partner by a minor on
his attaining majority.
➢ It must be given by publication in the Official Gazette. It must be
given by publication in at least one vernacular newspaper circulating in
the district where the firm to which it relates has its place or principal
place of business. It must be given to the Registrar of Firms (applicable
only for registered partnership firms).

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 Contract II Q & A.

Situational Problems:

Q1) L', 'M', and 'N' are partners of a firm. 'N' is a dormant partner
and,he retires from partnership on 25th March, 2017. Partners executed
a dissolution deed to dissolve the firm from 1st April, 2017, but fail to
give public notice till 30th April, 2017.'M' borrowed Rs. 4,00,000/- in
firms' name from 'Z'.
i) Is the firm liable to· 'Z'? Give reason with relevant provisions.
Ans) Yes, the firm is liable to 'Z' for the amount of Rs.40,000/-
borrowed from 'Z' by their partner 'M'. The liability for the act of the
firm is the same, and all partners are liable.
ii) Can 'N' · be made liable for act of 'M' ?
Ans) No, 'N' cannot be made liable for act of 'M'. After retirement
of 'N', a dormant partner, he is not liable as no public notice is required
of his retirement. since he has never been Known as a partner to the
public.

Q2) 'A', 'B', 'C' and 'D' are partners of a trading firm. 'D' is a dormant
partner and he retires from partnership on 15th February, 2014. Partners
execute a dissolution deed to dissolve the firm from 1st March, 2014,
but did not give public notice till 31st March, 2014. 'A' borrowed Rs.
20,000/-in firm's name from 'E'.
i) Is the firm liable to 'E' ? Cite relevant Section.
Ans) : Yes, the firm is liable to 'E'. The liability for the act of the firm
is the same, and all partners are liable.
ii) Can 'D' be made liable for the act of 'A'? Give reasons.
Ans) No 'D' will not be made liable for act of 'A'. After retirement of
'D', a dormant partner, he is not liable as no public notice is required of
his retirement since he has never been known as a partner to the public.

Q3) 'A' and 'B' entered into Partnership. It was inter alia agreed
between them that 'B' was to get a salary of Rs. 5,000/- p.m. in lieu of

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 Contract II Q & A.

the profits and that 'B' would not be liable for any loss or other-liability
of the Firm
i) Can 'B' a salaried person be legally called as a partner ? Give reasons.
Ans) Yes, such salaried partner can be considered as a valid sleeping
partner in the partnership business.
ii) What is the statutory provision of the Partnership Act which helps to
ascertain whether the relationship between partners is that of a
partnership or otherwise ?
Ans) The essential element of partnership is that there is agreement
between the partners to carry on the business by all or any of them acting
for all and to share the profits of the business.

Q4) 'A' a partner of a firm, takes a loan inmthe name of firm without
informing the other partners and utilizes the same for his personal
purposes.
i) Can the other partners and the Firm be held liable in default· of 'A'
for payment ? Give reasons.
Ans) Yes, the other partners of the Firm will be held liable for the
payment, though the loan is taken by 'A' in the name of the Firm. The
reason is, the act of the partner binds the other partners.
ii) What will be the situation if 'A' sent a notice for retirement after
this transaction ? Discuss.
Ans) In the above case, A has sent the notice of retirement post the
completion of transaction, as such the other partners and the partnership
firm can be held liable for such a debt.

Q5) A Partnership is created between 'A' and 'B'. 'A' and''B' agrees
'B's minor son C to enjoy the benefits of Partnership which is already in
•existence. i) Can 'A' and 'B' agree to B’s minor son C to enjoy the
benefits of partnership ?
Ans) Yes, As per Sec 30 of Indian Partnership Act 1932, a minor can
be admitted to the benefits of the Partnership, and therefore, in this

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 Contract II Q & A.

case 'A' and 'B' can agree to 'B's minor son 'C' to enjoy the benefits of
partnership.
ii) What is the 'right which is to be exercised by 'C-' on becoming major?
Ans) On attaining Majority, C has to take a decision whether he has to
continue in the partnership or can decide to retire from the partnership.
This decision has to be taken within 6 months of attaining majority and if
he opts for continuing the partnership his rights and liabilities shall be of
the other major partners.

Q6) ABC bank had given overdraft facility to a partnership firm 'and its
partners, against the firm's fix deposit. The partners and the firm made
a default in repayment of the loan inspite of notices given by the Bank.
i) Can Bank exercise lien over the fixed deposit receipts of the partnership
firm ? if yes, can the Bank liquidate the fixed deposit ?
Ans) Yes, the bank can exercise lien over the fixed deposit receipts of
the partnership firm'. The bank can liquidate the fixed deposit and
appropriate that amount towards overdraft account.
ii) Presuming the firm has two separate accounts in the same Bank, one
is the loan account and the other is current account. Can the Bank utilize
the balance in the current account for satisfaction of the overdraft
facility ? Give reasons?
Ans) The bank in exercise of its general lien, has got right to treat,
both, the loan account, and the current account, as one account and utilize
'the balance in the current account for satisfaction of the overdraft
facility.

Q7) 'A', a Principal Debtor, at the time of taking loan from a Bank,
executed an agreement of hypothecation of goods in favour of the said
Bank, and 'B' stood, as Surety for the loan granted by the Bank to 'A'.
'A' failed to repay the loan when due. Bank sued 'A' and 'B' to recover
the amount of loan. Due to negligence of Bank, 'A' had disposed off
hypothecated goods.

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 Contract II Q & A.

i) Does 'B? have any remedy against 'A'? If so, explain.

Ans) This is a case of act or omission of Creditor tending to impair,
Surety's remedy. As per provisions of 139 of Indian Contract Act, if the
creditor does any act which is inconsistent with the rights of the surety,
or omits to do any act which his duty to the surety requires him to do,
and the eventual remedy of the surety himself against the principal debtor
is thereby impaired, the surety is discharged
ii) Does 'B' stands discharged towards the Bank? Give reasons.
Ans) 'B' stands discharged towards the Bank for the same reasons stated
above.

Q8) A firm of cinema proprietors consisted of two partners X and Y. The

partnership Articles provided that, no partner should contract any debt
on account of the partnership except in the usual and regular course of
business of the firm. One partner X, borrowed money from Higgins for
his personal use. Higgins sued the other partner Y to recover the sum
lent.
a) Can Higgins sue the other partner for the recovery of money which he
has lent to X?
Ans): No. Higgins cannot sue the other partner Y for the recovery of
money lent to X
b) Can X Bind the firm by his act?
Ans) : N0: X cannot bind the firm by his acts, he had no implied authority
to bind the firm for his personal debts as the partnership Articles. had
clearly provided that; no partner should contract any debt on account of
the partnership except in the usual and regular course of business of the
firm.

Q9) The plaintiff A purchased two under wears from a retailer who dealt
in that type of goods. The under wears contained certain, chemicals: and
he contacted dermatitis by wearing them. 'The buyer sued the seller: The

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 Contract II Q & A.

seller took up the defense that the buyer did not expressly specified the
purpose at the time of buying it.
a) Will the buyer, succeed? What is the remedy available to the buyer?
Ans) Yes. The buyer will succeed. The remedy available to the buyer is
to sue the seller for damages.
b) Can the seller takes up this defense?
Ans) No. The seller cannot take up this defense, since garments, ie under
wears, in question were only intended to be worn next to skin as had been
done by the buyer; And there is no need to expressly specify the purpose
for which the buyer required them.
c) Is there a breach of implied condition or implied warranty? If yes,
specify the implied condition or warranty which is'.breached?
Ans) There was a breach of implied condition.The implied conditions
breached is that the goods shall be reasonably fit for a certain purpose;
Another implied condition breached is that; the goods shall be of
merchandisable quality.
d) Can you say that the underwear is of merchandisable quality? Give
reasons.
Ans) The underwear is not of merchandisable quality. The underwears
contained certain chemicals which could cause skin disease to a person
wearing them next to skin; it was because of such a defect the underwears
were not of merchantable quality.

Q10) C' agrees to appoint 'B' as his clerk to sell goods at yearly salary,
upon 'As becoming surety to 'C' for 'B's duly accounting for money
received by him as such clerk Afterward, without 'A's knowledge or
consent, 'C' and 'B' agree that 'B' should be paid by a commission on the
goods sold by him and not by a fixed salary.
i) Will 'A' be 1 liable for Subsequent misconduct of 'B' ? State reasons.
Ans) 'A' will not be liable for subsequent misconduct of 'B', because,
without the knowledge or consent of' A', 'C' and 'B' have changed the
terms of the contract and whenever there is a variance in the terms of

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 Contract II Q & A.

contract between the creditor and the principal debtor ('C' and 'B')
without the knowledge or consent of the surety ('A'), it discharges the
surety-from liability.
ii) Can 'A' be held liable for the conduct of 'B' prior to the new
arrangement'?
Ans) Yes. 'A' can be held liable for the conduct of 'B', prior to the new
arrangement, as that contract is done with 'A's consent.
iii) State any two grounds for the revocation of guarantee:
Ans) Any two grounds are required to be stated from the following grounds
a) Revocation by the surety Sec 30. b) Surety's death Sec 131. c)By
variance in the terms of the contract, Sec 133. d) By release or discharge
of principal debtor; Sec 134.

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