BRIDGE TEST: 1 TEST SERIES: MAY 2025

FOUNDATION COURSE

PAPER – 2: BUSINESS LAW

Question No. 1 is compulsory.

Attempt any two questions from the remaining three questions.

Time Allowed: 1.5 Hours Maximum Marks: 50

Question 1:
(a) Sheena was a classical dancer. She entered into an agreement with Shital Vidya Mandir
for 60 dance performances. As per the contract, she was supposed to perform every
weekend and she will be paid Rs. 10,000/- per performance. However, after a month, she
was absent without informing, due to her personal reasons. Answer the following
questions as per the Indian Contract Act, 1872.

(i) Whether the management of Shital Vidya Mandir has right to terminate the
contract?
(ii) If the management of Shital Vidya Mandir informed Sheena about its continuance,
can the management still rescind the contract after a month on this ground
subsequently?
(iii) Can the Shital Vidya Mandir claim damages that it has suffered because of this
breach in any of the above cases? (5 Marks)

(b) Vikrant, at the request of Govind, sells goods which were in the possession of Govind.
However, Govind had no right to dispose of such goods. Vikrant did not know this and
handed over the proceed of the sale to Govind. Afterwards, Madhav, who was the true
owner of the goods, sued Vikrant and recovered the value of the goods. In the light of the
provisions of the Indian Contract Act,1872, answer the following questions:

(i) Is Govind liable to indemnify Vikrant for his payment to Madhav?

(ii) What will be the liability of Govind if the goods are a prohibited drug? (5 Marks)

Answer:
(a) Section 39 provides that when a party to a contract has refused to perform or disabled
himself from performing his promise in its entirety the promisee may put an end to the
contract unless he had signified, by words or conduct his acquiesce in its continuance.
 Further, in term of Section 40, the promisee shall be required to perform personally, if
there is such an apparent intention of the parties.

Also, as per Section 75 of the Act, a person who rightfully rescinds a contract is entitled
to compensation for any damage which he has sustained through non-fulfilment of the
contract.

Therefore, in the instant case,

(i) Since, Sheena could not perform as per the terms of contract, Shital Vidya Mandir
can terminate the contract.
(ii) In the second situation, the management of Shital Vidya Mandir informed Sheena
about the continuance of the contract. Hence, the management cannot now rescind
the contract after a month on this ground subsequently.
(iii) As per Section 75, Shital Vidya Mandir can claim damages that it has suffered
because of this breach in part (i).

(b) According to section 178 of the Indian Contract Act, 1872, where a mercantile agent is,
with the consent of the owner, in possession of goods or the documents of title to goods,
any pledge made by him, when acting in the ordinary course of business of a mercantile
agent, shall be as valid as if he were expressly authorised by the owner of the goods to
make the same; provided that the pawnee acts in good faith and has not at the time of
the pledge notice that the Pawnor has no authority to pledge.

It is also to be noted that:

1. The possession of goods must be with the consent of the owner. If possession has been
obtained dishonestly or by a trick, a valid pledge cannot be effected.
2. The pledgee should have no notice of the pledger's defect of title. If the pledgee knows
that the pledger has a defective title, the pledge will not be valid.

(i) In the given question, Vikrant had no notice of the Govind’s defect of title. He acted in
ordinary course of business of a mercantile agent considering Govind as owner of the
good and genuinely handed over the proceed of the sale to him. Therefore, said
transaction is invalid. Thus, Govind shall be liable to indemnify Vikrant for his payment
to Madhav.
(ii) Govind shall not be liable to indemnify Vikrant as selling of prohibited drugs is a
prohibited act and against the public policy.

Question 2:
(a)
(i) A mobile phone was displayed in a shop with a price tag of ₹10,000 attached to the
mobile display box. As the price displayed was very less as compared to M.R.P. of the
 mobile phone, Y, a customer rushed to the cash counter and asked the shopkeeper to
receive the payment and pack up the mobile phone. The shopkeeper refused to hand
over the mobile phone to Y in consideration of the price indicated in the price tag
attached to the mobile phone.

Y seeks your advice whether he can sue to shopkeeper for the above cause under the
Indian Contract Act, 1872. (4 Marks)

(ii) Mr. A, the employer induced his employee Mr. B to sell his one room flat to him at
less than the market value to secure promotion. Mr. B sold the flat to Mr. A. Later on,
Mr. B changed his mind and decided to sue Mr. A. Examine the validity of the
contract as per the provisions of the Indian Contract Act, 1872. (3 Marks)

(b) Mr. Y aged 21 years, lost his mental balance after the death of his parents in an accident.
He was left with his grandmother aged 85 years, incapable of walking and dependent
upon him. Mr. M their neighbour, out of pity, started supplying food and other
necessaries to both of them. Mr. Y and his grandmother used to live in the house built by
his parents. Mr. M also provided grandmother some financial assistance for her
emergency medical treatment. After supplying necessaries to Mr. Y for four years, Mr. M
approached the former asking him to payback Rs. 15 Lakhs inclusive of Rs. 7 Lakhs
incurred for the medical treatment of the lady (grandmother). Mr. Y pleaded that he has
got his parent's jewellery to sell to a maximum value of Rs. 4 Lakhs, which may be
adjusted against the dues. Mr. M refused and threatened Mr. Y of legal suit to be brought
against for recovering the money.

Now, you are to decide upon based on the provisions of the Indian Contract Act, 1872:
(i) Will Mr. M succeed in filing the suit to recover money? Elaborate the related
provisions?
(ii) What is the maximum amount- of money that can be recovered by Mr. M?
(iii) Shall the provisions of the above act also apply to the medical treatment given to
the grandmother? (7 Marks)

(c) Explain whether the agency shall be terminated in the following cases under the provisions
of the Indian Contract Act, 1872:
(i) A gives authority to B to sell A's land, and to pay himself, out of the proceeds, the
debts due to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A's agent to sell A's land. B, under the authority of A, appoints C as
agent of B. Afterwards, A revokes the authority of B but not of C. What is the status
of agency of C? (6 Marks)
Answer:
(a)
(i) An invitation to offer is different from offer. Quotations, menu cards, price tags,
advertisements in newspaper for sale are not offer. These are merely invitations to
public to make an offer. An invitation to offer is an act precedent to making an offer.
Acceptance of an invitation to an offer does not result in the contract and only an
offer emerges in the process of negotiation.

In the instant case, Y reaches to shop and selects a Mobile Phone with a price tag of
₹10,000 but the shopkeeper refused to hand over the mobile phone to Y in
consideration of the price indicated in the price tag attached to the mobile phone.

On the basis of above provisions and facts, the price tag with the Mobile Phone was
not offer. It is merely an invitation to offer. Hence, it is Y who is making the offer and
not the shopkeeper. Shopkeeper has the right to reject Y's offer. Therefore, Y cannot
sue the shopkeeper for the above cause.

(ii) According to section 16 of the Indian Contract Act, 1872, a contract is said to be
induced by 'undue influence' where the relations subsisting between the parties are
such that one of the parties is in a position to dominate the will of the other and he
uses that position to obtain an unfair advantage over the other.

When consent to an agreement is caused by undue influence, the contract is

voidable at the option of the party, whose consent was so caused.

Hence, the contract between Mr. A and Mr. B is voidable at the option of Mr. B as it
was induced by undue influence by Mr. A and therefore Mr. B can sue Mr. A.

(b)
(i) Claim for necessaries supplied to persons incapable of contracting (Section 68 of the
Indian Contract Act, 1872):
If a person, incapable of entering into a contract, or anyone whom he is legally bound
to support, is supplied by another person with necessaries suited to his condition in
life, the person who has furnished such supplies is entitled to be reimbursed from
the property of such incapable person.
In the instant case, Mr. M supplied the food and other necessaries to Mr. Y (who lost
his mental balance) and Mr. Y’s grandmother (incapable of walking and dependent
upon Mr. Y), hence, Mr. M will succeed in filing the suit to recover money.

(ii) Supplier is entitled to be reimbursed from the property of such incapable person.
Hence, the maximum amount of money that can be recovered by Mr. M is Rs. 15
 Lakhs and this amount can be recovered from Mr. Y’s parent’s jewellery amounting to
Rs. 4 Lakhs and rest from the house of Y’s Parents. (Assumption: Y has inherited the
house property on the death of his parents)

(iii) Necessaries will include the emergency medical treatment. Hence, the above
provisions will also apply to the medical treatment given to the grandmother as Y is
legally bound to support his grandmother.

(c)
(i) According to section 202 of the Indian Contract Act, 1872, 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. In other words, when the agent is personally interested in the subject matter
of agency, the agency becomes irrevocable. In the given question, A gives authority to
B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him from
A. As per the facts of the question and provision of law, A cannot revoke this authority,
nor it can be terminated by his insanity.

(ii) According to section 191 of the Indian Contract Act, 1872, a “Subagent” is a person
employed by, and acting under the control of, the original agent in the business of the
agency. Section 210 provides that, the termination of the authority of an agent causes
the termination (subject to the rules regarding the termination of an agent’s authority)
of the authority of all sub-agents appointed by him. In the given question, B is the
agent of A, and C is the agent of B. Hence, C becomes a sub- agent. Thus, when A
revokes the authority of B (agent), it results in termination of authority of sub-agent
appointed by B i.e. C (sub-agent).

Question 3:
(a)
(i) X agrees to pay Y₹ 1,00,000/-, if Y kills Z. To pay Y, X borrows 1,00,000/- from W, who
is also aware of the purpose of the loan. Y kills Z but X refuses to pay. X also to repay
the loan to W. Explain the validity of the contract.
i. Between X and Y.
ii. Between X and W (4 Marks)

(ii) Miss Shakuntala puts an application to be a teacher in the school. She was appointed
by the trust of the school. Her friend who works in the same school informs her about
her appointment informally. But later due to some internal reasons her appointment
was cancelled. Can Miss Shakuntala claim for damages? (3 Marks)
(b) R owns an electronics store. P visited the store to buy a water purifier priced at
₹54,000/-. He specifically requested R for a purifier with a copper filter. As P wanted to
buy the purifier on credit, with the intention of paying in 9 equal monthly instalments, R
demands a guarantor for the transaction. S (a friend of P) came forward and gave the
guarantee for payment of water purifier. R sold P, a water purifier of a specific brand. P
made payment for 4 -monthly instalments and after that became insolvent. Explain with
reference to the Indian Contract Act, 1872, the liability of S as a guarantor to pay the
balance price of water purifier to R.

What will be your answer, if R sold the water purifier misrepresenting it as having a
copper filter, while it actually has a normal filter? Neither P nor S was aware of this fact
and upon discovering the truth, P refused to pay the price. In response to P's refusal, R
filed the suit against S, the guarantor. Explain with reference to the Indian Contract Act
1872, whether S is liable to pay the balance price of water purifier to R? (7 Marks)

(c) The general rule is that “an agreement made without consideration is void”. State the
exceptions of this general rule as per the Indian Contract Act, 1872. (6 Marks)

Answer:
(a)
(i) Illegal Agreement:
It is an agreement which the law forbids to be made. As an essential condition, the
lawful consideration and object is must to make the agreement valid. (Section 10).

As per Section 23 of the Indian Contract Act, 1872, an agreement is illegal and void, if
the consideration and object is unlawful / contrary to law i.e. if forbidden by law.
Such an agreement is void and is not enforceable by law. Even the connected
agreements or collateral transactions to illegal agreements are also void.

In the present case,

i. X agrees to give₹ 1,00,000 to Y if Y kills Z. Thus, the agreement between X
and Y is void agreement being illegal in nature.
ii. X borrows 1,00,000 from W and W is also aware of the purpose of the loan.
Thus, the agreement between X and W is void as the connected agreements
of an illegal agreements are also void.

(ii) No, Miss Shakuntala cannot claim damages. As per Section 4, communication of
acceptance is complete as against proposer when it is put in the course of transmission
to him.
 In the present case, school authorities have not put any offer letter in transmission.
Her information from a third person will not form part of contract.

(b) As per section 126 of the Indian Contract Act, 1872, the contract of guarantee is defined
as a contract to perform the promise or discharge the liability of a third person in case of
his default.

In this case, S has given a guarantee for P's payment obligation towards R. When P
defaulted after making four monthly instalments and became insolvent, S's liability as a
guarantor will come into existence.

According to Section 128 of the Act, the liability of the surety is coextensive with that of
the principal debtor, unless it is otherwise provided by the contract. Since P failed to pay
the remaining instalments due to insolvency, S, as the guarantor, is liable to pay the
balance price of the water purifier to R. In the given situation, S will have to pay the
balance amount of ₹30,000 to R. [54,000-(4x6,000)]

In the second situation, R sold the water purifier misrepresenting it as having a copper
filter, while it actually has a normal filter; this changes the situation significantly.

According to Section 142 of the Act, any guarantee which has been obtained by means of
misrepresentation made by the creditor, or with his knowledge and assent, concerning a
material part of the transaction, is invalid. Here, guarantee is obtained by means of
misrepresentation made by the creditor (R), and therefore the guarantee is invalid.

Furthermore, under Section 143, any guarantee which the creditor has obtained by means
of keeping silence as to material circumstances, is invalid.

Here R misrepresented the filter type and both P and S were unaware of this fact. The
creditor (R) has obtained the guarantee by remaining silent as to material circumstances.
Therefore, the guarantee obtained from S will be considered to be invalid.

Consequently, S cannot be held liable to pay the balance price of the water purifier to R.

(c) An agreement made without consideration is void (Section 25 of the Indian Contract Act,
1872):
In every valid contract, consideration is very important. A contract may only be
enforceable when consideration is there. However, the Indian Contract Act contains
certain exceptions to this rule. In the following cases, the agreement though made
without consideration, will be valid and enforceable.
Exceptions:
1. Natural Love and Affection:
Conditions to be fulfilled under section 25(1)
(i) It must be made out of natural love and affection between the parties.
(ii) Parties must stand in near relationship to each other.
(iii) It must be in writing.
(iv) It must also be registered under the law.

A written and registered agreement based on natural love and affection between the
parties standing in near relation (e.g., husband and wife) to each other is enforceable
even without consideration.

2. Compensation for past voluntary services:

A promise to compensate, wholly or in part, a person who has already voluntarily
done something for the promisor, is enforceable under Section 25(2). In order that a
promise to pay for the past voluntary services be binding, the following essential
factors must exist:
(i) The services should have been rendered voluntarily.
(ii) The services must have been rendered for the promisor.
(iii) The promisor must be in existence at the time when services were rendered.
(iv) The promisor must have intended to compensate the promisee.

3. Promise to pay time barred debt:

Where a promise in writing signed by the person making it or by his authorised
agent, is made to pay a debt barred by limitation it is valid without consideration
[Section 25(3)].

4. Agency:
According to Section 185 of the Indian Contract Act, 1872, no consideration is
necessary to create an agency.

5. Completed gift:
In case of completed gifts, the rule no consideration no contract does not apply.
Explanation (1) to Section 25 states "nothing in this section shall affect the validity as
between the donor and donee, of any gift actually made." Thus, gifts do not require
any consideration.

6. Bailment:
No consideration is required to affect the contract of bailment. Section 148 of the
Indian Contract Act, 1872, defines bailment as the delivery of goods from one person
to another for some purpose. This delivery is made upon a contract that post
accomplishment of the purpose, the goods will either be returned or disposed of,
 according to the directions of the person delivering them. No consideration is
required to affect a contract of bailment.

7. Charity:
If a promisee undertakes the liability on the promise of the person to contribute to
charity, there the contract shall be valid. (Kadarnath v. Gorie Mohammad)

Question 4:
(a)
(i) Examine the validity of the following contracts as per the Indian Contract Act, 1872
giving reasons.

1. X aged 16 years borrowed a loan of 50,000 for his personal purposes. Few
months later he had become major and could not pay back the amount
borrowed, on due date. The lender wants to file a suit against X.

2. J contracts to take in cargo for K at a foreign port. J's government afterwards

declares war against the country in which the port is situated and therefore the
contract could not be fulfilled. K wants to file a suit against J. (4 Marks)

(ii) Examine whether the following constitute a contract of ‘Bailment’ under the
provisions of the Indian Contract Act, 1872:

1. V parks his car at a parking lot, locks it, and keeps the keys with himself.
2. Seizure of goods by customs authorities. (3 Marks)

(b) State the difference between sub-agent and substituted agent. (7 Marks)

(c) Under the Indian Contract Act, 1872, contracts generally require mutual consent of
both the parties. However, explain any five circumstances where a contract need not be
performed with the consent of both the parties. (6 Marks)

Answer:
(a)
(i)
1. According to Section 11 of the Indian Contract Act, 1872, every person is
competent to contract who is of the age of majority according to the law to
which he is subject and therefore, a minor is not competent to contract and any
agreement with or by a minor is void from the very beginning. A minor cannot
ratify it on attaining the majority as the original agreement is void ab initio.
 According to Section 68 of the Act, a claim for necessaries supplied to a minor is
enforceable by law.

Necessaries mean those things that are essentially needed by a minor. They
cannot include luxuries or costly or unnecessary articles.

In the present case, X, the borrower, was minor at the time of taking the loan,
therefore, the agreement was void ab initio. Attaining majority thereafter will
not validate the contract nor X can ratify it. The loan was for personal purposes
and not for necessaries supplied to him. Hence, the lender cannot file a suit
against X for recovery of the loan as it is not enforceable by law.

2. As per Section 56 of the Indian Contract Act, 1872 the subsequent or supervening
impossibility renders the contract void. Supervening impossibility may take place
owing to various circumstances as contemplated under that section, one of
which is the declaration of war subsequent to the contract made.

In the instant case the contract when made between J and K was valid but
afterwards J's government declares war against the country in which the port is
situated as a result of which the contract becomes void. Hence, K cannot file a
suit against J for performance of the contract.

(ii) As per Section 148 of the Act, bailment is the delivery of goods by one person to
another for some purpose, upon a contract, that the goods shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of the
person delivering them. For a bailment to exist the bailor must give possession of the
bailed property and the bailee must accept it. There must be a transfer in ownership
of the goods.

1. No. Mere custody of goods does not mean possession. In the given case, since the
keys of the car are with V, Section 148, of the Indian Contract Act, 1872 shall not
applicable.

2. Yes, the possession of the goods is transferred to the custom authorities.

Therefore, bailment exists and section 148 is applicable.
(b)
Sub Agent Substituted Agent
A sub-agent does his work under the A substituted agent works under the
control and directions of agent. instructions of the principal.
The agent not only appoints a sub-
The agent does not delegate any part of
agent but also delegates to him a part
his task to a substituted agent.
of his own duties.
There is no privity of contract between Privity of contract is established between
the principal and the sub-agent. a principal and a substituted agent.
The sub-agent is responsible to the A substituted agent is responsible to the
agent alone and is not generally principal and not to the original agent
responsible to the principal. who appointed him.
The agent is not responsible to the
The agent is responsible to the
principal for the acts of the substituted
principal for the acts of the sub-agent.
agent.
The sub-agent has no right of action
The substituted agent can sue the
against the principal for remuneration
principal for remuneration due to him.
due to him.
Sub-agents may be improperly Substituted agents can never be
appointed. improperly appointed.
The agent remains liable for the acts of
The agent's duty ends once he has
the sub-agent as long as the sub-agency
named the substituted agent.
continues.

(c) Under following circumstances, the contracts need not be performed with the consent of
both the parties:
Novation:
Where the parties to a contract substitute a new contract for the old, it is called
novation. A contract in existence may be substituted by a new contract either being the
discharge of old contract. Novation can take place only by mutual agreement between
the parties. On novation, the old contract is discharged and consequently it need not be
performed. (Section 62 of the Indian Contract Act, 1872)

Rescission:
A contract is also discharged by recission. When the parties to a contract agree to rescind
it, the contract need not be performed. (Section 62)

Alteration:
Where the parties to a contract agree to alter it, the original contract is rescinded, with
the result that it need not be performed. In other words, a contract is also discharged by
alteration. (Section 62)
Remission:
Every promisee may dispense with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such performance or may accept
instead of it any satisfaction which he thinks fit. In other words, a contract is discharged
by remission. (Section 63)

Rescinds voidable contract:

When a person at whose option a contract is voidable rescinds it, the other party thereto
need not perform any promise therein contained in which he is the promisor.

Neglect of promisee:
If any promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such neglect or refusal as to any
non-performance caused thereby. (Section 67)