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Law of Contract MCQs for CLAT PG, Page 3

CLAT PG Law of Contract questions 51-75 of 100, with answer keys and explanations covering offer, acceptance, consideration, capacity, free consent, discharge, breach, remedies, indemnity, guarantee, bailment, and agency.

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Revise core LLB subjects through CLAT PG MCQs, passage-led questions, answer keys, explanations, statutes, and exam-oriented legal principles.

  • Agency by Estoppel and Holding Out5
  • Anticipatory Breach and its Consequences5
  • Consideration - Section 2(d) ICA and Privity5
  • Contingent Contracts vs Wagering Agreements5
  • Contracts with Government: Article 299 and Ultra Vires Doctrine5
  • Damages - Section 73 and Hadley v. Baxendale5
  • Discharge by Merger, Accord and Satisfaction5
  • Doctrine of Frustration and Restitution - Section 56 and 655
  • Doctrine of Part Performance and Section 53A Transfer of Property Act5
  • Frustration - Section 56 ICA5
  • Liquidated Damages - Section 74 ICA5
  • Minor's Agreement - Mohori Bibee5
  • Nemo Dat and Exceptions under Sale of Goods Act5
  • Offer and Acceptance - Carlill v. Carbolic Smoke Ball Co.5
  • Performance by Agent vs Personal Performance5
  • Restraint of Trade - Section 27 ICA5
  • Sale of Goods: Passing of Property and Risk5
  • Section 73 ICA and Remoteness of Damage5
  • Undue Influence - Section 16 ICA5
  • Wagering Agreement - Section 30 ICA5
Passage or principleIst Term LB102 / Venkata Chinnaya Rau v. Venkataramaya Garu (1881)

Section 2(d) of the Indian Contract Act 1872 provides that consideration for a promise may proceed from the promisee or from any other person. This distinguishes Indian contract law from English law where, under the doctrine of privity of consideration, consideration must move from the promisee. In Venkata Chinnaya Rau v. Venkataramaya Garu (1881), a sister made over certain property to her brothers by a deed, one of the conditions being that they would pay an annuity to their maternal aunt. The brothers executed a separate deed in favour of the aunt agreeing to pay the annuity. Subsequently, the brothers failed to pay and the aunt sued. The brothers argued that the aunt could not enforce the promise because she was a stranger to the consideration - it was the sister who had transferred the property, not the aunt. The Madras High Court rejected this argument, holding that the aunt was entitled to enforce the promise because under Section 2(d) consideration can move from any person, not necessarily the promisee. The consideration (the transfer of property) having moved from the sister satisfied the requirements of Section 2(d), and the aunt as beneficiary could enforce the promise made to her. This case must also be read alongside the doctrine of privity of contract, which under English law (Dunlop v. Selfridge) would have prevented the aunt from suing. Indian law has modified the privity rule through specific exceptions recognising third-party beneficiary rights in appropriate cases.

Question 51EasyConsideration - Section 2(d) ICA and Privity

The case of Venkata Chinnaya Rau v. Venkataramaya Garu arose because the brothers failed to pay:

  1. A

    An amount due to the sister under the property deed

  2. B

    An annuity to the maternal aunt as promised in their deed

  3. C

    A debt owed to a bank

  4. D

    Tax on the transferred property

View answer and explanation

Correct answer: B. An annuity to the maternal aunt as promised in their deed

The passage states: 'one of the conditions being that they would pay an annuity to their maternal aunt...the brothers failed to pay and the aunt sued.'

Source note: Ist Term LB102 / Venkata Chinnaya Rau v. Venkataramaya Garu (1881)

Question 52EasyConsideration - Section 2(d) ICA and Privity

The brothers' defence in the case was that:

  1. A

    The property transfer was invalid

  2. B

    The aunt was a stranger to the consideration and therefore could not enforce the promise

  3. C

    The deed was not registered

  4. D

    The limitation period had expired

View answer and explanation

Correct answer: B. The aunt was a stranger to the consideration and therefore could not enforce the promise

The passage states: 'The brothers argued that the aunt could not enforce the promise because she was a stranger to the consideration.'

Source note: Ist Term LB102 / Venkata Chinnaya Rau v. Venkataramaya Garu (1881)

Question 53MediumConsideration - Section 2(d) ICA and Privity

The Madras High Court allowed the aunt's claim because under Section 2(d) ICA:

  1. A

    The promisee must always provide consideration

  2. B

    Consideration can move from any person - not necessarily from the promisee herself

  3. C

    An aunt is a close enough relative to sue on a family contract

  4. D

    The deed was a gift not requiring consideration

View answer and explanation

Correct answer: B. Consideration can move from any person - not necessarily from the promisee herself

The passage states: 'under Section 2(d) consideration can move from any person, not necessarily the promisee...the consideration (the transfer of property) having moved from the sister satisfied the requirements of Section 2(d).'

Source note: Ist Term LB102 / Venkata Chinnaya Rau v. Venkataramaya Garu (1881)

Question 54MediumConsideration - Section 2(d) ICA and Privity

According to the passage, the position in English law on consideration is that:

  1. A

    Consideration can move from any person

  2. B

    Consideration must move from the promisee - the doctrine of privity of consideration

  3. C

    English law is identical to Indian law on consideration

  4. D

    Consideration is not required for commercial contracts

View answer and explanation

Correct answer: B. Consideration must move from the promisee - the doctrine of privity of consideration

The passage states: 'This distinguishes Indian contract law from English law where, under the doctrine of privity of consideration, consideration must move from the promisee.'

Source note: Ist Term LB102 / Venkata Chinnaya Rau v. Venkataramaya Garu (1881)

Question 55HardConsideration - Section 2(d) ICA and Privity

The passage suggests that the aunt could enforce the promise because she was:

  1. A

    A party to the original property transfer deed

  2. B

    A third-party beneficiary whose right Indian law recognises through modification of strict privity rules - she had an enforceable interest as the intended beneficiary of the brothers' promise

  3. C

    A signatory to the brothers' deed

  4. D

    The legal heir of the sister

View answer and explanation

Correct answer: B. A third-party beneficiary whose right Indian law recognises through modification of strict privity rules - she had an enforceable interest as the intended beneficiary of the brothers' promise

The passage refers to 'Indian law has modified the privity rule through specific exceptions recognising third-party beneficiary rights' and describes the aunt as the beneficiary of the brothers' promise.

Source note: Ist Term LB102 / Venkata Chinnaya Rau v. Venkataramaya Garu (1881)

Passage or principleIst Term LB102 / Hadley v. Baxendale (1854) / Section 73 ICA

Section 73 of the Indian Contract Act 1872 lays down the measure of damages for breach of contract. It provides that when a contract has been broken, the party who suffers is entitled to receive compensation for any loss or damage caused by the breach which naturally arose in the usual course of things from such breach, or which the parties knew at the time of making the contract to be likely to result from the breach. Compensation is not to be given for remote and indirect losses. This provision codifies the landmark English rule in Hadley v. Baxendale (1854), where the plaintiffs, millers in Gloucester, sent a broken mill shaft to the defendants, carriers, for delivery to an engineer in Greenwich. The only information given to the defendants was that the article was the broken shaft of a mill. Delivery was delayed due to the defendants' neglect. The plaintiffs claimed for loss of profits during the period of delay. The Court of Exchequer held that the plaintiffs were not entitled to recover loss of profits because such loss was not a natural consequence of the delay in the ordinary course of things, and the defendants had not been informed that the mill would be idle until the shaft was returned. The Court enunciated two limbs: first, damages that arise naturally or according to the usual course of things from the breach itself; and second, damages that may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach. Under the second limb, the special circumstances (that the mill would be stopped until the shaft was returned) must have been communicated to the carrier to make the loss of profits recoverable.

Question 56EasyDamages - Section 73 and Hadley v. Baxendale

Section 73 ICA entitles the injured party to compensation for losses:

  1. A

    Of any kind however remote

  2. B

    That arose naturally from the breach or that both parties knew at the time of contracting were likely to result from the breach

  3. C

    Only if specified in the contract

  4. D

    Only for physical damage to property

View answer and explanation

Correct answer: B. That arose naturally from the breach or that both parties knew at the time of contracting were likely to result from the breach

The passage states Section 73 provides for compensation for losses 'which naturally arose in the usual course of things from such breach, or which the parties knew at the time of making the contract to be likely to result from the breach.'

Source note: Ist Term LB102 / Hadley v. Baxendale (1854) / Section 73 ICA

Question 57EasyDamages - Section 73 and Hadley v. Baxendale

In Hadley v. Baxendale, the plaintiffs were refused loss of profits because:

  1. A

    The carrier had committed deliberate breach

  2. B

    The loss of profits was not a natural consequence in the ordinary course and the carrier had not been told the mill would be idle until the shaft returned

  3. C

    The shaft was not worth the claimed damages

  4. D

    The limitation period had expired

View answer and explanation

Correct answer: B. The loss of profits was not a natural consequence in the ordinary course and the carrier had not been told the mill would be idle until the shaft returned

The passage states: 'the plaintiffs were not entitled to recover loss of profits because such loss was not a natural consequence of the delay in the ordinary course of things, and the defendants had not been informed that the mill would be idle until the shaft was returned.'

Source note: Ist Term LB102 / Hadley v. Baxendale (1854) / Section 73 ICA

Question 58MediumDamages - Section 73 and Hadley v. Baxendale

The first limb of the rule in Hadley v. Baxendale covers:

  1. A

    Special circumstances communicated to the defendant

  2. B

    Damages arising naturally according to the usual course of things from the breach itself

  3. C

    All losses however remote

  4. D

    Only physical damage

View answer and explanation

Correct answer: B. Damages arising naturally according to the usual course of things from the breach itself

The passage states: 'first, damages that arise naturally or according to the usual course of things from the breach itself.'

Source note: Ist Term LB102 / Hadley v. Baxendale (1854) / Section 73 ICA

Question 59HardDamages - Section 73 and Hadley v. Baxendale

Under the second limb of Hadley v. Baxendale, for loss of profits to be recoverable in a case like the mill shaft, the passage suggests it was necessary that:

  1. A

    The plaintiff was a large commercial enterprise

  2. B

    The special circumstances (mill would be stopped until the shaft was returned) must have been communicated to the carrier

  3. C

    The carrier had contractually agreed to speed of delivery

  4. D

    The shaft had been insured

View answer and explanation

Correct answer: B. The special circumstances (mill would be stopped until the shaft was returned) must have been communicated to the carrier

The passage states: 'the special circumstances (that the mill would be stopped until the shaft was returned) must have been communicated to the carrier to make the loss of profits recoverable.'

Source note: Ist Term LB102 / Hadley v. Baxendale (1854) / Section 73 ICA

Question 60EasyDamages - Section 73 and Hadley v. Baxendale

Section 73 ICA expressly provides that compensation shall not be given for:

  1. A

    Losses arising naturally from the breach

  2. B

    Remote and indirect losses

  3. C

    Any loss unless specifically pleaded

  4. D

    Losses occurring after the date of breach

View answer and explanation

Correct answer: B. Remote and indirect losses

The passage states: 'Compensation is not to be given for remote and indirect losses.'

Source note: Ist Term LB102 / Hadley v. Baxendale (1854) / Section 73 ICA

Passage or principleIst Term LB102 / F.A. Tamplin SS Co. v. Anglo-Mexican Petroleum / ICA Sections 56 and 65

The doctrine of frustration under Section 56 of the Indian Contract Act 1872 discharges the parties from future obligations when a supervening event makes performance impossible or radically different from what was contemplated. The question of what happens to benefits already received under the contract before frustration - the restitutionary consequences - is governed by Section 65 ICA. Section 65 provides that when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it or to make compensation for it to the person from whom he received it. Applied to frustrated contracts, this means that parties must restore benefits received before the frustrating event occurred. The basis of Section 65 is the prevention of unjust enrichment - it would be inequitable for a party to retain a benefit obtained under a contract that has been discharged. The restitutionary obligation does not depend on fault: it arises simply from the fact of receipt of a benefit under a contract that has become void. However, the application of Section 65 to frustrated contracts requires careful calibration - a party who has fully performed his obligations before frustration may not be able to recover the value of that performance if no distinct benefit was conferred on the other party. Indian courts have had to balance the principle of restitution against the principle that frustration discharges all obligations prospectively, not retrospectively, leaving the loss where it falls unless a specific restitutionary claim can be identified. The legislature's intent in Section 65 was to prevent unjust enrichment and not to redistribute losses arising from the frustrating event itself.

Question 61EasyDoctrine of Frustration and Restitution - Section 56 and 65

Section 65 ICA provides that when a contract becomes void, any person who has received an advantage under it is:

  1. A

    Entitled to keep the advantage as the contract is void

  2. B

    Bound to restore it or make compensation for it to the person from whom he received it

  3. C

    Required to pay a penalty to the government

  4. D

    Not required to do anything as the contract is void

View answer and explanation

Correct answer: B. Bound to restore it or make compensation for it to the person from whom he received it

The passage states: 'Section 65 provides that...any person who has received any advantage under such agreement or contract is bound to restore it or to make compensation for it to the person from whom he received it.'

Source note: Ist Term LB102 / F.A. Tamplin SS Co. v. Anglo-Mexican Petroleum / ICA Sections 56 and 65

Question 62EasyDoctrine of Frustration and Restitution - Section 56 and 65

The basis of the restitutionary obligation under Section 65 as described in the passage is:

  1. A

    Punishment of the party who caused frustration

  2. B

    Prevention of unjust enrichment - it would be inequitable for a party to retain a benefit under a contract that has been discharged

  3. C

    A contractual term requiring restoration

  4. D

    Parliamentary mandate for compensation

View answer and explanation

Correct answer: B. Prevention of unjust enrichment - it would be inequitable for a party to retain a benefit under a contract that has been discharged

The passage states: 'The basis of Section 65 is the prevention of unjust enrichment - it would be inequitable for a party to retain a benefit obtained under a contract that has been discharged.'

Source note: Ist Term LB102 / F.A. Tamplin SS Co. v. Anglo-Mexican Petroleum / ICA Sections 56 and 65

Question 63MediumDoctrine of Frustration and Restitution - Section 56 and 65

According to the passage, the restitutionary obligation under Section 65 arises:

  1. A

    Only if the party retaining the benefit was at fault for frustration

  2. B

    Simply from the fact of receipt of a benefit under a contract that has become void - not dependent on fault

  3. C

    Only if the benefit received was money

  4. D

    Only when both parties have received benefits

View answer and explanation

Correct answer: B. Simply from the fact of receipt of a benefit under a contract that has become void - not dependent on fault

The passage states: 'The restitutionary obligation does not depend on fault: it arises simply from the fact of receipt of a benefit under a contract that has become void.'

Source note: Ist Term LB102 / F.A. Tamplin SS Co. v. Anglo-Mexican Petroleum / ICA Sections 56 and 65

Question 64HardDoctrine of Frustration and Restitution - Section 56 and 65

A difficulty in applying Section 65 to frustrated contracts arises when:

  1. A

    The benefit received was a service with no identifiable discrete value - a party who fully performed before frustration may not recover if no distinct benefit was conferred on the other party

  2. B

    Both parties have received equal benefits

  3. C

    The frustrating event was caused by a third party

  4. D

    The contract was registered

View answer and explanation

Correct answer: A. The benefit received was a service with no identifiable discrete value - a party who fully performed before frustration may not recover if no distinct benefit was conferred on the other party

The passage states: 'a party who has fully performed his obligations before frustration may not be able to recover the value of that performance if no distinct benefit was conferred on the other party.'

Source note: Ist Term LB102 / F.A. Tamplin SS Co. v. Anglo-Mexican Petroleum / ICA Sections 56 and 65

Question 65HardDoctrine of Frustration and Restitution - Section 56 and 65

The legislative intent behind Section 65 according to the passage is:

  1. A

    To redistribute all losses arising from the frustrating event

  2. B

    To prevent unjust enrichment and not to redistribute losses arising from the frustrating event itself

  3. C

    To penalise the party who caused frustration

  4. D

    To ensure all contracts are performed despite frustration

View answer and explanation

Correct answer: B. To prevent unjust enrichment and not to redistribute losses arising from the frustrating event itself

The passage states: 'The legislature's intent in Section 65 was to prevent unjust enrichment and not to redistribute losses arising from the frustrating event itself.'

Source note: Ist Term LB102 / F.A. Tamplin SS Co. v. Anglo-Mexican Petroleum / ICA Sections 56 and 65

Passage or principleIst Term LB102 / Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC)

Section 56 of the Indian Contract Act 1872 codifies the doctrine of frustration of contract. The second paragraph of Section 56 provides that a contract to do an act which, after the contract is made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. In Satyabrata Ghose v. Mugneeram Bangur & Co. (AIR 1954 SC 44), the Supreme Court comprehensively addressed the scope and application of Section 56 in India. The defendant company had agreed to develop and sell plots of land in a residential scheme and executed a sale agreement. Subsequently, the Government requisitioned the land for wartime purposes, making it impossible for the company to develop the plots. The Supreme Court held that Section 56 ICA comprehensively codifies the doctrine of frustration in India, and that recourse to the English doctrine of frustration through case law is not appropriate - the rights and liabilities of the parties when a contract is frustrated are to be determined entirely under Section 56. The Court also held that the test of impossibility under Section 56 is not to be applied in its literal and physical sense - it covers cases where performance has become 'impracticable and useless' having regard to the object and purpose of the contract. The Court further emphasised that the doctrine of frustration does not apply where the supervening event was foreseeable and should have been guarded against in the contract, or where the impossibility is self-induced by one of the parties.

Question 66EasyFrustration - Section 56 ICA

Section 56 ICA para 2 provides that a contract becomes void when performance becomes impossible after the contract is made due to:

  1. A

    Change in economic conditions making performance more expensive

  2. B

    An event which the promisor could not prevent that makes the act impossible or unlawful

  3. C

    Refusal of one party to perform

  4. D

    A decline in the market price of the goods

View answer and explanation

Correct answer: B. An event which the promisor could not prevent that makes the act impossible or unlawful

The passage states Section 56 para 2 covers 'an event which the promisor could not prevent' that makes performance impossible or unlawful.

Source note: Ist Term LB102 / Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC)

Question 67MediumFrustration - Section 56 ICA

In Satyabrata Ghose v. Mugneeram Bangur, the Supreme Court held that the rights of parties when a contract is frustrated in India are to be determined:

  1. A

    By applying English common law doctrine of frustration

  2. B

    Entirely under Section 56 ICA - Section 56 comprehensively codifies frustration and recourse to English case law is not appropriate

  3. C

    By the personal law of the parties

  4. D

    By whichever law is more favourable to the plaintiff

View answer and explanation

Correct answer: B. Entirely under Section 56 ICA - Section 56 comprehensively codifies frustration and recourse to English case law is not appropriate

The passage states: 'Section 56 ICA comprehensively codifies the doctrine of frustration in India, and that recourse to the English doctrine of frustration through case law is not appropriate.'

Source note: Ist Term LB102 / Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC)

Question 68MediumFrustration - Section 56 ICA

According to the Supreme Court in Satyabrata Ghose, the test of impossibility under Section 56 means:

  1. A

    Only literal, physical impossibility qualifies

  2. B

    Performance that has become impracticable and useless having regard to the object and purpose of the contract

  3. C

    Impossibility only due to natural disasters

  4. D

    Impossibility certified by a government authority

View answer and explanation

Correct answer: B. Performance that has become impracticable and useless having regard to the object and purpose of the contract

The passage states: 'the test of impossibility under Section 56 is not to be applied in its literal and physical sense - it covers cases where performance has become impracticable and useless having regard to the object and purpose of the contract.'

Source note: Ist Term LB102 / Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC)

Question 69HardFrustration - Section 56 ICA

The doctrine of frustration under Section 56 does not apply when:

  1. A

    The government requisitions the subject matter

  2. B

    The supervening event was foreseeable and should have been guarded against in the contract, or the impossibility is self-induced

  3. C

    One party's financial condition deteriorates

  4. D

    Performance becomes more expensive than anticipated

View answer and explanation

Correct answer: B. The supervening event was foreseeable and should have been guarded against in the contract, or the impossibility is self-induced

The passage states: 'the doctrine of frustration does not apply where the supervening event was foreseeable and should have been guarded against in the contract, or where the impossibility is self-induced by one of the parties.'

Source note: Ist Term LB102 / Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC)

Question 70EasyFrustration - Section 56 ICA

The factual basis of frustration in Satyabrata Ghose was:

  1. A

    The developer's insolvency

  2. B

    Government requisition of the land for wartime purposes making it impossible to develop the plots

  3. C

    Flooding of the residential scheme area

  4. D

    Refusal of third parties to purchase the plots

View answer and explanation

Correct answer: B. Government requisition of the land for wartime purposes making it impossible to develop the plots

The passage states: 'the Government requisitioned the land for wartime purposes, making it impossible for the company to develop the plots.'

Source note: Ist Term LB102 / Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC)

Passage or principleIst Term LB102 / Fateh Chand v. Balkishan Das (AIR 1963 SC) / Section 74 ICA

Section 74 of the Indian Contract Act 1872 deals with the situation where a sum is named in the contract as the amount payable upon breach, or where the contract contains any other stipulation by way of penalty. In such cases, the party who suffers the breach is entitled to receive reasonable compensation not exceeding the amount so named or, as the case may be, not exceeding the penalty stipulated. The important feature of Section 74 is that the party claiming damages need not prove actual loss - compensation can be awarded even if no actual damage has been suffered, subject to the ceiling of the stipulated sum. This is significantly different from English law, which distinguishes between a genuine pre-estimate of loss (liquidated damages - enforceable) and a sum in terrorem to force performance (penalty - not enforceable). Indian law under Section 74 makes no such distinction: whether the pre-agreed sum is a genuine estimate or a penalty, the court awards reasonable compensation not exceeding it. In Fateh Chand v. Balkishan Das (AIR 1963 SC 1405), the Supreme Court affirmed this interpretation. The defendant, a purchaser of land, had paid earnest money and subsequent instalments under an agreement for sale. On default, the vendor retained the earnest money and sued for further instalments. The Supreme Court held that Section 74 applied to the forfeiture of earnest money and subsequent amounts: the vendor was entitled to retain only 'reasonable compensation' not exceeding the stipulated amount, even though actual damage had not been fully established. The Court cannot, however, award more than the stipulated amount even if actual loss exceeds it.

Question 71EasyLiquidated Damages - Section 74 ICA

Under Section 74 ICA, when a sum is named in a contract for breach, the party suffering breach is entitled to:

  1. A

    The full named sum regardless of actual loss

  2. B

    Reasonable compensation not exceeding the amount named - even without proving actual loss

  3. C

    Nothing unless actual loss is proved

  4. D

    Compensation plus punitive damages

View answer and explanation

Correct answer: B. Reasonable compensation not exceeding the amount named - even without proving actual loss

The passage states: 'the party who suffers the breach is entitled to receive reasonable compensation not exceeding the amount so named' and 'the party claiming damages need not prove actual loss.'

Source note: Ist Term LB102 / Fateh Chand v. Balkishan Das (AIR 1963 SC) / Section 74 ICA

Question 72MediumLiquidated Damages - Section 74 ICA

The significant difference between Indian law under Section 74 and English law on this point is that:

  1. A

    Indian law always awards the full stipulated sum

  2. B

    Section 74 does not distinguish between a genuine pre-estimate (liquidated damages) and a penalty (in terrorem) - both are treated equally, with the court awarding reasonable compensation up to the ceiling

  3. C

    English law never enforces pre-agreed sums

  4. D

    Indian law requires the sum to be approved by a court in advance

View answer and explanation

Correct answer: B. Section 74 does not distinguish between a genuine pre-estimate (liquidated damages) and a penalty (in terrorem) - both are treated equally, with the court awarding reasonable compensation up to the ceiling

The passage states: 'Indian law under Section 74 makes no such distinction: whether the pre-agreed sum is a genuine estimate or a penalty, the court awards reasonable compensation not exceeding it.'

Source note: Ist Term LB102 / Fateh Chand v. Balkishan Das (AIR 1963 SC) / Section 74 ICA

Question 73MediumLiquidated Damages - Section 74 ICA

In Fateh Chand v. Balkishan Das, the Supreme Court held regarding the forfeiture of earnest money:

  1. A

    The vendor could retain the entire earnest money as agreed

  2. B

    The vendor was entitled to retain only 'reasonable compensation' not exceeding the stipulated amount - even though actual damage had not been fully established

  3. C

    The forfeiture clause was void for being a penalty

  4. D

    The purchaser was entitled to a full refund

View answer and explanation

Correct answer: B. The vendor was entitled to retain only 'reasonable compensation' not exceeding the stipulated amount - even though actual damage had not been fully established

The passage states: 'the vendor was entitled to retain only reasonable compensation not exceeding the stipulated amount, even though actual damage had not been fully established.'

Source note: Ist Term LB102 / Fateh Chand v. Balkishan Das (AIR 1963 SC) / Section 74 ICA

Question 74HardLiquidated Damages - Section 74 ICA

If the actual loss suffered by the party claiming damages exceeds the stipulated sum in the contract, under Section 74:

  1. A

    The court can award the actual loss exceeding the stipulated sum

  2. B

    The court cannot award more than the stipulated amount - the ceiling of the named sum is absolute

  3. C

    The court applies a reasonableness test to exceed the ceiling

  4. D

    The court deducts a penalty for overestimation

View answer and explanation

Correct answer: B. The court cannot award more than the stipulated amount - the ceiling of the named sum is absolute

The passage states: 'The Court cannot, however, award more than the stipulated amount even if actual loss exceeds it.'

Source note: Ist Term LB102 / Fateh Chand v. Balkishan Das (AIR 1963 SC) / Section 74 ICA

Question 75HardLiquidated Damages - Section 74 ICA

A key feature of Section 74 ICA that makes it more favourable to claimants than ordinary proof-of-damage rules is:

  1. A

    The claimant gets double damages automatically

  2. B

    Reasonable compensation can be awarded even if no actual damage is proved - the claimant need not establish actual financial loss

  3. C

    The court ignores the stipulated sum entirely

  4. D

    The claimant gets the benefit of both the stipulated sum and actual damages

View answer and explanation

Correct answer: B. Reasonable compensation can be awarded even if no actual damage is proved - the claimant need not establish actual financial loss

The passage states: 'the party claiming damages need not prove actual loss - compensation can be awarded even if no actual damage has been suffered, subject to the ceiling of the stipulated sum.'

Source note: Ist Term LB102 / Fateh Chand v. Balkishan Das (AIR 1963 SC) / Section 74 ICA

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