Law of Contract MCQs for Judiciary, Page 3

Correct answer: B. Under Section 44, if one of several joint promisees makes any agreement releasing any of the joint promisors, the promisor so released is discharged, but the other promisors are not discharged from their obligations; the releasing promisee alone cannot release the others' rights

Section 44 ICA 1872: 'Where one of two or more joint promisees releases one of two or more joint promisors, the other joint promisors are not thereby released, but the releasing promisee is not entitled to sue the released promisor.' Two important consequences of Section 44: (1) The RELEASED PROMISOR is free from the releasing promisee's claim but NOT from claims by the other co-promisees who did not release him; (2) The RELEASING PROMISEE cannot sue the released promisor (by his own release he has given up his right); (3) The OTHER CO-PROMISEES retain their rights against ALL promisors including the 'released' one. This provision prevents individual joint promisees from compromising the rights of other co-promisees by making unauthorized releases. The released promisor may still have contribution rights and obligations with other joint promisors under Section 43.

Source note: ICA 1872 Section 44

Correct answer: B. Under Section 45, the surviving joint promisees can enforce the contract; on the death of all joint promisees, their legal representatives jointly with the survivor (or after the last survivor's death, the representatives of all) can enforce

Section 45 ICA 1872: 'When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the representative of such deceased person jointly with the survivor or survivors, and, after the death of the last survivor, with the representatives of all jointly.' Section 45 creates a chain of entitlement parallel to Section 42's chain of obligation. The right to enforce a joint promise passes: living promisees jointly THEN on death of one promisee, the representative of the deceased joins the surviving promisees THEN on the death of all, the representatives of all jointly. This ensures that the benefits of a joint promise are not lost through the death of promisees and that enforcement rights are properly maintained through the estate.

Source note: ICA 1872 Section 45

Correct answer: B. The loan agreement's agency and enforcement mechanism governs; under the ICA principles of agency and the specific terms of the intercreditor agreement, if Bank L has exclusive authority to enforce security on behalf of all, Bank M cannot enforce independently without breach of the intercreditor arrangement; Bank M's remedy is to request Bank L to act or to proceed under the intercreditor agreement

Syndicated lending creates a complex multi-party contract. The intercreditor agreement governs the relationship between the lenders; the lead bank (security agent or trustee) typically holds security on behalf of all lenders as a trustee/agent. Under Section 226 ICA, the security agent's enforcement of security is binding on the principal-lenders. If the agreement grants exclusive enforcement authority to Bank L as agent/trustee, Bank M acting independently would: (1) breach the intercreditor agreement; (2) potentially disturb the pari passu (equal ranking) distribution of enforcement proceeds; (3) expose Bank M to claims from other lenders for damages. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI), banks can take possession and sell secured assets, but the intercreditor provisions under the RBI's June 2019 Circular govern priority in enforcement among multiple lenders.

Source note: ICA 1872 Section 226 / SARFAESI Act 2002

Correct answer: B. Under Section 43 ICA, if one of the joint promisors is insolvent and cannot contribute, the deficiency caused by R's insolvency must be made up by the other solvent joint promisors (P and Q) in equal shares; R's one-third (Rs. 20,000) is borne equally by P and Q (Rs. 10,000 each)

Section 43 ICA 1872 proviso: 'If one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.' P paid Rs. 60,000 (the full debt). P is entitled to contribution from Q and R: Rs. 20,000 each. R cannot pay (insolvent). Under Section 43 proviso, R's defaulted Rs. 20,000 must be shared EQUALLY between the remaining solvent contributors P and Q. Therefore: P is already out Rs. 60,000. P recovers Rs. 20,000 from Q (Q's equal share). Of R's defaulted Rs. 20,000, P and Q each bear Rs. 10,000. Net result: P bears Rs. 60,000 - Rs. 20,000 (from Q) + Rs. 10,000 (R's share) = Rs. 50,000 total. Q pays Rs. 20,000 + Rs. 10,000 = Rs. 30,000 total. Each bears half of R's default.

Source note: ICA 1872 Section 43 proviso

Correct answer: B. A 'pay when paid' clause in a subcontract may be a valid conditional payment provision; however, courts scrutinize such clauses strictly: if the clause merely sets a time of payment (pay within 7 days of receiving payment from O), it may be valid; if it is a condition to payment (CC is never obliged to pay SC unless O pays CC), courts may read it narrowly to protect the vulnerable subcontractor against the main contractor's insolvency risk

'Pay when paid' clauses shift the CREDIT RISK of the employer's non-payment onto subcontractors. Courts distinguish: (1) TIME clauses: the clause merely specifies when payment is due (after CC receives payment from O); the subcontractor will eventually be paid regardless; these are generally upheld; (2) CONDITION clauses: CC is only obliged to pay SC IF CC receives payment from O (making O's payment a condition precedent); if O becomes insolvent and never pays, SC never gets paid; courts have read these narrowly to protect subcontractors. In England, the Housing Grants Construction and Regeneration Act 1996 restricts pay when paid clauses in construction. Indian courts apply Section 23 ICA (public policy) and general equitable principles to avoid harsh results for subcontractors. The stronger CC (main contractor) should not transfer all credit risk to weaker SC (subcontractor) without clear and expressed agreement.

Source note: ICA 1872 Section 23

Correct answer: B. The tenant's assignment without consent is a breach of the lease; whether T2 gets any rights depends on: (1) whether the original tenant breached by assigning without consent.

This involves the interplay between the landlord's consent requirement and the reasonableness qualification. The clause 'not unreasonably withheld' is a qualified prohibition: the landlord must not refuse consent for arbitrary or capricious reasons (Landlord and Tenant Act principles, applied in India under the Transfer of Property Act provisions on assignment). However, the remedy for unreasonable withholding of consent is to seek a COURT DECLARATION that the withholding was unreasonable and to assign with court approval, NOT to simply proceed with an unauthorized assignment. The tenant who assigns without consent (even if the landlord's refusal was unreasonable) has breached the lease covenant against assignment without consent. T2's occupation is therefore without proper title. The landlord may seek forfeiture and an injunction against T2. The tenant's remedy for unreasonable refusal is declaratory relief and possibly damages, not self-help assignment.

Source note: ICA 1872 / Transfer of Property Act 1882

Correct answer: B. X must pay only up to his individual limit of Rs. 60,000; Section 146 ICA: co-sureties bound in different sums are liable to pay equally as far as the limits of their respective obligations allow; contribution is up to the proportionate limits of each surety

Section 146 ICA 1872: 'Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations allow.' The calculation for co-sureties bound in different sums: the contribution is made up to the proportionate limits. X's limit: Rs. 60,000; Y's limit: Rs. 90,000; Z's limit: Rs. 30,000. If X is asked to pay Rs. 90,000 (the full debt), X can only be compelled to pay up to his limit of Rs. 60,000. The remaining Rs. 30,000 must come from Y and/or Z. The precise apportionment depends on the individual limits and what each has already paid. X having paid Rs. 60,000 can claim contribution from Y and Z under Section 146 for their respective proportionate shares of the total liability of Rs. 90,000.

Source note: ICA 1872 Section 146

Correct answer: B. To debts in the order in which they became due (chronological order); the oldest debt is satisfied first, then subsequent debts in order of time

Sections 59-61 ICA 1872 form a hierarchy of appropriation rights: Section 59 gives the DEBTOR first priority to specify which debt the payment is for at the time of payment. Section 60 gives the CREDITOR priority to appropriate to any lawful debt if the debtor does not specify. Section 61 (the residual rule, applying Clayton's Rule from Devaynes v. Noble, 1816): 'where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time.' Chronological order means the oldest debt is paid first. This rule has critical practical implications in running accounts: in a bank account, for example, each payment into the account first reduces the oldest outstanding debit, which can affect whether a time-barred debt is extinguished (since appropriating to a time-barred debt may revive it under the Limitation Act). The rule protects creditors from having payments applied to most recent debts while old debts remain unpaid.

Source note: ICA 1872 Sections 59-61

Correct answer: B. P is entitled to reject the substitute and claim damages for breach; M contracted to build a machine to specific specifications.

A promisor generally bears the risk of performance being technically difficult or impossible unless the contract contains a force majeure or impossibility clause. The principle from Paradine v. Jane (1647) (absolute obligations): a party who has undertaken to perform an act must perform it even if performance becomes more difficult, unless the impossibility falls within Section 56 ICA (supervening impossibility). Technical limitations discovered DURING performance are generally NOT supervening impossibility; they are risks that should have been investigated before undertaking the contract. M should have done due diligence before making the specific promise. P's right to reject the substitute flows from Section 7 ICA (acceptance must be absolute and unqualified): a substitute machine with different specifications is not the contractual performance. P can claim: (1) return of any advance paid; (2) damages for the difference between the contract value and the market cost of obtaining the specified machine from another supplier.

Source note: ICA 1872 Sections 7, 56

Correct answer: B. The rescinding party must, if he has received any benefit under the contract, restore it to the other party; rescission is conditional on restoration of the status quo ante

Section 64 ICA 1872: '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. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.' This embodies the principle of RESTITUTIO IN INTEGRUM (restoring the parties to their original positions). The rescinding party cannot rescind and keep the benefit received. Both parties must be restored to their pre-contractual positions. If complete restoration is impossible (e.g., goods consumed), the court may impose monetary compensation as a condition of rescission. This connects with Section 65 ICA (when a contract is discovered void or becomes void, restore benefits) and with equity's requirement that one seeking equitable relief must do equity.

Source note: ICA 1872 Section 64

Correct answer: B. Y can claim under Section 73 ICA: first, general damages for the difference between the contract price and the market price at the date of breach for all remaining 6 months; second, if X knew of Y's sub-contracts at the time of contracting, Y can additionally claim special damages (loss of sub-contract profits) under the second limb of Hadley v.

Section 73 ICA (Hadley v. Baxendale principle): GENERAL DAMAGES for breach of supply contract are the difference between the contract price and the MARKET PRICE at the date of breach for the undelivered quantity (Sections 57-58 SOGA: buyer's remedy for non-delivery). These flow naturally from the breach. SPECIAL DAMAGES for loss of sub-contract profits are recoverable only under the second limb of Hadley v. Baxendale if X knew at contracting time that Y was buying for resale. If X knew Y was a trader, X would reasonably foresee resale commitments. Y's DUTY TO MITIGATE (Section 73): Y must buy replacement wheat from the market to minimize loss. If Y fails to mitigate, Y cannot recover losses that would have been avoided by reasonable mitigation. The measure is: extra cost of buying replacement wheat from the market, plus consequential losses from any sub-contract shortfalls that could not be avoided.

Source note: ICA 1872 Section 73 / SOGA Sections 57, 58

Correct answer: B. The promisee has a choice: he may elect to treat the refusal as a repudiation and terminate the contract, or he may elect to affirm the contract and wait for the performance date; this is the election principle in contract law

Section 40 ICA 1872 deals with the effect of a refusal to perform a promise in its entirety. The word 'MAY' confers a choice on the promisee, consistent with the general principle that a repudiation by one party does not AUTOMATICALLY terminate the contract; rather, it creates an option for the innocent party to: (1) ACCEPT the repudiation, treat the contract as terminated, and sue immediately for damages (anticipatory breach), OR (2) AFFIRM the contract, communicate this to the repudiating party, and wait for the performance date; if the repudiating party still fails to perform, the innocent party can then sue. The consequences of election: once the innocent party affirms, he is bound by the contract and takes the risk of supervening events (Avery v. Bowden principle). The acquiescence language in Section 40 is important: if the promisee has by words or conduct accepted the continuance, he cannot later claim the earlier refusal as grounds for termination.

Source note: ICA 1872 Section 40

Correct answer: B. P must show: the document is void or voidable; P has reasonable apprehension that if left outstanding it would cause serious injury.

Section 31 SRA 1963 deals with cancellation of instruments. For cancellation: (1) the instrument must be VOID OR VOIDABLE; (2) if void, the plaintiff need not do anything beyond getting the declaration; if VOIDABLE (like a contract induced by coercion, which P's case represents), the court may require restoration of any benefit under Section 64 ICA; (3) there must be REASONABLE APPREHENSION that if left outstanding, the instrument would cause serious injury to the plaintiff. 'Serious injury' includes the instrument being used as evidence against P or to claim rights P does not intend to confer. Section 33 SRA (related to minor's contracts): even in cases of void contracts with a minor seeking cancellation, the court may require the minor to restore benefits. The combination of Sections 31-33 SRA ensures that cancellation is not a one-sided remedy but restores parties to their pre-transaction position.

Source note: Specific Relief Act 1963 Sections 31, 33

Correct answer: B. To stay a judicial proceeding pending in another court (except to prevent multiplicity of suits), to restrain a court from enforcing its own judgment, or to restrain a legislative body from enacting a law

Section 41 SRA 1963 lists cases where injunctions shall NOT be granted: (a) to stay judicial proceedings unless to prevent multiplicity of suits; (b) to stay proceedings in a court not subordinate to the court granting the injunction; (c) to restrain persons from applying to courts for legal remedies; (d) to prevent breach of a contract whose performance courts would not order specifically; (e) to prevent breach of a contract that is a mere personal act (breach of which should be compensated by damages); (f) to prevent a continuing breach in which the plaintiff has acquiesced; (g) when equally effective relief can be obtained by other means; (h) when the plaintiff's conduct has disentitled him to assistance. Option (B) most accurately reflects the Section 41(a) restriction on staying judicial proceedings. Note that Section 37 SRA (temporary injunctions) is governed by the Code of Civil Procedure, while perpetual injunctions under Section 38 SRA require proof of actual or threatened violation of legal rights.

Source note: Specific Relief Act 1963 Section 41

Correct answer: B. Under Article 54 of the Limitation Act 1963, the limitation period for specific performance of a contract is 3 years from the date fixed for performance, or if no date is fixed, from the date when the plaintiff has notice that performance has been refused; B's suit filed 4 years after breach may be time-barred

Article 54 of the Limitation Act 1963 provides: 'For specific performance of a contract: 3 years. Period begins to run: when the contract should have been performed, or where the defendant has not performed on the due date, when the plaintiff has notice that performance is refused.' If B's notice of refusal was at the time of breach (V clearly refusing to complete), the 3-year period runs from that date. Filing 4 years later would ordinarily be time-barred. However: (1) if there were acknowledgments of the obligation by V within the limitation period, fresh limitation runs from those acknowledgments (Limitation Act Section 18); (2) if B was fraudulently concealed of his right to sue, Section 17 Limitation Act may extend the period. The combination of the limitation period and the Section 16(c) SRA readiness and willingness requirement means that B must not only file within time but also have been ready and willing to perform throughout.

Source note: Limitation Act 1963 Article 54 / Specific Relief Act 1963 Section 16(c)

Correct answer: B. The clause may be void under Section 23 ICA as being in restraint of employment and against public policy if it is designed to coerce the employee to remain by threat of financial penalty; the clause operates as a restraint on the employee's constitutional right to work and may be struck down as unconscionable; alternatively, it may be assessed under Section 74 ICA as a sum stipulated on breach with courts awarding only reasonable compensation

This question involves multiple overlapping legal principles. First, SECTION 27 ICA: post-employment non-compete clauses are void. Second, SECTION 23 ICA: a clause designed to economically coerce an employee to remain in service by threatening forfeiture of accrued benefits may be unconscionable and against public policy. Central Inland Water Transport Corporation v. Brojo Nath Ganguly (AIR 1986 SC 1571) struck down an unconscionable clause in an employment contract on public policy grounds under Section 23. Third, SECTION 74 ICA: if the forfeiture is treated as a penalty for breach (leaving early), courts award only reasonable compensation, not necessarily the full forfeiture amount. The courts weigh: is this a genuine incentive structure or a disguised penalty designed to trap the employee? Courts are more protective in employment contexts.

Source note: ICA 1872 Sections 23, 74 / Central Inland Water Transport v. Brojo Nath Ganguly (AIR 1986 SC)

Correct answer: B. No; under Section 37 ICA, personal contracts that depend on the skill, judgment, or personal confidence of a specific individual are not binding on the legal representative after that person's death; where P's business was purely personal and the contract with A was built on P's personal relationship and business judgment, A is entitled to treat the contract as discharged by P's death

Section 37 ICA 1872: 'Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.' The EXCEPTION: contracts that are PERSONAL in nature (dependent on the personal skill, trust, or creditworthiness of a specific individual) are NOT enforceable against legal representatives after the individual's death. A sole proprietorship business is effectively a personal business. If the contract with the advertising agency was built on: (1) P's personal credit; (2) P's personal creative direction; (3) P's specific personal relationship with A; then the contract may be personal in nature and automatically discharged by P's death. However, if P was merely a business owner and the contract was purely commercial (not dependent on P personally), the representative may continue it. The question requires contextual analysis but a personal sole proprietor's marketing contract is likely personal.

Source note: ICA 1872 Section 37

Correct answer: B. Under Section 57, the legal part of the reciprocal promise is valid and enforceable; the illegal part is void.

Section 57 ICA 1872: 'In the case of alternative promises, one branch of which is legal and the other illegal, the legal branch alone can be enforced.' This provision allows SEVERANCE: the legal promise can be extracted and enforced while the illegal promise is discarded. However, Section 57's principle applies where the promises are genuinely separable and independent: enforcing one does not require relying on or giving effect to the other. If the promises are fundamentally intertwined (the illegal promise is the very foundation of the legal one), severance is not possible and the entire contract fails. Section 24 ICA takes the stricter view for unlawful consideration, voiding the whole agreement. Courts must examine whether the legal part can stand alone after excising the illegal part. If yes, Section 57 saves the legal part.

Source note: ICA 1872 Section 57

Correct answer: B. The paying party must have a genuine legal or proprietary interest in making the payment such that the non-payment would expose him to legal liability or loss; a mere volunteer who pays out of charity cannot recover

Section 69 ICA 1872: 'A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.' The critical word is INTERESTED. The paying party must have a real interest in the payment such that failure to pay would expose him to some liability or prejudice. Example: X is a mortgagee of Y's property. Y fails to pay government revenue. The government may sell the property, which would extinguish X's mortgage. X pays the revenue. X can claim reimbursement from Y under Section 69 because X had a clear interest (protection of his mortgage). A mere volunteer who pays another's debt out of sympathy has NO INTEREST within Section 69 and cannot claim reimbursement. This prevents Section 69 from becoming an instrument for officious intermeddlers to impose liability on others.

Source note: ICA 1872 Section 69

Correct answer: B. Not necessarily; Section 70 requires that the act be done 'not intending to act gratuitously'.

Section 70 ICA requires: (1) lawfully doing something for another; (2) NOT intending to act gratuitously; (3) the other person enjoys the benefit. The difficulty with unsolicited professional advice is: (a) the client never requested it, raising the question whether the solicitors truly intended payment or were acting gratuitously by sending it unprompted; (b) the client may not have had a genuine opportunity to reject the benefit before it was conferred (unlike receiving goods that can be returned). In English law, the principle from Leigh v. Dickeson (1884) and Falcke v. Scottish Imperial Insurance (1886) holds that a person who voluntarily confers a benefit on another without request cannot generally recover unless the recipient had a genuine choice whether to accept. Indian courts apply Section 70 strictly. The mere enjoyment of a benefit does not automatically create liability; there must be a context where payment was reasonably expected.

Source note: ICA 1872 Section 70

Correct answer: B. Yes; Section 72 ICA provides that a person to whom money has been paid by mistake must repay it.

Section 72 ICA 1872: 'A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.' This applies to both MISTAKES OF FACT (the school believed a non-existent circular existed) and, following the modern position, MISTAKES OF LAW. The original Section 72 position was that it covered mistakes of fact only, but the Supreme Court in Shiba Prasad Singh v. Srish Chandra Nandi (1949 PC) and subsequent cases have recognised that money paid under a mistake of law is also recoverable (aligned with English law after Kleinwort Benson v. Lincoln CC, 1998 HL). The teachers' having spent the money is not a defence because they were never entitled to keep it. However, the school may have a practical difficulty if the teachers are impecunious. Legally, the obligation to repay exists under Section 72.

Source note: ICA 1872 Section 72

Correct answer: B. B is bound to take reasonable care of the found goods (same standard as a paid bailee under Section 151 ICA); B cannot use the goods for personal purposes.

Section 71 ICA 1872: 'A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee.' The duties therefore are those of a bailee under Section 151 (reasonable care), Section 154 (no unauthorised use), Section 163 (return any increase). Rights of the finder under Section 168 and 169: (1) Right to retain the goods against all except the true owner; (2) Right to sell if: the goods are perishable AND the owner cannot be found in time, OR the owner is found but refuses to pay the finder's lawful charges, OR the goods have been kept at some expense and 2 years have passed. The finder cannot appropriate the goods to his own use without exposing himself to liability for conversion. Any reward offered for the goods' return can be claimed by the finder who returns them.

Source note: ICA 1872 Sections 71, 168, 169

Correct answer: B. Yes, if P's payment was induced by a mistake of fact (the false belief that the property was unencumbered) and this false belief was caused by the government's failure to disclose the mortgage in the auction notice, P can recover the portion of the price attributable to the encumbrance under Section 72 ICA

Section 72 ICA covers money paid by mistake. P's payment of the full price was based on the belief that the property was free of encumbrances. This is a MISTAKE OF FACT (about the condition of the property). Additionally, if the government's auction notice omitted material information about the mortgage, this could also constitute misrepresentation under Section 18 ICA, making the contract voidable under Section 19. Under Section 72, P can recover the excess paid over what the encumbered property was worth. The principle of caveat emptor (buyer beware) under Section 16 SOGA applies to quality of goods, but where the defect was concealed by the vendor or resulted from the vendor's failure to disclose known information, caveat emptor is displaced by the fraud/misrepresentation principle. In government auctions, the disclosure obligations are particularly stringent.

Source note: ICA 1872 Section 72 / Section 18

Correct answer: B. Section 70 does not apply where: the act was done gratuitously (the doer intended to give a gift); the act was illegal.

The limits on Section 70 ICA recovery are important. Section 70 requires that the act was NOT done gratuitously. Where: (1) the act was a GIFT intended, Section 70 does not apply (Moon v. Durning principle); (2) the act was ILLEGAL, recovery is barred by ex turpi causa; (3) the recipient had no real choice (goods delivered while recipient slept, advice given to an unconscious person), courts are reluctant to impose liability; (4) the parties have an EXISTING CONTRACT that addresses the same subject matter, the quasi-contractual claim under Section 70 is displaced by the contractual regime (the parties must look to their contract). This last point is especially important: you cannot bypass an unfavorable contract by claiming in quasi-contract for the same benefit. State of West Bengal v. B.K. Mondal (AIR 1962 SC) allowed Section 70 where the contract was VOID, not where a valid contract existed.

Source note: ICA 1872 Section 70

Correct answer: B. Y must repay X because Section 72 ICA does not contain a 'good faith' exception; money paid by mistake must be repaid regardless of the recipient's good faith.

Section 72 ICA 1872 imposes an obligation to repay money paid by mistake. The section does not provide a 'good faith' defence for the recipient. Money paid by mistake belongs to the payer and the recipient holds it as a constructive trustee. Y's good faith is irrelevant to X's right of recovery under Section 72. The analysis: (1) X's payment was under a MISTAKE (X believed the cheque was validly drawn, not forged); (2) Y received money that was never intended by X to go to Y; (3) The forged cheque passes no title; (4) Y must repay X and Y's remedy is against Z (the forger) under tort law and criminal law. This also intersects with banking law: under the Negotiable Instruments Act, a forged instrument is a nullity; Section 85 NI Act protects the paying bank in certain circumstances but does not protect the recipient of the funds from restitutionary claims.

Source note: ICA 1872 Section 72 / NI Act Section 85