Law of Contract MCQs for Judiciary, Page 7

Correct answer: B. Non-disclosure in contracts of insurance - since insurance is a contract of utmost good faith (uberrimae fidei), failure to disclose material facts constitutes fraud entitling the insurer to avoid the policy

Contracts of utmost good faith (uberrimae fidei) impose a positive duty of disclosure - departure from this standard amounts to fraud or misrepresentation. The most important application is INSURANCE: a person seeking insurance must disclose all material facts affecting the risk. The insurer's liability is based on the disclosed information. Non-disclosure or misrepresentation of material facts (however innocent) entitles the insurer to avoid the policy ab initio - Carter v. Boehm (1766), codified in the Marine Insurance Act 1963 and Insurance Act 1938. Other uberrimae fidei contracts in Indian law: partnership, family settlements, surety/guarantee contracts (Sections 141-143 ICA - creditor must disclose facts materially affecting the surety's risk).

Source note: ICA 1872 Section 17 / Insurance principles

Correct answer: B. Indian Section 124 is limited to loss caused by human conduct - it does not cover loss from accidents or acts of God unless expressly included

Section 124 ICA defines indemnity as a contract to save a party from loss 'caused by the conduct of the promisor himself or by the conduct of any other person.' The definition is LIMITED to human conduct - loss from accidents, fire, natural disasters (acts of God) are NOT within the statutory definition of indemnity under Section 124. This is narrower than English law where indemnity can cover any loss from any source. However, parties can expressly agree to indemnify against accidental losses - such a contract would be valid as a general contract under Sections 10 and 23. Insurance contracts are not 'indemnity' under Section 124 but are quasi-indemnity arrangements governed by the Insurance Act and common law principles of indemnity.

Source note: ICA 1872 Section 124

Correct answer: B. Surety

Section 126 ICA 1872 defines the three parties in a guarantee: (1) SURETY - the person who gives the guarantee; (2) PRINCIPAL DEBTOR - the person in respect of whose default the guarantee is given; (3) CREDITOR - the person to whom the guarantee is given. The contract of guarantee is a TRIPARTITE arrangement - there are actually three separate contracts: (1) Between creditor and principal debtor (the main contract); (2) Between creditor and surety (the guarantee contract); (3) Between surety and principal debtor (usually an indemnity - the surety's right of reimbursement). The consideration for the surety's promise is the benefit given to the principal debtor by the creditor (Section 127).

Source note: ICA 1872 Section 126

Correct answer: B. The surety's maximum liability equals the principal debtor's liability, but the creditor may choose to sue the surety directly without first exhausting remedies against the principal debtor

Section 128 ICA 1872: 'The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.' This means: (1) QUANTUM - the maximum amount the surety can be liable for equals the principal debtor's liability (not more, though can be less by agreement); (2) NATURE - if the debt is void, the surety's obligation may also be affected; (3) No need to sue principal debtor first - the creditor can directly sue the surety without exhausting remedies against the principal debtor. The surety is NOT a guarantor in the English sense of secondary liability only - under Indian law, the surety can be sued directly. After paying, the surety gets: right of subrogation (Section 140 - steps into creditor's shoes) and right of indemnity from principal debtor (Section 145).

Source note: ICA 1872 Section 128

Correct answer: B. Discharges the surety as to transactions subsequent to the variation

Section 133 ICA 1872: 'Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.' This is one of the most important rules protecting sureties. The rationale: the surety agreed to guarantee a specific obligation - any change in that obligation without his consent potentially alters his risk. The discharge is PROSPECTIVE for subsequent transactions. Applied in Bank of Bihar Ltd v. Dr. Damodar Prasad (AIR 1969 SC 297) - the Supreme Court held that where the bank agreed to give time to the principal debtor without the surety's consent, the surety was discharged. Note: change must be material - trivial variations may not discharge. Sections 133-142 comprehensively list the events that discharge a surety.

Source note: ICA 1872 Section 133

Correct answer: B. Extends to a series of transactions - it can be revoked at any time by the surety as to future transactions (Section 130) or is revoked by death of the surety (Section 131) as to future transactions

Section 129 ICA 1872: 'A guarantee which extends to a series of transactions is called a continuing guarantee.' Examples: a guarantee to a tradesman for goods supplied on credit up to a specified limit over a period of time; a guarantee for a bank overdraft. Key rules for continuing guarantees: Section 130 - revocable as to future transactions by notice to the creditor (past transactions are not affected); Section 131 - automatically revoked as to future transactions by the death of the surety (the legal representatives are not bound for future advances, though they remain bound for past transactions). Section 130 revocation does NOT affect obligations already incurred under the guarantee.

Source note: ICA 1872 Sections 129-131

Correct answer: B. In indemnity, there are two parties and the indemnifier's liability is primary and independent; in guarantee, there are three parties and the surety's liability is secondary - it arises only on default of the principal debtor

The distinction between indemnity and guarantee is fundamental: INDEMNITY (Section 124): (1) Two parties - indemnifier and indemnified; (2) One contract only; (3) Liability of indemnifier is PRIMARY - he is directly liable; (4) The indemnifier acts on his own behalf; (5) Liability arises independent of any default by a third party. GUARANTEE (Section 126): (1) Three parties - creditor, principal debtor, surety; (2) Three contracts (as described in CT060); (3) Liability of surety is SECONDARY - arises only on default of the principal debtor; (4) The surety acts at the request of the principal debtor; (5) Surety has rights of subrogation, indemnity and contribution not available to an indemnifier. Pitts v. Jones (1903) - if a person guarantees in terms that his liability is primary, it may be treated as indemnity.

Source note: ICA 1872 Sections 124 vs 126

Correct answer: B. Subrogation - he steps into the shoes of the creditor and is entitled to all the rights which the creditor had against the principal debtor

Section 140 ICA 1872: '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 with all the rights which the creditor had against the principal debtor.' This is the right of SUBROGATION - the surety who pays steps into the creditor's shoes and can use all remedies the creditor had. Additionally: Section 141 - the surety is also entitled to the benefit of any security which the creditor holds against the principal debtor at the time of the contract of suretyship - if the creditor loses or releases that security without the surety's consent, the surety is discharged to the extent of the value of the security (Wulff v. Jay, 1872). Section 145 - right of INDEMNITY from principal debtor.

Source note: ICA 1872 Section 140

Correct answer: D. The principal debtor becoming insolvent

Sections 133-142 ICA list the circumstances that DISCHARGE a surety. Insolvency of the principal debtor does NOT discharge the surety - in fact, it is the event that most commonly makes the surety's obligation relevant and actionable. Events that DO discharge the surety include: Section 133 (variance in contract); Section 134 (release of principal debtor); Section 135 (act or omission impairing creditor's remedy against principal debtor); Section 136 (agreement to give time without surety's consent); Section 137 (creditor's neglect to sue within limitation making principal debtor free); Section 139 (any act or omission impairing rights against co-sureties). The general principle is that the surety's risk must not be increased beyond what was contemplated when the guarantee was given.

Source note: ICA 1872 Sections 133-142

Correct answer: B. The surety is discharged to the extent of the value of the security lost or released

Section 141 ICA 1872: '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.' The rationale: when the surety gave the guarantee, the securities held by the creditor reduced the surety's risk. If the creditor gives up those securities without the surety's consent, the surety's risk is increased beyond what was contemplated - the surety is discharged to the extent of the value of the released security. Wulff v. Jay (1872) - mortgagee released part of the security without surety's consent; surety discharged proportionally.

Source note: ICA 1872 Section 141

Correct answer: B. An agreement enforceable by law

Section 2(h) ICA 1872 provides: 'An agreement enforceable by law is a contract.' The key formula is: Contract = Agreement + Enforceability. An agreement that is not enforceable by law (e.g., a social agreement to meet for dinner) is NOT a contract. Enforceability requires: free consent, lawful consideration, lawful object, competent parties, and that it is not expressly declared void. Option (A) is too wide - every agreement is not a contract. Option (C) is a component, not the definition. Option (D) is wrong - oral contracts are perfectly valid under Indian law except where the statute requires writing.

Source note: Avtar Singh Law of Contract, Chapter 1

Correct answer: A. All contracts are agreements but all agreements are not contracts

This is one of the most fundamental propositions in contract law - 'All contracts are agreements but all agreements are not contracts.' An agreement is a wider term: every promise or set of promises forming consideration for each other (Section 2(e)). A contract is a narrower category - only those agreements that are enforceable by law. So every contract must be an agreement, but an agreement may lack enforceability (e.g., agreement without consideration, agreement with a minor, wagering agreement) and then it does not become a contract. Option (B) inverts this relationship and is factually incorrect.

Source note: Avtar Singh Law of Contract, Chapter 1

Correct answer: B. Free consent of parties competent to contract, for lawful consideration with a lawful object, and not expressly declared void

Section 10 is the cornerstone of contract formation in India. It lists the essential elements: (1) Free consent - defined in Section 13, vitiating factors in Sections 14-22; (2) Parties competent to contract - Section 11 (major, sound mind, not disqualified by law); (3) Lawful consideration - not forbidden by law, fraudulent, injurious, immoral or against public policy (Section 23); (4) Lawful object - same criteria; (5) Not expressly declared void - Sections 24-30 (restraint of trade, wagering, etc.). Writing and registration are required only where specifically mandated by a separate statute (e.g., sale of immovable property, negotiable instruments).

Source note: ICA 1872 Section 10

Correct answer: B. Meeting of minds - both parties agreeing on the same thing in the same sense

Consensus ad idem (Latin: 'agreement to the same thing') is the foundational requirement for a valid contract - both parties must agree on the same subject matter in the same sense. Section 13 ICA defines consent as 'two or more persons agreeing upon the same thing in the same sense.' Without consensus ad idem there is no true agreement. For example, if A offers to sell his white horse and B accepts thinking it is A's black horse, there is no consensus ad idem and no contract. This was applied in Raffles v. Wichelhaus (1864) - the classic 'Peerless' case where parties had different ships in mind.

Source note: ICA 1872 Section 13 / Avtar Singh Chapter 2

Correct answer: C. There was no intention to create legal relations - domestic/social arrangements are presumed not to be legally binding

Balfour v. Balfour (1919) CA is the leading case establishing that domestic and social agreements lack the intention to create legal relations - an essential element of a valid contract not expressly mentioned in the ICA but recognised by Indian courts. In this case, a husband promised to pay his wife a monthly allowance while she stayed in England for health reasons. The Court held this was a domestic arrangement, not a legally enforceable contract. Lord Atkin reasoned that if domestic arrangements were enforced, courts would be flooded with matrimonial disputes. This doctrine distinguishes social/domestic agreements (presumed not binding) from commercial agreements (presumed binding - Carlill v. Carbolic Smoke Ball Co.).

Source note: Avtar Singh Chapter 2 / Balfour v. Balfour (1919)

Correct answer: B. The offer comes to the knowledge of the person to whom it is made

Section 4 ICA 1872 deals with completion of communication. For an OFFER: communication is complete when it comes to the knowledge of the person to whom it is made. For ACCEPTANCE: (i) As against the PROPOSER - when it is put in the course of transmission so as to be out of the power of the acceptor; (ii) As against the ACCEPTOR - when it comes to the knowledge of the proposer. This is important in postal acceptance cases - the 'postal rule' under Indian law means acceptance is complete against the proposer (offeror) when the letter is posted, but complete against the acceptor only when the proposer receives it. Compare BG Kedia v. Girdharilal (AIR 1966 SC 543) - instantaneous communications (telex, telephone) = different rule.

Source note: ICA 1872 Section 4 / BG Kedia case

Correct answer: B. A servant who finds the missing nephew cannot claim the reward because he did not know of the offer when he performed the act

Lalman Shukla v. Gauri Datt (1913) Allahabad HC is the foundational Indian case on the requirement that acceptance must be in response to an offer - meaning the offeree must know of the offer at the time of acceptance. In this case, G's nephew went missing. G sent his servant (LS) to find the nephew and afterwards announced a reward for finding him. LS found the nephew without knowing of the reward. When LS later claimed the reward, the Court held he could not succeed - he had not accepted the offer because he did not know it existed when he performed the act. This establishes that: (1) acceptance must be in response to an offer; (2) you cannot accept an offer you do not know about.

Source note: Lalman Shukla v. Gauri Datt (1913) All.

Correct answer: A. When the offeree rejects it or counter-offers, when the offeror revokes before acceptance, when either party dies or becomes insane before acceptance, or when a specified time lapses

Section 6 ICA 1872 lists the modes of lapse/revocation of a proposal: (1) By notice of revocation by the proposer before acceptance is communicated; (2) By lapse of time - if no time is stipulated, after reasonable time; (3) By failure of a condition precedent - if the offer was conditional; (4) By the death or insanity of the proposer - if the offeree knows of it before acceptance. Also, a counter-offer (a modification of the original offer) terminates the original offer and puts a fresh offer on the table - Hyde v. Wrench (1840). Note: Revocation of offer is possible any time before acceptance is complete 'as against the proposer' (Section 5 read with Section 4).

Source note: ICA 1872 Section 6

Correct answer: B. Concluded at the place where acceptance is received - not where it is sent

Bhagwandas Goverdhandas Kedia v. M/s. Girdharilal Parshottamdas & Co. (AIR 1966 SC 543) resolved the question of where a contract is concluded when acceptance is communicated by telephone or telex (instantaneous communication). The Supreme Court held that the postal rule (acceptance complete when letter is posted) does NOT apply to instantaneous communications. For telephone/telex: acceptance is complete only when it is RECEIVED by the offeror - the contract is concluded at the place where the offeror receives the acceptance. This determines which court has jurisdiction. The Bombay HC had held the contract was concluded in Gujarat (where acceptance was sent); the Supreme Court reversed, holding it was concluded in Calcutta (where the offeror received the acceptance).

Source note: BG Kedia v. Girdharilal (AIR 1966 SC 543)

Correct answer: B. A statement of the lowest price at which a person will sell is an invitation to treat and not an offer - it does not give the other party a right to accept

Harvey v. Facey (1893) AC 552 (Privy Council): Harvey telegraphed Facey asking 'Will you sell us Bumper Hall Pen? Telegraph lowest cash price.' Facey replied: 'Lowest price for Bumper Hall Pen £900.' Harvey replied: 'We agree to buy...for £900.' Facey refused. The Privy Council held there was no binding contract. Facey's reply of £900 was merely a statement of the lowest price - it was a response to a specific question in a negotiation, not an offer capable of acceptance. It was an invitation to treat, not an offer. Harvey's final 'acceptance' was actually an OFFER, which Facey had not accepted. This case is always compared with BG Kedia and Lalman Shukla to test understanding of the distinction between offers and invitation to treat.

Source note: Harvey v. Facey (1893 PC)

Correct answer: B. An offer to perform by the promisor which is refused by the promisee - a valid tender discharges the promisor from further liability and puts the promisee in default

Section 38 ICA 1872 deals with the effect of a VALID TENDER (offer to perform): 'Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract.' A valid tender requires: (1) Unconditional offer; (2) Offer of proper performance (right thing, right time, right place, right manner); (3) Reasonable opportunity for the promisee to inspect. If a valid tender is made and rejected, the promisor is discharged from the obligation to perform and can sue the promisee. In a tender of money, the money must be ready and available - Startup v. Macdonald (1843): tender of goods at midnight on the last day was valid (technically right time) though impractical.

Source note: ICA 1872 Sections 37-38

Correct answer: B. An act becomes impossible or unlawful after the contract is made due to an event which the promisor could not prevent - making performance impossible or pointless

Section 56 ICA 1872 para 2: '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, the contract becomes void when the act becomes impossible or unlawful.' The LEADING CASE is Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC 44) where the Supreme Court held that Section 56 ICA comprehensively governs frustration in India - unlike English law where the doctrine evolved through common law (Taylor v. Caldwell, 1863; Fibrosa case). The doctrine does NOT apply where: (1) The event was foreseeable and provided for in the contract; (2) Performance merely becomes more difficult or expensive (commercial frustration); (3) Self-induced impossibility. Important: mere rise in prices, inflation, or economic hardship is NOT frustration.

Source note: ICA 1872 Section 56 / Satyabrata Ghose v. Mugneeram Bangur (AIR 1954 SC)

Correct answer: B. Compensation is awarded for losses arising naturally from the breach and losses which both parties knew at the time of contracting were likely to result - remote or indirect losses not recoverable

Section 73 ICA 1872 provides: 'When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken it, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, OR which the parties knew, when they made the contract, to be likely to result from the breach of it.' This perfectly codifies the two limbs of Hadley v. Baxendale (1854): LIMB 1 - losses arising naturally from the breach (general damages - foreseeable to a reasonable person); LIMB 2 - losses in the special circumstances of the case that both parties knew of at the time of contracting (special damages). The injured party has a DUTY TO MITIGATE losses (Section 73 - cannot recover avoidable losses). Victoria Laundry v. Newman Industries (1949) - lucrative dyeing contracts were too remote unless the defendant knew of them.

Source note: ICA 1872 Section 73 / Hadley v. Baxendale (1854)

Correct answer: B. Reasonable compensation not exceeding the sum named - the court has discretion and will not enforce a 'penalty' in excess of actual loss

Section 74 ICA 1872 is the Indian law on liquidated damages and penalty - significantly different from English law. Section 74: 'When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach...the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract REASONABLE COMPENSATION not exceeding the amount so named.' Unlike English law (Dunlop v. New Garage, 1915) which distinguishes liquidated damages (enforceable) from penalty (not enforceable): Indian Section 74 does NOT make this distinction. Any pre-estimated sum - whether 'genuine pre-estimate' or 'in terrorem' - is treated equally: the Court awards reasonable compensation UP TO the stipulated amount. Fateh Chand v. Balkishan Das (AIR 1963 SC 1405) - the Supreme Court confirmed Section 74 applies uniformly.

Source note: ICA 1872 Section 74 / Fateh Chand v. Balkishan Das (AIR 1963 SC)

Correct answer: B. One party, before the due date of performance, repudiates the contract by clear expression of intention not to perform or by doing an act making performance impossible

Anticipatory breach (Section 39 ICA - repudiation - read with Section 73): before the time for performance arrives, a party may breach by: (1) Express repudiation - clearly stating refusal to perform; (2) Implied repudiation - doing an act that makes performance impossible. The innocent party's options on anticipatory breach: (1) Treat the contract as immediately broken and sue for damages at once (Hochster v. De La Tour, 1853 - English law; accepted under Indian law via Section 39); OR (2) Affirm the contract, wait for the performance date, and then sue if the other party does not perform. If the innocent party affirms, the risk is that intervening events (e.g., frustration) may subsequently discharge the contract - losing the right to damages. Avery v. Bowden (1855) - innocent party waited and the contract was frustrated - lost damages.

Source note: ICA 1872 Section 39 / Hochster v. De La Tour (1853)