CA Foundation September 2024 Suggested Answers Paper 2 Business Laws

FOR CA FOUNDATION EXAM PREPARATION

CA Foundation 2024
Suggested Answers ·
Paper 2 Business Laws
EXAM YEAR TYPE SUBJECT

CA Foundation 2024 Suggested Answers Paper 2 Business Laws
DATE
September 2024

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 2: BUSINESS LAWS
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. any four questions from the remaining five questions. e m
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Attempt

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aQuestion 1
Working notes should form part of the Answers

(a) (i) Mr. L let out his residential house to Mr. M for ` 50,000 p.m. for a
period of one year. According to the Rent agreement, electricity bill will
be paid by Mr. L. But Mr. L could not pay electricity dues up to 5
months, due to his financial hardships. The Electricity Board sent the
notice of disconnection, if it is not paid within a week's time. To avoid

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all this, Mr. M paid the electricity bill of ` 50,000 with penalty. Later on,

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L refused to reimburse ` 50,000 and argued that he has paid bill

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voluntarily because of his own interest. Decide with reference to

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provisions of the Indian Contract Act, 1872 whether Mr. M is entitled to
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be reimbursed by Mr. L? (3 Marks)
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(ii) Mr. A offered to sell 25 chairs to Mr. B @ ` 1,500 per chair on
12.02.2024. A promised B that he would keep the offer open till
15.02.2024. However, on 13.02.2024, he sold those chairs to Mr. C @
` 1,700 per chair without the knowledge of B. Mr. B communicated the
acceptance of the above offer on 14.02.2024.
Advise, with reference to provisions of the Indian Contract Act, 1872
whether Mr. B can claim damages from Mr. A? (2 Marks)

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(iii) Mr. A was running an orphanage. His friend Mr. S, a philanthropist
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agreed to donate ` 2 lakh for treatment of a child, who was suffering

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from cancer. On emergency, Mr. A incurred ` 1.5 lakh on treatment of

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child. Now, Mr. S refused to pay. Whether Mr. A can claim ` 1.5 lakh
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from Mr. S with reference to provisions of the Indian Contract Act,

a 1872?
(b) (i) Kamal, a Chartered Accountant started his e-commerce business by
(2 Marks)

incorporating a One Person Company (the OPC) on 1st October, 2023.
He, being a sole member of the OPC named his brother Sudhakar, with

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FOUNDATION EXAMINATION: SEPTEMBER 2024

his consent, as his nominee in the Memorandum of Association of the
OPC. Now, Kamal intends to replace Sudhakar and to nominate any
one of the following short- listed friends as a nominee with effect from
1st January, 2024.
(1) Robert, an Indian citizen, and a resident in India shifted his
residence to the USA on 31st May, 2022 and has not returned to
India till 1st January, 2024.
(2) Dinkar, an Indian citizen, and non-resident in India came for
employment in India on 1st April, 2023 and have been continuously
staying in India since then.
Referring to the provisions of the Companies Act, 2013, advise Kamal
regarding eligibility of his short-listed friends to be appointed nominee
and the procedure to be followed for changing the name of the
nominee as per the provisions of the Companies Act, 2013. (4 Marks)
(ii) XYZ Ltd. was incorporated to hold the patent for a new product. The
company is expecting to start its commercial production within the
next two years. In the meanwhile, for timely installation, the company
has placed the purchase order for plant and machinery with a down
payment of ` 1 crore. Referring to the provisions of the Companies Act,
2013 examine, whether the company can go for acquiring the status of
a dormant company? (3 Marks)
(c) Referring to the provisions of the Indian Partnership Act, 1932, answer the
following:
(i) "If a partner is otherwise expelled; the expulsion is null and void."
Discuss. (4 Marks)
(ii) "The partner who is expelled will cease to be liable to the third party
for the act of the firm done after expulsion." Analyse. (2 Marks)
Answer
(a) (i) According to Section 69 of the Indian Contract Act, 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.
In the instant case, Mr. M paid the electricity bill to avoid the
disconnection that was pending due to Mr. L's failure to fulfil his

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contractual obligation. Hence, Mr. M is entitled to be reimbursed
₹ 50,000 from Mr. L.

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(ii) In terms of Section 5 of the Indian Contract Act, 1872, a proposal can

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be revoked at any time before the communication of its acceptance is

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complete as against the proposer.
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eAccordingly, l a
s acceptance, even though he had originally agreed to hold it open for g
an offer may be revoked by the offeror before its

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a withdrawn whenever the offeror desires.
a definite period of time. So long as it is a mere offer, it can be

In the instant case, B cannot claim damages from A because the offer
made by A is a mere offer and it can be withdrawn whenever A
desires.
(iii) The general rule is that an agreement made without consideration is
void (Section 25 of the Indian Contract Act, 1872).

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However, in the following case, the agreement though made without
consideration, will be valid and enforceable.

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Charity: If a promisee undertakes
a there the contract shall be valid.
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person to contribute to charity,

a A can claim 1.5 lakh from Mr. S.
In the instant case, Mr.
(b) (i) As per Rule 3 of the Companies (Incorporation) Rules, 2014:
Only a natural person who is an Indian citizen whether resident in
India or otherwise
(a) shall be eligible to incorporate a One Person Company;
(b) shall be a nominee for the sole member of a One Person
Company.
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Here, “resident in India” means a person who has stayed in India for a
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period of not less than one hundred and twenty days during the

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a (i) Robert cannot be appointed as a nominee in the OPC by Kamal
as his stay in the preceding F/Y 2022-23 is only for 61 days which
is less than 120 days.

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FOUNDATION EXAMINATION: SEPTEMBER 2024

(ii) Dinkar can be appointed as a nominee in the OPC by Kamal as he
is an Indian Citizen and non-resident in India.
Alternative Answer as follows:
As per Rule 3 of the Companies (Incorporation) Rules, 2014:
Only a natural person who is an Indian citizen whether resident in
India or otherwise and has stayed in India for a period of not less
than 120 days during the immediately preceding financial year
• shall be eligible to incorporate a OPC;
• shall be a nominee for the sole member of a OPC.
In the instant case,
(i) Robert cannot be appointed as a nominee in the OPC by Kamal
as his stay in the preceding F/Y 2022-23 is only for 61 days which
is less than 120 days.
(ii) Dinkar cannot be appointed as a nominee in the OPC by Kamal
as he has not stayed in the preceding F/Y 2022-23 for a single
day.
Procedure for changing the nominee: The member of OPC may at
any time change the name of nominee by giving notice to the
company and the company shall intimate the same to the Registrar.
Any such change in the name of the person shall not be deemed to
be an alteration of the memorandum.
(ii) According to Section 455 of the Companies Act, 2013, where a
company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company may
make an application to the Registrar in such manner as may be
prescribed for obtaining the status of a dormant company.
In the instant case, XYZ Ltd. has made a significant accounting
transaction (down payment of ₹1 crore for plant and machinery), it
does not meet the criteria of a dormant company under Section 455
of the Companies Act, 2013.
Therefore, XYZ Ltd. cannot acquire the status of dormant company.

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(c) (i) If a partner is otherwise expelled, the expulsion is null and void.
According to Section 33 of the Indian Partnership Act, 1932
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(i) the power of expulsion must have existed in a contract between

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the partners;
(ii) .the power has been exercised by a majority of the partners; and e
e(iii)m it has been exercised in good faith. l a s
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ag Ifbeallinthese conditions are not present, the expulsion is not deemed to
bona fide interest of the business of the firm.
The test of good faith as required under Section 33(1) includes three
things:
(i) The expulsion must be in the interest of the partnership.
(ii) The partner to be expelled is served with a notice.

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(iii) He is given an opportunity of being heard.

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Hence, it is correct to say that, if a partner is otherwise expelled, the

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expulsion is null and void.

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(ii) “The partner who is expelled will cease to be liable to the third

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party for the act of the firm done after expulsion”
According to Section 32(3) of the Indian Partnership Act, 1932,
notwithstanding the expulsion a partner from a firm, he and the
partners continue to be liable as partners to third parties for any act
done by any of them which would have been an act of the firm if
done before the expulsion, until public notice is given of the
expulsion.

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However, an expelled partner is not liable to any third party who

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deals with the firm without knowing that he was a partner.
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s em Question 2
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gla (a) (i) M/s RK Traders (Buyer) made a contract with M/s aspecifically
CK Traders (Seller)
a for purchase of 2000 kg of basmati rice grown in
Chhattisgarh State should be packed in pink colour bags of 25 kg each
to identify the place of origin by specifying the mode of packing of

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FOUNDATION EXAMINATION: SEPTEMBER 2024

basmati rice. The seller agreed for specific packing of rice grown in
Chhattisgarh State. However, by misunderstanding, staff of seller
packed the quantity of 1800 kg of basmati rice grown in the State of
Maharashtra in white colour bags of 30 kg each and the remaining
quantity of 200 kg, grown in Chhattisgarh State, in pink colour bags of
25 kg each. Referring to the provisions of the Sale of Goods Act, 1930
analyse, whether the buyer has the right to reject the entire quantity of
basmati rice supplied by the seller.
On the other hand what is the remedy available to buyer if he has to
accept the entire quantity to fulfil his other contracts with other
parties? (4 Marks)
(ii) Kartik agreed to sell his laptop to Vasant for a price to be fixed by
Kusum a hardware engineer. However, before the delivery of the
laptop, Kartik changed his mind and did not share any particulars and
configuration of the laptop with Kusum, which made her unable to do
the valuation. Kusum refused to do valuation.
Vasant needed laptop for his project, so he promised Kartik that, if the
laptop is delivered to him, he would pay a reasonable price for it
However, Kartik decided not to sell his laptop to Vasant. Now, Vasant
wants to know from you, being a legal expert, whether Kartik is bound
by his promise as he agreed earlier to deliver his laptop to him at a
reasonable price. If he does not agree to deliver what is the other
remedy available to Vasant? Advise, referring to the provisions of the
Sale of Goods Act, 1930. (3 Marks)
(b) Referring to the provisions of the Companies Act, 2013, answer the
following:
(i) "Corporate veil sometimes fails to protect the members of the company
from the liability connected to the company's actions." Explain any
three instances. (5 Marks)
(ii) What is the effect of Memorandum and Articles when registered?
(2 Marks)
(c) Referring to the provisions of the Limited Liability Partnership Act, 2008,
answer the following:

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(i) Under what circumstances a Limited Liability Partnership is
compulsorily required to change its name? Also, explain the
compliance requirement following the change of name and the
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consequences, if any, in case of default therein. (4 Marks)
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(ii) What do you mean by a Small Limited Liability Partnership? (2 Marks)
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(a) l(i) According to Section 15 of the Sale of Goods Act, 1930, where there is aa
ag contract of sale of goods by description, there is an implied condition
that the goods shall correspond with the description. The buyer is not
bound to accept and pay for the goods which are not in accordance
with the description of goods.
In the instant case, the contract specified that the basmati rice should
be grown in Chhattisgarh, packed in pink colour bags of 25 kg each
but the seller mistakenly packed 1800 kg of rice from Maharashtra in

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white bags of 30 kg each, and only 200 kg of rice from Chhattisgarh
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in the correct pink bags.
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e buyer as the goods do not correspond
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Therefore, the buyer has the right to reject the entire quantity of

with the description. l
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basmati rice supplied by the
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ANSWER TO SECOND PART
In case the buyer has to accept the entire quantity of rice to fulfil his
other contracts with other parties, he can claim damages which
provides that where the seller wrongfully neglects or refuses to
deliver the goods to the buyer, the buyer may sue the seller for
damages for non-delivery.
ALTERNATE ANSWER TO SECOND PART
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Section 13 of the Sale of the Goods Act, 1930 specifies cases where a
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breach of condition be treated as a breach of warranty. As a result of

s em which the buyer loses his right to rescind the contract and can claim
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damages only.

ag In the following cases, a contract is not avoided even on account of a
breach of a condition:

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FOUNDATION EXAMINATION: SEPTEMBER 2024

(i) Where the buyer altogether waives the performance of the
condition. A party may for his own benefit, waive a stipulation. It
should be a voluntary waiver by buyer.
(ii) Where the buyer elects to treat the breach of the conditions, as
one of a warranty. That is to say, he may claim only damages
instead of repudiating the contract. Here, the buyer has not
waived the condition but decided to treat it as a warranty.
According to above stated provision, there is a breach of condition,
and the buyer can reject the goods. But if the buyer so elects, he may
treat it as a breach of warranty, hence he may accept the entire
quantity to fulfil his other contracts with other parties and claim
damages.
(ii) Section 10 of the Sale of Goods Act, 1930 provides for the
determination of price by a third party.
1. Where there is an agreement to sell goods on the terms that
price has to be fixed by the third party and he either does not or
cannot make such valuation, the agreement will be void.
2. In case the third party is prevented by the default of either party
from fixing the price, the party at fault will be liable to the
damages to the other party who is not at fault.
In the instant case, as Kusum cannot do valuation of laptop due to
non-sharing of particulars and configuration by Kartik who was
bound by his promise, the agreement will be void.
The other remedy available to Vasant is that he can claim damages
from Kartik as he will be liable for the damages to Vasant who is not
at fault.
(b) (i) "Corporate veil sometimes fails to protect the members of the
company from the liability connected to the company's actions."
The following are the cases where company law disregards the
principle of corporate personality or the principle that the company is
a legal entity distinct and separate from its shareholders or members:
(1) To determine the character of the company i.e. to find out
whether co-enemy or friend: It is true that, unlike a natural
person, a company does not have mind or conscience; therefore,

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it cannot be a friend or foe. It may, however, be characterised as
an enemy company, if its affairs are under the control of people
of an enemy country. For this purpose, the Court may examine
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the character of the persons who are really at the helm of affairs
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(2) .To protect revenue/tax: In certain matters concerning the law
of the company.
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s em of taxes, duties and stamps particularly where question of the glas
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a (i) Where corporate entity is used to evade or circumvent tax, the
Court can disregard the corporate entity.
(ii) Where the company was not a genuine company at all but
merely the assessee himself disguised under the legal entity of
a limited company.
(3) To avoid a legal obligation: Where it was found that the sole

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purpose for the formation of the company was to use it as a

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device to reduce the amount to be paid by way of bonus to

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workmen, the Supreme Court upheld the piercing of the veil to

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look at the real transaction (The Workmen Employed in
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Associated Rubber Industries Limited, Bhavnagar vs. The
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Associated Rubber Industries Ltd., Bhavnagar and another).
(4) Formation of subsidiaries to act as agents: A company may
sometimes be regarded as an agent or trustee of its members, or
of another company, and may therefore be deemed to have lost
its individuality in favour of its principal. Here the principal will
be held liable for the acts of that company.
(5) Company formed for fraud/improper conduct or to defeat law:

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Where the device of incorporation is adopted for some illegal or

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improper purpose, e.g., to defeat or circumvent law, to defraud

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creditors or to avoid legal obligations.

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s Companies Act, 2013, where the memorandumgland articles when
(ii) Effect of Memorandum and Articles: As per Section

gla a thereof to the
a registered, shall bind the company and the members
same extent as if they respectively had been signed by the company
and by each member, and an agreement to observe all the provisions
of the memorandum and of the articles.

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FOUNDATION EXAMINATION: SEPTEMBER 2024

All monies payable by any member to the company under the
memorandum or articles shall be a debt due from him to the
company.
(c) (i) Change of name of LLP (Section 17 of Limited Liability Partnership
Act, 2008):
(1) Notwithstanding anything contained in sections 15 and 16, if
through inadvertence or otherwise, a LLP, on its first registration
or on its registration by a new body corporate, its registered
name, is registered by a name which is identical with or too
nearly resembles to —
(a) that of any other LLP or a company; or
(b) a registered trade mark of a proprietor under the Trade Marks
Act, 1999, as is likely to be mistaken for it,
then on an application of such LLP or proprietor referred to in
clauses (a) and (b) respectively or a company,
the Central Government may direct that such LLP to change its
name or new name within a period of 3 months from the date of
issue of such direction.
(2) Where a LLP changes its name or obtains a new name under sub-
section (1), it shall within a period of 15 days from the date of
such change, give notice of the change to Registrar along with
the order of the Central Government, who shall carry out
necessary changes in the certificate of incorporation and within
30 days of such change in the certificate of incorporation, such
LLP shall change its name in the LLP agreement.
(3) If the LLP is in default in complying with any direction given
under sub-section (1), the Central Government shall allot a new
name to the LLP in such manner as may be prescribed and the
Registrar shall enter the new name in the register of LLP in place
of the old name and issue a fresh certificate of incorporation with
new name, which the LLP shall use thereafter.
Nothing contained in this sub-section shall prevent a LLP from
subsequently changing its name in accordance with the provisions of
section 16.

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(ii) Small Limited Liability Partnership [Section 2(1)(ta) of the
Limited Liability Partnership Act, 2008]: It means a limited liability
partnership—
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(i) the contribution of which, does not exceed twenty-five lakh

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rupees or such higher amount, not exceeding five crore rupees,
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as may be prescribed; and

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ag Solvency for the immediately preceding financial year, does not
exceed forty lakh rupees or such higher amount, not exceeding
fifty crore rupees, as may be prescribed; or
(iii) which meets such other requirements as may be prescribed, and
fulfils such terms and conditions as may be prescribed.
Question 3
(a) Referring to the provisions of the Indian Partnership Act, 1932, answer the
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following:

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(i) Ram and Shyam are partners in a partnership firm styled as RS & Co.

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(the firm). Gopal, a renowned businessman, is their common friend.

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Ram introduced Gopal to Sundar, a supplier to the firm, as his newly

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joined partner. Gopal knowing that he is not a partner preferred to
keep quiet on such an introduction. This information about Gopal,
being a partner of the firm, was shared by Sundar with another
businessman Madhav. Next day, Sundar supplied the raw material on
credit and Madhav lent ` 5 lakhs to the firm for a short period on the
understanding that Gopal is a partner of the firm. On due dates, the
firm failed to discharge its liability towards both. Advise Gopal, whether
he is liable to Sundar and Madhav for the aforesaid liability of the firm.

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(3 Marks)
m . for the
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existing debts (referred to as the old debts) of the firm byean agreement
(ii) On admission as a new partner, Amar agreed to be liable
s Amar will
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signed by the all partners including Amar. Examine,lwhether
gfirm and all existing
gla a
be liable in a suit filed by the creditor against the
a partners for recovery of the old debt of the firm. (2 Marks)
(iii) Suman, having 10% share in the property of ` 200 lakh of a firm retires
from the firm on 31st March, 2023. The firm continues with the business

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FOUNDATION EXAMINATION: SEPTEMBER 2024

thereafter without final settlement of accounts between the existing
and retired partners and earned profits of ` 10 lakh during the
financial year ending 31st March, 2024. Suman, in her own interest and
in the absence of any provision in the partnership firm on this point,
claimed ` 3 lakh from the firm toward the use of her share in the
property and profit of the firm which was-rejected by the partners.
There is no contract between the partners contrary to the provisions of
the Act in this regard. Examine the validity of the amount claimed by
Suman under the provisions of the Indian Partnership Act, 1932.
(2 Marks)
(b) (i) JV Limited borrowed a secured loan of ` 5 crore from Star Bank Limited
(the bank) to meet its working capital requirement. However, the
borrowing powers of the company, under its Memorandum of
Association, were restricted to ` 1 crore. The bank released the loan
amount in two instalments of ` 1 crore and ` 4 crore. On the due date
for repayment of the loan, the company refused to accept the liability
of ` 5 crore on the ground that the borrowing was ultra vires the
company. The company's books of account show that the company has
utilised the loan amount of ` 3 crore for repayment of its lawful debts.
The utilisation of the remaining ` 2 crore cannot be traced. Referring
to the doctrine of ultra-vires under the Companies Act, 2013, examine
the validity of the decision of the company denying the repayment of
the loan and explore the remedy, if any, available to the bank for
recovery of the loan. (4 Marks)
(ii) After incorporation of Goodwill Private Limited (the company) on
15th May, 2024 the share certificates were issued to Amit, Sumit and
Sumati being subscribers to the Memorandum of Association of the
company without affixing the common seal thereon and under the
signature of Amit and Sumit, the directors of the company. The
company has yet to appoint a company secretary. On objection raised
by Sumati, a director, about the validity of the share certificate signed
by other two directors, Amit and Sumit, clarified that since the
company has opted not to have the common seal for the company the
share certificates (i.e. the document) signed by two directors are valid.
Referring to the provisions of the Companies Act, 2013, examine the

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correctness of the objection raised by one of the directors and in
response, the clarification offered by other directors.

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Would your answer be different, if the company had a company

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secretary? (3 Marks)

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(c) (i)
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In case of breach of contract, the court may award compensation or

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damages. Explain the circumstances when court may award ordinary

l a damages, special damages and liquidated damages under the
a
ag (ii) What are the conditions need to be fulfilled to make the following
provisions of the Indian Contract Act, 1872. (3 Marks)

agreements valid without consideration as per the provisions of the
Indian Contract Act, 1872?
(A) Agreement made based on natural love and affection
(B) Promise to pay time-barred debts (3 Marks)
Answer
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(a) (i) Partner by holding out (Section 28 of the Indian Partnership Act,

em or written or by conduct represents
1932):
Anyone who by words spoken s
a himself to be represented, to be a
lpermits
partner in a firm, is a
himself, or knowingly g
liable as a partner in that firm to anyone who has
on the faith of any such representation given credit to the firm,
whether the person representing himself or represented to be a
partner does or does not know that the representation has reached
the person so giving credit.
In the instant case, since Gopal allowed himself to be represented as
a partner to the RS & Co. and third parties acted based on this belief
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and therefore, Gopal is held liable to Sundar as he represented

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himself by his act to be a partner to the RS & Co.

e mincurred by
em s
However, Gopal is not liable to Madhav for the liabilities
the firm. Information of Gopal being a partner to theafirm was shared
l falling within the
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by the Sundar (Supplier to the firm) which is not

a ambit of doctrine of holding out.
Hence Gopal is liable to Sundar and not to Madhav for the liability of
the Firm.

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FOUNDATION EXAMINATION: SEPTEMBER 2024

(ii) Rights and liabilities of new partner: The new firm, including the
new partner who joins it, may agree to assume liability for the
existing debts of the old firm, and creditors may agree to accept the
new firm as their debtor and discharge the old partners. The
creditor’s consent is necessary in every case to make the transaction
operative. Novation is the technical term in a contract for substituted
liability, of course, not confined only to case of partnership.
But a mere agreement amongst partners cannot operate as Novation.
Thus, an agreement between the partners and the incoming partner
that he shall be liable for existing debts will not ipso facto give
creditors of the firm any right against him.
In the instant case, Amar will not be liable in a suit filed by the
creditor against the firm and all existing partners for recovery of the
old debt of the firm.
(iii) According to section 37 of the Indian Partnership Act, 1932,
• Where any member of a firm has died or otherwise ceased to be
partner, and the surviving or continuing partners
• carry on the business of the firm with the property of the firm
without any final settlement of accounts as between them and
the outgoing partner or his estate, then, in the absence of a
contract to the contrary,
• the outgoing partner or his estate is entitled at the option of
himself or his representatives
• to such share of the profits made since he ceased to be a partner
as may be attributable to the use of his share of the property of
the firm or
• to interest at the rate of six per cent per annum on the amount of
his share in the property of the firm.
In the instant case, Suman is entitled to claim either interest on her
share in the property i.e. ` 1,20,000 (6% of ` 20 Lakh) or a share of
the profits i.e. ` 1 Lakh (10% of ` 10 Lakh) from the firm for the use of
her share in the property.
Therefore, claim of Suman of ` 3 Lakh is not valid.

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(b) (i) Doctrine of ultra vires: The meaning of the term ultra vires is simply
“beyond (their) powers”. It is a fundamental rule of Company Law that
any act done or a contract made by the company which travels beyond
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the powers not only of the directors but also of the company is wholly
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void and inoperative in law and is therefore not binding on the
s e m
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eThe impact of the doctrine of ultra vires is that a company can neither gla
company.

s
la be sued on an ultra vires transaction, nor can it sue on it. Since thea
ag memorandum is a “public document”, it is open to public inspection.
Therefore, when one deals with a company one is deemed to know
about the powers of the company. If in spite of this you enter into a
transaction which is ultra vires the company, you cannot enforce it
against the company.
In the instant case, borrowing more than ₹1 crore was clearly beyond
JV Limited’s powers as per its MoA, making the loan transaction ultra

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vires to the extent of the excess amount over ₹1 crore.

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Hence, the decision of the company denying the repayment of the

s
loan being ultra virus the company shall be valid for ` 4 crore.

g l a
If the funds have been applied for legitimate business purposes (such
a
as repaying lawful debts), the lender steps into the shoes of the
debtor paid off and consequently he would be entitled to recover his
loan to that extent from the company.
Therefore, JV Limited cannot deny repayment of ₹3 crore, as it was
utilised for lawful purposes, despite the ultra vires nature of the loan.
Ultimately, the company has no remedy available to recover the
balance amount of loan of ` 1 crore as the spending thereof is not

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traceable.

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(ii) The documents which need to be authenticated by a common seal

se
will be required to be so done, only if the company opts to have a

s em common seal.
g la
gla In case a company does not have a common seal, the authorization a
a shall be made by two directors or by a director and the Company
Secretary, wherever the company has appointed a Company
Secretary.

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FOUNDATION EXAMINATION: SEPTEMBER 2024

In the instant case, the objection of Sumati is not valid as the share
certificate was signed by two directors Amit and Sumit as the
company secretary was not appointed.
If the company had a company secretary, then the share certificate
has to be signed by a director and the Company secretary.
Hence, yes, the answer will be different.
(c) (i) Ordinary damages: When a contract has been broken, the party who
suffers by such breach is entitled to receive, from the party who has
broken the contract, compensation for any loss or damage cause to him
thereby, which naturally arose in the usual course of things from such
breach, or which the parties know, when they made the contract, to be
likely to result from the breach of it.
Special damages: Where a party to a contract receives a notice of
special circumstances affecting the contract, he will be liable not only
for damages arising naturally and directly from the breach but also
for special damages.
Liquidated damage is a genuine pre-estimate of compensation of
damages for certain anticipated breach of contract. This estimate is
agreed to between parties to avoid at a later date detailed calculation
and the necessity to convince outside parties.
(ii) (A) Agreement made based on natural love and affection:
Conditions to be fulfilled under section 25(1) of the Indian Contract
Act, 1872
(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.

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(B) Promise to pay time barred debts: 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
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consideration [Section 25(3)].
c. o
Question 4
.co s e m
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eRaghav l a
(a) (i)

la s found gold and diamond studded wristwatch value
a g
ag
approximately ` 1,00,000/- on the roadside. He picked it up and then
advertised in the newspaper that the true owner thereof can take the
watch after showing proper evidence. After waiting for a certain period
of time, when the true owner did not tum up, he gifted that wristwatch
to his son Mahesh. A few days later, Madhav, the true owner of watch,
somehow noticed his watch on wrist of Mahesh. He approached him to
collect the same, but Mahesh refused. In the evening, Raghav called
Madhav and told him that he incurred f 20,000 to find the true owner if
he fails to reimburse him the lawful expenses incurred on finding out
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the true owner, he will sue him for recovery thereof or retain the

.
possession of the watch with him till recovery. Even he can sell the

s em
watch for recovery of expenses. Advise whether the following actions of

l a
Raghav were lawful according to provisions of The Indian Contract Act,
g
a
1872:
(A) Gifting the wristwatch to his son.
(B) Warning Madhav to sue for recovery of lawful expenses incurred in
finding true owner.
(C) Retaining the possession of wristwatch till recovery of lawful
expenses.
(D) Selling of wristwatch for recovery of expenses. (4 Marks)
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(ii) Woollen Garments Limited entered into a contract with a group of
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c. o women in July, 2023 to supply various woollen clothes for men, women

se
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em la
and kids like sweaters, monkey caps, mufflers; woollen coats, hand

las gloves etc. before the commencement of the winter season. The
a g
g
agreement expressly provides that the woollen clothes shall be supplied
a by the end of October, 2023 before starting of winter season. However,
due to the prolonged strike, women group could tender the supplies in
March, 2024 when the winter season was almost over. Analysing the

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FOUNDATION EXAMINATION: SEPTEMBER 2024

situation and answer the following questions in light of the provisions
of the Indian Contract Act, 1872:
(A) Whether company can reject the total supply by women group?
(B) Whether company can accept the total supply on request of
women group? (3 Marks)
(b) (i) With reference to provisions of the Negotiable Instruments Act, 1881,
tell the instances where a person shall be deemed to have committed
an offence for dishonour of cheque and what are the conditions to be
complied with for not constituting such an offence? (4 Marks)
(ii) (A) All cheques are bills while all bills are not cheques. Explain the
additional features of a cheque which differentiate a cheque from
bill as per the Negotiable Instruments Act, 1881.
(B) Ambiguous instrument (3 Marks)
(c) Explain the types of laws in the Indian Legal System considering the Indian
Regulatory Framework. (6 Marks)
Answer
(a) (i) Responsibility of finder of goods (Section 71 of the Indian Contract
Act, 1872): A person who finds goods belonging to another and takes
them into his custody is subject to same responsibility as if he were a
bailee.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence
would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
The right of finder of lost goods- may sue for specific reward
offered [Section 168]: The finder of goods has no right to sue the
owner for compensation for trouble and expense voluntarily incurred
by him in finding the owner and preserving the goods found. But he
has a right to retain the goods against the owner until he receives
such compensation.

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When finder of thing commonly on sale may sell it [Section 169]:
When a thing which is commonly the subject of sale if lost, if the
owner cannot with reasonable diligence be found, or if he refuses,
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upon demand, to pay the lawful charges of the finder, the finder may
o c. o
c
(1) .when the thing is in danger of perishing or of losing the greater
sell it—
e m
em part of its value, or l a s
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ag (2) when the lawful charges of the finder in respect of the thing
found amount to two-thirds of its value.
Hence, the answers are:
(A) Gifting the wristwatch to his son Mahesh is unlawful. Raghav
had no ownership rights over the watch and could not legally
transfer it to someone else.
(B) Warning Madhav to Sue for Recovery of Lawful Expenses:

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Raghav has no right to sue Madhav for the expenses voluntarily
incurred by Raghav in finding the owner.

s
(C) Retaining Possession of
em theaction
Wristwatch Until Recovery of

l a
Lawful Expenses: Raghav’s of retaining the wristwatch

ag him for lawful expenses is valid.
until Madhav reimburses
(D) Selling of Wristwatch for Recovery of Expenses: the watch is
not perishable, and the expenses claimed (₹ 20,000) are far below
two-thirds of the value of the watch (₹ 1,00,000). Therefore,
Raghav does not have the right to sell the watch under these
circumstances, and selling the watch would be unlawful.
(ii) According to section 55 of the Indian Contract Act, 1872, when a

m
party to a contract promises to do certain thing at or before the

m
specified time, and fails to do any such thing at or before the
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specified time, the contract, or so much of it as has not been

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performed, becomes voidable at the option of the promisee, if the
la se
las intention of the parties was that time should be of essence of the
a g
g
contract.
a

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FOUNDATION EXAMINATION: SEPTEMBER 2024

Effect of acceptance of performance at time other than agreed
upon -
If, in case of a contract voidable on account of the promisor’s failure
to perform his promise at the time agreed, the promisee accepts
performance of such promise at any time other than agreed, the
promisee cannot claim compensation for any loss occasioned by the
non-performance of the promise at the time agreed, unless, at the
time of acceptance, he gives notice to the promisor of his intention to
do so.
In the instant case,
(A) Woollen Garments Limited is legally entitled to reject the goods
due to the failure to meet the delivery deadline, as time was a
crucial term of the contract.
(B) The company cannot accept the total supply on the request of
woman group but only when the company i.e. buyer elects to do
so. In that case, the company cannot claim compensation for any
loss occasioned by the non-performance of the promise (i.e.
delay in supply) at the time agreed.
(b) (i) According to Section 138 of the Negotiable Instruments Act, 1881,
where any cheque drawn by a person on an account maintained by him
with a banker—
• for payment of any amount of money
• to another person from that account
• for the discharge, in whole or in part, of any debt or other
liability, [A cheque given as gift or donation, or as a security or in
discharge of a mere moral obligation, or for an illegal
consideration, would be outside the purview of this section]
• is returned by the bank unpaid,
• either because of the—
o amount of money standing to the credit of that account is
insufficient to honor the cheque, or
o that it exceeds the amount arranged to be paid from that
account by an agreement made with that bank,

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such person shall be deemed to have committed an offence and shall,
be punished with imprisonment for a term which may extend to two
years, or with fine which may extend to twice the amount of the
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cheque, or with both.
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When section 138 shall not apply: unless the below given
s e m
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e(a) Cheque presented within validity period: The cheque has been gla
conditions are complied with—

la s a
ag presented to the bank within a period of three months from the
date on which it is drawn or within the period of its validity,
whichever is earlier.
(b) Demand for the payment through the notice: the payee or the
holder in due course of the cheque, as the case may be, makes a
demand for the payment of the said amount of money by giving
a notice, in writing, to the drawer of the cheque, within 30 days
of the receipt of information by him from the bank regarding the

o m
c
return of the cheque as unpaid, and
(c) Failure of drawer to make.payment: the drawer of such cheque

s em of the said amount of money to the
a may be, to the holder in due course of the
fails to make the payment

g l
payee or, as the case
cheque, within a
fifteen days of the receipt of the said notice.
(ii) (A) According to the definition of cheque under section 6 of the
Negotiable Instruments Act, 1881, a cheque is a species of bill of
exchange. Thus, it should fulfil all the essential characteristics of a
bill of exchange.
The following two features distinguish a cheque from bill
(a) Must be drawn on a specified banker

o m
m
(b) It must be payable on demand
.c
c. o Thus, all cheques are bills while all bills are not cheques.m
s e as: “Where
s em (B) Ambiguous Instrument: Section 17 of the Act,areads
l
an instrument may be construed either as agpromissory note or
gla a
a bill of exchange, the holder may at his election treat it as either,
and the instrument shall be thenceforward treated accordingly.”

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FOUNDATION EXAMINATION: SEPTEMBER 2024

Thus, an instrument which is vague and cannot be clearly identified
either as a bill of exchange, or as a promissory note, is an ambiguous
instrument.
(c) The laws in the Indian legal system could be broadly classified as follows:
Criminal Law
Criminal law is concerned with laws pertaining to violations of the rule of
law or public wrongs and punishment of the same. Criminal Law is
governed under the Indian Penal Code, 1860, and the Code of Criminal
Procedure, 1973 (CrPC). The Indian Penal Code, 1860, defines the crime,
its nature, and punishments whereas the Criminal Procedure Code, 1973,
defines exhaustive procedure for executing the punishments of the
crimes.
Murder, rape, theft, fraud, cheating and assault are some examples of
criminal offences under the law.
Civil Law
Matters of disputes between individuals or organisations are dealt with
under Civil Law. Civil courts enforce the violation of certain rights and
obligations through the institution of a civil suit. Civil law primarily
focuses on dispute resolution rather than punishment. The act of process
and the administration of civil law are governed by the Code of Civil
Procedure, 1908 (CPC). Civil law can be further classified into Law of
Contract, Family Law, Property Law, and Law of Tort.
Some examples of civil offences are breach of contract, non-delivery of
goods, non-payment of dues to lender or seller defamation, breach of
contract, and disputes between landlord and tenant.
Common Law
A judicial precedent or a case law is common law. A judgment delivered
by the Supreme Court will be binding upon the courts within the territory
of India under Article 141 of the Indian Constitution. The doctrine of Stare
Decisis is the principle supporting common law. It is a Latin phrase that
means “to stand by that which is decided.” The doctrine of Stare Decisis
reinforces the obligation of courts to follow the same principle or
judgement established by previous decisions while ruling a case where
the facts are similar or “on all four legs” with the earlier decision.

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Principles of Natural Justice
Natural justice, often known as Jus Natural deals with certain fundamental
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principles of justice going beyond written law. Nemo judex in causa sua
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(Literally meaning “No one should be made a judge in his own cause, and

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it’s a Rule against Prejudice), audi alteram partem (Literally meaning “hear

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the other party or give the other party a fair hearing), and reasoned

l a
decision are the rules of Natural Justice. A judgement can override or alter
a g
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aQuestion
a common law, but it cannot override or change the statute.
5
(a) (i) Ashok, a trader, delivered a camera to Mangesh on 'sale or return'
basis. Mangesh delivers the camera to Rahul on the terms of 'sale for
cash only or return'. Afterward, Rahul delivered it to Vishal on a 'sale or
return' basis without paying cash to Mangesh. The camera, which was
in the possession of Vishal was lost by theft though he exercised due

m
care for its safety. Referring to the provisions of the Sale of Goods Act,

. co
1930, analyse the situation and advise, whether Mangesh, Rahul or

em
Vishal are, jointly or severally, liable to pay the price of the camera to
Ashok.

l a s (4 Marks)

a g
(ii) Ansari of Jaipur sold 100 smart TV set @ ` 50,000/- per set to
Baburam of Delhi. He delivered the TV sets to Chetan, a transport
carrier for transmission to Baburam. Baburam further sold these 100
TV sets to Shayamlal @ ` 60,000/- per set. On reaching the goods at
the destination, Baburam demanded the delivery but Chetan,
wrongfully, refused to deliver the goods to Baburam. That is why; he
failed to deliver TV sets to Shayamlal and suffered a huge loss on
account of non-delivery. Ansari came to know about this. He directed

m
Chetan to stop the delivery to Baburam and re-deliver the goods to

m
him at Jaipur.
c o
. Sale of
c. o Answer the following questions under the provisions of the
s em
em a
Goods Act, 1930:
s (A) Whether Ansari has right to stop the goods in g l
la a
transit?

ag (B) Whether Baburam can claim loss suffered due to non­delivery from
Ansari? (3 Marks)

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FOUNDATION EXAMINATION: SEPTEMBER 2024

(b) State the circumstances, in which a Court may, at the suit of the partner,
dissolve a partnership firm under the provisions of the Indian Partnership
Act, 1932. (7 Marks)
(c) In accordance with the provisions of the Indian Contract Act, 1872, answer
the following:
(i) Rights of Bailor against any wrong doer (Third Party)
(ii) Duties of the Pawnee (6 Marks)
Answer
(a) (i) As per the provisions of section 24 of the Sale of Goods Act, 1930, when
goods are delivered to the buyer on approval or “on sale or return" or
other similar terms, the property therein passes to the buyer when he
does something to the good which is equivalent to accepting the goods
e.g. he pledges or sells the goods.
Referring to the above provisions, we can analyse the situation given
in the question.
Since, Mangesh, who had taken delivery of the camera on Sale or
Return basis and delivers the same to Rahul on sale for cash only or
return, has attracted the third condition that he has done something
to the good which is equivalent to accepting the goods e.g. he
pledges or sells the goods. Therefore, the property therein (Camera)
passes to Mangesh.
Now, Rahul delivered it to Vishal on a sale or return without paying
cash to Mangesh.
Since Rahul did not pay cash and had not exercised the option to
purchase, ownership of the camera did not pass to Rahul. Therefore,
Rahul is not liable to pay the price of the camera either.
Since Vishal did not accept the goods and the camera was lost by
theft (despite his due care), Vishal is not liable for the price of the
camera as ownership had not passed to him.
Therefore, Mangesh is solely liable to pay the price of the camera to
Ashok, as he accepted the camera on a "sale or return" basis and did
not return it within a reasonable time.

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(ii) According to Section 51 of the Sale of Goods Act, 1930, when the
carrier wrongfully refuses to deliver the goods to buyer, the right of
stoppage in transit is lost and transit comes to an end.
m
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co
On the other hand, according to section 57 of the Sale of Goods Act,

. e m
s
1930, where buyer suffers losses due to non-delivery, he can sue
m
eIn the instant case, the transit came to an end when Chetan gla
seller for damages on account of non-delivery.

la s a
ag wrongfully refused to deliver the goods to Baburam, and he suffered
a huge loss due to non- delivery. Hence, Ansari cannot exercise the
right of stoppage of goods in transit as the transit has already come
to an end.
Baburam can claim loss suffered due to non-delivery from Ansari.
(b) DISSOLUTION BY THE COURT (SECTION 44 of the Indian Partnership
Act, 1932):

m
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Court may, at the suit of the partner, dissolve a firm on any of the
following ground:

e m a partner (not a sleeping partner)
s
(a) Insanity/unsound mind: Where
has become of unsoundamind, the court may dissolve the firm on a
l
ag or by the next friend of the insane partner.
suit of the other partners
Temporary sickness is no ground for dissolution of firm.
(b) Permanent incapacity: When a partner, other than the partner
suing, has become in any way permanently incapable of performing
his duties as partner, then the court may dissolve the firm. Such
permanent incapacity may result from physical disability or illness etc.
(c) Misconduct: Where a partner, other than the partner suing, is guilty

m
of conduct which is likely to affect prejudicially the carrying on of

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business, the court may order for dissolution of the firm, by giving

c. o regard to the nature of business.
(d) Persistent breach of agreement: Where a partner sother em than the
s em g la of agreements
la a firm or the conduct
partner suing, wilfully or persistently commits breach

ag relating to the management of the affairs of the
of its business, or otherwise so conduct himself in matters relating to
the business that it is not reasonably practicable for other partners to
carry on the business in partnership with him, then the court may

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FOUNDATION EXAMINATION: SEPTEMBER 2024

dissolve the firm at the instance of any of the partners. Following
comes in to category of breach of contract:
 Embezzlement,
 Keeping erroneous accounts
 Holding more cash than allowed
 Refusal to show accounts despite repeated request etc.
(e) Transfer of interest: Where a partner other than the partner suing,
has transferred the whole of his interest in the firm to a third party or
has allowed his share to be charged or sold by the court, in the
recovery of arrears of land revenue due by the partner, the court may
dissolve the firm at the instance of any other partner.
(f) Continuous/Perpetual losses: Where the business of the firm cannot
be carried on except at a loss in future also, the court may order for
its dissolution.
(g) Just and equitable grounds: Where the court considers any other
ground to be just and equitable for the dissolution of the firm, it may
dissolve a firm. The following are the cases for the just and equitable
grounds-
(i) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.
(c) (i) Suit by bailor & bailee against wrong doers [Section 180 of the
Indian Contract Act, 1872]: If a third person wrongfully deprives the
bailee of the use or possession of the goods bailed, or does them any
injury, the bailee is entitled to use such remedies as the owner might
have used in the like case if no bailment had been made; and either the
bailor or the bailee may bring a suit against a third person for such
deprivation or injury.
(ii) Duties of the Pawnee
Pawnee has the following duties:

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a. Duty to take reasonable care of the pledged goods.
b. Duty not to make unauthorized use of pledged goods.
m
c.
o m
Duty to return the goods when the debt has been repaid or the
c. o
.c promise has been performed.
e m
s ee. Duty not to do any act which is inconsistent with the terms of the glas
d.m Duty not to mix his own goods with goods pledged.

g la pledge. a
a
f. Duty to return accretion to the goods, if any.
Question 6
(a) Referring to the provisions of the Negotiable Instruments Act, 1881, answer
the following in the given scenario:
(i) Aman drew the bill of exchange (the bill) on Baban, who accepted it,
m
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payable to Magan or order. Magan indorsed the bill to Gagan. Gagan
.
em
indorsed the bill to Akash to be delivered to him on the next day.

s
However, on the death of Gagan on the same day, his only son Ankit

g l a
delivered the bill to Akash on the next day as intended by his deceased

a
father. On presenting the bill on the due date, Baban refused to pay.
Explaining the importance of delivery in negotiation, decide, whether
Akash can enforce the payment of the bill against Baban or the
previous parties. (4 Marks)
(ii) Reliable Limited, an Indian company, is a global leader in
Petrochemical products. For payment of the sale price of machinery
imported from Alex Manufacturing Limited, a USA based company (the
m
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exporter), the Indian company drew a bill of exchange on Manish, a
m .
c. o m
resident of Mumbai (India) who accepted the bill at Mumbai payable to

em se
the exporter in Los Angeles, USA. Decide, whether the bill of exchange

s g
is an inland instrument or a foreign instrument. Assume that the bill of
la
gla exchange was signed by the authorised person for the drawer company.
a
a (3 Marks)

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FOUNDATION EXAMINATION: SEPTEMBER 2024

(b) Answer the following as per the provisions of the Indian Contract Act, 1872:
(i) 'Agent cannot personally enforce, nor be personally bound by,
contracts on behalf of the principal' however there are some exceptions
to this general rule, explain. (4 Marks)
(ii) State the rights of Indemnity-holder when sued. (2 Marks)
OR
(i) Explain any four differences between Contract of Indemnity and
Contract of Guarantee. (4 Marks)
(ii) Whether the threat to commit suicide is coercion? (2 Marks)
(c) (i) Explain the legal rules of auction sale relating to the following points
as per provisions of the Sale of Goods Act, 1930:
(A) Bid by seller with or without notification
(B) Bidder to retract from his bid
(C) Effect of pretending bidding (4 Marks)
(ii) Explain the provisions relating to the delivery of the wrong quantity of
goods as per the provisions of the Sale of Goods Act, 1930. (3 Marks)
Answer
(a) (i) Importance of Delivery in Negotiation [Section 46 of the Negotiable
Instruments Act, 1881]
Delivery of an instrument is essential whether the instrument is
payable to bearer or order for effecting the negotiation. The delivery
must be voluntary, and the object of delivery should be to pass the
property in the instrument to the person to whom it is delivered. The
delivery can be, actual or constructive. Actual delivery takes place
when the instrument changes hand physically. Constructive delivery
takes place when the instrument is delivered to the agent, clerk or
servant of the indorsee on his behalf or when the indorser, after
indorsement, holds the instrument as an agent of the indorsee.
Section 46 also lays down that when an instrument is conditionally or
for a special purpose only, the property in it does not pass to the

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transferee, even though it is indorsed to him, unless the instrument is
negotiated to a holder in due course.

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The contract on a negotiable instrument until delivery remains
m
co m
incomplete and revocable. Delivery is essential not only at the time of
.
negotiation but also at the time of making or drawing of negotiable
m s e
a s e
instrument. The rights in the instrument are not transferred to the
g la
l indorsee unless after the indorsement the same has been delivered. If
a
ag a person makes the indorsement of instrument but before the same
could be delivered to the indorsee, the indorser dies, the legal
representatives of the deceased person cannot negotiate the same by
mere delivery thereof. (Section 57).
In the instant case, Ankit the only son of Gagan delivered the bill to
Akash on the next day as intended by his deceased father (Gagan)
which is not valid.

m
c. o
Hence, Akash cannot enforce the payment of the bill against Baban or
the previous parties.
(ii) As per section 11 of the m
promissory note, bill of a s e Negotiable Instruments Act, 1881, a

glor drawn upon any person resident in India
exchange or cheque drawn or made in India

a
and made payable in,
shall be deemed to be an inland instrument.
In the instant case, the bill of exchange was:
• Drawn in India (since it was drawn by Reliable Limited, an Indian
company).
• Accepted in India (Manish, a resident of Mumbai, accepted the
bill in Mumbai).

o m
m Payable outside India, in Los Angeles, USA.
.c
c. o
•

m
ein India, even
s
The bill of exchange in this case is an inland instrument because it

em l a
s
was drawn in India and accepted by a person resident

l a a g
though it is payable outside India (Los Angeles, USA).

ag (b) (i) Agent cannot personally enforce, nor be bound by, contracts on behalf
of principal.

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FOUNDATION EXAMINATION: SEPTEMBER 2024

EXCEPTIONS: In the following exceptional cases, the agent is
presumed to have agreed to be personally bound:
(1) Where the contract is made by an agent for the sale or
purchase of goods for a merchant resident abroad/foreign
principal: – When an agent has entered into a contract for the
sale or purchase of goods on behalf of a principal resident
abroad, the presumption is that the agent undertakes to be
personally liable for the performances of such contract.
(2) Where the agent does not disclose the name of his principal
or undisclosed principal; (Principal unnamed): when the agent
does not disclose the name of the principal then there arises a
presumption that he himself undertakes to be personally liable.
(3) Non-existent or incompetent principal: Where the principal,
though disclosed, cannot be sued, the agent is presumed to be
personally liable.
(4) Pretended agent – if the agent pretends but is not an actual
agent, and the principal does not rectify the act but disowns it,
the pretended agent will be himself liable.
(5) When agent exceeds authority- When the agent exceeds his
authority, misleads the third person in believing that the agent
he has the requisite authority in doing the act, then the agent
can be made liable personally for the breach of warranty of
authority.
(ii) Rights of Indemnity-holder when sued (Section 125 of the Indian
Contract Act, 1872): The promisee in a contract of indemnity, acting
within the scope of his authority, is entitled to recover from the
promisor/indemnifier—
(a) all damages which he may be compelled to pay in any suit
(b) all costs which he may have been compelled to pay in bringing/
defending the suit and
(c) all sums which he may have paid under the terms of any
compromise of suit.

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OR
(b) (i) Distinction between a Contract of Indemnity and a Contract of
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c. o
Guarantee

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Point of Contract of Indemnity Contract of

m .
distinction Guarantee
s e
s e Number of party/ There are only two There are three gla
la parties to the parties namely the parties- creditor, a
ag contract indemnifier [promisor] principal debtor and
and the indemnified surety.
[promisee]
Nature of liability The liability of the The liability of the
indemnifier is primary surety is secondary
and unconditional. and conditional as
the primary liability

m
is that of the

c o principal debtor.
. of the The liability arises
Time of liability
e m
The liability

s
onathe happening of a performance of an
indemnifier
l
arises only only on the non-

g
a contingency. existing promise or
non-payment of an
existing debt.
Time to Act The indemnifier need The surety acts at
not act at the request of the request of
indemnity holder. principal debtor.
Right to sue third Indemnifier cannot sue Surety can proceed

m
party a third party for loss in against principal

m .co
his own name as there is debtor in his own

c. o m
no privity of contract. right because he

em
Such a right would arise
se
gets all the right of a
la
las only if there is an
a g
creditor after

g
assignment in his discharging the

a Purpose
favour.
Reimbursement of loss
debts.
For the security of
the creditor

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FOUNDATION EXAMINATION: SEPTEMBER 2024

Competency to All parties must be In the case of a
contract competent to contract. contract of
guarantee, where a
minor is a principal
debtor, the contract
is still valid.

(ii) Whether the threat to commit suicide is coercion?
Suicide though forbidden by Indian Penal Code is not punishable, as
a dead man cannot be punished. But Section 15 of the Indian
Contract Act, 1872 declares that committing or threatening to
commit any act forbidden by Indian Penal Code is coercion. Hence, a
threat to commit suicide will be regarded as coercion.
(c) (i) Section 64 of the Sale of Goods Act, 1930 provides following
rules to regulate the sale by auction:
(A) Bid with notification: Right to bid may be reserved expressly by
or on behalf of the seller and where such a right is expressly
reserved, but not otherwise, the seller or any one person on his
behalf may bid at the auction.
Bid by seller without notification: Where the sale is not
notified to be subject to a right to bid on behalf of the seller, it
shall not be lawful for the seller to bid himself or to employ any
person to bid at such sale, or for the auctioneer knowingly to
take any bid from the seller or any such person; and any sale
contravening this rule may be treated as fraudulent by the buyer.
(B) Bidder to retract from his bid: The sale is complete when the
auctioneer announces its completion by the fall of hammer or in
any other customary manner. Until such announcement is made,
any bidder may retract from his bid.
(C) Effect of pretending bidding: If the seller makes use of
pretended bidding to raise the price, the sale is voidable at the
option of the buyer.
(ii) Delivery of wrong quantity [Section 37 of the Sale of Goods Act,
1930]: Where the seller delivers to the buyer a quantity of goods less
than he contracted to sell, the buyer may reject them, but if the buyer

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accepts the goods so delivered he shall pay for them at the contract
rate. [Sub-section (1)]

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Where the seller delivers to the buyer a quantity of goods larger than
m
co
he contracted to sell, the buyer may accept the goods included in the

. e m
s
contract and reject the rest, or he may reject the whole. If the buyer

em la
s
accepts the whole of the goods so delivered, he shall pay for them at

l a the contract rate. [Sub-section (2)]
a g
ag Where the seller delivers to the buyer the goods he contracted to sell
mixed with goods of a different description not included in the
contract, the buyer may accept the goods which are in accordance
with the contract and reject, or may reject the whole. [Sub-section (3)]
The provisions of this section are subject to any usage of trade,
special agreement or course of dealing between the parties. [Sub-
section (4)]

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g l a
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