Unit 3 - Practice Quiz

This is the definition of a 'Contract of Indemnity' as per Section 124 of the Indian Contract Act, 1872. Its primary purpose is to compensate for a loss.

A contract of indemnity involves two parties: the 'indemnifier' (who makes the promise) and the 'indemnity-holder' (whose loss is to be made good).

The 'Surety' is the person who gives the guarantee to the creditor on behalf of the principal debtor.

A contract of guarantee has three parties: the 'Principal Debtor' (who is primarily liable), the 'Creditor' (to whom the guarantee is given), and the 'Surety' (who gives the guarantee).

The surety's liability is secondary because it only arises if the principal debtor defaults. The primary liability rests with the principal debtor.

The guarantee is given to secure the payment or performance by the Principal Debtor, who has the primary obligation.

The main purpose of a contract of guarantee is to provide additional security to the creditor, ensuring that the debt will be paid or the promise will be performed.

This is the legal definition of an 'Agent' as per Section 182 of the Indian Contract Act, 1872. They act on behalf of the principal.

The 'Principal' is the person who authorizes the agent to act on their behalf and is bound by the agent's actions within the scope of their authority.

This Latin maxim is the fundamental principle of the law of agency, meaning that the acts of an agent are considered the acts of the principal.

Section 185 of the Indian Contract Act, 1872, specifically states that no consideration is required to create a valid contract of agency.

An Express Agency is formed when the authority is explicitly granted by the principal to the agent, either orally or in writing.

The relationship is one of utmost good faith, trust, and confidence, where the agent must act in the best interests of the principal.

To appoint an agent, a person must have the capacity to contract, which means they must have attained the age of majority and be of sound mind.

'Revocation' is the formal withdrawal of the agent's authority by the principal, which brings the agency relationship to an end.

The indemnifier's liability is contingent upon the happening of the loss against which the promise to indemnify was made.

The creditor is the party who receives the guarantee from the surety as a security for the debt owed by the principal debtor.

The foremost duty of an agent is to conduct the business of the agency strictly as per the directions given by the principal.

A 'Sub-agent' is a person employed by, and acting under the control of, the original agent in the business of the agency.

In a car insurance policy, the insurance company (indemnifier) promises to compensate the policyholder (indemnity-holder) for any loss or damage to the car under specified conditions.

According to Section 128 of the Indian Contract Act, 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 the creditor can proceed against the surety directly without first suing the principal debtor. The surety's obligation arises immediately upon the default of the principal debtor.

An agent has a duty not to deal on his own account without the principal's consent (Section 215). If an agent deals on his own account in the business of the agency without first obtaining the consent of his principal, the principal may repudiate the transaction. A's act of buying the house for himself through a third party is a breach of this fiduciary duty, allowing P to set aside the sale.

This is a contract of guarantee. There are three parties: S (creditor), Y (principal debtor), and X (surety). X is promising to discharge the liability of a third person (Y) in case of his default. A contract of indemnity is a two-party contract to save the other from loss, not necessarily based on a third party's default of a primary liability.

An agent has a duty to conduct the business of the principal according to the directions given by the principal (Section 211). By disobeying the clear instruction to sell immediately, A is liable for any loss that P sustains due to this breach of duty, regardless of A's good intentions.

According to Section 133 of the Indian Contract Act, 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. The change in the interest rate is a material alteration, thus discharging the surety, Mr. D, from his liability.

The agent has a duty to follow the principal's instructions. By chartering to Y Corp instead of X Corp, A has exceeded his authority. As per Section 216, if an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal, the principal may claim from the agent any benefit which may have resulted to him from the transaction. P can also repudiate the transaction if it causes loss.

This scenario involves a specific guarantee for a series of transactions. The surety's liability is limited to the extent of the default that has actually occurred within the scope of the guarantee. A guaranteed payment for goods delivered. Since C defaulted on one sack that was delivered, A is liable for that specific default. The guarantee for future deliveries (the 4th and 5th sacks) is not invoked as they were never delivered.

Agency by necessity arises when a person is entrusted with another's property and it becomes necessary to act to preserve that property, especially in an emergency and when it is impossible to communicate with the owner. Here, Q's action to protect P's goods after A's death, during a flood, creates an agency by necessity.

This question addresses the surety's right to benefit from the creditor's securities (Section 141). 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. However, case law has often interpreted this to mean a full discharge if the security is substantial and its loss impairs the surety's eventual remedy against the principal debtor. Most interpretations would lead to a complete discharge in such a clear case of parting with the security.

When an agent acts beyond their authority, and the principal suffers a loss as a direct consequence, the agent is liable to compensate the principal (Section 211). By selling on credit without authority, A breached his duty. The resulting non-payment (as the goods were destroyed and B may refuse to pay) is a loss for which A is responsible to P.

According to Section 142 of the Indian Contract Act, 1872, any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid. While a contract with a minor is voidable, the guarantee for a minor's debt can still be valid, with the surety acting as a principal debtor. Past consideration can be valid consideration in some contexts. The surety's personal interest is irrelevant.

An agent has a duty not to make any secret profit from the agency business (Section 216). When an agent makes a secret profit, the principal is entitled to recover that amount from the agent. In this case, P can affirm the contract and still claim the secret profit of ₹5 lakhs made by A.

The definition of a contract of indemnity under Section 124 is a promise to save another from loss. Traditionally, the liability of the indemnifier arises only when the indemnity-holder has actually incurred a loss. However, courts have evolved this to allow the indemnity-holder to compel the indemnifier to pay even before an actual loss is suffered, once liability becomes absolute. But based on the strict interpretation and common MCQs, 'actual loss' is the trigger point.

This is a case of an undisclosed principal. According to Section 233 of the Indian Contract Act, 1872, when an agent makes a contract with a person who neither knows nor has reason to suspect that he is an agent, the principal is still bound by the contract. The third party (T) has the right to sue either the agent (A) or the principal (P), or both.

According to Section 133, any variance in the terms of the contract discharges the surety for subsequent transactions. Section 130 covers revocation by notice, and Section 131 by death. The change in the constitution of a firm (e.g., by admission of a new partner) is considered a material alteration, and it revokes a continuing guarantee for all future transactions, unless the surety has consented to it.

Implied authority (Section 187) is the authority that an agent has to do all such acts which are incidental to the business of the agency. An agent authorized to sell a valuable painting would have the implied authority to take reasonable steps to protect and preserve it from damage before the sale, as this is a necessary and incidental part of the main task of selling it.

The original outstanding amount after D's repayment is ₹50,000 - ₹20,000 = ₹30,000. C receives a dividend from D's estate. This dividend is 10% of the outstanding debt: 10% of ₹30,000 = ₹3,000. The creditor must credit this amount against the debt. The remaining liability, for which the surety (S) is responsible, is ₹30,000 - ₹3,000 = ₹27,000.

According to Section 208 of the Indian Contract Act, 1872, the termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them. Since A was unaware of the revocation when he contracted with T, the contract is binding on the principal, P.

Under Section 125 of the Indian Contract Act, 1872, the indemnity-holder is entitled to recover from the indemnifier not only the damages he may be compelled to pay but also all costs which he may be compelled to pay in any such suit, provided he acted prudently and did not contravene the orders of the indemnifier.

In the case of an undisclosed principal, the third party has the right to sue either the agent or the principal. However, the third party must make an election. If T sues the agent A to judgment, T is deemed to have elected his remedy and cannot thereafter sue the principal P on the same contract, even if the judgment against A remains unsatisfied.

This question tests the application of Section 147 of the Indian Contract Act, 1872, which states that co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit. The total liability is ₹6,00,000. The sureties are liable to contribute equally, subject to their individual maximum limits. A's max is ₹1L, B's is ₹2L, C's is ₹3L. First, they share equally up to the lowest limit (A's ₹1L). So A, B, and C each contribute ₹1L (Total ₹3L). The remaining debt is ₹3L. A is now at their limit. The remaining debt is shared equally by B and C. B's remaining capacity is ₹1L (2L-1L), and C's is ₹2L (3L-1L). They share the next part of the debt. B contributes another ₹1L (Total paid by B is ₹2L). C contributes another ₹1L (Total paid by C is ₹2L). Debt remaining is ₹1L. B is now at their limit. The final ₹1L is borne by C alone. So the final liability is: A pays ₹1,00,000; B pays ₹2,00,000; C pays ₹3,00,000. Since C paid the entire ₹6,00,000, C is entitled to recover ₹1,00,000 from A and ₹2,00,000 from B.

This is a classic case of 'agency coupled with an interest' under Section 202. The interest that makes an agency irrevocable must be an interest in the subject matter of the agency itself, not just a collateral interest like remuneration. Here, the authority to sell the painting is given to A as a security for his pre-existing debt of ₹10 lakhs, with a specific right to satisfy that debt from the proceeds. The authority and the interest are intertwined and co-exist. Therefore, the agent has an interest in the property (the painting, via its proceeds), making the agency irrevocable by the principal in the absence of an express contract allowing revocation.

Section 143 of the Indian Contract Act invalidates a guarantee obtained by means of concealment of a material fact. The question is whether the existence of a prior, unexecuted decree is a 'material fact'. The financial standing and past conduct of the principal debtor are crucial to the surety's decision. A prior default leading to a court decree is a highly material fact that would likely influence the surety's willingness to give the guarantee. The bank had a duty to disclose such an unusual circumstance that affects the degree of risk. Failure to do so amounts to material concealment, rendering the guarantee invalid. Fraudulent intention is not a necessary ingredient for invalidation under Section 143; mere concealment of a material fact is sufficient.

This question explores the limits of the doctrine of 'relation back' in ratification (Section 196). While ratification generally relates back to the date of the agent's act, this principle is not absolute. A key exception is that ratification cannot be used to divest a third party of rights that have accrued to them between the agent's unauthorized act and the principal's ratification. When T discovered the lack of authority, T acquired a right to repudiate the contract. By exercising this right before P's ratification, T validly terminated their obligations. P's subsequent ratification cannot retrospectively nullify T's valid act of repudiation.

According to Section 131 of the Indian Contract Act, the death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. The critical point is that this revocation is effective for transactions made after the creditor has notice of the death. In this case, S's estate is liable for the ₹2,00,000 loan made before death. It is also liable for the ₹1,00,000 loan made after death but before C had notice of it. The revocation is not effective against a creditor who acts without notice. However, the loan of ₹50,000 made on Mar 5, after C was notified of S's death, is a future transaction for which the guarantee is revoked. Thus, the estate's total liability is ₹2,00,000 + ₹1,00,000 = ₹3,00,000.

This scenario tests the doctrine of election under Section 233 of the Indian Contract Act concerning undisclosed principals. When a third party (T) discovers the principal (P), they have the right to sue either the agent (A) or the principal, or both. However, they can only get a judgment against one. The act of 'election' must be clear and unequivocal. Simply sending an invoice or demanding payment from the principal is generally not considered a binding election that would prevent the third party from later suing the agent if the principal fails to pay. The election is typically considered made when the third party files a suit and proceeds to judgment against one party. Therefore, T's act of invoicing P does not bar T from suing A.

Section 133 of the Indian Contract Act is very strict. It states that any variance made in the terms of the contract between the principal debtor and the creditor, without the surety's consent, discharges the surety as to transactions subsequent to the variance. The law does not consider whether the variance is beneficial to the surety or not. The surety is entitled to say, 'This is not the contract I guaranteed.' The change in interest rate and repayment schedule, even if seemingly favorable to the debtor, constitutes a variance. Since S did not consent to it, S is completely discharged from his liability.

This question distinguishes between a sub-agent and a substituted agent. According to Section 194, where an agent, holding an express or implied authority to name another person to act for the principal, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him. This person is a 'substituted agent'. Given that customs clearance is a specialized task, there is an implied authority for A to appoint a specialist. By selecting C with due care, A has fulfilled his duty. C becomes P's agent for the customs work and is directly responsible to P for his negligence. A is not liable for C's acts. Therefore, P's primary remedy is against C.

This is a complex scenario involving company law and contract law. While it is true that a guarantee requires a principal debt, the law allows for guarantees of future debts. The promoter guaranteed the payment for goods supplied under the contract. Even though the company was not in existence at the time of the guarantee, the liability was clearly defined and contemplated. The promoter's guarantee can be construed as a primary obligation (akin to an indemnity) until the company adopted the contract, at which point it became a guarantee for the company's now-existing debt. Courts generally hold promoters to their pre-incorporation commitments and guarantees to protect third parties. The fact that the principal debtor (the company) did not exist at the moment the guarantee was signed does not invalidate the guarantee for the debt that arose as intended.

This question involves the intersection of agency law and the Negotiable Instruments Act, 1881. Section 28 of the NI Act provides that an agent who signs a bill of exchange without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument. The extrinsic evidence that T knew about the agency relationship is irrelevant for liability on the instrument itself. The liability on a negotiable instrument is determined by what is written on its face. By signing with his name alone, A made himself personally liable. T's remedy on the instrument is against A. T might have a separate remedy against P based on the underlying contract, but on the bill of exchange, only A is liable.

This scenario is governed by Section 141 of the Indian Contract Act, 1872. This section states that 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. 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. By negligently losing the title deeds, C has impaired the value of the mortgage security. Therefore, S's liability is reduced by the amount that the security was worth. S is not completely discharged unless the value of the lost security was equal to or greater than the debt.

Section 189 of the Indian Contract Act grants an agent authority in an emergency to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. The key elements are present here: an actual emergency (cyclone), inability to communicate with the principal, and an action taken to prevent loss. The fact that the cost was high is irrelevant if it was a prudent and necessary step under the extraordinary circumstances. Implied authority relates to usual business practices, not unforeseen emergencies. Ostensible authority relates to the principal's representations to third parties. Ratification is an act by the principal after the event and is not the source of the agent's authority in this case.

This question tests a nuanced aspect of co-suretyship under Section 138 of the Indian Contract Act. Section 138 states that the release of one co-surety by the creditor does not discharge the others. Crucially, it also does not free the released surety from his responsibility to the other sureties. However, the prevailing judicial interpretation, following English law principles, is that if the creditor releases one co-surety, the other co-sureties are discharged to the extent of the contribution which they could have claimed from the released surety. Assuming equal contribution, A's share would be ₹1,00,000. By releasing A, E has effectively reduced the total debt enforceable against B and C by A's share. Therefore, B and C would be jointly liable for ₹2,00,000 (₹3,00,000 - ₹1,00,000).

This question addresses the agent's duty of disclosure and the consequences of its breach. Section 215 of the Indian Contract Act states that if an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances, the principal may repudiate the transaction. Furthermore, Section 216 allows the principal to claim any benefit the agent has received. A's act of concealing a material defect known to him is a breach of his fiduciary duty. This act amounts to fraud on the principal. Consequently, P has the right to repudiate the entire transaction (the purchase of the property). The contract of agency itself becomes voidable at P's option, and P can also refuse to pay commission and sue A for any loss.

This question tests the commencement of the indemnifier's liability. While Section 125 of the Indian Contract Act mentions recovery after the indemnity-holder has paid, Indian courts have adopted a broader, more equitable interpretation. They have held that indemnity is not just about reimbursing a loss that has been paid, but also about saving the indemnity-holder from suffering the loss in the first place. Therefore, once the liability of the indemnity-holder (B) becomes absolute and certain (e.g., a court judgment), he can sue the indemnifier (A) and compel him to put him in funds to pay off the claim or to pay the creditor (C) directly. B does not have to wait until he has actually paid the judgment amount from his own pocket.

Section 208 of the Indian Contract Act is crucial here. It provides that the termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them. In this scenario, the termination becomes effective against the agent A on Wednesday when he receives the letter. However, with respect to the third party T, the termination is not effective until T comes to know of it. Since T was unaware of the revocation when the contract was made on Tuesday, A was still acting with apparent authority. Therefore, the contract is binding on the principal, P.

This scenario falls under Section 139 of the Indian Contract Act. This section discharges the surety if the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired. The payment schedule in a construction contract is a crucial security for the surety, as it ensures the contractor has an incentive to complete the work. By paying a substantial advance not required by the contract, B impaired the surety's remedy and acted inconsistently with C's rights. This act is prejudicial to the surety, and consequently, C is discharged from the guarantee.

This situation is governed by Section 123 of the Sale of Goods Act, 1930, which deals with auction sales. This section provides that if the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. A, being P's agent, making a bid to raise the price is equivalent to the seller making a pretended bid (unless a right to bid was expressly reserved). A's intention, even if well-meaning, is irrelevant. The use of a 'puffer' is considered a fraud on the genuine bidders. Therefore, the buyer, T, upon discovering this, has the option to treat the sale as voidable and rescind the contract.

This question tests the formation of an indemnity contract, specifically the requirement of acceptance. While the general rule under Section 4 of the Contract Act requires communication of acceptance, Section 8 provides for acceptance by performing conditions. A's offer of indemnity was conditional upon B entering the partnership. By performing this condition, B accepted the offer. This is an acceptance by conduct. The contract of indemnity was formed the moment B entered the partnership in reliance on A's promise. Therefore, A's defense that acceptance was not formally communicated is invalid. An indemnity can cover losses from fraud, as it is a 'consequence of a proceeding' arising from C's conduct.

This question concerns an agent's right to remuneration for acts done during the agency. The general principle, as established in case law, is that if the agent is the 'effective cause' of a transaction, he is entitled to commission on all payments flowing from that transaction, even if those payments are received after the agency has been terminated. Here, A procured the publishing contract. The royalties are a direct result of that contract. A's work was the foundation of the entire stream of income. Therefore, unless the contract expressly states otherwise, his right to the commission on the fruits of his labor (the royalties) continues even after he leaves the agency. The termination of the agency does not retroactively extinguish his right to be paid for the results he had already secured for the principal.