The Indian Contract Act, 1872

(b)Second Alternate:

Some objects and consideration are unlawful

Under Section 23 of the Indian Contract Act, 1872 in each of the following cases the consideration or object of an agreement is said to be unlawful:

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 6(b) OR (New Scheme).

(a)(i) Under Section 10 of the Indian Contract Act, 1872, a valid contract requires free consent, lawful consideration, and a lawful object.

In the instant case, the agreement to pay ₹ 10,000 in exchange for a

service (providing information about prospective grooms) is lawful.

Hence, the agreement is valid.

(ii)According to section 20, where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake. In such a case, the agreement is void.

In the instant case, the bull's death (unknown to both parties) constitutes a bilateral mistake regarding the subject matter of the contract.

Hence, the agreement is void.

(iii)Under Section 27, agreements in restraint of trade are void. However, an exception is provided for contracts involving the sale of goodwill. The local limits within which the seller of the goodwill agrees not to carry on similar business must be reasonable.

In the instant case, the restriction is limited to the local area and does not extend indefinitely.

Hence, the agreement is valid.

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(iv)According to section 12, a contract by a person who is not of sound mind is void.

In the instant case, a property worth ₹ 2,00,000 was agreed to be sold for just ₹ 25,000 by a person of unsound mind.

Hence, the agreement is void.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 1(a) (New Scheme).

(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.

(ii)In terms of Section 5 of the Indian Contract Act, 1872, a proposal can be revoked at any time before the communication of its acceptance is complete as against the proposer.

Accordingly, an offer may be revoked by the offeror before its acceptance, even though he had originally agreed to hold it open for a definite period of time. So long as it is a mere offer, it can be withdrawn whenever the offeror desires.

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).

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

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

In the instant case, Mr. A can claim 1.5 lakh from Mr. S.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 1(a) (New Scheme).

(c)An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. When the promisor refuses altogether to perform his promise and signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory Breach.

Anticipatory breach of a contract may take either of the following two ways:

(a)Expressly by words spoken or written, and

(b)Impliedly by the conduct of one of the parties.

Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as follows:

“When a party to a contract has refused to perform or disable himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, but words or conduct, his acquiescence in its continuance.”

Effect of anticipatory breach: The promisee is excused from performance or from further performance. Further he gets an option:

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(1)To either treat the contract as “rescinded and sue the other party for damages from breach of contract immediately without waiting until the due date of performance;

or

(2)He may elect not to rescind but to treat the contract as still operative and wait for the time of performance and then hold the other party responsible for the consequences of non-performance. But in this case, he will keep the contract alive for the benefit of the other party as well as his own, and the guilty party, if he so decides on reconsideration, may still perform his part of the contract and can also take advantage of any supervening impossibility which may have the effect of discharging the contract.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 5(c) (New Scheme).

(b)Essentials of a contingent contract

(a)The performance of a contingent contract would depend upon the happening or non-happening of some event or condition . The

condition may be precedent or subsequent.

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(b)The event referred to as collateral to the contract. The event is not

part of the contract. The event should be neither performance promised nor a consideration for a promise.

(c)The contingent event should not be a mere ‘will’ of the promisor.

The event should be contingent in addition to being the will of the promisor.

(d)The event must be uncertain. Where the event is certain or bound to happen, the contract is due to be performed, then it is a not contingent contract.

Definition of ‘Contingent Contract’ (Section 31 of the Indian Contract Act, 1872)

“A contract to do or not to do something, if some event, collateral to such contract, does or does not happen”.

Rules Relating to Enforcement of a contingent contract:

The rules relating to enforcement of a contingent contract are laid down

in sections 32, 33, 34, 35 and 36 of the Act.

(a)Enforcement of contracts contingent on an event happening:

Section 32 says that “where a contingent contract is made to do or not to do anything if an uncertain future event happens, it cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void”.

(b)Enforcement of contracts contingent on an event not happening:

Section 33 says that “Where a contingent contract is made to do or not do anything if an uncertain future event does not happen, it can be enforced only when the happening of that event becomes impossible and not before”.

(c)A contract would cease to be enforceable if it is contingent upon the conduct of a living person when that living person does something to make the ‘event’ or ‘conduct’ as impossible of happening.

Section 34 says that “if a contract is contingent upon as to how a person will act at an unspecified time, the event shall be considered to have become impossible when such person does anything which

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renders it impossible that he should so act within any definite time or otherwise than under further contingencies”.

(d)Contingent on happening of specified event within the fixed

time: Section 35 says that Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, becomes void if, at the expiration of time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.

(e)Contingent on specified event not happening within fixed time:

Section 35 also says that - “Contingent contracts to do or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired, and such event has not happened or before the time fixed has expired, if it becomes certain that such event will not happen”.

(f)Contingent on an impossible event (Section 36): Contingent

agreements to do or not to do anything, if an impossible event happens are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 6(b) OR (New Scheme).

(a)Trafficking relating to Public Offices and titles: An agreement to trafficking in public office is opposed to public policy, as it interferes with the appointment of a person best qualified for the service of the public. Public policy requires that there should be no money consideration for the appointment to an office in which the public is interested. The following are the examples of agreements that are void since they are tantamount to sale of public offices.

(1)An agreement to pay money to a public servant in order to induce him to retire from his office so that another person may secure the appointment is void.

(2)An agreement to procure a public recognition like Padma Vibhushan for reward is void.

Stifling Prosecution: An agreement to stifle prosecution i.e. “an agreement to present proceedings al ready instituted from running their normal course using force” tends to be a perversion or an abuse of justice, therefore, such an agreement is void. The principle is that one should not make a trade of felony. The compromise of any public offence is generally illegal.

For example, when a party agrees to pay some consideration to the other party in exchange for the later promising to forgo criminal charges against the former is an agreement to stifle prosecution and therefore is void.

Under the Code of Criminal Procedure, there is however, a statutory list of compoundable offences and an agreement to drop proceeding relating to such offences with or without the permission of the Court, as the case may be, in consideration the accused promising to do something for the complainant, is not opposed to public policy.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2023, 2(a) (Old Scheme).

(b)(i) An invitation to offer is different from offer. Quotations, menu cards, price tags, advertisements in newspaper for sale are not offer. These are merely invitations to public to make an offer. An invitation to offer is an act precedent to making an offer.

Acceptance of an invitation to an offer does not result in the contract and only an offer emerges in the process of negotiation.

In the instant case, Y reaches to shop and selects a Mobile Phone with a price tag of ₹ 10,000 but the shopkeeper refused to hand over the mobile phone to Y in consideration of the price indicated in the price tag attached to the mobile phone.

On the basis of above provisions and facts, the price tag with the Mobile Phone was not offer. It is merely an invitation to offer. Hence, it is Y who is making the offer and not the shopkeeper. Shopkeeper has the right to reject Y’s offer. Therefore, Y cannot sue the shopkeeper for the above cause.

(ii)As per the provisions of Section 39 of the Indian Contract Act, 1872, when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.

J Readymade Garments in the given situation has two options, out of which he has to select any one:

(i)Either to treat the contract as rescinded and sue T Readymade Dress Garments for damages from breach of contract immediately without waiting until the due date of performance or

(ii)He may elect not to rescind but to treat the contract as still operative and wait for the time of performance and then hold the other party responsible for the consequences of non-performance.

Important Note: The answer can also be given as per Section 73 of the Indian Contract Act, 1872 which lays down that 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 caused to him thereby which naturally arose in the usual course of things from such breach or which the parties knew when they made the contract to be likely to result from the breach of it.

In the instant case, J Readymade Garments, Jaipur would be entitled to get the damages i.e. difference between the contract price and the market price on the day of default from T Readymade Dress Garments, Shimla. In other words, the amount of damages would be ₹ 90,000 [300 piece @ ₹ 100 (Small), 300 piece @ ₹ 100 (Medium) and 300 piece @ ₹ 100 (Large)].

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2023, 3(b) (Old Scheme).

(a)Illegal Agreement: It is an agreement which the law forbids to be made. As an essential condition, the lawful consideration and object is must to make the agreement valid. (Section 10). As per Section 23 of the Indian Contract Act, 1872, an agreement is illegal and void, if the consideration and object is unlawful / contrary to law i.e. if forbidden by law. Such an agreement is void and is not enforceable by law. Even the connected agreements or collateral transactions to illegal agreements are also void.

In the present case,

(i)X agrees to give ₹ 1,00,000 to Y if Y kills Z. Thus, the agreement between X and Y is void agreement being illegal in nature.

(ii)X borrows ₹ 1,00,000 from W and W is also aware of the purpose of the loan. Thus, the agreement between X and W is void as the connected agreements of an illegal agreements are also void.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2022, 1(a) (Old Scheme).

(a)Under following circumstances, the contracts need not be performed with the consent of both the parties:

(i)Novation: Where the parties to a contract substitute a new contract for the old, it is called novation. A contract in existence may be substituted by a new contract either between the same parties or between different parties the consideration mutually being the discharge of old contract. Novation can take place only by mutual agreement between the parties. On novation, the old contract is discharged and consequently it need not be performed. (Section 62 of the Indian Contract Act, 1872)

(ii)Rescission: A contract is also discharged by recission. When the parties to a contract agree to rescind it, the contract need not be performed. (Section 62)

(iii)Alteration: Where the parties to a contract agree to alter it, the original contract is rescinded, with the result that it need not be performed. In other words, a contract is also discharged by alteration. (Section 62)

(iv)Remission: Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance or may accept instead of it any satisfaction which he thinks fit. In other words, a contract is discharged by remission. (Section 63)

(v)Rescinds voidable contract: When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is the promisor.

(vi)Neglect of promisee: If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby. (Section 67)

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 2(a) (Old Scheme).

(a)(i) Whether there is a legally valid and enforceable contract?

When a person to whom the proposal is made signifies his assent thereto, proposal is said to be accepted. The proposal when accepted, becomes a promise [Section 2(b) of the Indian Contract Act, 1872].

For a contract to be valid, acceptance must be absolute and unqualified. If the offeree accepts the offer but modifies, alters, or adds new conditions, it is not an acceptance, but a counter-offer (Section 7).

A counter-offer has the effect of rejecting and extinguishing the original offer ( Hyde Vs. Wrench ).

Two or more persons are said to consent when they agree upon the same thing in the same sense (Section 13).

In the present case, Rakesh offered to sell the car for ₹ 12 lakhs.

However, Ravi informed Vikash (the broker) that he was willing to purchase the car only for ₹ 10 lakhs before remitting the advance amount. Ravi’s response was not an acceptance of Rakesh’s offer; rather, it was a counter-offer. Consequently, Rakesh’s original offer to sell the car for ₹ 12 lakhs came to an end the moment Ravi proposed to buy it for ₹ 10 lakhs. Thus, a counter-offer results in rejection of

the original offer.

The parties never agreed on the same price and there was no meeting of minds on the essential term of price as required under Section 13 of the Act.

Therefore, since there was no valid acceptance of any offer, no legally binding contract was formed. The transaction is void for want of agreement on essential terms.

(ii)Remedies available to Rakesh: Even though no valid contract is formed, Rakesh has the following remedies:

1.Right to Refuse Delivery: As no valid contract exists, Rakesh is not bound to deliver the car for ₹ 10 Lakhs.

2.Refund of Advance Amount: Since the contract was not valid, Rakesh should refund the advance amount of ₹ 5 Lakhs to Ravi.

3.Remedy Against Vikash (Broker): An agent is bound to conduct the business of his principal according to the direction given by the principal (Section 211). Also, where, an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction (Section 228).

Here, Vikash has exceeded his authority, Rakesh may hold him liable for negligence or breach of duty.

4.Right to Sell to Another Buyer: As ownership never transferred to Ravi, Rakesh continues to remain the lawful owner and may sell the car to another buyer.

5.Sue for Specific Performance or Damages: Since no contract existed, specific performance is not applicable. However, if Ravi's counter-offer had been accepted and he then breached it, Rakesh could have sued for damages under Section 73 of the Indian Contract Act. 1872.

(iii)If Vikash unintentionally failed to inform Ravi about the actual price fixed by Rakesh, then Ravi believed the car price was ₹ 10 Lakhs, whereas Rakesh intended to sell only for ₹ 12 Lakhs.

Being an agent/broker, Vikash had a duty to correctly communicate the principal’s terms. Failure to do so, even unintentionally, constitutes misrepresentation under Section 18 of the Act. His negligence may make him liable to Rakesh, but Rakesh still cannot be compelled to sell the car for ₹ 10 Lakhs.

Ravi can rescind the contract on the ground of misrepresentation, since he was induced to pay ₹ 5 Lakhs without full knowledge of the

asking price.

Ravi is entitled to recover the ₹ 5 Lakhs paid since the transaction was

based on incomplete information. He is not bound by any contract he entered into without knowing the true selling price.

Vikash would be liable to both Rakesh (for breach of agency duty) and Ravi (for misrepresentation). Ravi can demand back the ₹ 5 Lakhs,

and Rakesh can seek compensation from Vikash for any loss.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 1(a) (New Scheme).

(c)The rule that stranger to a contract cannot sue is known as a “doctrine of privity of contract”, is subject to certain exceptions. In other words, even a stranger to a contract may enforce a claim in the following cases:

(1)In the case of trust , a beneficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee.

(2)In the case of a family settlement , if the terms of the settlement are reduced into writing, the members of family who originally had not been parties to the settlement may enforce the agreement.

(3)In the case of certain marriage contracts/arrangements , a

provision may be made for the benefit of a person, he may file the suit though he is not a party to the agreement.

(4)In the case of assignment of a contract , when the benefit under a contract has been assigned, the assignee can enforce the contract but such assignment should not involve any personal skill.

(5)Acknowledgement or estoppel - where the promisor by his conduct acknowledges himself as an agent of the third party, it would result into a binding obligation towards third party.

Where a party to a contract acknowledges or admits that he holds money or property for a third party, or where his conduct creates an estoppel, the third party can enforce the obligation. Example: A owes money to B. A receives money from C for B. B can directly claim from A.

(6)In the case of covenant running with the land , the person who

purchases land with notice that the owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.

(7)Contracts entered into through an agent: The principal can enforce the contracts entered by his agent where the agent has acted within the scope of his authority and in the name of the principal.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 5(c) (New Scheme).

(a)(i) Promise to pay Time Barred Debt : Where a promise in writing signed by the person making it or by his authorized agent, is made to pay a debt barred by limitation, it is valid without consideration [Section 25(3) of the Indian Contract Act, 1872].

Thus, in terms of the provisions of Section 25(3) of the Act, Madan can legally recover the debts with interest from Bhuvika since she had promised in writing to pay the outstanding amount shortly within a few months even though the loan has already been time barred.

(ii)Completed gift: According to Section 25 of the Indian Contract Act, 1872 an agreement made without consideration is void. Further explanation 1 to Section 25 states that nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made.

In case of completed gifts, the rule of no consideration no gift does not apply.

Thus, gifts do not require any consideration.

In the instant case, the gift of I-Phone from Abeer to Chhaya has already been done, which amounts to ‘Completed Gift’ and is covered by explanation 1 to Section 25.

Hence, gift given by Abeer to Chhaya is valid.

(iii)According to Section 25 of the Indian Contract Act, 1872, an agreement made without consideration is void, subject to certain exceptions.

One important exception is:

An agreement made out of natural love and affection between parties standing in a near relation to each other is valid, provided it is in writing and registered.

Position when Amol and Chakori are Friends: Since the Amol and

Chakori are merely friends (and not near relatives) and do not come within the purview of Section25(1). The promise to give a gold ring is mere promise and not supported by consideration. Hence the promise made by Amol is not legally enforceable.

Position when Amol and Chakori are Husband & Wife: In this position

the parties are in near relation and Amol promised out of natural love and affection to gift her wife a gold ring. This can be legally enforceable provided the promise is in writing and registered under the law.

In other words, this can be legally enforceable provided the promise is in writing and registered under the law as Amol and Chakori are in near relation and Amol promised out of natural love and affection to gift her wife which comes within the purview of Section 25(1) of the Indian Contract Act, 1872.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 4(a) (New Scheme).

(b)(i) Meaning of Fraud: (Section 17 of the Indian Contract Act, 1872):

‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with an intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(1)the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2)the active concealment of a fact by one having knowledge or belief of the fact;

(3)a promise made without any intention of performing it;

(4)any other act fitted to deceive;

(5)any such act or omission as the law specially declares to be fraudulent.

(ii)Effect of Fraud upon validity of a contract: When the consent to an

agreement in caused by the fraud, the contract is voidable at option of the party defrauded and he has the following remedies:

(1)He can rescind the contract within a reasonable time.

(2)He can sue for damages.

(3)He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been had the representation made been true.

Exception: In the following cases, contract is not voidable:

(i)If the party whose consent was caused by silence which amounting to fraud, had the means of discovering the truth with ordinary diligence.

(ii)A fraud which did not cause the consent of the party to agreement.

OR

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 6(b) (New Scheme).

(a)Principal’s liability when agent exceeds authority [Section 227 of the

Indian Contract Act, 1872]: When an agent does more than he is authorised to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal.

Principal not bound when excess of agent’s authority is not separable

[Section 228]: Where an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.

When the agent exceeds his authority, misleads the third person in believing that the agent has the requisite authority in doing the act, then the agent can be made liable personally for the breach of warranty of authority.

When the agent does not disclose the name of the principal then there

arises a presumption that he himself undertakes to be personally liable.

In the instant case, Q violated the instructions of P by buying cement at ₹ 3,500 per ton, which is beyond the authorized price limit. Furthermore,

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Q did not disclose to R that he was buying cement for ABC Infrastructure Ltd.

Therefore, the answers are

(i)No, P was not bound to pay Mr. R, as the agent Q exceeded his authority, and the deviation was inseparable from the authorized act.

(ii)Yes, Mr. R can file a suit against Q, as Q is personally liable for the contract made without disclosing about the ABC Infrastructure Ltd. and exceeding the authority given by the principal.

Alternative Answer

In the light of the given facts in the question, P, the Purchase Manger of the ABC Infrastructure Ltd., authorised Q his agent to buy raw material on his behalf for construction of roads in Delhi. He instructed Q to buy only Mazboot brand of cement @ ₹ 2000-2,500 per ton. However, Q, violated the instructions of P by buying cement at ₹ 3,500 per ton. Furthermore, he

did not disclose to R that he was buying cement for ABC Infrastructure Ltd.

The stated issue marked in the question is related to the undisclosed principal and exceeding of his authority. Given situation can be dealt with the provisions under section 230, 231 & 233 of the Indian Contract Act.

According to the provision stated in section 230, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. He can neither sue nor be sued on contracts made by him on his principal’s behalf.

However, there are exceptions where the agent is presumed to have agreed to be personally bound.

Where the agent does not disclose the name of his principal or undisclosed principal (Principal unnamed), then there arises a presumption that he himself undertakes to be personally liable. Also, when the agent exceeds his authority, misleads the third person in believing that the agent has the requisite authority in doing the act. In that case the agent can be made liable personally for the breach of warranty of authority.

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Further section 231 of the Indian Contract Act specifies rights of third parties to a contract made by undisclosed agent.

As per the provision, if an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same right as he would have had as against the agent if the agent had been the principal.

Section 233 gives the option to a third person to sue the Agent or the Principal. In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them, liable.

Therefore, the following are the answers:

(i)No, P was not bound to pay Mr. R for purchase of the cement @ ₹ 3500/- per ton, as the agent Q does not disclose the name of his

principal and also exceeded his authority, thus making himself to be personally bound and liable for the doing of said transaction.

(ii)Yes, in the light of the section 233, Mr. R is given an option to sue the agent or the Principal or both. Yes, R can file a suit against Q, as Q is personally liable for the contract made without disclosing about the ABC Infrastructure Ltd. and exceeding the authority given by the P (principal).

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 1(a) (New Scheme).

(c)Some of the agreements which are held to be opposed to public policy are-

(1)Trading with enemy: Any trade with person owing allegiance to a Government at war with India without the licence of the Government of India is void, as the object is opposed to public policy. Here, the agreement to trade offends against the public policy by tending to prejudice the interest of the State in times of war.

(2)Stifling Prosecution: An agreement to stifle prosecution i.e. “an agreement to present proceedings already instituted from running their normal course using force” tends to be a perversion or an abuse of justice; therefore, such an agreement is void. The principle is that one should not make a trade of felony. The compromise of any public offence is generally illegal.

Under the Indian Criminal Procedure Code, there is, however, a statutory list of compoundable offences and an agreement to drop

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proceeding relating to such offences with or without the permission of the Court, as the case may be, in consideration the accused promising to do something for the complainant, is not opposed to public policy.

(3)Maintenance and Champerty: Maintenance is an agreement in which a person promises to maintain suit in which he has no interest.

Champerty is an agreement in which a person agrees to assist another in litigation in-exchange of a promise to hand over a portion of the proceeds of the action.

(a)It is unreasonable so as to be unjust to other party or

(b)It is made by a malicious motive like that of gambling in litigation or oppressing other party by encouraging unrighteous suits and not with the bonafide object of assisting a claim believed to be just.

(4)Trafficking relating to Public Offices and titles: An agreement to

trafficking in public office is opposed to public policy, as it interferes with the appointment of a person best qualified for the service of the public. Public policy requires that there should be no money consideration for the appointment to an office in which the public is interested. The following are the examples of agreements that are void; since they are tantamount to sale of public offices.

(1)An agreement to pay money to a public servant in order to induce him to retire from his office so that another person may secure the appointment is void.

(2)An agreement to procure a public recognition like Padma Vibhushan for reward is void.

(5)Agreements tending to create monopolies: Agreements having for

their object the establishment of monopolies are opposed to public policy and therefore void.

(6)Marriage brokerage agreements: An agreement to negotiate marriage for reward, which is known as a marriage brokerage contract, is void, as it is opposed to public policy.

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(7)Interference with the course of justice: An agreement whose object

is to induce any judicial officer of the State to act partially or corruptly is void, as it is opposed to public policy.

(8)Interest against obligation: The following are examples of agreement that are void as they tend to create an interest against obligation. The object of such agreements is opposed to public policy.

(1)An agreement by an agent to receive without his principal’s consent compensation from another for the performance of his agency is invalid.

(2)A, who is the manager of a firm, agrees to pass a contract to X if X pays to A ₹ 200,000 privately; the agreement is void.

(9)Consideration Unlawful in Part: By virtue of Section 24, if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.”

This section is an obvious consequence of the general principle of Section 23. There is no promise for a lawful consideration if there is anything illegal in a consideration which must be taken as a whole. The general rule is that where the legal part of a contract can be severed from the illegal part, the bad part may be rejected and the good one can be retained. But where the illegal part cannot be severed, the contract is altogether void.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 3(c) (New Scheme).

(b)Agent’s authority in an emergency [Section 189 of the Indian Contract

Act, 1872]: An agent has 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.

To constitute a valid agency in an emergency, following conditions must be satisfied:

(i)Agent should not be in a position or have any opportunity to communicate with his principal within the time available.

(ii)There should have been actual and definite commercial necessity for the agent to act promptly.

(iii)the agent should have acted bonafide and for the benefit of the principal.

(iv)the agent should have adopted the most reasonable and practicable course under the circumstances, and

(v)the agent must have been in possession of the goods belonging to his principal and which are the subject of contract.

SUGGESTED ANSWER

OR

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 6(b) (New Scheme).

(b)Under the Indian Contract Act, 1872, both a sub-agent and a substituted agent are appointed by the agent. But, however, the following are the points of distinction between the two.

SUGGESTED ANSWER

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 6(b) OR (New Scheme).

(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.

SUGGESTED ANSWER

(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 consideration [Section 25(3)].

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 3(c) (New Scheme).

(a)(i) According to section 56 of the Indian Contract Act, 1872, an agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful:

A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

According to section 65 of the Indian Contract Act, 1872, when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.

In the instant case, Mr. J entered into a contract with Mr. S to purchase his house for ₹ 20 lakh, with a token payment of ₹ 50,000.

The agreement included a condition that the sale would be completed within three months. Before the completion of the sale, the house was demolished by the local administration. This event made it impossible for Mr. S to sell the house to Mr. J as agreed.

SUGGESTED ANSWER

In this situation, Mr. J is required to refund ₹ 50,000 token money

paid to Mr. S, as the contract to sell the house has become void due to the demolition of the house by the local administration, as a result of which it becomes impossible to sell the house on the part of S.

(ii)When termination of agent’s authority takes effect as to agent, and as to third persons [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.

In the instant case,

(1)The revocation of Shyam's authority becomes effective only when it is communicated to and received by Shyam. Since Shyam had not received the revocation letter at the time of selling the laptops, his authority to sell on behalf of Rama was still valid. Hence, the sale of laptops conducted by Shyam is binding on Rama.

(2)Shyam is entitled to receive his commission for the sales made while he still had the authority to sell. Since he sold the laptops before receiving the revocation, he is entitled to his commission as per the initial agreement with Rama.

Amount of Commission : Shyam sold 5 laptops at the price fixed by Rama, which is ₹ 1 lakh each. The total sales amount to ₹ 5 lakh. The agreed commission rate is 11% i.e. ₹ 55,000.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 4(a) (New Scheme).

(a)Under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third party; but the third party cannot sue on contract. Only a person who is party to a contract can sue on it.

The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of

privity of contract”, is however, subject to certain exceptions. In other words, even a stranger to a contract may enforce a claim in the following cases:

(1)In the case of trust, a beneficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee.

(2)In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of family who originally had not been parties to the settlement, may enforce the agreement.

(3)In the case of certain marriage contracts/arrangements, a provision may be

made for the benefit of a person, who may file a suit though he is not a party to the agreement.

(4)In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract but such assignment should not involve any personal skill.

(5)Acknowledgement or estoppel - Where the promisor by his conduct acknowledges himself as an agent of the third party, it would result into a binding obligation towards third party.

(6)In the case of covenant running with the land, the person who purchases land

with notice that the owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.

(7)Contracts entered into through an agent: The principal can enforce the contracts entered by his agent where the agent has acted within the scope of his authority and in the name of the principal.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2023, 2(a) (Old Scheme).

(a)(i) Agreements made out of love and affection are valid agreements: 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. The various conditions to be fulfilled as per Section 25(1) of the Indian Contract Act, 1872:

(A)It must be made out of natural love and affection between the parties.

(B)Parties must stand in near relationship to each other.

(C)It must be in writing.

(D)It must also be registered under the law.

Hence, the agreements made out of love and affection, without consideration, shall be valid, if the above conditions are fulfilled.

(ii)Promise to pay a time barred debt cannot be enforced: According to Section

25(3) of the Indian Contract Act, 1872, 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 is valid without consideration.

Hence, this statement is not correct.

Note: The above statement can be correct also on the basis of the “ Discharge of Contract by Lapse of time” as per Limitation Act, 1963 , and accordingly it can be mentioned that contract should be performed within a specified period as prescribed by the Limitation Act, 1963 and if no action is taken by the promisee within the specified period of limitation, he is deprived of remedy at law.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2022, 2(a) (Old Scheme).

(b)A contract made with or by a minor is void ab-initio: Pursuant to Section 11, a minor

is not competent to contract and any agreement with or by a minor is void from the very beginning.

(i)By following the above provision, Mr. Gupta will not succeed in recovering the outstanding amount by filing a case against Srishti, a minor.

(ii)Minor cannot bind parent or guardian: In the absence of authority, express or implied, a minor is not capable of binding his parent or guardian, even for necessaries. The parents will be held liable only when the child is acting as an agent for parents.

In the instant case, Mr. Gupta will not succeed in recovering the outstanding amount by filing a case against Mr. Ram, father of Srishti.

(iii)No ratification after attaining majority: A minor cannot ratify the agreement on attaining majority as the original agreement is void ab initio and a void agreement can never be ratified.

Hence, in this case also, Mr. Gupta will not succeed in recovering the outstanding amount by filing a case against Srishti, after she attains majority.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2022, 3(b) (Old Scheme).

(a)(i) Invitation to Offer: The offer should be distinguished from an invitation to offer. In terms of Section 2(a) of the Indian Contract Act, 1872, an offer is the final expression of willingness by the offeror to be bound by his offer should the party chooses to accept it.

Where a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does not make an offer, but invites only the other party to make an offer on those terms. This is the basic distinction between offer and invitation to offer.

The display of items with a price in it in a self-service system is merely an invitation to offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract.

In this case, Mr. X by selecting some items and approaching the cashier for payment simply made an offer to buy the items selected by him. If the cashier does not accept the price, Mr. X cannot compel him to sell.

Accordingly, in view of the above, Mr. X cannot compel the Cashier / Cosmo Mega Mall to sell the 10th article.

(ii)As per Section 2(h) of the Indian Contract Act, 1872 a contract is an agreement enforceable by law. It means that to become a contract an agreement must give rise to a legal obligation which means duly enforceable by law.

As per Section 10 of the Indian Contract Act, 1872, there must be an intention on the part of the parties to create legal relationship between them. Social or domestic type of agreements are not enforceable in court of law and hence they do not result into contracts.

In the given case, Mr. AT and Mrs. Priya had not entered into an agreement which is legally enforceable by law.

As per the facts of the case, Mr. AT agreed to pay to his wife Mrs. Priya ₹ 30,000 per month while he was abroad. Mr. AT failed to pay the

promised amount. Mrs. Priya sued him for the recovery of the amount.

In view of the above, Mrs. Priya cannot recover any amount as it was a social agreement and the parties did not intend to create any legal relationships.

(b)Negotiable Instruments: Negotiable Instruments is an instrument which is freely transferable from one person to another by mere delivery or by endorsement and delivery.

The property in such an instrument pass to a Bonafide transferee for value.

Classification of Negotiable Instruments according to manner in which it is made in terms of the Negotiable Instruments Act, 1881 (the Act).

(1)“Bearer Instrument” and “Order Instrument” [Section 13]

Bearer Instrument: It is an instrument where the name of the payee is blank or where the name of payee is specified with the words “or bearer” or where the last indorsement is blank. Such instrument can be negotiated by mere delivery.

Order Instrument: It is an instrument which is payable to a person or Payable to a person or his order or Payable to order of a person or where the last indorsement is in full, such instrument can be negotiated by indorsement and delivery.

(2)“Inland Instrument” and “Foreign Instrument” [Sections 11 & 12]

“Inland Instrument”: A promissory note, bill of exchange or cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be an inland instrument.

“Foreign Instrument”: A foreign instrument is one which is not an inland instrument.

(3)Inchoate and Ambiguous Instruments

Inchoate Instrument: It means an instrument that is incomplete in certain respects. The drawer/ maker/ acceptor/ endorser of a negotiable instrument may sign and deliver the instrument to another person in his capacity leaving the instrument, either wholly blank or having written on it the word incomplete.

Ambiguous Instrument : As per Section 17, where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either and the instrument shall be thenceforward treated accordingly.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 4(a) (New Scheme).

(c)(i) 1. According to section 42 of the Indian Contract Act, 1872, if two or more persons have made a joint promise, ordinarily all of them during their life-time must jointly fulfil the promise. After death of any one of them, his legal representative jointly with the survivor or survivors should do so. After the death of the last

SUGGESTED ANSWER

survivor the legal representatives of all the original co-promisors must fulfil the promise.

Hence, the legal representative can jointly discharge the obligations of joint promisor and promisee, after their death.

2.As per section 43, each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract.

Hence, the joint promisor may be compelled.

3.If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.

(ii)Effects of coercion under section 19 of the Indian Contract Act, 1872

(i)Contract induced by coercion is voidable at the option of the party whose consent was so obtained.

(ii)A person to whom money has been paid or anything delivered under coercion must repay or return it.

Threat to commit suicide - Whether it is coercion?

Suicide though forbidden by Indian Penal Code is not punishable, as a dead man cannot be punished. But Section 15 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.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 5(c) (New Scheme).

(a)Mere silence not amounting to fraud: Mere silence as to facts likely to affect the willingness of a person to enter into a contract is no fraud; but where it is the duty of a person to speak, or his silence is equivalent to speech, silence amounts to fraud.

It is a rule of law that mere silence does not amount to fraud. A contracting party is not duty bound to disclose the whole truth to the other party or to give him the whole information in his possession affecting the subject matter of the contract.

The rule is contained in explanation to Section 17 of the Indian Contract Act which clearly states the position that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.

Exceptions to this rule:

(i)Where the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak. Duty to speak arises when one contracting party reposes trust and confidence in the other or where one party has to depend upon the good sense of the other (e.g. Insurance Contract).

(ii)Where the silence is, in itself, equivalent to speech.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2023, 6(a) (Old Scheme).

(b)(i) According to section 16 of the Indian Contract Act, 1872, a contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and he uses that position to obtain an unfair advantage over the other.

When consent to an agreement is caused by undue influence, the contract is voidable at the option of the party, whose consent was so caused.

Hence, the contract between Mr. A and Mr. B is voidable at the option of Mr. B as it was induced by undue influence by Mr. A and therefore Mr. B can sue Mr. A.

(ii)The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.

Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract. (Section 37 of the Indian Contract Act, 1872).

As per the provisions of Section 40 of the Indian Contract Act, 1872, if it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representative may employ a competent person to perform it.

In terms of the provisions of Section 40 stated above, in case where Mr. S has to paint a family picture for Mr. M, Mr. M cannot ask the legal representative of Mr. S to complete the painting work on Mr. S’s deat h, since painting involves the use of personal skill.

In terms of the provisions of Section 37 stated above, in case where Mr. S had promised to deliver some photographs to Mr. M, the legal representatives of Mr. S shall be bound to deliver the photographs in this situation.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2023, 3(b) (Old Scheme).

(b)(i) Rights of finder of lost goods [Section 168 of the Indian Contract

Act, 1872]: A person who finds some goods which do not belong to him, is called the finder of the goods. It is the duty of the finder of goods to find the true owner and surrender the goods to him. However, 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; and, where the owner has offered a specific reward on the lost goods, the finder may sue the owner for such reward, and may retain the goods until then.

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, upon demand, to pay the lawful charges of the finder, the finder may sell it-

(i)When the thing is in danger of perishing or of losing the greater part of its value, or

(ii)When the lawful charges of the finder in respect of the thing found amount to two-thirds of its value.

(ii)Rights of Pawnee/Pledgee: Rights of Pawnee can be classified as under the following headings:

(a)Right to retain the pledged goods [Section 173 of the Act]:

The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest, of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

(b)Right to retention of subsequent debts [Section 174 of the

Act]: The Pawnee can retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged. But he can exercise this right only when there is a contract to this effect. i.e. a right to retain goods for subsequent debts can be exercised only when it has been provided for in a contract to this effect.

(c)Pawnee’s right to extraordinary expenses incurred [Section

175 of the Act]: The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have the right to retain the goods, but he can sue the pawnor for such expenses.

(d)Pawnee’s right where pawnor makes default [Section 176 of the

Act]: If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee has the following rights:

i.the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or

ii.he may sell the thing pledged on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 6(b) (New Scheme).

(b)[SECOND ALTERNATE]

(i)When the consent to an agreement in caused by the fraud, the contract is voidable at option of the party defrauded and he has the following remedies:

(1)He can rescind the contract within a reasonable time.

(2)He can sue for damages.

(3)He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been had the representation made been true.

(ii)Termination of Bailment: A contract of bailment shall terminate in the following circumstances:

1.On expiry of stipulated period : If the goods were given for a stipulated period, the contract of bailment shall terminate after the expiry of such period.

2.On fulfilment of the purpose : If the goods were delivered for a specific purpose, a bailment shall terminate on the fulfilment of that purpose.

3.By Notice:

(a)Where the bailee acts in a manner which is inconsistent with the terms of the bailment, the bailor can always terminate the contract of bailment by giving a notice to the bailee.

(b)A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the bailee. However, the termination should not cause loss to the bailee in excess of the benefit derived by him. In case the loss exceeds the benefit derived by the bailee, the bailor must compensate the bailee for such a loss.

4.By Death: A gratuitous bailment terminates upon the death of either the bailor or the bailee.

5.Destruction of the subject matter : A bailment is terminated if the subject matter of the bailment is destroyed or there is a change is in the nature of goods which makes it impossible to be used for the purpose of bailment.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 6(b) OR (New Scheme).

(a)(i) According to Section 202 of the Indian Contract Act, 1872 an agency becomes irrevocable where the agent has himself an interest in the property which forms the subject-matter of the agency and such an agency cannot, in the absence of an express provision in the contract, be terminated to the prejudice of such interest.

The rule of agency coupled with interest applies and does not come to an end even on death, insanity or the insolvency of the principal.

In the instant case, Mr. PG appointed Mr. VG to sell his shares on his behalf and authorized him to appropriate the amount of loan of ₹ 40

lakh with interest out of the sale proceeds.

Since, interest was created in favour of Mr. VG, thus the revocation of the said agency is not lawful.

(ii)According to Section 157 of the Indian Contract Act, 1872 if the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed, from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.

According to Section 160 & 161 of the Indian Contract Act, 1872, it is the duty of bailee to return, or deliver according to the bailor's directions, the goods bailed without demand, as soon as the time for which they were bailed, has expired, or the purpose for which they were bailed has been accomplished. [Section 160]

If, by the default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. [Section 161]

In the given question, Mrs. Shah mixed Mamra Badam with California Almond bailed by Mr. PK and then packed without information and delivered to Mr. PK. Mamra Badam once mixed cannot be separated.

As she mixed the two different kinds of almond, Mr. PK is entitled to be compensated by Mr. Shah. He cannot return goods to M/s GS Famous General Store.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 1(a) (New Scheme).

(a)Bailment: As per Section 148 of the Indian Contract Act, 1872, bailment is the delivery of goods by one person to another for some purpose, upon a contract, that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.

Bailor’s duty to disclose faults in goods bailed in case of non-

gratuitous bailment (Section 150): If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed.

Duty to pay necessary expenses in case of non-gratuitous bailment

[Section 158]: The bailor is liable to pay the extraordinary expenses incurred by the bailee.

Bailor’s responsibility to indemnify losses [Section 164]: It is the duty

of bailor to indemnify all the losses and expenses, which bailee has to pay on account of defective goods.

In the instant case, Y took a car on lease from X for 10 days for ₹ 50,000. During the journey, Y has to spend ₹ 10,000 for repair of engine and paid ₹ 50,000 for hospital expenses due to accident because of fault in brakes

of car. These are the extraordinary expenses and losses and it is the bailor’s duty to bear such expenses and losses.

Therefore, the answers are:

(i)Y can withhold the hire charges of ₹ 50,000 on account of nonpayment of damages and claim an additional ₹ 10,000, from X.

SUGGESTED ANSWER

(ii)X is liable for the full ₹ 60,000 ( ₹ 10,000 repair + ₹ 50,000 hospital) as

it is the bailor’s duty to supply a car fit for the purpose for which it was hired.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 4(a) (New Scheme).

(b)(i) Quasi- Contracts: A quasi-contract is not an actual contract, but it resembles a contract. It is created by law under certain circumstances. The law creates and enforces legal rights and obligations when no real contract exists. Such obligations are known as quasi-contracts. In other words, it is a contract in which there is no intention on part of either party to make a contract but law imposes a contract upon the parties.

SUGGESTED ANSWER

Salient features of quasi contracts:

(a)In the first place, such a right is always a right to money and generally, though not always, to a liquidated sum of money.

(b)Secondly, it does not arise from any agreement of the parties concerned, but is imposed by the law; and

(c)Thirdly, it is a right which is available not against all the world, but against a particular person or persons only, so that in this respect it resembles a contractual right.

(ii)Responsibility of finder of goods

As per 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.

OR

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 6(b) (New Scheme).

(b)(i) Pledge by mercantile agent: According to section 178 of the Indian Contract Act, 1872, a mercantile agent, who is in the possession of goods or document of title, with the consent of owner, can pledge them while acting in the ordinary course of business as a Mercantile Agent.

Such Pledge shall be valid as if were made with the authority of the owner of goods. Provided, Pawnee acted in good faith and had no notice that Pawnor has no authority to pledge.

(ii)Pledge by person in possession under voidable contract

According to section 178A of the Indian Contract Act, 1872, When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A (contracts where consent has been obtained by fraud, coercion, misrepresentation, undue influence), but the contract has not been rescinded at the time

SUGGESTED ANSWER

of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 6(b) OR (New Scheme).

(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.

SUGGESTED ANSWER

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, upon demand, to pay the lawful charges of the finder, the finder may sell it-

(1)when the thing is in danger of perishing or of losing the greater part of its value, or

(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 :

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

(C)Retaining Possession of the Wristwatch Until Recovery of

Lawful Expenses : Raghav’s action of retaining the wristwatch until Madhav reimburses him for lawful expenses is valid.

(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 party to a contract promises to do certain thing at or before the specified time, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of essence of the contract.

SUGGESTED ANSWER

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.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 4(a) (New Scheme).

(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:

SUGGESTED ANSWER

a.Duty to take reasonable care of the pledged goods.

b.Duty not to make unauthorized use of pledged goods.

c.Duty to return the goods when the debt has been repaid or the promise has been performed.

d.Duty not to mix his own goods with goods pledged.

e.Duty not to do any act which is inconsistent with the terms of the pledge.

f.Duty to return accretion to the goods, if any.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 5(c) (New Scheme).

(a)An agreement made without consideration is void (Section 25 of the Indian

Contract Act, 1872): In every valid contract, consideration is very important. A contract may only be enforceable when consideration is there. However, the Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made without consideration, will be valid and enforceable.

Exceptions:

1.Natural Love and Affection: Conditions to be fulfilled under section 25(1)

(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.

2.Compensation for past voluntary services: A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable under Section 25(2). In order that a promise to pay for the past voluntary services be binding, the following essential factors must exist:

(i)The services should have been rendered voluntarily.

(ii)The services must have been rendered for the promisor.

(iii)The promisor must be in existence at the time when services were rendered.

(iv)The promisor must have intended to compensate the promisee.

3.Promise to pay time barred debt: 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 consideration [Section 25(3)].

4.Agency: According to Section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency.

5.Completed gift: In case of completed gifts, the rule no consideration no contract does not apply. Explanation (1) to Section 25 states “nothin g in this section shall affect the validity as between the donor and donee, of any gift actually made.” Thus, gifts do not require any consideration.

6.Bailment: No consideration is required to affect the contract of bailment. Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from one person to another for some purpose. This delivery is made upon a contract that post accomplishment of the purpose, the goods will either be returned or disposed of, according to the directions of the person delivering them. No consideration is required to affect a contract of bailment.

7.Charity: If a promisee undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid. (Kadarnath v. Gorie

Mohammad)

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2022, 2(a) (Old Scheme).

(a)(i) Co-sureties liable to contribute equally (Section 146 of the

Indian Contract Act, 1872): Unless otherwise agreed, each surety is liable to contribute equally for discharge of whole debt or part of the debt remains unpaid by debtor.

Liability of co-sureties bound in different sums (Section 147): The

principal of equal contribution is, however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.

Surety’s right to benefit of creditor’s securities [Section 141]: A

surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

Right to set off: If the creditor sues the surety, for payment of principal debtor’s liability, the surety may have the benefit of the set off, if any, that the principal debtor had against the creditor.

In the instant case, the RCK Bank granted a loan of ₹ 70 Lakhs to

Mr. Bhusan. The Bank also possessed following securities:

•Gold bars worth ₹ 5 Lakhs mortgaged by Mr. Bhusan, were lost due

to negligence/connivance of bank staff discharges the sureties to the extent of ₹ 5 Lakhs.

•Ganesha Idol worth ₹ 5 Lakhs sold to the Bank, for which payment

was not made, that amount is also adjustable against the liability.

Hence, effective unpaid liability = ₹ 70 Lakhs - ₹ 10 Lakhs = ₹ 60 Lakhs.

As per the rule relating to co-sureties bound in different sums, contribution shall first be equal as far as possible, but not beyond individual limits.

Therefore, equal contribution among four sureties towards ₹ 60 Lakhs would be ₹ 15 Lakhs each. However, Sumati and Suman can each be made liable only up to ₹ 10 Lakhs.

Hence, the liabilities are

Sumati = ₹ 10 Lakhs

Suman = ₹ 10 Lakhs

Remaining liability = ₹ 40 Lakhs

This remaining amount will be equally shared between Suresh and Suyash:

Suresh = ₹ 20 Lakhs

Suyash = ₹ 20 Lakhs

Accordingly, the Bank’s contention that all guarantors should contribute equally is not fully valid because liability cannot exceed the amount guaranteed by each surety.

(ii)By variance in terms of contract (Section 133):

Where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

The discharge is absolute: the Guarantors cannot be held liable for any default occurring after the variation in terms.

A surety undertakes liability for a specific risk, if the terms of the contract are changed, the nature of the risk itself changes, and the surety cannot be held for a risk he did not agree to guarantee.

Therefore, if the Bank changes the terms and conditions of the loan with Mr. Bhusan without the consent and knowledge of the guarantors, all the guarantors shall be discharged from their liability in respect of transactions subsequent to such change.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 4(a) (New Scheme).

(c)According to the provisions of the Indian Contract Act, 1872, a surety is said to be discharged when his liability as surety comes to an end.

The various modes of discharge of surety are:

(i)By revocation of the contract of guarantee.

(ii)By the conduct of the creditor, or

(iii)By the invalidation of the contract of guarantee.

(i)By revocation of the Contract of Guarantee

(a)Revocation of Continuing Guarantee by Notice (Section 130):

The continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditors. A specific guarantee can be revoked only if liability to principal debtor has not accrued.

(b)Revocation of Continuing Guarantee by Surety’s Death

(Section 131): In the absence of any contract to the contrary, the death of surety operates as a revocation of a continuing guarantee as to the future transactions taking place after the death of surety. However, the surety’s estate remains liable for the past transactions which have already taken place before the death of the surety.

(c)By Novation [Section 62]: The surety under original contract is discharged if a fresh contract is entered into either between the same parties or between the other parties, the consideration being the mutual discharge of the old contract.

(ii)By conduct of the creditor

(a)By variance in terms of contract (Section 133): Where there is

any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.

(b)By release or discharge of principal debtor (Section 134): The

surety is discharged if the creditor:

i.enters into a fresh/ new contract with principal debtor; by which the principal debtor is released, or

ii.does any act or omission, the legal consequence of which is the discharge of the principal debtor.

(c)Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor [Sector 135]: A

contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or promises not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.

(d)Discharge of surety by creditor’s act or omission impairing

surety’s eventual remedy [Section 139]: 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 surety is discharged.

(iii)By the invalidation of the contract of guarantee

(a)Guarantee obtained by misrepresentation [Section 142]: 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.

(b)Guarantee obtained by concealment [Section 143]: Any

guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.

(c)Guarantee on contract that creditor shall not act on it until co-

surety joins (Section 144): Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 5(c) (New Scheme).

(c)Co-sureties liable to contribute equally (Section 146 of the Indian

Contract Act, 1872): Unless otherwise agreed, each surety is liable to contribute equally for discharge of whole debt or part of the debt remains unpaid by debtor.

Liability of co-sureties bound in different sums (Section 147): The

principle of equal contribution is, however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.

In the instant case,

(i)A, B and C act as co-sureties for a loan of ₹ 4,00,000 taken by R from

XYZ bank. As per specific bonds by each of them, A’s liability is limited to ₹ 1,00,000, B’s liability is limited to ₹ 2,00,000 and C’s Liability is limited to ₹ 4,00,000. R makes the default of ₹ 4,00,000.

Based on the above provisions, A, B and C were liable for contribution subject to maximum limit fixed as per their specific bonds.

Therefore, A is liable to pay 1,00,000 rupees, and B and C ₹ 1,50,000

rupees each.

(ii)If the loan amounts to ₹ 6,00,000, A is liable to pay 1,00,000 rupees, B is liable to pay ₹ 2,00,000 and C is liable to pay 3,00,000.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 3(c) (New Scheme).

(c)(i) The given statement is False

Justification: According to Section 178 of the Indian Contract Act, 1872, a mercantile agent, who is in the possession of goods or document of title, with the consent of owner, can pledge them while acting in the ordinary course of business as a Mercantile Agent.

Provided such Pledge shall be valid as if were made with the authority of the owner of goods and the Pawnee has acted in good faith and has no notice that the Pawnor has no authority to pledge.

(ii)The given statement is False

Justification: According to Section 210 of the Indian Contract Act, 1872, the termination of the authority of an agent causes the termination (subject to the rules herein contained regarding the termination of an agent’s authority) of the authority of all sub-agents appointed by him. In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a sub agent. Thus, when A revokes the authority of B(agent), it results in termination of authority of sub agent appointed by B i.e. C (sub-agent).

(iii)The given statement is True

Justification: As per Section 124 of the Indian Contract Act, 1872, the term “Contract of Indemnity” is defined as “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.” In case of a contract of insurance, the loss may happen due to natural calamities, and not due to conduct of the promisor or any person. Thus, a contract of Life Insurance is not contracts of indemnity as per definition given.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 5(c) (New Scheme).

(c)(i) Nature and extent of Surety’s Liability [Section 128 of the Indian Contract Act, 1872]

(A)The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.

(B)Liability of surety is of secondary nature as he is liable only on default of principal debtor.

(c)Where a debtor cannot be held liable on account of any defect in the document, the liability of the surety also ceases.

(D)A creditor may choose to proceed against a surety first, unless there is an agreement to the contrary.

SUGGESTED ANSWER

(ii)Discharge of a contract of Surety by the invalidation of the contract of guarantee.

(a)Guarantee obtained by misrepresentation [Section 142]: 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.

(b)Guarantee obtained by concealment [Section 143]: Any

guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.

(c)Guarantee on contract that creditor shall not act on it until

co-surety joins (Section 144): Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 3(c) (New Scheme).

(c)(i) Undue influence (Section 16): According to section 16 of the Indian Contract Act, 1872, “A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and he uses that position to obtain an unfair advantage over the other”.

(ii)Position to dominate the will: Relation between the parties exist in such a manner that one of them is in a position to dominate the will of the other. A person is deemed to be in such position in the following circumstances:

(a)Real and apparent authority: Where a person holds a real authority over the other as in the case of master and servant, doctor and patient and etc.

(b)Fiduciary relationship: Where relation of trust and confidence exists between the parties to a contract. Such type of relationship

SUGGESTED ANSWER

exists between father and son, solicitor and client, husband and wife, creditor and debtor, etc.

(c)Mental distress: An undue influence can be used against a person to get his consent on a contract where the mental capacity of the person is temporarily or permanently affected by the reason of mental or bodily distress, illness or of old age.

(d)Unconscionable bargains: Where one of the parties to a contract is in a position to dominate the will of the other and the contract is apparently unconscionable i.e., unfair, it is presumed by law that consent must have been obtained by undue influence. Unconscionable bargains are witnessed mostly in money-lending transactions and in gifts.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 5(c) (New Scheme).

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

SUGGESTED ANSWER

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.

SUGGESTED ANSWER

OR

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 6(b) (New Scheme).

(b)(i) Distinction between a Contract of Indemnity and a Contract of Guarantee

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.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 6(b) OR (New Scheme).

(a)As per section 126 of the Indian Contract Act, 1872, the contract of guarantee is defined as a contract to perform the promise or discharge the liability of a third person in case of his default.

In this case, S has given a guarantee for P's payment obligation towards R. When P defaulted after making four monthly instalments and became insolvent, S's liability as a guarantor will come into existence.

According to Section 128 of the Act, the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract.

Since P failed to pay the remaining instalments due to insolvency, S, as the guarantor, is liable to pay the balance price of the water purifier to R. In the given situation, S will have to pay the balance amount of ₹ 30,000

to R. [54,000-(4x6,000)]

In the second situation, R sold the water purifier misrepresenting it as having a copper filter, while it actually has a normal filter; this changes the situation significantly.

According to Section 142 of the Act, 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. Here, guarantee is obtained by means of misrepresentation made by the creditor (R), and therefore the guarantee is invalid.

Furthermore, under Section 143, any guarantee which the creditor has obtained by means of keeping silence as to material circumstances, is invalid.

SUGGESTED ANSWER

Here R misrepresented the filter type and both P and S were unaware of this fact. The creditor (R) has obtained the guarantee by remaining silent as to material circumstances. Therefore, the guarantee obtained from S will be considered to be invalid.

Consequently, S cannot be held liable to pay the balance price of the water purifier to R.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 1(a) (New Scheme).

(c)In terms of the provisions of the Indian Contract Act, 1872, the surety enjoys the following rights:

(a)Rights against the creditor;

(b)Rights against the principal debtor;

(c)Rights against co-sureties.

Right against the Creditor

(a)Surety’s right to benefit of creditor’s securities [Section 141]: A

surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

(b)Right to set off: If the creditor sues the surety, for payment of principal debtor’s liability, the surety may have the benefit of the set off, if any, that the principal debtor had against the creditor.

(c)Right to share reduction: The surety has right to claim proportionate reduction in his liability if the principal debtor becomes insolvent.

Right against the principal debtor

(a)Rights of subrogation [Section 140 of the Indian Contract Act,

1872]: Where, a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

This right is known as right of subrogation. It means that on payment of the guaranteed debt, or performance of the guaranteed duty, the surety steps into the shoes of the creditor.

(b)Implied promise to indemnify surety [Section 145]: In every

contract of guarantee there is an implied promise by the principal

SUGGESTED ANSWER

debtor to indemnify the surety. The surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but not sums which he paid wrongfully.

Rights against co-sureties

“Co-sureties (meaning)- When the same debt or duty is guaranteed by two or more persons, such persons are called co-sureties”

(a)Co-sureties liable to contribute equally (Section 146): Unless

otherwise agreed, each surety is liable to contribute equally for discharge of whole debt or part of the debt remains unpaid by debtor.

(b)Liability of co-sureties bound in different sums (Section 147):

The principal of equal contribution is, however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 3(c) (New Scheme).

(c)(i) Situations where Vindictive or Exemplary Damages are awarded:

Under the Indian Contract Act, 1872, the general rule under Section 73 is that only ordinary/compensatory damages are awarded for breach of contract. However, vindictive or exemplary damages (punitive in nature) are awarded in the following exceptional situations:

1.Breach of a contract to Marry: In an action for breach of promise to marry, exemplary damages may be awarded considering the mental suffering, injury to feelings, and humiliation caused to the aggrieved party.

2.Wrongful Dishonour of Cheque: For wrongful dishonour by a banker of his customer’s cheque (despite availability of sufficient funds), because in this case the injury due to wrongful dishonour to the drawer of cheque is so heavy that it causes loss of credit and reputation to him. A business man whose credit has suffered will get exemplary damages even if he has sustained no pecuniary loss. But a non-trader cannot get heavy damages in the like circumstances, unless the damages are alleged and proved as special damages. [Gibbons Vs. West Minister Bank].

(ii)Distinction between liquidated damages and penalty: Penalty

and liquidated damages have one thing in common that both are payable on the occurrence of a breach of contract. It is very difficult to draw a clear line of distinction between the two but certain principles as laid down below may be helpful.

1.If the sum payable is so large as to be far in excess of the probable damage on breach, it is certainly a penalty.

2.Where a sum is expressed to be payable on a certain date and a further sum in the event of default being made, the latter sum is a penalty because mere delay in payment is unlikely to cause damage.

3.The expression used by the parties is not final. The court must find out whether the sum fixed in the contract is in truth a penalty or liquidated damages. If the sum fixed is extravagant or exorbitant, the court will regard it as a penalty even if it is termed as liquidated damages in the contract.

4.The essence of a penalty is payment of money stipulated as a terrorem of the offending party. The essence of liquidated damages is a genuine pre-estimate of the damage.

Alternate Answer to (ii)

(ii)Three principles to differentiate Penalty from Liquidated Damages (Section 74 of the Indian Contract Act, 1872):

Both penalty and liquidated damages are amounts stipulated in the contract as payable on breach. The distinction as developed by English law and recognised in India:

Principle 1 - Genuine pre-estimate vs. In terrorem: Liquidated

damages represent a genuine pre-estimate of the loss likely to flow from the breach, agreed upon at the time of contract. A penalty is a sum fixed in terrorem (as a threat/deterrent) to secure performance, exorbitant and unconscionable compared to the greatest loss that could possibly flow from the breach.

Principle 2 - Proportionality to Breach: If a single sum is made payable on the occurrence of several events, some serious and some trivial, it is presumed to be a penalty (as it cannot be a genuine preestimate for all events). Liquidated damages would typically vary with the nature/extent of breach.

Principle 3 - Impossibility of Exact Estimation: If the nature of the breach is such that it is difficult to estimate damages precisely, a fixed sum agreed upon may be held as liquidated damages. Conversely, if the harm caused by breach is easily assessable and the fixed sum far exceeds it, the sum is a penalty.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 3(c) (New Scheme).

(a)Section 42 of the Indian Contract Act, 1872 requires that when two or more persons have made a joint promise, then, unless a contrary intention appears from the contract, all such persons jointly must fulfil the promise. In the event of the death of any of them, his representative jointly with the survivors and in case of the death of all promisors, the representatives of all jointly must fulfil the promise.

Section 43 allows the promisee to seek performance from any of the joint promisors. The liability of the joint promisors has thus been made not only joint but “joint and several”. Section 43 provides that in the absence of express agreement to the contrary, the promisee may compel any one or more of the joint promisors to perform the whole of the promise.

Section 43 deals with the contribution among joint promisors. The promisors, may compel every joint promisor to contribute equally to the performance of the promise (unless a contrary intention appears from the contract). If any one of the joint promisors makes default in such contribution the remaining joint promisors must bear the loss arising from such default in equal shares.

In the instant case,

(i)D can compel any of three parties A, B and C to pay him ₹ 6,000.

(ii)(1) C can recover the contribution from A and B because A, B and C are joint promisors.

(2)A is unable to pay anything, C is compelled to pay the whole. C is entitled to receive ₹ 3,000 from B.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 4(a) (New Scheme).

(a)As per the provisions of Section 59 of the Indian Contract Act, 1872, where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly.

As per the provisions of Section 61 of the Indian Contract Act, 1872, where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably.

In the present case, G made two payments by way of two cheques. Also, neither G nor T said anything as to the appropriation of the amount towards any particular debt.

Since one of the issued cheques was exactly the amount of the debt due i.e. of ₹ 12,500, by applying the provisions of Section 59 we can say that this is a circumstance indicating for appropriation against that particular debt.

Cheque of ₹ 4,000 can be appropriated in terms of the provisions of Section 61 since neither of the parties, have made any appropriation. The amount will be appropriated in discharging of the debts in order of time against any lawful debt whether they are or are not barred by the law in force for the time being as to the limitation of suits.

Hence cheque of ₹ 12,500 will be appropriated against the debt of ₹ 12,500 which is due on 1st April, 2022.

As per the scenario given in the question, since two debts are persisting in order of time which were treated as time barred on 1st July 2023, the amount of ₹ 4,000 will be appropriated proportionately, i.e. in proportion of 5,000:3,000. Therefore as per the provisions of the Indian Contract Act, 1872, ₹ 2,500 will be appropriated for the first debt and ₹ 1,500 will be appropriated towards the second debt.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2023, 1(a) (Old Scheme).

(a)Liquidated damages is a genuine pre-estimate of compensation of damage 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.

Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable and has no comparison to the loss suffered by the parties.

Distinction between liquidated damages and penalty

Penalty and liquidated damages have one thing in common that both are payable on the occurrence of a breach of contract. It is very difficult to draw a clear line of distinction between the two but certain principles as laid down below may be helpful.

1.If the sum payable is so large as to be far in excess of the probable damage on breach, it is certainly a penalty.

2.Where a sum is expressed to be payable on a certain date and a further sum in the event of default being made, the latter sum is a penalty because mere delay in payment is unlikely to cause damage.

3.The expression used by the parties is not final. The court must find out whether the sum fixed in the contract is in truth a penalty or liquidated damages. If the sum fixed is extravagant or exorbitant, the court will regard it is as a penalty even if, it is termed as liquidated damages in the contract.

4.The essence of a penalty is payment of money stipulated as a terrorem of the offending party. The essence of liquidated damages is a genuine pre-estimate of the damage.

5.English law makes a distinction between liquidated damages and penalty, but no such distinction is followed in India. The courts in India must ascertain the actual loss and award the same which amount must not, however exceed the sum so fixed in the contract. The courts have not to bother about the distinction but to award reasonable compensation not exceeding the sum so fixed.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2022, 6(a) (Old Scheme).

(a)Joint promisors (Section 42 of the Indian Contract Act, 1872)

When two or more persons have made a joint promise, then unless a contrary intention appears by the contract, all such persons must jointly fulfil the promise.

Any one of joint promisors may be compelled to perform (Section 43)

As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the promise.

If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.

In the instant case, A, B, C and D have jointly promised to pay ₹ 6,00,000 to F. B and C become insolvent. B was unable to pay any amount and C could pay only ₹ 50,000. A is compelled to pay the whole amount to F.

Hence, A is entitled to receive ₹ 50,000 from C and ₹ 2,75,000 from D, as worked out below:

From C ₹ 50,000 = (C’s Liability ₹ 1,50,000 Less: Amount he could not pay ₹ 1,00,000).

From D ₹ 2,75,000 = (D’s Liability ₹ 1,50,000+1/2 of liability of B (Loss) (1,50,000*1/2) i.e. ₹ 75,000+1/2 of C’s liability (Loss) (1,00,000*1/2) i.e., ₹ 50,000) In other words, equal proportion i.e., ₹ 5,50,000 (i.e. ₹ 6,00,000- ₹ 50,000) / 2.

Thus, total amount A can receive from C and D comes to ₹ 3,25,000 (50,000+2,75,000)

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 1(a) (Old Scheme).

(b)Quantum Meruit: Where one person has rendered service to another in circumstances which indicate an understanding between them that it is to be paid for although no particular remuneration has been fixed, the law will infer a promise to pay. Quantum Meruit i.e. as much as the party doing the service has deserved. It covers a case where the party injured by the breach had at the time of breach done only a part but not all of the work which he is bound to do under the contract and seeks to be compensated for the value of the work done.

For the application of this doctrine, two conditions must be fulfilled:

(i)It is only available if the original contract has been discharged.

(ii)The claim must be brought by a party not in default.

The claim for quantum meruit arises in the following cases:

(a)When an agreement is discovered to be void or when a contract becomes void.

(b)When something is done without any intention to do so gratuitously.

(c)Where there is an express or implied contract to render services but there is no agreement as to remuneration.

(d)When one party abandons or refuses to perform the contract.

(e)Where a contract is divisible and the party not in default has enjoyed the benefit of part performance.

(f)When an indivisible contract for a lump sum is completely performed but badly the person who has performed the contract can claim the lump sum, but the other party can make a deduction for bad work.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 6(b) OR (New Scheme).

(b)Wagering agreement (Section 30 of the Indian Contract Act, 1872):

An agreement by way of a wager is void. It is an agreement involving payment of a sum of money upon the determination of an uncertain event. The essence of a wager is that each side should stand to win or lose, depending on the way an uncertain event takes place in reference to which the chance is taken and in the occurrence of which neither of the parties has legitimate interest.

Transactions resembling with wagering transaction but are not void

(i)Chit fund: Chit fund does not come within the scope of wager (Section 30). In case of a chit fund, a certain number of persons decide to contribute a fixed sum for a specified period and at the end of a month, the amount so contributed is paid to the lucky winner of the lucky draw.

(ii)Commercial transactions or share market transactions : In these transactions in which delivery of goods or shares is intended to be given or taken, do not amount to wagers.

(iii)Games of skill and Athletic Competition : Crossword puzzles, picture competitions and athletic competitions where prizes are awarded on the basis of skill and intelligence are the games of skill and hence such competitions are valid.

(iv)A contract of insurance: A contract of insurance is a type of contingent contract and is valid under law and these contracts are different from wagering agreements.

OR

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 6(b) (New Scheme).

(b)(i) Claim for necessaries supplied to persons incapable of contracting (Section 68 of the Indian Contract Act, 1872):

If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.

In the instant case, Mr. M supplied the food and other necessaries to Mr. Y (who lost his mental ba lance) and Mr. Y’s grandmother (incapable of walking and dependent upon Mr. Y), hence, Mr. M will succeed in filing the suit to recover money.

(ii)Supplier is entitled to be reimbursed from the property of such incapable person. Hence, the maximum amount of money that can be recovered by Mr. M is ₹ 15 Lakhs and this amount can be recovered from Mr. Y’s parent’s jewellery amounting to ₹ 4 Lakhs and rest from the house of Y’s Parents. (Assumption: Y has inherited the house property on the death of his parents)

(iii)Necessaries will include the emergency medical treatment. Hence, the above provisions will also apply to the medical treatment given to the grandmother as Y is legally bound to support his grandmother.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2022, 3(b) (Old Scheme).

(c)Section 13 of the Sale of Goods Act, 1930 specifies cases where a breach of condition be treated as a breach of warranty. As a result of which the buyer loses his right to rescind the contract and can claim damages only.

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

(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.

(iii)Where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof. Acceptance means acceptance as envisaged in Section 72 of the Indian Contract Act, 1872.

(iv)Where the fulfilment of any condition or warranty is excused by law by reason of impossibility or otherwise.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 1(c) (Old Scheme).

(b)(i) According to Section 11 of the Indian Contract Act, 1872, every person is competent to contract who is of the age of majority according to the law to which he is subject and therefore, a minor is not competent to contract and any agreement with or by a minor is void from the very beginning. A minor cannot ratify it on attaining the majority as the original agreement is void ab initio.

According to Section 68 of the Act, a claim for necessaries supplied to a minor is enforceable by law.

Necessaries mean those things that are essentially needed by a minor. They cannot include luxuries or costly or unnecessary articles.

In the present case, X, the borrower, was minor at the time of taking the loan, therefore, the agreement was void ab initio. Attaining majority thereafter will not validate the contract nor X can ratify it. The loan was for personal purposes and not for necessaries supplied to him. Hence, the lender cannot file a suit against X for recovery of the loan as it is not enforceable by law.

(ii)As per Section 56 of the Indian Contract Act, 1872 the subsequent or supervening impossibility renders the contract void. Supervening impossibility may take place owing to various circumstances as contemplated under that section, one of which is the declaration of war subsequent to the contract made. In the instant case the contract when made between J and K was valid but afterwards J’s government declares war against the country in which the port is situated as a result of which the contract becomes void. Hence, K cannot file a suit against J for performance of the contract.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 3(b) (Old Scheme).

(a)Meaning of ‘Quasi Contract’: Under certain special circumstances obligation resembling those created by a contract is imposed by law although the parties have never entered into a contract. Such obligations imposed by law are referred to as 'Quasi Contracts'. Such a contract resembles with a contract so far as result or effect is concerned but it has little or no affinity with a contract in respect of mode of creation. These contracts are based on the doctrine that a person shall not be allowed to enrich himself unjustly at the expense of another.

The salient features of Quasi-contract:

1.It does not arise from any agreement of the parties concerned but it is imposed by law.

2.The right under it is always a right to money and generally though not always to a liquidated sum of money.

3.It is a right which is available not against all the world, but against a particular person or persons only, so that in this respect it resembles a contractual right.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 6(a) (Old Scheme).

(a)Revocation of Proposal otherwise than by Communication:

According to the provisions of Section 6 of the Indian Contract Act, 1872, when a proposal is made, the proposer may not wait indefinitely

for its acceptance. The offer can be revoked otherwise than by communication or sometimes by lapse of time.

(i)By Lapse of Time: The time for acceptance can lapse if acceptance is not given within the specified time and where no time is specified, then within a reasonable time period without communication of the acceptance, reason being the proposer should not be made to wait indefinitely.

(ii)By non-fulfilment of condition precedent: Where the acceptor fails to fulfil a condition precedent to acceptance the proposal gets revoked [Section 6(3)]. Failure to satisfy any condition will result in lapse of proposal. As stated earlier ‘condition precedent’ to acceptance prevents an obligation from coming into existence until the condition is satisfied.

In the instant case, the school indicated in the application form that provisionally selected students who have paid the admission fee and submitted all the documents by 18th April, 2025 will be confirmed.

Vishal paid the admission fee for his son Aakash on 16th April, 2025 but failed to submit the prescribed documents by 18th April 2025. On 19th April, 2025 Aakash’s admission was cancelled on account of

non-submission of documents without informing Vishal and all the fee was refunded.

As both the conditions regarding payment of admission fee and submission of documents till 18th April 2025 were the conditions precedent for Aakash’s

admission, the school’s action to cancel the admission of Aakash without communication was valid. Vishal’s absence from town from 16th April 2025 to 20th April 2025 was no excuse.

Thus, offer can be revoked otherwise than by communication.

The school's action to cancel the admission of Vishal is valid.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 1(a) (New Scheme).

(b)First Alternate:

According to the provisions of the Indian Contract Act, 1872, some of the agreements which are held to be opposed to public policy are:

OR

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 6(b) (New Scheme).

(a)As per one of the requirements of Section 10 of the Indian Contract Act, 1872, there must be an intention on the part of the parties to create legal relationship between them. Social or domestic agreements are not enforceable in court of law and hence they do not result into contracts.

In the instant case, Radha cannot sue her three friends for the loss incurred in the said party as the agreement between her and her ten friends was a social agreement, and the parties did not intend to create any legal relationship.

If the said party organised by Radha had been a “Contributory 2023 New year celebration party”, then Radha could have sued her three friends for the loss incurred in the said party as the agreement between her and her friends would have legal backing;

on the basis of which Radha deposited the advance amount and the parties here intended to create legal relationship.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2023, 1(a) (Old Scheme).

(a)The differences between void contract and voidable contract are as follows:

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2023, 6(a) (Old Scheme).

(a)Novation and Alteration: The law pertaining to novation and alteration is contained in Sections 62 to 67 of the Indian Contract Act, 1872. In both these cases, the original contract need not be performed. Still there is a difference between these two.

1.Meaning: Novation means substitution of an existing contract with a new one. But in case of alteration the terms of the contract may be altered by mutual agreement by the contracting parties .

2.Change in terms and conditions and parties: Novation may be made by changing in the terms of the contract or there may be a change in the contracting parties. But in case of alteration the terms of the contract may be altered by mutual agreement by the contracting parties but the parties to the contract will remain the same.

3.Substitution of new contract: In case of novation, there is altogether a substitution of new contract in place of the old contract. But in case of alteration, it is not essential to substitute a new contract in place of the old contract. In alteration, there may be a change in some of the terms and conditions of the original agreement.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2022, 6(a) (Old Scheme).