CA INTER

TEST 3 KEY ANSWER

30/05/2023
1. S asks R to beat T and promises to indemnify R against the
consequences, R beat T and is fined Rs. 50,000. Can R claim Rs. 50,000
from S.
Requirements in a contract of indemnity:
A contract of indemnity to be valid must fulfil all the essentials of a valid
contract which includes:
(a) Offer and acceptance
(b) Intention to create legal obligation
(c) Consideration
(d) Competency to contract
(e) Free consent
(f) Lawful object
(g) The agreement must not be expressly declared to be void, e.g. an
agreement in restraint of trade/ marriage etc.
(h) The terms of the agreement must not be vague or uncertain
(i) The agreement must be capable of performance- An agreement to do an
impossible act is void.
(j) Legal formalities
In the given case, object of the agreement was unlawful. Hence R cannot claim
from S.
2. Manoj guarantees for Ranjan, a retail textile merchant, for an amount of
Rs. 1,00,000, for which Sharma, the supplier may from time to time
supply goods on credit basis to Ranjan during the next 3 months.
After 1 month, Manoj revokes the guarantee, when Sharma had supplied
goods on credit for Rs. 40,000. Referring to the provisions of the Indian
Contract Act 1872, decide whether Manoj is discharged from all the
liabilities to Sharma for any subsequent credit supply. What would be
your answer in case Ranjan makes default in paying back Sharma for the
goods already supplied on credit i.e. Rs. 40,000?

Discharge of Surety by Revocation:

(a) As per Sec. 130 of the Indian Contract Act, 1872, a continuing guarantee
may, at any time, be revoked by the surety, as to future transactions, by
notice to the creditor, but the surety remains liable for transactions
already entered into.
(b) As per the above provisions, liability of Manoj is discharged with relation
to all subsequent credit supplies made by Sharma after revocation of
guarantee, because it is a case of continuing guarantee.
(c) However, liability of Manoj for previous transactions (before revocation) i.e.
for Rs. 40,000 remains. He is liable for payment of Rs. 40,000 to Sharma
 because the transaction was already entered into before revocation of
guarantee.
3. Shyam, at the request of Govind, sells goods which were, in the
possession of Govind. However Govind had no right to dispose of such
goods. Shyam did not know this and handover the proceed of the sale to
Govind. Afterwards, Manohar, who was the true owner of the goods, sued
Shyam and recovered the value of the goods. In the light of the
provisions of the Indian Contract Act, 1872, answer the following
questions:
(i) Is Govind liable to identify to Shyam for his payment to Manohar?
(ii) What will be the liability of Govind if the goods is a prohibited drug?

Pledge by Mercantile Agent:

(a) As per Sec. 178 of the Indian Contract Act, 1872, where a mercantile agent
is, with the consent of the owner, in possession of goods or the documents
of title to goods, any pledge made by him, when acting in the ordinary
course of business of a mercantile agent, shall be as valid as if he were
expressly authorised by the owner of the goods to make the same; provided
that the pawnee acts in good faith and has not at the time of the pledge
notice that the Pawnor has no authority to pledge.

(b) It is also to be noted that:

i. The possession of goods must be with the consent of the owner. If
possession has been obtained dishonestly or by a trick, a valid pledge
cannot be effected.
ii. The pledgee should have no notice of the pledger's defect of title. If the
pledgee knows that the pledger has a defective title, the pledge will not
be valid.
(c) In the given situation, Shyam had no notice of the Govind's defect of title.
He acted in ordinary course of business of a mercantile agent considering
Govind as owner of the good and genuinely handed over the proceed of the
sale to him. Therefore, said transaction is invalid.

Conclusion: Based on the above discussion, following conclusions may be

drawn:
(i) Govind shall be liable to indemnify Shyam for his payment to Manohar.
(ii) Govind shall not be liable to indemnify Shyam as selling of prohibited
drugs is a prohibited act and against the public policy.
4. Radheshyam borrowed a sum of Rs. 50,000 from a Bank on the security
of gold on 1.07.2021 under an agreement which contains a clause that
the bank shall have a right of particular lien on the gold pledged with it.
Radheshyam thereafter took an unsecured loan of Rs. 20,000 from the
same bank on 1.08.2021 for three months. On 30.09.2021 he repaid
entire secured loan of Rs. 50,000 and requested the bank to release the
gold pledged with it. The Bank decided to continue the lien on the gold
until the unsecured loan is fully repaid by Radheshyam. Decide whether
 the decision of the Bank is valid within the provisions of the Indian
Contract Act, 1872?

General lien of bankers:

(a) As per Sec. 171 of the Indian Contract Act, 1872, bankers, factors,
wharfingers, attorneys of a High Court and policy brokers may, in the
absence of a contract to the contrary, retain, as a security for a general
balance of account any goods bailed to them; but no other persons have a
right to retain, as a security for such balance, goods bailed to them, unless
there is an express contract to the effect.
(b) Sec. 171 empowers the banker with general right of lien in absence of a
contract whereby it is entitled to retain the goods belonging to another
party, until all the dues are discharged. Here, in the first instance, the
banker under an agreement has a right of particular lien on the gold
pledged with it against the first secured loan of Rs. 50,000, which has
already been fully repaid by Radheshyam. Accordingly, Bank's decision to
continue the lien on the gold until the unsecured loan of Rs. 20,000 (which
is the second loan) is not valid.

5. Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the
purpose of making new a silver bowl out of it. Every evening she used to
receive the unfinished good (silver bowl) to put it into box kept at Mr.
Y's Shop. She kept the key of that box with herself. One night, the silver
bowl was stolen from that box. Was there a contract of bailment?
Whether the possession of the goods (actual or constructive) delivered,
constitute contract of bailment or not?

Contract of Bailment:
(a) Sec. 148 of Indian Contract Act, 1872, defines 'Bailment' as the delivery of
goods by one person to another for some purpose, upon a contract that
they shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the direction of the person delivering them.
(b) As per Sec. 149 of the Indian Contract Act, 1872, the delivery to the bailee
may be made by doing anything which has the effect of putting the goods
in the possession of the intended bailee or of any person authorised to hold
them on his behalf. Thus, delivery is necessary to constitute bailment.
Conclusion: Mere keeping of the box at Y's shop, when Mrs. A herself took
away the key cannot amount to delivery. Therefore, in this case there is no
contract of bailment as Mrs. A did not deliver the complete possession of the
good by keeping the keys with herself.