CONTRACT ACT IMPORTANT QUESTIONS WITH ......SAHIL GROVER [CA, LLB., B.COM (H)(SRCC,DELHI UNIVERSITY)] Page 1 CONTRACT ACT IMPORTANT QUESTIONS WITH SUGGESTED ANSWERS Question 1: Explain

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SAHIL GROVER [CA, LLB., B.COM (H)(SRCC,DELHI UNIVERSITY)] Page 1

CONTRACT ACT

IMPORTANT QUESTIONS WITH SUGGESTED ANSWERS Question 1:

Explain the validity of agreements in restraint of trade.

Answer

An agreement which interferes with the liberty of a person to engage himself in any lawful trade, profession or

vocation is called ‘an agreement in restraint of trade’.

Section 27 of the Indian Contract Act, 1872 renders agreement in restraint of trade as void. The section applies

even when the restraint is for a limited period only or is confined to a particular area.

But contracts by which in the exercise of his profession, trade or business, a person enters into ordinary agreements

with persons dealing with him which are really necessary for the carrying on of his business are not void under this

section.

The exceptional cases which constitutes the valid contracts in restraint of trade are as follow:

1. Sale of goodwill: Restrain on a seller of goodwill from carrying on (i) a similar business, (ii) with in specified local

limits, (iii) so long as the buyer or his representative deriving title to the goodwill carriers on a like business,

Provided (iv) the restraint is reasonable in point of time and place.

2. Partner’s agreements:

i. Partners may enter into an agreement that a partner will not carry on similar business while he is partner.

ii. An outgoing retiring partner may agree with other partners that he will not carry on any business similar to that

of the firm within a specified time or local limits.

iii. Upon or in anticipation of dissolution a partnership firm some or all the partners may agree not to carry on a

business similar to that of the firm with a specified period or local limit.

iv. A partner may upon the sale of goodwill of the firm, make an agreement with the buyer that he will not carry on

any similar business within specified time or local limits.

3. Service agreement:

Agreements of service often contain a clause by which the employees prohibited from working anywhere else

during the term of the agreement, such agreement are valid

4. Trade Combinations:

An agreement among members of trade associations or chambers of commerce etc. to regulate their business is not

void under section 27.

Question 2:

Mr. Seth an industrialist has been fighting a long drawn litigation with Mr. Raman another industrialist. To support

his legal campaign Mr. Seth enlists the services of Mr. X a legal expert stating that an amount of Rs.5 lakhs would be

paid, if Mr. X does not take up the brief of Mr. Raman Mr. X agrees, but at the end of the litigation Mr. Seth refuses

to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth under the provisions of the Indian

Contract Act, 1872.

Answer:

The problem as asked in the question is based on one of the essential elements of a valid contract as stated under

Section 10 of the Indian Contract Act, 1872. read with Section 28 of the Act.

In terms of the said section, “all agreements are contracts if they are made by the free consent of the parties

competent to contract, for a lawful consideration and with a lawful object and are not expressly declared void”.

Thus, in order to be valid contract, such agreement must not be one which the law expressly declares to be either

illegal or void.


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A void agreement is one which does not have any legal effect. Certain agreements such as agreements in restraint of

trade, marriage, legal proceedings etc., are void agreements since they have been identified as “opposed to public

policy”.

The given instance is based on the agreement in restraint of legal proceedings. This agreement restricts one’s right

to enforce his legal rights. Such an agreement has been expressly declared to be void under section 28 of the Indian

Contract Act, 1872 as they are opposed to public policy.

Hence, “X” in the given case cannot recover the amount of Rs 5 lakhs promised by “Mr.Seth” because it is a void

agreement and cannot be enforced by law.

Question 3:

‘X' agreed to become an assistant for 5 years to 'Y' who was a Doctor practising at Ludhiana. It was also agreed that

during the term of agreement 'X' will not practise on his own account in Ludhiana. At the end of one year, ‘X' left the

assistantship of 'Y' and began to practise on his own account. Referring to the provisions of the Indian Contract Act,

1872, decide whether ‘X' could be restrained from doing so?

Answer:

The problem as asked in the question is based on one of the essential elements of a valid contract as stated under

Section 10 of the Indian Contract Act, 1872 read with section 27 of the Act.

In terms of the said section, “all agreements are contracts if they are made by the free consent of the parties

competent to contract, for a lawful consideration and with a lawful object and are not expressly declared void”.

Thus, in order to be valid contract, such agreement must not be one which the law expressly declares to be either

illegal or void.

A void agreement is one which does not have any legal effect. Certain agreements such as agreements in restraint of

trade, marriage, legal proceedings etc., are void agreements since they have been identified as “opposed to public

policy”. The given instance is based on the agreement in restraint of lawful trade

Agreement in Restraint of Trade: Section 27 of the Indian Contract Act, 1872 deals with agreements in restraint of

trade. According to the said section, every agreement by which anyone is restrained from exercising a lawful

profession, trade or business of any kind, is to that extent void.

However, in the case of the service agreements restraint of trade is valid. In an agreement of service by which a

person binds himself during the term of agreement not to take service with anyone else directly or indirectly to

promote any business in direct competition with that of his employer is not in restraint of trade, so it is a valid

contract.

In the instant case, agreement entered by X with Y is reasonable, and do not amount to restraint of trade and hence

enforceable.

Therefore, X can be restrained by an injunction from practicing on his own account in Ludhiana.

Question 4:

M promised to pay N for his services at his (M) sole discretion found to be fair and reasonable. However, N

dissatisfied with the payment made by M and wanted to sue him. Decide whether N can sue M under the provisions

of the Indian Contract Act, 1872?

Answer

As per section 29 of the Indian Contract Act, 1872 – agreements, the meaning of which is not certain, or capable of

being made certain, are void”.


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The parties to the contract should be aware of the precise nature and scope of their mutual rights and obligations

under the contract. If the words used by the parties are vague and indefinite, the law cannot enforce the

agreement.

In the instant case, M promise to pay N only if he finds his services to be fair and reasonable .This makes the N’s

right to get the amount uncertain as the right is based on the sole discretion of M

Therefore the contract in this case falls within the purview if Section 29 and is uncertain and thus void.N’s suit will

not be valid because the performance of a promise is contingent upon the mere will and pleasure of the promisor;

hence, there is no contract.

Question 5:

Point out with reason whether the following agreements are valid or void:

i. Kamala promises Ramesh to lend Rs.50,000 in lieu of consideration that Ramesh gets Kamala’s marriage

dissolved and he himself marries her.

ii. Sohan agrees with Mohan to sell his black horse. Unknown to both the parties, the horse was dead at the

time of agreement.

iii. Ram sells the goodwill of his shop to Shyam for Rs.4,00,000 and promises not to carry on such business

forever and anywhere in India.

iv. In an agreement between Prakash and Girish, there is a condition that they will not institute legal

proceedings against each other without consent.

v. Ramamurthy, who is a citizen of India, enters into an agreement with an alien friend.

Answer

Validity of agreements

i. Void Agreement: As per Section 23 of the Indian Contract Act, 1872 an agreement is void if the object or

consideration is against the public policy.

ii. Void Agreement: As per Section 20 of the Indian Contract Act, 1872 the contracts caused by mistake of fact

are void. There is mistake of fact as to the existence of subject-matter.

iii. Void Agreement: As per Section 27 of the Indian Contract Act, 1872 an agreement in restraint of trade is

void. However, a buyer can put such a condition on the seller of good will, not to carry on same business.

However, the conditions must be reasonable regarding the duration and the place of the business

iv. Void Agreement: An agreement in restraint of legal proceedings is void as per Section 28 of the Indian

Contract Act, 1872.

v. Valid Agreement: An agreement with alien friend is valid, but an agreement with alien enemy is void.

Question 6:

State whether the following statements are correct or incorrect:

i. The agreement towards compounding of an, offence to avoid prosecution is void.

ii. An agreement to subscribe to or contribute a plate or prize of the value of Rs.500 or above to be awarded to

the winner of a horse race is void.

Answer:

i. Incorrect: Under the Indian Penal Code(IPC) there are certain offences which are compoundable in nature

i.e. which can be compromised and the agreement to compound(compromise) such offences is valid.

ii. Incorrect: According to the exception stated under Section 30 of the Indian Contract Act, 1872, a

subscription, or contribution or agreement to subscribe or contribute, made or entered into for or towards

any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded

to the winner of any horse race, shall not be deemed to be unlawful.

CONTRACT ACT IMPORTANT QUESTIONS WITH ......SAHIL GROVER [CA, LLB., B.COM (H)(SRCC,DELHI UNIVERSITY)] Page 1 CONTRACT ACT IMPORTANT QUESTIONS WITH SUGGESTED ANSWERS Question 1: Explain

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