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‘A’ sends goods to ‘B’ for sale, and gives instructions not to sell under a fixed price. ‘C’ being…

Under section 237 of the Indian Contract Act, 1872, a principal is bound by an agent’s act outside actual authority when the principal’s words or conduct induced the third…

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‘A’ sends goods to ‘B’ for sale, and gives instructions not to sell under a fixed price. ‘C’ being ignorant of ‘B’s instructions, enters into a contract with ‘B’ to buy the goods at a lower price than the reserved price.

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Answer and explanation

Correct answer D

Under section 237 of the Indian Contract Act, 1872, a principal is bound by an agent’s act outside actual authority when the principal’s words or conduct induced the third party to believe that the act was authorised. Entrusting the goods to B for sale gave B apparent authority to sell. C did not know of the private price restriction, so the contract binds A. Section 237, illustration (a), applies this rule to a reserved-price sale.

Option feedback

Option A

Incorrect. Because 'A' entrusted 'B' with the goods for sale (conferring ostensible authority to sell) and 'C' had no notice of the private price restriction, 'A' cannot repudiate the contract against 'C'.

Option B

Incorrect. The contract between 'B' (acting as agent) and the bona fide third party 'C' is valid and enforceable under Section 237, not void.

Option C

Incorrect. The agent 'B' has no option to avoid the contract; the contract binds the principal 'A' in favour of the bona fide purchaser 'C'.

Option D

Correct. Under Section 237, Illustration (a) of the Indian Contract Act, 1872, 'A' is bound by the contract because 'C' entered into the contract in good faith without knowledge of 'A's private instructions limiting the minimum price.

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