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CMA Foundation · Fundamentals of Business Laws and Business Communication · Capacity of Parties, Free Consent

Mehta Traders agrees to buy a specific consignment of 500 bags of rice lying in a godown in Kolkata from Sen & Co. Unknown to both parties, a fire had destroyed the entire consignment the previous night, before the agreement was made. What is the legal position?

The agreement is void. Both parties wrongly believed the rice existed, and its existence is a fact essential to the agreement. Under Section 20, such a shared mistake of fact makes the agreement void, regardless of the absence of any fraud.

  1. AThe agreement is void because both parties were under a mistake as to a matter of fact essential to itCorrect
  2. BThe agreement is voidable at the option of Mehta Traders
  3. CThe agreement is valid and Sen & Co. must pay damages
  4. DThe agreement is valid because neither party was fraudulent

Explanation

The goods had ceased to exist when the agreement was made, and neither party knew. This is a bilateral mistake as to an essential fact, like the dead horse and lost cargo illustrations, so under Section 20 the agreement is void. Voidable is wrong because no option arises.

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