Capacity of parties

MFM-1Business LawSession-2

1Capacity of partiesMeaning: Capacity to contract means competence of parties to enter into a valid contract. Sec. 11Sec.10 requires parties to be competent to contract.Sec.11 lays down that: every person is competent to contract who is of:Age of majority according to law to which he is subject.Sound mind.Not disqualified from contacting by any law to which he is subject.

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Reasons For Incapacity

Status Mental Deficiency Unsound Mind

Foreign Sovereign Convict Corporation Insolvent Person Alien Enemy 4Incapacity arising from status:Foreign Sovereigns and Ambassadors.Alien EnemyConvictsCorporationInsolvent person5Incapacity arising from unsound mind: Person of unsound mind means who:Lack capacity to understand the terms of the contract.Have inability to form rational judgement and realise its effect.A person who is usually of unsound mind but occasionally of sound mind or vice versa may make the contract when he is of sound mind. 6Sr. No.Type of Unsoundness Effect on Contract1. Lunatic: person who is mentally deranged due to some mental strain or other personal experience but who has some lucid intervals of sound mind.a) While he is of unsound mindHe can not enter into any contract. Any agreement entered into by him during this period is altogether void and he can not be held liable.b) While he is of sound mindHe can enter into a valid contract and he is liable for such contracts .2.Idiot: a person who is permanently of unsound mind.He can not enter into any contract 7Sr. No.Type of Unsoundness Effect on Contract3.Drunken person: a sane person who is delirious from fever or who is so drunk that he can not understand the terms of a contract or form a rational judgement as to its effect on his interest.He can not contract while such delirium or drunkenness lasts.8Position of drunkard is the same as that of Lunatic.Contracts by a minorWho is minor?Sec.3 of Indian Majority Act, 1875 deems person as Major

9CategoryAge of majorityWhere a guardian of a minor person is appointed under Guardian and Wards Act,1890.On completion of 21 Years.Where Minors property has passed under superintendence of the Court of Wards.On completion of 21 Years.In others case.On completion of 18 Years.Two fundamental Rules governing minors contract. The judges are his counselors, the jury are his servants and the law is his guardian.Law should not cause unnecessary hardship to person who deal with minors. 10The following govern agreements with a minor.Void.No ratification possible.No estoppel against minor.Restitution of goods and property acquired fraudulently.Enforceability of contracts by a minor.Minor and insolvency.Minor and partnership.Minor and agency.Minor and negotiable instrument.Minor as a member of a company.Position of minors parents.Minors liability for necessities.Minor and guardian. Minors liability for tort.No specific performance.11Free consentConsent means acquiescence or act of assenting to an offer.The essence of every agreement is that there should be free consent on both sidesTwo or more persons are said to consent when they agree upon the same thing in the same sense. In other words there should be Consensus ad idem i.e. understanding same thing in same sense and same manner. 1213No Free Consent, If caused byCoercion Undue InfluenceFraudMisrepresentationMistakecoercion

14Definition and meaningSec.15: the committing or threatening to commit, any act forbidden by Indian Penal Code, OrThe unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into contractCoercion may proceed from any person and may be directed against any person including stranger.A threat to file suit does not amount coercion unless suit is on false charge.

15Threat to commit suicide amounts to coercion.Coercion may be extra-territorial: it is immaterial whether Indian Penal Code 1860 is in force in the place where coercion is employed, provided the act has been planned in India.Duress is the word used in English Law instead of coercion.Burden of Proof: Aggrieved Party must prove that his consent was caused by coercion. 16Undue Influence

17Definition and meaningSec.16:The following are essentials of Undue Influence:The relation subsisting between the parties should be such that one of them is in a position to dominate the will of the other, andThe dominant party should have used that position to obtain an unfair advantage over the other.18The following relationships are said to raise a presumption of Undue Influence:Parent and ChildDoctor and PatientLawyer and ClientGuardian and WardReligious Advisor and DiscipleTrusty and Beneficiary

19In following relationship Undue Influence is not presumed.Land lord and Tenant Creditor and DebtorHusband and WifeBurden of Proof: the burden of proof that the contract was not induced by Undue Influence lies on party who was in dominant position. 20Consequences: in both coercion and undue influence it gives aggrieved party right to avoid contract.21Fraud

22Definition and meaningSec.17:Fraud means and includes any of the following act committed by a party to a contract with intent to deceive another party to induce him to enter into contract. It includes-The active concealment of a fact by one having knowledge or belief of the fact.A promise made without any intention of performing it.The suggestion as to a fact, of that which is not true, by one who does not believe it to be true.Any other act fitted to deceive.Any such act or omission as the law specially declares to be fraudulent.23For fraud to exist, there must be-A representation, and it must be false.The representation must relate to fact.The representation must have deceived the other party.The other party who has been deceived must suffer some loss. As such fraud without damage or damage without fraud does not give rise to an action.24Consequences: the party defrauded can:Avoid the contract.Insist that contract shall be performed.Sue for damages.Loss of right to avoid contract.Ability to discover by ordinary diligence.Contract in ignorance.The party after becoming aware, takes benefit.An innocent third party acquires title.The parties can not be restored to original position. 25Silence- amounts to fraud?Mere silence as to fact likely to affect the willingness of a person to enter into a contract is not fraud.Exceptions:Where parties stand in fiduciary relationship.Where silence itself is equivalent to speech.26misrepresentation

27Definition and meaningSec. 18:It means misstatement of fact material to the contract. It is false representation made innocently, without any intention of deceiving the other party.

28Consequences: the party misrepresented can:Avoid the contract.Insist that contract shall be performed.Loss of right to avoid contract.Ability to discover by ordinary diligence.Contract in ignorance.The party after becoming aware, takes benefit.An innocent third party acquires title.The parties can not be restored to original position.

2930A statement of fact which one party makes it to another in the course of negotiation with a view to inducing other party to enter into contract is known as representation. Such representation when made innocently/intentionally amounts to misrepresentation/fraud.There is thin line of distinction between Fraud and Misrepresentation.mistake

31Mistake may be defined as erroneous belief about something.Mistake

Mistake of Law Mistake of Fact

Indian Law Foreign Law Bilateral Unilateral

32ValidVoidVoidValidTypes of Bilateral Mistake:Mistake as to existence of subject matter.Mistake as to identity of subject matter.Mistake as to title of subject matter.Mistake as to quantity of subject matter.Mistake as to quality of subject matter.Mistake as to price of subject matter.Mistake as to possibility of performance.33In case of Unilateral Mistake, contract remains valid but if it is committed by fraud of other party then contract can be avoided.34Thank You.35