w.s. capacity to contract

7/28/2019 W.S. Capacity to Contract

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1INTRODUCTION

Section 10 if theIndian Contract Act, 1872 says that:

All agreements are contract if they are made by the free consent of the parties competent to

contract, for a lawful consideration and with the lawful object, and are not hereby expressly

declared to be void.

Nothing herein contained shall affect any law in force in India and not hereby expresslyrepealed, by which any contract is required to be made in writing or in the presence of witnesses,

or any law relating to the registration of documents.

An agreement becomes a contract when following conditions are satisfied:

(1)There is some consideration for it.(2)The parties are competent to contract.(3)Their consent is free.(4)Their object is lawful.

The above said all the conditions should be fulfilled for a contract to be valid. The competency tocontract is one of the important things to be satisfied. The term competent to contract implies

that a person should be able to understand the terms and conditions of the contract and itsconsequences as a reasonable and prudent man. The person entering into an agreement has to

understand the nature of the agreement and be able to form the rational judgement as to what heis doing or is about to do in his interest. The term person takes into its ambit the natural

person as well as legal persons. The juristic or legal person has limited power to enter into the

contract i.e. a legal person has to first see that whether he is authorized to enter into the contractby law or not. In other words, it can be said that a natural person should have both physical and

legal capacity and legal person should have legal capacity first because physical restrictions are

not applicable to juristic persons. The various capacities and incapacities to which natural or

juristic person is subjected to in the realm of the contract are discussed below.


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2

CAPACITY TO CONTRACT

NATURAL PERSON JURISTIC PERSON

PHYSICAL MENTAL LEGAL

REASONS REASONS REASONS

Visually Impaired

Minor Unsoundness

Oldage of mind

Insolvency

Due to Drugs/Alcohol

Foreign

Lunacy National

Disease Alien Enemy


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3Section 11of theIndian Contract Act, 1872 says that every person is competent to contract who

is of the age of majority according to law to which he is subject, and who is of sound mind and is

not disqualified from contracting by any law to which he is subject.

Thus, the following persons are incompetent to contract:

(1)Minors(2)Persons of unsound mind(3)Persons disqualified by law to which they are subject.

MINOR

POSITION IN INDIA

The term minor is nowhere defined in the Contract Act (hereinafter referred to as Act) but

taking into consideration Section 3 of theIndian Majority Act, 1875 every person domiciled inIndia shall be deemed to have attained his majority when he shall have completed the age of

eighteen years, and not before. In the case, however, of a minor of whose person or property or

both a guardian has been appointed by a court, or of whose property the superintendence isassumed by a court of wards, before the minor has attained the age of eighteen years, when he

has completed the age of 21 years.

Section 11of the Act expressly bars a minor to enter into a contract. This means that any contract

entered into with the minor is void ab initio regardless of the fact that whether the person was

aware of his minority or not.

The Indian Courts have favored that the minors contract is voidable at his option. In

Mohoribibi v. Dharmodas Ghosh council ruled that, the Act makes it essential that all

contracting parties should be competent to contract, and especially provides that a person who byreason of infancy is incompetent to contract cannot make a contract within the meaning of this

Act. It was accordingly held that a mortgage made by a minor was void, and a money-lender

who has advanced money to a minor on the security of the mortgage is not entitled torepayment. A child is generally considered to show poor judgement in making contract, and it is

protection against its own ignorance and immaturity. The general principle is ignored wherein it

is believed that the man is best judge of his own interests. Not in every case it can be said that the

contract with the minor is absolutely void. When a contract is entered into by a person (i.e.

guardian) on behalf of the minor, it shall be binding upon both; the minor as well as the guardian.

Such a contract will not consider being void.

Effects of Minors Agreement

A minors contract is void. Since there is no contract, there should be no contractual obligation

on either side of that agreement. The effects of a minors agreement can be classified under the

following heads:


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4(1)No estoppel against a minor.(2)No liability in contract.(3)No ratification.(4)Limited application of restitution.

Though this is not true of the present state of Indian Law. An agreement which confers benefitson minors is not only held not void but its enforcement is at his instance. A minors consent is

nullity. It cannot change matters.

No estoppel against minor

A minor can never be estopped under section 115 of the Indian Evidence Act, 1872 from setting

up that he was a minor when he entered into an agreement with the other party. There were manyconflictions after the Mohoribibi Case but in Sadik Ali Khan v. Jai Kishore the Privy Council

observed that a deed executed by a minor is nullity and incapable of founding a plea of

estoppel. The underlying principle was there can be no estoppel against a statute.

Thus, the position now is that even if a minor has entered into a contract by misrepresenting his

age, he can at any later stage plead minority and avoid the contract.

No liability in Contract

A minor is in law incapable of giving consent, and, there being no consent, there could be no

change in the matter. In 1665 also, in England it was held that an infant who takes loan of

money by falsely representing his age cannot be held liable for repayment of money.

No ratification

A minors agreement is void ab initio there cannot be any ratification of such a contract whichwas entered into during minority. Since, in the eyes of law, a contract with the minor has no

existence so when no contract exists nothing can be ratified. In Nazir Ahmedv.Jiwandas, it washeld that a person cannot on attaining majority ratify an agreement made by him during hisminority. If it is necessary a fresh contract can be made which shall require fresh consideration

and the previous consideration will not be applicable and acceptable by law, whether impliedly

or expressly. Ratification can only be of such acts which are valid in the eyes of law at the time

of commission and also at the time of ratification.

Limited application of Restitution

A minor can be compelled to restore those benefits which he had fraudulently obtained up to the

extent to which it is traceable in his possession. This is known as Doctrine of Equitable

Restoration. A minor can never be made to restore the full value of goods which he had

obtained because if this happens then it will amount to enforcement of void agreement. In the

well known authority ofLeslie Ltd. v. Sheil, it was held that .there is no possibility ofrestoring the very thing got by the fraud, nothing but compulsion through a personal judgement

to repay an equivalent sum out of his present and future resources. I think this would be

nothing but enforcing a void contract.


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5Section 41 of the original Specific Relief Act, 1877 authorized the courts to order any

compensation that justice required to be paid by the party at whose instance the contract was

cancelled. The first landmark case decided under this section was that ofMohoribibis case

where it was held that at the first instance the reasons are not enough to exercise this discretion.

Honble Court in the case ofKhan Gulv.Lakha Singh held that .. there is no real difference

between restoring the property and refunding the money except that the property can beidentified but the cash cannot be traced.. it must be remembered that, while in India allcontracts made by infants are void, there is no such rule in England. There should be therefore

greater scope for the application of the Doctrine of Restitution. But the Court allowed the

refund of money after applying Sections 39 & 41 of Specific Relief Act, 1877 that infants cannot

be allowed to take advantage of their own fraud.

In the 9th

Report of Law Commission of India this view was supported which resulted in its

codification under Section 33 of the Specific Relief Act, 1963. The following are the results of

this amendment:

(1)When a void or voidable contract has been cancelled at the instance of the eitherparty, the court may require the him to restore the benefits received and to makecompensation as justice may require; and

(2)Where a defendant successfully resists to the contract on the ground that the contractis void due to his incapacity, he shall be liable to restore the benefits up to the extent

to which his estate is benefitted thereby.

But it was held in Bhim Mandal v. Mangaram Corain that the court will not compel anyrestitution by a minor even when he is plaintiff, where the other party was aware of the

minority so that he was not deceived.

Effects of Contracts beneficial to Minors

In the authority ofRaghavachariarv. Srinivasa it was held that a mortgage executed in favor ofminor, who has advanced the whole mortgaged money, is enforceable by him or any other

person on his behalf. Thus, a minor is allowed to enforce a contract which is of some benefit to

him and under which he is required to bear no obligation.

A minor has the option of retiring from a contract in beneficial nature on attaining majority

provided that he exercises this power within reasonable time.

Liability of Minor for Necessaries

Section 68 of Chapter V of theIndian Contract Act, 1872 makes provision for the reimbursement

for the necessaries supplied to a minor. The provision says:

If a person, incapable of entering into a contract, or any-one whom he is legally bound

to support, is supplied by another person with necessaries suited with his condition to life, the

person who has furnished such supplies is entitled to be reimbursed from the property of such

incapable person.

This section clarifies the following:


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6 Necessaries are supplied. To an incapable person e.g. Minor or lunatic. To a person who is dependent on such an incapable person. No personal action against minor for reimbursement other than from his property.

The authority in this context is that ofChapple v. Cooper, where the term necessary is explainedand concludes by saying that articles of mere luxury are excluded, though luxurious articles of

utility are in some cases allowed. Necessaries can depend upon the nature of the person and also

his requirement at the time of actual delivery of goods. If the minor has sufficient amount of

goods at the time of delivery, then such a supply will not be considered as necessaries.

DISTINCTION BETWEEN STATUS OF MINOR IN INDIAN LAW AND ENGLISH LAW

The basic difference between Indian Law and English Law is that in India minority is a fact and a minor

is treated as a minor in all the cases and circumstances but in English Law minority is a privilege which isprovided to a minor under certain contracts and not always granted.

A) Nature of Minors ContractIn India, agreement with minor is void ab initio in all circumstances but under the EnglishLaw, contract with a minor may be valid, void or voidable.

B) Liability for necessariesIn India the reimbursement of money is from the property of the minor [sec 68] but in

England the minor can be made personally liable since the contract is valid.

C) Insolvency ProceedingsIn India, a minor cannot be declared insolvent. In England, a minor can be declared

insolvent.

A minor can never be made personally liable for even his duplicity in India because in India a

child is never allowed to take his decision up to the age of 21 years or up to the age when he is

not married. It is due to this over protective attitude that such a reflection is there in the Act aswell to protect and save a minor after all Law is reflection of social norms and ideals.

UNSOUND MIND

In English Law the contract with a person of unsound mind is voidable at the option of that

unsound person if he proves that at the time of making that contract he was incapable of

understanding it and the other party knew it. It becomes binding on him only if he affirms it.

The contract with an unsound person is voidable and not void.

On the other hand in India a contract with an unsound person is absolutely void. But an unsoundperson can make a contract when he is of sound mind but not vice versa. Section 11 of the Act

specifies that every person is competent to contract who is of sound mind. Thus, if anyperson who is of unsound mind is disqualified from entering into a contract and which if provedwould make the contract void ab initio. Unsoundness can be of temporary or of permanent

nature. Here are some of the categories of persons who may suffer from unsound mind:

a) Persons with an advanced age or illness affecting mental ability.b) Person under the influence of alcohol or drug.c) Persons having mental incapacity on account of attacks of lunacy.


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7Section 12 of the Act lays down the provision for a sound mind to enter into a contract. It reads:

A person is said to be of sound mind for the purpose of making a contract if, at the time

when he makes it, he is capable of understanding it and of forming a rational judgement as to its

effect upon his interests.

A person, who is usually of unsound mind, but occasionally of sound mind, may make acontract when he is of sound mind.

A person, who is usually of sound mind, but occasionally of unsound mind, may not

make a contract when he is of unsound mind.

Aged persons

A person in his old age cannot be regarded as incompetent to contract unless he is proved to havea diminished mental incapacity or insanity. Oldage generally results in reduced understanding

and faculties of mind get weaken. Law throws a fine cloak upon such persons to prevent anyone

to take unscrupulous advantage of their oldage. Such a person can be anyone who is close to

such an oldage person, relative, doctor or his friends. An oldage person can plead the followingtwo defences to avoid such a contract:

A) Undue InfluenceB) Unsound mind

Undue infl uence

Such contracts can be avoided under section 16 of the Act. The old person has to prove that he

was unduly influenced and also that the other party was in the position to unduly influence him.

InAbdur Rauffv.Aymona Bibi , an aged father executed gift deed and wakfnama at the time ofhis prolonged illness which was a result of his weak mental state. These transactions were

brought about at the instance of his son who resulted in depriving the other members of hisfamily from the share of their inheritance. It was proved that the son was at the position to

dominate his father so the deed was held to be void.

If undue influence is proved, the contract becomes voidable at the option of the aged person and

not of the other party influencing unduly.

Unsound mind

The second ground on which the aged person or anyone on his behalf can avoid contract is by

proving that at the time of entering into the contract he mental faculties were not in the state to

understand the consequences of his act. If unsoundness is proved to the satisfaction of the

court, then the contract is treated void ab initio.

Lunacy

InInder Singh v. Parmeshwardhari Singh , a property worth ` 25,000 was agreed to be sold in

just ` 7000. His mother proved that he was a congenital idiot and most of the times wandered

about. Holding the sale to be void, SINHA J explained that in this case the person was incapable


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8of making a rational judgement which was not in his own interest and without understanding the

consequences of that sale. Thus, making the sale void. A person who is usually of unsound mind

and sometimes of sound mind the court generally presumes that person to be unsound if such acase comes before it. The onus is on the unsound person to prove that at the time of entering into

the contract he was sane and the contract is valid. For example, a person was in an asylum from

April to June and August to December. He enters into a contract in the month of July. Now hehas to prove that he was in lucid interval when he entered into the contract. A Lucid interval isan interval between two strikes of insanity; when a person is fully sane and able to make rational

judgments in his own interest. But in the case where a person is usually of sound mind was

unsound at the time of entering into the contract (due to intoxication, drugs, alcohol, mentalshock, emotional shock, or otherwise) is generally presumed to be of sound mind and onus is on

the person to prove that he was not in his senses while contract was made and it is not valid

contract.

A person when is incapable of performing rational judgements in his own interests, we call him

jurisprudentially insane or legally insane. Insanity is a disease of mind which impairs themental faculties of human being. In Q.E. v. Kader Nasayer Shah, the Calcutta High Court

explained jurisprudential insanity as, one which materially impairs the cognitive faculties ofmind so much so that it would make the person incapable of knowing the nature of act. In the

cases of Contract Act the court has to apply the test of rational judgement in the interest of the

self.

Drunkard

In India, in the case of drunkard, the contract is absolutely void and in England the contract isvoidable at the option of the drunkard. The third part of Section 12 says, A person, who is

usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of

unsound mind.

The person under the effect of intoxication, drugs, alcohol or such other intoxicating substance isordinarily presumed to be occasionally of unsound mind. The plaintiff has to prove beyond

doubt that at the time of entering into the contract he had no control over his mental faculties and

was unable to understand the nature of the effects of that contract and could not judge his

interests at his best.

If the plaintiff proves before the Court that at the time of making the contract plaintiff was not

able to make a rational judgement of his own interests, the Court can declare that contract as void

ab initio regardless of whether the defendant knew that the plaintiff was under the effect of

intoxication.

LEGAL INCAPACITY

We are born a living soul with flesh and blood, with the responsibility to respect other life andtreat our fellow man with love and kindness, and with a life-spirit provided by the Creator. Our

unalienable rights are for life, liberty and property, and to respect those rights of other human


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9beings on this planet, our home. But then man elected Governments to protect and uphold our

unalienable rights and our responsibilities to the Creator and our fellow man. After a while,

Governments became corrupt so we ask: How could Governments and other "regulatory bodies"possibly make us follow their rules and be subservient to them since our true allegiance is to our

Creator? How can we serve two masters - our creator and our Government?

One of the ways Governments and other regulators have "captured" the rights and freedoms of

the human-being, is to create for themselves an "artificial-person / corporation" who is not we,

but whom the Government has fooled you into thinking it is we. But, so as not to violate ourfundamental rights, they also recognized a natural-person or human-being in law, with which all

of our fundamental rights intact. However we may not have been told about the existence of the

natural-person in law, until now. This concept of an "artificial-person", a legally obligated entity,that appears to be us, but in fact is not we, is a little difficult to grasp at first, but if we follow

through this site, we will understand.

Section 11 of the Act expressly says that person, . not disqualified from contracting by anylaw to which he is subject is capable to enter into the contract. A person can either be a natural

person or legal person.

A natural person includes:

(i) Insolvent(ii) Prisoners(iii) Alien Enemy(iv) Foreign National

Law throws a cloak of humanity on certain associations of persons, organizations and treats them

as persons for certain limited purposes. These artificially created persons are also known as

'juristic persons.

Natural Persons

Natural persons are sometimes restricted from the law of the land to which they are subjected.These restrictions are for those persons which are situated under special circumstances. Some of

such kinds of persons are Insolvent, Prisoners and Alien Enemy.

I nsolvent

InRama Raju v. Official Recieverit has been held that a person can enter into the contract whenthe proceeding for his insolvency has been commenced but before adjudication. If the person is

adjudicated as insolvent he becomes incompetent to contract. Once the person is adjudicated as

insolvent his property vests in the official reciever. This vesting is made for the benefit of the

creditors.


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Prisoners

Convicts cannot enter into a contract in some countries under the prison laws of that country. In

India, nowhere expressly this is mentioned that prisoners are not competent to enter into the

contract. Despite this it is seen that such a prisoner can enter into a contract subjected to jailorspermission. Thus, it is seen that a prisoner is not free to contract on the terms he want, withwhomever he wants or any contract which he wants. His will is subjected to jailors wish. There

is no express restriction but implications are certainly imposed.

Al ien Enemy

Every man is free to enter into contract with any person irrespective of the fact that whether he is

a citizen of India or not. But this freedom is up to the time when the countries to which the

persons belong are at a state of peace. Once the war is declared, any contract with the citizens ofthose two countries comes to an end. This imposition is made as a matter of public policy and is

felt to be in the interest of nation. Therefore, such a freedom to contract is sacrificed. When the

war comes to an end the contract can either be restored fully or partially or completely

suspended, depending on the governments policy.

Foreign Nationals

Foreign Nationals can enter in to the contracts but they cannot be sued unless a prior permission

has been taken from the Central Government of India to sue them.

Legal Persons

Law throws a cloak of humanity on certain associations of persons, organizations and treats themas persons for certain limited purposes. These artificially created persons are also known as

juristic persons.

Companies

The companies registered under the relevant company act are assumed to have a separate legal

entity distinct from the persons forming it or running it. Since it becomes a separate legal entity,

it can sue or can be sued in its own name. This power is not absolute but restricted. This

restriction can be imposed by its object clause and at the time of winding up of the company.

Limitation through Memorandum

The Companies Act expressly provides that a company can only enter into a contract only withinthe scope mentioned in its memorandum of association or those which are reasonably incidental

or consequential thereto. If a company enters into a contract which does not falls within the

ambit of its scope then such a contract is void ab initio and cannot be validated even with themutual consent of its shareholders. This doctrine of ultra vires was established in the case of

Ashbury Railway Carriage & Co. v. Riche. This clause with the passage of time has become


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11obsolete since the companies in clause ii of their object clause widen its sphere and frame the

language in such a manner which covers almost any of its activity.

Limitation during winding up

The only contracts which can be entered into this period of winding up is that for the sale of the

companys assets, or realization of debts, etc., and only the liquidator of the company has thepower to act on behalf of the company and he has to exercise this power in a manner which he

feels would be in the best interests of all the parties concerned.

CONCLUSION

TheIndian Contract Act, 1872 is a great piece of Legislation. This is an Act of Britishers which

Indian Judiciary still follows. It has been more than six long decades that India is independent.

The Act is around 130 years old and since then the society has been constantly changing and the

Act needs to be revised.It is suggested that the minors are not liable to restore and repay full benefits even when he had

falsely represented his age and had entered into the contract. The Act provides him shelter for

unlawful acts and offences like misrepresentation. The Act should be amended and minors

should be held liable for their frauds.

The second loophole is that the persons who are disqualified by law are not expressly coveredunder this Act. The disqualifications discussed are all results of judicial decisions and

pronouncements. The Act should expressly and exhaustively contain a list of persons

disqualified or certain parameters as to how a person can be judged as disqualified by law.

The term person in section 11 of the Act does not expressly says that it covers natural andjuristic persons but the conclusion has been drawn by various decisions and sections of variousActs. The Act needs to be revised with certain other amendments so as to cover the new sphere

of contracts e.g. E-frauds, E-contracts, etc.


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