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Capacity of Parties – CA Foundation Business Law Notes
What do you mean by capacity to contract?
An essential ingredient of a valid contract is that the contracting parties must be ‘competent to contract’ (Sec. 10). Section 11 lays down that “Every person is competent to contract who is of the age of majority according to the 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.
- Persons of unsound mind
- Persons disqualified by law from contracting.
Law Relating to Minor’s Agreements:
According to section 3 of the Indian Majority Act, 1875, a person, domiciled in India, who is under years of age is a minor. Accordingly, every person who has completed the age of 18 years becomes a major. In two exceptional cases a minor attains majority when he completes 21 years of his age:
- a guardian is appointed by court, for the minor to look after his person or property or both.
- a Court of Wards has been appointed for the superintendence of minor’s property.
1. An agreement with a minor is void ab initio:
An agreement with a minor is absolutely void and inoperative. This rule was established by the Privy Council in the famous case MohiriBibiv. Dharmodas Ghose ( 1903) LR 30 Cal 539. In this case, Dharmodas Ghose, a minor, mortgaged his house in favour of the defendant. Mohiri Bibi, to secure a loan of ₹ 20,000. A part of this amount was actually advanced to him.
Subsequently, Dharmodas Ghose approached the Court for the cancellation of mortgage since he was a minor. It was held by the Privy Council that agreement with a minor is absolutely void and the money lender is not entitled even to repayment of the money lent because he had given the loan with full knowledge of the minority of the borrower.
2. No restitution:
Restitution means ‘restoring’ (i.e. giving back) of something to its proper owner. A minor cannot be j directed to return benefit obtained under a void agreement (because sections 64 & 65 which deal with restitution do not apply to a minor).
However, according to the doctrine of equitable restitution, the goods and property which are still in possession of minor can be recovered from him, if so required with the condition that it does not involve any personal liability of the minor. However under section 33 of the Specific Relief Act, 1963 where the minor misleads the other person into believing him to be of majority age, restitution shall be available to the deceived party.
→ Where minor is the plaintiff (complainant) and has requested the court to cancel his agreement and get his money or property restored from the other party, the court will demand from the minor either the restoration back of what he himself obtained from the other party, or if this was not possible, to compensate him suitably.
This is based on the view One who seeks equity must do equity himself too’. Thus, the Court will compel restitution by a minor when he is a plaintiff. For example, if a minor sells a house for ₹ 5 lakhs and later on files a suit to set aside the sale on the ground of minority, he may be directed by the Court to refund the purchase money received by him.
→ Where the other party himself is unscrupulous towards the minor, or is not influenced by the false representation by minor, or the court has no reason to believe that restitution is necessary in the interest of justice, minor may not be asked to restore back anything.
→ In case, the person is aware of or has reason to be aware of the minority age of the opposite party, then no restitution whatsoever, shall be granted to that person.
3. Minor can be a beneficiary:
The Court protects the rights of minors. Accordingly, any contract, which is of some benefit to the minor and under which he is required to bear no obligation, is valid. In other words, a minor can be a beneficiary e.g., a payee, an endorsee or a promisee under a contract. Thus, money advanced by a minor can be recovered by him by a suit because he can take benefit under a contract.
Generally contracts for the benefits of minor are made by guardian on behalf of the minor. It should be how-ever be noted that all contracts made by guardian on behalf of a minor are not valid. For example, a guardian cannot empower himself to bind the minor by a contract for the purchase of immovable property unless such contracts are sanctioned by the Court.
4. No ratification:
A minor’s agreement being a nullity and void ab initio has no existence in the eye of law. It cannot be ratified by the minor on attaining the age of majority, for, an agreement void ab initio cannot be made valid by subsequent ratification (Mohendra v. Kailash).
5. The rule of estoppel does not apply to a minor:
The ride of estoppel does not apply to a minor i.e. a minor is not estopped from pleading his infancy in order to avoid a contract, even if he has entered into an agreement by falsely representing that he was of full age.
In other words, where a minor represents fraudulently or otherwise that he is of age majority and thereby induces another to enter into a contract with him, then in an action v founded on the contract, the infant is not estopped from setting up infancy.
But if anything is traceable in the hands of minor, out of the proceeds of the contact made by fraudulently representing that he was of full age, the court may direct the minor to restore that thing to the other party, on equitable considerations, for minors can have no privilege to cheat men.
According to the rule of estoppel, if a person has, by words or conduct, led another to believe in a state of facts as true and induced him to act on that faith, such a person will be stopped by law from denying those facts later even if the facts presented earlier were untrue. In simple words, rule of estoppel means one cannot deny his previous conduct. This principle does not apply against a minor.
So, if a minor misleads the other party to believe that he is of majority age, and then acquires some benefit from him under an agreement, he will be permitted to deny later the fact that he was of majority age. Thereby, he will have no liability towards the other party.
6. Minor’s liability for necessaries:
A minor is not personally liable for the necessaries supplied to him but his property is liable for payment to the other person. The case of necessities supplied to a minor is governed by Section 68 of the Contract Act which provides that “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 to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person”.
A minor is ill and needs urgent medical attention. N, a neighbour, arranges for his treatment and spends his money. He is entitled to be paid out of minor’s property. Necessaries would include such items as food, clothing, accommodation, expenses on education, medical treatment, funeral ceremonies, etc. and not items of comfort or luxury. It would depend on socio-cultural status of the minor.
7. Minor cannot bind his parents or guardian:
If there is no express or implied authority, a minor cannot bind his parents or guardian, even for necessaries. Parents will be held liable only if the child acts as an agent for parents.
8. Contract by a major and a minor:
In case when a major and a minor enters jointly into a contract, then only major person will be liable and not the minor. As held in Sain Das v. Ram Chand, when a contract for purchase is entered f into by a major and a minor, the seller could enforce the contract against the major purchaser and not the minor.
9. No Specific performance:
Since an agreement by a minor is absolutely void, the court will never direct ‘specific performance’ of such an agreement by him.
10. Minor Partner:
A minor being incompetent to contract cannot be a partner in a partnership firm, but under Section 30 of the Indian partnership Act, he can be admitted to the ‘benefits of partnership’ by an agreement executed by his guardian on his behalf, with the consent of all the partners.
11. Minor Agent:
A minor can be an agent (Sec. 184). He shall bind the principal by his acts done in the course of such an agency, but he cannot be held personally liable for negligence or breach of duty. Thus in appointing a minor as an agent, the principal runs a great risk.
12. Surety for a minor:
In case of a contract of guarantee when a major stands as a surety for a minor then the surety is primarily liable as if the contract was entered by him with the third party.
13. Minor and insolvency:
A minor cannot be adjudicated an insolvent, for, he is incapable of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his property is liable (Sec. 68)
14. Minor as a shareholder:
A minor can become a shareholder of fully paid of shares through transfer, if he applies for registration of transfer through his guardian. However, if a minor makes application for shares, the company will refuse to allot him shares because being incompetent, he will have no liability to pay the amounts due on the shares.
15. Minor’s liability for torts:
A tort can be described as a civil wrong. A minor is liable for the torts which do not arise from a contract. For example, a minor was held liable when he failed to returned certain goods which he has hired and passed them to his friend instead.
Persons of Unsound Mind:
As per Section 11 of the Contract Act, for a valid contract, it is necessary that each party to it must have a ‘sound mind’.
What is a ‘sound mind’?:
Section 12 of the Contract Act defines the term ‘sound mind’ as follows. “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 judgment as to its effects upon his interest.”
According to this Section, therefore, the person entering into the contract must be a person who understands what he is doing and is able to form a rational judgment as to what he is about to do, is to his interest or not.
Section 12 further states that:
(i) “A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. ” Thus a patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
(ii) “A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. ” Thus, a sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts.
The third type of incompetent persons, as per Section 11, are those who are “disqualified from contracting by any law to which they are subject.”
(a) Alien enemies:
An alien (a person of a foreign country) living in India can enter into contracts with citizens of India during peace time only, and that too subject to any restrictions imposed by the Government in that respect. On the declaration of a war between his country and India, he becomes an alien enemy and cannot enter into contracts. Alien friend can contract but an alien enemy can’t contract.
→ A contract entered into with an alien enemy before the declaration of war shall be suspended until the war is over. However, the existing contract can be revived after the completion of war or with the approval of the central government.
(b) Foreign sovereigns and ambassadors:
One has to be cautious while entering into contracts with foreign sovereigns and ambassa dors, because whereas they can sue others to enforce the contracts. They cannot be sued in the Indian Courts, except in the following two cases:
- Where they voluntarily submit themselves to the Court.
- Where the person intending to sue them obtains the approval of the Central Government. Thus they are in privileged position and are ordinarily considered incompetent to contract.
A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is incompetent (a) to enter into contracts, and (b) to sue on contracts made before conviction. On the expiry of the sentence, he is at liberty to institute a suit and the Law of Limitation is held in abeyance during the period of his sentence.
An adjudged insolvent (before an ‘order of discharge’) is competent to enter into certain types of contracts i.e. he can incur debts, purchase property or be an employee but he cannot sell his property which vests in the Official Receiver.
Before ‘discharge’ he also suffers from certain disqualifications example he cannot be a magistrate or a director of a company or a member of local body but he has the contractual capacity except with respect to his property. After the ‘order of discharge’, he is just like an ordinary citizen.
(e) Joint-stock company and corporation (Example: LIC, RBI, SEBI, etc.):
A company/Corporation is an artificial person created by law. It cannot enter into contracts outside the powers conferred upon it by its Memorandum of Association or by the provisions of its special Act, as the case may be. Again, being an artificial person (and not a natural per-son) it cannot enter into contracts of strictly personal nature example – marriage.