Capacity to Contract – CA Foundation Law Study Material

This Capacity to Contract – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Capacity to Contract – CA Foundation Business Law Study Material

Question 1.
What is the law relating to minor’s agreements?
OR
Explain the minor’s position in an agreement.
Answer:
The law regarding minor’s agreements may be summed up as under :
1. An agreement with a minor is void ab initio: An agreement with a minor is absolutely void and inoperative.

2. No restitution: Restitution means ‘restoring’ (ie. giving back) of something to its proper owner. A minor cannot be 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 that are still in possession of the minor can be recovered from him, if so required with the condition that it does not involve any personal liability of the minor.

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.

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.

5. The rule of estoppel does not apply to a minor: I.e., a minor is not es¬topped from pleading his minority 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 founded on the contract, the minor is not estopped from setting up the minority.

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. Necessaries would include such items as food, clothing, accommodation, expenses on education, medical treatment, etc., and not items of comfort or luxury. It would depend on the socio-cultural status of the minor.

7. Specific performance: Since an agreement by a minor is absolutely void, the court will never direct the ‘specific performance’ of such an agreement by him.

8. Minor Partner: A minor being incompetent to contract cannot be a partner in a partnership firm, but under Section 30 of the Indian Part¬nership 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.

9. Minor Agent: A minor can be an agent (Sec. 184). He shall bind the prin¬cipal by his acts done in the course of such an agency, but he cannot be held personally liable for negligence or breach of duty.

10. Minor and insolvency: A minor cannot be adjudicated insolvent, as he is incapable of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his property is liable (Sec. 68).

11. Minor as a shareholder: A minor can become a shareholder of fully paid shares through transfer if he applies for registration of transfer through his guardian. However, if a minor makes an application for shares, the company will refuse to allow him shares because being incompetent, he will have no liability to pay the amounts due on the shares.

12. No liability of parents or guardians: The parents or guardians of the minor are not liable for the contracts entered into by the minor. How¬ever, in certain cases the parents or guardians of the minor may enter into contracts on behalf of the minor for his benefit. In such cases, the parents or guardians shall be liable to the contracting party.

13. Liability for torts: A minor is liable for a tort (civil wrong), provided the tort is independent of a contract.

Capacity to Contract – CA Foundation Law Study Material

Question 2.
Write Short Notes on the following:

  1. Minor’s liability with respect to necessaries of life
  2. Alien Enemies
  3. Foreign Sovereigns & Diplomats
  4. The company as a person incompetent to contract

Answer:
1. According to the provisions of Section 68 of the Indian Contract Act, 1872, in the event of necessaries of life supplied to an incompetent person or to his dependent by another person, that other person is entitled to claim reimbursement from the properties of the incompetent person, if any. Thus in case necessaries of life are supplied by a person to a minor, then person providing the same can recover the reimbursement for his expenses from the properties of the minor if any. Minor shall not incur any personal liability for the expenses, since he cannot be held personally liable.

Further, the estate of the minor shall be held liable for the necessaries supplied, provided the goods and services supplied by the person to the minor should be regarded as ‘necessaries’ ie. reasonably required to support his standard of living and the minor must not already be inadequate possession of the same.

2. A contract with an alien friend is valid subject to the law of our country. However when an alien friend is declared as an alien enemy, due to the declaration of war between his country and the Republic of India, then he is disqualified from entering into a contract with any national of India so long as the war or the declaration continues.
Any contract with an alien enemy is not only void ab initio on account of the incompetence of the contracting party, but it is also treated as illegal.

Further, any contract formed prior to the declaration of war in respect of which performance is still outstanding becomes void subsequently due to change in circumstances.

3. Foreign sovereigns and ambassadors: One has to be cautious while entering into contracts with foreign sovereigns and ambassadors, because whereas they can sue others to enforce the contracts, they cannot be sued in the Indian Courts, except in the following two cases :

(a) Where they voluntarily submit themselves to the Court.
(b) Where the person intending to sue them obtains the approval of the Central Government.

Thus they are in a privileged position and are ordinarily considered incompetent to contract.

4. Joint-stock company and corporation incorporated under a Special Act (Like LIC, RBI, 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 person) cannot enter into contracts of a strictly personal nature e.g., marriage.

Capacity to Contract – CA Foundation Law Study Material

Question 3.
“A person who is usually of unsound mind but occasionally of sound mind may enter into a valid contract when he is of sound mind”, explain.
Answer:
As per section 11 of the Contract Act, for a valid contract, it is necessary that each party to the contract must have a ‘sound mind’. What is a ‘sound mind’? Section 12 of the Contract Act defines the term ‘sound minds 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:

  • “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.

Question 4.
“Though minor is not competent to contract nothing in the contract act prevents him from making the other party bound to the minor”. Discuss.
Answer:
According to the provisions of section 11 of the Indian Contract Act, 1872, a minor is incompetent to contract and any contract made with a minor is void ab initio. A minor can never be held personally liable for the contracts entered into by him. Thus no person can enforce any contract against a minor and cannot claim any restoration of benefits or compensation against the minor. However, the courts, with an intention to protect the interest and the rights of the minor, allow minors to enforce contracts where he is a party as a beneficiary and no personal obligation is to be borne by him. Thus in respect of contracts where the minor is entitled to benefits, rights, and interest (without any subsisting legal obligations), the enforcement of such contracts shall be permitted to the minor. Therefore in cases where the minor is a payee, endorsee, or promise to a contract or a negotiable instrument, he can seek its enforcement in the court of law.

Capacity to Contract – CA Foundation Law Study Material

Question 5.
Ishaan, aged 16 years was studying in an engineering college. On 1st March 2016, he took a loan of ₹ 2 lakhs from Vishal for the payment of his fees and agreed to pay by 30th May 2017. Does Ishaan possess assets worth ₹ 15 lakhs. On the due date, Ishaan fails to pay back the loan to Vishal. Vishal now wants to recover the loan from Ishaan out of his assets. Decide whether Vishal will succeed referring to the provisions of the Indian Contract Act, 1872.
Answer:
Hint: Claim for necessaries of life supplied to a minor can be made from the properties of the minor if any; education expenses amount to necessaries of life; Vishal can recover the amount of loan of X 2 lakhs from the properties of the minor Ishaan.

Question 6.
A minor fraudulently misrepresent is the age to Mr. X, a moneylender, and executes a mortgage deed for ₹ 20,000. The minor subsequently denies his liability on the deed. Comment.
Answer:
Hint: Contracts with minor are void ab initio; no personal liability of the minor; rule of estoppel does not apply against a minor and he can plead minority in his defense. The mortgage deed is void ab initio and the moneylender has no right of action against the minor.

Capacity to Contract – CA Foundation Law Study Material

Question 7.
A executes a promissory note in favor of Mr. X during his minority. The promissory note is later on renewed by A on the attainment of his majority. Mr. X wants to bring a suit for the recovery of his amount due on the basis of the second note. Comment.
Answer:
Hint: A minor cannot ratify the contracts made by him during his minority; the contract made during minority shall be void ab initio in spite of the subsequent approval given on the attainment of majority; Mr. X cannot recover any sum even on the second note since ratification is not possible.

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