CAPACITY TO CONTRACT
Introduction
‘Capacity to Contract’ means competency of the parties to enter into a valid contract. Competency of the parties is an essential element of a valid contract.
According to Section 10 of the Contract Act, “all agreements are contracts if they are made by free consent of parties competent to contract." Thus Section 10 requires parties to be competent to contract.
Section 11 of the Contract Act declares that a person is incompetent to contract under the following circumstances:
1. If he is a minor, according to the law to which he is subject.
2. If he is of unsound mind and
3. If he is disqualified from contracting by any law which he is subject.
4. Incapacity to contract may arise out of mental deficiency and status. Incapacity arising out of mental deficiency may be due to minority, idiocy, lunacy or drunkenness. Incapacity arising out of status may be divided into political or civic, professional, artificial or corporate, and married.
The term minor includes any person, male or female who has not attained the age of majority. According to Section 2(e) of the Citizenship Act, 1955, a minor is a person who has not attained the age of majority.
Minority means the status of any person who has not completed the age of 18 years. Age is reckoned only from birth. In England by Family Law Reform Act, 1969, every person under 18 years of age is a minor. The age of majority being 18 years, a person less than that age even by a day would be a minor for the purpose of contract.
According to Section 3 of the Indian Majority Act, 1875, person, domiciled in India, who is under 18 years of age is a minor. Accordingly, every person who has completed the age of 18 years becomes a major. But minors, for whose person or property or both a guardian is appointed by a Court, and minors of whose property superintendence has been assumed by a Court of Wards, attain majority at the age of 21 years.
An agreement with a minor is absolutely void and inoperative. It is considered to be a nullity and non-existent from the very beginning.
For Example, A is 17 years and 10 months old. He needs some money to go on a tour. He approached a moneylender and borrows Rs 12,000. As security, he signs some papers mortgaging his laptop. Two months later, when he attains the age of majority, he files a suit declaring that the mortgage executed by him when he was a minor is void and should be cancelled. The Court agrees and relieves him of all liability to repay the loan.
Mohori Bibee vs Dharmodas Ghosh
A landmark case held in the year 1903 in which the court held that a minor’s agreement is void-ab-initio that means any agreement with a minor is void from the very beginning itself.
Facts of the case– Dharmodas Ghosh being a minor mortgaged his immovable property to a money lender Brahmo Dutt and secured a loan of Rs.20,000 at 12% interest rate per year. Later on, the plaintiff only paid Rs.8000 and refused to pay the rest of the amount. His mother(legal guardian) took the defence that his son being a minor was not liable for his actions and not bound to pay the sum.
Judgment – The Privy Council held that a minor is incompetent to contract (section 10) and an agreement with such a person cannot be enforced. Thus, Brahmo Dutt’s appeal was dismissed as there was no contract between the parties.
The Privy Council held that the Act makes it essential that all contracting parties should be competent to contract and the Act specially provides in Section 11 that a person, who by reason of minority or infancy, is incompetent to contract cannot make a contract, within the meaning of the Act. It was accordingly held that a mortgage made by a minor was void.
Restitution means ‘restoring’ (i.e. 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, 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 the Specific Relief Act, 1963, the Court may, however, in certain cases, while ordering for the cancellation of an instrument, at the instance of a minor, require the minor plaintiff to make compensation to the other party to the instrument. Thus, the Court will compel restitution by a minor when he is a plaintiff.
For example, if a minor sells a house for Rs. 50,000/- 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.
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. While no liability can be incurred by a minor, he is not debarred from accepting a benefit. If a minor has advanced mortgage money and there is a mortgage in his favor, he can sue for enforcement of the contract. Similarly, a minor can sue on a Promissory Note executed in his favor. For the same reason, if a contract is made on behalf of the minor by his guardian and for the benefit of the minor, he is entitled to sue on contract.
Example, A lends some money to his neighbour, B and asks him to mortgage his house as security. B agrees and the mortgage deed is made favouring A’s 10-year-old son – C. B fails to repay the loan and A, as the natural guardian of C, files a suit against B to recover his money. The Court holds the case since a minor can be a beneficiary of a contract.
A minor’s agreement being a nullity and void- ab-initio has no existence in the eyes 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. A consideration furnished in respect of a transaction during minority cannot be considered to be a valid consideration for a subsequent promise after attaining majority and thus no ratification is possible of a promise made by a person during his minority. A contract by a minor is void. A void contract which is a dead letter cannot be revived and cannot constitute a valid consideration for a subsequent contract and therefore a transaction entered into by a minor during minority, cannot be ratified. Every contract needs a separate consideration and consideration which passed under the earlier contract cannot be imported into the contract which the minor entered on attainment of majority.
Suraj Narain Vs Sukhu Aheer
Facts of the case– In this case, a minor executed a promissory note in favour of a money lender while he took a loan of Rs. 11,000 from him. After attaining the age of majority, he executed a secondary note in favour of the same person.
Judgment – The court held that the minor was not liable as the agreement cannot be ratified even after the minor attains the age of majority. Both the promissory notes will not be binding on him.
A minor is not stopped 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 an infant represents fraudulently or otherwise that he is of the age of majority and thereby induces another to enter into a contract with him, then in an action founded on the contract, the infant is not estopped from setting up infancy. 'Estoppels' means that if a person causes another person to believe a thing to be true and to act upon such belief, then he will not be allowed denying the truth of that thing. But if anything is traceable in the hands of minor, out of the proceeds of the contract 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.
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 anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, person who has furnished with, such supplies, is entitled to be reimbursed from the property of such incapable person”
Kuwarlal Vs Surajmal
Facts of the case– In this case, a minor was provided with a room by the plaintiff for
living so that he can continue his studies, the plaintiff filed the suit against the
Minor to claim the rent of the room when he refused to pay.
Judgment – The court held that as the room being provided was the same as
supplying necessary for the minor thus here as per section 68, a specific amount
can be claimed by the plaintiff as he is entitled to be paid from the minor’s property.
Since an agreement by a minor is absolutely void, the court will never direct ‘specific performance’ of such an agreement by him.
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 ‘benefit of partnership’ by an agreement executed by his guardian on his behalf, with the consent of all the partners.
A minor can be an agent (Section 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 of Breach of duty. Thus in appointing a minor as an agent, the principal runs a great risk.
A minor cannot be adjudicated as 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. (Section 68).
A minor is incapable of entering into a contract because an agreement by a minor is void. A minor cannot appoint an agent or in other words a minor cannot become a principal. However, a minor can be appointed as an agent. He can represent his principal in dealing with other parties. The principal will be responsible to third parties for the act of his minor agent. The principal, however cannot hold the minor agent personally responsible for any wrongful acts.
Section 11 of the Contract Act declares that a person is incompetent to contract under the following circumstances:
1. If he is a minor, according to the law to which he is subject.
2. If he is of unsound mind and
3. If he is disqualified from contracting by any law which he is subject.
4. Incapacity to contract may arise out of mental deficiency and status. Incapacity arising out of mental deficiency may be due to minority, idiocy, lunacy or drunkenness. Incapacity arising out of status may be divided into political or civic, professional, artificial or corporate, and married.
Position of a Minor
The term minor includes any person, male or female who has not attained the age of majority. According to Section 2(e) of the Citizenship Act, 1955, a minor is a person who has not attained the age of majority.
Minority means the status of any person who has not completed the age of 18 years. Age is reckoned only from birth. In England by Family Law Reform Act, 1969, every person under 18 years of age is a minor. The age of majority being 18 years, a person less than that age even by a day would be a minor for the purpose of contract.
Nature and Effects of Minor's agreement
According to Section 3 of the Indian Majority Act, 1875, person, domiciled in India, who is under 18 years of age is a minor. Accordingly, every person who has completed the age of 18 years becomes a major. But minors, for whose person or property or both a guardian is appointed by a Court, and minors of whose property superintendence has been assumed by a Court of Wards, attain majority at the age of 21 years.
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. It is considered to be a nullity and non-existent from the very beginning.
For Example, A is 17 years and 10 months old. He needs some money to go on a tour. He approached a moneylender and borrows Rs 12,000. As security, he signs some papers mortgaging his laptop. Two months later, when he attains the age of majority, he files a suit declaring that the mortgage executed by him when he was a minor is void and should be cancelled. The Court agrees and relieves him of all liability to repay the loan.
Mohori Bibee vs Dharmodas Ghosh
A landmark case held in the year 1903 in which the court held that a minor’s agreement is void-ab-initio that means any agreement with a minor is void from the very beginning itself.
Facts of the case– Dharmodas Ghosh being a minor mortgaged his immovable property to a money lender Brahmo Dutt and secured a loan of Rs.20,000 at 12% interest rate per year. Later on, the plaintiff only paid Rs.8000 and refused to pay the rest of the amount. His mother(legal guardian) took the defence that his son being a minor was not liable for his actions and not bound to pay the sum.
Judgment – The Privy Council held that a minor is incompetent to contract (section 10) and an agreement with such a person cannot be enforced. Thus, Brahmo Dutt’s appeal was dismissed as there was no contract between the parties.
The Privy Council held that the Act makes it essential that all contracting parties should be competent to contract and the Act specially provides in Section 11 that a person, who by reason of minority or infancy, is incompetent to contract cannot make a contract, within the meaning of the Act. It was accordingly held that a mortgage made by a minor was void.
2. No Restitution
Restitution means ‘restoring’ (i.e. 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, 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 the Specific Relief Act, 1963, the Court may, however, in certain cases, while ordering for the cancellation of an instrument, at the instance of a minor, require the minor plaintiff to make compensation to the other party to the instrument. Thus, the Court will compel restitution by a minor when he is a plaintiff.
For example, if a minor sells a house for Rs. 50,000/- 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.
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. While no liability can be incurred by a minor, he is not debarred from accepting a benefit. If a minor has advanced mortgage money and there is a mortgage in his favor, he can sue for enforcement of the contract. Similarly, a minor can sue on a Promissory Note executed in his favor. For the same reason, if a contract is made on behalf of the minor by his guardian and for the benefit of the minor, he is entitled to sue on contract.
Example, A lends some money to his neighbour, B and asks him to mortgage his house as security. B agrees and the mortgage deed is made favouring A’s 10-year-old son – C. B fails to repay the loan and A, as the natural guardian of C, files a suit against B to recover his money. The Court holds the case since a minor can be a beneficiary of a contract.
4. No ratification
A minor’s agreement being a nullity and void- ab-initio has no existence in the eyes 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. A consideration furnished in respect of a transaction during minority cannot be considered to be a valid consideration for a subsequent promise after attaining majority and thus no ratification is possible of a promise made by a person during his minority. A contract by a minor is void. A void contract which is a dead letter cannot be revived and cannot constitute a valid consideration for a subsequent contract and therefore a transaction entered into by a minor during minority, cannot be ratified. Every contract needs a separate consideration and consideration which passed under the earlier contract cannot be imported into the contract which the minor entered on attainment of majority.
Suraj Narain Vs Sukhu Aheer
Facts of the case– In this case, a minor executed a promissory note in favour of a money lender while he took a loan of Rs. 11,000 from him. After attaining the age of majority, he executed a secondary note in favour of the same person.
Judgment – The court held that the minor was not liable as the agreement cannot be ratified even after the minor attains the age of majority. Both the promissory notes will not be binding on him.
5. The rule of estoppels does not apply to a minor
A minor is not stopped 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 an infant represents fraudulently or otherwise that he is of the age of majority and thereby induces another to enter into a contract with him, then in an action founded on the contract, the infant is not estopped from setting up infancy. 'Estoppels' means that if a person causes another person to believe a thing to be true and to act upon such belief, then he will not be allowed denying the truth of that thing. But if anything is traceable in the hands of minor, out of the proceeds of the contract 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.
6. Minor’s liability for necessaries
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 anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, person who has furnished with, such supplies, is entitled to be reimbursed from the property of such incapable person”
Kuwarlal Vs Surajmal
Facts of the case– In this case, a minor was provided with a room by the plaintiff for
living so that he can continue his studies, the plaintiff filed the suit against the
Minor to claim the rent of the room when he refused to pay.
Judgment – The court held that as the room being provided was the same as
supplying necessary for the minor thus here as per section 68, a specific amount
can be claimed by the plaintiff as he is entitled to be paid from the minor’s property.
7. Specific performance
Since an agreement by a minor is absolutely void, the court will never direct ‘specific performance’ of such an agreement by him.
8. Minor As 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 ‘benefit of partnership’ by an agreement executed by his guardian on his behalf, with the consent of all the partners.
9. Minor As Agent
A minor can be an agent (Section 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 of Breach of duty. Thus in appointing a minor as an agent, the principal runs a great risk.
10. Minor and Insolvency
A minor cannot be adjudicated as 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. (Section 68).
11. Minor in an Agency
A minor is incapable of entering into a contract because an agreement by a minor is void. A minor cannot appoint an agent or in other words a minor cannot become a principal. However, a minor can be appointed as an agent. He can represent his principal in dealing with other parties. The principal will be responsible to third parties for the act of his minor agent. The principal, however cannot hold the minor agent personally responsible for any wrongful acts.
12. Minor in a Contract of Marriage –
The arrangement of the marriage of minors is enforceable by law as it is considered beneficial for them. One thing to note is marriage can take place after attaining majority only arrangements are made here.
13. Minor as a shareholder –
A minor cannot act as a shareholder of any company.
A minor can draw, deliver and endorse negotiable instruments without himself being liable.
Subject to certain conditions, a minor can become a member of a friendly society, an industrial and provident society, a trade union or building society provided such memberships are for the benefit of the minor or a requirement of conditions of service or for the welfare of the minor or his Family. Under Section 21 of the Trade Union Act, 1926, a person who has attained 15 years of age can become a member of a trade union.
A contract of insurance by a de-facto guardian of minor in respect of the minor’s goods and property is held valid. It is being for the benefit of the minor. The minor would be entitled to sue thereon. However contract of insurance against the person of minor is not valid.
When a document is executed by a minor and a major, the document is void in respect of minor and valid in respect of major. It can be enforced against the major person.
The Indian Apprentices Act, 1850 provides for service contracts to be entered into by the guardian of a minor for the minor’s benefit is binding on minors. Minor’s contract for service is void, whereas that of apprenticeship is valid.
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. A person is said to be of a 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 effects upon his interest.
A person of unsound mind can be-
Idiots are those people who are devoid of thinking capacities and thus are unable to make rational judgements. Contracts with such person are void, except for the necessities ones.
Lunatics are the persons whose mental faculties are deranged. These types of persons don’t have lunatic periods for a continuous period of time, but it exists for a sporadic moment. The contracts with them are void, except if it can be proved that it was entered when the person was having sound mind or contracts made for is necessities, in which case his estate will be liable.
A person who is usually of unsound mind, but occasionally of sound mind can make a contract when he is of sound mind. Similarly, a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
For example- A patient in a lunatic asylum, who is at intervals of sound mind, may enter into a contract during those intervals.
A sane person, who is delirious from fever or who is so drunk that he cannot understand terms of a contract or form a judgement can not enter into a contract at that time.
Drunkard is a person who is under the impression of alcohol or drugs stands on the same footing as a lunatic person as above discussed.
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." These are:
An alien is a citizen of a foreign State. An alien may be friend or an enemy. Contract with alien friends are valid. But contracts with alien enemies are void. An alien enemy is one whose country is at war with India.
14. Minor and Negotiable Instruments
A minor can draw, deliver and endorse negotiable instruments without himself being liable.
15. Membership of Societies
Subject to certain conditions, a minor can become a member of a friendly society, an industrial and provident society, a trade union or building society provided such memberships are for the benefit of the minor or a requirement of conditions of service or for the welfare of the minor or his Family. Under Section 21 of the Trade Union Act, 1926, a person who has attained 15 years of age can become a member of a trade union.
16. Insurance
A contract of insurance by a de-facto guardian of minor in respect of the minor’s goods and property is held valid. It is being for the benefit of the minor. The minor would be entitled to sue thereon. However contract of insurance against the person of minor is not valid.
17. Joint Documents
When a document is executed by a minor and a major, the document is void in respect of minor and valid in respect of major. It can be enforced against the major person.
18. Contracts of Apprenticeship
The Indian Apprentices Act, 1850 provides for service contracts to be entered into by the guardian of a minor for the minor’s benefit is binding on minors. Minor’s contract for service is void, whereas that of apprenticeship is valid.
Law relating to 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. A person is said to be of a 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 effects upon his interest.
A person of unsound mind can be-
- Lunatic
- Idiot
- Drunken
- Intoxicated
Idiots are those people who are devoid of thinking capacities and thus are unable to make rational judgements. Contracts with such person are void, except for the necessities ones.
Lunatics are the persons whose mental faculties are deranged. These types of persons don’t have lunatic periods for a continuous period of time, but it exists for a sporadic moment. The contracts with them are void, except if it can be proved that it was entered when the person was having sound mind or contracts made for is necessities, in which case his estate will be liable.
A person who is usually of unsound mind, but occasionally of sound mind can make a contract when he is of sound mind. Similarly, a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
For example- A patient in a lunatic asylum, who is at intervals of sound mind, may enter into a contract during those intervals.
A sane person, who is delirious from fever or who is so drunk that he cannot understand terms of a contract or form a judgement can not enter into a contract at that time.
Drunkard is a person who is under the impression of alcohol or drugs stands on the same footing as a lunatic person as above discussed.
Law relating to Contract by Persons Incompetent by Statute
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." These are:
1. Alien Enemies
An alien is a citizen of a foreign State. An alien may be friend or an enemy. Contract with alien friends are valid. But contracts with alien enemies are void. An alien enemy is one whose country is at war with India.
2. Foreign Sovereigns and Ambassadors
Foreign sovereigns, diplomatic staff and representative of foreign staff can enter into valid contract. However, a suit cannot be filed against them, in the Indian courts without the prior sanction of the central Government.
3. A Convict
Convict can’t enter into a contract while he is undergoing imprisonment. But he can enter into a contract with permission of central government while undergoing imprisonment. After the imprisonment is over, he becomes capable of entering into contract. Thus the incapacity is only during the period of sentence.
4. Corporations
A corporation is an artificial person created by law and has no physical existence. There are some contracts into which it cannot enter, e.g., a contract to marry. Further, the powers of a corporation to contract are limited by its Statute, Charter or Memorandum of Association. Any contract beyond such powers is void.
5. Insolvent
When any person is declared as an insolvent, his property vests in receiver and therefore, he can not enter into contract relating to his property. Again he becomes capable to enter into contract when he is discharged by court.
Conclusion
From the above discussion, it can be concluded that the capacity to contract is the legal competence to contract. A person declared as incompetent to contract is the one who is incapable of entering into a contract, and a contract with such a person is unenforceable by law. Further, such persons are also divided into categories such as minor, unsound mind and persons disqualified by law. Any person if falls in any of these categories will be declared as an incompetent person to contract, making his contract void or voidable in certain circumstances. But the court of law also provides relief to certain people, making them incapable of contracting for only a specific period of time such as convicts and insolvents.
Thus, the capacity to contract is an essential element to fulfil the requirements of a valid contract.
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