Contractual Capacity

 

                                                                        Contractual Capacity

 

(Incapable persons, rules regarding Minor's agreement, persons of unsound mind and disqualified persons)

 

One of the essential elements for a valid contract is the contractual competence or capacity of the parties. Capacity of the parties means their ability to enter into contract. Contract is the result of consensus ad idem of two parties or the parties involved. It means the opinion of the parties must be the same, and added to this they must have mental, physical and statute ability to give opinion on any matter. They must possess the capacity to comprehend the value, volume and nature of obligation arising out of the contract.

 

A Valid contract requires that contracting parties must have contractual capacity.

Nepalese Contract Act 2056 in its Sec. 3 reads as, "Except person, who has not completed 16 years of age, or who is of unsound mind, any person is deemed to have capacity to contract." Similarly, Sec. 3(2) states a person not declared disqualified under the current law is also competent to contract."

 

Sec.11 of Indian Contract Act 1872 provides that "Every person is competent to contract (a) who is of age of majority according to the law to which he is subject; (b) who is of sound mind; and (c) who is not disqualified from contracting by any law to which he is subject.

 

From the above elaborations we can draw a conclusion that a person who is of age of majority according to the law to which he is subject, who is of sound mind and  who is not disqualified from contracting by any law to which he is subject is considered as capable or competent for entering into a contract:

 

Incapable persons

A person is considered as incapable or incompetent for entering into a contract:

 

                      i.            If he is a minor

                    ii.             If he is of unsound mind, and

                  iii.             If he is disqualified, by any law to which he is subject, from contracting.

 

Rules regarding Minor's agreement

 

Meaning of minor

In law, a minor is a person under a certain age; usually under the age of majority. This age legally demarcates childhood from adulthood. The age as minor depends upon jurisdiction and application of the country one is subject to. The concept of "minor" is not sharply defined in most jurisdictions. The ages of criminal responsibility and consent, the age at which legally binding contracts can be entered into, and so on, may all be different.

 According to Nepalese Contract Act 2056 a person, who has not completed 16 years of age is not capable to enter a contract that means someone below 16 is a minor.

 

According to sec. 3 of Indian Majority Act 1875, a person, domiciled in India, who has not completed his 18 years of age, is considered to be a minor.

     

Rules or Laws Relating To Minor's Agreement

Contractual Capacity is the legal ability to enter into a contract. Minors have particular rights and obligations established by the court when it comes to contracts. Legally, a minor is not a competent person and cannot be a party in a contract. A contract entered by a minor is not enforceable, however, he can bind others by entering into contract but he cannot be held responsible to the counter part for his words and obligation. As per Indian laws, a minor is allowed, to take advantages of his acts but does not incur any kind of obligation. He cannot be held personally liable for any of his wrongs. No legal action can be taken against him even for his misbehavior or false promise. Only his property is liable that too for his necessities.

 

Law has made the position of a minor is very safe. A lot of privileges have been provided to minor. The followings are the rules relating to Rules regarding Minor's agreement which clearly indicate the minor's position in a contract:

 

1. An Agreement with a Minor is absolutely void and Inoperative

 

      An agreement with a minor has no legal effect. It has been held to be void ab initio. It is not only void but is absolutely void and inoperative. If a business is carried by or with a minor, he cannot be held liable for the agreements relating to transactions. He has all right to claim benefits and profit but he is not responsible for any loss and liability.

 

Example:

In a case of mortgage a minor executed a mortgage for a loan of Rs. 20,000 and received Rs. 8000 only from the mortgagee. As the property was mortgaged, Dharmodas sued against to whom property was mortgaged, for setting aside the mortgage. The court held that according to sec. 10 and 11 of Indian Contract Act the minor's agreement is void, thus the mortgage was also declared void.

However, Mohori Bibi prayed in the Privy Council for refund of the amount of loan by the minor. In this case, it was held that the money advanced to minor cannot be recovered because minor's agreement was void ab initio. (Mohori Bibi vs. Dharmodas Ghosh (1903). Cal. 539)

 

2. Rule regarding Contract for the benefit of a minor

 

The agreement in which a minor gets benefit is enforceable in court. If minor is a beneficiary in a mortgage, he can take verdict. If a promissory note is drawn in favour of minor, it is enforceable in court. Thus, a Minor can be a Promisee

 

Example:

Doyle, a boxer entered into contract with white city stadium for the license from British Boxing Board. The condition was that if he becomes disqualified the deposited amount will be fortified by white city stadium. Doyle was declared disqualified. However, he sued for the amount of deposit and thus, in this case, court gave decision in the favour of Doyle on the ground that he was a minor. (DOYLE vs. WHITE CITY STADIUM (1935) 1 KB 110)

 

3. The Minor's Liability for the Payment of a Reasonable Price for Necessary Supplies

 

      Sec. 68 of Indian Contract Act 1872 describes that "If person, incapable of entering into contract or any one whom he is legally bound to support, is supplied by another person, who has furnished such supplies, is entitled to be reimbursed from the property of such incapable person".

 

      Accordingly, the supplier can enjoy only quasi-contractual right for the supply of necessaries. However, even in this case minor is not personally liable but his property is liable. If minor owns no property, he cannot be held responsible and supplier will lose the price of necessaries. Again, for the supplies, supplier can recover only the reasonable price, but not additional or agreed price.

 

Examples:

                    I.            A supplied B, a minor, with necessaries suitable to his condition in live. A is entitled to be reimbursed from B's property.  (Food Supplies – Liable To Pay)

 

Necessaries of a Minor

 The following are the necessaries of a minor

·         Fooding, lodging, education, medical expenses.

·         The cost for marriage of a minor's sister.

·          The cost of defending a minor in civil and criminal proceedings

·          Funeral ceremonies of the family members.

·          Shradha ceremonies of the ancestors

·           Loan to maintain social prestige

 

"What is necessary Article" is to be determined with references to the status and circumstances of the particular minor.

Examples

 

a) Inman – a minor and undergraduate student in Cambridge (Trinity College) bought Eleven fancy waistcoat suited to his condition of life from Nash. Nash sued against Inman for the recovery of £ 145. Here, in this case, court of Appeal gave verdict in favour of the defendant that 11 fancy, extra vagant and ridiculous style waistcoat could not be necessary for a minor and plaintiff could not recover the cost. (NASH vs. INMAN (1908) 2 KB. 1)

 

(b) Trading by a minor – he is not responsible for any loss. It is also not necessaries.

 

4. Minor can be a Beneficiary

 

      Minor can be a beneficiary and contract in which minor gets something cannot be void. Though the contract itself is void, it can be enforced in court by minor in his favour.

 

5. No Ratification of an agreement with a minor

Ratification means the subsequent adoption and acceptance of an Act or agreement. Contract by a minor is void ab initio (from the very beginning). So, it cannot be ratified. A minor, who enters into a contract, cannot ratify it even after becoming major.

 

 

6. Rules regarding Compensation / Restitution

 

      No liability is to repay any money or to compensate for any benefit that a minor might have received under a void contract. Sec. 41 of the Indian Special Relief Act 1963 clears that a minor cannot be compelled to compensate for or refund any benefit which he has received under a void agreement. Here, court can only request the minor.

 

Example:  "A" a minor sold his shop to "B". Selling price was received. However, due to minority of age, registration was not passed. B could not recover the money which was paid as price for the shop.

 

7. Doctrine of Estoppel does not apply to a minor

Estoppel is a rule of evidence that a person cannot deny having done something which is recorded in a deed. This Doctrine of Estoppel does not apply to a minor. A minor is not bound by his misrepresentation. If a minor enters into contract fraudulently representing him to be a major, he cannot be prevented from pleading his minority in defense. Here, in such a situation, court may request the minor to compensate the other party or return the purchased item or in case of resale, refund the money but cannot compel or issue the order of estoppel as is found in the case of majority.

 

Sec. 115 of Indian Evidence Act and LORD HALSBURY describes ESTOPPEL as "Estoppel arises when you are precluded from the denying the truth of anything, which you have represented as a fact although it is not a fact. Even this rule of Estoppel does not apply to a minor".

 

8. Minor can act as an Agent

 

      A minor can be an agent. He can represent his principal. He can draw, deliver and approve negotiable instruments without himself being liable. Principal will be responsible for the act or forbearance of minor, but principal cannot sue against minor.

 

9. Rule regarding Minor as a Partner

 

      Business, trading and other activities are not necessaries to a minor. However, a minor can be a partner in a partnership firm but only for benefit and profit. His liability will be limited up to the limit of his interest.

 

10. Minor's Position in Joint Stock Co.

 

      A minor can be a shareholder in Joint Stock Co., but the name of lawful guardian must be declared. And, company should also issue fully paid up share to minor but not partly paid share.

 

11. A Minor cannot be declared Insolvent

 

      Business is not necessary for a minor, even for necessary supplies, a minor cannot be held liable personally. If someone is not personally liable, he cannot be declared insolvent.

 

12. Surety for a Minor

      In a contract of Guarantee, if a minor is debtor and a creditor has granted loan to him as against guarantee given by surety, and if minor fails to pay the amount of loan to the creditor, surety is liable for minor's default. Furthermore, Surety cannot recover that amount from minor.

 

13. Minor in Negotiable Instrument

      By drawing, accepting or endorsing a negotiable instrument- promissory note, Bills of Exchange or cheque, a minor can bind others but not himself. A minor cannot be a party in negotiable instrument. Promissory note written and signed by a minor is meaningless. Bill of exchange accepted by a minor is also not effective and operative in the eye of law.

 

 

B. PERSONS OF UNSOUND MIND

 

Meaning of unsound mind and Contract with persons of Unsound Mind

 

A person who is not of sound mind is said to be of unsound mind. A person who is an      idiot, lunatic or insane is a person of unsound mind.

      For a valid contract both the parties in a contract must possess sound mind. It means, a person, who is not of sound mind, cannot be a party in a contract. He has, legally, no contractual capacity. A person of unsound mind has no rational judgments over the objectives, cannot understand the term and condition and cannot calculate the consequence of a contract.

 

The state of absence of Sound Mind is Unsound Mind. According to sec. 12, of the Indian Contract Act 1872, "SOUND MIND" is defined in this manner:

 

      "A person is said to be of sound mind for the purpose of making contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interest".

 

      The above definition can be explained in the following manner too:

 

a)      A person may make a contract when he is of sound mind even if

·         He is of unsound mind usually

·         He is of unsound mind occasionally.

 

b)      A person may not make a contract when he is of unsound mind even if

 

·         He is of sound mind usually

·         He is sound mind occasionally.

The above discussion clears that soundness of mind of person is the legal requirement to a person entering into a contract.

 

The test of Soundness of mind

 

      I.   Capacity to understand the business concerned

      II. Ability to form a rational judgment as to its effect on a person's interest.

     III. Ability to calculate the consequences of the contract.

 

Thus, based upon above discussion, the following persons are considered as possessing no sound mind:

 

THE PERSONS NOT CONSIDERED AS OF SOUND MIND

 

1. LUNATICS

2. IDIOTS

3. DRUNKEN OR DELIRIOUS PERSONS

 

1. Lunatics: Lunatic is one, whose mental powers are disturbed so that he cannot form a rational judgment on any subject. Lunacy is an illness of the brain. It causes strain of mind.  In this condition, the brain sense is found affected in such a manner that person concerned cannot form a rational judgment.

 

       Lunacy is generally not complete and permanent insanity (madness).It may return to sanity (judgment) condition for a short and long period.

Rules regarding contract with Lunatics:

 

· Contract made with lunatics are void. However, if a person enters into an agreement in lucid intervals is valid.

· A lunatic cannot be held responsible personally. However, for necessaries supplied, the property of lunatic is liable.

 

Examples:

                    I.            A supplied the wife and children of B, a lunatic, with necessaries suitable to their condition in live. A is entitled to be reimbursed from B's property(Food Supplies – Liable To Pay)

 

2. IDIOTS: Some people suffer from a state of naturally underdeveloped mind called Idiocy and are called Idiots. These are the persons whose mental powers are completely absent. Lunacy can sometimes be cured, but idiocy is incurable, because it is a congenital defect caused by lack of development of brain.

Rules regarding contract with Idiots

The contracts/agreements entered by idiots are void. However, as in the case of lunatic, an agreement for necessaries supplied by any one, the property of idiot is liable.

 

3. Drunken or Delirious Person

 

      Drunkenness or deliriousness produces temporary unsoundness and incapability of mind. This state is generally due to having intoxicants. The mental faculties are clouded for a time, so rational judgment cannot be formed.

Rules regarding contract with Drunken or Delirious Person:

 

·         A person is intoxicated or delirious sufficiently but not ordinarily, cannot understand the effect of contract and form rational judgment so the contract cannot be valid.

·         The partial and ordinary drunkenness is not sufficient to avoid a contract.

·          For necessaries supplied by the parties, the property of these persons is liable.

 

C. PERSONS DISQUALIFIED BY LAW

 

In addition to minors and persons of unsound mind, there are others who are disqualified from contracting under the provision of some other laws and they are:

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1. Foreign Sovereigns, Ambassadors and Foreign Representatives:

 

 No individual contract with Foreign Sovereigns, Ambassadors and Foreign Representatives is safe. Thus, the foreign sovereigns, ambassadors or their accredited representatives cannot be a party to enter into contract. They cannot be sued by any person because they are free from the Civil Liability created by the law of other country.

However, if they choose voluntarily, they can enter into contract and enforce them in courts.

 

2. Alien Enemy

 

 An Alien is a person who is not a citizen of land. If the state of alien is at peace relation, he is called alien friend and is allowed under defined categories to conduct business and enjoy contractual capacity. On the contrary, if there exists breach of peace or outbreak of war, same person will be treated as alien enemy and according to law, alien enemy cannot enjoy contractual capacity.

 

Example

 

Zinc Corporation entered into contract with alien enemy to sale the product of mine before outbreak of war. However, before accomplishment of contract, a war broke out between these two countries of contracting parties. Here, the buyer became an alien enemy and court decided that "the contract must be declared void", stating that if it was permitted and enforced to be accomplished then the produce of the mine could not be availed for the national interest.

(ZINC CORPORATION vs. HISET (1916) K.B. 41 C.A.)

 

3. Professional Persons

There are some professionals in every country who can't sue for the fee of the service they provide and thus don't posses contractual capacity for fees. In England, the fellow of Royal College like Barristers and Doctors having FRCS and FRCP cannot sue against clients and patients for fees as the profession is accepted as prestigious. However, in India, the barristers who are registered and enrolled as an advocates under bar Council Act 1927 and Advocates Act 1961 enjoy the right of suit and enter into contract. Before these Acts, English law was enforced in India and under it neither they could be sued nor were they legally permitted to sue for the fees.

 

4. Corporation

 

A corporation is an artificial person. It enters into contract through its agents: – Board of Directors & Executives. As it is an artificial person, it has only legal possibility. It has no natural possibility. It can perform only what is spelled in its Memorandum of Association (M/A) as its statute powers.

 

Again, a corporation cannot act as a person acts. It cannot enter into contracts relating to personal ability.

 

5. Married Woman

 

      Before married Woman Property Act 1882, in England, woman had no contractual power. In India, law does not make any distinction between contractual power of man & woman. Woman can enter into contract and for that woman's property is liable. However, for necessaries, her husband is liable.

 

 

6. Convicts

 

Convicts or prisoners till they are in undergoing sentence are incapable to enter into any agreements. Only after the expiry of the sentence or state pardons this inability will come to an end and enjoy full contractual right, if otherwise, is not provisioned in any relating Acts.

Capacity to contract - Unsound Mind and Disqualification by law (A brief Summary)

In addition to minors, some other persons are able to avoid contracts. Mentally impaired and intoxicated people, convicts, and aliens lack the capacity to enter into a contract.
1) A person who is not of sound mind is said to be of unsound mind. That is a person who is an  Idiot; lunatic, insane person is a person of unsound mind.
2) It has to be understood that a person has to understand the nature of the contract he is entering into. He has to make rational judgment and understand the terms and conditions of the contract, for this purpose he has to be of sound mind. A person who is an idiot, lunatic and insane cannot understand the terms of the contract. Certain types of unsoundness of minds such as idiot are acquired since birth and others such lunacy and insanity are acquired later.
3) A person who is of unsound mind can be under lucid interval at certain times. Lucid interval is a state where he is not of unsound mind and can form a rational judgment about the terms of the contract.
At this state of lucid interval he can enter into a contract but if he has entered into a contract when he is not under lucid interval then that contract is void.  Eg: A who is undergoing treatment at a mental asylum escapes from there and goes back to his native where he enters into a contract to sell his ancestral property. Such a contract is totally void as he is a person who was undergoing treatment at an asylum.
4) Drunken state- Mere drinking is not a hindrance to enter into a contract. But drunken state of mind is a hindrance to enter into a contract. When a person is so drunk that he cannot form a rational judgment about the terms and conditions of the contract then such contract is a void contract. But if he is at such a state of mind where he has consumed alcohol but he can still understand the terms and conditions of the contract then that contract is valid as he could understand the terms and conditions of the contract that is why it is said that mere drinking is not a hindrance to contract.
5) Persons disqualified by law:
Certain persons are disqualified by law from entering into a contract, they are as follows:
1) Alien enemy- Persons from a country with whom the country is in a state of war or is already at war with.
2) Criminals.
3) Illegal immigrants from foreign countries who do not have a valid passport and other necessary documents.