Business Law

Capacity of Parties

Unit I
CAPACITY
OF
PARTIES
Capacity of Parties

An essential ingredient of a
valid a contract is that the
contracting parties must be
‘competent to contract’
 Capacity of parties.

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”
 Capacity of parties.

Thus the section declares that a person

is incompetent to contract under the
following:-

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 to which he is subject.
 Capacity of parties.

MINOR
Capacity of parties.
 Capacity of parties.

MINOR
According to section 3 of the Indian Majority
Act 1875
“A person domiciled in India, which is under 18
years of age is a minor”.

Accordingly every person who has completed

the age of 18 years become a major.
 Capacity of parties.

But minors of 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.

Section 11 expressly provides that the age of

majority of a person is to be determined
“according to the law to which he is subject”.
 Capacity of parties.

The Courts of Law use to decide the age of

majority by the law of domicile and not by the
law of the place where contract is entered
into.

But the later trend of law for determining the

age of majority is :

(1) In the case of contract relating to

ordinary mercantile transaction , the age of
majority is determined by the law of place
where the contract is entered.
 Capacity of parties.

(2) In the case of contract relating

to Land transaction , the age
of majority is determined by
the law of the place where
the land is situated.
 Capacity of parties.

Minor’s Agreement
1. An Agreement by a minor is absolutely void and
inoperative as against him.

2. Beneficial agreement are valid contracts.

3. No ratification on attaining the age of majority.

4. The rule of estoppels does not apply to a minor.

 Capacity of parties.

5. Minor’s liability for necessaries.

6. Specific Performance.

7. Minor Partner.

8. Minor Agent.

9. Minor and insolvency.

10. Contract by minor and adult jointly.

 Capacity of parties.

11. Surety for a minor.

12. Position of minor’s parent.

13. Minor shareholder.

14. Minor’s liability in tort.

 Capacity of parties.

1. An Agreement by a minor is absolutely void

and inoperative as against him.

 Law act as a guardian of minors and protects

their rights because their mental faculties are
not mature enough to judge what is good and
what is bad for them.

 Where a minor is charged with obligations against

minor, the agreement is deemed as void ab-initio.
 Capacity of parties.

Mohori Bibi vs Dharmo Das Ghosh:-

A minor executed a mortgage for Rs. 20,000 and

received Rs. 8,000 from the mortgagee. The
mortgagee filed a suit for the recovery of his
mortgage money and for sale of the property in
case of default. The Privy Council held that an
agreement by a minor was absolutely void as
against him and therefore the mortgagee can
not recover the mortgage money not could he
have the minors property sold under his
mortgage.
 Capacity of parties

Note:-
No restitution except in certain case

A minor cannot be ordered to make compensation

for a benefit under a void agreement. The court
may 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 as per Section 33 Specific Relief Act,
1963.
 Capacity of parties

Section 33 Specific Relief Act, 1963. is

framed so as to afford relief only in a case
where the minor himself as plaintiff seeks the
assistance of Court and the Section is
inapplicable if he happens to be merely a
defendant in a suit by the person who dealt
with him when he was a minor. This Section is
base on the well known principle that
“he who seeks equity must do equity”.
 Capacity of parties

Jager Nath Singh vs Lalta Prasad

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 before he can recover
possession of the property sold.
 Capacity of parties.

2. Beneficial agreement are valid contracts.

 Any agreement which is beneficial for the minor and

under which he is required to bear no obligation, is
valid.

 The Hindu Minority and Guardianship Act, 1956, also

state that guardian is empowered to enter into a
contract on behalf of the minor and the contract would
be binding and enforceable if it is for the benefit of
the minor.
 Capacity of parties.

Abdul Gafar vs Piare Lal

Where a minor had performed his part of the

agreement and delivered the goods he was
held entitled to maintain a suit for the
recovery.
 Capacity of parties.

Note:-
Contracts of apprenticeship and service
by a minor

 A Contract of apprenticeship stands on a different

footing than an agreement of service by a minor.

 A contract of apprenticeship is valid and binding upon

a minor because such a contract is protected by the
Apprentices Act, 1961, provided the case falls within
the term of that Act.
 Capacity of parties.

 The Act provides that the minor must not be less

than 14 years of age and the contract must be
entered into on behalf of the minor guardian.

 The act was passed with a view to enabling children to

learn trades, crafts and employments, by which, when
they come to full age, they may gain a livelihood.
 Capacity of parties.

3. No ratification on attaining the age of majority.

 Ratification means the subsequent adoption and

acceptance of an act or agreement.

 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.

 An agreement void ab-initio cannot be made valid by

subsequent ratification.
 Capacity of parties

Thus, if an advance is made to a minor during

his minority, a promise to pay for such amount
after he attains majority would not be
enforceable.( Mohendra vs Kailash)

Since ratification relates back to the date

when the contract was originally made, it is
necessary for a valid ratification that the
person who purports to ratify must be
competent to contract at the time of the
contract.
 Capacity of parties

But if services are rendered or an advance is

made to a minor during his minority and the
services are continued or a further advance is
made after he attains majority, a promise to
pay for such services or amount as a whole
would be valid and enforceable
(Sindha vs Abraham)
 Capacity of parties

4. The rule of estoppels does not apply to a

minor.

As per the Section 115 Indian Evidence Act

”Estoppels” is “where one person has by his
declaration, act or omission, intentionally
caused or permitted other person to believe a
thing to be true and act upon this belief,
neither he or his shall be allowed in any suit
or proceeding between himself and that
person to deny the truth of that thing.
 Capacity of parties

• The rule of estoppels does not apply to

a minor i.e. a minor is not estopped from
pleading his infancy in order to avoid
contract even if he has entered into the
contract by falsely representing that he
was of full age.
 Capacity of parties

5. Minor’s liability for necessaries.

The case of necessaries supplie to a minor is

governed by Section 98 of the Contract Act
which provides that “ if a person is, incapable
of entering into a contract or any one whom
he is legally bound to support is supplied by
another person with necessaries to his
condition in life, the person who has furnished
such supplies is entitled to be reimbursed
from the property of such incapable person”.
 Capacity of parties

This Section 68 confers a quasi right where

the incapable if supplied by the necessaries
become liable to pay back.
But in case of minor it is his property from
which the person who has supplied will be
compensated in case of no property with
minor he will loose the money.
This is applicable only in the case of supply of
the necessaries not the supply of Luxury
items.
 Capacity of parties

6. Specific Performance:-
 Specific performance means the actual
performance of the contract as agreed. But
this being a void the court will never direct
performance of the contract.
 But if it has been entered on minors behalf
by his Guardians or the manager of his
estate it is binding provided
(a) The contract is within the authority of the
Guardian or Manager and
(b) It is for the benefit of the minor.
 Capacity of parties

7. Minor Partner:-

A minor being incompetent can not act

as a partner in a partnership firm.

But under Section 30 in case of benefit

to the minor through partnership it can
be carried out by authorized Guardian
on behalf of the minor.
 Capacity of parties

 Such a minor will only be entitled to share the

profit as agreed upon he can also view any books
of account of the organization.

 The minor can not will not be the part of losses if

arise or any other obligation.

 He will not participate in the management.

 He can accept these obligation if he feel fit to do

so at the age of attaining majority.
 Capacity of parties

8. Minor Agent:-

Minor can act as a agent. He shall bind the

principal by his acts done in the course of
such an agency, but cnnot be held
personally liable for any obligation of
breach of contract.

Thus in appointing the minor as an agent the

principal runs a great risk.
 Capacity of parties

9. Minor and insolvency:-

A minor can not be adjudicated an insolvent

for he is incapable of contracting debts.
Even for the necessaries supplied it is the
property of minor which is liable rather the
himself.
 Capacity of parties

10. Contract by minor and adult jointly.

Where a minor and an adult jointly enter into
an agreement with another person, the
minor has no liability but the contract as a
whole can be enforced.
(Jamna Bai vs Vasanta Rao)
 Capacity of parties

11. Surety for a minor:-

Where in a contract of guarantee, an adult stands

surety for a minor, the adult is liable under the
contract all though the minor is not.
(Kashiba vs shripat)

Note:- Bombay High court (Manju Mahadeo vs

shavappa Manju) and Madras High court (Edavan
Nambiar vs Moolaki Raman) stated that the minor
can not default thus there is no question of surety
for a minor.
 Capacity of parties

12. Position of minor’s parent:-

The Parents of a minor are not liable for

agreement made by a minor, whether the
agreement is for the purchase of
necessaries or not. The parents can be held
liable only when the child is contracting as
an agent for the parents.
 Capacity of parties

13. Minor shareholder:-

A minor being incompetent can not be the shareholder of

the company. A company can also refuse to register
transfer or transmission of shares in favor of minor
unless the share are fully paid.

Thus, a minor through his guardian can be a part of

company as a shareholder on taking fully paid shares.
 Capacity of parties

14. Minor’s liability in tort:-

A ‘tort’ is a civil wrong for which the

ordinary remedies is damage. A minor
is liable for his tort, unless the tort
is in reality a breach of contract.
 Capacity of parties

PERSONS OF UNSOUND
MIND
One of the essential conditions of
competency of parties to a contract is
that they should be of sound mind.
What is sound mind?
 Capacity of parties

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
effect upon his interests”.
 Capacity of parties

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
whether what he is about to do is to
his interest or not.
 Capacity of parties

It further states that:-

(1) A person, who is usually of unsound mind

but occasionally of sound mind, may make a
contract when he is of sound mind.

Eg:- A patient in a lunatic asylum, who is at

intervals of sound mind, may contract
during those intervals.
 Capacity of parties

(2) A person, who is usually of sound mind,

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

Eg:- A sane man who is delirious from fever, or

who is so drunk that he cannot understand
the term contract, or from a rational
judgment as to its effect on his interests,
cannot contract whilst such delirium or
drunkenness lasts.
 Capacity of parties

Soundness of mind of a person depends on

two facts:-

(i) His capacity to understand the contents of

the business.
(ii) His ability to form a rational judgment as to
its effect upon his interests.

If person is incapable of both he will be

perceived of suffering from unsoundness,
which will be decided by court on the basis
of proofs.
 Capacity of parties

Unsoundness of mind arise from:-

Lunatics:-A lunatic is a person who is mentally deranged due to

some mental strain on other personal experience. He suffers
from intermittent intervals of insanity. He can enter into the
contract during the period when he is of sound mind.

Idiocy:-It is something which is God gifted. He is the person

whose brain is not developed at all and thus his mental powers
are completely loss even for the ordinary matters. Thus
contract with such person is void .
 Capacity of parties

Drunkenness:-It produces temporary incapacity,

till the drunkard is under the influence of
intoxication.

Hypnotism:-It also produces temporary incapacity

till the person is under the impact of artificially
induced sleep.

Mental decay:-On account of old age.

 Capacity of parties

DISQUALIFIED PERSON

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”
 Capacity of parties

Alien Enemies:-An Alien enemies ( citizen 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.
Alien Friends can contract but alien enemy can not.

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 entered upon them they
cannot be sued without obtaining the prior sanction of the
Central Government.
 Capacity of parties

Convict:-
Convict is one who is found guilty and is imprisoned.
During the period of imprisonment, a convict is
incompetent to enter contract and to sue on
contracts made before conviction.

Married Women:-
Married women are competent to contract with
respect of their separate properties provided they
are major and sound minded. They cannot get into
contract for his husband’s property.
 Capacity of parties

Joint Stock Company and corporation

incorporated under a special Act:-

A company is an artificial person created by law. It

cannot enter into contract outside the powers
conferred upon by its Memorandum of Association or
by the provision of its Special Acts. Being a Artificial
Person he can not enter into contracts strictly
personal nature e.g. Marriage.