MS EDUCONZ PVT. LTD.

LAW& AUDIT

CAPACITY TO CONTRACT

Parties unable to Enter into a contract

Minor A person of unsound mind Person disqualified by law

Lunatic Idiot Drunken and Intoxicated

Alien enemy Foreign Sovereign Convict Corporation and Company Insolvent

1. Who is competent to make a contract:-

Section 11. Every person is competent to contract who is of age of majority according to the
Law to which he is subject, who is of sound mind and not is disqualified from contracting by
any Law to which he is subject.

Age of majority:- According to section 3 of Indian majority Act-1875 every person domiciled
in Indian attains majority on the completion of 18 years of age.

Exception: - 21 years- in the following cases.

a. Where a guardian of a minor’s person or property is appointed under the Guardian and wards
Act, 1890.

b. Where minor’s property has passed under the superintendence of the court of words.

Position of Agreements by Minor:-

1. Validity: - An agreement with a minor is void-ab-initio

[ Mohoribibee v. Dharmodas Ghose]
Example :
Mr. D, a minor, mortgaged his house for Rs.20000 to a money – lender, but the
mortgagee, i.e. the money – lender, paid him a sum of Rs.8000. Subsequently, the minor
sued for setting aside the mortgage. Held that the contract was void, as Mr. D was minor
and therefore he is not liable to pay anything to the lender.

2. A minor’s has received any benefit under a void contract, he cannot be asked to return
the same.

3. If a minor has received any benefit under a void contract, he cannot be asked to return
the same.

4. Fraudulent representation by a minor- no difference in the status of agreement. The

contract remains void.

5. A minor with the consent of all the partners, be admitted to the benefits of an existing
partnership.

6. Contracts entered into by minors are void-ab-initio. Hence no specific performance

can be enforced for such contracts.

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7. Minor’s parent/guardians are not liable to a minor’s creditor for the breach of
contract by the minor.

8. A minor can act as an agent but not personally liable. But he cannot be principal.

9. A minor cannot become shareholder of a the company except when the shares are
fully paid up and transfer by share.

10. A minor cannot be adjudicated as insolvent.

11. Can enter into contracts of Apprenticeship, Services, Education, etc:

(a) A minor can enter into contract of apprenticeship, or for training or instruction in
a special art, education, etc.
(b) These are allowed because it generates benefits to the Minor.

12. Guarantee for and by minor

A contract of guarantee in favour of a minor is valid. However, a minor cannot be a
surety in a contract of guarantee. This is because, the surety is ultimately liable under a
contract of guarantee whereas a minor can never be held personally liable.

13. Minor as a trade union member

Any person who has attained the age of fifteen years may be a member for registered
trade union, provided the rules of the trade union allow so. Such a member will enjoy all
the rights of a member.

EXCEPTION

• Contract for the benefit of a minor.

• Contract by Guardian
Benefit of a minor by his guardian or manager of his estate.

a. within the scope of the authority of the guardian.

b. Is for the benefit of the minor.

• Contract for supply of Necessaries.

Example :
Food, clothes, bed, shelter, shoes, medicines and similar other things required for the
maintenance of his life or for the life of his dependents, expenses for instruction in grade
or arts; expenses for moral religions or intellectual education, funeral expenses of his
deceased family members, marriage expenses of a dependent female member in the
family; expenses incurred in the protection of his property or personal liberty, Diwali
pooja expenses, etc. have been held by courts to be necessaries of life. However, the
things like earrings for a male, spectacles for a blind person or a wild animal cannot
be considered as necessaries.
• Liability for tort: A minor is liable for a tort, i.e., civil wrong committed by him.
Example :
A, a 14 – year – old boy drives a car carelessly and injures B. He is liable for the accident
i.e., tort.

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A person of unsound mind

Lunatic Idiot Drunken and Intoxicated

Person of Unsound Mind

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.

⇒ At time of entering into a contract, a person must be sound mind. Law presumes that
every person is of sound mind unless otherwise it is proved before court. An agreement
by a person of unsound mind is void. The following are categories of a person
considered as person of a unsound mind.

⇒ An idiot
An idiot is a person who is congenital (by birth) unsound mind. His incapacity is
permanent and therefore he can never understand contract and make a rational judgment
as to its effects upon his interest. Consequently, the agreement of an idiot is absolutely
void ab initio. He is not personally liable even for the payment of necessaries of life
supplied to him.

⇒ Delirious persons
A person delirious from fever is also not capable of understanding the nature and
implications of an agreement. Therefore, he cannot enter into a contract so long as
delirium lasts.

⇒ Hypnotized persons
Hypnotism produces temporary incapacity till a person is under the effect of artificial
induced sleep.

⇒ Mental decay
There may be mental decay or senile mind the to old age or poor health. When such
person is not capable of understanding the contract and its effect upon his interest, he
cannot enter into contract.

⇒ Lunatic is not permanently of unsound mined. He can enter into contract during lucid
intervals i.e., during period when he is of sound mind.

Generally of Occasionally of Capacity to Example

Contract
Unsound Sound Mind Can enter into a A patient in a lunatic asylum,
Mind Contract when he who is at intervals of sound
is of Sound Mind. mind, may contract during
those intervals.
Sound Mind Unsound Mind Cannot make a A sane man, who is delirious
Contract when he from fever or who is so drunk
is of Unsound that he cannot understand terms
Mind. of a contract or form a
judgment, cannot contract

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while such delirium or

drunkenness lasts.

⇒ Drunken person
An agreement made by intoxicated person is void.

Person Disqualified by law

Alien enemy Foreign Sovereign Convict Corporation and Company Insolvent

Person Disqualified by Law

⇒ Body corporate or company or corporation

Contractual capacity of company is determined by object clause of its memorandum of
association. Any act done in excess of power given is ultra – virus and hence void.

⇒ Alien enemy
• An ‘alien’ is a person who is a foreigner to the land. He may be either an ‘alien
friend’ or an ‘alien enemy. If the sovereign or state of the alien is at peace with the
country of his stay, he is an alien friend. An if a war is declared between the two
countries he is termed as an alien enemy.

• During the war, contract can be entered into with alien enemy with the permission of
central government.

(Discuss in class)

⇒ 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, be becomes capable of entering into
contract. Thus the incapacity is only during the period of sentence.
⇒ Insolvent
When any person is declared as an insolvent, his property vests in receiver and therefore,
he can’t enter into contract relating to his property. Again he becomes capable to enter
into contract when he is discharged by court.

⇒ 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 counts without
the prior sanction of the central Government.

Third party to a contract cannot sue or a stranger to a contract cannot sue.

Only those persons, who are parties to a contract, can sue and be sued upon the contract.
This Rule is called “Doctrine of privities of contract.” Exception.

i. Trust:- In case of trust a beneficiary can sue upon the contract.

Example:
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A transferred certain properties to B to be held by him in trust for the benefit of C. In this
case, C although not a party to the trust, can sue for the benefits available to him under
the trust.
This exception to the rule of Privity of contract has been recognised in a well known case
of khwaja Mohd. Khan v. Hussaini Begum (1910) 32 All 410.

ii. Family settlement / Marriage contract:- In case of family settlement members who
were not originally party to the contract can also sue upon it.
A female members cone force a provision for marriage expenses made on partition of
HUF.
Example:
H sued her father – in – law K to recover Rs.15,000 being arrears of allowance called Pin
money payable to her by K under an agreement between K and H’s father, consideration
being H’s marriage to K’s son D. Both H and D were minors at the time of marriage.
Held, the promise can be made enforceable by H.

Provision of marriage expenses of female members of a Joint Hindu Family, entitles the
female member to sue for such expenses on a partition between male members.,

Two brothers, on partition of family joint properties, agreed to invest in equal shares for
their mother’s maintenance. Held, the mother was entitled to require her sons to make
the investment.

iii. Acknowledgement of liability:- Where a person admits his Liability thereafter if he

refused be will be stopped from denying his liability.
Example
X receives money from Y for paying it to Z. X admits the receipt of that amount to Z. Z
can recover the amount from X, even though the money is due from Y.

iv. Assignment of contract. Assignee (the person to whom benefits of contract are
assigned) can enforce upon the contract..

v. Contract entered into through an agent.

vi. Covenants running with land.

Stranger to consideration:- “Stranger to contract” must be distinguished from a

stranger to consideration need not necessarily be provided by the promises if may flow
from a third party also such a person is ‘ stranger to consideration,.
( Chinnaya Vs Ramayya).

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