Capacity to Contract | Law of Contracts - CLAT PG PDF Download

Introduction 

The  rule of law  ensures that all parties involved in a contract are competent and agree to the terms. In India, the legal framework for contracts is primarily governed by the  Indian Contract Act of 1872  . Within this Act,  Section 11  specifically addresses the capacity to contract, emphasizing its necessity for a valid agreement.

 Who are Competent to Contract? 

•  Age of Majority:  A person must be of the age of majority as per the law applicable to them.
•  Sound Mind:  The individual should be of sound mind, capable of understanding the contract's terms.
•  Legal Capacity:  The person should not be disqualified from contracting by any applicable law, such as being declared insolvent or bankrupt.

 Persons Not Eligible for Contract 

• A person is considered an  incompetent party  to a contract if they fall into any of the following categories:
•  Minors:  Individuals who are below the legal age of majority (usually 18 years old) are not legally allowed to enter into a contract.
•  Persons of Unsound Mind:  Individuals who are mentally incapacitated or lack the mental capacity to understand the nature and consequences of the contract are considered incompetent. This includes people with mental illnesses or disabilities that affect their judgment.
•  Persons Disqualified by Law:  Certain individuals may be disqualified from entering into a contract by specific laws. This could include individuals declared bankrupt, or those prohibited by law from engaging in certain activities.

Minor's Agreement

 Who is a Minor? 

• A person who has not reached the age of majority is considered a minor.
• According to Section 3 of the Indian Majority Act, 1875, a person is deemed to have attained the age of majority upon turning 18 years old.
• However, if a court has appointed a guardian for a person's person or property, that person's age of majority is 21 years.

 Nature of a Minor's Agreement 

• A minor is generally considered  not competent to contract  .
• When a minor enters into an agreement, the question arises whether the agreement is  void  or  voidable  .
• Section 10 of the law states that an agreement must be between parties who are  competent to contract  .
• Section 11 indicates that a minor is  incapable of entering into a contract  .
• However, neither section clarifies the  effect of an agreement made by a minor  , leading to controversy.

Cases

 Mohoribibi v. Dharmadas Ghose 

• Facts: A minor mortgaged his properties in favor of the plaintiff, a money lender, to secure a loan of Rs. 20,000. After some money was advanced, the plaintiff discovered the minor's age and filed a suit to repudiate the contract and recover the money advanced.
• Held: The minor is not liable because a minor's agreement is void ab initio.
• Reasons:
  • The question of whether a contract is void or voidable assumes the existence of a contract as per the legal definition and does not apply in the case of an infant (minor).
  • The general presumption that individuals are the best judges of their own interests is not applicable to minors.

 Position under English Law 

• At common law, a contract made by an infant is  voidable at their option  .
• The  Infants Relief Act, 1874  modified this rule by declaring certain types of contracts as ̳absolutely void.̶
• The following contracts are considered absolutely void under the Act:
•  Contracts for the repayment of money lent or to be lent. 
•  Contracts for the supply of goods (other than necessaries). 
•  Contracts for accounts stated. 

Effects of Minor's Agreement

 No Estoppel Against Minor 

• When a minor misrepresents their age to induce another party into a contract, the principle of estoppel cannot be applied against the minor.
• Estoppel cannot override statutory protections, as the law aims to shield minors from contractual obligations.
• The doctrine of estoppel cannot be used to undermine this legal policy.
• A minor is entitled to invoke the defense of minority, regardless of any misrepresentations made.
• Estoppel occurs when one party makes a statement that another party relies upon, preventing the first party from denying or contradicting that statement.
• In the case of  Mohiri Bibee v. Dharmodas Ghose  , when a minor misrepresented their age while securing a loan, the Privy Council did not find it necessary to determine the applicability of estoppel because the money lender was aware of the borrower's age.
• Since the money lender was not misled by the minor's false statement and knew the borrower's age, estoppel did not apply in this situation.

 No Liability for Tort Based in Contract 

• An agreement made by a minor is considered void. Therefore, if a minor breaches an agreement, they cannot be held liable for it. However, when a minor commits a tort, they are liable in the same manner and to the same extent as an adult.
• There are instances where an action by a minor may constitute both a breach of contract and the commission of a tort. For example, in the case of  Johnson v. Pye  , a minor falsely claimed to be of legal age and obtained a loan of $300. The court ruled that the minor could not be compelled to repay the loan by pursuing an action for deceit against him.
• A minor's agreement has no legal consequences. A contract cannot be transformed into a tort to sue an infant. While a minor is not liable for a tort connected with a contract, they are not exempt from liability for an independent tort.

 Doctrine of Equitable Restitution

 Definition:  Compelling a minor to return property or goods obtained through misrepresentation of age, as long as the items are traceable in their possession.

• If a minor resells the goods, they cannot be forced to repay the value of the items.
• The doctrine does not apply when a minor receives money instead of goods.

 Case Study: Leslie v. Sheill  In this case, a minor misrepresented his age to obtain a loan from the plaintiff. The plaintiff sued to recover the money, arguing that the minor was liable for damages due to fraud and should be compelled to return the money in equity.

• Since the money was given to the minor for his own use and he had used it, there was no way to trace it or restore the exact amount obtained through fraud.
• Forcing the minor to repay an equivalent sum from his current and future resources would be equivalent to enforcing a void contract.

 Indian Law: Compensation by a Minor 

The issue in Indian law is whether a minor can be required to restore benefits obtained under a void agreement and if they can be asked to pay compensation to the other party.

Two main legal provisions have been considered in courts:

1. Whether a minor can be asked to pay compensation under Sections 64 and 65 of the Indian Contract Act for benefits gained under a void agreement.
2. Whether a minor can be asked to pay compensation based on Sections 39 and 41 of the Specific Relief Act.

 Case: Mohori Bibee v. Dharmodas Ghose 

• In this case, the issue of whether a minor could be asked to pay compensation under Sections 64 and 65 of the Indian Contract Act arose.
• The Privy Council ruled that compensation under these sections is applicable only when the parties are competent to contract and does not apply to a minor's agreement.
• The minor in this case sought to cancel a mortgage deed he had signed, and the Privy Council addressed the issue of compensation under Section 41 of the Specific Relief Act.
• It was determined that since the loan was given to the minor with full knowledge of his minority, the question of compensation to the money lender did not arise.

 Liability to Restore Benefits 

When a minor seeks the court's assistance to cancel a contract, the court may grant relief with the condition that the minor restores all benefits received under the contract. Alternatively, the minor may be required to make suitable compensation to the other party.

In  Khangul v. Lakhasingh  , the defendant, by fraudulently concealing his age, agreed to sell a plot of land, received Rs. 17,500, but later refused to fulfill his promise. The plaintiff then sued for possession of the land or a refund of the consideration. The court ruled that the agreement was void, denying the plaintiff possession of the land but ordering the refund of the consideration.  Shadilal CJ  explained that restoring property and refunding money are similar except that while property can be identified, cash cannot be traced. He noted that in India, all contracts made by infants are void, unlike in England, suggesting a greater scope in India for the application of  equitable restitution  .

 Section 33 of Specific Relief Act, 1963 

When a defendant successfully defends a lawsuit on the basis that the agreement in question is void due to their lack of competence to contract under Section 11 of the Indian Contract Act, 1872, the court may require the defendant to restore any benefits received under the agreement to the other party, to the extent that the defendant or their estate has benefited from it.

 Beneficial Contracts and Minors 

• Contracts that are advantageous to minors are valid and enforceable by them.
• The legal principle established in the  Moharibibi case  indicates that minors can be bound by contracts that impose obligations on them, but this principle is becoming less common.
• When a minor enters a contract that is beneficial and does not impose any obligations on them, such as a mortgage in their favor or a contract for the sale of property, they have the right to enforce the agreement.
• For instance, a minor can enforce a promise made by another party after they fulfill their part of the agreement.

 Contracts of Service and Minors 

• Any contract of service that a minor enters into is considered void and unenforceable.

 Contract of Marriage

• In Khimji Kuverji v. Lalji Karamsi, the Bombay High Court examined if a mother could legally bind her minor daughter to a marriage contract with an adult male and if the daughter could seek legal action for breach of this contract.

Contracts of Immovable Property by the Minor's Guardian

• In Mir Sarwarjan v. Fakhruddin, a guardian made a land purchase contract for a minor. When the minor sought to enforce the contract, the court dismissed the case despite the contract benefiting the minor.

No Ratification

• A person cannot validate a contract made during minority upon reaching adulthood. Since a minor's agreement is void, it cannot be ratified later. For example, if a minor borrows money and signs a promissory note, he cannot make it valid by creating a new note when he becomes an adult.
• In Surgi Narain v. Sukhu Aheer, a minor borrowed Rs. 11,000 and signed a promissory note. After turning 18, he signed another note for the same lender. The court ruled that the consideration received during minority could not be valid for a new promise, making the minor not liable for the new promise.

Ratification of Acts Done on Minor's Behalf

• A minor cannot enter into a contract or authorize someone to do so on their behalf since their agreement is void from the beginning. For an act done on a minor's behalf to be ratified, it must be something that could have been legally authorized.

 Liability for Necessaries 

• Section 68 of the Indian Contract Act addresses the reimbursement for necessaries provided to individuals who are incapable of entering into a contract or on behalf of such individuals.
• According to this section, if a person who is unable to contract, such as a minor or a lunatic, is supplied with necessaries that are appropriate for their condition in life, the supplier is entitled to be reimbursed from the property of the incapable person.
• For instance, if a lunatic named B is provided with necessaries by A, A has the right to be reimbursed from B's property.
• In the context of minors, while their property may be liable for necessaries under Section 68, the minor themselves is not personally liable, unlike in English law.

 Definition of Necessaries 

• The Indian Contract Act does not provide a definition for the term "necessaries," making it necessary to refer to judicial decisions to understand its meaning.
• In the case of Peters v. Fleming, Baron Parke ruled that "necessaries" is not limited to items essential for survival but includes goods that help maintain a person's status and lifestyle.
• Therefore, "necessaries" refers to goods suitable to the individual's condition in life and their specific needs at the time of purchase.
• What constitutes a necessary item can vary from person to person based on their circumstances.

 Examples of Necessaries 

• Items that may be considered necessaries for one person could be seen as mere conveniences for another.
• For example, items bought by a minor for their wedding could be deemed necessary, even if they are not typically considered essential.
• The term "necessaries" also includes money urgently needed by a minor for various purposes, not just basic needs like food and clothing.
• Instances such as cash lent for home repairs or payment of government dues are examples of necessaries for a minor.
• In the case of a minor Muslim girl, expenses related to marriage are considered a necessity, and those incurring such expenses can seek reimbursement under Section 68.
• Other examples of necessaries include expenses for a minor's education, the marriage of a sibling, funeral expenses for the minor's parents, and necessary legal expenses.
• However, in the case of Nash v. Inman, if a minor already has sufficient clothing for their status, additional clothing supplied by a tailor may not be recoverable.

Agreements by Persons of Unsound Mind 

A person entering into a contract must be of sound mind; otherwise, the contract is considered invalid according to the law. Section 12 of the Indian Contract Act defines a person of sound mind as someone who, at the time of making the contract, is capable of understanding its terms and forming a rational judgment about its impact on their interests. Soundness of mind depends on:

•  Capacity to understand  the contract's terms.
•  Ability to form a rational judgment  regarding its effects on one's interests.

If a person lacks both capacities, they are deemed to have an unsound mind. Examples of such individuals include idiots, lunatics, and intoxicated persons. Section 12 also clarifies that a person who is usually of unsound mind but occasionally of sound mind can enter into a contract during their lucid intervals. Conversely, a person who is typically of sound mind but occasionally of unsound mind cannot make a contract when they are not of sound mind.

 Agreements by Lunatics 

• A lunatic is someone who experiences periods of mental derangement due to various factors but also has intervals of sound mind.
• Contracts entered into during these lucid intervals are binding on the lunatic, similar to the position of a minor.

 Agreements by Idiots 

• An idiot is a person who is permanently of unsound mind due to a congenital defect.
• Such individuals lack lucid intervals and cannot enter into valid contracts.

 Agreements by Drunken Persons 

• Drunkenness is treated similarly to lunacy in legal terms.
• Contracts entered into by intoxicated individuals are considered void.

 Exceptions for Persons of Unsound Mind 

• Contracts with individuals of unsound mind are subject to similar exceptions as those involving minors.
• Such individuals can enforce contracts for their benefit, and their properties can be attached to fulfill monetary obligations for necessaries supplied to them or their dependents.

 Persons Disqualified by Law 

 Alien Enemies 

•  Definition:  All individuals who are not Indian citizens are considered aliens. When the sovereign or state of an alien is at peace with India, the alien is an  alien friend  . Conversely, if the sovereign state is at war with India, the alien becomes an  alien enemy  .
•  Rules for Contracts: 
  •  During War:  No contracts can be made with an alien enemy during the war period unless  approved by the Government of India  .
  •  Before War:  Contracts made before the war will be  suspended  during the war.
  •  Post-War:  Contracts can be performed only after the war ends, and the government may impose restrictions if deemed necessary for national interest.

 Insolvents 

• An  insolvent  is a person who is legally disqualified from entering into a contract until they are discharged by a court of law.

 Conclusion 

• The  capacity to contract  is crucial in determining who can legally enter into a contract.
• Individuals deemed  incompetent  to contract, such as minors, those of unsound mind, and legally disqualified persons, cannot legally enter into contracts, making such agreements  unenforceable  .
• While individuals like convicts and insolvents are generally considered incapable of contracting, the law allows for  specific exceptions  .
• Understanding  capacity to contract  is essential for ensuring that contracts are legally binding and enforceable.