Incompetence Through Status in Contracts & Mental Incompetency | Legal Reasoning for CLAT PDF Download

Incompetence through Status in Contracts

Besides minors and persons of unsound mind, there are some other persons who are incompetent to contract, partially or wholly, so that the contracts of such persons are void. Incompetency to contract may arise from political status, corporate status, legal status, etc.

Alien Enemy (Political Status)

• An alien is a person who is the citizen of a foreign country.
• Thus, in the Indian context, an alien is a person who is not a subject of India.
• An alien may be:
  • An alien friend, or
  • An alien enemy.

Alien friend (i.e., a foreigner)

• Whose country is at peace with the Republic of India, has usually the full contractual capacity of a natural born Indian subject.
• But he cannot acquire property in Indian ship, and also cannot be employed as Master or any other Chief Officer of such a ship.
• In the case of contracts with an alien enemy(i.e. an alien whose country is at war with India) the position is studied under two heads:
  • (i) contracts during the war; and
  • (ii) contracts made before the war.
• During the subsistence of the war, an alien can neither contract with an Indian subject nor can he sue in an Indian court except by licence from the Central Government.
• As regards contracts entered into before the war breaks out, they are either dissolved or merely suspended. Those contracts, which are against the public policy or are such which would benefit the enemy, stand dissolved.
• Other contracts (i.e., not against the public policy) are merely suspended for the duration of the war and revived after the war is over, provided they have not already become time-barred under the law of limitation.
• It may be observed that an Indian, who resides voluntarily, or who is carrying on business, in a hostile territory would be treated as an alien enemy.

Foreign Sovereigns and Ambassadors (Political status)

• Foreign sovereigns and accredited representatives of a foreign State or Ambassadors enjoy some special privileges. 
•  They cannot be sued in our courts unless they choose to submit themselves to the jurisdiction of our courts. 
•  They can enter into contracts and enforce those contracts in our courts. 
•  However, they cannot be proceeded against in Indian courts without the sanction of the Central Government. 

Company under the Companies Act or Statutory Corporation by passing Special Act of Parliament (Corporate status)

A company cannot enter into a contract which is ultra vires its Memorandum of Association. A statutory corporation cannot go beyond the objects mentioned in the Act, passed by the Parliament. Similarly, Municipal Corporations (Local bodies) are disqualified from entering into contracts which are not within their statutory powers.

Married Women (Marital status): A married woman has full contractual capacity and can sue and be sued in her own name. She is not incompetent to contract.

Insolvent Persons (Legal status): Insolvent persons are incompetent to contract until they obtain a certificate of discharge.

Mental Incompetency

• “A person is said to be of unsound mind for the purpose of making a contract, if at the time when he makes it, he is incapable of understanding it, and of forming a rational judgement as to its effect upon his interests.
• A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
• A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.”

Examples-

• A patient, in a lunatic asylum, who is at intervals, of sound mind, may contract during those intervals.
• A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgement as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts.

From the above examples given, it is obvious that Soundness of mind of a person depends on two facts:
(i)his capacity to understand the terms of the contract, and
(ii) his ability to form a rational judgement as to its effect upon his interests.

Contracts with Lunatics

A lunatic is a person who is mentally deranged due to some, mental strain or other personal experience. However, he has some intervals of sound mind. He is not liable for contracts entered into while he is of unsound mind. However, as regards contracts entered into during lucid intervals, he is bound. His position in this regard is identical with minor,  i.e., in general the contract is void but the same exceptions as discussed above (under minor’s contracts) are relevant.

Contracts with Idiots

An idiot is a person who is permanently of unsound mind. He does not have lucid intervals. He is incapable of entering into a contract and, therefore, a contract with an idiot is void. However, like a minor, his properties, if any, shall be liable for recoveries on account of necessaries of life supplied. Also he can be a beneficiary.

Contracts with Drunken or Intoxicated Persons

A person who is drunk, intoxicated or delirious from fever so as to be incapable of understanding the nature and effect of an agreement or to form a rational judgment as to its effect on his interests cannot enter into valid contracts whilst such drunkenness or delirium lasts.

Are contracts with minors valid?

A minor is not competent to contract

• A contract with or by a minor is void and a minor, therefore, cannot, bind himself by a contract.
• In English Law, a minor’s contract, subject to certain exceptions, is only voidable at the option of the minor.
• In 1903 the Privy Council in the leading case of .

Held : That in India minor’s contracts are absolutely void and not merely voidable.

The facts of the case were:

Example-

• Dharmodas Ghose, a minor, entered into a contract for borrowing a sum of Rs. 20,000 out of which the lender paid the minor a sum of Rs. 8,000. The minor executed aside the mortgage. The Privy Council had to ascertain the validity of the mortgage.
• Under Section 7 of the Transfer of Property Act, every person competent to contract is competent to mortgage. The Privy Council decided that Sections 10 and 11 of the Indian Contract Act make the minor’s contract void. The mortgagee prayed for refund of Rs. 8,000 by the minor. The Privy Council further held that as a minor’s contract is void, any money advanced to a minor cannot be recovered.

A minor can be a promisee or a beneficiary

• During his minority, a minor cannot bind himself by a contract, but there is nothing in the Contract Act which prevents him from making the other party to the contract to be bound to the minor. Thus, a minor is incapable of making a mortgage, or a promissory note, but he is not incapable of becoming a mortgagee, a payee or endorsee. He can derive benefit under the contract.

A minor’s agreement cannot be ratified by the minor on his attaining majority

• A minor cannot ratify the agreement on attaining the age of majority as the original agreement is void ab-initio and, therefore, validity cannot be given to it later on.

Example-

• A, a minor makes a promissory note in favour of B. On attaining majority, he makes out a fresh promissory note in lieu of the old one. Neither the original, nor the fresh promissory note is valid.

If a minor has received any benefit under a void contract

• He cannot be asked to refund the same. We have mentioned the facts of Mohiri Bibi’s case. Under that case, the lender could not recover the money paid to the minor. Also the property mortgaged by the minor in favour of the lender could not be sold by the latter for the realization of his loan.

A minor is always allowed to plead minority

• And is not estopped to do so even where he had procured a loan or entered into some other contract by falsely representing, that he was of full age. Thus, a minor who has deceived the other party to the agreement by representing himself as of full age is not prevented, from later asserting that he was a minor at the time he entered into agreement.

Example-

• S, a minor, borrowed £400 from L, a moneylender, by fraudulently misrepresenting that he was of full age. On default by S, L sued for return of £400, and damages for the tort of deceit.

Held:L could not recover £400, and his claim for damages also failed. The court did not grant the relief; otherwise, it would have been an indirect way of enforcing a void contract. Even on equitable grounds, the minor could not be asked to refund £400, as the money was not traceable and the minor had already spent the same.