Capacity To Contract Under Indian Contract Act, 1872

by
Table of Contents hide
1) Introduction
2) Capacity to Contract Meaning
3) Position of Minor in Contract
4) Effect of a Minor’s Agreement
4.1) Doctrine of Estoppel: Not Applicable
4.2) Ratification: Not Allowed
4.3) Liability for Compensation
4.4) No Liability In Contract or In Tort Aarising Out of A Contract
4.5) Liability for Necessaries
5) Position of a Minor as a Beneficiary
5.1) In Contract of Service and Apprenticeship
5.2) In a Contract of Marriage
5.3) In a Partnership Agreement
5.4) Under Negotiable Instruments
6) Position of a Minor in a Contract of Agency
7) Position of A Person of Unsound Mind
8) Position of A Person Disqualified from Contracting by Law
9) Concluding Remarks

Introduction

One of the most important requirements for entering into a legal contract is that both parties must have the capacity to contract. According to section 11 of the Indian Contract Act, 1972.

“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.”

From this definition, it can be inferred that the following categories of persons do not possesse the capacity to contract:

  1. Minors,
  2. Persons of unsound mind, and
  3. Persons disqualified from contracting by law.

Before looking at the larger picture, it is important to understand the meaning of some terms and phrases, namely, ‘majority’ and ‘sound mind’ for the purpose of Contracting. These are as follows:

Age of Majority – Section 3(1) of the Indian Majority Act, 1875 defines age of majority as the age from eighteen years onwards.

Sound mind – Section 12 of the Indian Contract Act, 1872 defines “sound mind for the purposes of contract”. It states, “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”. It implies that persons, who are unable to understand the nature of a contract and its consequences while making the contract, would be deemed as of unsound mind. It implies persons who may be lunatics, insane, imbecile, intoxicated etc. The condition may be of a temporary or a permanent nature.

Capacity to Contract Meaning

The phrase ‘Capacity to contract’ or ‘Contractual capacity’ refers to the legal competency of parties to enter into a valid contract. In general, it delves into the question as to ‘who can enter into a contract and who cannot’. Capacity is established by whether or not a person has achieved the age of majority and whether or not they are mentally competent of comprehending the terms and conditions of the contract. For instance, children have a restricted legal capacity to contract, meaning that they can only engage in legal transactions in particular situations, which often involves the presence of a parent or legal guardian. This is done because of their immaturity and lack of understanding of contractual transactions, and to protect them from exploiters. The capacity to sign contracts, is moreover, a delicate responsibility, since it requires an individual to legally commit himself or herself to several conditions that might have financial or personal ramifications. This is why contractual capacity has limits.

Simply put, such capacity has the effect of binding the parties to the contract with a promise to abide by it. But on failure to fulfil such promise, the defaulting party can be made legally liable and be sued in a court of law. For this reason, only certain persons have been granted the competency or the capacity to make a contract.

This capability is also linked to individuals’ health conditions and mental stability at the time of signing. So, individuals with mental disorders or significant psychological impairments are typically deemed incapable of acting on behalf of others or even for themselves. The positions of various such persons who are declared ‘incapable of contracting’ is discussed at length in this article.

Position of Minor in Contract

A minor refers to someone who has not yet attained the age of majority. In India, the age of majority is 18. However, a person whose person or property has been assigned to a guardian by the court remains a minor until they reach the age of 21.

A person under the age of 18 has no legal competence to engage into a contract. Hence, a contract by a minor, or any agent acting on his behalf, is void ab initio, i.e., it is invalid from its inception. The same was ruled in Mohori Bibee v. Dharmodas Ghose[1] in 1903. In the instant case, Dharmodas, who was a minor at the time, mortgaged his property to a moneylender, Brahmo Dutt, in order to get a loan. It was said that his attorney, Kedar Nath Mitter was aware of Dharmodas’ minority but nevertheless approved the arrangement. Dharmodas, the plaintiff, filed an action claiming the agreement invalid and as a result, inoperative.  The defendant alleged that the minor had misrepresented his age and sought remedy through the application of estoppel as well as a repayment of the loan taken out by the minor upon cancellation of the mortgage. These arguments were dismissed, and the court ruled that the minor couldn’t be asked to repay the loan taken by him. The court went on to state that the law of estoppel (contained in section 115 of Indian Evidence Act) couldn’t be applied as the defendant’s agent knew about the truth and was not misled.[2]

Apparently, minors are granted civil and criminal immunity by the state. It functions to protect them from exploitation against their ignorance and immaturity and bargains to their prejudice. Thus, minors are not allowed to engage into contracts because of these immunities.

Effect of a Minor’s Agreement

Doctrine of Estoppel: Not Applicable

The rule is that an estoppel action cannot be brought against a minor. Even if he falsely represented that he had reached the age of majority when the agreement was made, he is permitted to plead minority as a defense to escape responsibility under the agreement. The rationale behind this is that giving effect to the doctrine of estoppel would mean enforcing an otherwise void agreement and would defeat the substantive principles of the Statute.

Ratification: Not Allowed

Because a minor’s agreement is invalid from its inception, it cannot be confirmed by ratification after the minor has reached the age of majority. A void contract is like a dead letter and cannot be revived, nor can it serve as a consideration for a subsequent promise. Thus, an agreement entered into by a minor cannot be ratified.

However, if a person receives part of the benefit while still in his minority and part after reaching the majority, a commitment to pay for both made after reaching the majority is legitimate and enforceable. So, while a contract made by a minor is void, it is perfectly legal for such a person to continue the transaction begun during his or her minority, after reaching majority, in such a way as to commit oneself for the entire transaction.

Liability for Compensation

The question of Compensation finds mention under sections 64, 65 and 70 of the Indian Contract Act on one hand, and under sections 39 and 41 of the Specific Relief Act, 1963 on the other. According to the current position, a minor cannot be made liable under sections 64 and 65 as these sections apply to only those who are competent to contract in the first place. With regard to section 70, it has been observed in State of W.B. v. B.K. Mondal & Sons[3], “ The minor is excluded from the operation of Section 70 for the reason that his case has been specifically provided for by Section 68…”.

There is yet another difference regarding the minor’s liability under section 39 and 41. In Khan Gul v. Lakha Singh[4], Sir Shadi Lal, C.J. of the Lahore High Court laid down the following points:

  • If a minor sues as a plaintiff to get the instrument cancelled, or claims relief, he can be asked to compensate the defendant in the interest of equity, so as restore the position before the contract took place.
  • A minor could be asked to compensate the ill gains even when the property cannot be traced.

In Ajudhia Prasad v. Chandan Lal[5], the Allahabad High Court noted the following points:

  • The minor cannot be asked to compensate when he/she is the defendant.
  • The rule of the equitable doctrine of restitution laid down in Leslie v. Sheill[6] was followed, according to which a minor can be asked to restore back the property only if it can be traced and not otherwise.

The contemporary position is as under:

  • The minor can be asked to restore any benefit derived from the instrument if he goes to the court as a plaintiff, wanting its cancellation.
  • Even if he is a defendant, he may be asked to restore to the extent his estate has been profited.

No Liability In Contract or In Tort Aarising Out of A Contract

When a minor commits a tort, he is liable like any other major person. But if the tort committed is directly related to the breach of a contract, the infant cannot be held accountable. “You cannot convert a contract into a tort to enable you to sue an infant,” according to the usual rule.

However, if the tort is independent from the contract, the presence of a contract does not relieve the infant of culpability. In Burnard v. Haggis[7], an infant hired a mare for riding only, agreeing expressly that it would not be used “for jumping and larking”. He gave her to one of his companions, who leapt and killed her. He was held liable for negligence, and the tort was considered independent of the contract.

Liability for Necessaries

According to Section 68 of the Indian Contract Act of 1872, if a person is unable to enter into a contract and gets necessaries that are suitable for his or her position in life from another person, he or she has the authority to compensate the person who provided the necessaries. Reimbursement is permitted from the estate of such an incapable person.

Despite the fact that section 68 holds minor responsible for the necessaries, it does not specify the meaning of necessaries. In fact, necessaries encompass all necessities as well as additional requirements that are to the infant’s reasonable advantage and comfort, based on his or her social and economic standing.

Position of a Minor as a Beneficiary

In Contract of Service and Apprenticeship

The Indian Apprentices Act of 1850 allows minors to enter into arrangements (through their guardians) that are similar to service contracts. Its very objective is to enable poor children and orphans to learn certain vocational skills in their minority so that they can gain a livelihood when they become adults. Nevertheless, it was held by Desai J. in Raj Rani v. Prem Adib[8] that the minor cannot be held liable in such a contract as he or she is a beneficiary, and his or her contract is void. In such case, no reimbursement can be claimed for training, rather the minor ought to be paid for the work.

In a Contract of Marriage

A contract for a minor’s marriage is presumed to be for his or her advantage. In India, parents amongst certain communities contract the arranged marriage of their minor son or daughter. This custom has been accepted in law, provided it does not violate any statute. For instance, the age of the girl must be at least 18 years and that of the boy must be at least 21 years as per the Hindu Marriage Act, 1955 on the date fixed for marriage. Similarly, under Muslim Law, the girl and boy must have attained puberty. If the age falls before the stipulated lower limit, the contract can be avoided.[9]

In a Partnership Agreement

A minor being incompetent to contract, cannot enter into a partnership agreement. Being a partner, a person acts as both the ‘principal’ as well as an ‘agent’. Here, the minor is not capable of being a ‘principal’, so he or she cannot be a partner.

Although a minor cannot be a partner, he or she can be admitted to the profits of the partnership as a beneficiary with the consent of all partners as per section 30 of the Indian Partnership Act. As a result, they would be entitled to a portion of the firm’s property and profits, as well as access to and inspection of the firm’s finances. As regards their liability, they can only be held liable regarding their shares, but not towards third persons for the firm’s acts.

Under Negotiable Instruments

According to section 26 of the Negotiable Instruments Act, 1881, a minor is authorized to draw, indorse, deliver and negotiate a negotiable instrument (e.g., Bill of Exchange, Cheque, etc.). In doing so, a minor can bind all the parties, save himself or herself. That is to say, he or she wouldn’t incur any liabilities as a promise, payee, indorser, etc.

Position of a Minor in a Contract of Agency

It is important to highlight that even if a minor enters into contractual agreements through an authorized agent acting on his behalf, the agreement would still be considered void.

So, a contract which is entered by a minor (acting as a principal) through his agent is void. The rationale behind this is that ‘an agent is said to act on behalf of the principal’; so, it would mean enforcing a contract by a principal who is a minor, viz., someone not allowed by law to contract.

Although the minor cannot act as a principal, he or she can be an agent as an agent functions only as a connecting link between two parties. Moreover, he can be absolved from liability as an agent on account of his minority.

Position of A Person of Unsound Mind

According to section 12 of the Indian Contract Act of 1872, “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.”

From this definition, a person of ‘unsound mind’ can be interpreted to be someone who isn’t capable of understanding the nature and consequences of the contract. It may include a drunken person, insane person, a lunatic etc. Further, even a normal person, who is incapable of understanding the nature of the transaction can be deemed as a person of ‘unsound mind’ or an idiot. In the case of Inder Singh v. Parmeshwardhari Singh[10], a property valued around Rs.25,000 was agreed to be sold for only Rs.7000. His mother demonstrated that he was a “congenital idiot,” incapable of comprehending the transaction which he spent much of his time wandering about.

This definition also applies to ‘imbeciles’. However, in Lingaraj v. Parvathi[11], it was noted that mere ‘weakness of intellect’ does not come under the ambit of the definition of unsound mind, and that mere simplicity of mind would not mean that a person is of ‘unsound mind’. In the same manner, ‘loss of memory’, or ‘absent mindedness’ due to old age cannot mean the same as ‘unsoundness of mind’.[12]

To establish unsoundness of mind, medical evidence of mental disorder need not be proved; simply, it could be proved that the person was not conducting himself or herself reasonably, and not able to judge the consequences of the act, thereby acting to his or her detriment.

A contract made with, or entered into by a person of ‘unsound mind’ is absolutely void. However, as regards the position of a person of unsound mind to contract, the following points must be noted:

  • A person who is usually of unsound mind can make a contract when he is of sound mind.
  • A person who is usually of sound mind cannot enter into a contract when he is of unsound mind.

It must be noted that the onus to prove unsoundness of mind lies upon the person(s) who allege such state of mind of the person.

Position of A Person Disqualified from Contracting by Law

1. Alien Enemies[13] – All persons other than Indian citizens are aliens. When the sovereign or the State of that alien is at peace with India, he is an alien friend. Contrary to it, he will be an alien enemy if there is a war. An alien friend living in India has full contracting competency subject to certain restrictions. In the event of war with the alien country, no contract can be made, except with the prior approval of the Government of India.

2. Convicts– A convict refers to a criminal who has been sentenced or pronounced ‘guilty’ by a decision of a judge in a court of law. A convict cannot engage into a legal contract or sue while serving his or her sentence. However, when his term expires or he is pardoned, his incompetency ends. As a result, his ability to contract is merely suspended during his term and not lost. When he is set free, he regains these rights.

3. Insolvents [14]– Insolvents are barred from engaging into contracts unless they have been discharged by a court of law. The possessions of these people are vested in a judge’s appointee, who is responsible for discharging the insolvent’s responsibilities over his or her estates. The provisions of the Bankruptcy Acts limit such individual’s contractual competence.

4. Foreign Sovereigns and Ambassadors[15]– Representatives of other States are known as foreign sovereigns. They have a number of advantages. In most cases, they cannot be sued unless they submit to the jurisdiction of an Indian court of law. They cannot engage into a contract unless an Indian citizen obtains prior permission from the Indian government to sue them in an Indian court of law.

5. Body Corporate– Corporations (which include registered corporations and municipal bodies) can buy and sell property, do business, and sue and be sued, but they can’t do so without their seals. A corporation’s powers are limited by its Charter or Memorandum of Association, which dictates what it may and cannot do. All such contracts, save those that are reasonably ancillary to the objects, are ultra vires and hence null and invalid. Such contracts cannot be ratified by a resolution passed at the company’s general meeting.

Concluding Remarks

It is apparent from the preceding explanation that only those persons who are major, of sound mind, and not legally disqualified are competent to contract. This has been done to prevent such persons from being sued and undertaking liabilities that are unfair, owing to their immaturity or mental illness, or due to legal restrictions imposed on them. Generally, when someone is deemed incompetent, a guardian is appointed to manage their assets.

References

[1] (1903) 30 I.A. 114 (P.C.)

[2] Dr. R.K. Bangia, Contract-I p. no. 107-110 (Allahabad Law Agency, Haryana, Seventh ed., 2017).

[3] A.I.R. 1962 S.C.  779.

[4] A.I.R. 1928 Lahore 609

[5] A.I.R. 1937 All. 610

[6] (1914) 3K.B. 607

[7] (1863) 143 ER 360

[8] AIR 1949 Bom 215

[9][9] Dr. Avtar Singh, Law of Contract and Specific Relief p. no. 166-167 (EBC Publishing (P) Ltd., Lucknow, Twelfth edition, 2017).

[10] AIR 1957Pat 491.

[11] AIR 1975

[12] Theoretical Basis of Capacity to Contract and its Types, available at: https://www.lawctopus.com/academike/theoretical-basis-of-capacity-to-contract-and-its-types/ (last visited on July 29, 2021).

[13] See section 83, Civil Procedure Code

[14] See section 141(1)(b), the Insolvency and Bankruptcy Code, 2016

[15] See section 86, Civil Procedure Code

Tazeen Ahmed

Tazeen Ahmed is a first-year law student at Jamia Millia Islamia, New Delhi, inquisitive about Constitutional Law, Family Law, Corporate Law, Human Rights Law, and Criminal Law. She is a proficient writer, skilled in conducting legal research and organizing her articulations on social-legal and political issues. She holds a sound academic record, having scored 93.80 % in AISSE and 95% in both Political Science and English Language in AISSCE. She has held prestigious positions in the Student Council and been adjudged the ‘Student of the Year 2016, Gurgaon’ by UnivQuest. She has formerly served as a legal intern at ubadvocate, where her performance was marked “outstanding” by the team and is an Editor at The Wall of Justice blog. She is also an avid reader, a poet, and a political enthusiast. Above all, she is a dedicated and dynamic soul, ever-prepared to undertake challenging roles in the legal battlefield, and treats constructive criticisms as stepping stones towards progress.

...