CAPACITY TO CONTRACT

Article submitted by GopalaKrishnan, BCOM LLB (Hons), Sastra Deemed University.

ABSTRACT

Capacity to contract means a person’s capacity to enter into a legal agreement or contract. This article analyses the concept of capacity to contract, with particular focus to the Indian contracts act, 1872. With the help of legislation and case laws, this article tries to provide a deep insight of the said concept.

INTRODUCTION

An agreement enforceable by law is a contract.[1] Any agreement devoid of the same, i.e., legal enforceability, is void. For a contract to be enforceable by law there has to be proposal, acceptance and effective communication of both proposal and acceptance. Also necessary is the valid capacity of the parties to contract. Given this much, are these the only requisites for entering into a contract? No, a person must be legally capable of entering into a contract. This requirement is technically known as ‘capacity of parties to contract’.

CAPACITY TO CONTRACT

Legal capacity means the right or authority of a person to enter into an agreement. “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.”[2] From the above definition, it is inferable that there are three categories of people expressly prohibited to enter into a contract:

· Minors.

· Persons who are of unsound mind.

· Persons who are expressly prohibited, by any law, to contract.

We shall now see each of these categories in detail.

1. MINOR

In India, any person who is below the age of 18 is considered to be a minor. In cases where a guardian is appointed to the person or property of a minor by the court, majority is bestowed upon attainment of 21 years of age. A contract by a minor is void ab initio.[3] This is to protect the minor from his or her own immaturity and ignorance. But, it is completely alright for the guardian to enter into a contract on behalf of the minor. In Durga Thakurani Bije Nijigarh v. Chintamoni Swain[4], it was held that the guardian is competent to enter into contracts for the minor’s interest, except in cases of purchase of immovable property.

A minor’s contract, being void ab intio, has certain effects on the agreements. There can be no estoppel against a minor. Suppose a minor misrepresents his age and enters into a contract, it cannot be made held against him. This is because the very reason why minors are prohibited from contracting is to protect from liabilities arising out of it. The minor is also immune to liabilities arising out of the contract or from a tort as a result of entering into the contract, because of his incapacity to contract legally. Another effect of minor’s agreement is the equitable doctrine of restitution. If a minor misrepresents his age and obtains property or goods, he is liable to give it back only if the property or good is still in his possession. But as soon as repayment in any mode begins, restitution stops. For example, suppose A misrepresents his age to B, and B lends his money based on this representation. A can be forced to give the money back only as long as he is in possession of the money. Otherwise, he cannot be held responsible. This is supported by section 31 of the Specific relief act, 1963, by which a minor is granted a relief of cancellation.

Another important concept is ratification of contracts entered into by a minor upon attaining majority. Can a minor ratify a contract entered into by him after attaining majority? Suppose X enters into a contract with Y when he was seventeen years old. Two years later, i.e., when X becomes 19 years old, he conveys to Y that he will perform his obligation under their contract. Subsequently, X fails to keep up his part of the promise. Can Y sue X on the basis of the assurance given by X upon attaining majority? No, ratification of contracts by a minor is impermissible according to The Indian Contract Act, 1872. Upon attaining majority, a person can enter into as many new contracts as he wants to, but cannot validate or ratify a contract entered into by him when he was a minor.

BENEFICIAL CONTRACTS

A minor is allowed to enter into contracts that are beneficial to him, and which bears no obligation on his part. “In a general sense contracts which can be brought within certain categories and are also for the benefit of the infant can be supported. A trading contract does not come within ant of these categories. The only contracts of an infant which can be enforced are which relate to the infant’s person, as contracts by which he provides himself with clothes, food, or lodging or contracts of marriage, apprenticeship and service.”[5] Marriage contracts by a minor have been considered to be beneficial contracts according to various customs in India, but, a trade contract can never become a beneficial contract. A minor will, however, have the option to retire from a beneficial contract upon attaining majority, within a reasonable time.

2. UNSOUND MIND

Section 12 of the Indian contract act, 1872, defines what constitutes a sound mind for the purpose of entering into a legally enforceable agreement. The law holds that a contract entered into by a person of unsound mind is void. However, if a person usually of unsound mind enters into a contract during an interval of sound mind, it is valid. But, if a person who is usually of sound mind enters into a contract while he is in an interval of unsoundness of mind, the contract is legally void.

Illustration 1: G, a lunatic, enters into a contract with Z. This contract is void.

Illustration 2: Z, a lunatic, enters into a contract with G during a period of lucidity. This contract is enforceable.

3. DISQUALIFICATION

The Indian law of capacity holds that the following categories of persons are disqualified from entering into any form of contract:

· Convicts or criminals.

· Insolvent persons. (Individuals whose liabilities surmount assets.)

· Alien enemy or enemy of the state. (Persons who belong to a nation at war with our state.)

· Foreign ambassadors and sovereigns.

· A company contracting ultra vires.

· Pardanashin women

NECESSITIES

Necessities are things without which a person cannot reasonably sustain himself or herself. In this case, the inability of a person to contract is overlooked. If a person acquires necessities via a contract, the contract is enforceable against the property of the incompetent person. Section 12 of the Indian Contract Act, 1872, deals with the same. It states that:

“If a person incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.”[6]

It is pertinent to note the usage of the words ‘suited to his condition in life’, in the above section. This implies that a person can contract for necessities according to his lifestyle. What maybe a luxury for one person maybe a necessity for another. The section does not limit the scope of the term ‘necessity’, and allows persons to acquire whatever necessities they require in line with their way of life and social status.

LANDMARK JUDGMENTS

· Mohori bibee v. Dharmadas Ghose[7]

A minor’s contract is void ab initio, and cannot be enforced against him in a court of law.

In this case, Dharmadas Ghose, a minor misrepresented his age in the declaration to avail a loan of INR 20000/- against a mortgage of his property in favour of the moneylender. Upon execution of the mortgage, Dharmadas Ghose’s bought in an appeal contending that the mortgage executed by her son was void ab initio because of his incapacity to contract. The Privy Council upheld this view and observed that minor’s contracts are void ab initio.

A minor’s contract can be made enforceable, if and only if the minor holds up his obligation. In such cases, the other party can be compelled to perform his obligations.

· A.T. Raghava Chariar v. O.A. Srinivasa Raghava Chariar[8]

A contract of mortgage was entered into by a minor and a major. The minor discharged his obligation, but the major refused to hold up his end of the contract. The court held that since what is mortgagor is of full age and completely capable of entering into contracts, the contract is enforceable.

Suraj Narain Dube v. Sukhu Ahir[9]

This case held that a minor cannot ratify a contract entered by him, when he attains majority. This is because; at the time of entering into the agreement he or she was incapable of entering into a valid contract. In the present case, a minor executed a promissory note in exchange for borrowing some money. After attaining majority, he executed a second promissory note ratifying the same liability. The court held that the first promissory note is invalid due to incapacity to contract, and the second promissory note lacks consideration.

· Mir Sarwanjan v. Fakhruddin Mohamed Chowdhuri[10]

The guardian of a minor entered into a contract for the purchase of certain immovable property. The minor sued for specific performance, which was rejected by the court on the ground that the guardian is not authorized to contract for purchase of immovable property on behalf of the minor.

· Khan Gul v. Lakha Singh[11]

In this case, a minor fraudulently misrepresented his age to sell his land and received money. He did not uphold his end of the agreement and the plaintiff sued for specific performance. The court held that since the contract was void, specific performance was not possible. However, the court ordered the minor to return all the money he received from the plaintiff.

CONCLUSION

Capacity to contract is a very important concept that each and every individual has to understand clearly. In reality, it is not the case. Even though the Indian contracts act has defined the rules clearly, it is spread unevenly in the Act. By putting into one place most of the provisions relating to capacity to contract and its exceptions, this article aims at providing a better understanding of the concept. If people at large have a better understanding of the concept, several unnecessary conflicts and disagreements can be avoided. An added bonanza would be lifting the burden of deciding these cases off the judiciary’s shoulders.

[1] Section 2 (h), The Indian Contract Act, 1872. [2] Section 11, The Indian Contract Act, 1872. [3] Mohori bibee v. Dharmodas Ghose, (1903) I.L.R. 30 Cal 539 (P.C.). [4] A.I.R. 1982 Ori 158. [5] Cowern v. Nield, (1912) 2 K.B. 419. [6] Section 12, the Indian contract act, 1872. [7] Ibid at 3. [8] (1916) 31 M.L.J. 575. [9] A.I.R. 1928 All. 440. [10] (1907) I.L.R. 34 Cal 163. [11] A.I.R. 1928 Lah 609.