9/3/2018 Study Material-1: CAPACITY OF PARTIES

(Paper-5) Business Law

Study Material-1

1 Contents
1.3 CAPACITY OF PARTIES
(2) CAPACITY OF PARTIES
 
Section 10 of the Contract Act requires that an agreement to be enforceable by law must be made by
the parties competent to contract.
Section 11 of the contract Act provides that “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 disqualified
from contracting by any law to which he is subject.”
This Section deals with personal capacity in three distinct branches:
(a)   Disqualification by infancy, i.e. minors.
(b)   Disqualification by insanity, i.e. lunaties.
(c)   Other special disqualifications by personal laws, such as insolvancy, conviction etc.

Disqualification by Infancy
Age of Majority: A valid agreement requires that both the parties to the contract should understand the
legal implications of their conduct. They must have mature mind. They should be major in age.
According to Indian Majority Act, 1875, every person domiciled in India shall be deemed to have
attained his majority when he shall have completed his age of eighteen years and not before. In case,
guardian has been appointed to the minor or where the minor is under the guardianship of the court of
wards, the person shall become major on the completion of the age of 21 years.

Law Relating to Minor’s Agreement

The Act makes it essential that all contracting parties should be competent to contract, and if a person
is incompetent to contract by reason of infancy, he cannot make a contract within the meaning of the
Act. Therefore, an agreement with a minor is void and a minor can neither sue nor be sued upon it. The
Contract is also not capable of ratification in any manner. The parents of a minor are not legally
responsible for his contracts unless he acts as their agent.
Following important provisions govern agreements made with a minor.
(i)    Agreement is absolutely void: An agreement by or with a minor is void-ab-initio. It is considered to
be a nullity and non-existing from the very beginning. Thus, if a party who has parted with goods, can
trace them with the minor then he can recover damages for the breach of contract or recover their
price. Nor can money lent to such a minor be recovered because if that were to be allowed it would
tentamount of enforcing the contract.

Leading case: Mohiri Bibi V. Dharmodus Ghosh.

In this case a minor executed a mortgage for Rs. 20,000 and received Rs.8,000 from the mortgagee.
The minor sued for setting aside the mortgage. The mortgage claimed the sum which he had actually
paid, i.e. Rs. 8,000. The Privy Council held that as the minor’s contract was absolutely void, and no
question of money could arise in these circumstances.
However, if the minor has carried out his obligations, he can bring a suit against the other party for the
enforcement of the other party’s obligations.

Example:
A, a minor, advanced money to B against a mortgage. It was held that the mortgage was enforceable by
him or by the other person on his behalf, (Satyadev V. Tribeni) (1936).
But the contract is enforceable only when the minor has performed his part, the agreement is
unenforceable.

Example:
M entered into a contract on behalf of a minor with S to purchase some immovable property. On S’s
non-fulfilment of his promise, the minor filled a suit against S. It was held that the agreement was void
because the contract is still executory. Therefore, his plea could not be accepted. (Mir Sawargan V.
Fakhrudin Md. Chowdhry) (1912).
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9/3/2018 ratification: Since the contract is void ab initio it cannot
2.    No be ratifed
Study Material-1: by the
CAPACITY minor on attaining
OF PARTIES

the age of majority. However, a minor who, on attaining majority, takes up and carries on transaction
commenced while he was under disability, will bind himself for the whole transaction.
Example :(A)
F, an infant speculated on the stock exchange and became liable to the stockbrokers for £547. After
attaining the age of majority, he gave two bills for £50 each in satisfaction of the original debt. Held F
was not liable on the bills (Smith V. King, (1892) 2 R.B. 543).

Example :(B)
A, a minor, takes a loan of Rs. 1,000 from B during his minority. After attaining age of majority, A
applies for a fresh loan of Rs. 1,000 B gives the loan and obtain from A a combined promissory note of
Rs.2,000. This will be taken as a new contract and will therefore, be enforceable.
3.    No restitution: When a contract becomes void, it is not to be performed by either party. But if any
party has received any benefit under such a contract from the other party he must restore it or make
compensation for it to the other party. This is called restitution.
A minor is not liable to repay any money or compensation for any benefit that he might have received
under a void contract. Court, may however, in certain cases, while ordering for the cancellation of an
instrument at the instance of the minor, require him to pay compensation to the other party to the
instrument under Sec. 33 of the Specific Relief Act.

4.    No Estoppel: A minor is not bound by his mis-representations. If a minor procures a loan or enters
into any other agreement by representing that he he is of full age. He cannot be prevented from
pleading his minority in his defence. He will not be held liable under the contract. It was held in Sadiq
Ali Khan V. Jai Kishore (1928) that a deed executed by a minor is a nullity there can be no estoppel
against a statue, Thus the rule of estoppel as per S.115 of the Evidence Act, 1872 is not applied against
a minor.
But this does not mean that the minors are allowed to cheat and to enjoy the fruits of their fraud.
According to S.33 of the Sepcific Relief Act, 1963 Court will order, on equitable considerations for
restitution if the minor is still in possession of the money or things purchased out of it. The minor shall
have no liability if the money or things cannot be traced out in his hands.

Examples:
(a)   A minor borrowed Rs. 1000 on a fraudulent representation that he was a major, and he spent the
whole of the money in a picnic tour of Kashmir. In this case the creditor cannot sue for the realisation
of the money so advanced by him.
(b)    A minor fraudulently over states his age and takes delivery of a motor car after executing a
promissory note in favour of the trader for its price, though the minor cannot be compelled to pay on
the promissory note; but the court on equitable grounds may order the minor to return the car to the
trader, if it is still with the minor.
3.        Mino’s liability for necessities: All contracts relating to the necessities supplied to a minor
according to this status in life are valid. But only the minor’s property is liable for necessities, and no
personal liability is incurred by him.
Necessities must be things which the minor actually needs; therefore it is not enough that they be of a
kind which a person of his condition may reasonably want for ordinary use, they will not be necessities
if he is already sufficiently supplied with things of that kind, and it is immaterial whether the other
party knows this or not. Objects of mere luxury cannot be necessities nor can objects which, though of
real use, are excessively costly. The fact that buttons are normal part of any kinds of clothing, but it
will not make pearl or diamond buttons necessities.
Example:
A grocer supplies monthly rations for 6 months to B who is aged 17 years. On B’ failure to pay, he sues
him for the realisation of his dues. In this case B’s property is liable for the payment of credit rations
consumed by B during the period of his minority.
Costs incurred in successfully defending a suit on behalf of a minor in which his property was in
jeopardy are “necessities”.

6.    Minor as a beneficiary: All such contracts under which the minor is to receive some benefit or
which are beneficial to him are valid. These contracts include agreements which provide for the
teaching, instruction or employment of a minor. It is to be noted that only his property is liable for
liabilities arising out of such contracts. In no case he will be personally liable.
English law has expressly made a contract for the minor’s benefit enforceable. But in India all contracts
made by minors are void. Still majority of the contracts for the benefit of minor have been held to be
enforceable on the ground that it will be unjust in the circumstances to deprive a minor of a benefit
which he may be entitled to get under a contract.
7.    Minor as Agent: A minor can be appointed as an agent. He can represent his principal in dealings
with other parties. Since minor does not incur any personal liability, he cannot be held responsible for
his any act of negligence or fault. Therefore the principal will be responsible to the third parties for the x
acts of his minor agent. He cannot hold the minor agent personally liable for any wrongful acts. Thus Please Ask
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 8.    Minor
9/3/2018 as a partner: A minor cannot be a partner of a firm.
StudyAn agreement
Material-1: CAPACITYof
OFpartnership
PARTIES making a
minor a full-fledged partner is invalid between all partners. However, he may be admitted to the
benefits of an already existing partnership firm with the unanimous express consent of all the existing
partners. Such an agreement may be entered into by his guardian on his behalf with the partners.
A minor admitted to the benefits of partnership, has a right to share the property and profits of the firm
in the proportion agreed upon by him with the other partners. Further, he has a right to have access to
and inspect and copy any of the accounts of the firm but not the books of accounts of the firm. He
liability is limited to the extent of his share in the firm.

9.        Minor as a member of a company: A minor cannot be a member of a company since he is

incompetent to enter into a contract.
A minor may be allotted shares. His name may remain on a company’s register of members, but during
minority he incurs no liability. On attaining majority and becoming aware of the presence of his name in
the register of members, the major has the option to repudiate his shares within a reaonsable time.
Where he does not do so he may safely be taken to have accepted his position. His liability as a share-
holder then commences.
However, it a minor has been allotted shares through ignorance and his name has been entered in the
Register of members both the compoany and the minor, can repudiate the allotment of shares during his
minority.

10.  Surety for a minor: A person who stands as a surety for a loan taken by the minor will be liable to
the creditor for payment of the loan, even though minor was not liable.

11.  Mortages and sales in favour of minors : A sale or mortgages of his property by a minor is void.
But a duly executed transfer by way of sale or mortgage in favour of a minor who has paid the
consideration money is not void and it is enforceable by him or any other person on his behalf. A minor,
therefore, in whose favour a deed of sale is executed is competent to sue for the possession of the
property conveyed thereby.
12.   A minor can not be declared as an insolvent even for his necessities of life. Only his property is
liable even for necessities of life and he, personally, is not liable for the same.
Thus, the contract made with the minors can be under three heads.

(i)        Valid Contracts: They include (a) contracts for necessities which include goods as well as
services. (b) Contracts for loans taken to purchase “necessities”.

(ii)        Voidable Contracts: This category of voidable contracts is not recognised our country. This
category includes those contracts in which minor is a beneficiary. Only minor is entitled to enforce but
not the other party. They can be reasonably called as contract voidable at the option of the minor.
(iii)  Void Contracts: All contracts by a minor other than those referred to above shall be void.
Salmond has defined the position of a minor in the following words:
“The law protects their persons, preserves their rights and estates, excuseth their laches and assists
them in their pleadings, the judges are their counsellors, the jury are their servants and law is their
guardian.”
Disqualificatioin by insanity
According to Sec.12 “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 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.

Example:
(a)    A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those
intervals.
(b)   A sane man, who is delirous from fever, or who is so drunk that he can not understand the terms of
a contract or form a rational judgement as to its effect on his interests, can not contract during such
delirium or drunkness.
Thus, idiots, lunatics and drunkard are not considered to be persons of sound mind. 

(i)    Idiot : A person who is devoid of any faculties of thinking or rational judgement. All agreements,
other than those for necessaries of life, with idots are absolutely void.
(ii)    Lunatic: A person whose mental powers are derange is called a lunatic. Lunatic is not a person
who is continuously in state of unsoundness of mind but he may have lucid intervals. period in which he
is to his senses. Agreement with lunatics are void except those made during lucid intervals and made for
necessities of life. However, for necessities of life, the property of such persons is liable. He does not
have personal liabilities. x
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 (iii)  Drunkards:
9/3/2018 A person under the influence of drink or drugs,
Studystands
Material-1:on the same
CAPACITY footing as lunatic.
OF PARTIES

Mere drunkenness affords no ground for resisting a suit to enforce a contract. But where the judgement
of one party was, to the knowledge of the other part, seriously affected by drink, equity will generally
refuse specific performance at the suit of the other. And, where the court is satisfied that a contract
disadvantageous to the party affectedhas been obtained by “drawing him into drink” or that three has
been real unfairness in taking advantage of his position, the contract may be set aside.

13.  Persons disqualified by any other laws: Certain types of people are specifically disqualified by
special statues from entering into valid contracts.

(I)   Alien Enemies: A person who is not an Indian citizen is an alien. An alien may be either an alien
friend or an alien enemy. An alien friend is one, whose state or Sovereign is at peace with India. He has
full contractual capacity like an Indian Citizen subject to certain restrictions put by the Government of
India, e.g., and alien can not acquire any ownership interests in any Indian ship. On the declaration of
war between India and alien’s country he becomes an alien enemy. A contract with an enemy becomes
unenforceable on the outbreak of war. With regard to a contract with an alien enemy following rules
will apply:
(i)      Since trading with an alien enemy is considered illegal, no contract can be made with an alien
enemy during the subsistence of war except with the prior approval from the Central Government.
(ii)      Contracts entered into before the outbreak of war will be suspended during the course of war.
They will be performed after the war is over.
(II)   Foreign Sovreigns and Ambassadors: Foreign sovereigns and accredited representatives of
foreign states, i.e., Ambassadors. High Commissioners. enjoy a special priviledge in that they can not be
used in Indian courts, unless they voluntarily submit to the jurisdiction of Indian courts. Though they
can enter into contracts through agents residing in India. In such cases the agent becomes personally
liable for the due performance of the contracts.

(III) Corporations: A corporations is only an artificial person created by law, e.g. a company registered
under the Companies Act, public bodies created by statue such as Industrial Finance Corporation of
India, A corporation exists only in contemplation of law, it has no physical body or form. It can hold
property, can sell or purchase goods and can sue or be sued in relation to any of the contracts entered
into by it. Being a mere creature of law it cannot go beyond those objectives which have been laid down
in the charter of its creation, i.e., Memorandum of Association. Further, its capacity and powers to
contract are also limited by its charter. Any contract beyond such powers is ultra vires and void. Such
ultravires contracts can not be ratified even by the unanimous vote of all its members.
Besides that a Company etc. can not make certain contracts at all e.g., a contract to marry. 

(IV)  Convicts: While undergoing sentence a convict is incapable of entering into a contract. This
inability comes to an end on the expiration of the sentence or if he has been “pardoned”.
(V)   Professionla persons: In England barristers-at law, are prohibited by the etiquette of their
profession from suing for their fees. So also are the Fellow Members of the Royal College of Physicians.
In our country no such professional disqualification exists. 

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