INDIAN CONTRACT ACTS 1872

CAPACITY OF CONTRACT - PER-

SONS OF UNSOUND MIND.
 DONE BY :
MADHURI. B
1ST YEAR, 3 B.L(Hons)

TABLE OF CONTENTS

1) INTRODUCTION.............................................................3
2) MEANING OF UNSOUND MIND....................................3
3) TEST OF UNSOUNDNESS OF MIND............................4
4) INDIAN LAW v. ENGLISH LAW.....................................5
5) CASE LAWS...................................................................7
6) CONCLUSION................................................................11

2
INTRODUCTION

The ancient rule of the common law was that a lunatic could not set up his own in-
sanity (though his heir might) so as to avoid an obligation which he had undertaken.
But by 1847 Pollock C.B. was able to say, in delivering the judgment of the Court of
Exchequer Chamber in Moulton v. Camroux, 2 Ex 487, that "the rule had in modern
times been relaxed, and unsoundness of mind would now be a good defense to an
action upon a contract, if it could be shown that the defendant was not of the capac-
ity to contract 'and the plaintiff knew it." Imperial Loan Co. v. Stone [1892] of the

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Sale of Goods Act 1979 makes the same provision for persons who are incompetent
to contract by reason of mental incapacity as for minors.

A lunatic so found by inquisition was held to be incapable of making a valid inter-

pretation about disposition of property (although he could make a valid will) since
this would be inconsistent with the position of the Crown under the Lunacy Acts: Re
Walker [1905]. Presumably the position of a lunatic so found with respect to con-
tracts not effecting inter vivos dispositions of his property was the same as that of a
lunatic not so found; that is, he would be bound unless he could show that he was
not in fact of capacity to contract and that the plaintiff knew it. The Lunacy Acts
have been repealed, but an order under the Mental Health Act 1983, may have the
same effect as a finding of lunacy.

UNSOUNDNESS OF MIND IN CONTRACTS

The general theory of the law in regard to contracts made by parties affecting their
rights and interest is that there must be full and free consent in order to bind the
parties. Consent is an act of reason combined with deliberation. It is upon the
ground that there is a lack of rational and deliberate consent that transaction of per-
sons of unsound mind are held to be void. 1

To constitute a valid and binding contract, a party contracting must have the capaci-
ty to arrive at a reasoned judgement, as to the consequences of the transactions he
is entering into. This does not mean that he must necessarily be suffering fro lunacy
to disable him from entering into a contract. To all appearances, a man may behave
in a normal fashion, but he may really be incapable of understanding a bargain or
transaction, and of forming a rational judgement as to its effect upon his interests.2

Mental incapacity, arising out of any reason deprives a person not only of a full un-
derstanding of a transaction, but also the awareness that he does not understand it.
This distinguishes it from lack of ability arising out of illiteracy and unfamiliarity
with the language. 3

When making a contract it is required that the minds of the parties meet, and an in-
sane person is incapable of understanding the nature of his acts, it would be impos-
sible for a person who does not know what a contract is to enter into one and to

1 Commentaries on the Indian contract Act, M.R. Mallick, second edition, kamal law house, Calcutta, 2000.
2 Principles of Law of Contract, Praful Ramanlal Desai, Second edition, N.M. Tripathi Pvt. Ltd, Bombay, 1988
3 Smith and thomas; Casebook on contracts (online version) : acssessed on 14/11/2012
4
 make any contract at all, and all the contracts that he tried to enter into would be
void. In practice, however, while the contracts of a person who has been adjudged
insane are thus considered void, the contract of other parties of unsound mind will
be merely voidable at his option, or of that of the person qualified to choose for him.
Certain contracts of insane persons will be held valid. Such are contracts created by
law, and contracts for necessaries, including necessaries for his wife and children.
In such cases the same limitations must be observed as in the case of those fur-
nished to infants, and the insane person held liable, not for the contract price, but
for the reasonable value of the goods. Mere mental weakness, from whatever cause
it may result, which does not prevent the party from understanding the nature of the
contract, will not render the contract voidable except under such circumstances as
will constitute a case of undue influence.4

TEST OF UNSOUNDNESS OF MIND

1)A person who is not of sound mind is said to be of unsound mind. That is a per-
son who is an Idiot,lunatic,insane person is a person of unsound mind.

2) Insanity - A disposition by lunatic is completely void under the English law.5 But
for a contract to be declared void mere dilution is not sufficient. It is a matter if the
dilution affected the contract or disposition. It is also be to noted if the party was
suffering from such a mental disability that he was unable to understand the nature
of the contract. Therefore, it will be declared void by the English law under such cir-
cumstances and voidable if the other party contracting knew the mental disability of
the other.

3) Mental Idiocy - An idiot or a natural fool is a person that has no understanding

from his infancy. Contracts entered into by an idiot than those for necessaries are
void.

4) Old age - With increasing old age there must be a loss of vigor and even mental
energy. So when any particular transaction is made, there is that infirmity of mind
which is disables the man of old age from understanding what he is doing. Only
then can a contract made by that individual deemed to be void at the option of the
man. 6 Lack of capacity is inferred only if, due to age, the mind has become vacuous
and delusory. A 70-year old man gifted some property to his daughter. He offered
the delusion that he possessed thousands of acres of land when he in fact pos-

4 http://chestofbooks.com/society/law/Popular-Law-3-Contracts/Section-8-Persons-Of-Unsound-Mind.html
5 case law : Re walker (1905)
6 The law of Contracts, M. Krishnan Nair, Fifth Edition, Orient Longman, Hyderabad, 1996.
5
sessed only 15-20 acres of land in India. It was held that he could not assess the ef-
fect of the gift on his own interests and so was found to lack contractual capacity.7

5) Drunken state- Mere drinking is not an hindrance to enter into a contract. But
drunken state of mind is a hindrance to enter into a contract. When a person is so
drunk that he cannot form a rational judgement about the terms and conditions of
the contract then such contract is a void contract.But if he is at such a state of mind
where he has consumed alcohol but he can still understand the terms and condi-
tions of the contract then that contract is valid as he could understand the terms
and conditions of the contract,that is why it is said that mere drinking is not an hin-
drance to contract. When a person owing to drunkenness and debauchery was quite
incapable of understanding the contract made by him and of forming a rational
judgement as to its effect upon his interest is held to be of unsound mind and such
a contract under the Indian law in view of Section 11 must be held to be void con-
tract. 8

It has to be understood that a the person has to understand the nature of the con-
tract he is entering into.He has to make rational judgement and understand the
terms and conditions of the contract,for this purpose he has to be of sound mind. A
person who is an idiot,lunatic and insane cannot understand the terms of the con-
tract. Certain types of unsoundness of minds such as idiot are acquired since birth
and others such lunacy and insanity are acquired later.
A person who is of unsound mind can be under lucid interval at certain times. Lu-
cid interval is a state where he is not of unsound mind and can form a rational judg-
ment about the terms of the contract.
At this state of lucid interval he can enter into a contract but if he has entered into a
contract when he is not under lucid interval then that contract is void. Eg: A who is
undergoing treatment at a mental asylum escapes from there and goes back to his
native where he enters into a contract to sell his ancestral property.Such a contract
is totally void as he is a person who was undergoing treatment at an asylum.

INDIAN CONTRACT LAW VS. ENGLISH CONTRACT LAW

The Indian Contract Act was evolved from its english counterpart. Here it is going to
be distinguished as to what extent the English model differs from that of the Indian
one.

7 case law : Govindswami Naicker v. K.N. Srinivasa Rao MANU/WB/0260/1932 : AIR 1933 Cal 488.
8 case law : Kamala v. Kaura 15 IC 404
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 There are of course, under the English law, degrees of mental disability. English
contract law recognizes three categories.

1) First, there are those whose mental state is such that their affairs are under the
control of the court, by virtue of Part VII of the Mental Health Act of 1983. Since the
court effectively takes over the individual’s power to make contracts, any contracts
purported to be made by the individual will be unenforceable against him or her.
2) Secondly, there are those mental health state is such that, although they are not
able under the control of the court, they are unable to appreciate the nature of the
transaction they are entering into. Contracts made by the people in such a condition
will be enforceable against them entering into. Contracts made by people in such
condition will be enforceable against them even if the contract may in some sense
be regarded as "unfair", unless it is proved that the other party was aware of the in-
capacity. 9

3) The third category consists of those people who are capable of understanding
the transaction, but who are, as a result of some mental disability, more suspectible
to entering into a disadvantageous contract. Contract made by such people are con-
sidered to be binding, unless affected by the rules of " undue influence".

In English law, a person of unsound mind is incompetent to contract, although he

may avoid his contract if he satisfies the court that he was incapable of understand-
ing the contract and the other party knew it. The contract is voidable at his option
then. It becomes binding on him only if he affirms it.

HALSBURG'S LAW OF ENGLAND STATES :

"Consent is an act of reason and of volition or choice, and it is on the ground that
there is a want of rational and deliberate consent that he contracts of mentally dis-
ordered peons may be invalidated. A valid contract cannot be made by a person suf-
fering from such incapacity of mind as not to understand the nature of what he is
doing"

Under the English law, the contracting capacity of a drunken person is the same as
that of one who is mentally afflicted, such contract is not altogether void, but is
voidable at the instance of the person who entered into the contract in such a state
of drunkenness as not to know what he was doing and if this fact is appreciated by
the other contracting party. But under Indian Contract Act, such an agreement

9 Cheshire, Fifoot and Furniston’s Law of Contract, Michael Furninston, 15th edition, Oxford University Press,
Delhi, 2007.
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would be void and therefore unenforceable. A drunken person is liable for neces-
saries supplied to him while suffering from incapacity to contract. A similar ap-
proach would be taken of agreements made under the influence of other intoxicat-
ing substances.
In terms of issues concerning mentally disordered persons, English and Indian laws
differ to a certain extent. Though the Indian law developed what constitutes a " men-
tally disordered person" from its English counterpart, Mental Health Act of 1983, the
positions are quite different.

In Imperial loan Co. v. Stone where this rule was stated, the action was on a promis-
sory note and it was argued in appeal that" if a man becomes so far insane as to
have no mind perhaps, he ought to be deemed dead for the purpose of contracting".
But some judges felt that the contracts of a person non compos mantis may be
avoided inly when this condition can be shown to have known the mental condition
is since " No man of full age shall be received in any plea by the Law, to stultify and
disable his own person."

In Campbell v Hooper, where a mortgagee sought a decree directing repayments

and foreclosure in default in default of such repayment and where there was evi-
dence that at the time the mortgage was executed the mortgagor was a lunatic.

The Indian Law regarding the contractual capacity of mentally disabled persons is
however different. When a person imbalanced in mind executed a sale deed, the
transferee cannot acquire any right, title or interest. In Jyotindra Bhattacharjee v.
Sona Bala Bora, late Bhagirath Bora executed a sale deed in favor of the Plaintiff
transferring the house property. It was alleged by the wife and sons of late Bora that
at the time of execution of sale deed, the expectant was imbalanced in mind and his
mental sickness deteriorated so much that he instated a criminal case against his
family members and therefore, the sale trisection was done fraudulently. It was held
that the conduct if the expectants indicated that he was a normal person and men-
tally unsound at the time of the execution indicates that he was a normal person and
mentally unsound at the time of execution of the sale deed and, therefore, did not
confer any right, title and interest on the Plaintiff. As a logical corollary of the Privy
Council decision in Mohoribibi's case of a minor's incompetency. It naturally follows
that a lunatic's contract must also be void under Indian Law. Where, however, a per-
son supplies necessaries for a lunatic, he is entitled to be reimbursed out of the
property of the lunatic under the provisions of Section 68 of the Indian Contract Act.

Overall, it is quite evident that the Indian and English concerns in contract law with
respect to unsoundness of mind are similar apart from a few exceptions. However,
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in English law, unsoundness as a concept does not exist but it comes under the am-
bit of incapacity to contract which includes other ancillaries like Public Corpora-
tions and Minority. But in the Indian context, unsoundness is limited to mental dis-
ability, intoxication, senility and idiocy.

Where unsoundness of mind is proved by definite medical evidence, the fact that
the person was in a lucid interval when he made the contract must also be prayed
as string and as mush demonstrative evidence. The question may arise whether a
lunatic adjudged can contract during intervals of sound mind.10 Illustration (a) to the
section suggests that a lunatic in a mental asylum can contract during a lucid inter-
val. In England, a lunatic not so cound or before he is so found, by inquisition is not
the reason of the fact absolutely incapable of contracting, though the burden of
proof in such a case is on the party maintaining that he is not insane, or that the
contract was made during a lucid interval11 and the same is the law in India.

In England, an individual is classified to be " mentally disordered" if he/she satisfies

the definition as espoused under the Mental Health Act of 1983. According to this
Act, under section 2, a person suffering from " mental disorder" means "meant ill-
ness, arrested or incomplete development of mind, psychopathic disorder and any
other disorder or disability of mind.

CASE LAWS :

LANDMARK CASE IN ENGLISH LAW :

Masterman-Lister v Brutton & Co. (Nos 1 and 2) [2002] Masterman-Lister v Jewell

and Another 2003

The Claimant suffered serious head injuries at the age of 17 on the 9th September
1980 when he was involved in a road traffic accident. He commenced an action on
the 24th December 1980 with his father as litigation friend, but adopted the action
himself after reaching the age of 18 on the 24th July 1981. In September 1987, after
receiving advice from his solicitors and counsel, he accepted an offer to compro-
mise his claim for £76,000 plus costs.

In December 1993, the Claimant issued proceedings against his former solicitors
claiming damages for professional negligence and breach of contract. The writ was

10 Mental Health Act 1983.

11 Mohanlal Malangopaly Marwadi v. Vinayak Sadsheo Sonak AIR 1956 Nag 251
9
not served until May 1996. Liability was denied. In June 1997, the Claimant was ex-
amined by a neuropsychiatric rehabilitation consultant, who expressed the view that
since the time of his accident, the Claimant had been a “patient” within the meaning
of section 94(2) of the Mental Health Act 1983 ( Exercise of the judge’s functions:
“the patient”.) 12

The Claimant also sought to reopen the settlement of his earlier claim on the ground
that it had never received the approval of the court. The trial judge ruled that the
Claimant had been a patient from three years after the accident, but not thereafter
and that he had full capacity when the first action was compromised.

HELD:-

Lord Justice Kennedy went over the facts of the case. He considered the old Rules
of the Supreme Court Order 80, which defined a patient as someone who was “inca-
pable of managing and administering his property and affairs.” Rule 2(1) provided
that a person under a disability could not bring or make a claim except by a next
friend and Rule 10 provided for approval to be sought from the court to any settle-
ment.

There was no criticism of those who had originally advised the Claimant, for failing
to recognize that the Claimant was a patient. It was simply contended that from the
date of the accident, the Claimant was a patient, who could only settle his claim with
the approval of the court.

First it had to be recognized that someone who was treated as a patient for the pur-
poses of Order 80 was not necessarily and might never become accepted by the
Court of Protection as a patient pursuant to section 94(2) of the Mental Health Act
1983. Section 94(2) required a nominated judge to address that issue, whereas un-
der Order 80, no judicial officer had to consider medical evidence or be satisfied as
to incapacity.

Secondly the issue of capacity was important in relation to the Claimant’s ability to
sue his former solicitors during the six years after September 1987, and the limita-
tion provisions of section 28(1) of the Limitation Act 1980.

The Claimant’s counsel submitted that the Claimant was a patient for the purposes
of the new Civil Procedure Rules (which replaced the Rules of the Supreme Court in
1999) and in particular CPR Rule 21.1(2)(b). The wording was different insofar the
12 http://www.legislation.gov.uk/ukpga/1983/20/contents : accsessed on 14:11:2012
10
CPR referred to “own affairs” as opposed to the words “property and affairs” in the
old RSC.

Lord Justice Kennedy said that the Official Solicitor acted at any one time for some
1700 patients in civil and family proceedings.
There was no definition in the Mental Health Act 1983, in the Rules of the Supreme
Court or in the Civil Procedure Rules of the words “incapable of managing and ad-
ministering…..his affairs” but in In Re F (Mental Patient: Sterilization) [1990] 2 AC 1 it
was held that this did not extend to physical care and/or treatment. It included “only
business matters, legal transactions and other dealings of a similar kind.”
It was common ground that there was a presumption of capacity. However Lord Jus-
tice Kennedy said that he did not accept a presumption that incapacity continued af-
ter a finding of incapacity.

Ronald Harry Bailey v. Matthew George Warren 200613

The Claimant suffered severe head injuries in a road traffic accident on the 3rd May
1998. He and a friend, who had been drinking were crossing a four lane urban dual
carriageway late at night. (The friend later compromised her own personal claim on
a 50/50 basis). Neither the Claimant nor his friend had any memory of stepping out
into the road. The Defendant pleaded guilty to driving without due care and atten-
tion. He had little recall of the events.
He had made a good physical recovery to the extent that he was able to return to
work in October 1998 albeit on light duties, but his injuries resulted in permanent
damage to his cognitive functions, although there was disagreement about the ex-
tent of that damage according to the experts. In February 1999 he returned to his
former duties as a machine operator but in March 1999 he developed post traumatic
epilepsy and could no longer work.
In March 2000 the Defendant’s insurer wrote to the Claimant’s solicitors offering to
settle the case on a 50/50 basis. Counsel advised in strong terms that such a settle-
ment should be accepted. In September 2000, the Claimant was consulted and he
discussed the offer with his family. His step-brother who was nominated on his be-
half, contacted the Claimant’s solicitors giving his approval to the compromise.
Liability was settled on a 50/50 basis in November 2000. At that point no-one had
considered whether the appointment of a litigation friend was appropriate and it ap-
peared that those advising him were heavily influenced by the fact that the Claimant

13 http://www.mjsol.co.uk/library/cases/child-abuse/ronald-harry-bailey-litigation-friend-janet-ashton-
matthew-george-warren-2006/ : accessed on 14/11/2012
11
was being monitored by a consultant in rehabilitation medicine, who described his
recovery as “excellent.” Proceedings were commenced in April 2001 and in Decem-
ber 2001, judgement was entered on a 50/50 basis on liability. At that point quantum
still fell to be determined.
In January 2003 a professor of neurology suggested that the Claimant lacked capac-
ity and application was made to appoint a litigation friend. In August 2003, there was
a change of solicitors. Those solicitors expressed concerns about the level of inves-
tigation carried out by their predecessors and the settlement on liability. They ar-
gued that the settlement should have been on a full liability basis.
The Claimant’s father was appointed as litigation friend and he applied to set aside
the judgment on liability on the basis that, at the time of the settlement, he was a pa-
tient under CPR Part 21. The Claimant’s father was later replaced by his sister. Mr
Justice Holland found that although the Claimant was now a patient, and had been a
patient in December 2001, he was not a patient in November 2000, for the purposes
of agreeing a 50/50 split on liability.
Mr Justice Holland heard no oral evidence. There was a police report, photographs
and three witness statements, two from the Defendant and one from an independent
witness, who had not seen the collision. The layout of the junction had also
changed since the time of the accident. Justice Holland said that in his view, whilst
he would query an apportionment less favourable to the Claimant than 60/40, it
might have been difficult to resist a strong submission in favour of a 50/50 split.
Therefore the settlement of 50/50 would be approved.
The Claimant sought permission to appeal against the finding to the effect that he
was not a patient in November 2000.

Lady Justice Hallett reviewed the existing medical evidence. Some of that evidence
suggested that the Claimant was a patient and some suggested that he was not. She
considered the terms of CPR 21, which states:

21.2(1): “A patient must have a litigation friend to conduct proceedings on his be-
half.”

21.1(2) “Patient means a person who by reason of mental disorder within the mean-
ing of the Mental Health Act 1983 is incapable of managing and administering his
property and affairs.”

21.3(4) “Any steps taken before…a patient has a litigation friend shall be of not ef-
fect unless the court otherwise orders.”

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21.10(1) “Where a claim is made by or on behalf of a patient….no settlement, com-
promise or payment….shall be valid, so far as it relates to the claim, by or no behalf
of…the patient without the approval of the court.”
Lady Justice Hallett then considered the landmark case of Masterman-Lister v
Brutton & Co. [2003] WTLR 259 which deals with the test for incapacity and the as-
sessment of incapacity.

CASE LAWS IN INDIA :

DRUNKENNESS ( UNSOUND MIND)

Chacko and Anr. Vs. Mahadevan14

The facts of the case are that Chacko had land of an extent of 20 cents (100 cents
being equal to 1 acre). By sale deed dated 4.9.1982, Chacko sold one cent out of this
land for Rs. 18000. Thereafter Chacko sold another three cents of this land to Ma-
hadevan for Rs. 1000 sale deed dated 11.7.1983. The suit O.S.431 of 1983 was filed by
Chacko and Annakutty seeking to set aside that sale deed dated 11.7.1983, on the
ground that it was vitiated by fraud and was hence null and void and for a prohibito-
ry injunction restraining Mahadevan from entering into that property. The averment
in the plaint was that Chacko was given liquor by Mahadevan and others and under
that influence the sale deed was got executed. Hence it was void. The defendant Ma-
hadevan denied the plaint's allegations.
The trial court held that Chacko and Annakutty had not proved any vitiating circum-
stances to invalidate the said sale deed dated 11.7.1983 and consequently title to the
said land passed to Mahadevan.

Chacko and Annakutty filed an appeal before the First Appellate Court. The First Ap-
pellate Court held that the fact that one cent land was sold for Rs. 18000 (sale deed
dated 4.9.1982) and three cent land was sold (sale deed dated 11.7.1983) for a sum of
Rs. 1000, showed that this was an unconscionable transaction and hence the sale
deed dated11.7.1983 was liable to be set aside. Aggrieved Mahadevan filed a Second
Appeal, which was allowed by the impugned judgment.

It may be mentioned that in a First Appeal filed under Section 96 CPC, the appellate
court can go into questions of fact, whereas in a Second Appeal filed under Section
100 IPC the High Court cannot interfere with the findings of fact of the First Appel-
late Court, and it is confined only to questions of law. Hence we have to see the
judgment of the First Appellate Court and its findings of fact.
14 http://jajharkhand.in/judg/sc/pdf : accessed on 14:11:2012
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 A perusal of the judgment of the First Appellate Court dated 29.6.1988, copy of
which is Annexure - P2 to this appeal, shows that it has been recorded therein that
Chacko was not having sound mind when he executed, which is established from
which is the medical certificate. He was treated from 11.8.1983 to 14.8.1983 in Mental
Hospital, Trichur for Alcoholic Psychosis. This is a finding of fact which could not
have been interfered with by the High Court in Second Appeal. Moreover, it is estab-
lished from the facts that one cent of land was sold for Rs. 18000 on 4.9.1982 while
10 months thereafter three cents of land was sold for only Rs. 1000. This corrobo-
rates the finding of the First Appellate Court that Chacko was not of sound mind at
least at the time when he executed the sale deed dated 11.7.1983. If one cent of land
costs Rs. 18000 then three cents of land should ordinarily cost Rs. 54000. No one in
his senses would sell property worth Rs. 54000 for Rs. 1000.
According to the well known Latin maxim 'res ipsa loquitur' i.e. the matter speaks
for itself. Hence it is obvious that Chacko sold the land by sale deed dated 11.7.1983
when he was not of sound mind and some fraud was played on him at that time.
In the circumstances, we set aside the impugned judgment of the High Court and re-
store the judgment of the First Appellate Court dated 29.6.1988 and we quash the
sale deed dated 11.7.1983. The Appeals are allowed. There is no order as to costs

CONCLUSION

As can be seen from the above explanations, there were two conclusions that were
drawn. The first assumption is that whether the Indian and English positions in con-
tract law with regards to unsoundness was identical or not. To conclude, that the In-
dian model was heavily borrowed from its English counterpart and the basic struc-
ture is based on English common law notions.
The second conclusion is that if “mentally ill” and “mentally disordered” persons
under the Mental Health Acts of England and India were comprehensive enough to
include all types of mental illness. In English law they made an attempt to differenti-
ate both and to define the term in a more all inclusive manner unlike in India.

BIBLIOGRAPHY

1) CONTRACT & SPECIFIC RELIEF, AVATAR SINGH, TENTH EDITION.

2) practicalacademic.blogspot.in
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3) en.wikipedia.org

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