Capacity and Competency to Contract under Indian Contract Act

As per Section 11, competency to contract for any person is as follows:- 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.

Section 10 of the Indian Contract Act provides that an agreement in order to be a contract, must satisfy the following conditions:

• It must be made by free consent of the parties.
• The parties must be competent to contract.
• It must be made for a lawful consideration and with a lawful object.
• It should not have been expressly declared as void by law.

Also, there must be consensus ad idem or identity of minds in the sense that parties have agreed about the subject matter of the contract at the same time and in the same sense, as evidenced by offer and acceptance(Section 13). It has been observed that the agreement must import an intention to create a legal relationship between the parties and that agreements relating to social matters are not enforceable by law.[1]

Competency to Contract under Indian Contract Act

As per Section 11, competency to contract for any person is as follows:-

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.

Age of majority

In India the age of majority is regulated by the Indian Majority Act (Act IX of 1875). Every person domiciled in India attains majority on the completion of 18 years of age. Except when a guardian of a minor’s person or property has been appointed by the court, in such case it is 21. [2]

Competency to Contract: Position of Minor’s Agreement

Effects of Minor’s Agreement

1. No estoppel against minor: There can be no estoppel against a minor i.e., if a minor by misrepresenting his age induces another to contract with him, then also he cannot be made liable.

2. No liability in contract or in tort arising out of contract: A minor is incapable of giving consent, and the nature of the minor’s agreement is a nullity and cannot be enforced. [3]

3. Doctrine of Restitution: If an infant by misrepresenting his age, obtains property or goods, then he can be compelled to restore it, but only so long as the same is traceable in his possession, this is called the equitable Doctrine of Restitution. Where the infant has converted or sold the goods, he cannot make to repay the value of goods as that would lead to enforcing a void contract. When the infant has obtained the cash instead of goods, then in this case again the Doctrine of Restitution is not applied.[4]

In Mohori Bibee v. Dharmodas Ghosh[7], a minor Dharmodas Ghosh mortgaged his immovable property to Brahmo Dutt a money lender to secure a loan of Rs. 20,000. The actual amount was not paid by the plaintiff as he paid Rs. 8000 only and refused to pay the rest amount. Minor’s mother said that his son is not liable to pay the sum as he was a minor. The privy council held that the minor contract is void and accordingly the Brahmo Dutt’s appeal was dismissed.

An agreement entered into by a minor is altogether void

Contract with or by a minor is altogether void. The Indian Contract Act simply says that only a person who is a major jas the competency to contract. The main reason for holding a minor’s agreement void is that a minor is incapable of giving a promise imposing a legal obligation.

Minor can be a beneficiary

Though a minor does not have the competency to contract, nothing in the Contract Act prevents him from making the other party bound to the minor. Thus, a promissory note duly executed in favour of a minor is not void and can be sued upon by him. A minor cannot become a partner in a partnership firm. However, he may, with the consent of all partners, be admitted to the benefits of a partnership (Section 30 of the Indian Partnership Act, 1932).

Minor can always plead minority

A minor’s contract being void, any money advanced to a minor on a promissory note or otherwise cannot be recovered. Even when a minor procures a loan by falsely representing that he is full age, it will not stop him from pleading his minority in a suit to recover the amount and the suit will be dismissed.

But where a minor had fraudulently mortgaged and sold certain properties, the Court held that on the cancellation of the agreement at the instance of the minor the lender and purchaser must be compensated.

Ratification on attaining majority is not allowed

As a minor’s agreement is void he cannot validate it by ratification on attaining a majority. For instance, a minor borrows money and executes a promissory note. On attaining majority, he executes a fresh promissory note in substitution of the one executed as a minor.

The second promissory note is also void being without consideration. But a person who supplies necessaries of life to a minor or to one whom the minor is legally bound to support, according to his situation in life, is entitled to be reimbursed from the property of the minor not on the basis of any contract but on obligation resembling a contract. However, a minor’s property is liable for necessaries and no personal liability is incurred by him.

Contract by a guardian – how far enforceable

Though a minor’s agreement is void, his guardian can under certain circumstances enter into a valid contract on the minor’s behalf. Where the guardian makes a contract for the minor, which is within his competency to contract and which is for the benefit of the minor, there will be a valid contract which a minor can enforce. For instance, a guardian can make an enforceable contract of marriage for a minor.

But all contracts made by a guardian on behalf of a minor are not valid. For instance, the guardian of a minor has no power to bind the minor by a contract for the purchase of immovable property. But a contract entered into by a certified guardian (appointed by the court) of a minor, with the sanction of the court for the sale of the minor’s property, may be enforceable by either party to the contract.

Competency to Contract: Persons of unsound mind

The agreement with a person of unsound mind in India is void. According to Section 12 of the Indian Contract Act, a person is said to be of a sound mind if, at the time of making the contract, the person is able to understand the contract and is capable of making a rational decision considering the effects of the same.

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. Persons of unsound mind include an idiotic, lunatic and intoxicated person.

Sound Mind:

A person is said to be of sound mind for the purpose of making a contract if at the time when it is, he is capable of understanding it and of forming a rational judgment 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. Similar is the case with a person who is generally of sound mind but occasionally of unsound mind.

Contract by a person of unsound mind

A person of unsound mind too, under the Indian Contract Act, is incapable of entering into a contract. Although a contract by a person who is not of sound mind is void, such a person can enter into a valid contract during an interval of lucidity. The test of unsoundness of mind is whether or not the person is capable of understanding the business and of forming a rational judgment as to its effect upon his interest. Idiots, lunatics and drunken persons are examples of those having an unsound mind.

The presence or the absence of the capacity mentioned in this section at the time of the making the contract is in all cases a question of fact. Where a person is usually of sound mind, the burden of proving that he was of unsound mind at the time of execution of a document lies on him who challenges the validity of the contract.

Illustrations:

A patient in a lunatic asylum, who is at intervals of sound mind my contract during such intervals.
The liability for necessaries of life supplied to person of unsound mind is the same as for minors (section 68).

Competency to Contract: Persons disqualified by law

Apart from minors and persons of unsound mind, there are also other persons such as Foreign sovereigns, convicts, alien enemies, insolvents and so on who are disqualified from contracting partly or wholly and do not have the competency to contract. Therefore, contracts by such persons are void.

Contract by disqualified persons

Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly, so that the contracts by such a person are void. If by any provincial legislation, a person is declared disqualified proprietor, he do not competency to contract to enter into any contract in respect of the property.

Illustrations

(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 delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts.

(c) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.

 (d) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.

Section 64: Consequences of rescission of voidable contract

“When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.”

Section 2(i) defines a voidable contract as “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others is a voidable contract”. It means that a contract which can be terminated or continued only on the option of one party is a voidable contract.

Section 64 states that if a person on whose option the contract is voidable rescinds the contract, then he must restore the benefit he has received from the other party in the contract and the other party is not obliged to perform any promise it had promised to perform in the contract as a promisor.

Case Law: In Sinaya Pillai Vs Muniswami Iyyer, [5]it was postulated that; “This principle is acknowledged in section 64 of the Indian Contract Act and generally by the Indian Courts as Courts of Equity and good conscience.”

The Indian Contract Act only provides for the restoration received by the party rescinding the voidable contract, whereas under The Specific Relief Act, there is a provision for the payment of compensation to which the other party may require. This provision of The Specific Relief Act is more logical as compared to the provision in Section 64.

For example: X has received a loan from Y on a voidable contract. It is not enough to only return the amount borrowed by X but he should also pay some interest to Y on account of the benefit obtained on such a transaction. It is suggested to amend Section 64 to bring it in line with the provisions of The Specific Relief Act but strangely the Law Commission recommended no change in it.

Section 33 in The Specific Relief Act, 1963

33. Power to require benefit to be restored or compensation to be made when an instrument is cancelled or is successfully resisted as being void or voidable.—

(1) On adjudging the cancellation of an instrument, the court may require the party to whom such relief is granted, to restore, so far as may be any benefit which he may have received from the other party and to make any compensation to him which justice may require.

(2) Where a defendant successfully resists any suit on the ground—

(a)that the instrument sought to be enforced against him in the suit is voidable, the court may if the defendant has received any benefit under the instrument from the other party, require him to restore, so far as may be, such benefit to that party or to make compensation for it;

(b) that the agreement sought to be enforced against him in the suit is void by reason of his not having been competency to contract under section 11 of the Indian Contract Act, 1872 (9 of 1872), the court may, if the defendant has received any benefit under the agreement from the other party, require him to restore, so far as may be, such benefit to that party, to the extent to which he or his estate has benefited thereby.

Section 65 of The Indian Contract Act, 1872

The obligation of the person who has received an advantage under a void agreement, or contract becomes void.

When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it or to make compensation for it to the person from whom he received it.  When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.”

Illustrations:

(a) A pays B 1,000 rupees, in consideration of B’s promising to marry C, A’s daughter. C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees.”

Section 68: Claim for necessaries supplied to person incapable of contracting, or on his account

“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 a such incapable person.”[6]

Illustrations

(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.

 (b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.

Under section 68, any person would be entitled to reimbursement out of the minor’s estate for necessities supplied to him or to his family. Necessaries also include goods and services. If the minor had obtained payment fraudulently by concealment of age, he may be compelled to restore the payment, but he cannot be compelled for an identical sum, if any, as it would amount to enforcing a void contract.

Conclusion

Thus, for a valid contract, capacity to contract is an essential element and for that, Section 11 of the Contract Act defines the persons who are eligible for contract i.e. competent to contract or who can enter into the contract. A person incompetent to contract like a minor, unsound mind and persons disqualified by law are not eligible to contract and a contract with such type of person is unenforceable by law.

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[1] Indian Contract Act, 1872 (No. 9 of 1872)

[2] The Majority Act, 1875 (No. 9 of 1875)

[3] Avtar Singh, Contract & Specific Relief, Page- 158, 12^th Edition, EBC Publishing (P) Ltd.

[4] https://indiankanoon.org/doc/1164247/

[5] 22. Mad. 289,291.

[6]  https://indiankanoon.org/doc/1164247/

[7] (1903) 30 Cal 539 (Pc)

This article is contributed by Sunita Basak is a student at University of Engineering and Management, Kolkata.