Importance of Capacity to Contract

Author: Riya Ganguly

Section 2(h) of the Indian Contracts Act 1872 defines a contract as an agreement that is enforceable by law. Section 10 of the Act lists out the requisites that make the agreement enforceable. One such requisite is the capacity of the parties to contract. Capacity to contract basically means competency of the parties to contract. Section 11 of the Act declares the people who are competent to enter into a contract. So as per the Section, every person is competent to a contract given the person is of the age of majority and is not disqualified as per the law to which he is subjected to and he/she should be of sound mind.

In nutshell, minors, people of unsound minds, and people disqualified by law are incompetent to contract. Competency to contract is of great importance for its absence renders the agreement void. Hence, the aspect of the capacity to contract attracts greater attention at the time of making an agreement.

1. Minors

The age of majority in India is 18 years and when a guardian is appointed for a minor’s person and property, the age of majority for such minor is 21 years. Neither Section 10 nor Section 11 make it clear that whether the effect of the minor’s agreement is either void or voidable. However, the judicial committee of the privy council in the landmark case of Mohiri Biwi vs. Damodardas Ghosh held that the agreement with the minor was VOID lacking all the contractual obligations on either side. The rationale propounded by the council was that a child may exhibit poor judgment in making a contract that may adversely affect its interests. Hence, deeming the agreement with the minor as void may best serve his interest. The contract which is for the benefit of the minor and within the competence of the guardian is enforceable.

Effects of minor’s agreement:

a. No estoppel against a minor: Minor is not estopped from setting up the defense of infancy. The policy of the law of contract is to protect persons below age from contractual liability and naturally, the doctrine of estoppel cannot be used to defeat that policy.

b.No liability in tort arising out of the contract: A minor’s agreement is in principle devoid of all legal effects due to his incapacity to give consent. Hence, a minor cannot be held responsible for anything which would be an indirect way of enforcing his agreement. So consequently, if a tort is directly connected with a contract, the minor would not be held liable in tort as enforcing it would have the effect of suing an infant. In Burnard vs Haggis (1863), it was held that where the tort is independent of the contract, the mere fact that a contract is involved will not absolve the minor from his liability.

c. Doctrine of Restitution: Initially in the case of Leslie vs Shell[1] wherein an infant deceived the money lenders by telling lie about his age and borrowed 400 euros on the faith of being an adult, it was held that an infant was compellable to restore goods or properties (but not cash) obtained by misrepresenting his age only when the same was traceable in his possession. Since the given case involved monetary matters, hence the action of the plaintiff to recover money from the minor failed.

In the case of Khan Gul vs. Lakha Singh[2] in which the defendant, a minor, fraudulently concealing his age, contracted to sell a plot of land and after taking consideration of Rs 17500 from the plaintiff refused to perform his part of the obligation, the Chief Justice extended the principle established in Leslie vs Sheill to monetary matters so as to establish equity and held the minor liable to refund the consideration. Ultimately, The Law Commission of India incorporated the principle of restitution by inserting Section 33 in the Specific Relief Act 1963 as per which the minors may be required to restore the benefits obtained by him during the course of the contract to the extent of which he was benefitted thereby.

d. Beneficial Contract: If a contract is for the benefit of a minor (such as a contract for marriage, apprenticeship, etc) under which he is required to bear no obligation, then such contracts could be enforced by such minor as such contracts would not be a detriment to the interest of the minor[3]. Minor can even claim restitution.

It is to be noted that minors cannot on attaining majorityratify an agreement made by him during his minority.

2. Person of Unsound Mind:

Section 12 of the Act describes the concept of sound mind for the purpose of contracting. A person is said to be of sound mind at the time making a contract if, he is capable of understanding it or forming a rational judgment so as to effect upon its interests. A person who is usually of unsound mind and occasionally of sound mind may enter into contact if he is of sound mind at the time of making the contract.

Similarly, a person who is usually of sound mind and occasionally of unsound mind may not enter into a contract if he is of unsound mind at the time of making the contract.To better understand the above proposition, we may take the example of a patient of a mental asylum. The given person can enter into a contract when he is of sound mind i.e.capable of understanding the content and consequences of the contract and forming a rational judgment affecting its interests. Similarly, a drunk man who is so drunk that he is not capable of forming rational judgment or understanding the contract cannot contract until such drunkenness lasts. It is to be noted that in India (unlike English law where such agreement is voidable) agreement with people of unsound mind is absolutely VOID.

References:

[1](1914) 3 KB 607(CA) [2]ILR (1928) 9 Lah 701 [3]Raghava Chariar v Srinivasa