Capacity to Contract

Meaning of capacity to contract

 According to sec. 10 of Indian law of contract, all

agreements are contracts if they are made by the parties’
competent to contract.

 Thus the competence or capacity to contract is the one of

essentials of a valid contract
Who are competent to contract?

 Section 11 reads,

“ 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 sound mind and is not disqualified from contracting by any
law to which he is subject”
Non Competency

Conversely, it can be said that the persons falling under the

following categories are not competent to contract:-
 1. Minors
 2. Persons of unsound mind
 3.Person disqualified from contracting by any other law of
the land.
Who is a MINOR? 

 Any person, who has not attained the age of majority

prescribed by law, is generally known as Minor. 
 Section 3 of the Indian majority act prescribes the age
limit for majority and says “A minor is a person who has
not completed Eighteen years of age”.
Additional conditions

But this same act also applies that in the following two cases
a person attains majority only after he completes his age of
21 years:-
1. Where a court has appointed guardian of a minor’s person
or property for both (under the Guardians and wards Act
1890)
2. 2. Where the minor’s property has been placed under the
superintendence of court of wards. 
Position of Agreement by a Minor

1. Minor’s agreement is absolutely Void from very beginning.

Therefore it will be never enforced by law .

 Leading case : Mohiri Bibi V. Dharmodas Ghosh

 2. Minor can be a promisee or beneficiary- The courts regard minor
as capable of accepting benefits under an agreement.
Example: - A who was a minor sold some goods to B who was a major
person, Now in this case after selling the good, A has the right to
recover the price from B, even though he is a minor.
3. No Ratification- the term ratification means approving or
confirming a past contract. one of the basic rule of
ratification is that only valid acts may be ratified. A minor’s
agreement is void from beginning so it cannot be ratified.

4. Generally a minor is not liable to compensate for any

benefits which he has received.
 5. No Estoppel-A minor is not estopped from setting up the
plea of minority.
Example: -A, who was a minor, by fraudulently representing
himself as a major, induced B to lend him 1000Rs.
B lends the amount but now B cannot sue A for recovery
because the rule of Estoppel does not apply against the
minor.
6. The agreement made by a minor jointly with a major
person are void vis-à-vis the minor but can be enforced
against the major person. 

7. A minor cannot become a partner in a partnership firm. He

can share the profits only without incurring any personal
liability.

8. A minor’s parent/ guardian/ manager can enter into

contract on behalf of the minor .
9. The parents or guardian of a minor are not liable for
agreements made by them for minor.

10.Minor cannot appoint an agent because only competent

person can appoint agent. However a minor can be appointed
as an agent by any person competent to contract. 
Cases
 Mohri Bibi v. Dhuromdas Ghose, 1903 30 IA 114
 Ajudhia Prasad v. Chandan Lal, AIR 1937 All. 610
 
Nature of a contract made on behalf of a minor
 
 B. Sitarama Rao v. Venkatarama Reddiar, AIR 1956 Mad 261 [pay special attention to the discussion of
Subramanyam v. Subba Rao]
 
 Suggested Additional Reading
 
 Nash v. Inman, [1908] 2 KB 1 [Supply of Necessities to Minor]

 
PERSONS OF UNSOUND MIND

Section 11 requires that in order to be competent to contract, a person must be of

sound mind.

What is a Sound mind?

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
judgment as to its effect upon his interest. (Sec 12)
Position of a person who is usually of unsound mind but
occasionally of sound mind

According to section 12,”A person who is usually of unsound mind but occasionally
of sound mind may make a contract, when he is Of sound mind.

Moreover,' A person who is usually of sound mind but occasionally of unsound mind
may not make a contract, when he is Of unsound mind.

A sane man who is so drunk that he cannot understand the terms of a contract or
form a rational judgment as to its effect on his interest, cannot enter into a contract
while such drunkenness lasts. 
Kinds of unsound mind, effect on
agreements
 Idiot: - An idiot is a person who is of unsound mind by birth. His incapacity is
permanent. Such a person can never understand contract and make a rational
judgments as to its effect upon his interests.
Consequently the agreement with an idiot is absolutely void from beginning.
Lunatic: - A lunatic is the person whose mental powers are deranged due to some
disease of brain or mental strain. The lunacy is not a disease of permanent nature and
maybe curable.
This type of person can make a contract at time when he is sane. But if he did enter
into some contracts during insanity, they will be void.
Delirious person- A person delirious from fever is also not capable of understanding the
nature and implications of an agreement.

Drunken or intoxicated person: - A drunken or intoxicated person is temporarily

incompetent to contract. Any contract entered in drunken state is void ab initio.

Hypnotized person: - Hypnotism produces temporary incapacity till a person is under the
effect of artificial induced sleep.
 Burden of proof
The burden of proof lies on
1.Where a person is usually of sound mind
The burden of proving that he was of unsound mind at the time of contract lies on the
person who challenges the validity of contract.

2. Where a person is usually of unsound mind

The burden of proving that he was of sound mind at the time of contract, lies on the person
who affirms it.

3.In case of drunkenness or delirium from fever or other causes.

The burden of proving lies on the person who challenges the validity of the contract. 
PERSONS DISQUALIFIED BY OTHER
LAW 
Alien Enemy-
an alien whose country is at war with the Republic of India is called an alien enemy.

Foreign sovereigns and ambassadors-They can enter into contracts and enforce those contracts in our
country but cannot be sued without the sanction of the Central Govt.

Convicts- A person is called a convict during his period of sentence. He cannot enter into a contract during
that time but after that period or when he is on parole he can enter into contract.

Insolvents-He cannot enter into contracts relating to his property, cannot sue or be sued.
Minor: Incapacity

 By virtue of section 11, a minor is incompetent to contract. But the Indian

Contract Act is conspicuous by its silence about the nature of a minor’s contract.
It is thus not clear as to whether a minor’s contract is void or voidable. Upto 1903,
there was a great controversy among High Courts in this connection.

 This controversy was finally resolved by the Privy Council in 1903 in Mohori
Bibee v. Dharmodas Ghose. 
Mohori Bibee v. Dharmodas Ghose
 In this case, Dharmodas Ghose, a minor, entered into a contract for borrowing a sum of Rs.
20,000 out of which the lender paid the minor a sum of Rs. 8,000.

 The minor executed mortgage of property in favour of the lender. Subsequently, the minor
sued for setting aside the mortgage.

 The Privy Council had to ascertain the validity of the mortgage.

 Under Section 7 of the Transfer of Property Act, every person competent to contract is
competent to mortgage.
 The Privy Council decided that Sections 10 and 11 of the Indian Contract Act make
the minor’s contract void.

 The mortgagee prayed for refund of Rs. 8,000 by the minor.

 The Privy Council further held that as a minor’s contract is void, any money advanced to a
minor cannot be recovered.

 A minor’s contract is void and it is immaterial whether father signs on behalf of minor or gives
an undertaking that the minor would act or perform the contract.

 The Privy Council held that guardian cannot contract on behalf of minor.

 However, this rule was subsequently modified by the Privy Council in Srikakulam
Subramanyam v. KurraSubba Rao.
Srikakulam Subramanyam v. KurraSubba
Rao
The Privy council entertained no doubt that it was within the powers of the mother of
a minor as a guardian to enter into a contract of sale for the purpose of discharging
his father’s debts.

Thus, if the court finds that the contract has been entered into for the benefit of the
minor, it would be declared valid.

When a guardian enters into a contract on behalf of a minor, the validity of the
contract depends on whether the guardian is acting within the scope of his legal
powers or not.
doctrine of mutuality?
 The Privy Council, in the case of Mir Sarwarjan v. Fakhruddin, held that the guardian’s contract
can neither be enforced against the minor nor be enforced against him.
 The contract was for the purchase of immovable property and the suit was by the minor for
specific enforcement.
 The Privy Council applied the doctrine of mutuality. The rights of both parties to the contract
should be equal.
 The other party could not enforce the contract against the minor. Therefore, the minor cannot
enforce the contract.
 The Doctrine of Mutuality has been expressly superseded with the Specific Relief Act, 1963.
 The validity of the guardian’s consent, therefore, should be considered only with reference to
his legal powers.
no estoppel against a minor

 Even when a minor misrepresents that he is a major and thereby induces another to
enter into a contract, it cannot be enforced against him as he is not estopped from
setting up his minority as a defence.

 He is not bound by Section 115 of the Indian Evidence Act, 1872.

 The point was raised but not decided in Mohoribibi v Dharmodas Ghose but the
point was settled in Sadik Ali Khan V. Jai Kishore, where privy council observed
that:
A deed executed by a minor is nullity and incapable of founding a plea of estoppel.
The principle underlying the decision being, there can be no estoppel against a statute.
The positions therefore is- even if a minor has entered into a contract by
misrepresenting his age, he can at any later stage plead ‘ minority’ and avoid the
contract. Minority in India is a fact and not a privilege (as in England) and this fact
can be proved at any stage of the proceedings, regardless of the surrounding
circumstances.
tLimited application of Restitution in case of minor’s agreement

If a minor obtains property or goods by misinterpreting his age he can be compelled

to restore it, but only so long as the same is traceable in his possession. This is known
as the equitable doctrine of restitution.
Where the minor has sold the goods or converted them, he cannot be made to repay
the value of the goods, because that would amount to enforcing a void agreement.

So also, the doctrine will not apply where the minor has obtained cash instead of
goods.
 Under English Law, if a minor wrongfully obtains an undue advantage from the other party and the same is
traceable and in his possession, the minor can be compelled under the equitable doctrine of restitution to
restore back the benefit so received. However, if the minor has sold the goods or converted them, he cannot
be compelled to pay the value of such goods because it will amount to enforcing a void contract. It follows
that the doctrine is not applicable to money for it is not possible to identify the money and ask a minor to
return the exact same.

 In the case of Leslie (R) Ltd vs. Sheill, an infant deceived some money lenders about his age and obtained a
loan of £ 400 on the faith of his being an adult. When the attempt of the money lenders to recover the
principal amount and interest failed, they claimed return of the principal amount under a quasi contract.
 At last, the money lenders relied upon the doctrine of restitution but their contention was rejected.

 The money lenders claimed that an infant should be compelled in equity to restore the money. But their
argument failed .

 LORD SUMMER stated “…There is no question of tracing, no possibility of restoring the very thing got by
the fraud, nothing but compulsion through a personal judgement to repay an equivalent sum out of his
present and future resources…I think this would be nothing but enforcing a void contract.”
The case of Khan Gul vs. Lakha Singh deserves a special mention under the Indian
Law. A minor fraudulently concealed his age and contracted to sell a plot of land to
another. The minor received the consideration of Rs. 17, 500/- and then refused to
fulfil his part of the bargain.

The other party prayed for possession or refund of consideration. The question rose
whether a minor who entered a contract through false representation retain the
benefits from the contract while refusing to perform his part.

Since a minor’s contract is void, specific performance was not granted. However,
refund of the consideration was order.
 Sir SHADILAL CJ observed that “the language of the Section…shows that the
jurisdiction conferred thereby is to be exercised when the minor himself invokes the aid
of the court.” However, the learned Chief Justice found sufficient reason to extend the
principle of restitution as explained in the case of Leslie (R) Ltd to the cases of money
also. He held “the doctrine of restitution is not however confined by those sections…The
doctrine rests upon the salutary principle that an infant cannot be allowed by a court of
equity to take advantage of his own fraud.” The Court ordered refund of the
consideration.

 A perusal of the judgements of various High Courts after the Khan Gul case confirms
that many still considered themselves bound by the principle of restitution as explained
and restricted in the case of Leslie (R) Ltd and conscious of the difference in position of
a minor when he was suing as a plaintiff and was being sued as a defendant.

 Some even expressed solidarity with observation made in Leslie (R) Ltd that there was
no rule of equity, justice and good conscience which entitles a court to enforce a void
contract of a minor under the cloak of restitution.
The Law Commission of India in its Ninth Report expressed its agreement with case of
Khan Gul. Further, the new Specific Relief Act, 1963 incorporated the principle of
restitution under Section 33.

Section 33 of the Specific Relief Act, 1963 greatly reduces the potential for ambiguities
and uncertainty in the matter. Section 33(1) seeks to restore the parties to their original
position to the extent possible.
If a void or voidable contract is cancelled at the instance of a party to the contract, the
court may require such party to restore the benefits received under the contract and to such
compensation as justice may require.
This discretion can also be exercised where the plaintiff is a minor. Thus, under Section
33(1), a minor who is a plaintiff can be compelled to return all the advantages and benefits
received under the void contract as under the older law. 
However, the court will not compel any restitution by a minor (even if he is a plaintiff) if:

a) the other party was aware of the fact of infancy and thus, was not deceived;

b) the other party was unscrupulous in his dealings with the minor;

c) the other party was overzealous to enter into the agreement that the minor’s misrepresentation 
did not influence him;

d) the other party provided no material for the court to conclude that justice required return of the
money paid to the minor in the instant case.
 Section 33(2) attempts to put the parties in the pre-contract position. Even if the defendant is a
minor and successfully resists a suit on grounds of his incompetence and resultant void agreement,
he can be compelled to account for the advantage, the money or anything else received by him
which benefits him personally, such as education or training, or results in a benefit of a permanent
nature to his estate.

 It is implied in Section 33(2) (b) that the English law as laid down in Leslie v Sheill is not
applicable in India as it extends the doctrine of restitution to money matters.
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 any one 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.

 In the Indian Contract Act, section 68 provides that a minor falls within the class of
persons referred to in the section, and so, though he is not liable even for
necessaries and no demand in respect thereof is enforceable against him by law, a
statutory claim is created thereby against his property. 
 But though the property of the minor may be liable for the necessaries under
section 68 of the Contract Act, the minor himself is not personally liable as in
English Law. Section 68 will not apply where necessaries are supplied to a person
or to someone whom that person is bound to support when such person is
competent to contract.
Necessaries
There is no definition of the term “necessaries” in the Contract Act. It is, therefore, necessary to
turn to judicial decisions to determine its precise import.

Now, it was ruled by Baron Parke in Peters v. Fleming, that from the earliest times down to the
present, the word ‘necessaries’ is not confined in its strict sense to such articles as were necessary
to support life, but extended to articles fit to maintain the particular person in the state, degree and
station in life in which he is; and therefore we must not take the word “necessaries” in its
unqualified sense but with qualification as above pointed out. 
 To put the matter concisely, “necessaries” means goods suitable to the condition in life of the
defendant and to his actual requirements at the time of the sale and delivery, and whether an article
supplied to an infant is necessary or not, depends upon its general character and upon its suitability
to the particular infant’s means and station in life.

 It must further be observed that as necessaries include everything necessary to maintain the infant
in the state, station, or degree of life in which he is, what is necessary is a relative fact, to be
determined with reference to the fortune and circumstances of the particular infant; articles
therefore that to one person might be mere conveniences or matters of taste, may in the case of
another be considered necessaries, where the usages of society render them proper for a person in
the rank of life in which the infant moves. 
 Expenses incurred for minor’s education,
 marriage of his sister,
 expenses incurred in funeral of minor’s parents,
 expenses incurred for necessary litigation etc. have been held to be necessaries.
 Expenses incurred for minor’s marriage have also been held to be ‘necessaries’.
12. What is a sound mind for the purposes of contracting.—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 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. A person who is usually of sound mind, but
occasionally of unsound mind, may not make a contract when he is of unsound mind.
llustrations
 (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.
Unsound mind: India

 Unsoundness of mind is also another circumstance which renders a contract void

and unlike English Law, the question whether the other party had or had not the
knowledge of such fact does not arise. A contract entered into by a person who at
the time was of unsound mind is void.

 Mere weakness of mind does not amount to unsoundness of mind. In English law
in order that a person may avoid contract on the ground of insanity it is not only
necessary to show that he was insane at the time of entering into the contract, but
it is further necessary for him to prove that the other party knew him to be so
insane as not to be capable of understanding what he was about. 
 The test of unsoundness of mind is whether the person is capable of understanding the
business and of forming a rational judgment as to its effect upon his interest.
 There being a presumption in favour of sanity, the person who relies on the unsoundness
of mind must prove it sufficiently to satisfy this test.
 Where a person is not proved to be a lunatic on inquisition, it is necessary to rebut the
general presumption of sanity.
 This can be done by proving that his mind was completely deranged so that he was
incompetent to enter into any contract, or by proving that he was of unsound mind with
regard to the particular transaction.
 But when a person has been found lunatic by inquisition, so long as the inquisition has not
been superseded, he cannot, even during the lucid interval, enter into a valid contract.
 Although it is not necessary to prove utter mental darkness or congenital idiocy, the party alleging
unsoundness of mind of a person must establish that that person was incapable of understanding
business and forming rational judgement as to its effect.
 Idiocy is the most extreme form of mental unsoundness.

 Mere temporary forgetfulness is not sufficient to indicate want of mental capacity. In a case to set
aside a mortgage on the ground of unsoundness of mind, the Court cannot substitute a mere weakness
in the mind of the executant and give him a decree thereon on the plaintiff failing to prove the
particular kind of insanity originally set up by him.
Imbecility

An imbecile person is one who has no understanding from his infancy. Contracts entered into by such
persons, other than those for necessaries, are void. In the case of Keolapati v. Amar Krishna Narain Singh,
a document executed by an imbecile person and bearing his signature does not have conclusive force.

Drunkenness
Similarly drunkenness is a ground for avoidance of contract but in order to be so it must be so excessive
and absolute as to suspend the reason for a time and create impotence of mind, and it must be distinguished
from that “merriment of a cheerful cup which rather revives the spirits than stupefies the reason”. 

So it has been held that although a mortgagor may have been drinking hard and frequently of unsober and
unsound mind, a mortgage deed executed by him is good and validly executed unless it is established that
at the time the deed was executed he was of unsound mind. 

A contract by a drunken person is voidable only and not void and so it may be ratified by him when he is
sober.
Old Age
Mere loss of memory is not sufficient to constitute unsoundness of mind as such loss of memory,
on its own, does not render any person unable to manage his own affairs. It has been held that
loss of memory and absent mindedness is not inconsistent with the acts of a sane man.
Therefore, even an extremely old man with declining strength of mind and body may be deemed
fit to contract if he could exercise an independent and intelligent mind over what he is doing.
 With ageing, there results a natural decay of mind, but it cannot be said that such a person has
become of unsound mind unless it can be proved that his mind has become completely blank.

In such cases, the onus is on the one who alleges unsoundness of mind to prove that he has
become unable to understand his own affairs and form rational judgements.

Ramsundar v. Kalinarayan, AIR 1923 Cal 889