Business Law –

Assignment No.1

Capacity of Parties and Law Relating to Minors

ASB Batch A , Group 4

Neethu Jose (09063)
Nirmala.G (09065)
Nivedha.P (09067)
Pooja Nair (09069)
Prashanth K Nath (09071)
Praveen P (09073)
Raghav R Warrier (09077)
Rahul V Gopinath (09079)
Ramasamy N (09081)
Rohitha Chowdary K (09083)
 Capacity of Parties and Law Relating to Minors
According to Section 11 “Every person is competent to contract who is of the age of
majority according to the lawa) 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.”

Conversely speaking, the following categories of persons are deemed disqualified or

incompetent to enter into a valid agreement and contract:

a) Minors

b) Mentally incompetent persons, and

c) Persons who are declared incompetent through their status (political, corporate, legal
etc).

a)Minors

As defined in section of the Indian Majority Act, 1857, a minor is a person who has
not completed 18 years of age. But then, in the following two specific cases, a minor is said
to attain the majority on the completion of his 21 years of age, instead:

a) Where a guardian of minor’s persons or property has been appointed under the
Guardian and Wards Act,1890,or
b) Where a Court of Wards assumes the superintendence of the minor’s property.

Rules Relating to a Minor’s Contract

1. Minor’s contract is absolutely void

In Mohrori Bibee v.Dhurmodas Ghose(1903-30Cal.539) Privy Council had
held that a minor’s contract is void ab initio and not merely voidable. A minor’s
agreement being absolutely void, neither he nor the other party acquires any right
or incurs any liability under the agreement. So a minor is neither liable to perform
 what he has promised to do under an agreement nor he is liable to repay money he
has received under it. The principle behind this ruling is ,a minor is incapable of
judging what is good for him. Even if a minor has received any benefit, he cannot be
asked to compensate or pay for it. A minor is incapable of giving a promise imposing
a legal obligation upon him.
In Mohrori Bibee v.Dhurmodas Ghose(1903-30 Cal.539) , a minor executed a

mortgage for the sum of ` 20, 000/- out of which he received ` 8, 000/-. Minor filed a

suit subsequently for setting aside the mortgage. The money lender claimed refund

of ` 8, 000/- from the minor. It was held that minor’s contract is all together void and

the money lender, therefore, cannot recover the amount. A minor’s contract being
absolutely void, he can neither sue nor be sued upon it.

2. Specific performance of a minor’s contract

As a minor’s contract is absolutely void there can be no specific performance
of such a contract in Mir Sarwarjan Vs Fakhruddin Mahomed (1912Cal.232 ) , Privy
council has held that guardian has no power to bind a minor by a contract for the
purchase of immovable property. Even a minor cannot enforce a specific
performance as there is no mutuality. However, when such a contract is entered into
by a guardian on behalf of a minor, for minor’s benefit, it can be specifically enforced
by or against the minor.

3. Ratification of a minor’s contract

Ratification means consenting to a passed contract entered into during
minority at a future date on attaining majority. It relates back to the date of the
making of the contract. Since a minor’s contract is void, there can be no question of
ratifying it as the consideration given during the minority is held to be no
consideration at all. It cannot be made valid by a subsequent ratification. A fresh
contract can be entered into by a minor on attaining majority with a fresh
consideration.
4. False representation by a minor-Estoppel
A minor cannot be stopped by a false representation as there can be no
estoppels against a statute. A minor who falsely represents himself to be major and
thereby induces another person to enter into a contract with him, can plead
minority as defence. The infant is stopped from setting up infancy.
A minor cannot be sued on the ground that he falsely represented that he is
of full age and thereby induced other persons to enter into a contract, because to
allow an injured person to sue a minor person, would be giving him an indirect
means of enforcing a void contract.
It has been held by Andhra High court that equity requires a minor who
seeks to avoid a contract which he induced the opposite party to enter into with him
by fraudulent misrepresentation as to his age to return the consideration which he
received under it and this equitable principle is found statutorily embodied in
sections 41 and 9 of Specific Relief Act. Gokeda Latcharao Vs Vishwanathan
Bhimayya – AIR 1956 Andhra – 182.

5. Liability of a third person-Surety for a minor

An agreement by a guardian on the behalf of a minor is valid. Where a
guardian enters into a contract in respect of a minor’s property on behalf of the
minor, it is valid, provided it is for his benefit or for legal necessity.

6. Insolvency
A minor cannot be adjudged insolvent as he is incapable of contracting.

7. Relinquishment by a minor
A release by a minor of his rights in a property is absolutely in fructuous in
law.
8. Service contracts
a) A contract for personal service by minor is void under Indian law and the
mere fact it is for his benefit would not entitle the minor to sue under the
contract.
b) A minor may bind himself to a contract of apprenticeship if it be for his
benefit but he cannot be sued for failing to serve as such.
c) Contract with minor does not create legal contractual relationship between
the parties. Minor girls entering into a contract of service with a person can
leave the service at any time without committing any actionable wrong.

Exceptions to the rule that minor’s contract is absolutely void – when can a minor
contract?

1. Promisee or transferee
A minor can be a promisee or transferee. Law does not regard a minor as
incapable of accepting benefit. Example:- A promissory note executed in favour of a
minor can be enforced by the minor. A minor is allowed to enforce a contract which
is of some benefit to him and under which he has to bear no obligation.

2. Agency
A minor can act as an agent. He can bind his principal by his act but unlike
other agents, he is not liable to his principle of acts.

3. Partnership
A minor cannot enter into a contract of partnership as a full-fledged partner
though he may be admitted to the benefits of partnership by his guardian with the
consent of other partners, provided it is supported by necessity or benefit. A minor
partner cannot be personally liable for any obligations of the firm, but minor’s share
alone in the property of the firm is liable. Personally, he is not liable.
 4. Necessaries
If a person supplies necessaries to a minor or to minor dependants, which he
actually needs, whom the minor is bound to support , the person who supplies such
necessaries is entitled to be reimbursed from the properties of such a minor. A
minor is therefore, liable to pay out of his property for necessaries supplied to him,
or to his minor dependants whom he is legally bound to support.
Example: A supplies B, a lunatic, with necessaries suitable to his condition in life, A
is entitled to be reimbursed from B’s property.
It should be noted that the minor’s property is liable to compensate for
necessaries supplied and not the minors personally.

b)POSITION OF PERSONS OF UNSOUND MIND

Who is a person of Unsound Mind

According to Section 12 of the purpose of the Indian Contract Act, “A person is said
to be of sound mind for the purpose of making a contract, if at the time when he makes it, is
capable

a) to understand the terms of the contract,

b) to form a rational judgment as to its effect upon his interests.”

Thus, if a person is not capable of both, he is said to have suffered from unsoundness
of mind. These examples of persons having an unsound mind include idiots, lunatics and
drunken persons. A person who is so mentally deficient by birth as to be incapable of
ordinary reasoning or rational conduct is said to be an ‘idiot’. A person affected by lunacy is
said to be ‘lunatic’. A person can become lunatic at any stage of his life.
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.”

Example: A patient in a lunatic asylum who is at intervals of sound mind may contract
during those lucid intervals.

Position of a Person who is usually of Sound Mind but Occasionally of Unsound Mind

According to Section 12, “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 sane man 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 contract whilst
such drunkenness lasts.

Burden of Proof

The rules regarding the burden of proof are summarized as under:

Case The burden of proof lies on...

1. Where a person is usually of sound The burden of proving that he was of
mind unsound mind at the time of contract lies on
the person who challenges the validity of
2. Where a person is usually of unsound contract.
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 that he was delirious
from fever or was so drunk at the time of
contract, lies on the person who challenges
the validity of contract.
Position of Agreements with Persons of Unsound Mind

The position of agreements of persons of unsound mind is summarized as under:

Persons of unsound mind Capacity to enter into contract

1) Lunatic (i.e. a person who is
mentally deranged due to some
mental strain or other personal
experience but who has some lucid
intervals of sound mind)
a)While he is of unsound mind He cannot enter into any contract. Any
agreement entered into by him during this
period is altogether void and he cannot be
held liable thereon.

b)While he is of sound mind He can enter into a valid contract and he is

liable for such contracts.

2)Idiots(i.e. a person who is He cannot enter into any contract. Any

permanently of unsound mind) agreement entered into by him is altogether
void and he is not liable thereon.

3)Drunken Person(i.e. a sane He cannot contract while such delirium or

person who’s delirious from fever or drunkenness lasts.
who’s so drunk that he cannot
understand the terms of a contract or
form a rational judgment as to its
effect on his interest
c) PERSONS DISQUALIFIED BY LAW

Besides minors and persons of unsound mind, there are others who are disqualified
from contracting under the provision of some other laws. Such persons have been shown in
the below figure.

Persons (other than minors or persons of unsound mind) disqualified by law

Alien enemies Foreign Sovereigns Convicts Insolvents

a) Alien enemy
An alien is a person who is the citizen of a foreign country. An alien may
either an alien friend or an alien enemy.
An alien whose country is at peace with the Republic of India is called as
alien friend. He has usually the full contractual capacity.
An alien whose country is at war with the Republic of India is called an alien
enemy.
 His contractual capacity can be summarized as under:

1. Positions of contracts during the An alien enemy can neither enter into
war any contract nor can be sued in an
Indian Court except by license from the
Central Government.

2. Position of contract entered into

before the war a)such contracts stand dissolved
a)If such contracts are against the
public policy or are such that may
benefit the enemy

b) Such contracts are merely suspended

b)If such contracts are not against for the duration of the war and reviewed
public policy after the war is over unless they have
already become time barred under the
Law of Limitation Act.

Example: X, an Indian, carries on a business in Pakistan. He enters into a contract

with Y who carries on business in India. Immediately after the formation of the
contract, a war broke out between India and Pakistan. In this case, X becomes an
alien enemy though he is Indian and the contract between X and Y (if not against the
public policy) will be suspended for the duration of the war and reviewed after the
war is over.
b) Foreign Sovereigns and Ambassadors
They can enter into contracts and enforce those contracts in our courts but
they cannot be sued in our courts without the sanction of the Central Government
unless they choose to submit themselves to the jurisdictions of our courts.
Notes:
1) An ex-king can be sued in our Courts.
2) Where a foreign sovereign etc. enter into a contract through an agent residing in
India, the agent shall be held liable on the contract.

c) Convicts
A person is called a convict during his period of sentence. His contractual
capacity is summarized as under:

1. During the period of sentence He cannot enter into any contract

2. After the expiration of the period He can enter into a contract. He can sue
of sentence or when he is on on a contract.
parole

d) Company under the companies Act or Statutory Corporation under the Special
Act of Parliament
The contractual capacity of the company and the statutory corporation is
summarized as under:

1. In case of a Company Its contractual capacity is determined by

the ‘object clause’ of its Memorandum of
Association.
2. In case of Statutory Corporation Its contractual capacity is determined by
the statute creating it.
 Any act done in excess of the power given is ultra vires (i.e. beyond power)
and hence void.

e) Insolvents
When a person’s debts exceed his assets, he is adjudged insolvent and his
property stands vested in the Official Receiver or Official Assignee appointed by the
Court. Such person –
1) Cannot enter into contracts relating to his property,
2) Cannot sue,
3) Cannot be sued.
Note: When the insolvent is discharged, the aforesaid disqualification is removed.
Appendix

Voidable Contract
A voidable contract is one, which could be repudiated but at the option and
will only of one of the parties involved. Thus such contract would be deemed to
valid and binding, unless it is specifically repudiated by the party, entitled to do so.
It is affected by one or more of the flaws, like simple misrepresentation, fraud,
coercion and undue influence.

Void Contract
As against voidable which could be set aside by only one of the parties, in
case of void contract, it cannot be enforced even by either of the two parties
involved, inasmuch as such agreements are invalid and void ab initio(right from the
beginning), and, thus, is unenforceable in law.

Estoppel
Estoppel is a rule of evidence. When a man has by words, spoken or written,
or by conduct, induced another to believe that certain state of things exist, he will
not be allowed to deny the existence of that state of things.