Capacity to Contract

Chapter 9

Slide 1

Definition of Capacity
A person must have the ability to give consent before he can be legally bound to an agreement, thus capacity is the ability to incur legal obligations and acquire legal rights

Section 11 of the Indian Contract Act 1872 deals with the competency of parties and provides that every person is competent to contract (i) Who is of age of majority (ii) Who is of sound mind (iii)Who has not been disqualified by law from entering into a contract

Minors
A minor is a person who is under the age of 18 years old As they have less experience, the law tries to protect minors from situations where they might enter into contracts which do not benefit them

Effect of minors agreement 1. An agreement with minor is void [Case: Mohiri Bibi v. Dharmodas Ghose] Dharmodas Ghose, a minor, borrowed a sum of Rs 20000 from M by executing a mortgage of his property in favour of M. Out of which M paid the minor a sum of Rs 8000. Subsequently D sued for setting aside the mortgage, stating that he was underage when he executed the mortgage.

Held: Mortgage was void and lender was not entitled to repayment of money

Agreement with minor cannot ratified on attaining the age of majority

[Indran Ramaswamy v. Anthiappa Chettiar] A,a minor borrows Rs 5000 makes a promissory note in favor of B. On attaining majority, he makes out a fresh promissory note in settlement of the old one. Neither the original, nor the fresh promissory note is valid

3. A minor can be a promisee or a beneficiary.

Contract is enforceable at minors option. A, a minor under a contract of sale delivered goods to the buyer. In case of default A can file suit for recovery of goods but buyer cant if A didnt deliver the goods.

4. Minor can plead minority [Leslie v. Shiell]

S, a minor, borrowed 400 from L, by fraudulently misrepresenting that he was a major. On default by S, L sued for return of 400. Held : L could not recover 400, and his claim for damages also failed. It is to be noted that if money could be traced then the court would have, on equitable grounds, asked the minor for restore the money, as minor does not have a liberty to cheat.

5. If a minor has received any benefit under a void contract, he cannot be asked to refund the same. 6. A minor cannot enter into contract of partnership. Can be admitted to benefit 7. Minors parents/guardians are not liable to a minors creditor for the breach of contract by the minor. parents are liable where the minor is acting as an agent of the parents or the guardian.

8. A minor can act as an agent and bind his principal by his acts without incurring any personal liability. 9. Liability for tort: civil wrong not criminal Minor is liable in a tort If tort arises out of a contract a minor is not liable:

10. No insolvency: Cannot be declared insolvent 11. Joint contract by a minor and an adult: Adult liable 12. Liability for the necessaries supplied or necessary services rendered to him: Not personally liable, paid out of his property.

Contracts for Necessaries

Necessaries are things necessary to maintain the minor, reasonably necessary Necessaries includes food, shelter and cloth It would not include things like jewellery and DVD players and other luxuries Minor is only required to pay a reasonable price for necessaries If the minor already has a good supply of a particular thing (eg clothes) then more of these may not be necessaries even though they are useful and within the minors usual income

[Case: Nash v. Inman]

I, a minor, ordered 11 fancy coats for about 45 with N, the tailor. The tailor sued I for the price. Is father proved that his son had already a number of coats and had clothes suitable to his condition in life when the clothes made by the tailor were delivered. Held : The coats supplied by the tailor were not necessaries and, therefore, the action failed

 Services Rendered also include necessaries Education, training for a trade,medical advice, legal advice, Loan incurred to obtain necessaries also bind minor although not personally liable, his estate liable for such loans.

Persons of Unsound mind

Two tests of soundness are: (i) Capacity to understand the contract (ii) Capacity to form rational judgment as to its effects upon his interests

 A person who is usually of unsound mind but occasionally of sound mind, make valid contract when of sound mind. A person usually of sound mind, occasionally of unsound mind, cannot make contract when of unsound mind. If a person challenges that he was of unsound mind, must prove to satisfy the court.

Persons of unsound mind

1) Idiot a person who is mentally deficient by birth & is incapable of ordinary reasoning. Void 2) Lunatic person who becomes mentally unfit due to some mental strain. He suffers from intermittent intervals of sanity & insanity. Valid when of sound mind 3) Drunken/intoxicated persons. Valid, when of sound mind

 If a person of unsound mind makes a contract for supply of necessaries to him, then the compensation to the supplier may be paid out of that persons property. But he cant be held personally liable.

Persons disqualified by law from entering into a Contract

1) Alien Enemy citizen of another country which is at war with India. a. contract made during war void b. contract made before war suspended during war period & may be revived later on.

2) Foreign diplomats & ambassadors They can make contracts & enforce them in our courts. But if an Indian wants to sue him over a contract, he has to take prior permission from Govt. of India.

3) Corporation/Company a. Company its contractual capacity is determined by its Memorandum of Association b. Statutory Corporation its contractual capacity is determined by the statute under which it was created.

4) Convicts a. contract made during the period of his imprisonment void b. contract made after the expiry of imprisonment period valid & enforceable.

5) Insolvent when a persons debts exceed his assets, he is adjudged insolvent, & his property is transferred to the Official Receiver appointed by the court. Contracts made by an insolvent relating to such property will be void.

THANK YOU

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