Competence of Parties entering into a contract


Table of contents:

1. Introduction

2. Who all are competent to enter into a contract

3. Disqualifications from entering into a contract

3.1 Minor’s agreement

3.1.1 Mohori Bibi v.s Dharmodas Ghose

3.1.1.1 Judgement

3.1.2 Other landmark cases

3.1.3 Exceptions to the general rule

3.2 Contract with a person of unsound mind

3.3 Contract with a person disqualified by law

4. Conclusion



Abstract:

This article defines section 11 of the Indian contract act, 1872 which describes which parties are competent to enter into a contract. This article also points out the exceptions to the general rule mentioned in section 11 along with some major landmark cases which furthermore describes section 11 of the Indian contract act, 1872. This article explores various aspects related to the capacity of a party to enter into a contract and shall point out the cases of minor’s agreement, agreement with a person of an unsound mind, and an agreement with a person disqualified by the law.


1. INTRODUCTION

Almost every transaction done in our life is an agreement but not all agreements are contracts. Section 10 of the Indian contract act mentions that there are certain essentials that shall be required for an agreement to become a contract. This article tries to explore an essential mentioned in sections 10 and 11 of the Indian contract act, 1872 i.e capacity of an individual to enter into a contract. For this purpose, it is important to

understand section 11 of the Indian contract act, 1872.


2. WHO ALL ARE COMPETENT TO ENTER IN A CONTRACT

Section 11 of the Indian contract act, 1872 mentions that the parties who are competent to enter a contract shall be

i) Above the age of 18 i.e should not be a minor

ii) Shall be of sound mind while entering into the contract

iii) Shall not be disqualified by the law to which he/she is subject

This means that anyone who is under the age of 18 or is of unsound mind or has been disqualified by the law cannot be a party to the contract and the agreement is void. It is important to note that an agreement that is void shall not make a contract thus there is nothing that shall be called a void contract as agreements that are void can never be a contract.


In India the age majority is mentioned in the Indian majority act, 1875 as 18 years, this means that no person below the age of 18 shall be treated as a major by law. The reason for this requirement is that many psychologists believe that below the age of 18 are not mature enough to make their own decisions and thus maturity and a sound mind is a precedent for a person to be able to enter into contracts. Section 12 of the Indian contract act defines the persons with a sound mind as individuals who are capable of understanding the contract and its terms and shall be able to make a rational decision as to the effects of the contract according to his interest. It also mentions that a person shall not make a contract with an unsound mind even if he is usually of a sound mind and similarly a person who usually is of an unsound mind shall only make a contract when he/she is of sound mind. The same logic is applied in the case of minors as they are not capable of understanding the terms of the contract and are not mature enough to make a rational judgment according to their interests. An example of this would be a mentally ill person becomes a party to the contract when he is of unsound mind then, in this case, the agreement would be void whereas if that person comes into a contract when he is of sound mind then the contract is valid and binding even if the person is usually of unsound mind. The necessity is a sound mind and the age of both parties shall be the age of maturity or above it i.e 18 years or above. Another condition listed is that both the parties shall not be disqualified by the law they are subject to.


3. DISQUALIFICATION FROM ENTERING INTO A CONTRACT

This section of this article shall analyze in-depth the competencies of individuals who can be a party to the contract with detailed analysis with some landmark cases related to them.


3.1 Minor’s agreement

As discussed before, the minor’s agreement is void as a minor is not mature enough to understand the liabilities and conditions of a contract and thus the court shall not direct a minor to perform his/her obligations in a contract. An agreement with a minor has no legal value in the eyes of law and is void ab initio[1]. Let us now understand the minor’s agreement through a landmark case of Mohori Bibee v.s Dharmodas ghose[2].


3.1.1 Mohori Bibee v.s Dharmodas Ghose

The Mohori Bibee v.s Dharmodas Ghose case is a famous case based on the concept of the minor’s agreement and in this case, the minor’s agreement was stated as “absolutely void” by the privy council. Some of the basic facts of the case are given below:

1) The plaintiff Dharmodas Ghose mortgaged his property to Brahmodutt who was the defendant while he was a minor, for Rs 20000.

2) The whole amount was not paid by the defendant to the plaintiff Dharmodas Ghose and only Rs 10,500 was paid which was 50% amount of the amount that was to be paid and the defendant’s attorney had knowledge of the plaintiff is a minor at the time of this transaction.

3) When the plaintiff’s mother got to know about this incident, she sent a letter to the defendant’s attorney, stating that the contract is a void agreement as the plaintiff was a minor while entering into it and thus the property mortgaged shall be returned.

4) The defendants stated that the loan plaintiff was provided by the defendant shall be returned as the agreement is void.

5) Further the plaintiff bought a legal suit against the defendant on the ground that the attorney of the defendant already had acknowledged the plaintiff being minor and thus the plaintiff isn’t responsible to fulfill the legal obligations on his part.

6) The case went to the privy-council after the defendant’s death after which her wife Mohori Bibi was the executor of the defendant who prosecuted the case on the behalf of the defendant.


3.1.1.1 Judgement

The privy-council gave the judgment in the favour of the plaintiff stating that the contract done with a minor is mere agreement and thus is void. Pointing out the difference the privy-council also stated that this agreement was a void agreement and not a voidable contract as the defendant had the full knowledge of the plaintiff is a minor and thus no contract exists, therefore the minor cannot be forced to fulfill his contractual obligations.


Thus, a minor’s consent is not valid and results in the agreement being void. Also, the rule of estoppel cannot be applied as the knowledge of a party entering into an agreement with minor thinking that he/she is major shall not bring any liability on the minor even if he/she misrepresented his/her age. Also if a minor has entered into an agreement fraudulently then the court can ask the minor to return the benefits obtained from it if the benefits are tangible and traceable, though money is tangible still is not traceable thus a minor shall not pay it back to the other party this is called restitution of benefit. Section 64 of the Indian contract act describes that if a voidable contract is rescinded by the aggrieved party then the benefits obtained directly from the contract shall be returned but a minor’s agreement is a mere agreement that shall bring any liability on the minor.



3.1.2 Other landmark cases

Srikakulam Subramaniam v. SubbaRao[3]: In this case, a minor along with his mother sold a piece of land in order to pay the debts of the father and to get back the land that his father mortgaged. After selling the land the minor paid off the debt and got possession of the land which was mortgaged but then the minor claimed the land he sold to the holders on the ground that he was a minor at the time of contract and the contract is a mere agreement and thus the land shall be returned to him, but unlike the case of Mohori Bibee v.s Dharmodas Ghose, here the supreme court said that since this contract was to benefit the minor and the minor was accompanied by her mother or her guardian, the contract is valid and binding.

Suraj Narayan v. SukhuAheer[4]: In this case, a minor Sukhu Aheer, executed a promissory note against the borrowed money. Suraj Narayan who was the moneylender provided the loan to the minor. After 4 years when the minor attained the age of majority, executed another promissory note stating that he will return the money to the moneylender along with the interest. But the contract was declared unenforceable because:

i) A minor’s agreement is void

ii) Even if he attained the age of majority, the agreements that were initiated by him when he was a minor could not be ratified by him.

iii) In the second promissory note, there was no consideration present, thus no contract shall be formed in an absence of consideration.

3.1.3 Exceptions to the general rule

Though the minor’s agreement is generally void, there are still few exceptions to it. For example- A minor’s agreement may form a contract in some cases, where the court finds that the agreement done is for the benefit of the minor such as:

1. Contract of necessary goods and services

2. Contract of apprenticeship

3. Contract of partnership, though the minor will not be held liable for the losses incurred[5].

4. Any contract with the guardian of the minor or minor himself which gives a benefit to the minor.


3.2 Contract with a person of unsound mind

The notion of unsound mind is different from that of the notion that is provided in the Indian contract act, 1872. There are several cases that have defined the scope of the term “unsound mind” such as Kanhaiyalal v. Harsing Laxman Wanjari[6]where it was held that any mental incapacity that shall arise out of any reason which deprives the person of understanding the terms and conditions of the contract and deprives him/her of forming a rational judgment about his/her acts and fully understanding the consequences that shall directly or indirectly arise out of it. Similar judgments are provided across different landmark cases. Although section 10 and section 12 of the India contract law mentions that a person must be of sound mind for that person to enter into a contract, the English law says that the person of unsound mind may enter into a contract which shall be voidable at his option if he could prove his mental incapability to the court. Some of the cases of unsoundness of mind are mentioned below:

1) Lunatic: A person who may be of sound mind in usual circumstances but of unsound mind in rare circumstances is known as a lunatic. A lunatic shall enter into a contract when of sound mind. In other words, even if a person is of unsound mind mostly or rarely, the common condition for him to be competent to be able to enter a contract shall be the soundness of mind or capability of understanding his acts and their consequences following which the contract shall be valid.

2) Person with an underdeveloped brain: This category may involve persons with an underdeveloped brain who are also termed idiots in medical terms. People who are mentally disabled shall not enter into a contract as they are incapable of understanding the acts and their consequences, thus making them incapable of forming rational judgments and giving consent.

3) People who are influenced by drugs: People who are influenced by drugs may not be able to understand the terms and conditions of a contract which means they shall not be capable of giving their consent. But this condition may or may not be necessarily true, for example- A person who is drunk may not be able to make rational judgments about his acts and their consequences but if he does then the contract becomes enforceable and valid and vice-versa.


3.3 Contract with people disqualified by law

There are certain categories of people who may not be minor or of unsound mind but maybe disqualified by law. Disqualification by law means persons who are unlawful or have been charged for unlawful activity. Not every time a person disqualified by law shall include unlawful persons it might also include alien enemies, foreign sovereigns, or corporations. Some of the basic categories of people are given below:


a) Convicts: Convicts are unlawful individuals who are sentenced to death or for life imprisonment or any other criminal activity. Until and unless their period of the sentence gets over they cannot enter into a contract.


b) Insolvent: A person who is insolvent and is not discharged by the court on the grounds of insolvency also cannot enter into a contract unless the proceedings against him are commenced.


c) Alien enemies: Alien enemy is a term used for those citizens who are residents of a state that is at war with India. Alien means outsider and enemy is used for a person with whom you are in deep enmity, thus, residents of a state which is in war with India cannot enter into a contract in India without prior permission of the government of India until the war ends. Although any alien ally can enter into a contract in India.


d) Foreign sovereigns: Anybody who may want to enter into a contract with a foreign sovereign cannot do so until he/she has the permission of the Government of India to do so, the reason being special privileges provided to them. They cannot be sued in the Indian court of law and thus it makes them immune to any legal obligations on them.


4. CONCLUSION

The competency of parties is one of the most important legal aspects which could help an agreement in becoming a contract. Some of the important essentials of the contract include free will, lawful obligation, lawful consideration, competency of parties, which should not be void according to the Indian contract act, 1872. The article explored the various aspects and conditions that are described by section 11 of the Indian contract act, 1872 such as the minor’s agreement, contract with a person of unsound mind, and contract with person disqualified by law. These three conditions if satisfied to be untrue then the parties shall be competent whereas even if one of the conditions stated becomes true (In case of unsound mind and disqualification by law) then the agreement becomes void.

[1] Void from the beginning [2] ILR(1903) 30 Cal. 539 (PC) [3] (1948) 50 BOMLR 646 [4] AIR 1928 ALL 440 [5] Indian partnership act, 1932,S.30 (No. 9 of 1932) [6] AIR 1944 Nag 232

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