LAW OF CONTRACT

TOPIC: CAPACITIY OF PARTIES TO

ENTER INTO CONTRACT

Submitted To: Submitted By:

Dr. Manpreet Kaur Shubham Tanwar

(Asst. Prof. of Contract) Roll No. 18020

RGNUL, Punjab Group No. 3

SUPERVISOR’S CERTIFICATE

This is to certify that Mr. Shubham Tanwar has successfully completed this project work
entitled “Capacities of party to enter into contract” under the guidance and supervision of Dr.
Manpreet Kaur. The report is the result of his efforts and endeavours. The report is found
worthy of acceptance as final project report for the subject Law of Contract.

Dr. Manpreet Kaur

Assistant Prof. Of law

ACKNOWLEDGEMENT
I would like to take this opportunity to thank all those who have helped me throughout my
project. I am grateful to my teacher Dr. Manpreet Kaur for her nonstop support for the project.
Next I would like to thank the RGNUL library staff for helping me finding the books related
to my project. I wish to thank my parents for their personal support which inspired me to go
my own way.

At last but not the least I want to thank my friends who encouraged me and helped me wherever
I needed and finally God who made all the things possible for me to do till the end.
Contents
Contract:.............................................................................................................................................. 5
Capacity to Contract: .............................................................................................................................. 6
1] Attaining the Age of Majority ........................................................................................................ 7
A Minor can be a Beneficiary of a Contract .................................................................................... 7
A Minor is always given the Benefit of being a Minor .................................................................... 8
Contract by Guardian ...................................................................................................................... 8
Joint contract by a Minor and an Adult .......................................................................................... 8
2] Person of Sound Mind .................................................................................................................... 8
3] Disqualified Persons ....................................................................................................................... 9
Alien Enemy: ................................................................................................................................... 9
Convict: ........................................................................................................................................... 9
Corporations: .................................................................................................................................. 9
Insolvent:....................................................................................................................................... 10
Case laws .............................................................................................................................................. 11
Conclusion ............................................................................................................................................ 13
Bibliography .......................................................................................................................................... 14
Chapter 1: Introduction

Contract:
Section 10 in The Indian Contract Act, 1872 defines the contract. What agreements are
contracts.—All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void. —All agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration and with a lawful object,
and are not hereby expressly declared to be void."1 Nothing herein contained shall affect any
law in force in [India], and not hereby expressly repealed, by which any contract is required to
be made in writing or in the presence of witnesses, or any law relating to the registration of
documents. A contract is a legally-binding agreement which recognises and governs the rights
and duties of the parties to the agreement.A contract is legally enforceable because it meets the
requirements and approval of the law. An agreement typically involves the exchange of goods,
services, money, or promises of any of those. In the event of breach of contract, the law awards
the injured party access to legal remedies such as damages and cancellation.

In the Anglo-American common law, formation of a contract generally requires an offer,

acceptance, consideration, and a mutual intent to be bound. Each party must have capacity to
enter the contract. Although most oral contracts are binding, some types of contracts may
require formalities such as being in writing or by deed.In the civil law tradition, contract law
is a branch of the law of obligations. In order for a contract to be formed, the parties must reach
mutual assent (also called a meeting of the minds). This is typically reached through offer and
an acceptance which does not vary the offer's terms, which is known as the "mirror image rule".
An offer is a definite statement of the offeror's willingness to be bound should certain
conditions be met. If a purported acceptance does vary the terms of an offer, it is not an
acceptance but a counteroffer and, therefore, simultaneously a rejection of the original offer.

1
Indian contract act, 1872
Capacity to Contract:
One of the most essential elements of a valid contract is the competence of the parties to make
a contract. Section 11 of the Indian Contract Act, 1872, defines the capacity to contract of a
person to be dependent on three aspects; attaining the age of majority, being of sound mind,
and not disqualified from entering into a contract by any law that he is subject to. In this article,
we will look at all aspects in a detailed manner.

According to Section 11, “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 of sound mind and is not disqualified
from contracting by any law to which he is subject.”2

So, we have three main aspects:

1. Attaining the age of majority

2. Being of sound mind
3. Not disqualified from entering into a contract by any law that he is subject to

Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have
contracts enforced against them is restricted. For instance, very small children may not be held
to bargains they have made, on the assumption that they lack the maturity to understand what
they are doing; errant employees or directors may be prevented from contracting for their
company, because they have acted ultra vires (beyond their power). Another example might be
people who are mentally incapacitated, either by disability or drunkenness.Each contractual
party must be a "competent person" having legal capacity. The parties may be natural persons
("individuals") or juristic persons ("corporations"). An agreement is formed when an "offer" is
accepted. The parties must have an intention to be legally bound; and to be valid, the agreement
must have both proper "form" and a lawful object. In England (and in jurisdictions using
English contract principles), the parties must also exchange "consideration" to create a
"mutuality of obligation," as in Simpkins v Pays3.

In the United States, persons under 18 are typically minor and their contracts are considered
voidable; however, if the minor voids the contract, benefits received by the minor must be
returned. The minor can enforce breaches of contract by an adult while the adults enforcement

2
Ibid
3
[1955] 1 WLR 975
may be more limited under the bargain principle.[citation needed] Promissory estoppel or
unjust enrichment may be available, but generally are not.

1] Attaining the Age of Majority

According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years.
For the purpose of entering into a contract, even a day less than this age disqualifies the person
from being a party to the contract. Any person, domiciled in India, who has not attained the
age of 18 years is termed as a minor.

Let’s look at certain laws governing a minor’s agreement: A Contract made with a Minor is
Void Since any person less than 18 years of age does not have the capacity to contract, any
agreement made with a minor is void ab-initio (from the beginning).

Peter is 17 years and 6 months old. He needs some money to go for a vacation with his friends.
He approached a moneylender and borrows Rs 25,000. As security, he signs some papers
mortgaging his laptop and motorcycle. Six months later, when he attains the age of majority,
he files a suit declaring that the mortgage executed by him when he was a minor is void and
should be canceled. The Court agrees and relieves Peter of all liability to repay the loan.

Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority
since the contract is void ab-initio. And, a void agreement cannot be ratified.

A Minor can be a Beneficiary of a Contract

While a minor cannot enter a contract, he can be the beneficiary of one. Section 30 of the Indian
Partnership Act, 1932, also specifies that while a minor cannot become a partner in the
partnership firm, the benefits of the firm can be extended to him.4

Peter lends some money to his neighbor, John and asks him to mortgage his house as security.
John agrees and the mortgage deed is made favoring Peter’s 10-year-old son – Oliver. John
fails to repay the loan and Peter, as the natural guardian of Oliver, files a suit against John to
recover his money. The Court holds the case since a minor an be a beneficiary of a contract.

4
The partnership act, 1932
A Minor is always given the Benefit of being a Minor

Even if a minor falsely represents himself as a major and takes a loan or enters into a contract,
he can plead minority. The rule of estoppel cannot be applied against a minor. He can plea his
minority in defense.

Contract by Guardian

Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of
the minor. Such a contract, which the guardian enters into, for the benefit of the minor, can also
be enforced by the minor. However, guardians cannot bind a minor by a contract for buying
immovable property. But, a contract entered into by a certified guardian of a minor, appointed
by the Court, with an approval from the Court for the sale of a minor’s property can be enforced.

Insolvency

A minor cannot be declared insolvent as he cannot avail debts. Also, if some dues are pending
from the properties of the minor and he is not personally liable for the same.

Joint contract by a Minor and an Adult

In case of a joint contract between an adult and a minor, executed by the guardian on behalf of
the minor, the liability of the contract falls on the adult.

2] Person of Sound Mind

According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a
contract, a person is said to be of sound mind if he is capable of understanding the contract and
being able to assess its effects upon his interests.

It is important to note that a person who is usually of an unsound mind, but occasionally of a
sound mind, can enter a contract when he is of sound mind. No person can enter a contract
 when he is of unsound mind, even if he is so temporarily. A contract made by a person of an
unsound mind is void.

3] Disqualified Persons
3. Apart from minors and people with unsound minds, there are other people who cannot
enter into a contract. i.e. do not have the capacity to contract. The reasons for
disqualification can include, political status, legal status, etc. Some such persons are
foreign sovereigns and ambassadors, alien enemy, convicts, insolvents, etc. Disqualified
by Law:
The scope of those disqualified is wide, namely including:

Alien Enemy:

“An alien who is the subject or citizen of some hostile state or power”5, is deemed as an alien
enemy. And through the columns of Indian Constitution and Citizenship Act, the citizens of
the sovereign India naturally under an obligation to devote complete affection and dedication
(which is acknowledged as patriotism) to the country. Acting against its interest amounts to
treason and the offender can be subjected to serious punishment by law. Accordingly, the
Indian Contract law prevents its citizens to form a contract with an alien enemy, thereby
safeguarding national interest. Undoubtedly, forming contract with alien friends is justified,
but once the relations sour and war breaks out, then, such a contract too, becomes void.

Convict:

Once held guilty of any crime/violation by a competent Court of Law the convict cease to lose
many of his/her rights, one of them rightly being the right to ratify a contract. The question of
revival of their rights does not arise in case of a death penalty, but may enjoy this privilege,
once the term of imprisonment is over.

Corporations:

“An artificial person or legal entity created by or under the authority of the laws of a state or
nation, composed, in some rare instances, of a single person and his successors, being the

5
https://thelawdictionary.org/alien-enemy/
incumbents of a particular oltice, but ordinarily consisting of an association of numerous
individuals, who subsist as a body politic under a special denomination, which is regarded In
law as having a personality and existence distinct from that of its several members, and which
is, by the same authority, vested with the capacity of continuous succession, irrespective of
changes in its membership, either in perpetuity or for a limited term of years, and of acting as
a unit or single individual in matters relating to the common purpose of the association, within
the scope of the powers and authoritiesconferred upon such bodies by law.6
In simple words, its artificial existence prohibits it from entering a contract. Nonetheless, the
contractual capacity of a company is determined by an “Object Clause” of its Memorandum of
Association.

Insolvent:

“One who has not means or property sufficient to pay his debts”7 is described as an insolvent
person. Once it is brought to the notice of the Court of Law that a person has more debts than
assets, then, it is bound to declare him insolvent. Obviously, the lack of security puts him in a
state, where he/she needs to depend upon some other person even for basic necessities of life-
indirectly, the Indian Contract Act, 1872eliminates insolvent person from entering a contract.
Including Foreign Diplomats and Sovereigns within its ambit, the aforesaid people are
disqualified from entering a contract within the meaning of Indian Contract Law, thereby
placing the interest of the State above everything and everyone.

6
https://thelawdictionary.org/corporation/

7
https://thelawdictionary.org/insolvent/
Case laws
Mohiri Bibi v. Dharmodas Ghosh8

The case goes back to the year 1903 in which, for the first time, the Privy Council held that a
minor’s contract is void-ab-initio that it is void from the beginning.

Facts of the case – the plaintiff Dharmodas Ghosh, when he was a minor, mortgaged his
property to the defendant, a moneylender. At that time, defendant’s attorney had the knowledge
about plaintiff’s age. The plaintiff later paid only Rs 8000 but refused to pay rest of the money.
The plaintiff’s mother was his next friend (legal guardian) at that time, so he commenced an
action against the defendant saying that at the time of making of a contract, he was a minor, so
the contract being a void one, he is not bound by the same. The court held that unless the parties
have competence under Section 11 of the Act, no agreement is a contract.

Raghava Chariar vs. Srinivasa9, a mortgage was executed in favour of a minor who had
advanced the whole of the mortgage money. The question arose whether the mortgage executed
in favour of a minor was enforceable by the minor or by other person on his behalf. The
unanimous opinion of the Full Bench was that the transaction was enforceable by or on behalf
of the minor. WALLIS CJ opined: “The provision of law which renders minor incompetent to
bind themselves by contract was enacted in their favour and for their protection, and it would
be a strange consequence of this legislation if they are to take nothing under transfers in
consideration of which they have parted with their money.” Further, it was observed: “What is
meant by the proposition that an infant is incompetent to contract or that his contract is void is
that the law will not enforce any contractual obligations of an infant.” He is a mere promisee
praying for recovering the benefit stipulated in the contract from the courts.

Raj Rani vs. Prem Adib10 the plaintiff, a minor, was allotted the role of an actress in a certain
film by the defendant, a film producer. The agreement was made with her father. Subsequent,

8
ILR (1903) 30 Cal 539 (Pc)
9
Raghava vs. Srinivasa (1916) 40 Mad 314
10 AIR (1949) Bom 215
the role was given to another actress by the defendant and the agreement with the father was
terminated. It was held that neither the minor nor her father could sue on the promise. The
contract, if with the minor, was null and void. If the contract was with the father, it was without
consideration and thus, void. It was clarified that the promise of a minor to serve was not
enforceable against her and thus, could not have furnished any consideration for the
defendant’s promise to pay her a salary.

In Ryder vs. Wombwell 11, a minor who moved in high society was supplied with a pair
of diamond and ruby cufflinks and a silver goblet could. It was observed that there are
exceptional cases wherein even things merely ornamental in nature could be deemed
necessary. However, the court held that the goods in the particular case could not be
necessaries as the supplier could not prove that the ornamental goods were especially
necessary for the minor in question.

In Robert vs. Gray,12 the defendant was a minor who agreed to join a well known
professional billiards player in a world tour together and compete against each other. The
plaintiff used his resources like money and time to make arrangements for the matches but
the defendant repudiated the contract. It was held that the contract was one of necessaries
for it was for the minor’s “good teaching or instruction whereby he may profit afterwards”.
It was apparent that the minor was not employed by the plaintiff but was receiving the
benefit of advice and experience. The experience and instruction gained by playing against
the plaintiff on a worldwide tour was treated as a part and parcel of a potential billiards
player’s training and career. The plaintiff succeeded in recovering damages for the breach
of contract. The Court of Appeal regarded it as a quasi-educational contract and
accordingly, within the scope of a contract for necessaries.

11 (1868)LR Ex.90
12
1913) 1 KB 520
Conclusion

Legal capacity is the attribute of a person who can acquire new rights, or transfer rights, or
assume duties, according to the mere dictates of his own will, as manifested in juristic acts,
without any restraint or hindrance arising from his status or legal condition. Ability;
qualification; legal power or right. Applied in this sense to the attribute of persons (natural or
artificial) growing out of their status or juristic condition, which enables them to perform civil
acts. This, according to Black’s Law Dictionary, is how one could define capacity. In simpler
terms: In every case of a valid contract there must be assent of the parties. “But a man cannot
be said to assent that he will be bound, unless he be endowed with such a degree of reason and
judgment as will enable him to comprehend the subject of negotiation. Hence it is, that the
assent which is requisite to give validity to a contract, necessarily presupposes a free, fair and
serious exercise of the reasoning faculty; or, in other words, the power, both physical and
moral, of deliberating upon and weighing the consequences of the engagement about to be
entered into. If, therefore, either of the parties to an engagement be absolutely deprived of the
use his understanding, or if he be deemed by law not to have attained to it, there can in such a
case be no aggregaitomentium (agreement) and, consequently, no agreement which shall bind
him. The rule of law, therefore, which requires the assent of the parties to a contract, assumes
“that such assenting parties shall be competent to contract; and accordingly, in order to there
being a valid contract, a capacity to contract is absolutely necessary”. The contract by a lunatic
is void. The subordinate Judge is a ‘Person’ and is capable of entering into a contract. Adult
pardanashin women of sound mind are sui juris and must not be treated as though they were
minors and were incapable through mental deficiency in conducting their own business. Illness
may prevent a person from electing an agreement but does not prevent a transfer by others in
his favour as he is a passive party. The competency laid down by section 11 is indispensable
for the formation of an agreement which may become the embryo of a contract, and unless it
is present in both parties the result is infertility. Such competency is a personal qualification
Bibliography
• Contract and specific relief by Avtar Singh
• Law of contract and specific relief act by R K Bangia
• Indian contract act, 1872
• Contract law by Akhileshwar Pathak
• Law of contract by Kriti Sharma