Submitted to: Hafiz Usman Submitted by: Usman Ali

Module B

Skans School of Accountancy Rawalpindi

Capacity of Parties
Introduction
Section 10 of the Contract Act requires that the parties must be competent to contract. Section 11 of the Indian contract act states that every person is competent to contract, who is: the age of majority, who is of sound mind and Who is not disqualified from contracting by law.

INCAPACITY

MINOR

DISQUALIFIED BY LAW

UNSOUND MIND

Minor
According to Majority act, 1875, a minor is one who has not completed 18 year of age. So a person becomes a major after the completion of 18 year of life. To this rule there are two exceptions: i. ii. When a guardian of the minors property is appointed by a court of law. When a minors property is taken over by the court of wards for management.

In either of the two cases minority continues up to the completion of 21st year.

1. An agreement by minor is absolutely void and inoperative as against him

a. An agreement is void ab-initio where minor is charged with obligations and the other contracting parties seek to those obligations against minor e.g. Case of Mohori Bibi vs. Dharmo Das Ghosh. A minor executed for Rs. 20000 and received Rs. 8000 from the mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and for sale of the property in case of default. The Privy Council held that an agreement by a minor was absolutely void. b. A minor can not be ordered to make compensation for a benefit obtain under a void agreement. c. There is no restitution when the minor is at the position of defendant but the court will compel restitution by a minor when he is a plaintiff for example if a minor sell house for Rs. 50000 and later on files a suit to set a side sale on the ground of minority he may be directed by the court to refund the purchased money received by him before he can recover possession of the property sold.

2. Beneficial agreements are valid contracts.

a. A minor can be a beneficiary. b. An agreement which is of some benefit to the minor and under which he required to bear no obligation is valid. c. In the same context money advanced by a minor can be recovered. d. All agreements would be binding and enforceable if the it is for the benefit of the minor Illustration: Where the minor purchaser of immovable property was, subsequent to his purchase, dispossessed by a third party, it was held that the minor could recover from his vendor the sum which he has paid as purchase money. e. Contracts of apprenticeship and service by a minor is valid and binding upon a minor, provide that the minor must not be less then 14 years of age and the contract must be entered into on behalf of the minor by his guardian. The act was passed with a view to enabling children

to learn trading, crafts and employment by which, when they come to full age they may gain a livelihood.

3. No ratification on attaining the age of majority.

Ratification means the subsequent adoption and acceptance of and act or agreement. a. Minors agreement being void ab-initio has no existence in the eye of law. b. Minors agreement can not be ratified by the minor when attaining the age majority. Thus, if advance is made to a minor during his majority, a promise to pay for such amount after he attains majority would not be enforceable. c. The consideration which passed under the earlier contract can not be implied into the contract into which the minor enters on attaining majority. d. Void deed can not form a good consideration for a fresh contract made by the minor on attaining the majority. Example case: - Surej Narain Vs Subhu Ahir. Where a minor borrowed a sum of money by executing a promissory note, and after attaining majority executed the second bond in respect of the original loan, the court held that the suit upon the second bond was not maintainable as that bond was without consideration. e. But if the services are rendered or and advance is made to a minor during his minority and the services are continued or a further advanced is made after he attains majority, a promise to pay for such services or amount as a whole would valid and enforceable.

4. The rule of estoppel does not apply to a minor

The principle of estoppel is a rule of evidence. When a man has, by words spoken of written or by conduct, induced another to believe that a certain state of things exists, he will not be allowed to deny the existence of that state of things. Lord Hulsbury words: Estoppel arises when a person precluded from denying the truth of anything, which he/she has represented as a fact, although it is not a fact. a. The rule of estoppel does not apply to minor, i.e. a minor is not estopped his infancy in order to avoid the contract, even he has entered into an agreement by falsely representing that he was of full age. b. If anything is traceable in the hands of minor, out the proceeds of the contract made by fraudulently representing that he was of full age, the court may direct the minor to restore that thing to the other party. c. Infant must restore the property which he has obtained by his fraud to its former owner. But he can not be made to repay the money which he has spent, merely because he received it under a contract induced by his fraud. d. If a minor obtains a loan by fraudulent representation and purchases a motorcar out of that, although the loan transaction is invalid, the court may direct the minor to restore the

motorcar to the lender. But once the identity of the property or money has been lost because it has been spent wastefully.

5. Minors liability for necessaries.

a. 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. b. Actually a minor is not personally liable, it is his property only which is liable. Therefore if a minor owns no property, the suppler will lose the price of necessaries. Even where a minor owns property, the supplier will get a reasonable price and not the price agreed to by the minor. What is a necessary article? Necessary article is to be determined from the status and social position of the minor. Food and clothing may be taken as simple examples of necessaries. The necessaries would also include the infants lodging expense, medical attendance, and cost of defending a minor in civil and criminal proceedings. Loans taken by a minor to obtain necessaries also bind him. Objects of mere luxury are not necessaries, nor are objects, which though of real use, are excessively costly.

6. Specific performance. Specific performance means the actual carrying out of the contract as agreed.
a. As we are aware that an agreement by a minor is absolutely void, the court will never direct specific performance of such a contract by a minor. But a contract entered into, on behalf of a minor, by his guardian or by the manage of his estate will be binding on the minor and can be specifically enforced by or against the minor provided that: i. The contract is within the authority of the guardian or manager. ii. It is for the benefit of the minor. b. Some contracts cannot be specifically enforced by or against the minor because, a guardian has no power to bind the minor on the following grounds: i. To purchase the immoveable property. ii. Contract of service on minors behalf.

7. Minor Partner.

Law says that A minor being incompetent to enter into contract can not be a partner in a partnership firm but under section 30 of contract act 1932, he can be admitted to the benefits of partnership with the consent of all the partners by an agreement executed through his lawful guardian with the other partners. Such a partner will have a right to receive share of the property or profits of the firm and can have an access to and inspect the books of account of the firm. The minor can not participate in the management of the business and can bear losses of the firm only up to the extent of the capital contribution in the firm. He can not be made personally liable for any obligations of the firm, although he may after attaining majority accept those obligations if he thinks fit to do so.

8. Minor as an agent.
A minor can be appointed as an agent. He can draw, make, indorse and deliver negotiable instruments so as to bind all parties except himself. In other words, it can be said that a minor can bind the principal by his acts done in the course of agency, but he can not be held personally liable for negligence or breach of the duty.

9. Minor and insolvency.

A minor can not be adjudicated an insolvent because he is incapable of contracting debts. Even for necessaries supplied him, he is not personally liable, only his property is liable.

10. Contract by minor and adult jointly.

Where a minor and a major jointly enter into a contract with another person the minor has no liability but the contract as a whole can be enforced against the major.

11. Surety for a minor.

Where in a contract of guarantee, an adult stands surety for a minor, the adult liable under the contract. But in the true sense there can not be a contract of guarantee because if a minor could not default, the liability of the guarantor being secondary does not arise at all.

12. Position of minors parents.

The parents of the minor are not liable for agreements made by a minor, whether the agreements is for the purchase of necessaries or not. The parents can be held liable only when the child is contracting as an agent for the parents.

13. Minor shareholder.

According to contract act, a minor being incompetent to contract can not be a shareholder of a company. Therefore, a company can refuse to register, transfer or transmission of shares in favour of a minor unless the shares are fully paid. A minor acting through his lawful guardian may become a shareholder of a company, in case of transfer or transmission of fully paid shares to him. Logically also, if

a minor could legally hold property in his name, it would be wrong to set him aside from holding fully paid up shares in his own name.

14. Minors liability in tort.

Tort is a civil wrong. So minors position in civil wrong is that A minor is liable for his tort i.e. a civil wrong unless the tort is in reality a breach of contract. For which ordinary remedy is damages. If he hires a horse without any instruction, he will not be liable for any damage made by him but in case under express instruction not to jump, and he does so, he will be liable for damage as it is the breach of contract.

Persons of unsound mind

As per section 11 of contract act, for a valid contract each party to the contract must have a sound mind. Contract made by person of unsound mind are void. The reason is that a contract requires assents of two minds but a person of unsound mind can not express his assent. What is sound mind? A person is said to be of sound mind for the purpose for 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 effects upon his interests. People of unsound mind can be of following categories: i. ii. A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind e.g. lunatic asylum (who is at intervals 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 e.g. drunkenness.

Unsoundness of mind may arise from:

(a) Idiocy An Idiot is a person with no intervals of saneness. He is in capable. His mental powers of understanding even ordinary matters are absent because of lack of development of brain. The agreement with an idiot is void. (b) Lunacy or Insanity It is disease of brain. A lunatic loses the use of his reason due to some mental strain or disease. He may have Lucid Intervals of sanity. He can enter into contract during that period when he is of sound mind. (c) Drunkenness

It produces temporary incapability till the man is under the effect of intoxication creating impotence of mind. He stands on the same footing as a lunatic.

(d) Hypnotism It also produces temporary incapability till the person is under the impact of artificially induced sleep. (e) Mental decay It is on account of old age etc.

Burden of Proof

Case
1. Where a person is usually of sound mind.

The burden of proof lies on..

The burden of proving that he was of unsound mind at the time of contract lies on the person who challenges the validity of the 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 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 the contract.

Effects of agreements made by persons of unsound mind:

Agreement by a person of unsound mind is absolutely void and inoperative as against him but he can derive benefit under it. The property of a person of unsound mind is, however, always liable for necessaries supplied to him or to any one whom he is legally bound to support.

Disqualified Persons
The third type of incompetent persons, as per section 11, is those who are disqualified from contracting by any law to which they are subject.

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

1. Position of contracts during the war

An alien enemy can neither enter into any contract nor can be sued in Pakistan Court except by license from the Central Government.

2. Position of contracts entered into before the war a. If such contracts are against the public or are such that may benefit the enemy b. If such contracts are not against public policy

a. Such contracts stand dissolved. b. Such contracts are merely suspended for the duration of the war and revived after the war is over unless they have already become time barred under the Law of Limitation Act.

b.Foreign sovereigns and ambassadors.

They can enter into contracts and enforce those contracts in our courts but they can not be sued in courts without the sanction of the Central Government unless they choose to submit themselves to the jurisdictions of our Courts.

c. Convicts.
A person is called convict during his period of sentence. His contractual capacity is summarized as under: 1. During the period of sentence He can not enter into any contract.

2. After the expiration of the period of sentence or when he is at liberty

He can enter into a contract. He can sue on a contract.

d. Married women.
Married women are competent to enter into contract with respect to their separate properties provided they are major and sound mind. They can not enter into contracts with respect to their husbands properties. A married woman can, however, act as an agent of her husband and bind her husbands property for necessaries supplied to her, if he fails to provide her with these.

e. Insolvent.
When a persons debts exceed his assets, he is adjudged insolvent and his property stands vested in the Official Receiver or Official Assignee appointed by Court. Such person i. Cannot enter into contracts relating to his property, ii. Cannot sue, iii. Cannot be sued.

Note: When the insolvent is discharged, the disqualification is removed.