CHAPTER FOUR

CAPACITY TO CONTRACT

Capacity to contract is the legal competency of a party to enter into legal relations. According to
Section 11 of the Contract Act, “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 a sound mind, and is not
disqualified from contracting by any law to which he is subject”.
The purpose of prescribing the test of contractual capacity is to protect vulnerable parties from
exploitation. The following persons have therefore been declared to be incompetent to make
contract:
(i) Minors,
(ii) Persons of Unsound Mind, and
(iii) Persons disqualified from contracting by any law.

MINORS
According to Section 3 of the Indian Majority Act, 1875, a person domiciled in India, who has
not completed 18 years of age, is a minor.
Exceptions:
In the following cases, the age of minority shall, however, extend to 21 years of age, if:
(i) the guardian to the minor’s person or property or both has been appointed by the court or,
(ii) the minor has been put under the superintendence of Court of Wards.

Rules Regarding Minor’s Agreements

A minor is considered to lack the ability to understand and appreciate the consequences of his
acts. Under the law of contract, a minor enjoys a privileged position. While he is protected
against his own inexperience, the law also guards third parties from undue hardship arising from
dealing with minors.
The following is the legal position of a minor’s agreements:
1. An agreement with or by a minor is void ab initio
An agreement with or by a minor is a nullity and non-existent. It is void from the very outset,
inoperative, and devoid of any consequences against the minor. This rule has been emphasized in
Mohiri Bibee vs. Dharmodas Ghose (1903) 309 All 4 PC. In this case, a minor executed a
mortgage for Rs. 20,000 and received Rs. 8,000 from the mortgagee. The mortgagee filed a suit
for recovery of money and for sale of property in case of default. The Privy Council held that a
contract with a minor being absolutely void, neither can the money be refunded under Section 64
nor can the house be sold.
In case of a joint contract by an adult and a minor, only the adult party can be held liable. For
instance, in Sain Das vs. Ram Chand, there was a joint purchase by two vendees, one of whom
was a minor, it was held that the vendor could enforce the contract against the major vendee
only.
2. A minor can be a promisee or a beneficiary
Agreements beneficial to a minor are valid. These are enforceable at the option of the minor but
not at the option of the other party He can draw, negotiate or endorse a negotiable instrument
without being liable thereon. Under the Hindu minority and Guardianship Act, 1956 a contract
made by a natural guardian on behalf of the minor shall be binding on the minor only if it is for
his benefit.

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Example:
A mortgage was executed in favour of a minor. He was held entitled to enforce the same
[Raghvachariar vs. Srinivas (1916) 40 Mad 308].
3. No Ratification on attaining the age of majority
A minor cannot ratify a contract that was made during his minority after attaining majority. The
reason is that ratification relates back to the date when contract was originally made. For a valid
ratification, the person who made the contract must be competent to contract. A transaction made
during minority was void ab initio and hence incapable of subsequent adoption.
Example:
In Arumugam Chetti vs. Duraisinga Tewar (1914) 37 Mad 38, a minor borrowed Rs. 5000 from
B and executed a promissory note in his favour. After attaining majority, he executed a fresh
promissory note in B’s favour. Held, B cannot sue on it, as there is no fresh consideration for the
second promissory note.
4. No Restitution except in certain cases
If the minor has received any benefit under a void agreement, he cannot be asked to return the
same under sections 64 and 65 which are applicable to valid contracts not a void agreement
Example:
In Leslie (R) Ltd. vs. Sheill (1914) 3 KB 607, a minor obtained a loan b misrepresenting his age.
The lenders sued for restitution on the ground of a quasi contract. Held, a void agreement cannot
be enforced.
Exception
However, under Section 33(2) of the Specific Relief Act 1963, the court may order the minor
who is a plaintiff in a case to return the benefits obtained by him misrepresenting his age on
equitable grounds. This provision is nor applicable where the minor is a defendant.
In Khan Gul v Lakha Singh AIR 1926 Lah 609, a minor sold a plot for Rs 17,500 but refused to
transfer the property to the buyer. The court held that where a minor invoked the jurisdiction of
court, he cannot be allowed to take benefit of his own fraud. The restitution was thus ordered to
be made by the minor.
5. No Specific Performance:
There can be no specific performance of an agreement made by a minor. But Privy Council has
held in the case of Subramanyam vs. Subarao (1948) 757 A 115 that, “a contract made by the
minor’s parents or guardian or manager of his estate can be specifically enforced by or against
the minor provided: (a) the contract is within the scope of authority of the parent, etc., and (b) it
is for the benefit of the minor.” In Madhegowda vs. Ankegowda AIR 2002 SC 215, it was held
that alienation of minor’s property by de facto guardian is void ab initio.
6. No Estoppel
Estoppel prevents a person from denying the truth of the first statement by him. Section 115 of
the Evidence Act, 1872 relating to estoppels does not apply to a minor. Thus where a minor
overstates his age and fraudulently induces another to contract with him; he cannot be estopped
from setting up infancy as a defence [G. Bhimappa Meti vs. Balangowda Bhimangowda AIR
1931 Bom. 567].

7. Tortuous liability:
A minor is liable for tort i.e., for causing any injury or damage by his negligence, or for
converting property that does not belong to him. But, he is not liable for a tort directly connected

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with a contract which as an infant he would be entitled to avoid (Johnson vs. Pye). In other
words, a person cannot convert a contract into a tort to enable him to sue an infant.
8. Minor as Agent:
A minor can be an agent as per Section 184 of the Act. The principal is bound by the acts done
by the minor agent in the course of agency. The minor cannot be held personally liable in respect
of the acts done during the agency.
Example: In Jennings vs. Rundall (1799) 8 TR 335, an infant hired a mare for riding. He rode
the mare negligently which led to injuries to the mare. Held, the infant is not liable as the case
arose out of a contract and not in tort.
9. Minor as a Partner-in profits:
A minor being incompetent to contract cannot become a partner in a firm. But under Section 30
of the Partnership Act, he can be admitted to the benefits of partnership with the consent of all
the partners. Only his share of profits is liable for losses of the firm.
10 A Minor cannot be declared insolvent:
A minor cannot be adjudicated insolvent since he is incapable of contracting debts.
11. Minor’s liability for Necessaries:
A minor’s estate has quasi contractual liability under section 68 to pay for the necessaries
supplied to him or his dependants. He does not have any personal liability in this behalf. The
meaning of ‘necessaries’ will depend on the socio-economic background of the concerned minor.
Example:
In Nash vs. Inman (1908) 2 KB1, a college student who already had sufficient clothing suited to
his condition of life was provided with certain clothing of an extravagant style by the defendant.
The court did not consider those clothing to be necessaries and held the supplier’s claim to be
inadmissible.
12. Surety for a minor: Where in a contract of guarantee, an adult stands surety for a minor, the
former shall be liable as a principal debtor. There will be no liability on the minor’s part.

PERSONS OF UNSOUND MIND

For a valid contract, it is imperative for the contracting parties to be of sound mind to make
reasoned deliberations. Section 12 has defined that “a person is said to be of a sound mind for
the purpose of 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.”
A person who is usually of an unsound mind may make a contract when he is of a sound mind.
On the other hand, a person who is usually of a sound mind but occasionally of an unsound mind
may not make a contract when he is of unsound mind.

Tests of Soundness of Mind

In order for a person to be considered to be of a sound mind, he must have the following two
capacities:
(i) Capacity to understand the contract, and
(ii) Capacity to form rational judgment as to the effects of contract upon his interests.
Both of these tests must be fulfilled at the time of formation of the contract.

Who are considered to be of sound mind?

The persons who are considered to be of unsound mind include the following:

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(a) Idiots who are permanently deprived of mental capacity due to lack of development of brain
(b) Lunatics or Insane persons who lose the use of reason due to some mental disease. Hey may
have lucid intervals at times
(c) Drunken or intoxicated persons suffer from temporary mental impotence until the influence
of the substance lasts
(d) Mental decay due to old age or prolonged sickness.
The burden of proof of establishing unsoundness of mind lies on the person who alleges such
disability. Once this burden is discharged, the onus shifts to the party to establish the fact of
lucidity (Mohanlal vs. Vinayak AIR 1941 Nag. 251)

Effects of agreements made by persons of unsound mind

An agreement entered into by a person of unsound mind is treated on the same footing as that of
minor. Such an agreement is absolutely void and inoperative as against him but he can derive
benefit under it (Jugal Kishore vs Cheddu 1903 All L J 43, 282)

PERSONS DISQUALIFIED FROM CONTRACTING

The following categories of persons have been expressly disqualified from contracting:

1. Alien enemies
‘Alien’ is one who is not a citizen of India. An alien may be a friendly alien or an alien enemy.
During war with the country of a foreigner, he becomes an alien enemy. In that situation, he can
neither contract with an Indian subject nor can he file a suit in an Indian court to enforce any
legal rights. He can do so only after obtaining the permission of the Central Government.
Contracts made before war may either be suspended or dissolved. They are dissolved if they are
found to be against the public policy of the country or of benefit to the enemy.
2. Insolvent
On adjudication of person as insolvent by a court, his property vests in a court appointed official.
On declaration of insolvency, the insolvent is thereby deprived of his authority to deal in his
property. Only when he is discharged by the court, he becomes competent to contract.
3. Foreign Sovereigns, Ambassadors, Diplomatic Staff and Accredited representatives of
Foreign States:
All of the above-mentioned officers enjoy certain immunities and privileges under the
international law. They cannot be sued in the national courts unless they voluntarily submit to
their jurisdiction. An Indian citizen needs the prior sanction of the Central Government to sue
them. But they can sue Indian citizens to enforce contracts entered upon with them. Because of
the legal immunity, they are considered to be disqualified from contracting.
4. Joint Stock Company and Corporations incorporated under Special Acts
A company can make contracts within the limits of the ‘Objects Clause of its Memorandum.
Any contract outside the purview of the objects clause is regarded to be ultra vires and
unenforceable against the company. The same consequence follows if a company violates the
provisions of the Special Act under which it has been incorporated.
5. Convicts:

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 A convict, while undergoing imprisonment, cannot make a contract nor sue on contracts made
before conviction. After serving the sentence, he can pursue the case and the period of limitation
prescribed under the Limitation Act is held in abeyance during the period of sentence.
6. Married Hindu Women
Married Hindu women can make contracts only to the extent of their ‘stridhan’ which is their
exclusive property. For their contracts, the husband’s property cannot be held liable. However,
the husband is liable to pay in case he has failed to make adequately provision therefor.

QUESTIONS
1. What is meant by the capacity to make contract?
2. Write a note on capacity to contract stating clearly as to who is competent to contract.
3. Write a short essay on the capacity to contract showing clearly who are competent to
contract under the Contract Act. What is the legal effect, if one of the two contracting
parties is a minor?
4. What are the legal effects of agreements by minor? Are they void or voidable? Explain
the term “beneficial agreements” in the contract.
5. Do minors, aliens, corporations, lunatics and diplomats enjoy contractual capacity in
India?
PROBLEMS
1. A, a minor, borrows Rs. 5000 and executes a pronote for the amount in favour of B. After
attaining majority, A executes another pronote in settlement of the first pronote. Will B
succeed in a recovering money from A? Give reasons in support of your answer.
Ans. No. A minor cannot ratify contracts entered into during minority [Armugam vs.
Duraisinga]. Ratification always has a retrospective effect dating back to the time when the
transaction was originally made. A minor’s contract being void ab initio, there is nothing
which could be ratified.
2. A, a minor and an undergraduate student of a university, buys on credit from B, a
clothier, seven suit lengths for his own use. Is B entitled to any payment in respect of the
goods?
Ans. A contract with a minor is void ab initio. But Section 68 imposes quasi-
contractual liability upon persons incapable of contracting. In other words, personal estate, if
any, of the minor is liable for the price of necessaries supplied to him. The meaning of
‘necessaries’ depends on the status of the minor and other relevant facts. The purchase of
seven suit lengths by an undergraduate student, does not appear to be "necessaries". On
similar facts, a similar decision has been given in Nash vs. Inman (1908). Hence, B is not
entitled to payment.
3. A, a minor wanted to become a professional billiards player and entered into an agreement with a
famous billiards player. Under the contract, the minor would pay a certain sum of money to the
billiards player to learn the game and would also accompany the man to play matches during his
world tours. Is the agreement valid?
Ans.Agreements entered into by a minor for his benefit are valid and enforceable. Such agreements
are enforceable against the estate of the minor. On similar facts in Roberts vs. Gray, a similar
decision has been given.
4. A, a minor, borrowed Rs. 5000 from B stating that he was a major and executed a receipt in his
favour. Discuss the remedies available to B to recover the money sent by him.
Ans.There can be no estoppel against a minor because the statute has declared minor's contract to be

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void. A minor's contract being void, and Section 115 of the Evidence Act relating to doctrine of
estoppel having no application to a minor's contract, there can be no restitution by a minor. The
position would be the same even if the minor has misrepresented his age. A similar decision has
been given on similar facts in Leslie (R) Ltd. vs. Sheill (1914).

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