CHAPTER 3

CAPACITY TO CONTRACT
Introduction : According to Sec 10, An agreement becomes a contract if it is entered between
parties who are competent to contract. Thus capacity means competence of the parties to enter into
a valid contract. It includes both physical and mental capacity.

Who are competent to Contract?

As per Sec 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.” Thus three persons who are disqualified are:
 Minor
 Persons of unsound mind and
 Persons disqualified by Law
Age of Majority - As per Sec 3 of the INDIAN MAJORITY ACT 1875, every person domiciled in India
shall be deemed to have attained majority when he/she has completed the age of 18 years. Where a
guardian of a minor’s person or property is appointed under the Guardians & Wards Act, 1990 or by a
Court of Wards, the age of majority is 21.

Nature of Minors Agreement

1. Minor is not competent to contract: A minor being incompetent to contract makes the minor’s
agreement void-ab-initio (from the very beginning). For e.g. ‘A’ a minor, alleging to be a major
mortgaged his house in favour of B, a moneylender to secure a loan of INR 20000. A sum of INR
8000 was advanced to A by B. Subsequently A sued for cancellation of the mortgage on the pretext
that he was a minor. The mortgage was held void and was thus cancelled. B’s request for
repayment of money advanced to A as part consideration for the mortgage was also not accepted.
It was thus held by the Privy Council that as the minor’s contract was absolutely void, there was
no question of refunding money in these circumstances. Case Ref. (Mohiri Bibee v/s
Dharmodasghose, 1903)
2. No specific performance: A minor’s agreement being void, it cannot be specifically enforced.
However if the contract is entered by a guardian for the benefit of the minor, it can be specifically
enforced.
3. No ratification: It means consenting to a past act entered during minority. Since a minor’s contract
is void, there can be no question of ratifying it after majority. For e.g. M a minor, borrows INR
5000 from L and executes a promissory note in favour of L. After attaining majority he executes
another promissory note in settlement of the first note. The second promissory note is void for
want of consideration. Case Ref Ramaswamy vs Chettiar.
4. No insolvency: A minor cannot be declared insolvent because any agreement with a minor is
void . Minor is not personally liable for debts incurred during minority.
5. No estoppel: It means to be stopped from going back on once own words. A minor cannot be
stopped by a false representation as the law of estoppel does not apply. S a minor by fraudulently
representing himself to be of full age induced L to lend him pounds 400. He refused to repay it
and L sued him for the money. Held, the contract was void and S was not liable to repay the
amount. Case Ref. Leslie vs. Shiell.
6. Contract by parents or guardian: A parent or guardian can enter into an agreement on behalf of
a minor if it is for the minor’s benefit and parent is capable of performing the contract, if the minor
fails to perform.

Business Law Prof Gita Prakash

EXCEPTIONS OR ENFORCEABLE AGREEMENTS
a) Promisee or beneficiary: A minor can be a beneficiary of a promise. Law does not regard minor
as incapable of accepting a benefit. For e.g. A a minor under a contract of sale delivered goods to
the buyer. It was held that he was entitled to maintain a suit for the recovery of the price.
Case Ref Abdul Ghaffar vs Pyarelal.
b) Minor can be an agent: A minor binds the principal by his acts without incurring any personal
liability.
c) Minor as a partner: A minor cannot be a partner as he is not capable of contracting. But he can
be admitted to the benefits of partnership, with the consent of all existing partners.
d) Necessaries to a minor Sec 68 of Quasi contract: A minor is liable to pay out of his property for
necessaries supplied to him or to anyone whom he is legally bound to support. The person who
has furnished supplies is entitled to be reimbursed from the property of a minor.

AGREEMENTS BY PERSONS OF UNSOUND MIND

A contract with a person of unsound mind is void. Sec 12 states “A person is said to be of sound mind
for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding
it and forming a rational judgement as to its effects upon his interest”. Sec 12 further states “A person
who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is
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. For e.g. A patient in a lunatic asylum, who is at intervals
of sound mind, may make a contract during such intervals.

AGREEMENTS BY DISQUALIFIED PERSONS

The following persons are disqualified

a. Alien Enemy: An alien is a person who is a foreigner to the land. If his country is at war with India,
he is an alien enemy. Such an alien enemy becomes disqualified and loses his capacity to contract.
b. Foreign Sovereigns: Foreign Sovereigns or diplomatic staff enjoy certain privileges. They can enter
into contracts and enforce them in India. However, a suit cannot be filed against them in Indian
courts without prior permission of the Central Government.
c. Insolvent persons : Under the Insolvency Act, an insolvent is incompetent to contract because
he is deprived of his power to deal with his property. Thus when a debtor is declared insolvent,
his property vests with the official receiver or an assignee.
d. Convicts: A convict is a person who is found guilty and is imprisoned. Such a convict who is
undergoing imprisonment is incapable of entering into a contract. This incapacity comes to an
end under a licence called “TICKET OF LEAVE”.
e. Company or Statutory Corporation: The contractual capacity of a Company is governed by the
object clause of MOA. If it exceeds its powers from the object clause of the MOA, the contract is
ultra – vires the company and therefore is void. Further it cannot enter into contracts of a strictly
personal nature as it is an artificial and not a natural person.

QUESTIONS
1. What is meant by capacity to contract?
2. Explain with illustrations the law relating to minors agreement. Are there any exception to the
above?
3. Discuss agreement by disqualified persons.

Business Law Prof Gita Prakash