Business Law: Capacity of Parties

BUSINESS LAW
CAPACITY OF PARTIES
Competent to Contract
All the parties to a contract must be competent to contract. Every

person is competent to contract who is of the age of majority, of sound
mind and not disqualified from contracting by the law. In a nutshell, a
minor, a person of unsound mind and a person disqualified by law are
not competent to contract [Section 10,11].
Business & Corporate Law: Offer and Acceptance,

2
Competency, Consideration
Age of Majority
According to Majority Act, 1875, a minor is a person who has not

attained 18 years of age. It means a person is competent to contract
after attaining 18 years of age.

3
Minor’s agreement
The rules regarding minor’s agreement are as under:-
1. Void agreement
2. Minor and ratification
3. Minor and necessaries
4. Guardian of Minor
5. Minor as partner
6. Surety of Minor
7. Member of company
8. Minor and insolvency
9. Contract by Minor and Adult
4
Void agreement
An agreement with a minor is void from the beginning. A minor is not

liable to perform any promise because he cannot understand the
nature of a contract. A minor cannot be compelled to return the benefit
received by him under the agreement.

5
Void agreement
Example
A minor hires a car under an agreement that he will be liable for any
damages to the car. The agreement is not enforceable.

6
Minor and Ratification
The ratification means the acceptance of an agreement already made.

The ratification by a minor is not valid. An agreement made by a minor
cannot be approved by him on attaining the age of majority because an
agreement which is void cannot become valid by subsequent approval.

7
Minor and Ratification
Example
B, a minor, makes an agreement to buy a house. The agreement is void.
B cant ratify the agreement after attaining the age of majority.

8
Minor and Necessaries
A person who supplies necessaries to a minor or his dependents can

recover reasonable value of such goods from the property of a minor. If
a minor owns no property, the supplier cannot recover the price of
necessaries.

9
Minor and Necessaries
Example
C supplied necessaries of life to B, a minor. C can recover reasonable
value of goods from B’s property.

10
Guardian of Minor
A contract made by a guardian on behalf of a minor is binding on the

minor. It can be enforced against the minor if the guardian is authorized
to enter into a contract and contract is for the benefit of the minor.

11
Guardian of Minor
Example
Mr. ABC entered into an agreement to sell property on behalf of two
minor girls D and E. Mr. ABC was not the legal guardian of the minors.
The agreement is void.

12
Minor as Partner
A minor cannot become a partner of a firm. He can be admitted to the

benefits of the firm through his guardian with consent of all partners.

13
Minor as Partner
Example
B and C are partners in a frim. In order to make M, a minor, a partner,
they make a contract with N who is guardian of M. M can be admitted
to the benefits of the firm.

14
Surety of Minor
When an adults stands surety for a minor in a contract of guarantee,

the adult is liable under contract but the minor is not answerable. The
adult is responsible because there is a direct contract between the
adult and the third party.

15
Surety of Minor
Example
B, a minor, makes a contract with C. D stands surety for B. The contract
is valid.
Business & Corporate Law 16

Member of Company
A minor cannot directly buy shares of a company because he is not

competent to contract. If the parents of a minor are shareholders in a
company, the company shall transfer the shares in favor of the minor
upon death of the parents.

Member of Company
Example
N held shares in a company. N died and left M, a minor, as his legal
representative. The company is bound to transfer the shares to M.

Minor and Insolvency
A minor cannot be declared insolvent because he is not liable to pay

debts. A minor is not personally liable for the price of necessaries
supplied to him. The price of necessaries can be recovered from the
minor’s property only. If he owns no property, nothing can be
recovered. [Section 68].

Minor and Insolvency
Example
M, a minor buys some medicines. M has no property. M cannot be held
liable for payment. He cannot be declared insolvent.

Contract by Minor and Adult
Where, a minor and an adult jointly enter into a contract with another
person, the contract is valid. But if the minor does not perform his
share of obligation, he cannot be held liable. However, the adult is
responsible to perform the whole contract.

Contract by Minor and Adult
Example
M, a minor, and N jointly make an agreement to purchase a car. The
agreement is valid. The adult will be liable to make payment.

Person of Unsound Mind
For a Valid contract, it is necessary that each party to the contract

must have a sound mind [Section 11].
Sound Mind
Section 12 states that “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 of forming a rational judgment as to its
effect upon his interests. 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 actually of sound mind but occasionally of
unsound mind, may not make a contract when he is of unsound mind.
It means that a person must be able to understand the nature of a

contract. A person who is temporarily of unsound mind cannot make a
contract during such period. However, he can make a contract when he
becomes of sound mind. A person may become of unsound mind due
to insanity, drunkenness, old age etc.

Example
B, a sane man become temporarily insane due to drug overdose and
sold his scooter to C. The agreement is void.

BUSINESS LAW
FREE CONSENT
Free consent
Free consent is one of the essentials of a valid contract. According to

Section 14, consent is free if it is not obtained by coercion, undue
influence, fraud, misrepresentation or mistake.

Coercion
Coercion means using pressure by one party against another to compel

him to enter into an agreement. It may be in the form of physical harm
or loss.
Section 15 defines, “Coercion is the committing or threatening to

commit any act forbidden by the Pakistan Penal Code, or the unlawful
detaining, or threatening to detain, any property, to the prejudice of
any person whatever, with the intention of causing any person to enter
into an agreement”.

Essentials of Coercion
The following are essentials of Coercion:-

1. Commit or threat to commit
2. Detain or threat to detain
3. Threat to third party

1. Commit or threat to commit

If a person commits or threatens to commit an act which is forbidden
by the Pakistan Penal Code to compel another person to enter into a
contract, it is an agreement made under coercion.

Example
N threatens to shoot M, if he does not give his house on rent. M
agrees. The consent of M is obtained by coercion.

2. Detain or threat to detain

If a person unlawfully detains or threatens to detain the property of
another person to compel him to enter into an agreement, the
agreement is made under coercion and it is voidable.

Example
A says to B, I will not return the documents of your wife’s property
unless you sell your house to me. B agrees. A employs coercion.

3. Threat to third party

An act of coercion may be used against a party to the contract. It can
also be used against his friends or relatives. Similarly, coercion may be
used directly by a party to the contract or indirectly through any person
related to him.

Example
C threatens to kidnap B’s son if he does not give him Rs. 2mn. B agrees.
The agreement is made by coercion.

Effect of Coercion
The effect of coercion is as under [Sec: 19, 64, 72]

1. The contract is voidable at the option of the party whose consent is
obtained by coercion.
2. The aggrieved party need not to perform his part of contract
3. If the aggrieved party decides to cancel the contract, h must return
the benefit received from the other party.
4. If the aggrieved party does not decide to cancel the contract, it
remains a valid contract.

Undue Influence
The undue influence is the improper persuasion of one person by

another who has a dominant position in a relationship.
It means using moral or mental pressure by a dominating party against

a weaker party to compel him to enter into an agreement.

Undue Influence
Section 16(1) : A contract is said to be induced by undue influence here

the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.

Undue Influence
Section 16(2) : A person is deemed to be in a position to dominate the

will of other in the following cases:
1. Where he holds a real or apparent authority over the other.

2. Where he stands in a fiduciary (Mukhlis) relation to the other.
3. Where he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness,
mental or bodily distress etc.

Essentials of Undue Influence
The essentials of undue influence are as follows:-
1. Position to dominate
a. Real or apparent authority
b. Fiduciary relation
c. Mental Capacity

1. Position to dominate
In order to prove undue influence, the relation existing between the
parties must be such that one of them must be in a position to
dominate the will of the other party. The person in a superior position
may obtain the consent of the other party.


A person who has authority over other can dominate the will of that
person. The authority may be real or apparent. For example, income
tax officer has authority over an assesse, police officer over an accused
person, master over servant etc.


Example: A, a police officer, buys a property worth Rs. 50m for Rs. 15m
from B, an accused under his custody. B may sue for cancellation of
contract.

A fiduciary relation is a relationship of mutual trust and confidence. In
fiduciary relation, one person is in a dominant position because the
other person keeps faith in him. It exists between father and son,
guardian and minor, advocate and client, doctor and patient, religious
adviser and follower etc.

Example: A doctor induces his patient to pay unreasonable sum for his
treatment. The agreement is made by undue influence.

c. Mental capacity
A person may lack mental capacity temporarily or permanently due to
old age, mental or physical illness etc. A person lacking mental capacity
can be easily persuaded to give consent to a contract which may be
unfavorable to him.

c. Mental capacity
Example: An old woman admitted in hospital signed an agreement
before her death to transfer her property to a nurse. The agreement
was obtained by undue influence.

Difference between Coercion and Undue Influence
Difference between coercion and undue influence
Coercion Undue influence
Nature
It involves physical threat to property or person It involves mental or moral pressure
Act
It involves doing or threatening to do an illegal act It involves doing or threatning to do an unfair act
Offense
It involves criminal liability It does not involve criminal liability
Parties
It can be used by a party to the contract or through another
person It can be used by a party to the contract only
Relationship
No specific relationship between the parties is necessary A specific relationship between the parties is necessary
Return of Benefit
The aggrieved party must return the benefit received from The court has discretion to direct the aggreived party to return
other party the benefit received from other party
Effect
The contract is voidable or court may cancel or enforce it in a
The contract is voidable at the option of aggrieved party modified form

Business Law: Capacity of Parties

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business Law: Capacity of Parties

Uploaded by

Copyright:

Available Formats

BUSINESS LAW

All the parties to a contract must be competent to contract. Every

Business & Corporate Law: Offer and Acceptance,

According to Majority Act, 1875, a minor is a person who has not

Business & Corporate Law: Offer and Acceptance,

The rules regarding minor’s agreement are as under:-

An agreement with a minor is void from the beginning. A minor is not

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

The ratification means the acceptance of an agreement already made.

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

A person who supplies necessaries to a minor or his dependents can

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

A contract made by a guardian on behalf of a minor is binding on the

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

A minor cannot become a partner of a firm. He can be admitted to the

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law: Offer and Acceptance,

When an adults stands surety for a minor in a contract of guarantee,

Business & Corporate Law: Offer and Acceptance,

Business & Corporate Law 16

A minor cannot directly buy shares of a company because he is not

Business & Corporate Law 17

Business & Corporate Law 18

A minor cannot be declared insolvent because he is not liable to pay

Business & Corporate Law 19

Business & Corporate Law 20

Business & Corporate Law 21

Business & Corporate Law 22

For a Valid contract, it is necessary that each party to the contract

It means that a person must be able to understand the nature of a

Business & Corporate Law 24

Business & Corporate Law 25

Free consent is one of the essentials of a valid contract. According to

Business & Corporate Law 27

Coercion means using pressure by one party against another to compel

Section 15 defines, “Coercion is the committing or threatening to

Business & Corporate Law 28

The following are essentials of Coercion:-

Business & Corporate Law 29

1. Commit or threat to commit

Business & Corporate Law 30

Business & Corporate Law 31

2. Detain or threat to detain

Business & Corporate Law 32

Business & Corporate Law 33

3. Threat to third party

Business & Corporate Law 34

Business & Corporate Law 35

The effect of coercion is as under [Sec: 19, 64, 72]

Business & Corporate Law 36

The undue influence is the improper persuasion of one person by

It means using moral or mental pressure by a dominating party against

Business & Corporate Law 37

Section 16(1) : A contract is said to be induced by undue influence here

Business & Corporate Law 38

Section 16(2) : A person is deemed to be in a position to dominate the

1. Where he holds a real or apparent authority over the other.

Business & Corporate Law 39