Legal Environment of

Business

Chapter 3: Capacity of Parties

by
Barrister Shahrina R. Juhi
Bar-at-Law, MBA, LL.B,
Diploma in Law
OBJECTIVES
AFTER STUDYING THIS CHAPTER,
YOU SHOULD BE ABLE TO LEARN:

• Definition of capacity of the parties

• Competent persons
• Incompetent persons
LEARNING

• Minor and minor’s agreements

• Persons of unsound mind
• Disqualified persons
What is Capacity of the Parties

An essential ingredient of a valid contract is that

the contracting parties must be ‘competent to
contract’ (Section 10, Contract Act 1872).

Minors, the mentally insane, and persons who are

under the influence are not considered to be of legal
capacity to enter into a contract.
Competent Person
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.
 Incompetent Person
A person is incompetent to contract
if he is –

(i) a minor, according to the law to

which he is subject,
(ii) of unsound mind, and
(iii) disqualified from contracting by any
law to which he is subject.
 Who is a Minor?

According to Section 3 of the Indian

Majority Act 1875, a person, domiciled
in India, who is under 18 years of age is
a minor.
Rules Regarding Minor’s Agreement

1. An agreement by a minor is absolutely void

and inoperative as against him.
2. Beneficial agreements are valid contracts
3. No ratification on attaining the age of
majority
4. The rule of estoppel does not apply to a minor

5. Minor’s liability for necessaries

6. Specific performance
Rules regarding minor’s agreement

7. Minor partner
8. Minor agent
9. Minor and insolvency
10. Contract by minor and adult jointly
11. Surety for a minor
12. Position of minor’s parents
13. Minor shareholder
14. Minor’s liability in tort.
1. An agreement by a minor is absolutely
void and inoperative as against him

Law acts as the guardian of minors and protects their

rights, because their mental faculties are not mature -
they don’t possess the capacity to judge what is good
and what is bad for them.

Example – If the minor has obtained any benefit, such

as money on a mortgage, he cannot be asked to refund,
nor can his mortgaged property be made liable to pay.
 2. Beneficial agreements are valid
contracts

Any agreement which is of some benefit to the

minor and under which he is required to bear no
obligation, is valid.

Money advanced by a minor can be recovered

by him by a suit because he can benefit
under a contract.
 Examples of Beneficial Agreements
1. A duly executed transfer by way of sale or
mortgage in favor of a minor is enforceable by
him.
2. A minor purchaser of immovable property was
held entitled to recover possession of property
purchased from his vendor, when refused by
vendor.
3. Where a minor had performed his part of the
agreement and delivered the goods, he was held
entitled to maintain a suit for the recovery of
their price.
3. No ratification on attaining the age of
majority

Ratification means the subsequent

adoption and acceptance of an act or
agreement.
It is necessary for a valid ratification that
the person who purports to ratify must be
competent to contract at the time of the
contract.
4. The rule of estoppel does not
apply to a minor

Estoppel
Estoppel means, if a person makes a
statement that misleads another person,
he cannot deny the same statement in
the future when his obligation in respect
of his statement arises. The doctrine of
estoppel prevents a party to state
something which contradicts his
previous statements. Thus, the minor is
not estopped from presenting the
defense of infancy.
4. The rule of estoppel does not
apply to a minor

A minor is not estopped from

pleading his infancy in order to
avoid a contract, even if he has
entered into an agreement by
falsely representing that he was of
full age.
 Example :
• In the Mohori Bibee v/s Dharmodas Ghose case, the
defendant misrepresented his age in order to
mortgage his house but the moneylender was
already aware of the fact that the defendant
was a minor. Therefore, the Privy Council did
not consider the doctrine of estoppel as the
plaintiff was not misrepresented or mislead by
the statement of the minor.
5. Minor’s liability for necessaries

1. A minor is not personally liable, it is his

property only which is liable.
2. If a minor owns no property, the
supplier will lose the price of
necessaries.
3. Where a minor owns property, the
suppler will get a reasonable price and
not the price agreed to by the minor.
5. Minor’s liability for necessaries

A supplies B, a minor, with rice

needed for his consumption. A can
recover the price from the minor’s
property.
 6. Specific performance

Specific performance means the actual

carrying out of the contract as agreed.

Since an agreement by a minor is

absolutely void, the court will never
direct ‘specific performance’ of such an
agreement by him.
 7. Minor partner
1. A minor being incompetent to contract
cannot be a partner in a partnership firm

2. But 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.
 8. Minor Agent
A minor can be an agent. He shall bind the
principal by his acts done in the course of
such an agency, but he cannot be held
personally liable for negligence of breach
of duty.
 9. Minor and Insolvency

1. A minor cannot be adjudicated an

insolvent, for, he is incapable of
contracting debts.

2. Even for necessaries supplied to him,

he is not personally liable, only his
property is liable.
10. Contract by minor and adult
jointly
Where there was a joint purchase by
two people, one of whom was a minor,
it was held that the vendor could
enforce the contract against the
major buyer.
 11. Surety for a minor
Where in a contract of surety, an
adult stands for a minor, the adult is
liable under the contract, although the
minor is not.
Example: A advances a loan of Taka 10,000 to
B, and C promises A that if B does not repay the
loan, I will repay it. This is a contract of surety.
 12. Position of minor’s parents
1. The parents of a minor are not liable for
agreements made by a minor, whether the
agreement is for the purchase of
necessaries, or not.

2. The parents can be held liable only when

the child is contracting as an agent for
the parents.
 13. Minor’s Agreement

1. A minor, being incompetent to

contract, cannot be a shareholder
of the company.
 Persons of Unsound Mind

Section 12 of the Contract Act defines –

“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 effects upon
his interests.”
 Causes of unsoundness
Unsoundness of mind may arise from –
a) Idiocy – it is God given and permanent
b) Lunacy or Insanity – it is a disease of the
brain
c) Drunkenness – it produces temporary
incapacity till the drunkard is under the effect
of intoxication.
d) Hypnotism – it also produces temporary
incapacity till the person is under the impact
of artificially induced sleep.
e) Mental decay – on account of old age, etc.
Effects of agreements made by
persons of unsound mind

An 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 always liable for necessaries
supplied to him or to any one whom he is
legally bound to support.
 Disqualified Persons
a) Alien enemies: Alien means citizens of a
foreign country.
b) Foreign sovereigns and ambassadors: They
are in a privileged position and are ordinarily
considered incompetent to contract.
c) Convict: A convict is one who is found guilty
and is imprisoned.
 Disqualified Persons
d) Insolvent: An adjudged insolvent is
competent to enter into certain types of
contracts, i.e., he can incur debts, purchase
property or be an employee but he cannot
sell his property which vests in the Official
Receiver.
e) Joint-stock company and corporation
incorporated under a special Act: A
company/Corporation cannot enter into
contracts outside the powers conferred upon
it by its Memorandum of Association or by
the provisions of the special Act.
Any Questions?