Competency to Contract: A Detailed Analysis

Author: Siddharth Shankar Singh

Rajiv Gandhi National University of Law

The competency of parties to enter into a contract is one of the most basic parts of a legal contract. ‘Article 11 of the Indian Contract Act 1872′ states an individual’s ability to engage in a contract to be reliant on three factors; to reach the age of majority, to be sound-minded and not to be disqualified by any laws related to that contract. In this essay, we will examine all these topics in-depth.

CONTRACTUAL CAPACITY

By section 11, “A person must have the authority to enter into contracts with a majority age in accordance with his law, having a sound mind and not being barred from contracts under any legislation to which he is subject.”

Let’s look at the legislation controlling the agreement of a minor:

A CONTRACT WITH A CHILD IS VOID

Since any individual under the age of 18 is not able to form a contract, any agreement reached with a child is invalid (from the beginning) “void-ab-initio”.

Peter, for example, is seventeen years and six months old. To go on vacation with his pals, he needs some money. He came to a moneylender and borrowed Rs 25,000. In security, he signs documents that mortgage his motorbike and laptop. Six months later, at the age of adulthood, he filed a lawsuit stating that the mortgage made by him in a minor period is invalid and should be revoked. The Court accepts and relieves Peter of any responsibility for repaying the debt.

Moreover, if a minor forms a contract, he cannot ratify it even after majority has been reached, as the contract is ab-initio invalid. And no vacuum agreement can be approved. One such landmark case is discussed below.

• Mohoribibi vs. Dharmodas Ghose 30 IA 114: 30Cal 539 (1903)[1]

A kid mortgaged the defendant’s property and pocketed some money in advance. He then filed an action to annul this hypothecary. Nevertheless, the defendant argued that his money should be remitted under ‘Section 64 of the 1872 Indian Contract Act’ dealing with invalid contracts. The Court found that the contract entered into by a minor was null and invalid. The kid is thus not responsible for paying any money which has already been provided to him.

A CHILD MAY BENEFIT FROM A CONTRACT

While a minor is unable to conclude a contract, he may be one’s beneficiary. ‘Section 30 of the Indian Partnership Act 1932′ further stipulates that the benefit of the company may be extended to him/her while a minor cannot become a partner in the partnership business.

For instance, Peter gives his neighbor John some money and asks him to take his home for protection. John agrees, and the mortgage deed favours the 10-year-old son of Peter, Oliver. John doesn’t pay the debt, and Peter, as Oliver’s natural guardian, sues John for recovering his money. The Court takes the matter because a juvenile may be a recipient of a contract. This has been further illustrated by a real-life case below.

• Rose Fernandez v. Joseph Gonsalves (1924) ILR 48 Bom 673[2]

The father of the girl (claimant) entered into a marriage deal with the defendant. The defendant married another person. The complainant sued the defendant for maturity. The Court found that when the girl had reached majority, she may sue the defendant for damages for breaking the marriage vow, and the defendant could not plead that she had not entered into the contract since she was a beneficiary of the arrangement.

A CHILD IS ALWAYS ENTITLED TO BE A MINOR

Even if a minor is a major wrongly and gets a debt or contract, he might plead a minority. The ‘estoppel rule’ cannot be enforced against a minor. He may plead in defence of his minority.

GUARDIAN CONTRACT

Under certain situations, on behalf of the child, a guardian of the minor may conclude a lawful contract. The minor may also enforce such a contract that the guardian enters into for the advantage of the minor. One such example is illustrated below.

• Great American Insurance v. Madan Lal[3]

The guardian, on behalf of its son, entered into an insurance contract for fire on the minor’s property in the case of ‘Great American Insurance v. Madan Lal.’ When the property was destroyed and the youngster sought reimbursement, the insurance company refused by arguing that a minor’s contract is invalid. However, the Court subsequently determined that this contract was binding and was responsible for paying compensation.

Guardians cannot, however, bind a child via a contract to purchase real property. A contract entered into with the sanction of the Court for the sale of a child’s property may nonetheless be enforced by a certified guardian of a minor designated by the Court.

JOINT AGREEMENT BETWEEN A MINOR AND AN ADULT

For a joint contract between an adult and a juvenile, performed on behalf of a minor by the guardian, the adult shall be liable for the contract.

• In the case of Sain Dasv Ram Chand14[4], the vendor was found to be able to comply with the contract against the main vendor when two vendors, one of whom was a juvenile, purchased together.

PERSON OF SOUND MIND

Under ‘Section 12 of the Indian Contract Act of 1872′, a person is deemed to be sound-minded when he is able to grasp the contract and to evaluate its impact on his interests for the purposes of concluding a contract.

It is vital to emphasize that a person who is typically unsound but sometimes sound may engage in a contract if he is sound. No one can engage in a contract if he is unsound, even if it is temporary. A contract formed by an unsound individual is invalid.

• It was said in Kanhaiyalal v. Harsing Laxman Wanjari (AIR 1944 Nag 232)[5] that simple weakening of the mind is not mental unhealth. Mental disability, coming from whatever cause, not only deprives the individual of a complete grasp of the transaction but also of the knowledge that he does not grasp it. Therefore, a person with an unhealthy mind is not always a fool. It is enough if the individual is unable to assess the implications of his actions.

DISQUALIFIED INDIVIDUALS

Other persons, except children and persons with unhealthy minds, cannot sign a contract. i.e., having no contracting capability. The reasons may include political status, legal standing, etc. Some of these people are foreign sovereigns and diplomats, alien enemies, criminals, insolvents, etc.

• Alien enemy: A foreign citizen is referred to as an alien or non-citizen of the Republic of India. An alien adversary is a person whose nation is fighting against India. In India, a contract is invalid with an alien adversary; however, under the ‘Indian Contract Act, a contract with an alien friend is legal. No deal may be concluded with a foreign adversary during wartime, with the exception of the Indian Government’s prior consent.

• Convict: A convict is a person who is condemned to death or imprisonment by a competent court. A condemned individual cannot conclude a contract during the sentence. When his punishment is completed, or when he is forgiven, his incompetence is gone.

• Insolvent: There is no restriction of an insolvent against a contract after insolvency procedures but before the award. In plain terms, the bankrupt shall be prohibited from the conclusion of a contract until the Court releases him.

For instance, A carried out a selling act, but the deed was recorded during the insolvency pendance before it could be registered. The sales deed is legitimate and binding on the parties under certain situations.

• Sovereigns and ambassadors from abroad: Foreign sovereigns enjoy certain advantages. They cannot generally be prosecuted unless they present themselves to the Indian Court of law. They are unable to sign a contract unless an Indian citizen has previously received a sanction from the Government of India to sue them in the Indian Court of Justice.

• Corporations: The authority of a company to enter into a contract varies with the nature of the company. A corporation is an artificial entity established by law that has contracting jurisdiction. However, its contractual authority is subject to the restriction that is required or stated.

CONCLUSION

From the previous explanation, it is quite evident that only those persons are competent to contract who are major, sound-minded, and not disqualified by law. A person who is diagnosed as being mentally ill that prohibits him from handling his own affairs may be pronounced mentally incompetent by a court of law. When a person is deemed to be incompetent, a guardian is appointed to oversee the individual’s property and personal affairs.

So, it may be stated that law has given various barriers for various groupings of individuals in order to make them able to engage in a contract. This has been developed by taking into consideration the public policy, their personal advantages, as chances are that their right may be harmed.

Of all the three groups stated, children are more prone to being exploited, and laws have specifically desired to make sure that their interest is not compromised in any form. It may be claimed that some distinction has been developed by legislations to make sure that distinct sects of people’s interests be guaranteed.

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[1] (1903) ILR 30 Cal 539 (PC)

[2] (1924) 26 BOMLR 1035, 85 Ind Cas 587

[3] (1935) 37 BOMLR 461, 158 Ind Cas 554

[4] (1923) 4 Lah. 334

[5] 1944 AIR (Nag) 232