COMPETENCY OF PARTIES TO A CONTRACT

ABSTRACT

This paper is on the study of section 11 of Indian Contract Act, 1872, which lists the parties who can engage into a contract. Along with highlighting several significant landmark judgements and the exceptions to the general rule outlined in section 11 of the Indian Contract Act of 1872 along with analyses of section 11 of the Indian Contract Act. This article discusses a variety of topics pertaining to a party’s ability to enter into a contract and will highlight the situations of a minor’s agreement, an agreement with a person who is not of sound mind, and an agreement with a person who is legally disqualified by the law.

Keywords: Competency, Capacity, Contract, Parties, Minor, Unsound, Disqualified

INTRODUCTION

We do many transactions in our life. Most of these are agreements but all agreements are not actually contracts because contracts are only those agreements enforceable by law.^[1] The buying behaviour trends of people have been changing rapidly. People are increasingly conscious of their surroundings as progress and modernization continue. Just because their associates have done so, or because they are particularly aware of the goods and services that can be useful to them in their daily lives, they frequently buy goods and services. For buying these products or services, the buyer as well as the seller mostly enters a contract as the following agreement is under the provisions of section 10 of Indian Contract Act, 1872. Each party is contractually obligated to the other parties under a contract. The term “contract” is defined as an “agreement enforceable by law” in section 2(h) of the Indian Contract Act, 1872 (ICA). According to section 2(e) of the ICA, 1872, “every promise and every set of promises forming consideration for each other becomes an agreement.” A genuine contract is created when an agreement becomes legally binding and incorporates promises from both parties. The offer and subsequent acceptance to create an agreement are crucial components of a legal contract. An offer, which may be both positive and negative, i.e., to do or not to do anything, is the outward expression of the promisor’s thinking. The promisee or the person receiving the offer should act or refrain from acting in a way that indicates their intent to convey their assent in relation to this offer. Acceptance is the term for this consent. when a suggestion is accepted by the opposite side. It is properly and timely conveyed to the person that made the proposal, and if the consideration and the goal are lawful, it becomes a valid contract. The parties intend to establish legal relationships. The consideration of competency of parties to a contract is thus important as it tells us about the eligibility for being able to sign a contract which this paper studies.

BACKGROUND

The Indian Contract Act, 1972’s section 10 states under one of the requirements for a legal contract: “the parties must be competent to enter into the contract.” Section 11 states that, “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.” It signifies that those who fall into the 3 categories listed below are incompetent to contract:^[2]

1. Someone who is still a minor, or not of age of majority
2. A person who lacks mental stability
3. A person who is prohibited by law from entering into contracts

The issue of the parties’ competence is crucial since the law deems some individual’s “incompetent” to engage into contracts because they are deemed unable to fulfil their obligations as part of the consideration required to make a contract. “Since, people desire to enter into a contract, to bind one another to fulfil their respective promises and to secure legal enforceability, law ensures the same and thus, lays down certain criteria according to which, people are considered to be able to complete the contract and hence, are competent parties to the contract.”^[3] The law has barred some groups of  people from contracting owing to their inability of understanding  the terms of contract either due their small age, unsound mind or other reasons like being foreign citizen mainly to prevent people from taking advantage of their inability to understand the terms of contract and fulfil their promises also. Consequently, its significance results from the fact that people engage into contracts in order to protect their position by requiring the other party to abide by the deal signed and to get legal enforceability. There are some exceptions also to incompetency of parties which will be discussed below.

LITERATURE REVIEW

BANGIA R.K., INDIAN CONTRACT ACT  (ALLAHABAD LAW AGENCY 2019)

In this book, Indian Contract act has been explained meticulously in simple detailed language along with reference of many cases and contradicting decisions of different courts which is very helpful.

COMPETENCY OF PARTIES ENTERING INTO A CONTRACT^[4]

In this blog the concept is explained somewhat in form of a summarized detail which helps in knowing the basic details quickly.

Capacity To Contract- Section 11 Of Indian Contract Act^[5]

In this article, the topic is explained with more points as compared to other papers as competency of parties for e contract is talked about and examples of more persons are given in persons disqualified by law.

 RELEVANCY OF COMPETENCY OF PARTIES TO A CONTRACT^[6]

In this journal, the topic is explained meticulously with a lot of clarity.

WHO ARE COMPETENT TO CONTRACT^[7]

In this blog all subtopics are explained in points which introduces you to the topic very nicely.

RESEARCH QUESTION

How persons incompetent to a contract may receive benefits, loans etc. being an exception to the contract act.

METHODOLOGY

Doctrinal and analytical research is the approach that has been used for this study. In this research, among the primary sources used are Indian Contract Act, 1876 and precedents. Among the secondary sources are books, blogs, journals, articles etc.

RELEVANCE

This study is relevant as it highlights the ones not permitted to sign a contract by being incompetent and deals with how the parties incompetent to a contract can still receive some benefits of a contractual agreement.

RATIONALE

Since every party to a contract must be competent to give assent to the contract, sometimes confusions arise as to whether a party is competent or not and would there be return of benefits or compensation in case a contract has been found to be void? This research aper attempts to clear out the confusions.

COMPETENCY OF PARTIES TO A CONTRACT

 As I have already discussed that the parties who are competent to engage into a contract must be, according to Section 11 of the Indian Contract Act, 1872^[8]

i) Of at least the age of majority (18 yrs.)

ii) Shall be of comprehensive cognizance while entering into the contract

iii) ) Shall not be disqualified by the law to which he/she is subject

This indicates that the contract cannot be entered into by anybody who is under the age of 18, is mentally incapacitated, or has been declared ineligible by the law, and the agreement is void. It is crucial to remember that a void agreement does not constitute a contract; therefore, there is no such thing as a void contract as void agreements can never be a contract.

1. POSITION OF MINOR

The Indian majority act of 1875, section 3 specifies the age of majority in India at 18 years, except in case of a person for whom a guardian has been appointed for person or property for whom age of majority is 21 years (being amended to 18 years for everyone as bill has been passed by both houses but president’s assent has to be given) which means that no one under that age may be considered a major under the law. Many psychiatrists think that people under the age of 18 are not capable of making their own decisions, which is why this condition was put in place. Maturity and a sound mind are prerequisites for someone to be allowed to engage into contracts. Persons of sound mind are defined in Section 12 of the Indian Contract Act as those who are able to understand the contract and its terms and who are able to decide rationally how the contract will affect their interests. It also states that even though a person usually has a sound mind, they should not enter into a contract while they are mentally unsound, and vice versa: a person whose mental state is generally unsound should only enter into a contract when the soundness of mind prevails. The same reasoning is used in the case of children since they are too young to be able to grasp the terms of the contract and too immature to make decisions that are in their best interests. 

1.1. Minor’s Agreement

As was previously mentioned, the minor’s agreement is void because a minor lacks the maturity to grasp the responsibilities and terms of a contract, and the court cannot order a minor to carry out his or her contractual obligations. “In the absence of any statutory provision, there had been a controversy among high courts on this point which was set at rest by decision of the Privy Council in Mohori Bibee v. Dharmodas Ghose (Mohori Bibee v. Dharmodas Ghose, 1903) where the agreement by a minor was held void.”^[9] In this case, the plaintiff, Dharmodas Ghose, mortgaged his property while still being a minor in favour of the defendant, moneylender Brahmo Dutt, in order to obtain a loan. The money lender’s attorney, who was representing them during the transaction, was aware that the plaintiff was a minor.

The kid filed a lawsuit against the moneylender, claiming that because he was a juvenile at the time the mortgage was issued, it was invalid and should be revoked.  The defendant, amongst other points contended that law of estoppel should be applied against minor and the minor should be asked to refund the loan if the mortgage is cancelled as requested by minor. The defendant’s contentions were rejected as it was held that minors agreement is void ab initio and also it was held that the minor cannot be asked to repay the loan taken by him.

  As a result, the agreement is null and void since a minor’s agreement is invalid. A person entering into an agreement with a minor believing that he or she is a major is not liable for the minor’s actions, even if the minor lied about their age, hence the law of estoppel cannot be used. The court may also order a juvenile who entered into an agreement falsely to refund any physical or traceable advantages they received from it but not money as it would lead to formation of contract. While money is tangible, it cannot be tracked, thus a minor is not permitted to return it to the other party. This is known as restitution of benefit. According to Section 64 of the Indian Contract Act, if a voidable contract is rescinded by the aggrieved party, then the benefits received directly from the contract must be restored, however a minor’s agreement being invalid will not subject the child to any obligation.^[10] Also application of section 65 of Indian Contract act was considered which states, “ when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it”. It was decided that because this provision, like section 64, only applies to agreements or contracts between competent parties and does not apply to invalid contracts, the minor cannot be required to pay the money back under this section.^[11]

Effects of the contract with minor -The contract with the minor is void ab initio. But, if the minor made the contract with another party by hiding his age, then there will be some effects on the contract such as:^[12]

“Minor is not liable to perform his duty in the contract.

The minor is not responsible in case of any mishap during the contract.

The person cannot sue him for the breach of contract done by minor.

Another party cannot ask him to pay expenses incurred to them while doing a contract with minor.”

1.2. Ratification of minor’s agreement^[13]

“A minor’s agreement being void ab initio, it is incapable of being validated by a subsequent ratification of the minor when he has attained the age of majority. The consideration furnished in respect of a transaction during minority cannot be considered to be a valid consideration for subsequent promise after attaining majority and thus there’s no ratification possible of a promise made by a person during his minority.”

Suraj Narayan v. Sukhu Aheer^[14]– A promissory note was signed in this case by Sukhu Aheer, a minor, against the money borrowed. The loan was given to the minor by Suraj Narayan, the moneylender. After four years, when the minor reached the age of majority, he signed a new promissory note pledging to pay the money back to the lender plus interest. the contract was declared unenforceable because:^[15]

 “A minor’s agreement is void even if he attained the age of majority, the agreements that were initiated by him when he was a minor could not be ratified by him. In the second promissory note, there was no consideration present, thus no contract shall be formed in an absence of consideration.”

1.3. Law of Estoppel Against Minor?

According to the rule contained in section 115, Indian Evidence Act, if you make a statement today which misleads another person, you are not allowed to deny the statement tomorrow when the question of your liability arises.^[16] In view of the decisions given by different high courts, it has been established that the law of estoppel does not apply against a minor even though he misrepresented his age.  Thus, he can plead minority as a defence to avoid liability even though he earlier committed fraud. In Khan Gul v. Lakha Singh^[17], it was held by Lahore high court that law of estoppel does not apply against a minor.

1.4. Compensation by Minor

It has already been discussed that section 64 and 65 Indian contract acts do not apply to a case of minor’s agreement. Even section 70 of Indian contract act 1872 which recognised quasi contractual liability to compensate a person at whose cost some benefit has been enjoyed by another is not applied in the case of a minor. In this context it has been observed:^[18] “the minor is excluded from the operation of section 70 for the reason that his case has been specifically provided for by section 68. Besides, in the case of a minor, even the voluntary acceptance of the benefit of work done or thing delivered which is the foundation of the claim under section 70 would not be present, and so, on principle, that section cannot be invoked against a minor.”  According to provisions of section 33 of Specific Relief Act, compensation in terms of money is permitted.

 1.4. Claim for Necessaries Supplied to Minor

According to Section 68 of the Indian Contract Act of 1872, if a person lacks the capacity to enter into a contract, they may nonetheless acquire necessities from another person. “Necessaries are goods suitable to the condition in life of the defendant and to his actual requirements at the time of the sale and delivery, and whether an article supplied to an infant is necessary or not, depends upon its general character and upon its suitability to the particular infant’s station in life.”^[19] He has the authority to demand compensation from the disabled individual. Section 68 holds minor responsible for the necessities, although it doesn’t specify what those necessities are. The situation will determine the necessities. The person providing the necessities must demonstrate that they are good and reasonable in order to be reimbursed for them. In Sham Charan Mal v. Chowdhry Debya Singh,^[20] A kid received funding to help him defend himself in court proceedings where he was being sued for dacoity. The child signed a bond for his loan, and he later utilised this sum to fund his defence. It was decided that the amount borrowed fell under the definition of necessities because it had to do with his personal freedom..^[21]

1.5. Exceptions to the General Rule

A minor’s agreement may form a contract in some cases, where the court finds that the agreement done is for the benefit of the minor such as:^[22]

1. Contract for supply of necessaries
2. Contract of apprenticeship
3. Contract of partnership, though the minor will not be held liable for the losses incurred.
4. Any contract with the guardian of the minor or minor himself which is beneficial to the minor.

CONTRACT WITH PERSON OF UNSOUND MIND

The definition of an unsound mind differs from the definition given in the Indian Contract Act of 1872. The phrase “unsound mind” has been defined in a number of instances, including Kanhaiyalal v. Harsing Laxman Wanjari^[23], where it was decided that any mental impairment resulting from any cause that prevents a person from comprehending the terms and conditions of a contract and prevents them from making an informed decision about their actions and fully knowing the repercussions that would result directly or indirectly from them falls under this umbrella. In Inder sing v. Parmeshwardhari Singh (AIR 1957 Pat 491)

A guy agreed to sell a property valued at around RS. 25000 for RS. 7000. His mother demonstrated that he was a born fool, incapable of comprehending the deal, and that he mainly just walked around. SINHA J. declared the sale to be invalid.

The following sentences outlined how section 12 would have an impact: “…According to this section, the crucial point, therefore, is to find out whether he is entering into the contract which he has understood and has decided to enter into that contract after forming a rational judgment in regard to his interest…it does not necessarily mean that a man must be suffering from lunacy to disable him from entering into a contract. A person may to all appearances behave in a normal fashion, but, at the same time, he may be incapable of forming a judgment of his own, as to whether the act he is about to do is to his interest or not. In the present case he was incapable of exercising in his own Judgment.” The examples of unsound mind are:     

2.1) Lunatic: A lunatic is a person who, while normally being of sound mind, is unsound of mind under certain uncommon situations. When of sound mind, a lunatic may sign a contract.

2. 2)Person with an undeveloped brain: People in this group may also be referred to as idiot in medical terminology since they have an underdeveloped brain. People with mental disabilities are not allowed to sign contracts because they are unable to comprehend the acts and their effects.

2. 3) People under the influence of drugs and alcohol: These individuals may not be able to comprehend the terms and circumstances of a contract, which precludes their ability to provide their assent. However, it’s not always the case that this stipulation holds true. For instance, a person under the influence of alcohol may not be able to weigh the pros and disadvantages of his actions or their effects, but if they do, the contract is then binding and legal. In J. Ghattacharjee v. S. B. Bora (AIR 1994 Gau 99), “the person in question filed cases against family members, remained away from home for long periods, transferred family properties to the extent of making the family homeless, the court said that all this was sufficient to indicate that the vendor was not normal and was not mentally sound at the time of sale. The purchaser adduced no evidence that the person was of sound mind.”^[24] 

CONTRACT WITH PEOPLE DISQUALIFIED BY LAW

There are several groups of persons who might not be minors or mentally ill but who might nevertheless be excluded under the law. Disqualification under the law refers to those who are illegal or who have been accused of doing anything illegal. A person who is ineligible under the law may occasionally include foreign enemies, sovereigns, or companies in addition to illegal people. Some of the basic categories of people are given below:^[25]

1. a) Convicts: Convicts are those who have violated the law and have received a death sentence, a life term, or any other type of criminal punishment. They are unable to sign a contract until their sentence has been over.
2. b) Insolvent: A person who is bankrupt but has not been released from responsibility by the court due to bankruptcy is also prohibited from signing contracts until legal action is taken against him.
3. c) Alien enemies: Any person who lives in a nation at war with India is referred to as an “alien enemy.” Residents of a state at war with India are prohibited from entering into a contract there until the conflict is finished since the terms “alien” and “enemy” denote foreigner and “someone with whom you are in great animosity,” respectively. However, any foreign ally is permitted to sign a deal in India.
4. d) foreign sovereigns: Due to the particular advantages accorded to them, anybody who would desire to engage into a contract with a foreign sovereign cannot do so unless he or she receives the Government of India’s consent to do so. They are therefore exempt from any legal duties because they cannot be sued in an Indian court of law.

Competency of Parties to enter into an e-contract

Electronic-based contracts are known as E-contracts. If the contract complies with sections 11 and 12 of the Indian Contract Act, the party is permitted to enter into it.

CONCLUSION

Competency of parties is an important condition of contract as it not only reduces instances of contract breach but also ensures that the parties fulfil the commitments they have made in a legal manner. It also prevents people not capable of understanding the terms of contract from ratifying it. In this approach, law ensures that all legally binding agreements must adhere to predetermined standards, ensuring that only capable parties enter into significant agreements.             

SUGGESTIONS

According to my point of view, I like to suggest that there must be changes in provisions dealing with compensation of minor’s void contract where in case of fraud by a minor, he shall return all the monetary benefits he received in case of fraud or misrepresentation as there have been cases where minors got away in cases of fraud by misrepresenting their age and receiving money and later on pleading minority to avoid being made liable.

References

R.K Bangia, Indian Contract Act (15th ed. 2019).

Kenisha B, Relevancy Of Competency Of Parties To A Contract, LEGAL SERVICE INDIA E-JOURNAL (19.1.2023, 9:15 PM), https://www.legalserviceindia.com/legal/article-9161-relevancy-of-competency-of-parties-to-a-contract.html

Brahm Sareen, Competence of Parties entering into a contract, THE LEGAL WATCH (19.1.2023, 9:30 PM), https://www.thelegalwatch.in/post/competence-of-parties-entering-into-a-contract

Abhay Pandey, Who are Incompetent to Contract?, IPLEADERS BLOG (19.1.2023, 11:10 PM), https://blog.ipleaders.in/who-are-incompetent-to-contract/?amp=1

Admin, Capacity To Contract- Section 11 Of Indian Contract Act, LEGAL STUDY MATERIAL BLOG (19.1.2023, 11:00 PM, https://legalstudymaterial.com/about-us/

Indian Contract Act, 1872, 11, No. 9, Acts of Imperial Legislative Council,1872

Mohori Bibee v. Dharmodas Ghose,1903

A.I.R 1928 All. 440

AIR 1928 Lahore 609

State of W.B. v. B.K. Mondal & Sons, A.I.R. 1962 S.C. 779, at 789

I.L.R 1894 21 CAL. 1872

AIR 1944 Nag 232

[1]  R.K. BANGIA, INDIAN CONTRACT ACT 1 (Allahabad Law Agency 2019)

[2]  R.K. BANGIA, INDIAN CONTRACT ACT 1 (Allahabad Law Agency 2019)

[3]Kenisha B, Relevancy Of Competency Of Parties To A Contract, LEGAL SERVICE INDIA E-JOURNAL (19.1.2023, 9:15 PM), https://www.legalserviceindia.com/legal/article-9161-relevancy-of-competency-of-parties-to-a-contract.html

[4] Brahm Sareen, Competence of Parties entering into a contract, THE LEGAL WATCH (19.1.2023, 9:30 PM), https://www.thelegalwatch.in/post/competence-of-parties-entering-into-a-contract

[5] Admin, Capacity To Contract- Section 11 Of Indian Contract Act, LEGAL STUDY MATERIAL BLOG (19.1.2023, 11:00 PM, https://legalstudymaterial.com/about-us/

[6] Kenisha B, Relevancy Of Competency Of Parties To A Contract, LEGAL SERVICE INDIA E-JOURNAL (19.1.2023, 9:15 PM), https://www.legalserviceindia.com/legal/article-9161-relevancy-of-competency-of-parties-to-a-contract.html

[7] Abhay Pandey, Who are Incompetent to Contract?, IPLEADERS BLOG (19.1.2023, 11:10 PM), https://blog.ipleaders.in/who-are-incompetent-to-contract/?amp=1

[8] Indian Contract Act, 1872, 11, No. 9, Acts of Imperial Legislative Council,1872

[9] BANGIA R.K., INDIAN CONTRACT ACT 88 (ALLAHABAD LAW AGENCY 2019)

[10] Brahm Sareen, Competence of Parties entering into a contract, THE LEGAL WATCH (19.1.2023, 9:30 PM), https://www.thelegalwatch.in/post/competence-of-parties-entering-into-a-contract

[11] BANGIA R.K., INDIAN CONTRACT ACT 89 (ALLAHABAD LAW AGENCY 2019)

[12] Admin, Capacity To Contract- Section 11 Of Indian Contract Act, LEGAL STUDY MATERIAL BLOG (19.1.2023, 11:00 PM,https://legalstudymaterial.com/capacity-to-contract/

[13] BANGIA R.K., INDIAN CONTRACT ACT 90 (ALLAHABAD LAW AGENCY 2019)

[14] A.I.R 1928 All. 440

[15] Brahm Sareen, Competence of Parties entering into a contract, THE LEGAL WATCH (19.1.2023, 9:30 PM), https://www.thelegalwatch.in/post/competence-of-parties-entering-into-a-contract

[16] BANGIA R.K., INDIAN CONTRACT ACT 92 (ALLAHABAD LAW AGENCY 2019)

[17] AIR 1928 Lahore 609

[18] State of W.B. v. B.K. Mondal & Sons, A.I.R. 1962 S.C. 779, at 789

[19] BANGIA R.K., INDIAN CONTRACT ACT 102 (ALLAHABAD LAW AGENCY 2019)

[20] I.L.R 1894 21 CAL. 1872

[21] BANGIA R.K., INDIAN CONTRACT ACT 102 (ALLAHABAD LAW AGENCY 2019)

[22] Brahm Sareen, Competence of Parties entering into a contract, THE LEGAL WATCH (19.1.2023, 9:30 PM), https://www.thelegalwatch.in/post/competence-of-parties-entering-into-a-contract

[23] AIR 1944 Nag 232

[24]  Brahm sareen, Competence of Parties entering into a contract, The Legal Watch (Jan. 16, 2021), https://www.thelegalwatch.in/post/competence-of-parties-entering-into-a-contract.

[25] Brahm sareen, Competence of Parties entering into a contract, The Legal Watch (Jan. 16, 2021), https://www.thelegalwatch.in/post/competence-of-parties-entering-into-a-contract.