Capacity to Contract

 

Capacity to Contract

[Sections 11–20 of Law of Contract Act, 2019]

One of the essential requirements for a valid contract is that the parties involved must be legally competent to contract, as stated in Section 11 of the Law of Contract Act, 2019]

Who Are Competent to Contract?

Section 11 of the Act specifies: "Every person is competent to contract who is of the age of majority according to the law to which he is subject, of sound mind, and not disqualified from contracting by any law to which he is subject." 

Incapacity to contract arises from:

A. Minority

B. Mental incompetence

C. Status.

A. Minority

As per Section 4(1) of the Law of the Child Act, a minor/child is an individual who has not attained the age of 18 years.

Contracts Involving Minors

The position of a minor’s contract under Law of Contract Act, 2019] is summarized as follows:

1.Void Contracts: Contracts entered into by a minor are void ab initio. In the landmark case Mohiri Bibi v. Dharmodas Ghose (1903), the Privy Council held that a minor's contract is void and unenforceable. For instance, in this case, a minor borrowed money and executed a mortgage. The court declared the mortgage void and ruled that the lender could not recover the money advanced.

2. Promisee or Beneficiary:

While a minor cannot bind himself through a contract, the other party may still be bound. For example, a minor can become a mortgagee, payee, or endorsee and derive benefits under the contract.

3. No Ratification Upon Attaining Majority:

A minor cannot validate a void agreement by ratifying it after attaining the age of majority. Forexample, if a minor executes a promissory note and later issues a fresh one upon becoming an adult, neither is valid (Indran Ramaswamy v. Anthiappa Chettiar).

4. No Refund Obligation:

A minor who has received a benefit under a void contract is not obligated to return it. For example, in Mohiri Bibi v. Dharmodas Ghose, the lender could not recover the money advanced to the minor.

5. Pleading Minority: A minor is not estopped from claiming minority even if they misrepresent their age to enter into a contract. For instance, in Leslie v. Shiell (1914), a minor fraudulently borrowed money but could not be held liable for repayment.

6. Exclusion from Partnerships: A minor cannot be a partner in a partnership firm but can be admitted to the benefits of an existing partnership with the consent of all partners.

7. Liability for Necessaries:

A minor’s estate is liable for the supply of necessaries, which are defined as goods or services suitable to the minor’s standard of living and actual requirements at the time of delivery (Section 68). This includes education, medical expenses, and legal services. For example, in Nash v. Inman (1908), coats supplied to a minor who already had sufficient clothing were not considered necessaries.

8. Agent Role : A minor can act as an agent, binding the principal through their actions, but cannot be personally liable.

9. No Parental Liability: Parents or guardians are not liable for contracts entered into by a minor unless the minor acts as their authorized agent.

Position Under English Law

Under English law, individuals below 21 years are classified as infants. Contracts with minors are categorized as:

1. Void Contracts:

These include agreements for repayment of loans, supply of goods (other than necessaries), and stated accounts (Infants Relief Act, 1874).

2. Voidable Contracts:

Contracts of a continuing nature or those involving permanent property interests may be repudiated by a minor before or shortly after attaining majority.

3. Valid Contracts:

These include contracts for necessaries or those for the minor's benefit, such as education or skill development (Roberts v. Gray).

4. Enforceable at Minor’s Option:

Some contracts are binding only if the minor chooses to enforce them.

Key Takeaways on Minor’s Contracts

1. Contracts with minors are void ab initio.
2. Ratification upon attaining majority is not allowed.
3. Minors are not obliged to refund benefits received under void agreements.
4. A minor can plead minority despite misrepresentation.
5. Minors cannot be partners but may benefit from partnerships.
6. Minors can act as agents.
7. Parents/guardians are not liable for a minor’s contractual breaches.

B. Mental Incompetence

A person must be of sound mind to be considered competent to contract, as stipulated in Sections 11-16. Section 12 outlines the criteria for determining soundness of mind:

“A person is said to be of unsound mind for the purpose of making a contract, if at the time when he makes it, he is incapable 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 usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.”

Examples:

- A patient in a lunatic asylum who is occasionally of sound mind may contract during those intervals.

- A sane person who is delirious due to fever or extremely intoxicated to the point of being unable to understand the terms of a contract or form a rational judgment cannot contract during the period of delirium or intoxication.

From these examples, it is clear that the soundness of mind of a person depends on two factors:

-The capacity to understand the terms of the contract, and

-The ability to form a rational judgment regarding its effect on their interests.

If a person is incapable of both, they are considered to have an unsound mind. Examples of individuals with unsound minds include those who are mentally impaired (idiots), those who are mentally disturbed (lunatics), and those who are intoxicated. Determining whether a party to a contract is of sound mind at the time of entering into the contract is a factual matter for the court. Although there is a presumption of sanity, this presumption can be rebutted, and the person challenging the soundness of mind must prove it to the court.

The liability for necessaries of life supplied to persons of unsound mind is similar to that of minors (Section 68).

Lunatics

A lunatic is someone who is mentally disturbed due to some strain or experience but has occasional lucid intervals. While a lunatic is not liable for contracts made during periods of unsound mind, contracts made during lucid intervals are binding. The lunatic’s position is similar to that of a minor, where, in general, the contract is void, but the same exceptions as for minors apply.

Idiots

An idiot is someone who is permanently of unsound mind and does not experience lucid intervals. Such a person is incapable of entering into a contract, making any contract with an idiot void. However, like minors, their property may be held liable for recovery of necessaries of life, and they can still be a beneficiary.

Drunken or Intoxicated Persons

A person who is intoxicated or delirious due to fever and is incapable of understanding the nature and effect of an agreement or forming a rational judgment regarding its effect on their interests cannot enter into valid contracts while under the influence of such intoxication or delirium.

In English law, contracts made by persons of unsound mind are considered voidable, not void.

C. Incompetence Through Status

Besides minors and persons of unsound mind, certain individuals may be incompetent to contract either partially or wholly, rendering their contracts void. Incompetence to contract can arise from political, corporate, or legal status.

-Alien Enemy (Political Status): An alien is someone who is a citizen of a foreign country. In Tanzania, an alien is someone who is not a Tanzanian subject. Aliens can be classified as:

-Alien friend (a foreigner from a country at peace with Tanzania) has the full contractual capacity of a natural-born Tanzanian subject.

-Alien enemy (a foreigner from a country at war with Tanzania) cannot contract with a Tanzanian or sue in Tanzanian courts without a license from the Central Government.

Contracts made by alien enemies are treated differently depending on when they were made:

-During the war: They are either dissolved or suspended, depending on whether they are against public policy or benefit the enemy.

-Before the war: These contracts are either dissolved or suspended based on the situation.

It’s also important to note that a Tanzanian residing in a hostile territory or conducting business there would be treated as an alien enemy.

Foreign Sovereigns and Ambassadors (Political Status): Foreign sovereigns and accredited representatives (Ambassadors) enjoy special privileges and cannot be sued in Tanzanian courts unless they submit to the jurisdiction. While they can enter into contracts and enforce them in Tanzanian courts, they cannot be sued without the sanction of the Central Government.

Companies under the Companies Act or Statutory Corporations (Corporate Status): A company cannot enter into a contract that is outside the scope of its Memorandum of Association. Similarly, statutory corporations are restricted from entering into contracts that go beyond the objectives set by the act passed by the legislature. Municipal corporations and local bodies are similarly disqualified from entering into contracts beyond their statutory powers.

Married Women (Marital Status): Married women have full contractual capacity, can sue, and be sued in their own name. They are not considered incompetent to contract.

Insolvent Persons (Legal Status): Insolvent individuals are not competent to contract until they receive a certificate of discharge.