Legal Environment of

Business
B.A (H) BUSINESS
ECONOMICS
Semester I
Dr. Upasana Dhanda
 UNIT I
PART II
INDIAN CONTRACT ACT,
1872
Unit I: Chapter 4

CAPACITY TO
CONTRACT
 SECTION 11, INDIAN CONTRACT ACT:
PARTIES COMPETENT TO CONTRACT:

• Every person is competent to contract

who is of the age of majority according to
the law to which he is subject , who is of
sound mind, and is not disqualified from
contracting by any law to which he is
subject
Who has contractual capacity ?
 PEOPLE INCOMPENT TO
CONTRACT:

1. MINOR

2. PERSONS OF UNSOUND MIND

3. PERSONS DISQUALIFIED BY LAW

TO WHICH THEY ARE SUBJECT
 Age of majority?
• The term “minor/minors” is no where defined in the Indian
Contract Act.

• Section 11: The age of majority of a person is to be determined

according to the law to which he is subject

• The age of majority of a person is regulated by Section 3 of the

Indian Majority Act, 1857.
– ‘A person domiciled in India, who is under 18 years of age is a minor,’

• But where a guardian has been appointed to the person or property

of the minor by a Court or when the minor’s property is under
supervision of Courts of wards, the age of majority of such a person
is 21 years and not 18 years.
 Who are Minors?
• As per Indian Majority Act, 1875:
– Persons below the age of 18
OR
– Persons below the age of 21. If,
• Guardian has been appointed by the court
• If property is under the supervision of the court.
 Age of majority:
Law of which country?
• Earlier, courts used to determine the age of
majority by the place of domicile and not by the
law to which he is subject

• Later & now: the age of majority is determined as

per---
– For ordinary mercantile transactions- law where the
contract is made
– For contracts related to land- law where the land is
situated
 EFFECT OF AGREEMENTS WITH MINOR
• Section 11 of the Act expressly forbids a minor from
entering into a Contract.

• Law acts as the guardian of minors to protect their rights

• As their mental capacities are not developed
• They lack the capacity for rational judgment

• The effect of this expressed prohibition is that any contract

entered into by a minor is void-ab-initio regardless of
whether the other party was aware of his minority or not.

• Mohori Bibi vs. Dharmo Das Ghosh

 EFFECT OF AGREEMENTS WITH MINOR
① An agreement by a minor is absolutely void and
inoperative as against him/her

Rationale of such legal rule:

– To protect the minor against his own inexperience, which may enable an adult
to take unfair advantage of him, or to induce him to enter into a contract
which, though in itself is fair, is simply imprudent
– To avoid unnecessary hardship to adults who deal fairly with minors

No restitution except in certain cases

– A minor cannot be ordered to make compensation for a benefit obtained under
a void agreement
– Certain exceptions:
• One who seeks equity must do equity
• Section 33 of the Specific Relief Act, 1963
• When the other party has been unscrupulous in its dealings- no restitution
 Mohori Bibi vs. Dharmo Das Ghosh

A minor executed a mortgage of 20,000 and

received 8000 from mortgage.

The mortgagee filed a suit for the recovery of his

mortgage money and for the sale of the property in
case of a default.

The contract with minor is void-ab-initio and

mortgagee cannot recover his money and nor could
minor’s property be sold under the mortgage.
One who seeks equity must do equity

If a minor sells a house for 50,000 and later on files

a suit to set aside the sale on the grounds of
minority.

He may be directed by the Court to refund the

money received by him before he can recover the
possession of the property sold.

Relief only in case where the minor himself as a

plaintiff seeks the assistance of the Court (Section
33 of Special Relief Act 1963)
 EFFECT OF AGREEMENTS WITH
MINOR…contd.(2)
②Beneficial Agreements are valid agreements
• An agreement which is of some benefit to the minor and
under which he is required to bear no obligation is valid.

• A minor can be a beneficiary, a payee, an endorsee or a

promisee under a contract.

• Example:
– A promissory note executed in favor of a minor
– Recovery of sum of money due to be received by minor on
delivery of goods (Abdul Ghaffar vs. Prem Piare Lal)
– Contracts of Apprenticeship
 Can Minors Ratify the contract?

• What is ratification?
– Subsequent adoption and acceptance of an act or
agreement
– It relates back to the date of the making of the
contract
 EFFECT OF AGREEMENTS WITH
MINOR…contd.(3)
③No ratification on attaining the age of majority
• A minor’s agreement being a nullity and void-ab-initio
cannot be ratified by minor on attaining majority.
• ‘A person cannot ratify an agreement entered by him
during his minority’.
• A new contract with fresh consideration should be
entered.
 What is Estoppel?

– Lord Halsbury:
• Estoppel arises when you are precluded from denying the
truth of anything, which you have represented as a fact,
although it is not a fact.
– Section 115 of the Indian Evidence Act :
• Where one person has, by his declaration, act or
omission, intentionally or permitted another person to
believe a thing to be true and to act upon such belief,
neither he or his representative shall be allowed to deny
that thing.
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
④No estoppel for minor
• The rule of estoppel does not apply to minor
• A minor is not estopped from pleading his/her infancy in order
to avoid an agreement even if he/she has intentionally
falsified or misrepresented his/her age
• Restoration of benefits:
– Doctrine of Restitution not applicable to minors.
– But in cases of fraud:
» Restore whatever is in possession and can be traced.
» If sold then cannot make him pay as it would amount to
enforcement of?
» In cash transactions?
» If he is the plaintiff then it can apply.
 No estoppel for minor
• In simple words,

Where an infant represents fraudulently or

otherwise that he is full age and thereby induces
other person to enter into contract with him,
then in action founded on the contract, the
infant is not stopped from setting up infancy.
 Restoration of benefits
– Doctrine of Restitution not applicable to minors.
– But in cases of fraud:
» Restore whatever is in possession and can be traced.
(Minors have no privilege to cheat)

A minor obtains a loan by fraudulent representation and

purchases a car of it.
Loan transaction is VOID-AB-INTION.
Minor has to restore the car to lender.
But if the money is wastefully spent and cannot be
traced, it is no longer possible to invoke the aid of
equitable doctrine of restitution.
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
⑤Minor’s liability for necessaries:
– Section 68 states that a person can be reimbursed for
necessities supplied to-
• A person incapable to enter into a contract
• Person dependent on such person
– Can be reimbursed from the property of that person
but not with any personal action
– Only reasonable price and not the price agreed
– Necessaries include items and services that are
necessary to the minor's health and safety, such as
food, lodging, shelter and clothing.
 What are necessaries ?
• According to Section 68 the necessaries supplied to a
minor “should be suited to his condition in life”. It does
not mean bare necessities of life, but such things which
may be necessary to maintain a person according to his
condition in life.

• What are necessaries may depend upon the status of a

person, and also his requirement at the time of actual
delivery of the goods. In Jagon Ram Vs. Mahadeo
Prasad Sahu it was observed.

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• “ Necessaries means goods suitable to the condition in
life of the dependent 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. It must further be
observed that as “necessaries” include everything
necessary to maintain the infant in the state, station, or
degree of life in which he is, what is necessary is a
relative fact, to be determined with reference to the
fortune and circumstances of the particular infant;
articles therefore that to one person might be mere
convenience or matters of taste, may in the case of
another be considered necessaries, where the usages of
society render them proper for a person in the rank of
life in which the infant moves.”

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• In Clyde Cycle Co. Vs. Hargreaves (1898), it has been held that a
racing cycle is a necessary for an infant apprentice. Similarly, in
Chapple Vs. Cooper (1844) it was held that an infant widow is bound
by a contract for the burial of her husband as the contract is for a
necessary. In Nash Vs. Inman (1908) a minor, who was already having
sufficient supply of clothing suitable to his position, was supplied
further clothing by a tailor. It was held that the price of the clothes so
supplied could not be recovered.
• In Ryder Vs. Wombwell, the defendant, an infant, having an income
of only 500 Pounds per year was supplied a pair of crystal, ruby and
diamond solitaries and an antique silver goblet. It was held that
these things could not be considered to be necessaries. It was
observed that certain things like ear rings for a male, spectacles for a
blind person, or a wild animal, cannot be considered as necessaries.
• In Kunwarlal Vs. Surajmal (1963) it was held that the house given to
a minor on rent for living and continuing his studies is deemed to be
supply of necessaries suited to the minor’s conditions of life, and the
rent for the house can be recovered.

24
 What are necessary goods?
• It is relative concept- depends on the status
and circumstances of a minor.

• Decided in the case Jagon Ram vs. Mahadeo

Prasad Sahu-
– Necessity depends upon the status of person and
his requirement at the time of the delivery.
 Question
• A supplies the B (a minor) with necessities.
Can A recover money from B?
Can A recover money by selling B’s property?
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
⑥Specific Performance
– Means actual performance as agreed in the contract
– Minor cannot be sued for specific performance
– Since the contract is void-ab-initio
– Exceptions: where a guardian has entered into a
contract-
• For benefit of a minor person
• On behalf of minor
• Within their scope of authority
• But, they cannot bind the minor for purchase of immovable
property and contract of service.
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
⑦Minor Agent

– An agent is merely a connecting link, between his

principal and third person.
– Therefore, a minor can be appointed as an agent.
– But he will not be personally liable for his acts as an
agent [Sec. 184].
– It may, however, be noted that the principal will be
liable to the third persons for the acts of the minor
agent which he does in the ordinary course of dealings
• Minor Agent……contd.

• It has been noted above that a minor is capable of becoming

an agent for the purpose of binding the third party and his
principal.

• So far as relations between the principal and his agent is

concerned, a binding contract as between them is possible
only if both parties i.e. the principal and the agent are
competent to contract.

• Regarding this aspect Section 184 states that, “no person who
is not of the age of majority and of sound mind can become
an agent, so as to be responsible to his principal according to
the provisions in that behalf herein contained.”

• Thus, if a minor is appointed as agent, he will be able to

create a contract between his principal and the third party,
but so far as his own liability towards the principal is
concerned that will not be there because of his minority.
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 EFFECT OF AGREEMENTS WITH
MINOR…contd.
⑧Minor Partner

• A minor cannot become a partner in the partnership firm

• But he can be admitted to benefits of the partnership

with consent of all the partners

• The minor is liable to losses but not his personal property

 EFFECT OF AGREEMENTS WITH
MINOR…contd.
⑨Minor Insolvency

– A minor cannot be declared as an insolvent

– This is so because all agreements with a minor are
absolutely void.
– Even for necessaries, minor is not personally liable,
only his/her property is liable.
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
⑩Contracts by Minor and Adult jointly

– In such a case, the adult will be liable on the contract and

not the minor.
– In Sain Das Vs Ram Chand, where there was a joint purchase
by two purchaser, one of them was a minor.
• It was held that the vendor could enforce the contract
against the major purchaser and not the minor.
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
11. Surety for a minor

– In a contract of guarantee when an adult stands for

a minor then he (adult) is liable to third party as
there is direct contract between the surety and the
third party`.
– Although, the minor is not liable but the surety is
liable.
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
12. Position of Minor’ agent

– A minor is incapable of entering into a contract because an

agreement by a minor is void. What a minor cannot do
himself, he cannot do that even through an agent.

– Therefore, a minor cannot appoint an agent, or in other

words, a minor cannot become a principal.

– Section 183, therefore, provides that any person who is of

the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an agent.
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
13. Minor shareholder

– A minor, being incompetent to contract cannot be a

shareholder of the company
– If by mistake he become a member, the company
can rescind the transaction and remove his name
from register
– But, a minor may, acting through his lawful
guardian become a shareholder by transfer or
transmission of fully paid shares to him
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
14. Minor’s liability in tort
– The term ‘tort’ implies a civil wrong for which a suit can
be filed by the affected party
– Includes conduct such as assault, conversion,
defamation, trespass, wrongful use of another’s
property, etc.
– If a minor enters into an agreement by misrepresenting
his age, he cannot be sued either for damages for
breach or in the form of damages for tort.
– A minor is liable for his tort ,unless the tort is in reality
a breach of contract
– When the act results in tort- Burnard vs. Haggis
 EFFECT OF AGREEMENTS WITH
MINOR…contd.
Position of Minor’s parents
– The minor’s contracts do not impose any liability on his
parents or guardians even if the contracts are for
‘necessaries’

– The parents or guardians of the minor may pay money

borrowed by him just out of moral obligations.

– But there is no legal obligation to make such payments.

– Parents or guardians can be held liable when the minor

child is acting as an agent of his parents or guardians.
Minor’s liability when the same act results in a
tort as well as breach of agreement
• It has been noted above that an agreement by a minor is void and,
therefore, if a minor makes a breach of an agreement he cannot be
made liable for the same.

• On the other hand, when a minor commits a tort he is liable for that In
the same way and to the same extent as an adult person. commits a
tort. For example, a minor misrepresents his age and fraudulently
stating that he is of the age of majority takes a loan from another
person. Under the law of contract the minor cannot be asked to repay
the loan as a minor’s agreement is void, but he has also committed
fraud for which the liability for the tort of deceit can be possibly be
there. The question which in such case arises is: Should we make him
liable for fraud ?

• If we do so, it may also mean enforcement of an agreement which is

void.

38
• On this point the Courts have held that where permitting an action in
tort will result in an indirect enforcement of an agreement the law will
not permit such an action, because “one cannot make an infant liable
for breach of a contract by challenging the form of action to one ex
delicto. In Johnson Vs. Pye (1665), a minor falsely stated that he was
of the age of majority and obtained a loan of 300 pounds. It was held
that the minor cannot be asked to repay the loan by bringing an action
for deceit against him. Similar was the decision in Jennings Vs.
Rundall (1799). There a minor, who hired a mare for riding, injured
her by over-riding. It was held that he could not be made liable for the
tort of negligence because that would mean making him liable for the
breach of contract of bailment. Similarly, if a minor purchases goods
on credit, he cannot be sued to recover the value of the goods by
permitting an action for the tort of conversion.

39
• Although when an action under the law of tort implies an
indirect enforcement of the contract the action for the same
is not permitted, yet if the nature of the act is such that the
tort committed by the minor is totally independent of the
breach of obligation under the contract, the action for the
same can lie. This may be illustrated by reference to Burnard
Vs. Haggis (1863) There a minor hired a mare. It was
expressly agreed that the mare will be used only for riding
and not “for jumping and larking.” The mare was made to
jump over a fence, she was impaled on it and killed. It was
held that the minor was liable for negligently killing the mare
as his act was totally independent of the contract made by
him.

40
Position of a person of Unsound Mind

• We have already noted that according to section 11 a person of sound

mind is competent to contract. It means that if a person is of unsound
mind he is as much incompetent to contract as a minor.

• What is sound mind for the purpose of making a valid contract has
been defined by section 12 as under :

– “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
judgement as to its effect upon his interests.”

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 SOUND MIND
Soundness of mind means that:

• Understand: He is in a state to
understand what he is doing

• Rational judgment: He is able to form a

rational judgment about the effect of his
acts to his interest.
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• Soundness of mind is required only at the time of making a
contract.
• It is possible that a person who is usually of unsound mind, may make a
contract when he is of sound mind.

– It means that even a person who is usually of unsound mind can make a
contract during lucid intervals, i.e., at such intervals when he is of sound
mind. Thus, a patient in a lunatic asylum, who is at intervals of sound
mind, may contract during those intervals.

• Just as a person who is usually of unsound mind can make a contract

during lucid intervals, in the same way, a person who is usually of sound
mind, but occasionally of unsound mind, may not make a contract when
he is of unsound mind.

– Thus, a sane man, who is delirious from fever or who is so drunk that he
cannot understand the terms of a contract or form a rational judgement
as to its effect on his interests, cannot contract whilst such delirium or
drunkenness lasts

43
 UNSOUND MINDED PERSON:
CASES COVERED
Unsoundness may arise from:

• Idiocy
• Lunacy
• Drunkenness
• Hypnotism
• Metal decay
 Idiocy
• It is god given and permanent, with no
intervals of saneness.

• An idiot is a person who has completely lost

his mental powers

• The mental powers of an idiot are completely

absent because of lack of development of the
brain
 Lunacy or Insanity
• It is a disease of the brain.

• A lunatic loses the use of his reason due to

some metal strain or disease.

• He/She may have lucid intervals of sanity

 Lunacy vs. Idiocy
• Idiocy is permanent where as Lunacy is
temporary

• An agreement by an Idiot is void

• Whereas a lunatic can make a contract when he is

mentally stable.
– Ex. A patient in a lunatic asylum who is at intervals of
sound mind, may contract during those intervals.
 Drunken or Intoxicated Persons
• It produces temporary incapacity, till the
drunkard is under the effect of intoxication,
provided
– it is so excessive as to suspend the reason for a time
and create impotence of mind

• A person so drunk or intoxicated that he is not

capable of forming a rational judgment during
the period of intoxication or drunkenness, is
incapable of contracting
 Hypnotism
• It also produces temporary
incapacity, till the person is under
the impact of artificially induced
sleep
 Mental Decay
• It can be on account of old age etc.
 Effect of agreements with persons of
unsound mind
• In case where the contract is sought to be
avoided on any of the above grounds,
– the burden of proof lies on the party who
sets up such a disability

• But if unsoundness of mind is once

established
– the burden of providing a lucid interval is on
him, who sets it up
• In Indar Singh Vs. Parmeshwardhari Singh (1957) it has been held
that “ a person may to all appearances, behave in a normal fashion,
but, at the same time, he maybe incapable of forming a judgement of
his own, as to whether the act he is about to do is to his interest or
not, and to the contracts of such a person the law gives protection”. In
this case, on the death of his Father, the defendant No. 1 purported to
sell some properties to the plaintiff for a consideration of Rs. 7,000/-
and executed a sale deed for the purpose. The properties purported
to be sold under the sale deed were worth Rs. 25,000/- Mother of
defendant No. 1 pleaded that her son was a congenital idiot, incapable
of understanding transactions relating to transfer of properties, and
that he is a man of unsound mind and mostly wanders about here and
there and therefore, the transaction made by him is void. It was held
that defendant No. 1 was incapable of understanding business and
forming a rational judgement as to its effect upon his interest at the
relevant time and, therefore, the sale deed executed by him in favour
of the plaintiffs did not confer any title on them.

52
 LEGAL CONSEQUENCES FOR AGREEMENT
WITH UNSOUND PERSON
• It is on the same footing as contracts with minors.
– Void and inoperative as against the person with
unsound mind

• Contracts for the benefits for person with unsound

person is valid.

• Section 68: The property of a person of unsound mind is

however, always liable for necessaries supplied to him or
to any one whom he is legally bound to support
 LEGAL DISQUALIFICATION
① Alien Enemy

② Foreign sovereigns and ambassadors

③ Convicts

④ Married Woman

⑤ Insolvent

⑥ Joint Stock Company

 LEGAL DISQUALIFICATION
• ALIEN ENEMY
– Alien: Citizen of a foreign country
– “Alien friend can contract but an alien enemy can’t contract.”

– An alien living in India can enter into contracts with citizens of India
during peace time only,
• and that too subject to any restrictions imposed by the government in that
respect

– On the declaration of a war between his country and India, he

becomes an alien enemy and cannot enter into contracts

– Contracts entered into before the declaration of the war stand

suspended and cannot be performed during the course of war
• They can be revived after the war is over provided they have not already
become time- barred
 LEGAL DISQUALIFICATION
• FOREIGN SOVEREIGNS AND AMBASSADORS

– They can sue others to enforce the contracts

entered upon with them

– BUT, they cannot be sued without obtaining the

prior sanction of the central Government.

– Thus they are in a privileged position and are

ordinarily considered incompetent to contract.
 LEGAL DISQUALIFICATION
• CONVICTS:
– A convict is one who is found guilty and is imprisoned.

– During the period of imprisonment, a convict is

incompetent
• To enter into contracts, and
• To sue on contracts made before conviction

– On the expiry of the sentence, he is at liberty to

institute a suit and the law of limitation is held in
abeyance during the period of his sentence.
 LEGAL DISQUALIFICATION
• MARRIED WOMEN:

– Cannot enter into a contract for the property of

husband.

– Although can enter into a contract with respect to her

own property (stridhan!!)

– However, Married women can act as agent of husband

and bind her husband’s property for the necessaries
supplied to her if he fails to provide her with these
 LEGAL DISQUALIFICATION
• INSOLVENT:

– An adjudged insolvent cannot into few contracts

like-
• Sell his property which is with official receiver

– But he can incur debts, purchase property,

become a employee
 LEGAL DISQUALIFICATION
• Other disqualifications of Insolvent:
– Can’t be a magistrate or a director of company or
a member of local body

• But he has the contractual capacity except with

respect to his property.

• After the order of discharge, he is just like an

ordinary citizen.
 LEGAL DISQUALIFICATION
• JOINT STOCK COMPANY AND CORPORATION
INCORPORATED UNDER A SPECIAL ACT.

– A company/ corporation is an artificial person created by

law

– It cannot enter into contracts outside the power conferred

upon it by its memorandum of association or by the
provisions of its special act, as the case may be.

– Again being an artificial person(and not a natural person) it

cannot enter into contracts of a strictly personal nature
e.g. marriage.