Part I The Indian Contract Act, 1872

Chapter 3
Competency of Parties

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 Learning Objectives

• Who is Competent to Contract?

• Who is a Minor?
• Position of Agreements with a Minor
• Persons of Unsound Mind
• Agreements with Persons of Unsound Mind
• Effects of Agreements Made by Persons of Unsound Mind
• Agreements by Idiots, lunatics, drunken persons
• Persons Disqualified by Law; Alien Enemies, Insolvents; Foreign
Sovereigns and Ambassadors; Joint Stock Companies and Statutory
Corporations

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Who is Competent to Contract

Every person who has attained the age of majority; is of sound mind,
and is not disqualified from contracting by any law, to which he is
subject, is competent to contract. [S11]
In the light of above provision, the following persons can be deemed
to be incompetent to enter in to a contract:
• Minors
• Lunatics; and
• Persons disqualified by law to which they are subject.

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 Who is a Minor?

A minor is a person, being domiciled in India, who has not attained the age of 18 years.
Accordingly, every person, male or female, who is under 18 years of age, is a minor.
[Section 3 of the Indian Majority Act, 1875]
However, in the following two cases a person continues to be a minor until he
completes 21 years of age:
• Where a guardian of a minor's person or his property or both has been appointed by a
court of law under the Guardian and Wards Act, 1890, and
• Where his property has passed under the superintendence of the court of wards.
Thus, a person normally attains majority upon completing his/her 18 years of age. But
in case a person or his/her property is under the guardianship of someone, the former
shall remain minor unless s/he attains 21 year of age. The same condition applies to a
person whose property has been passed under a court-appointed custodian (court of
wards).
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Position of Agreements with a Minor

A valid agreement requires that both the contracting parties must be able to
understand the legal implications of their conduct i.e., they must have a
mature mind.
The legal yardstick to measure maturity, according to the law of contract, is that
both the parties must have attained majority. Otherwise the law would
presume that they do not possess the capacity to judge what is good and what
is bad for them, hence a bar on minors' competency to contract.

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Case study: Mohori Bibee Vs. Dharmodas Ghosh
Case name Mohori Vs. Dharmodas Ghosh
Before The Privy Council
Decided on 04.03.1903
Appellants MohoriBibee and Ors
respondent Dharmodas Ghose
Facts of the case: Dharmodas Ghose, was the respondent in this case. He was a minor (i.e. has not completed
the 18 years of age) and he was the sole owner of his immovable property. The mother of
Dharmodas Ghose was authorized as his legal custodian by Calcutta High Court.

When he went for the mortgage of his own immovable property which was done in the favor
of appellant i.e. Brahmo Dutta, he was a minor and he secured this mortgage deed for Rs.
20,000 at 12% interest rate per year.

Bhramo Dutta who was a money lender at that time and he secured a loan or amount of Rs.
20,000, and the management of his business was in the control of Kedar Nath, and Kedar
Nath acted as the attorney of Brahmo Dutta.

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Case study: Mohori Bibee Vs. Dharmodas Ghosh
Case name Mohori Vs. Dharmodas Ghosh
Before The Privy Council
Decided on 04.03.1903
Appellants MohoriBibee and Ors
respondent Dharmodas Ghose
Facts of the case: Dharmodas Ghose was a minor (i.e. has not completed the 18 years of age) and he was the
sole owner of his immovable property. The mother of Dharmodas Ghose was authorized as
his legal custodian by Calcutta High Court.

When he went for the mortgage of his own immovable property which was done in the favor
of appellant i.e. Brahmo Dutta, he was a minor and he secured this mortgage deed for Rs.
20,000 at 12% interest rate per year.

Bhramo Dutta who was a money lender at that time and he secured a loan or amount of Rs.
20,000, and the management of his business was in the control of Kedar Nath, and Kedar
Nath acted as the attorney of Brahmo Dutta.

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 The Legal Position of Minor’s Agreements

Legal position of minor's agreements may be studied under the following heads:
• An agreement by a minor is void altogether
• Minor can always plead minority
• No ratification on attaining the age of majority
• Contracts for the minor’s benefits
• Contract by a parent or guardian - how far enforceable
• Contract by minor and adult jointly
• Minor as a partner
• Minor as an agent
• Minor as a shareholder
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The Legal Position of Minor’s Agreements

Minor as a shareholder. A minor can become a shareholder, or a member of a company in

respect of fully paid shares if the articles of the company so permit. However, if a minor is
allotted partly paid shares, he being incompetent to contract, incurs no liability.
Contract of Apprenticeship by the Guardian of a Minor. A contract of apprenticeship entered
into on behalf of the minor or by his parent or guardian is valid and is binding upon a minor as
such a contract is protected by the Apprentices Act, 1961 provided that the minor is not less than
14 years of age at the time of making the contract.
Minor's liability for Supply of Necessaries
A Minor’s liability in Tort. A tort refers to civil wrong or breach of duty other than under the
contract leading to incurring liability for damages. A minor is liable in tort unless his act is directly
connected with the contract and is the means of producing it.

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Persons of Unsound Mind

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 effect upon his interests. [Section 12]
Accordingly, for the purpose of making a contract, a person is deemed to be of
unsound mind if at the time of entering into an agreement he is:
Incapable of understanding its terms; and
Unable of forming a rational judgment as to its effect or implications upon his
interests.
Unsoundness of mind may be caused by a variety of factors viz., idiocy, lunacy or
insanity, intoxication, mental festering due to old age etc.

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Agreements with Persons of Unsound Mind

A person of unsound mind, under the Indian Contract Act, is incapable of entering into a
contract.

Section 12 further clarifies:

• 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.

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Effect of Agreements by Persons of Unsound Mind

The law recognizes different levels of mental instability or unsoundness

of minds, such as lunacy, idiocy, etc. Accordingly, agreements with such
persons have been dealt with differently. The position of contracts and
agreements with such people is discussed separately in the following
slides.

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Agreements by Idiots

Idiocy, in the eyes of law, implies extreme mental imbecility with no interval of saneness.
Accordingly, an idiot is a mentally deficient person who is permanently incapable of rational
conduct. He has no intervals of saneness so he cannot make a valid contract. A case in point
is the decision of the Patna High Court in Inder Singh vs Parmeshwardhari Singh. A property
worth about Rs 25,000 was agreed to be sold by a person for Rs 7,000 only. His mother
proved that he was a congenital idiot, incapable of understanding the transaction. Holding
the sale to be void, SINJHA J. stated that, ‘…. 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 in his interest or
not. In the present case he was incapable of exercising his own judgment.

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Agreements by Lunatics

As against idiocy, lunacy is not God-given. Hence, a person can become a lunatic at
any stage of his life. He is a person who is mentally disturbed on account of
mental strain or other personal experiences and of course; he may have some
lucid intervals of sanity.
Accordingly, he is bound for contracts entered into during intervals of lucidity. But
he shall not be liable as regards contracts entered into during his lunacy i.e., while
he was of unsound mind.

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 Agreements by Intoxicated Persons

An intoxicated person is placed in the same category as a lunatic. Therefore, a contract by such
persons is altogether void. However, to avoid a contract on this ground it must be shown that the
person was so intoxicated that he was unable to understand the terms of the contract or form a
rational judgment as to its effects on his interests. Thus, partial or ordinary intoxication cannot impair
person’s capacity to contract.

Exceptions.
If a contract, entered into by a person of unsound mind, is for his benefit, it can be enforced (for his
benefit) at law against the other party. A person of unsound mind usually incurs no liability. But for
necessaries supplied to such a person or to any member of his family, from his estate, if any, will be
liable [Section 68].
Burden of Proof . The presence or absence of mental soundness at the time of making the contract in
all cases is a question of fact to be decided by the Court of law. Where a person is usually of sound
mind, the burden of proving that he was of unsound mind at the time of execution of a document lies
on him who challenges the validity of the contract.
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 Persons Disqualified by Law

Apart from minors and persons of unsound mind, there are certain other persons who are
disqualified from contracting under some statutes. Such persons are called ‘legally disqualified
persons’. Besides convicts, the term includes alien enemies, insolvents, foreign sovereigns and
ambassadors, corporations etc.
Alien Enemies. In case of an alien enemy i.e., a foreign national whose country is at war with
India, contracts entered into during the outbreak of war become unenforceable and cannot be
sued in Indian Courts except by license from the Central Government.
Convicts. All convicts are legally disqualified from being entered into the contract from the date
of imprisonment till the date of their release from the jail. They may, however, contract:
• with the expiration of the period of sentence;
• during their parole; or
• on remission of the legal consequences of their crime.

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Persons Disqualified by Law

• Un-discharged Insolvents. If a person’s debts exceed his property, he is adjudicated as

insolvent. An adjudged insolvent’s property stands vested in the Official receiver or official
assignee appointed by the Court. He can not enter into contracts relating to his property and
sue, and be sued until he obtains a certificate of discharge from the Court.
• Foreign Sovereigns and Ambassadors. Foreign sovereigns and accredited representatives of a
foreign nation i.e., Ambassadors and High Commissioners enjoy special privilege in that they
cannot be legally proceeded against in Indian Courts. However, they can, in their personal
capacity, enter into contracts that may be enforceable in Indian Courts.
• Joint Stock Companies and Statutory Corporations. A joint stock company, and a statutory
corporation, created by a special Act, exist only in contemplation of law. They are artificial
persons and have no physical shape or form. The contractual capacity of a company is
determined by its charter i.e., Memorandum of Association. Similarly, the statute creating a
statutory corporation expressly defines its contractual capacity. Any act by a company or a
corporation, which is outside the limits of contractual capacity is ultra vires (beyond the
powers) and void.
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