Business Law Complete Notes for BBS TU/ Capacity to Contract

Chapter- 5 Capacity to Contract

Introduction 

An essential ingredient of a valid contract is that contracting parties must be ‘competent to contract’. An agreement amounts to a contract only when the parties to it are capable of entering into a contract. Capacity to contract regulates the competency of the parties to enter into a contract. It prescribes the qualifications of the parties to enter into a contract. 

It deals with the mental ability of the parties to form a valid contract. It believes, in the fact that a person willing to enter into a contract should be competent in terms of his ends deciding powers, condition of mind, and legal provisions. Actually, this element of a valid contract prevents a weak person from being cheated by a strong person mentally, physically, and legally. 

The main objective of the capacity to contract is relating to provisions to permit the competent party to make a contract and to set aside incompetent from making a contract. It means it is making the best for good (legally good) and avoiding the possibility of entering incapable (legally incapable) into the contract.

Section 11 of Indian Contract Act, 1872 “Every person is competent to contract who is of the age of the majority according to 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.”Under Section 506(1) of the Civil Code, 2074;

1. Any person other than those mentioned below maybe competent for concluding a contract;

1. Minor,

1. Person of unsound mind.

2. Notwithstanding anything contained in sub-section (1) any person not qualified to enter into a specific contract under the prevailing law shall be deemed to be incompetent to conclude the contract. 

3. For the persons who are not able to enter into a contract as per sub-section (1) the guardian can enter on behalf or for their benefit. 

4. If a person disqualified by Contract Act has been made capable to contract by any law of the country then he can enter into the contract. 

Hence age, soundness, and disqualification need to determine whether a person is competent to contract or not. The section is quite clear that except these three groups of person, all other persons have contractual capacity. 

 

Thus, the person who is major, of sound mind and is not disqualified from contracting by law, is competent to enter into a valid contract; otherwise a contract made by or with a person lacking such competency is void.

The contract by or with incompetent human never form a lawful contract and if it is formed the resulting contract may not always similar. The contract can be void in a specific situation and voidable in another circumstance. The major factors that create the incapacity in any person to form a contract as shown in the following diagram:

Major factors that create the incapacity to enter into a contract

1. Who is a competent party to contract? Explain the rules regarding an agreement made by a minor.

Answer 

The party competent to contract

Capacity means an individual’s capability to form a contractual relationship with another individual. In common sense, all adults of sound mind have full capacity to create contracts and handle so created relations. Though, the capacity of definite persons is limited. 

In every contract, the contracting parties undertook certain obligations so that the parties must in such a position to take the decision to have such responsibilities. If the party of a contract is not in such a position to work out the effect of his promise to his interest is known as a person without contractual capacity and incapable to enter into a contract. 

Thus, it is the capability of a person to make a logical computation of the effect of the conditions of the contract upon his best interest. Therefore, all the individuals who are mentally being able to diagnose the effect and pressure of terms and conditions of their promises that could form if they agree to enter into the contract, in their own self-interest are called competent parties. 

According to Section 506(1) of the Civil Code, 2074 except one who is minor and one who is unsound mind, all the individuals are capable persons to enter into a contract and can form a valid contractual association ship between them.

Minor

Minor is a person who has not attained majority or he/she is an infant. A minor is any person who has not attended the age of majority predetermined by the law of the nations. The person who has completed the age of majority as per law is called a major or adult. The age of the majority is different in some counties in other countries and the same in some countries. 

Under English law, the age of majority formerly was 21 years. But now under Section 1 of Family Law Reform Act, 1969, “a minor is a person under eighteen years.” Formerly a ‘minor’ was referred to as ‘infant’, but this Act has changed the term into ‘Minor’. 

Indian law is also similar in this regard. However, Section 3 of the Indian Majority Act, 1875 states that a minor, for whom a guardian has been appointed or his property is managed by the Court of Wards, becomes a major only on his completing the age of 21 years.

In Nepal, the age of majority is 20 years on both bride and bridegroom for the purpose of marriage. For the purpose of the contract, Section 2(e) of the Civil Code expressly provides that a minor is a person who has not completed the age of 18 years. 

It is the new provision made by the Civil Code. Previously it was 16 years. The Convention on the Right of Child, 1989 (CRC) has defined child in Article 1 as: ‘a child means every human being below the age of eighteen years unless, under the law applicable to the child, the majority is attained earlier.’

Minor is believed that he or she is not mentally fitted to analyze the effects of terms and conditions of the contract in their interest and life and they may not face the consequences of their actions through the contract, so the law regards that minor and adult should be viewed and treated differently on the basis of their intrinsic mental and physical differences with reference to their age factor. 

It is believed that minor or infant does not understand the nature and consequences of action and they do not control themselves, so they are viewed and treated differently than an adult. Agreements entered into by minors may be classified within three possible categories: valid; voidable; and void.

Rules regarding minor’s contract

Being an incompetent party, it is clear that the minor has no right to enter into a contract, if a minor enters into an agreement it becomes void and the court does not enforce. But, sometimes, they enter or obliged to enter into an agreement according to the circumstances. There are several rules regarding minor contracts recognized by different laws and also accepted by the Civil Code of Nepal too.

Agreement with or by a minor is void

In general, any agreement made by or with a minor is declared as void. Because of incompetence to contract an agreement is void from the beginning if it is created by or with a minor party. It has no legal effect. Section 506 (1) (a) of the Civil Code has made the provision that a minor person cannot make a contract and the age of majority is determined by Section 2(e) of the Civil Code as 18 years.

A contract that is beneficial to a minor is not void: A contract is not void by the law if it is beneficial to the minor person. The other party has to fulfill his liability to the minor part. But the contract created liability from minor becomes void, because the law protects the fights of the minor. 

For example, Hazard (Plaintiff) is a professional football player. He enters into an agreement with Bimal (Defendant). They agreed that Bimal should accompany Hazard on a European tour for playing Football and during the tour, all expenses should be met by Bimal and should be paid a remuneration of £ 1500. After completion of the tour when Hazard demanded the amount from Bimal as per the agreement Bimal had refused and said I was minor at the time of agreement and not liable to pay the amount as per agreement. 

The trial court awarded the agreed amount to Hazard and the decision was confirmed by the Court of Appeal. In the opinion of the court playing football in a company with a noted player like Hazard may be an important and most valuable kind of instruction for the kid who desired to play professional football. The agreement was in effect for the benefit of the minor and thus enforceable by law.

The questions of the validity of such beneficial contracts based on the following two factors;

•      The skill, training, employment, experience and other benefits must be able to create positive changes and progress in the life of minor.

•      The benefits must be suitable to the condition in the life of a minor, i.e. suitable to the position, financial and social status of the minor.

Contracts for the supply of Necessary is valid

According to Common law, the only case of a contract which is valid is a contract for necessaries. Where the necessaries are supplied to a minor, he is legally bound to pay out of his property. It means, it is only the property of the minor which is liable for meeting the liability arising from the contract and the minor is not personally liable.

The term necessaries have been defined under Section 3 of the English Sale of Goods Act, 1979, which provides as follows: Necessaries indicate supplies appropriate to the situation in the life of the minor or another person concerned and to his actual requirement at the time of sale and delivery.  

As per English law, necessary goods mean something reasonable required for the nourishment, clothing, lodging, food, etc. along with the goods said by the definition.

But the required conditions are;

• The supplies are required to be fitting to the condition in the life of minor, i.e. suitable to the position, monetary and societal status of the minor,
• The goods must be of necessaries both at the time of sale and delivery of such goods.

For example, tailor supplied to an EIC undergraduate a set of clothing which included five coats worth of Rs.15000. It was proved that he was a minor at the time of contract as well as the time of delivery and he had already a sufficient supply of clothing according to his position of life.  

The court of Appeal dismissing the claim held that the tailor had failed to prove the clothing was suitable to the minor’s actual requirement at the time of the sale and delivery. And the burden of proof is on the supplier. As a result, the contract had become invalid or void.

A minor can always plead minority

Even if a minor misrepresenting his age or induced the other party to enter into a contract with him and acquires something that cannot create a fraud case legally. If the victim party was allowed to sue for fraud, it would amount enforcement of a void contract. It is decided in an English case, but the minor has to return the goods, if it is possible, received from the other (victim) party under that contract.

No ratification of an agreement with a minor

An agreement with a minor is inoperative.  Ratification means approval or reaffirmation of agreement. A minor cannot ratify the agreement after attaining a majority of his age because a void agreement is always void, it cannot be ratified. If a minor party wants to provide validity to such contracts formed by him or with him he needs to form a fresh new contract after attaining the age of majority.

Contract valid until avoided

Some contracts made with or by a minor are treated as valid and binding on the infants until he avoids them either before or within a reasonable time after attaining majority though these contracts are not made for necessaries or benefits to infants.

Any contract in which the minor is getting permanent or continues benefits were valid and binding until the minor disclaimed them either during minority or within a reasonable time after becoming an adult. For example, benefit (interest) from the land, possession of the share in a company which is not fully paid etc., the minor will be bound unless he expressly repudiates the contract during the minority or within a reasonable time after attaining the age of majority. The reasonability of time is based on the legal circumstances. 

Surety of minor

A person who stands a surety of a minor against money advanced to a minor can be sued and made liable as a surety though the minor himself is not liable. A surety for a minor’s loan has primary liability over the loan. A surety for a minor’s loan has primary liability over the loan.

The minor as a partner

A minor person cannot become a partner in any business firm. But he may admit to the benefits of an already existing firm with the consent of the other partners with the agreement executed through his lawful guardian.  So minors only can share profits but not losses. He doesn’t become personally liable for any obligations of the firms.

The minor as an agent

A minor can be employed as an agent because an agent is merely a connecting link between his principal and a third party. But in such case the minor of not personally liable for his acts during the course of dealings. A minor bind the principal by his acts because the minor is not the party of the contract.

Minor’s act cannot bind his parents or guardian

The acts done by a minor, except provided, cannot bind his parents or guardians even for his necessities.

Minor as a shareholder

Theoretically a minor cannot be a shareholder or member of a company because such a person is incapable to make a contract legally. But, his guardian may purchase and sell the share on behalf of a minor. Such provisions are included under the Company Act, 2006 and Section 35(2) of the Civil Code, 2074. Therefore, indirectly minors may be shareholders and members of the company through his parents.

A contract can be made on behalf of the minor

To prevent the interest of minors his parents or any other third person may become a guardian and such guardian can either into necessary contract on behalf of the minor.  Section 506(3) of the Civil Code has mentioned that the guardian of a person who is incompetent to conclude a contract may conclude a contract on his/her behalf in his interest. In this contract, the priority of the minor is responsible to perform the condition. Such a contract must fulfill the following conditions:

1. The contract is within the scope of the authority of a guardian.
2. It is for the benefit of the minor.

Contract by Minor and Major jointly

If any contract is made by minor and major persons jointly with another party, the minor is not liable under such a contract but the major person is fully liable and the contract can be enforced against him. No liability resulted from the contract can be shared with the minor person.

A contract made by fraudulent concealment of the age minority

If a minor fraudulently concealing his age as a major to enter into a contract and formulate a contract, such a person is liable to compensate the other person or aggrieved party because even minor has no privilege to deceive or cheat the other person.

No estoppels against minor

Estoppel is a principle of evidence law under which a person does not go against his prior statement about him that is relating to the fact. If a person expressed a particular statement on any matter of fact, such a person is bound to abide it in the future. No variation is permitted. However, it will be interesting to know that there is no such estoppel against the minor. It means a minor person can vary his statement of fact subsequently.