Capacity to Contract/Business Law Complete Notes for BBS TU

Chapter-5 Contractual Capacity/ Incapacity to Contract

2. Define necessities. When is a minor liable to a contract for necessaries? 

Answer

The general rule is that a contract made with minor is void ab-initio but a contract formed for the sake of his benefit or interest is valid and enforceable. When necessities and essentials are supplied or rendered to minor or any person (father, mother, and the like) dependent on him, the minor is liable to pay out of his property from them. It means, it is only the property of the minor which is liable for meeting the liability arising out of such contract. Minor is not personally liable.

Section 3 of the English Sale of Goods Act, 1979, defines term necessaries as Necessaries means goods suitable to the condition in life of the minor or another person concerned and to his actual requirement at the time of sale and delivery. 

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

But the required conditions to be considered anything supplied as necessaries are;

• The goods 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,
• The goods must be of necessaries both at the time of sale and delivery of such goods.

For example, A, 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.

Capacity to Contract/Complete Answer to all Questions

Thus, in case of necessaries and benefit to the minor, the person who is supplying such necessaries or rendering services to a minor or anyone whom he is legally bound to support is entitled to get reimbursement from the property of such minor. If M supplies N, a minor with necessaries suitable to his life.  M is entitled to reimburse the amount from N’s property. This claim arises not out of contract but out of quasi-contract. 

There is no personal liability of minor and only his property is liable. The supplier may lose the price of necessities if the minor has no property and fails to pay for such supplied to him. But, if a minor is acting as an agent for the parents or guardian, the parent or guardian is liable under the contract.

The liability of minors will come only in the necessaries suitable to social standards but what are the necessities that have not absolutely defined. It may be because it differs from individual to individual and from time to time. 

It is always based on the financial position of the persons. So, only those things which are fit and proper for a minor with reference to his situation in the society is termed as necessaries. The term necessary has not defined in the Nepalese law.

In general, a minor is not a competent party to enter into the contract. It is a matter of fact that, when anybody enters a contract he will have a right and corresponding duty as well. 

Here if we assume a minor is entering into an agreement, and here the minor may not have any income or possibly he may not own any properties or he cannot be able to undertake any responsibility and liability as he is not capable enough to perform such responsibilities and is mentally not much mature to understand the effect and impact of such rights and duties so created from the contract. So the law protects minor by making law and termed minor as an incompetent party to enter into a contract. 

Law identifies that all the agreements with and by minor are void from beginning; minor has not to refund any money or matters received under void contract to the major party as if any major party had entered into an agreement with a minor, it is assumed that the major has done such at his own risk so he has lost his money or the property provided to minor under the agreement.

Necessary is border term than necessity and which may include; articles required to maintain a particular person in the state and degree in life, in which he is living, things without which an individual cannot reasonably exist, a loan taken by minor to save his property from sale in execution of a verdict, money advanced to a minor for purchase of necessaries, debt incurred for executing funeral obligations, wedding present for a bride of minor, funds provided to a minor for the marriage of minor female in the family, and expenses reasonably incurred in defending the litigation threatening the property of a minor. Thus when the goods that are necessary to the life and situation of minor then only minor has to be obliged for such supply only up to his property but not personally.

3. What are the circumstances in which incapable persons are liable? /Who are disqualified persons to contract? What is the legal effect of the contract made by/with them?

Answer

Incapable persons/Persons incompetent to contract

Every person is assumed to competent to contract except for some classes of persons because they are not able enough to understand the terms and motive of the contract, they have no reasonable capacity or rational judgment to calculate the consequences of the contract and they have no capacity to perform legal obligations created by the contract. So those persons who are not competent to enter into a valid contract are called incapable persons or persons incompetent to contract. Specifically saying, minors, the person of unsound mind and legally disqualified persons are called incapable person to enter into the contract.

Minor

(For minor and legal effect of an agreement by or with minor and minor’s liability, please see the answer of an earlier question)

The person of unsound mind

The very essential requirement to form a valid contract is a sound and rational mind of the parties to a contract. As minors, the person who is not of sound mind or person of unsound mind is also considered as the incompetent person to generate contractual relationships and any contract with such a person is also void. Thus, any contract to be efficient and lawful, it has to be made only with the person of sound mind.

Simply, the term sound mind denotes the normal condition of a mind. A person of unsound mind refers to such a person who loses his soundness, that is to say, a person losing soundness is called a person of unsound mind. Thus, a person who is incompetent to differentiate right and wrong about his act is called a person of unsound mind.

Except the above cases, a person who is capable of understanding the nature of his act and judging right and wrong by evaluating it when he acts, is known as a person having a sound mind. 

Nepalese Laws have not defined the term unsound mind but the Section 506(1) (b) of the Civil Code provides only that a person of unsound mind is incompetent to make a contract. 

According to Section 12 of Indian Contract Act it, “A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, is capable to understand the terms of the contract and to form a rational judgment as to its effect on his interest.”

Further section 12 says 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 makes a contract when he is of sound mind.

Unsoundness of the mind of a person may be due to different factors. Lunatic, Idiots and Drunken or intoxicated persons are considered as a person of unsound mind.

Lunatics: It is a person who is mentally deranged due to some psychological twist or other personal experience. He suffers from irregular intervals of sanity and insanity. Such a person can enter into a contract when he is mentally stable. For instance, a patient in a lunatic shelter having at an interval of sound mind, may enter into a contract but not in the interval of insanity.

Idiots: The person who has lost his mind powers entirely. Or a person who is lasting of unsound mind. Idiocy is lasting whereas Lunacy is momentary. An agreement formed by and with an Idiot is also void.

Drunken or Intoxicated persons: The person who is drunk or intoxicated and is not competent in forming a rational opinion during the period of intoxication or drunkenness. Like a Lunatic, a drunken person can make a contract when his circumstance is steady. 

For example, a sane man J was drunk and entered into a contract in such a situation with K. Such a contract is considered void because J was not able to recognize the terms of the contract entered by him with K.

Effects of contract with a person of unsound mind/Circumstances when incapable persons are liable

Usually, the contract by and with a person of unsound mind is regarded as void contract and cannot create any sorts of legal relationships among the contracting parties. So contracts by insane persons are absolutely void and on behalf of them, their parents or guardian can take the charge for the contract, not them. 

However, they are also liable for necessaries supplied to them or rendered to them just like minors are liable. So a contract made with a person of unsound mind is valid and creates legal obligations for unsound minded persons when it is made for the sake of benefits and interest of such parties.

They themselves cannot enter into any sort of contract directly but on behalf of them their parents or guardian can enter into the contract for their necessaries and benefits and such contracts will create legal obligations. And in case of the supply of necessaries to the person of unsound mind and those who have been living depending on them, the person who has supplied such necessaries fitted to the social and financial condition can recover the price of such goods and services from the property of such persons. However, they are not personally liable similar to the case of minors. 

For example, a trader supplies some articles of food to B, the wife of C who is a lunatic. C has assets worth Rs. 500,000. On non-payment, A can recover from the assets of C for the supply of necessaries. Here if C does not have any assets or property then the supplier cannot take any price form B. 

Section 506(3) of the Civil Code, 2074 states that concluding a contract on behalf of a person who is of unsound mind, his or her guardian may make such a contract for the sake of benefit and interest of such a person. 

Similarly, Chapter 15 of Part 5 of the Civil Code has provided the power to the person who supplies or renders the necessary goods or services to such person have the right to recover the price of such goods or services from the property of such a person. However, such a person is not liable over the range of his or her property.   

Person disqualified by law

The third group of persons who are incompetent to enter into the contract is the person disqualified by any law which they are subject. These persons lack the capacity to create contractual relationships with other persons because the law makes them disqualified and out of the extent of the contract. 

Such types of persons are being disqualified by law because of their special status, position, circumstances, and responsibilities. Following are the persons not qualified to enter into the contract by law:

1. Foreign sovereign and ambassadors
2. Alien Enemy
3. Convicts
4. Professional Persons
5. Corporations

Foreign sovereign and ambassadors

Foreign sovereign or ambassador is the person who is not in his own country. In a contract, a foreigner or an ambassador can take action against his contracting party as per the necessity. However, a local person cannot take action against the foreigner or ambassador without fulfillment of governmental policies, etc. 

Foreign sovereigns and accredited representatives of a foreign state or ambassadors enjoy special privileges, by which they cannot be sued in Nepalese courts. However, they can, if they choose, enter into contracts and can enforce such contracts in Nepali courts. No order can be issued by a national court to the foreign sovereign, ambassadors, and other accredited representatives of a foreign state.

Alien Enemy

All persons other than Nepalese citizens are aliens. When the sovereign or the state of that alien is at peace with Nepal, he is an alien friend. The opposite of it is an alien enemy. An alien friend living in Nepal has full contracting competency subject to certain restrictions, which may be imposed by the Government of Nepal.

In case of an outbreak of war between Nepal and the alien country, the following rules apply for the performance of agreements: - No contract can be made with an alien enemy during the subsistence of war, except with the prior approval of the Government of Nepal. If the contract is created between the two alien parties and thereafter war breaks out between these states, then the contract either end or stays till the end of the war.

Convicts

A convict is one who is found guilty and is imprisoned. During the imprisonment, this person is unable to enter into the contract. His incompetency is over, when the period of his sentence is over or if he is excused. Then he can enter into the contract.

Professional Persons

Some of the persons (i.e., doctor, judge, lawyer, professor, etc.) are deemed to be disqualified to make a contract as to profession due to their high and reputed profession. However, there is different opinion to this regard in England, India, and Nepal. In England, the profession of barristers is regarded reputed so that they are prohibited from suing for their fees.

In India, a senior advocate or advocate can enter into a contract with his client and can also bring a suit against him for the recovery of fees. In the context of Nepal, retired judges of the Supreme Court cannot represent on behalf of his clients. In Nepal, the case accepted by the lawyer on contract prohibited by the Code of Conduct of Lawyers issued by Nepal Bar Council.  

Corporation

It is an artificial person and it enters into a contract through its agent or an authorized person under the legal jurisdiction. It is always limited by MOA of the corporation and company and contract that crosses the jurisdiction cannot be valid.

These persons are neither minor nor persons of unsound mind. It means they are major and mentally sound nut they are disqualified legally to enter any contract. 

Section 506(2) of the Civil Code has made the provision that any person who is deemed incompetent to make a particular contract under the law shall not be deemed to be competent to make such a contract. Their legal status or surrounding circumstances is the main reason for disqualification and they are not able to make contact. So all the contract formed by these classes of persons is void.

Here the point to be noted is that the current Nepalese law has made provision that each woman is equally competent to contract in comparison to men. 

The Civil Code, 2074 has enforced the provision of equality and empowered married women as equal to men in order to form a contract. There is no provision in the Civil Code that excludes women to enter into a contract in which men can conclude.

Legal effect of the contract made by or with persons disqualified by law

Any contract entered by or with the person disqualified by law is declared as a void contract because of following basic reasons;

• If a person who has to work for the benefit of the nation and society or the general public is involved in his own economic or other interests, then the social and national interest may be in crisis.
• When contracting with such persons, if there is any difficulty, it is more difficult to collect the necessary evidence against them and file a case against them to start the process of action and decide the case.
• Even if a court decides on such a person, it is not possible to assume the responsibility as per the decision on the basis of state power.

Therefore, in order to prevent such people from participating in any kind of business contract, the law declares them to be ineligible to join the contract or termed them as the person disqualified by law.

References

Mishra B.P. (2014), Mercantile Law, Kathmandu: Asia Books Distributers

Upreti Shreepraksh(2018), Business Law, Kathmandu: Samjhana Publication Pvt Ltd

Kuchhal M.C. (1978), Mercantile Law, New Delhi: Vikas Publishing House Pvt Ltd