Chapter 5 Capacities of parties business law.pptx

Business law

1. Legal Environment of Business Chapter 5: Capacity of Parties by Barrister Shahrina R. Juhi Bar-at-Law, MBA, LL.B, Diploma in Law

2. AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO LEARN: Definition of capacity of the parties Competent persons Incompetent persons Minor and minor’s agreements Persons of unsound mind Disqualified persons L E A R N I N G O B J E C T I V E S

3. An essential ingredient of a valid contract is that the contracting parties must be ‘ competent to contract ’ (Section 10, Contract Act 1872). Minors , the mentally insane , and  persons who are under the influence are not considered to be of legal capacity to enter into a contract. What is Capacity of the Parties

4. Every person is competent to contract who is of the age of majority according to the 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. C ompetent Person

5. A person is incompetent to contract if he is – a minor, according to the law to which he is subject, of unsound mind, and disqualified from contracting by any law to which he is subject. Incompetent Person

6. According to Section 3 of the Indian Majority Act 1875, a person, domiciled in India, who is under 18 years of age is a minor. Who is a Minor ?

7. Rules Regarding Minor’s Agreement An agreement by a minor is absolutely void and inoperative as against him. Beneficial agreements are valid contracts No ratification on attaining the age of majority The rule of estoppel does not apply to a minor Minor’s liability for necessaries Specific performance

8. Rules regarding minor’s agreement 7. Minor partner 8. Minor agent 9. Minor and insolvency 10. Contract by minor and adult jointly 11. Surety for a minor 12. Position of minor’s parents 13. Minor shareholder 14. Minor’s liability in tort.

9. 1. An agreement by a minor is absolutely void and inoperative as against him Law acts as the guardian of minors and protects their rights, because their mental faculties are not mature - they don’t possess the capacity to judge what is good and what is bad for them. Example – If the minor has obtained any benefit , such as money on a mortgage, he cannot be asked to refund, nor can his mortgaged property be made liable to pay.

10. 2. Beneficial agreements are valid contracts Any agreement which is of some benefit to the minor and under which he is required to bear no obligation, is valid. Money advanced by a minor can be recovered by him by a suit because he can benefit from it.

11. Examples of Beneficial Agreements A minor purchaser of immovable property was held entitled to recover possession of property purchased from his vendor, when refused by vendor. Where a minor had performed his part of the agreement and delivered the goods, he was held entitled to maintain a suit for the recovery of their price.

12. 3. No ratification on attaining the age of majority Ratification means the subsequent adoption and acceptance of an act or agreement. It is necessary for a valid ratification that the person who purports to ratify must be competent to contract at the time of the contract.

13. 4. The rule of estoppel does not apply to a minor Estoppel Estoppel means, if a person makes a statement that misleads another person, he cannot deny the same statement in the future when his obligation in respect of his statement arises. The doctrine of estoppel prevents a party to state something which contradicts his previous statements. Thus, the minor is not estopped from presenting the defense of infancy.

14. 4. The rule of estoppel does not apply to a minor A minor is not estopped from pleading his infancy in order to avoid a contract, even if he has entered into an agreement by falsely representing that he was of full age.

15. Example : In the Mohori Bibee v/s Dharmodas Ghose case , Dharmodas Ghose, a minor,  mortgaged  his property in favour of a moneylender, Brahmo Dutt , against the loan of Rs 20,000. Dutt's attorney, acting on behalf of him, was aware of Ghose's minority. Ghose, through his mother and guardian, sued Dutt claiming that the mortgage was void due to his minority. The Court of First Instance held in Ghose's favour , and on appeal, the  High Court of Judicature at Fort William  upheld that decision. 

16. 5. Minor’s liability for necessaries A minor is not personally liable, it is his property only which is liable. If a minor owns no property, the supplier will lose the price of necessaries. Where a minor owns property, the suppler will get a reasonable price and not the price agreed to by the minor.

17. 5. Minor’s liability for necessaries A supplies B, a minor, with rice needed for his consumption. A can recover the price from the minor’s property.

18. 6. Specific performance Specific performance means the actual carrying out of the contract as agreed. Since an agreement by a minor is absolutely void, the court will never direct ‘specific performance’ of such an agreement by him.

19. 7. Minor partner A minor being incompetent to contract cannot be a partner in a partnership firm But he can be admitted to the ‘ benefits of partnership’ with the consent of all the partners by an agreement executed through his lawful guardian with the other partners.

20. 8. Minor Agent A minor can be an agent. He shall bind the principal by his acts done in the course of such an agency, but he cannot be held personally liable for negligence of breach of duty.

21. 9. Minor and Insolvency A minor cannot be adjudicated an insolvent, for, he is incapable of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his property is liable.

22. 10. Contract by minor and adult jointly Where there was a joint purchase by two people, one of whom was a minor, it was held that the vendor could enforce the contract against the major buyer.

23. 11. Surety for a minor Where in a contract of surety, an adult stands for a minor, the adult is liable under the contract, although the minor is not. Example : A advances a loan of Taka 10,000 to B, and C promises A that if B does not repay the loan, I will repay it. This is a  contract of surety .

24. 12. Position of minor’s parents The parents of a minor are not liable for agreements made by a minor, whether the agreement is for the purchase of necessaries, or not.

25. 13. Minor’s Agreement A minor, being incompetent to contract, cannot be a shareholder of the company.

26. Persons of Unsound Mind Section 12 of the Contract Act defines – “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 effects upon his interests.”

27. Causes of unsoundness Unsoundness of mind may arise from – a) Idiocy – it is God given and permanent b) Lunacy or Insanity – it is a disease of the brain c) Drunkenness – it produces temporary incapacity till the drunkard is under the effect of intoxication. d) Hypnotism – it also produces temporary incapacity till the person is under the impact of artificially induced sleep. e) Mental decay – on account of old age, etc.

28. Effects of agreements made by persons of unsound mind An agreement by a person of unsound mind is absolutely void and inoperative as against him but he can derive benefit under it. The property of a person of unsound mind is always liable for necessaries supplied to him or to any one whom he is legally bound to support.

29. Disqualified Persons a) Alien enemies : Alien means citizens of an enemy country. b) Foreign sovereigns and ambassadors : They are in a privileged position and are ordinarily considered incompetent to contract. c) Convict : A convict is one who is found guilty and is imprisoned.

30. Disqualified Persons d) Insolvent : An adjudged insolvent is competent to enter into certain types of contracts, i.e., he can incur debts, purchase property or be an employee but he cannot sell his property which vests in the Official Receiver. e) Joint-stock company and corporation incorporated under a special Act : A company/Corporation cannot enter into contracts outside the powers conferred upon it by its Memorandum of Association or by the provisions of the special Act.

31. Any Questions?