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Capacity of parties - Sec 1111. Who are 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, and who is sound mind and is not disqualified from contracting by any law to which he is subject.

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Capacity: Ability to do something, such as the mental ability to make a rational decision. Why capacity is important?

If a plaintiff seeks to enforce a contract, he must prove that the defendant had legal capacity to enter into a contract. Capacity is an essential element of a contract because it shows that a party understood the contractual obligation.

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Contd -

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MinorPerson domiciled in India, who is under 18

years of age.Law protects minor’s rights because they are

not mature and may not possess the capacity to judge what is good or what is bad

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Position of minor’s agreement

Validity – An agreement with a minor is void-ab-intioCase – Mohiri Bibee vs Dharmdas Ghosh

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Position of persons of unsound mindWho is a person of unsound mind

Sec 12 - 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 – (a) to understand the terms of the contract. (b) to form a rational judgment as to its effect upon

his interests Ex ; idiots, lunatic, drunken person

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Position of agreements with persons of unsound mindPersons of unsound

mind

1. Lunatic

(a) while he is of unsound mind

Capacity to contract

He cannot enter into any contract. Any agreement entered into by him during this period is altogether void and he cannot be held liable thereon.

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Contd-b) While he is of sound

mind

(II) Idiots

He can enter into a valid contract and he is liable for such contract.

He cannot enter into any contract. Any agreement entered by him is void and he is liable thereon.

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ContdDrunken person He cannot contract

while such delirium or drunkness lasts

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Persons disqualified by lawAlien enemies – cannot enter into any

contractsForeign sovereigns and ambassadors –

can enter into contracts enforce those contracts in our courts but cannot be sued in our courts without the sanction

of the central government

Convicts – Cannot enter into any contract during the period of the sentence

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Example of Alien

X, an Indian carries on a business in Pakistan.He enters into a contract with Y who carries on business in India. Immediately after the formation of the contract, a war broke out between India & Pakistan. In this case X becomes an alien enemy though he is an Indian and the contract between X & Y (if not against public policy) will be suspended for the duration of the war and revived after the war is over.

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Contd -Company –

Contractual capacity is determined by the ‘object clause’ of the memorandum of association.

Any act done in excess of the power given is ultra vires [(i.e) beyond the power] and hence void.

Insolvent –Cannot sue and be sued. Cannot enter into contracts relating to his

property. When the insolvent is discharged the

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ConsiderationWithout which no single promise is

enforceableA technical term used in the sense of quid

pro quo (ie, something in return).When a party promises to do something

he must get ‘something in return’. This something is defined as consideration.

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Section 2(d)“When at the desire of the promisor, the

promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise”.

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Contd -

Ex – X promises to deliver the goods to Y and Y promises to pay Rs 1000 on delivery. In this case, the consideration for each of these promises is as under:For X’s promise - Y’s promise to pay Rs 1000

on deliveryFor Y’s promise – X’s promise to deliver the

goods

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Elements of valid consideration

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Essential elementsMove at the desire of the promisor – An act

constituting consideration must have been done at the desire or request of the promisor.Case – Durga Prasad vs Baldeo

May move from any person – immaterial as to who furnishes the considerationCase – Chinnayya vs Ramayya

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Contd -It may be past present or future It must be of some value.It must be real and not illusorySomething other than the promisor’s existing

obligation Case – Ramachandra Chintamana vs Kala

Raju

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Stranger to contractA stranger to consideration – can sue

because the consideration can be furnished or supplied by any person whether he is a promisee or not

A stranger to the contract - cannot sue because of the absence of the privity of the contractCase – Dunlop P tyre Co ltd vs Selfridge&Co

Ltd

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Contracts without consideration(Exceptions to general rule,no consideration, no contract )Agreements made on account of natural love

and affectionPromise to compensate for past voluntary

servicePromise to pay a time barred debtCompleted giftAgency

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Free consent It is essential to the creation of the contract

that the parties are ad idem,ie, they agree upon the same thing in the same sense at the same time and their consent is free and real.

Consent means an act of assenting to an offer.

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Sec 13“Two or more persons are said to consent

when they agree upon the same thing in the same sense.”

Effect of absence of consent – When there is no consent at all, the agreement is void ab-intio, ie, it is not enforceable at the option of either party.

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FREE CONSENTTwo or more persons are said to consent

when they agree upon the same thing in the same sense. (Section 13) 

Example: A agreed to sale car to B. But A has to cars X and Y. A thought of selling car X whereas B thought of purchasing car Y.

no consent =>no contract as there was no meeting of mind

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Free consentSec 14

Consent is said to be free when it is not caused by (a) coercion (b)undue influence (c)fraud (d)misrepresentation or (e) mistake

No free consent – contract is usually voidable

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Contd-

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CoercionSec 15

A contract is said to be caused by coercion if it is obtained by (a) committing any act which is forbidden by the

Indian Penal Code (b) threatening to commit any act which is

forbidden by the Indian Penal Code (c) Unlawful detaining of any property (d) threatening to detain any property

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CaseCase 1Ranganayakam vs Alwar Shetty, (1889) 13

Mad 214The relatives of a young widow threatened

her that they would not allow her to cremate the dead body of her husband unless she consented to the adoption of a boy as her son.

Held: The adoption is not binding on her on account of coercion

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CaseMuttiah Chettiar vs Koruppen Chetty(1927) 50 Mad 786A person secured a release from liabilities

from his principal by refusing to hand over the books of account. The release deed was held to be voidable of the option of the principal.

Effect of coercion: Contract is voidable at the option of the party whose consent has been caused by coercion.

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Undue influenceDominating the will of the other person to obtain

an unfair advantage over the otherSometimes the parties to the agreement are

related in such a way that one of them is able to dominate the will of the other.

It creates a mental or moral fear created by coercion. Consequently the party on whom undue influence is exercised is indirectly compelled to enter into the contract

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Contd-Ex: A, having money advanced money to his

son B during his minority, upon B’s coming of age, obtains by parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence

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Fraud-Sec 17 "Fraud" means and includes any of the following acts

committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract:-

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to

be fraudulent.

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Contd-Explanation.- Mere silence as to facts

likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

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Illustrations

a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A.

(b) B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse, is unsound.

 

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Contd-(c) B says to A - "If you do not deny it, I shall

assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech.

(d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B.

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EffectSuit for recissionSuit for damages for fraud

Right of recession lost if—Affirmation of the contract even after

becoming aware of the fraud

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MisrepresentationA false representation of fact made

innocently or non-disclosure of a material fact without the intention to deceive the other party

Aggrieved party can avoid or rescind the contract

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Contd-Ex: A tells B, without checking records, that

in his factory 1000 tons of indigo is manufactured every month. A believes his assessment to be true. The actual production is found to be only 830 tons. A is guilty of misrepresentation.

Effect: Right to rescind the contract

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MISTAKE

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Mistake

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MistakeBilateral/Mutual Mistake of Fact

If both parties to an agreement are under a mistake as to a matter of fact essential to the agreementEffect: Void Agreement

An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact.

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ESSENTIAL OF A VALID CONTRACT FREE CONSENT (MISTAKE)ExamplesA agrees to sell to B a specific cargo of goods

supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the facts. The agreement is void.

A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.

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ESSENTIAL OF A VALID CONTRACT FREE CONSENT (MISTAKE)Unilateral Mistake of one party as to matter

of fact.Effect: Not voidable

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Sec21. Effect of mistakes as to law A contract is not voidable because it was

caused by a mistake as to any law in force in India; but a mistake as to a law not in force in [India] has the same effect as a mistake of fact.

IllustrationA and B make a contract grounded on the

erroneous belief that a particular debt is barred by the Indian Law of Limitation: the contract is not voidable.

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ESSENTIAL OF A VALID CONTRACT FREE CONSENT (MISTAKE)Mistake as to Indian law

Effect: not voidableMistake as to foreign law

Effect: not voidableExample A and B make a contract grounded

on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. The contract is not voidable.

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Legality of the object and considerationObject and consideration of contract must

be lawful, otherwise the agreement is voidConsideration or object of contract is

unlawful in the following cases:(a) If it is forbidden by law(b) If it defeats the provision of any law(c) If it is fraudulent(d) If the court regards it as immoral or

opposed to public policy

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Contd-If considerations and objects unlawful in

part is unlawful,.Effect: the agreement is void

Example: A promises to superintend, on behalf of B, a

legal manufacture of plants, and an illegal traffic in other articles. B promises to pay to A a salary of 10,000 rupees a year.

The agreement is void, the object of As promise, and the consideration

for Bs promise, being in part unlawful.

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Agreements opposed to the public policyAgreements of trading with the enemyAgreement of stifling prosecutionAgreement in restraint of paternal rightsAgreement in restraint of personal libertyAgreements in restraint of trade

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Other essentials Certainty of meaning – terms of contract

must be unambiguousPossibility of performance – An agreement

to do an impossible act is void Legal formalities - Must comply with

necessary formalities like writing, registration and stamping

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Examples of uncertain/certain agreements

a) A agrees to sell to B " a hundred tons of oil ".

The agreement is void for uncertainty. There is nothing whatever to show what kind of oil was intended.

(b) A, who is a dealer in coconut-oil only, agrees to sell to B"one hundred. tons of oil".

The nature of As trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of coconut-oil.

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Contd-(c) A agrees to sell to B one hundred tons of oil of

a specified description, known as an article of commerce.

There is no uncertainty here to make the agreement void.

(d) A agrees to sell to B " my white horse for rupees five hundred or rupees one thousand".

The agreement is void, There is nothing to show which of the two prices was to be given for buying the horse.

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