Function of contractual capacity

• All legal systems have rules which deny

contractual capacity to minors, lunatics and
incompetents under certain conditions, only
people of certain age, minimum level of
understanding can bind themselves by contract.
The function of rule of contractual capacity is
protective. It protects those whose mental
powers are not developed or under developed
from loss or injury by their legal declaration and
contracts.
 Capacity and incapacity
Every one is presumed to be competent to
contract, but the law limits the capacity of certain
persons either
1. To bind themselves by a promise or
2. To enforce the promise made to them
The rules limiting contractual capacity is based
on the policy of protecting those under the in
capacity. Incapacity arise from minority of age,
mental incompetence and status (professional
diplomatic etc..
 Concept and definition
 One of the essential element of a valid contract is
the contractual capacity of the parties. It means
the parties must have the legal ability to contract
and enforce the promise. Every person is
presumed to be competent to contract but for
reason of public policy/public order, law holds
that certain class of person lack contractual
capacity.
 Anyone who wants to avoid the contract on the
ground of incapacity must prove such incapacity.
 Contd
• except the following all others are
competent to conclude a contract (sec
506(1) and 506(2)
– Minors
– Persons of unsound mind (Insane)
– Persons disqualified by law
 Contd
• Broadly, contractual capacity may be
defined as a legal ability to bind
themselves to a contract and enforce it.
Civil code 2074 does not define capacity
to contract. But according sec 506(1&2),
certain category of person do not
possess capacity to contract or their
contractual capacity is limited.
 Contd
• ICA, section (10) reads, parties to the contract
must be competent to contract. According to
ICA, section 11, every person is competent to
contract who is of the age of majority, is of
sound mind and is not disqualified from
contracting by any law. In this way, we can see
that in-competency to contract arises from
• (a) Minority (b) mental unsoundness (c) status
 Rules Regarding Minor's Agreement
• A minor is a person who has not attained the age of legal
majority. A person reaches majority in Nepal at 18 years of age.
In India and England the age of majority is 18{family law reform
act 1969 reduced the age of majority from 21 to 18}. In Austria
it is 19, Switzerland 20, Japan 20. according to civil code
chapter on law of persons minor’s can be classified into a)
incapables (sec 33) (b)semi capable (sec 34). The rules
regarding minors agreement are:
1. Minors contract is void from the very beginning
According to sec 517(j) and ICA[sec 11], a minors contract is
void absolutely. He cannot be bound by contract nor can he
ratify the contract after he reaches the age of majority. But in
English law with some exceptions it is voidable at the option of
the minor.
 Contd
Hence as per English law, a minors contract is not completely void
but it is voidable at the option of the minor. He can avoid the contract
on the plea of being a minor but after he reaches the majority he can
also (accept) ratify the contract . But in India it is void ab initio (see
the case of Mohiri bibi v Dharmodas Ghose), but he can become a
promisee or benificiary (Raghav v Srinivas)
2. A contract for minors benefit is valid
Any contract made for the benefit of the minor by his parents or
guardians or guardian by law is valid. But, it should be made only for
the benefit of the minor, there should be no (wrong) mala fide
intention. According to section 506(3), a guardian can enter into a
contract for the benefit of the minor.(Dhrmodas gosh privy council
1903 ).
 Contd
 Any contract of benefit to the minor e.g.
beneficial in his education , training for a
career are binding even if it has some
burdensome terms against the minor.
 But such contracts must be as a whole
beneficial to the minor see the case of Doyle v
white city stadium 1935 & Chaplin v Leslie
Frewin publishers ltd 1966
 Contd
3.Always plea infancy
A minor’s contract is no contract, it is void
from the very beginning. A contract by minor is
void even if the minor enters into a contract by
falsely representing that he was of full age. For
e.g., a minor says that he is 16 years of age and
actually looks that old also and enters into a
contract he has right to plea infancy and avoid
the contract. see the case of Leslie v shiell
(1914)3 k b 607
 Contd
4.Estoppel does not apply to a minor
The rule of estoppel does not apply to a minor.
The evidence law rule of estoppel means a
person cannot deny what he has stated
previously in a legal transaction but this rule
does not apply to the minor. as a contract by a
minor is void by the provisions of the statute
and there cannot be any estoppel against the
statutes
 Contd
5 Minor as a partner
A minor cannot become a partner in a
partnership firm as a full partner but a minor
may with the consent of all the partners be
admitted to the benefits of partnership. He
can share profits not losses and cannot
participate in management(go through the
partnership acts of Nepal and India).
 Contd
6. Restitution of benefit received by the minor
If a minor has received any benefit under a void agreement he
cannot be asked to compensate or pay for it. A lender cannot recover
the money paid to the minor. Even if the minor overstates his age
and enter into the contract he can be compelled to restore the
property or goods only if traceable(case of Leslie v shiell ). In the
case of willful misrepresentation of age, the courts may award
compensation to the plaintiff under specific relief act 1963 (sec 30
&33). But the contracts itself cannot be enforced under the cloak of
restitution (gokeda latcharo v vishanadham bhimayya air 1956 ap
182. A minor may have a responsibility under tort must be
independent from contract for the minor to be liable. In English law
minor is liable for his torts but, he has immunity for breach of
contract hence, only if the tort is liable from the contract he is liable
Food for thought: what are the Nepalese provision as per the civil
code 2074 (sec 661 and 673)? How does it differ from English and
 Contd
7. Position of minor's parents and guardian
As per Indian and English law, Minors' parents or
guardians are not liable for the breach of agreement by a
minor. Any agreement with a minor does not give the
other party any right against the parents even if the
contract is made for the supplies of necessaries of life .
Unlike in civil law systems English law has no all purpose
legal representative (माथवर and
संरक्षक). It also does not have general concept Of
minor’s incapacity to contract.
Food for thought: What do you think is the law in Nepal
after the introduction of Civil code?
 Contd
8.Minors are liable for necessaries
Minor is liable for necessaries of life supplied
to him provided he owns property. If he has
no property the creditors will lose the price of
necessaries supplied to him. Hence there is no
personal liability on a minor for the
necessaries of life supplied to him. Only his
estate is liable to the supplier.
 Meaning of necessaries of life to a minor

• As per the English sale of goods act 1979 sec (3). It refers
to goods suitable to the condition and actual requirement
of the minor at the time of the sale and delivery. Thus it
means goods and services necessary to maintain the
minor as per his social position( case of Nash v Inman
where a minor was excused from paying for eleven fancy
waistcoats .
• NCA sec 11(a) also mentions necessaries of life as goods
or services suitable as per his/her social position .
• But, the new civil code strangely and completely removes
the meaning of necessaries of life provided in NCA 2056
 Contd
 Minors are liable for the supply of not only
necessaries of life but also for things suitable
to his standard of living/ social position and
particular circumstances at the time
 However certain things are outside the range
of possible necessaries see the case of Ryder
v Wombwell and Nash v Inman
 The burden of proof lies with the seller . He
has to prove that the goods were necessary
 Contd
to the minor at the time of sale and delivery if he
wants to recover the purchase price
 He has to show not only the goods were suitable
to the status of the minor but also actually
required by him at the time of sale and delivery
 The point to remember “there is no liability for
undelivered goods”
 Food for thought: As per the new civil code is a
minor’s estate liable or is the minor personally
liable? (sec 661)
 Contd.
9. Cannot be declared insolvent
They cannot be adjudicated insolvent since they are
incapable to take debts. E.g. if the minor is PD the
primary liability lies with the surety.
10. Joint contract by minor and adult
In such case the minor has no liability but the contract
can be enforced against the adult.
11. Cannot become a shareholder
However their guardians can buy shares in his/her
name.
 Contd
12. Valid contracts by minor in Nepal
According to civil code section 506(5), specific
prevailing laws of Nepal can remove the
disqualification of the minor to enter into a
contract. For e.g., a minor who is 14 years of age
can make an employment contract according to
the provisions of Labour Act 2048. In the same
way a minor can make a contract with debtor or
creditor if it is counter signed by his guardian..
But for other contracts a guardian can sign on his
behalf, minors signature is not needed.
 Minors contract under English law
• Are roughly divisible into three classes :–
 void,
 voidable,
 binding,
 Void contracts
• Contracts void against minor :- the following
are absolutely void against the minor
i. Contracts for repayment of money lent or to
be lent
ii. Contracts for goods supplied or to be
supplied (other than necessaries)
iii. All accounts stated for e.g. I owe you and
other admissions of indebtedness
 Contd
iv. Any promise made by a minor to pay his/her
debts after he becomes a major
• Same way
a) A minor does not bear liability by signing a
cheque as drawer, endorser or acceptor(bill of
exchange act)
b) If he/she fraudulently obtains goods under a
void contract he must return but cannot be
made to pay for them(Leslie v Shiell 1914)
 Voidable contract
• Are of two types
i) positively voidable contracts: contracts
requiring express repudiation are those
involving a continuing interest in property of a
permanent nature for e.g. Leases , partnership
agreement, agreements to take share etc. such
a contracts becomes binding when the minor
becomes 18 years of age, unless he expressly
repudiates it before or within a reasonable
time after he becomes a major.
 Contd

• Hence the contracts of permanent or continuous

nature are binding unless made void by the minor
before 18 or within a reasonable time after
becoming a major
ii. Negatively voidable contracts :- They include all
contracts other than contracts for necessaries and
continuous nature contract such as lease, tenancy
and shares in a company. Negative voidable
contracts are voidable at the option of the minor.
 Contd
He can enforce them if he so wants, but the
other party cannot enforce them. Thus this class
of contract made during minority is not binding
on a minor unless ratified by him within a
reasonable time after majority.
• Hence positively voidable contracts are binding
to a minor unless he repudiates it during
minority or after becoming major but negatively
voidable contracts does not bind the minor
unless ratified by him when he becomes a major
 Valid contract
• A minor is bound by two types of contract
i. Executed Contracts for necessaries. But it must
be suitable to his actual need at the time of sale
and delivery of the goods (sale of goods act 1979
sec 3)thus if a minor orders eleven fancy coats
he cannot be made to pay for them since so
many cannot be suitable to his actual
requirements. In the case(Nash v Inman 1908
the court held that the coats supplied were not
necessaries therefore the suit of the tailor failed.
 Contd
ii. Beneficial contracts :-contracts of benefit to
the minor like his education or training for a
career are valid and binding even if it has
some burden some terms, provided the
contracts are as a whole beneficial to the
minor. Go through the case of Doyle v white
city stadium (1935)and Chaplin v Leslie Frewin
(publishers) ltd (1966)
 Liabilities of minor

• In an enforceable obligation
against a minor there are two
theories:-
i) Restitution
ii) Contractual
 i)Liability in restitution
 The liability is restitutionary not contractual i.e. obligation imposed
by law not as a result of valid contract. The restitution is allowed as
long as it does not amount to the enforcement of the contract
indirectly. Even the fraudulent minor is not liable to the contract
despite the fraud. But in some cases equitable relief may be provided
if the goods or money is identifiable and still in minors possession.
(Leslie® ltd v Shiell)
 Apart of rights of restitution based on equity minors contract act
1987 sec 2(1)a & b provides that the courts may restore property
acquired by minor. But if delivered property is consumed or lost there
is no remedy under this act.
 The rule of necessaries is the peculiar feature of English law, despite
his minority a minor must par or necessaries supplied to him.
Necessaries include food, clothes, medicines, education, hire up car
etc for him or for his family.
 The concept of unjust enrichment may apply in the case of minor if the
 ii)Liability in contract
Unless the liability is contractual in nature the minor
will not be liable where the contract is executory [sec
(3) sale of goods act 1979] indicates the obligation
restitutionary as it deals only with necessaries sold
and delivered not with sold and undelivered
(executory). Even for the goods delivered the plaintiff
will not necessarily recover the contractual price but
only a reasonable price for them. Thus minor may be
liable on an executory contract for necessaries
provided that the terms are not onerous. But as per
Anson it is difficult to state the nature of minor’s
liability with assurance
 Purchase of goods other than necessaries

• If the minor contracts for buying goods which are not

necessaries, such contracts are voidable at the option of the
minor. A minor who wants to avoid such contracts need not
sue, he can just inform the other party or plea his minority
as defense to any claim. If the minor has bought goods other
than necessaries he can only claim back the price he paid if
he has used the objects he cannot claim his money back.
This principle is based on equity that a minor cannot be
allowed to claim back what he has given if he cannot return
what he has received (Pearce v Brain). But in USA the minor
may claim back what he paid even if he has consumed or
destroyed or diminished the goods he bought
 Persons of unsound mind
• Rules Regarding contracts made by persons
of unsound mind
One of the essential elements of a valid
contract is the party must be competent to
contract and to be competent to contract the
person must be of sound mind. A person is of
unsound mind if he is not capable of
understanding the subject matter and
consequences of the contract.
 Contd
• Civil code does not give any definition of sound
mind it only provides that a person of unsound mind is
incompetent to contract sec 506(1)-(b)
• According to ICA sec[12 Para (1)] a person is of sound mind
for the purpose of making contract if at the time of
entering into a contract he is capable of understanding the
contract and its consequences.
 Contd.
• From this definition we can say that a person
of unsound mind is a person
I. not having adequate mental capacity to
enter into a contract,
II. unable to understand the subject matter,
nature and results of the contract.
 Contd
• Unsound mind is a mental deficiency/defect of
mind. It may arise broadly from
1. Mental illness
2. Idiocy
3. Drunkenness
• Such person are not able to comprehend in a
reasonable manner the subject matter and the
effects of the contract they make/enter
 Contd
1. Mental illness/defect
Mental illness is known as condition of insanity.
Insane persons are also known as lunatics. They have
lucid intervals. Such person may be occasionally of
unsound mind and usually of sound mind or usually of
unsound mind and occasionally of sound mind
(explanation section 506 (1(b)). They can make a
contract when they are in sound mind and vice versa. A
contract by the lunatics when they are of unsound
mind is void but a contract made by them when they
are normal is valid. Sec 528 provides provisions of
assignment of a lunatic’s contract.
 Difference between lunatics and incompetents

• Like in continental civil codes, our civil code also

differentiates between incompetents and lunatics. A
contract by a lunatic has to be rescinded by proving
that at the time of the contract he was of unsound
mind and the other party knew it. But, incapables
[33(1) 33(2) and 33(3)] are persons who do not have
to bear any legal liability including contractual, they
do not have lucid intervals like lunatics.
• Thus in Nepal incompetents do not have any liability
but, lunatics may have if they contracted during the
lucid intervals.
 English law
• As per mental health act 1983(uk) a mentally
disordered person are patients suffering from
disorder listed in the act. A contract with them is
valid unless the person can prove
i. That he was not in a position to understand what
the contract was about
ii. The other party was aware of this (imperial loan
co v stone(1892), hart v O'Connor (1985)
 As per Indian law a judicially determined mentally
ill person’s contract is void rather than voidable.
 Contd
• 2. Idiocy
An idiot is a person who has completely lost his mental
powers. It is permanent and incurable. He doesn't have
understanding of even ordinary things. Idiots differ from
lunatics. Lunacy is periodical which means they have lucid
intervals of sanity and insanity whereas the idiots do not
have any lucid intervals, his mental powers are weak
permanently. So, an agreement of an idiot is void abinito like
that of minors. The necessaries supplied for the idiots also
depend upon the estate they own which means the rule is
similar as that of minor in Common law. The provisions
earlier as per the contract act 2056 were the same.
Food for thought: What is the new position as per civil code?
 Distinction between incapables and
semicapables
• Civil code places idiots in the category of incapables.
• Like in Germany our civil code draws a distinction between
incapables and semicapable (persons with limited
capability). As per section 33(1) incapables are children
below 10 and person’s who do not understand the nature
and consequences of their act even if they are above 10.
Any declaration of intention or act by them are absolutely
without legal effect. Quasi capable’s contract is
provisionally invalid. It needs ratification of their parents or
their statutory representative to validate it, if not ratified
provision invalidity turns into permanent invalidity but,
incapables legal act remains permanently invalid ab initio.
 Contd
• 3. Drunkenness
The drunkard or intoxicated person suffer
temporary incapacity to contract. They are so
drunk that they are not in a position to
understand the subject, nature and results of the
contract. Their position is similar to that of
lunatics.
• If he wants to avoid the contract he must prove
that - i)he was so drunk hence had no reasoning
mind to give a valid consent ii)the other party
was aware of his mental condition
 Burden of proof
• Under English law contracts made by persons of unsound are
voidable not void.
• The presence or absence of contractual capacity at the time of
the contract is a question of fact
• If someone wants to avoid on the ground of lacking sound
mind the burden of proof rests on him i.e. on him who
challenges the validity of contract. But if unsoundness of mind
is once established the burden of proving a lucid interval is on
the other party (Mohan lal v Binayak 1941 AIR Nagpur 251.
• Persons with mental weakness, mental illness, drunkenness,
lack the capacity to behave in a reasonable manner, hence
without contractual capacity, but they must prove it to avoid
the contract.
 Person disqualified by law
• As per civil code (section 506(2)) and
ICA, minors and persons of unsound mind lack
contractual capacity. Besides them there are
some other persons who are incompetent to
contract partially or wholly. Their
incompetency to contract may arise from
status like legal, political, professional,
diplomatic, corporate, etc. The person
disqualified by law are namely:
 Contd
• 1. Professional people
A barrister in England cannot enter into
a contract with his client about his fees. In
India, an advocate has a right to contract and
sue for fees. But in Nepal a lawyer cannot
make a contract with his clients on the basis of
champerti and maintenance regarding his fees
as per bar council rules.
 Contd
• 2. Alien
An alien person or company can make a valid contract but in
case of war he becomes an alien enemy and cannot enter into
a contract. Contracts make before the war is either suspended
or dissolved. As per English law they cannot sue in British
courts during war time, but can be sued in such case they can
defend, appeal and lodge counter claims either personally or
through agents(porter v Freudenberg 1915)
• 3. Foreign sovereigns and diplomats (immunity and
privileges of foreign states and representatives act 2027)
Any foreign sovereign or diplomats can enter into
contract but they cannot be sued unless they them self waive
their immunity and voluntarily submit to the jurisdiction of the
local courts.
 4. Corporations

• Corporations are artificial persons created by law.

They have a legal existence separate from its
members. Their contractual capacity is limited by the
statute governing them (like food corporation of Nepal
or Nepal Airlines Corporation act). The contractual
capacity of the companies registered under company
acts can enter into a contract within the MOA or bye
laws/AOA, if the contract is beyond MOA it is ultavires.
But as per company act 2063 if a contract is made
beyond the bye laws and liabilities are created the
company is compelled to fulfill it(sec 95(4) & 104)
 5. Insolvents

• Insolvents cannot make contracts

regarding their property until they obtain a
certificate of discharge. The official assignee or
court receiver can enter contract relating to
their property.(go through insolvency act
provisions). But he has contractual capacity in
other matters except his property. After he gets
the discharge he is just like an ordinary citizen.
• Go through the insolvency act 2063 and part 2
chapter 3 of civil code.
 6. Convicts
• A person convicted for crimes like
fraud, robbery, murder, etc. cannot enter in
certain type of government contracts. A
convict while undergoing prison sentence
cannot make a contract but they may enter
into contract after their release.
 7. Married woman
• In India, they’re competent to make
contract about their separate property but they
cannot enter into contracts regarding their
husband's property. In Nepal, previously it was
necessary for a woman to make a contract
about immovable property with the consent of
her husband or son. But these days she has a
right to enter into contract concerning movable
or immovable assets by her own.
 8. Unincorporated bodies
• An unincorporated association has no legal personality
as per English law therefore it cannot contract or sue
or be sued in its name, unless it is authorized by
statutes or by rules of court. But a contract entered
into by or with an unincorporated body is not
necessarily invalid. The person who made the contract
for e.g. secretary or committee o a club may be held
personally liable on the contract. They may be held to
have contracted on behalf of the members of the
association under the rules of agency. (now think
about the Nepalese position?)