COMPETENCY OF PARTIES TO CONTRACT- PERSONS DISQUALIFIED BY LAW AND ARTIFICIAL PERSONS

 Section 10 prescribes that only parties competent to contract can enter into a valid contract. Section 11 lays down three categories of persons who are not competent to contract-

1.      Minors

2.      Persons of Unsound Mind

3.      Persons disqualified by law

We have discussed the competency of minors and persons of unsound mind in previous articles. In this article, we will discuss the competency of persons disqualified by law to enter into a contract.

Persons disqualified by law are several classes of persons who are disqualified by provisions under certain legislations from entering into contracts with respect to particular matters specified in such legislation. Such persons are disqualified to enter into some types of contracts which if allowed would put them in a position in which they can misuse their position or may be tempted to use the influence of their position to acquire the results that benefit them the most. Some examples of such disqualification by legislations are as follows:

1.     Section 75 of the Patents Act, 1970-

“All officers and employees of the patents office shall be incapable, during the period for which they hold their appointments, to acquire or take, directly or indirectly, except by inheritance or bequest, any right or interest in any patent issued by that office.”

For example, A is a patent officer in the Patents registration office of Pune. A company LawVastutah files for a patent for its new AI technology. A cannot do any business (for e.g. buying shares) with LawVastutah in any way as it would put A in a position to misuse his position to gain benefits.

This incapacity is subject to the exception that such officers can take or acquire interest by inheritance or bequest.

2.     Section 75 of the Indian Forests Act, 1927-

“Except with the permission in writing of the ⁵¹[State Government], no Forest-officer shall, as principal or agent, trade in timber or other forest-produce, or be or become interested in any lease or any forest or in any contract for working any forest, whether in or outside ⁵³[the territories to which this Act extends].”

Section 75 explains that any Forest officer cannot enter into any contract for the trade of timber or any other forest-produce OR any contract for the ownership or control of the operations in any forest where this act applies.

3.     Section 136 of the Transfer of Property Act,1882-

“No Judge, legal practitioner, or officer connected with any Court of Justice shall buy or traffic in, or stipulate for, or agree to receive, any share of, or interest in, any actionable claim, and no Court of Justice shall enforce, at his instance, or at the instance of any person claiming by or through him, any actionable claim so dealt with by him as aforesaid.”

Thus, this section specifies the class of persons who cannot be transferees of actionable claims.

(actionable claim- a claim to an unsecured debt or a claim to any beneficial interest in movable property not in actual or constructive possession of the claimant. Transfer of actionable claim is also a transfer of property.)

Section 136 thus postulates that a judge, a legal practitioner, or an officer of the court cannot buy or traffic or stipulate, or agree to receive any share or interest in any actionable claim. Further, if any instance any such claim is made by such persons or anyone else is claiming through such persons, no court of justice will enforce such enforceable action claimed. The intent of this section was described in the case of Rathanasami v. Subramanya. The court opined that

“The intention of the former section was said to be that officers attached to a court should not be placed in a position in which they may be tempted to use the influence or the information which they may have acquired by virtue of their possible connection with the transaction of business in the court, to the prejudice of persons who might have to resort to it for the adjudication of actionable claims.”

It was also held by the Privy Council in the case of Kerakoose v. Serle  that

“It is of great importance in all countries, and more particularly in a country like India, that no officer of a Court of Justice should be even exposed to the suspicion that in the discharge of his official duties his conduct may be influenced by any personal consideration. The section is therefore analogous to Order XXI, rule 73, of the Civil Procedure Code, 1908, which provides that no officer or other person having any duty to perform in connection with any sale shall, either directly or indirectly, bid for, acquire or attempt to acquire any interest in the property sold.”

4.     Section 52 of Indian Trusts Act, 1882-

“No trustee whose duty it is to sell trust-property, and no agent employed by such trustee for the purpose of the sale, may, directly or indirectly, buy the same or any interest therein, on his own account or as agent for a third person.”

This section prescribes that a trustee who is imposed trust in to sell the property for the benefit of the beneficiary cannot enter into a contract of trade for such property i.e. cannot buy the same property or any interest in the property for himself or as an agent for a third person. This incapacity has an exception that the trustee can enter into such a transaction if the court thinks that it for the benefit of the beneficiary.

In all the above provisions, certain classes of persons are disabled from entering into a contract due to the position they hold like patent officer, forest officer, judge or legal professional, trustee, etc. This list is not exhaustive. These are just some examples and there are several more provisions that disable persons from entering into a contract due to their legal status or position. This incompetency is temporary i.e. those persons are disqualified only as long as they hold their office. After they retire or stop occupying the office, they also automatically become competent to contract.

There are also several other categories of people whose competency to contract needs to be discussed here. They are;

1.      Alien Enemy-

Any person other than the citizens of India is an alien. If the person is a citizen of a country that India is with peace right now is an alien friend. An alien enemy is a citizen of a country that India is at war with. An alien friend living in India has full contracting capacity except to some restrictions which the Government of India may impose upon them. Any contract made with an alien enemy during the period of war is void except if it is made with the prior permission of the Government of India as it is opposed to the public policy. Any existing contract is suspended until the end of the war which can be revived by the parties after the war if it is not barred by limitation.

 

2.      Convicts-

A convict who is sentenced by a competent court is incompetent for entering into a contract until he/she has completed his/her sentence or has been pardoned. He/she regains his/her capacity to contract after the completion of the sentence.

 

3.      Insolvent-

Insolvency of an individual does not per se operate as the cancellation of a contract. An insolvent is prohibited from transferring, encumbering, alienating, or disposing of any of its assets or any legal rights or beneficial interest in the assets (Section 14(b) of Insolvency and Bankruptcy Code,2016). He/she cannot enter into a contract concerning the sale of his/her property which is vested in the Resolution Professional.

[The property of the bankrupt vests in the Interim Resolution Professional and later on the Resolution Professional during the course of insolvency proceedings. The resolution professional is appointed by the adjudicating authority under the Insolvency and Bankruptcy Code, 2016.]

In a case Sakhamuri Peraya v. Nimmaraju Kondayya, an insolvent executed a sale deed before the insolvency suit was initiated, the registration of which took place during the course of the insolvency proceedings. The court held the sale deed valid and binding on both the properties.

 

4.      Married women-

The capacity of a woman is not affected by her marital status under any personal law. A woman can enter into a contract in respect to her own properties (Stridhan). Such a woman will be liable herself for any contract that she makes (Section 7 and 8 of the Married Women’s Property Act, 1874). Therefore, the contractual capacity of a married woman is the same as a man or when she was unmarried.

The husband does not acquire any interest in the property of the wife after marriage (Section 20 of the Indian Succession Act, 1866). She has absolute ownership over her own property.

The wife cannot act as the husband’s agent without his authority and bind him by a contract unless it is for the purpose of necessaries which he is not providing her.  [(1880-82) ILR 3-4 All 67 (in case of pressing necessity)]

 

CONTRACTUAL CAPACITY OF ARTIFICIAL LEGAL PERSONS-

Under the contract act, the scope of the definition of a person is extended. It also includes artificial persons along with natural persons.  

[Natural person- a person created by the process of natural birth

Artificial person- a person created by the operation of law]

 

1.     The central and state governments-

According to the constitution of India, the executive power of the central and state governments extends to the purpose of making contracts for trade. This power is bestowed upon the government by article 298 of the constitution of India. Article 299 prescribes the conditions that are to be fulfilled to make the contract made by the government enforceable in a court of law.

 

2.     Statutory bodies-

A statutory body is expressly conferred with the capacity to the contract by the statute under which they are constituted. For e.g. Section 7 of Competition Act, 2002- competition commission of India is a body corporate; Section 5 of the Advocates Act, 1961- bar council of India is a body corporate; Section 3 of The Chartered Accountants Act, 1949; Section 3 of The Life Insurance Corporation Act, 1956.

[body corporate- a body having the power to contract and to acquire and hold property(movable/immovable).]

 

3.     Companies-

A company is an artificial person created by law. It has the same powers and rights as those of a natural person. Once a company is incorporated under the Companies Act, 2013 it is granted the status of a body corporate. So, it can enter into a contract with respect to the affairs of the company.

A company has no capacity to contract before its incorporation as it does not assume the status of an artificial legal person yet. However, a plain reading of section 15(h) and section 19(e) of the specific relief act, 1963 indicate that a pre-incorporation contract can be enforced either by the company or the other party if –

i.                 the contract is warranted by the terms of the incorporation, and

ii.               it is accepted by the company after its incorporation, and

iii.             such acceptance is communicated.

 

4.     Artificial Intelligence-

Artificial Intelligence does not have the capacity to contract yet as it is not accorded the status of a juristic person yet by the Indian Courts. Various theorists have argued the need for AI to be declared as a legal person however until it is declared so by the courts its competency to enter into a contract is questionable.

 

We have discussed all the aspects of the competence of parties to enter into a contract. In the next article, we will discuss the next essential of a contract i.e. free consent. Stay Tuned!

 

BY

LAWVASTUTAH

 

REFERENCES-

1.     Indian Contract Act, 1872.

2.     Pollock & Mulla, The Indian Contract and Specific Relief Acts, 16th edition.

3.     Anson’s Law of Contract, 29th edition.

4.     Halsbury’s Laws of India Contract, 2e 2015.

5.     Abhay Pandey, Who are Incompetent to Contract?, Available at- https://blog.ipleaders.in/who-are-incompetent-to-contract/#:~:text=An%20alien%20enemy%20is%20a%20person%20whose%20country,with%20the%20prior%20approval%20of%20the%20Indian%20Government.

6.     Rathanasami v. Subramanya, (1888) ILR 11 Mad 56.

7.     Kerakoose v. Serle, (1846) 3 Mad IA 329, p 346.

8.     Sakhamuri Peraya v. Nimmaraju Kondayya, AIR 1948 Mad 430: 1948 Mad 872.