Contract Case

CONTRACTS PROJECT MONSOON SEMESTER 2018-19

PROBLEM 2 MINOR’S CAPACITY TO CONTRACT

THIS PROJECT HAS BEEN SUBMITTED BY-

AATMIK JAIN I YEAR 218066

SECTION-B CONTENTS FACTS ........................................................................................................... 3 ASSUMPTIONS ........................................................................................... 3 INTRODUCTION.......................................................................................... 3 ISSUES .................................................................................................... 3 COUNSEL FOR THE BANK ............................................................................... 5 COUNSEL FOR THE MINOR ............................................................................. 5 JUDGEMENT ............................................................................................. 7 BIBLIOGRAPHY ......................................................................................... 10

FACTS A is admitted to a top law school at the age of 17. For the purpose of pursuing the education and meeting the expenses at the college, A visits the bank and applies for an education loan. While filling the loan application, A deliberately represents his age as 18. Will A be able to get the loan from the Bank? Give your opinion supported by relevant reasons. ASSUMPTIONS 1. The application form was accepted by the bank. 2. The bank has refused to disburse any amount of loan money to the minor due to discovery of his misrepresentation of age. INTRODUCTION The minor has deliberately misrepresented his age to portray himself as a major and therefore be competent to enter into a contract. The bank has refused to disburse the loan amount to the minor citing the fact that a minor is not competent to contract. The bank argues that even if there was a contract, the fact that the minor deliberately misrepresented his age amounts to fraud and hence, the contract is voidable. The minor pleads that the education loan is a necessary, which leads to the contract being valid. Further, it is argued that the bank did not exercise ordinary diligence while checking the claims made on the application form and therefore, the minor cannot be put to loss for the bank’s fault. He moves the court for the enforcement of the contract and the disbursement of the loan amount on the basis of the said contract. ISSUES The main contention that is to be considered is whether it was a valid contract? The above question is answered if we look into the following issues 1. Was the minor competent to enter into a contract? 2. Was this a contract for a necessary? 3. Does the act of the minor amount to fraud?

COUNSEL FOR THE BANK The Bank argues that the plaintiff, being 17 years of age, was a minor according to §3 of the Indian Majority Act, 1875,1 at the time the contract was entered into. This means that the plaintiff was incompetent to enter into a contract according to §11 of the Indian Contract Act, 1872 (hereinafter ICA). If we read §10 and §11 of the ICA together, we learn that the following agreement cannot become a contract due to incompetence of the plaintiff. This was established in the case of Mohori Bibee v. Dharmodas Ghose.2 ICA states that for an agreement to become a contract, the parties must be competent to contract, wherein age of majority is a condition for competency.3 Alternatively, §17(1) of the ICA defines fraud as, the suggestion, as a fact, of that which is not true, by one who does not believe it to be true.4 The Supreme Court in Bhaurao Dagdu Paralkar v. State of Maharashtra held “......’Fraud is proved when it is shown that a false representation has been made (i) knowingly, or (ii) belief in its truth, or (iii) recklessly, careless whether it be true or false.”5 The plaintiff had full knowledge of his minority and deliberately misrepresented his age. His act, therefore, amounts to fraud. The bank had no intention to enter into a contract with a minor. The fraudulent misrepresentation by the plaintiff led to the bank accepting the loan application. The contract is therefore voidable at the option of the aggrieved party i.e. the bank, according to §19 of the ICA.6 The conclusion drawn is that the contract between the bank and the minor is non est because of the incompetence of the minor to enter into a contract. Even if the court decides on the existence of a valid contract, we contend that it will be voidable at the option of the bank.

COUNSEL FOR THE MINOR 1

The Indian Majority Act, 1875, §3 (“Every other person domiciled in India shall be deemed to have attained his majority when he shall have completed his age of eighteen years and not before”). 2

Mohori Bibee v. Dharmodas Ghose, (1903) 30 Cal. 539.

3

Mathai Mathai v. Joseph Mary and Ors., AIR 2014, SC 2277.

4 The 5

Indian Contract Act, 1872, §17(1).

Bhaurao Dagdu Paralkar v. State of Maharashtra, (2005) 7 SCC 605.

6 The

Indian Contract Act, 1872, §19.

It is submitted that all the ingredients required to make a contract have been satisfied. There was a proposal by the plaintiff when he submitted his loan application. The bank accepted the application, the offer herein leading to an acceptance. The consideration for the plaintiff is the loan amount and for the bank it is repayment in future. Both the parties also had legal intention to enter the same. These steps have led to a valid agreement which leads to a contract. The defendant cannot rescind the contract by pleading fraud. Exception 1 of §19 of the ICA says that a contract is not voidable if the aggrieved party had the means of discovering the truth with ordinary diligence.7 Following this, the bank should have performed ordinary diligence to find out the truth of the claims made by the minor in his application. A bank is a commercial institution and has the responsibility to make sure that all the information provided in the application is correct before accepting it. In the case of Classic Motors Pvt. Ltd. the court set aside an arbitration award which did not take into account the vital information that a commercial entity having vast experience could have discovered the truth with ordinary diligence.8 The plaintiff had misrepresented his age in the application but the bank had nevertheless accepted it. Therefore, it is submitted that the contract should not be declared to be void as the bank did not exercise ordinary diligence to detect the fraudulent misrepresentation. The plaintiff has now taken admission in college and is in immediate need of money to deposit his fees. He depends on the loan amount to meet the expenses and we therefore, request the court to order the bank to respect the contract and disburse the loan amount as agreed. Admittedly, minors are not allowed to enter into contract because they are thought to be incapable of giving free consent.9 In certain cases, however, minors have been allowed to enter into contracts for their benefit. §68 of the ICA states that a minor can enter into a contract for necessaries and the creditor has a right to get reimbursement from the estate of the minor in lieu of providing such necessaries. There is diversity in the meanings given to the word “necessaries”. It extends to contracts for minors benefit and particular to contracts 7

The Indian Contract Act, 1875, Exception to §19, “if consent is caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.” 8

Classic Motors Pvt. Ltd. and another v. Goyal M. G Gases Pvt. Ltd. and Another, (2018) DEL 1376.

9POLLOCK AND MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS,

2012).

Vol.1 374 (Nilima Bhadbhade, 13th ed.,

of apprenticeship, education and service.10 Money advanced for necessary purposes is money advanced for necessaries.11 Necessaries include the expenses of education and instruction suited to the social state in which the infant is.12 Education in a university is what is suited at the age of 17. This means that the loan provided for the education of a minor will be a loan for necessary and the bank is liable to hold the estate of the minor for reimbursement if the minor rescinds the contract in future. The bank therefore should be ordered to enforce the contract. JUDGEMENT The plaintiff argues that there is a contract which should be enforced per contra the defendant denies the existence of any contract in the first place. The question whether a contract is void or voidable presupposes the existence of a contract within the meaning of the Act, and cannot arise in the case of an infant.13 In the case of an infant the agreement is said to be void ab initio and therefore results in no contract. The ICA makes it essential that all contracting parties should be “competent to contract”.14 Infancy in India is a fact and not a privilege as in English law. The law in India assumes that minors are incapable of giving free consent and therefore incompetent to contract. In Ritesh Agarwal v. SEBI the Court held that,a person who is competent to contract must be of the age of majority as only such person has the ability to make a promise or an offer.15 Since the plaintiff was of 17 years of age at the time of entering into the agreement, he is not a major and, therefore, is incompetent to contract. No contract exists between the plaintiff and the defendant. The question of necessaries has been raised by the plaintiff. However, necessaries in §68 of the ICA is a plea that the creditor to the minor raises for the enforcement of the contract. It is a section which assures the creditor reimbursement from the minor’s estate if the minor fails 10 CHITTY ON CONTRACTS, 11 DUTT ON CONTRACTS,

Vol.1 8-004 (29th ed., 2004).

504 (Saharay, H.K., 9TH ed.).

12 Ibid. 13 Mohori

Bibee v. Dharmodas Ghose, (1903) 30 Cal. 539.

14 Ibid. 15 Ritesh

Agarwal v. SEBI, (2008) 8 SCC 205.

to provide the money that was lent for the minor’s or his dependent’s necessaries. The creditor here is the bank. The question of necessaries only becomes relevant if the existence of a contract is established and its performance is ordered. Since no contract exists in the first place and the bank doesn’t intend to provide any necessaries it cannot be compelled to do so. The court does not hold the existence of any contract. The question of fraud, therefore, doesn’t arise. However, since the plaintiff has raised the question of ordinary diligence, it becomes important to make it clear how the exception to §19 is pleaded. The difficulty has been caused by the punctuation, namely, a comma after the word ‘silence’, which seems to indicate that the words fraudulent within the meaning of the section apply, both to misrepresentation, and to silence. However, these words refer to silence exclusively.16 Thus, the defence of ordinary diligence cannot be taken to enforce a contract if the agreement was induced by fraud. The only exception to this is fraudulent silence. The case of a person who is wishing to sell his house causes bogus offers to be made to him comes under the section and not the exception.17 Similarly, in the present case even if there had been a contract, it would be voidable at the option of the aggrieved party i.e. the bank. The case of the plaintiff, therefore, wholly fails. It is held that there is no contract between the plaintiff and the defendant due to incompetence of the plaintiff to enter into the same. The submissions of the defendant are accepted and it need not disburse any loan amount to the plaintiff as the contract stands void ab inito.

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16 17

DUTT ON CONTRACTS, 211 (Saharay, H.K., 9TH ed.).

Niaz Ahmed Khan v. Parsottam Chandra, AIR 1931 ALL 154; Governor of Orissa State v. Shiva Prasad, AIR 196 Ori 217.

BIBLIOGRAPHY

Cases Governor of Orissa State v. Shiva Prasad, AIR 196 Ori 217.................................................................7 Bhaurao Dagdu Paralkar v. State of Maharashtra, (2005) 7 SCC 605. ...................................................4 Classic Motors Pvt. Ltd. and another v. Goyal M. G Gases Pvt. Ltd. and another, (2018) DEL 1376 ...5 Mathai Mathai v. Joseph Mary and Ors., AIR 2014, SC 2277. ..............................................................4 Mohori Bibee v. Dharmodas Ghose, (1903) 30 Cal. 539 ........................................................................4 Niaz Ahmed Khan v. Parsottam Chandra, AIR 1931 ALL 154 ...............................................................7 Ritesh Agarwal v. SEBI, (2008) 8 SCC 205. ..........................................................................................6

Statutes The Indian Contract Act, 1872 ................................................................................................................4 The Indian Majority Act, 1875 ................................................................................................................4

Other Authorities CHITTY DUTT

ON CONTRACTS,

ON

Vol.1 8-004 (29th ed., 2004). ............................................................................5

CONTRACTS, 504 (Saharay, H.K., 9TH ed.). .............................................................................5

POLLOCK AND MULLA, INDIAN CONTRACT

AND

SPECIFIC RELIEF ACTS, Vol.1 374 (Nilima

Bhadbhade, 13th ed., 2012)..................................................................................................................5