TAMIL NADU NATIONAL LAW SCHOOL

A PROJECT SUBMITTED ON;

CAPACITY TO CONTRACT - UNSOUNDNESS OF MIND

IN COMPLIANCE TO PARTIAL FULFILLMENT OF THE MARKING SCHEME,

FOR TRIMESTER VII OF 2017, IN THE SUBJECT OF PROPERTY LAW

SUBMITTED TO FACULTY:
Mrs. DEEPIKA
FOR EVALUATION

SUBMITTED BY:
MOHAMED FARVACE
B.A L.L.B (HONS.)

1
TABLE OF CONTENTS

1) INTRODUCTION..................................................
...........3
2) MEANING OF UNSOUND
MIND....................................3
3) TEST OF UNSOUNDNESS OF
MIND............................4
4) INDIAN LAW v. ENGLISH
LAW.....................................6
5) CASE
LAWS...................................................................
9
6) CONCLUSION......................................................
.........14

2
 INTRODUCTION

The ancient rule of the common law was that a lunatic could not set up his own insanity (though his
heir might) so as to avoid an obligation which he had undertaken. But by 1847 Pollock C.B. was
able to say, in delivering the judgment of the Court of Exchequer Chamber in Moulton v. Camroux,
2 Ex 487, that "the rule had in modern times been relaxed, and unsoundness of mind would now be
a good defense to an action upon a contract, if it could be shown that the defendant was not of the
capacity to contract 'and the plaintiff knew it." Imperial Loan Co. v. Stone [1892] of the Sale of
Goods Act 1979 makes the same provision for persons who are incompetent to contract by reason of
mental incapacity as for minors.

A lunatic so found by inquisition was held to be incapable of making a valid interpretation about
disposition of property (although he could make a valid will) since this would be inconsistent with
the position of the Crown under the Lunacy Acts: Re Walker [1905]. Presumably the position of a
lunatic so found with respect to contracts not effecting inter vivos dispositions of his property was
the same as that of a lunatic not so found; that is, he would be bound unless he could show that he
was not in fact of capacity to contract and that the plaintiff knew it. The Lunacy Acts have been
repealed, but an order under the Mental Health Act 1983, may have the same effect as a finding of
lunacy.
3
 UNSOUNDNESS OF MIND IN CONTRACTS

The general theory of the law in regard to contracts made by parties affecting their rights and
interest is that there must be full and free consent in order to bind the parties. Consent is an act of
reason combined with deliberation. It is upon the ground that there is a lack of rational and
deliberate consent that transaction of persons of unsound mind are held to be void. 1

To constitute a valid and binding contract, a party contracting must have the capacity to arrive at a
reasoned judgement, as to the consequences of the transactions he is entering into. This does not
mean that he must necessarily be suffering fro lunacy to disable him from entering into a contract.
To all appearances, a man may behave in a normal fashion, but he may really be incapable of
understanding a bargain or transaction, and of forming a rational judgement as to its effect upon his
interests.2

Mental incapacity, arising out of any reason deprives a person not only of a full understanding of a
transaction, but also the awareness that he does not understand it. This distinguishes it from lack of
ability arising out of illiteracy and unfamiliarity with the language. 3

When making a contract it is required that the minds of the parties meet, and an insane person is
incapable of understanding the nature of his acts, it would be impossible for a person who does not
know what a contract is to enter into one and to make any contract at all, and all the contracts that
he tried to enter into would be void. In practice, however, while the contracts of a person who has
been adjudged insane are thus considered void, the contract of other parties of unsound mind will be
merely voidable at his option, or of that of the person qualified to choose for him. Certain contracts
of insane persons will be held valid. Such are contracts created by law, and contracts for
necessaries, including necessaries for his wife and children. In such cases the same limitations must
be observed as in the case of those furnished to infants, and the insane person held liable, not for the
contract price, but for the reasonable value of the goods. Mere mental weakness, from whatever
cause it may result, which does not prevent the party from understanding the nature of the contract,

1 Commentaries on the Indian contract Act, M.R. Mallick, second edition, kamal law house, Calcutta, 2000.
2 Principles of Law of Contract, Praful Ramanlal Desai, Second edition, N.M. Tripathi Pvt. Ltd, Bombay, 1988
3 Smith and thomas; Casebook on contracts (online version) : acssessed on 24/5/2017
4
will not render the contract voidable except under such circumstances as will constitute a case of
undue influence.4

TEST OF UNSOUNDNESS OF MIND

1)A person who is not of sound mind is said to be of unsound mind. That is a person who is an
Idiot,lunatic,insane person is a person of unsound mind.

2) Insanity - A disposition by lunatic is completely void under the English law. 5 But for a contract
to be declared void mere dilution is not sufficient. It is a matter if the dilution affected the
contract or disposition. It is also be to noted if the party was suffering from such a mental
disability that he was unable to understand the nature of the contract. Therefore, it will be
declared void by the English law under such circumstances and voidable if the other party
contracting knew the mental disability of the other.

3) Mental Idiocy - An idiot or a natural fool is a person that has no understanding from his infancy.
Contracts entered into by an idiot than those for necessaries are void.

4) Old age - With increasing old age there must be a loss of vigor and even mental energy. So when
any particular transaction is made, there is that infirmity of mind which is disables the man of
old age from understanding what he is doing. Only then can a contract made by that individual
deemed to be void at the option of the man. 6 Lack of capacity is inferred only if, due to age, the
mind has become vacuous and delusory. A 70-year old man gifted some property to his
daughter. He offered the delusion that he possessed thousands of acres of land when he in fact
possessed only 15-20 acres of land in India. It was held that he could not assess the effect of the
gift on his own interests and so was found to lack contractual capacity.7

5) Drunken state- Mere drinking is not an hindrance to enter into a contract. But drunken state of
mind is a hindrance to enter into a contract. When a person is so drunk that he cannot form a
rational judgement about the terms and conditions of the contract then such contract is a void
contract.But if he is at such a state of mind where he has consumed alcohol but he can still
understand the terms and conditions of the contract then that contract is valid as he could

4 http://chestofbooks.com/society/law/Popular-Law-3-Contracts/Section-8-Persons-Of-Unsound-Mind.html
5 case law : Re walker (1905)
6 The law of Contracts, M. Krishnan Nair, Fifth Edition, Orient Longman, Hyderabad, 1996.
7 case law : Govindswami Naicker v. K.N. Srinivasa Rao MANU/WB/0260/1932 : AIR 1933 Cal 488.
5
understand the terms and conditions of the contract,that is why it is said that mere drinking is not an
hindrance to contract. When a person owing to drunkenness and debauchery was quite incapable of
understanding the contract made by him and of forming a rational judgement as to its effect upon
his interest is held to be of unsound mind and such a contract under the Indian law in view of
Section 11 must be held to be void contract. 8

It has to be understood that a the person has to understand the nature of the contract he is entering
into.He has to make rational judgement and understand the terms and conditions of the contract,for
this purpose he has to be of sound mind. A person who is an idiot,lunatic and insane cannot
understand the terms of the contract. Certain types of unsoundness of minds such as idiot are
acquired since birth and others such lunacy and insanity are acquired later.
A person who is of unsound mind can be under lucid interval at certain times. Lucid interval is a
state where he is not of unsound mind and can form a rational judgment about the terms of the
contract.
At this state of lucid interval he can enter into a contract but if he has entered into a contract when
he is not under lucid interval then that contract is void. Eg: A who is undergoing treatment at a
mental asylum escapes from there and goes back to his native where he enters into a contract to sell
his ancestral property.Such a contract is totally void as he is a person who was undergoing treatment
at an asylum.

INDIAN CONTRACT LAW VS. ENGLISH CONTRACT LAW

The Indian Contract Act was evolved from its english counterpart. Here it is going to be
distinguished as to what extent the English model differs from that of the Indian one.
There are of course, under the English law, degrees of mental disability. English contract law
recognizes three categories.

1) First, there are those whose mental state is such that their affairs are under the control of the
court, by virtue of Part VII of the Mental Health Act of 1983. Since the court effectively takes
over the individuals power to make contracts, any contracts purported to be made by the
individual will be unenforceable against him or her.
2) Secondly, there are those mental health state is such that, although they are not able under the
control of the court, they are unable to appreciate the nature of the transaction they are entering into.

8 case law : Kamala v. Kaura 15 IC 404

6
Contracts made by the people in such a condition will be enforceable against them entering into.
Contracts made by people in such condition will be enforceable against them even if the contract
may in some sense be regarded as "unfair", unless it is proved that the other party was aware of the
incapacity. 9

3) The third category consists of those people who are capable of understanding the transaction, but
who are, as a result of some mental disability, more suspectible to entering into a disadvantageous
contract. Contract made by such people are considered to be binding, unless affected by the rules of
" undue influence".

In English law, a person of unsound mind is incompetent to contract, although he may avoid his
contract if he satisfies the court that he was incapable of understanding the contract and the other
party knew it. The contract is voidable at his option then. It becomes binding on him only if he
affirms it.

HALSBURY'S LAW OF ENGLAND STATES :

"Consent is an act of reason and of volition or choice, and it is on the ground that there is a want of
rational and deliberate consent that he contracts of mentally disordered peons may be invalidated. A
valid contract cannot be made by a person suffering from such incapacity of mind as not to
understand the nature of what he is doing"

Under the English law, the contracting capacity of a drunken person is the same as that of one who
is mentally afflicted, such contract is not altogether void, but is voidable at the instance of the
person who entered into the contract in such a state of drunkenness as not to know what he was
doing and if this fact is appreciated by the other contracting party. But under Indian Contract Act,
such an agreement would be void and therefore unenforceable. A drunken person is liable for
necessaries supplied to him while suffering from incapacity to contract. A similar approach would
be taken of agreements made under the influence of other intoxicating substances.
In terms of issues concerning mentally disordered persons, English and Indian laws differ to a
certain extent. Though the Indian law developed what constitutes a " mentally disordered person"
from its English counterpart, Mental Health Act of 1983, the positions are quite different.

9 Cheshire, Fifoot and Furnistons Law of Contract, Michael Furninston, 15th edition, Oxford University Press, Delhi,
2007.
7
In Imperial loan Co. v. Stone where this rule was stated, the action was on a promissory note and it
was argued in appeal that" if a man becomes so far insane as to have no mind perhaps, he ought to
be deemed dead for the purpose of contracting". But some judges felt that the contracts of a person
non compos mantis may be avoided inly when this condition can be shown to have known the
mental condition is since " No man of full age shall be received in any plea by the Law, to stultify
and disable his own person."

In Campbell v Hooper, where a mortgagee sought a decree directing repayments and foreclosure in
default in default of such repayment and where there was evidence that at the time the mortgage
was executed the mortgagor was a lunatic.

The Indian Law regarding the contractual capacity of mentally disabled persons is however
different. When a person imbalanced in mind executed a sale deed, the transferee cannot acquire
any right, title or interest. In Jyotindra Bhattacharjee v. Sona Bala Bora, late Bhagirath Bora
executed a sale deed in favor of the Plaintiff transferring the house property. It was alleged by the
wife and sons of late Bora that at the time of execution of sale deed, the expectant was imbalanced
in mind and his mental sickness deteriorated so much that he instated a criminal case against his
family members and therefore, the sale trisection was done fraudulently. It was held that the
conduct if the expectants indicated that he was a normal person and mentally unsound at the time of
the execution indicates that he was a normal person and mentally unsound at the time of execution
of the sale deed and, therefore, did not confer any right, title and interest on the Plaintiff. As a
logical corollary of the Privy Council decision in Mohoribibi's case of a minor's incompetency. It
naturally follows that a lunatic's contract must also be void under Indian Law. Where, however, a
person supplies necessaries for a lunatic, he is entitled to be reimbursed out of the property of the
lunatic under the provisions of Section 68 of the Indian Contract Act.

Overall, it is quite evident that the Indian and English concerns in contract law with respect to
unsoundness of mind are similar apart from a few exceptions. However, in English law,
unsoundness as a concept does not exist but it comes under the ambit of incapacity to contract
which includes other ancillaries like Public Corporations and Minority. But in the Indian context,
unsoundness is limited to mental disability, intoxication, senility and idiocy.

Where unsoundness of mind is proved by definite medical evidence, the fact that the person was in
a lucid interval when he made the contract must also be prayed as string and as mush demonstrative
evidence. The question may arise whether a lunatic adjudged can contract during intervals of sound

8
mind.10 Illustration (a) to the section suggests that a lunatic in a mental asylum can contract during a
lucid interval. In England, a lunatic not so cound or before he is so found, by inquisition is not the
reason of the fact absolutely incapable of contracting, though the burden of proof in such a case is
on the party maintaining that he is not insane, or that the contract was made during a lucid interval 11
and the same is the law in India.

In England, an individual is classified to be " mentally disordered" if he/she satisfies the definition
as espoused under the Mental Health Act of 1983. According to this Act, under section 2, a person
suffering from " mental disorder" means "meant illness, arrested or incomplete development of
mind, psychopathic disorder and any other disorder or disability of mind.

CASE LAWS :

LANDMARK CASE IN ENGLISH LAW :

Masterman-Lister v Brutton & Co. (Nos 1 and 2) [2002] Masterman-Lister v Jewell and Another
2003

The Claimant suffered serious head injuries at the age of 17 on the 9th September 1980 when he
was involved in a road traffic accident. He commenced an action on the 24th December 1980 with
his father as litigation friend, but adopted the action himself after reaching the age of 18 on the 24th
July 1981. In September 1987, after receiving advice from his solicitors and counsel, he accepted an
offer to compromise his claim for 76,000 plus costs.

In December 1993, the Claimant issued proceedings against his former solicitors claiming damages
for professional negligence and breach of contract. The writ was not served until May 1996.
Liability was denied. In June 1997, the Claimant was examined by a neuropsychiatric rehabilitation
consultant, who expressed the view that since the time of his accident, the Claimant had been a
patient within the meaning of section 94(2) of the Mental Health Act 1983 ( Exercise of the
judges functions: the patient.) 12

10 Mental Health Act 1983.

11 Mohanlal Malangopaly Marwadi v. Vinayak Sadsheo Sonak AIR 1956 Nag 251
12 http://www.legislation.gov.uk/ukpga/1983/20/contents : accsessed on 24:5:2017
9
The Claimant also sought to reopen the settlement of his earlier claim on the ground that it had
never received the approval of the court. The trial judge ruled that the Claimant had been a patient
from three years after the accident, but not thereafter and that he had full capacity when the first
action was compromised.

HELD:-

Lord Justice Kennedy went over the facts of the case. He considered the old Rules of the Supreme
Court Order 80, which defined a patient as someone who was incapable of managing and
administering his property and affairs. Rule 2(1) provided that a person under a disability could not
bring or make a claim except by a next friend and Rule 10 provided for approval to be sought from
the court to any settlement.

There was no criticism of those who had originally advised the Claimant, for failing to recognize
that the Claimant was a patient. It was simply contended that from the date of the accident, the
Claimant was a patient, who could only settle his claim with the approval of the court.

First it had to be recognized that someone who was treated as a patient for the purposes of Order 80
was not necessarily and might never become accepted by the Court of Protection as a patient
pursuant to section 94(2) of the Mental Health Act 1983. Section 94(2) required a nominated judge
to address that issue, whereas under Order 80, no judicial officer had to consider medical evidence
or be satisfied as to incapacity.

Secondly the issue of capacity was important in relation to the Claimants ability to sue his former
solicitors during the six years after September 1987, and the limitation provisions of section 28(1)
of the Limitation Act 1980.

The Claimants counsel submitted that the Claimant was a patient for the purposes of the new Civil
Procedure Rules (which replaced the Rules of the Supreme Court in 1999) and in particular CPR
Rule 21.1(2)(b). The wording was different insofar the CPR referred to own affairs as opposed to
the words property and affairs in the old RSC.

Lord Justice Kennedy said that the Official Solicitor acted at any one time for some 1700 patients in
civil and family proceedings.

10
There was no definition in the Mental Health Act 1983, in the Rules of the Supreme Court or in the
Civil Procedure Rules of the words incapable of managing and administering..his affairs but in
In Re F (Mental Patient: Sterilization) [1990] 2 AC 1 it was held that this did not extend to physical
care and/or treatment. It included only business matters, legal transactions and other dealings of a
similar kind.
It was common ground that there was a presumption of capacity. However Lord Justice Kennedy
said that he did not accept a presumption that incapacity continued after a finding of incapacity.

Ronald Harry Bailey v. Matthew George Warren 200613

The Claimant suffered severe head injuries in a road traffic accident on the 3rd May 1998. He and a
friend, who had been drinking were crossing a four lane urban dual carriageway late at night. (The
friend later compromised her own personal claim on a 50/50 basis). Neither the Claimant nor his
friend had any memory of stepping out into the road. The Defendant pleaded guilty to driving
without due care and attention. He had little recall of the events.
He had made a good physical recovery to the extent that he was able to return to work in October
1998 albeit on light duties, but his injuries resulted in permanent damage to his cognitive functions,
although there was disagreement about the extent of that damage according to the experts. In
February 1999 he returned to his former duties as a machine operator but in March 1999 he
developed post traumatic epilepsy and could no longer work.
In March 2000 the Defendants insurer wrote to the Claimants solicitors offering to settle the case
on a 50/50 basis. Counsel advised in strong terms that such a settlement should be accepted. In
September 2000, the Claimant was consulted and he discussed the offer with his family. His step-
brother who was nominated on his behalf, contacted the Claimants solicitors giving his approval to
the compromise.
Liability was settled on a 50/50 basis in November 2000. At that point no-one had considered
whether the appointment of a litigation friend was appropriate and it appeared that those advising
him were heavily influenced by the fact that the Claimant was being monitored by a consultant in
rehabilitation medicine, who described his recovery as excellent. Proceedings were commenced
in April 2001 and in December 2001, judgement was entered on a 50/50 basis on liability. At that
point quantum still fell to be determined.

13 http://www.mjsol.co.uk/library/cases/child-abuse/ronald-harry-bailey-litigation-friend-janet-ashton-matthew-
george-warren-2006/ : accessed on 24/5/2017
11
In January 2003 a professor of neurology suggested that the Claimant lacked capacity and
application was made to appoint a litigation friend. In August 2003, there was a change of solicitors.
Those solicitors expressed concerns about the level of investigation carried out by their
predecessors and the settlement on liability. They argued that the settlement should have been on a
full liability basis.
The Claimants father was appointed as litigation friend and he applied to set aside the judgment on
liability on the basis that, at the time of the settlement, he was a patient under CPR Part 21. The
Claimants father was later replaced by his sister. Mr Justice Holland found that although the
Claimant was now a patient, and had been a patient in December 2001, he was not a patient in
November 2000, for the purposes of agreeing a 50/50 split on liability.
Mr Justice Holland heard no oral evidence. There was a police report, photographs and three
witness statements, two from the Defendant and one from an independent witness, who had not
seen the collision. The layout of the junction had also changed since the time of the accident. Justice
Holland said that in his view, whilst he would query an apportionment less favourable to the
Claimant than 60/40, it might have been difficult to resist a strong submission in favour of a 50/50
split. Therefore the settlement of 50/50 would be approved.
The Claimant sought permission to appeal against the finding to the effect that he was not a patient
in November 2000.

Lady Justice Hallett reviewed the existing medical evidence. Some of that evidence suggested that
the Claimant was a patient and some suggested that he was not. She considered the terms of CPR
21, which states:

21.2(1): A patient must have a litigation friend to conduct proceedings on his behalf.

21.1(2) Patient means a person who by reason of mental disorder within the meaning of the Mental
Health Act 1983 is incapable of managing and administering his property and affairs.

21.3(4) Any steps taken beforea patient has a litigation friend shall be of not effect unless the
court otherwise orders.
21.10(1) Where a claim is made by or on behalf of a patient.no settlement, compromise or
payment.shall be valid, so far as it relates to the claim, by or no behalf ofthe patient without the
approval of the court.
Lady Justice Hallett then considered the landmark case of Masterman-Lister v Brutton & Co.
[2003] WTLR 259 which deals with the test for incapacity and the assessment of incapacity.

12
CASE LAWS IN INDIA :

DRUNKENNESS ( UNSOUND MIND)

Chacko and Anr. Vs. Mahadevan14

The facts of the case are that Chacko had land of an extent of 20 cents (100 cents being equal to 1
acre). By sale deed dated 4.9.1982, Chacko sold one cent out of this land for Rs. 18000. Thereafter
Chacko sold another three cents of this land to Mahadevan for Rs. 1000 sale deed dated 11.7.1983.
The suit O.S.431 of 1983 was filed by Chacko and Annakutty seeking to set aside that sale deed
dated 11.7.1983, on the ground that it was vitiated by fraud and was hence null and void and for a
prohibitory injunction restraining Mahadevan from entering into that property. The averment in the
plaint was that Chacko was given liquor by Mahadevan and others and under that influence the sale
deed was got executed. Hence it was void. The defendant Mahadevan denied the plaint's
allegations.
The trial court held that Chacko and Annakutty had not proved any vitiating circumstances to
invalidate the said sale deed dated 11.7.1983 and consequently title to the said land passed to
Mahadevan.

Chacko and Annakutty filed an appeal before the First Appellate Court. The First Appellate Court
held that the fact that one cent land was sold for Rs. 18000 (sale deed dated 4.9.1982) and three cent
land was sold (sale deed dated 11.7.1983) for a sum of Rs. 1000, showed that this was an
unconscionable transaction and hence the sale deed dated11.7.1983 was liable to be set aside.
Aggrieved Mahadevan filed a Second Appeal, which was allowed by the impugned judgment.

It may be mentioned that in a First Appeal filed under Section 96 CPC, the appellate court can go
into questions of fact, whereas in a Second Appeal filed under Section 100 IPC the High Court
cannot interfere with the findings of fact of the First Appellate Court, and it is confined only to
questions of law. Hence we have to see the judgment of the First Appellate Court and its findings of
fact.

A perusal of the judgment of the First Appellate Court dated 29.6.1988, copy of which is Annexure -
P2 to this appeal, shows that it has been recorded therein that Chacko was not having sound mind

14 http://jajharkhand.in/judg/sc/pdf : accessed on 24:5:2017

13
when he executed, which is established from which is the medical certificate. He was treated from
11.8.1983 to 14.8.1983 in Mental Hospital, Trichur for Alcoholic Psychosis. This is a finding of fact
which could not have been interfered with by the High Court in Second Appeal. Moreover, it is
established from the facts that one cent of land was sold for Rs. 18000 on 4.9.1982 while 10
months thereafter three cents of land was sold for only Rs. 1000. This corroborates the finding of
the First Appellate Court that Chacko was not of sound mind at least at the time when he executed
the sale deed dated 11.7.1983. If one cent of land costs Rs. 18000 then three cents of land should
ordinarily cost Rs. 54000. No one in his senses would sell property worth Rs. 54000 for Rs. 1000.
According to the well known Latin maxim 'res ipsa loquitur' i.e. the matter speaks for itself. Hence
it is obvious that Chacko sold the land by sale deed dated 11.7.1983 when he was not of sound mind
and some fraud was played on him at that time.
In the circumstances, we set aside the impugned judgment of the High Court and restore the
judgment of the First Appellate Court dated 29.6.1988 and we quash the sale deed dated 11.7.1983.
The Appeals are allowed. There is no order as to costs

CONCLUSION

As can be seen from the above explanations, there were two conclusions that were drawn. The first
assumption is that whether the Indian and English positions in contract law with regards to
unsoundness was identical or not. To conclude, that the Indian model was heavily borrowed from its
English counterpart and the basic structure is based on English common law notions.
The second conclusion is that if mentally ill and mentally disordered persons under the Mental
Health Acts of England and India were comprehensive enough to include all types of mental illness.
In English law they made an attempt to differentiate both and to define the term in a more all
inclusive manner unlike in India.

BIBLIOGRAPHY

1) CONTRACT & SPECIFIC RELIEF, AVATAR SINGH, TENTH EDITION.

2) practicalacademic.blogspot.in
3) en.wikipedia.org

14