Persons Disqualified from Contracting by Law under Section 11 of the Indian Contract Act, 1872: Alien Enemies, Foreign Sovereigns and Diplomats, Convicts, Insolvents and Corporations

The third limb of Section 11 is the only one that does not define its own content. A person is incompetent if he is disqualified from contracting by any law to which he is subject, and the Contract Act then sends the reader elsewhere to find out who those persons are and what the disqualification amounts to. The disqualifications are of different kinds and produce different consequences: some make the agreement void, some suspend the right to sue, some remove the capacity to sue without prior sanction, and some are restrictions on a legal person's powers rather than on any natural person's capacity. This topic takes each class in turn.

1. The Statutory Reference

Two features of the drafting govern this limb. The disqualification must be imposed by law, so a private stipulation or a professional rule without statutory force does not disqualify. And it must be a law to which that person is subject, which brings in questions of nationality, domicile and status. The consequence of a disqualification is not uniform; it is determined by the provision that imposes it, and the table below sets out the differences.

2. Alien Enemies

An alien is a person who is not a citizen of India. In peacetime an alien friend has full contractual capacity, subject to such restrictions as the State imposes, particularly in relation to the acquisition of property and to exchange control under the Foreign Exchange Management Act, 1999. The position changes on the outbreak of hostilities.

1. An alien enemy is a person of enemy nationality, or a person voluntarily residing or carrying on business in enemy territory, whatever his nationality. The test is adherence to the enemy rather than nationality alone, so an Indian citizen voluntarily resident in enemy territory may be treated as an alien enemy, and an enemy national resident in India under the protection of the State ordinarily is not.
2. Contracts made during the war with an alien enemy are void, as being opposed to public policy under Section 23. Trading with the enemy is forbidden because it tends to supply the enemy with resources, and an agreement to do so has an unlawful object.
3. Contracts made before the war are either dissolved or suspended. Those whose performance would involve intercourse with the enemy, or would be against public policy, are dissolved. Those that do not offend these considerations, such as a debt already due, are suspended for the duration and revive on the restoration of peace, with the period of hostilities generally excluded from limitation.
4. The alien enemy's right to sue is suspended. He cannot maintain or continue a suit in the Indian courts during the war without the permission of the Central Government, though he may be sued and may defend and appeal.

3. Foreign Sovereigns, Ambassadors and Diplomats

Foreign sovereigns, rulers of foreign States, ambassadors and accredited diplomatic representatives have full capacity to contract. Their special position lies not in capacity but in immunity from suit: they may enforce contracts against Indian citizens, but cannot ordinarily be sued in the Indian courts without consent. The disqualification is therefore one of procedure rather than of substance, and it works one way.

The framework in India is statutory. Section 86 of the Code of Civil Procedure, 1908 requires the Central Government's consent for a suit against a foreign State, and Section 87A governs suits against rulers of foreign States. Diplomatic immunity is separately governed by the Diplomatic Relations (Vienna Convention) Act, 1972, which gives effect to the Vienna Convention on Diplomatic Relations, 1961. Immunity may be waived, and a foreign sovereign who himself sues submits to the jurisdiction for the purposes of a counterclaim arising out of the same transaction.

4. Convicts

A person undergoing a sentence of imprisonment is under a disability while the sentence runs. He cannot ordinarily enter into contracts or sue on them during that period, and the period of his incarceration is excluded in computing limitation for suits he may afterwards bring. The disability is suspensory rather than destructive: it ends on the expiry of the sentence or on the grant of a pardon, after which he may sue and be sued in the ordinary way, including on causes of action that arose during the sentence.

The disqualification is a survival from an older law and is of limited practical significance today. A convict retains his property, and contracts made through a duly constituted agent or by a person appointed to manage his affairs are unaffected.

5. Insolvents

When a person is adjudged insolvent, his property vests in the Official Assignee or Receiver, who alone can deal with it. The insolvent is not deprived of contractual capacity as such, but he loses the power to deal with the vested estate, and a contract purporting to transfer property that has vested is ineffective against the assignee. The disqualification ends on discharge, when the insolvent regains full power over property afterwards acquired. The relevant statutes are the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909, so far as they remain in force, and for corporate and individual insolvency now governed by it, the Insolvency and Bankruptcy Code, 2016, under which a moratorium also restricts the institution and continuation of proceedings.

6. Corporations and Contractual Capacity

A corporation is a legal person and has capacity to contract, but its capacity is limited in two ways that do not apply to natural persons. It can act only through agents, so the law of agency governs whether a particular person could bind it. And its powers are limited by the instrument that created it, so a transaction beyond those powers is ultra vires and void.

The Indian position follows from the Companies Act, 2013. A company's memorandum must state its objects under Section 4, and an act outside them remains ultra vires the company and void, incapable of ratification by the shareholders. Two distinctions must be kept in view. An act that is ultra vires the directors but within the company's powers may be ratified by the company. And an act that is within the company's powers but carried out irregularly may bind the company as against an outsider dealing in good faith, under the doctrine of indoor management. Statutory corporations created by a special Act are subject to the same principle, their powers being those the Act confers.

7. The Disqualifications Compared

8. The Position Stated Shortly

1. The third limb of Section 11 imports disqualifications imposed by other laws, and the consequence in each case is determined by the disqualifying provision.
2. An alien enemy is defined by adherence to the enemy rather than by nationality alone.
3. Contracts made with an alien enemy during hostilities are void under Section 23; pre-war contracts are dissolved or suspended, and the right to sue is suspended.
4. Foreign sovereigns and States have full capacity but are immune from suit without the consent of the Central Government under Section 86 of the Code of Civil Procedure, 1908.
5. Mirza Ali Akbar Kashani: Section 86 is mandatory and is not confined to acts of a sovereign character.
6. Diplomatic immunity is governed by the Diplomatic Relations (Vienna Convention) Act, 1972 and may be waived.
7. A convict's capacity is suspended during the sentence and revives on its expiry or on pardon.
8. An insolvent retains capacity but loses the power to deal with property vested in the assignee until discharge.
9. A corporation's capacity is limited by its objects; Ashbury Railway Carriage holds an ultra vires contract void and incapable of ratification even by unanimous shareholder assent.
10. An act ultra vires the directors but intra vires the company may be ratified, and the doctrine of indoor management protects an outsider dealing in good faith.

9. Related Topics and Provisions