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GENERAL PRINCIPLES OF CONTRACT-1

COMPETENCY OF LEGAL PERSONS


(Project towards partial fulfilment of assessment in the subject of Contracts-1)
Submitted By:

Submitted To:

Archit Gupta

Prof. SK Kaushik

Roll no-1160

Faculty of Contracts-1

BBA, LL.B
1st Semester

NATIONAL LAW UNIVERSITY, JODHPUR


SUMMER SESSION
(JULY-NOVEMBER 2014)

Table of Contents
REFERENCES.............................................................................................................. 3
INTRODUCTION........................................................................................................... 4
GOVERNMENT AND ITS BODIES.................................................................................. 6
COMPANIES AND STATUTORY CORPORATIONS..........................................................11
IDOLS OR DIETIES..................................................................................................... 13

REFERENCES

Indian Cases
Ahmedabad Municipality v Sulemanji Ismalji, (1903) 27 Bom 618.............................................11
Andhra Pradesh Tourism Development v Pampa Hotels ltd, AIR 2010 SC 1806..............................12
Bhikaraj Jaipuria v Union of India , AIR 1962 SC 113...............................................................7
Bishwanath & Anr. V Shri Thakur Radhaballabhji & ors ,1967 SCR (2) 618..................................13
K.P.Chowdhary v State of Madhya Pradesh , AIR 1967 SC 203..................................................10
Navrattanmal v State of Rajasthan , AIR 1961 SC 1704............................................................10
Pramatha Nath Mullick v. Pradyumna Kumar Mullick, AIR 1925 PC 139.....................................13
Ram Lal v State of Punjab , AIR 1966 Pun 436......................................................................10
Ram Nagina Singh v Governor-General in Council, AIR 1952 Cal 306.........................................11
State of Bihar v Abdul Majid, AIR 1954 SC 245......................................................................9
State of Bihar v Majeed, AIR 1954 SC 786.............................................................................6
State of Bihar v Sonabati, AIR 1954 Pat 513...........................................................................9
State of Uttar Pradesh and ors. v kanhaiya lal makand lal ,AIR 1956 All 383.............................8
State of Uttar Pradesh v Kishori Lal ,AIR 1980 SC 680..............................................................7
State of West Bengal v B.K. Mandals and Sons, AIR 1962 SC 779..............................................10

Statutes
Constituion of India.......................................................................................................... 6
The Indian Contracts Act,1872............................................................................................ 4
General Clauses Act......................................................................................................... 6

Treatises
Hindu and Mohammedan Endowments, P. R. Ganapati Iyer, 2nd edn...........................................13
Indian Contracts Act, Pollock and Mulla, 14th edition, pg 302....................................................11
T.K Mukherjee; Law of Contract;Vol-1;Ed 2000;Page37............................................................9
The Hindu Law of Religious and Charitable Trust, B.K. Mukherjee, 2nd Edn p. 249........................14

English Cases
Kelner v Baxter, (1866) LR 2 CP 174.................................................................................. 12
Williams v The Shipping Corporation of India, 63 ILR 363.........................................................5

INTRODUCTION
All agreements are contracts if they are made by free consent of parties competent to contract,
for a lawful consideration and with a lawful object, and are not hereby expressly declared to be
void.1 Section 11 of The Indian Contracts Act (herein The Act) deals with who are all
competent to contract under The Act. However, this section deals with natural persons or living
persons. Persons who are minors according to the law of their land or are of unsound mind or are
disqualified from contracting by any law to which they are subject to, are not competent to enter
into a contract.2 But it is to be noted that not only individuals, but other legal persons can also
enter into contracts.3 The Act does not clearly define what a legal person is. Though, a legal
person refers to a non-human entity that is treated as a person for limited legal purposes-corporations, for example. Legal persons can sue and be sued, own property, and enter into
contracts. In most countries, legal persons cannot vote, marry, or hold public office. Most
countries also exclude legal persons from holding natural or constitutional rights, such as the
freedom of speech.4 While people acquire legal personhood when they are born, judicial persons
do so when they are incorporated in accordance with law. Legal persons act through natural
persons. When the legal person is simply a natural person, both action and identification of
which acts are attributable to her is relatively straightforward. Many legal persons, however, are
complex; they are constituted by and encompass large numbers of other legal persons, both
natural and artificial.5 Though, it is to be understood that there exists a difference between the
contracts between firms from contracts between the firm and its employees and from contracts

1 Section 10,The Indian Contracts Act,1872


2 Section 11, The Indian Contracts Act,1872
3 Pollock and Mulla, The Indian Contract and Specific Relief Act, Pg 302
4 www.law.cornell.edu/wex/legal_person
5 Contracts between legal persons, Lewis Kornhauser, Princeton University Press, Princeton
(10.3386/w16049)
4

between parts of the firm in terms of the remedies available to resolve disputes.6, A corporation is
"capable of being treated as a citizen of [the State which created it], as much as a natural
person."7
Some examples of legal persons include:

Cooperatives (co-ops), business organization owned and democratically operated by a

group of individuals for their mutual benefit


Corporations are bodies corporate created by statute or charter. A corporation sole is a
corporation constituted by a single member, such as The Crown in the Commonwealth

realms. A corporation aggregate is a corporation constituted by more than one member.


Partnerships, an aggregate of two or more persons to carry on a business in common for
profit and created by agreement. Traditionally, partnerships did not have continuing legal
personality, but many jurisdictions now treat them as having an independent legal

personality.
Companies, a form of business association that carries on an industrial enterprise, are
often corporations, although companies may take other forms, such as trade unions,
unlimited companies, trusts, and funds. Limited liability companiesbe they a private
company limited by guarantee, private company limited by shares, or public limited
companyare entities having certain characteristics of both a corporation and a

partnership. Different types have a complex variety of advantages and disadvantages.


Sovereign states are legal persons.
In the international legal system, various organizations possess legal personality. These
include intergovernmental organizations (the United Nations, the Council of Europe) and
some other international organizations (including the Sovereign Military Order of Malta,
a religious order). The European Union has legal personality since the Lisbon Treaty
entered into force on 1 December 2009. That the EU has legal personality is a
prerequisite for the EU to join the European Convention on Human Rights (ECHR)

6 Id
7 Louisville, C. & C.R. Co. v. Letson, 2 How. 497, 558, 11 L.Ed. 353 (1844),
5

Idols or temples, in some legal systems, have separate legal personality8

For the purpose of this project, extensive study would be done on Government and its bodies,
Companies and Statutory Corporations, and Idols.

GOVERNMENT AND ITS BODIES

The executive power of the union and of each state shall carry on of any trade or business
and to the acquisition, holding or disposal of property and the making of making
contracts for any purpose.9 Every contract is an agreement between persons who are
persons within the meaning of The Act, and hence the Central or State Government is a
person within the meaning of Section 72 of The Act and enters into contracts as persons.10
It is to be understood that the word "person" is not defined in the Indian Contract Act, and
unless there is anything repugnant in the context it will include "any company or
association or body of individuals, whether incorporated or not."11 It is true that in respect
of Government Contracts the provisions of Article 299(1) must be complied with, but that
does not mean that the provisions of the Indian Contract Act have been superseded. It
may be noted that like other contracts, a Government Contract is also governed by The
Act, yet it is distinct a thing apart. In addition to the requirements of the Indian Contract
Act such as offer, acceptance and consideration, a Government Contract has to comply
with the provisions of Article 299. Thus subject to the formalities prescribed by Article

8 Williams v The Shipping Corporation of India, 63 ILR 363


9 Article 298,Constituion of India
10 Articles 298 and 299, Constitution of India
11 Section 3(39), General Clauses Act

299 the contractual liability of the Central or State Government is same as that of any

individual under the ordinary law of contract.12


Article 299 of The Constitution provides:
1. All contracts made in the exercise of executive power of the union or a state shall
be expressed to be made by the President or by the Governor of the State as the
case may be, and all such contracts and all assurances of property made in the
exercise of that power shall be executed on behalf of the President or the
Governor by such person and in such manner as he may direct or authorize.
2. Neither the President nor the Governor shall be personally liable in respect of any
contract or assurance made or executed for the purpose of any enactment relating
to Government of India hereto before in force , nor shall any such contract or

assurance on behalf of any of them be personally liable in respect thereof.


Thus Article 299 lays down three conditions which the contracts made in the exercise of
the executive power of the Center or a State must fulfill to be valid
a) The contract must be expressed to be made by the president or the Governor as
the case may be;
b) These contracts made in the exercise of the executive power are to be executed on
behalf of the President/Governor as the case may be; and
c) The execution must be by such person and in such manner as the President or the
Governor of the case as the case may be, may direct or authorize.

It has been held by the Hon'ble Supreme Court in the case of Bhikaraj Jaipuria v Union of
India13
"it is clear from the words "expressed to be made" and "executed" that there must be a formal
written contractThe provisions of Article 299(1) are mandatory in character and any
contravention thereof nullifies the contract and makes it void. The provisions of Article 299(1)
have not been enacted for the sake of mere form but they have been enacted for safeguarding the
Government against the unauthorized contracts. The provisions are embodied in the constitution
on the ground of public policy on the ground of protection of general public and these
formalities cannot be waived or dispensed with.
12 State of Bihar v Majeed, AIR 1954 SC 786
13 AIR 1962 SC 113
7

A contract complying with the Article can be enforced by or against the government. It is
subject to the general provisions of the contract law, and its terms cannot be changed by
resorting to Article 14 of the constitution. A contract not complying with any of the
conditions of Article 299(1) of the Constitution is not binding on or enforceable by the
Government , and is absolutely void , though not so for collateral purposes , and cannot
be ratified. No damages can be claimed for breach unless the contract is complete under

this article14
In the case of State of Uttar Pradesh and ors. v kanhaiya lal makand lal15, the advocate
general had argued that that the State Government is not a "person" within the meaning of
this section and that the mistake to which the section refers must be a mistake of fact.16
The honorable judge said that If the Government is not a person within the meaning of
S, 72 it is not in my opinion a person within the meaning of the other sections of the Act
where that terra is used; and the consequence of accepting the view advanced by the
Advocate General would be that Government cannot enter into contracts17 Article 295
states the rights, liabilities and obligations of the Government of India and of the
Government of a State arising out of contract.18 It is a matter of common knowledge that
The Government keeps on entering into contracts with respect to provide basic amenities
to the public. Contracts of letting of service and freight are matters of everyday
occurrence, and it has never been suggested that a Government is not competent to enter
into a contract because it is not a person. A 'State' is a body of individuals and therefore
may be recognized as a 'person' unless the law provides otherwise. The provisions of the
Constitution, quoted above, far from prescribing to the contrary, go to show that the
Union of India and the States in India are bodies having a definite juristic personality

14 State of Uttar Pradesh v Kishori Lal , AIR 1980 SC 680


15 AIR 1956 All 383
16 Id at para 3
17 Id at para 6
18 Article 295, Constitution of India
8

capable of suing or being sued in a court of law.19 The Government of India may sue or
be sued by the name of the Union of India and the Government of a State may sue or be
sued by the name of tile State. The Union of India and the States in India have the
capacity to hold the property and to enter into contracts, vide Articles 294 to 299.20 The
court held in this case that a 'State' is a body of individuals and therefore may be
recognized as a 'person' unless the law provides otherwise.
Implied Contract with the Government
In view of Article 299(1) there can be no implied contract between the government and another
person, the reason being that if such implied contracts between the government and another
person were allowed, they would in effect make Article 299(1) useless, for then a person who
had a contract with the government which was not executed at all in the manner provided under
Article 299(1) could get away by saying that an implied contract may be inferred on the facts and
the circumstances of the particular case.21 This was further explained wherein It was held by the
Hon'ble Supreme Court in the case of K.P.Chowdhary v State of Madhya Pradesh22 that
"In view of the provisions of Article 299(1) there is no scope for any implied contract. Thus no
contract can be implied under this Article. If the contract between the Government and a person
is not incompliance with Article 299(1), it would be no contract at all and would not be
enforceable as a contract either by the Government or by the person."
The Court justified this strict view by saying that if implied contracts between the government
and other persons were allowed, they would in effect, make Article 299(1) a dead letter, for then
a person who had a contract with the government which was not executed at all in the manner
provided under Article 299(1) could get away by pleading that an implied contract be inferred
from the facts and circumstances of the case.
19 Supra note(12) at para 21
20 Article 300,Constitution of India
21 T.K Mukherjee; Law of Contract;Vol-1;Ed 2000;Page37
22 AIR 1967 SC 203
9

Contractual Liability

Article 299(2) immunizes the President, or the Governor, or the person executing any
contract on his behalf, from any personal liability in respect of any contract executed for
the purposes of the Constitution, or for the purposes of any enactment relating to
Government of India in force. This immunity is purely personal and does not immunize
the government, as such, from a contractual liability arising under a contract which

fulfills the requirements under Article 299(1).23


The governmental liability is practically the same as that of a private person, subject, of

course, to any contract to the contrary.24


In order to protect the innocent parties, the courts have held that if government derives
any benefit under an agreement not fulfilling the requisites of Article 299(1), the
Government may be held liable to compensate the other contracting party under S.70 of
the Act, on the basis of quasi-contractual liabilities, to the extent of the benefit received.
The reason is that it is not just and equitable for the government to retain any benefit it
has received under an agreement which does not bind it. Article 299(1) is not nullified if
compensation is allowed to the plaintiffs for work actually done or services rendered on a

reasonable basis and not on the basis of the terms of the contract.
Section 70 lays down three conditions namely:
1. A person should lawfully do something for another person or deliver something to him;
2. In doing so, he must not intend to act gratuitously; and
3. The other person for whom something is done or to whom something is delivered must
enjoy the benefit thereof.
Section 70, in no way detracts from the binding character of Article 299(1) . The cause of
action for the respondent's claim under Section 70 is not any breach of contract by the
government. In fact, the claim under Section 70 is based on the assumption that the
contract in pursuance of which the respondent has supplied the goods, or made the
construction in question, is ineffective and, as such, amounts to no contract at all. Thus,
Section 70 does not nullify Article 299(1). In fact, Section 70 may be treated as

23 State of Bihar v Sonabati, AIR 1954 Pat 513


24 State of Bihar v Abdul Majid, AIR 1954 SC 245
10

supplementing the provisions under Article 299(1).What Section 70 prevents is unjust


enrichment and it as much to individuals as to corporations and governments.25
Exceptions

As regards the interpretation of contract, there is no distinction between the contracts to

which one of the parties is the Government and between the two private parties.26
Though there is hardly any distinction between a contract between private parties and
Government contract so far as enforceability and interpretation are concerned yet some
special privileges are accorded to the Government in the shape of special treatment under

statutes of limitation.27
Some privileges are also accorded to Government in respect of its ability to impose
liabilities with preliminary recourse to the courts. This probably is because of doctrines of
executive necessity and public interest.

COMPANIES AND STATUTORY CORPORATIONS


A corporation is an artificial person created by law, e.g., a company registered under the
Companies Act, public bodies created by statute, such as Municipal Corporation of Delhi. A
corporation exists only in contemplation of law and has no physical shape or form.
A statutory person is not on the same footing as a minor in the matter of capacity of contract.
While a minors capacity is an inherent one, the statutory person suffers from no such
incapacity.28 It can exercise its power subject to the formalities imposed by statute, and any
restriction on the exercise of power does not amount to inherent disqualification or incapacity.29
25 State of West Bengal v B.K. Mandals and Sons, AIR 1962 SC 779
26 Ram Lal v State of Punjab , AIR 1966 Pun 436
27 Navrattanmal v State of Rajasthan , AIR 1961 SC 1704
28 Indian Contracts Act, Pollock and Mulla, 14th edition, pg 302
29 Ram Nagina Singh v Governor-General in Council, AIR 1952 Cal 306
11

But it is also to be understood that non observance of the formalities renders the contract with the
statutory body or person void.30 Where a contract which fails to comply with the formalities and
is only executory, neither party can enforce performance against the other.31
While some statutes expressly confer upon the corporation or statutory body formed under them
the capacity to enter into contracts, others assume that such corporation has the capacity to
contract, and confer the authority of contracting upon a body within the corporation. Eg, The
Companies Act, 1956 also assumes that a company can contract, and provides in S.46, the mode
of executing contracts by the company, and that such contracts shall bind the company.32

Pre-incorporation Contracts
The promoter is obligated to bring the company in the legal existence and to ensure its successful
running, and in order to accomplish his obligation he may enter into some contract on behalf of
prospective company. These types of contract are called Pre-incorporation Contract'. Nature of
Pre-incorporation contract is slightly different to ordinary contract. Nature of such contract is
bilateral. But the remarkable part of this contract is that, this contract helps the perspective
company, who is not a party to the contract.
Before the passing of the Specific Relief Act 1963, the position in India, regarding preincorporation contract, was similar to the English Common Law. This was based on the general
rule of contract where two consenting parties are bound to contract and third party is not
connected with the enforcement and liability under the terms of contract. And because company
does not come in existence before its incorporation, so the promoter signs contract on behalf of
company with third party, and that is why the promoter was solely liable for the preincorporation contract.33

30 Id at para 30
31 Ahmedabad Municipality v Sulemanji Ismalji, (1903) 27 Bom 618
32 Supra at note (28)
33 Kelner v Baxter, (1866) LR 2 CP 174
12

Under Specific Relief Act


Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important sections for
pre-incorporation contract. Section 15 is about stranger's right to sue if he entitled to a benefit or
has any interest under the contract, although it has certain limitation. Section 15(h) talks about
the company, being a stranger to pre-incorporation contract, has the right to sue to the other
contracting party. But the necessary condition is that the contract should be warranted by the
terms of its incorporation. This provision clearly negates the common law doctrine which says
that the company cannot ratify or adopt the pre-incorporation contract. Under this provision
promoter can give his right to sue to sue to the company.
On the other hand, section 19(e) states that the company can be sued by the other party of preincorporation contract, if the terms of incorporation warrant and adopt the contract. This
provision reduces the promoter of liability of pre-incorporation contract.
In the case of Andhra Pradesh Tourism Development v Pampa Hotels ltd34, the defendant had
come into a contract with the appellant before the company was incorporated. Though, the
contract had not arisen between the promoters and the appellant. The company before even
coming into existence had signed two agreements. The court in this held that An agreement
enforceable by law is a contract. An agreement has to be between two or more persons.
Therefore if one of the two parties to the arbitration agreement was not in existence when the
contract was made, then obviously there was no contract and if there was no contract, there is no
question of a clause in such contract being an arbitration agreement between the parties.35The
court also held that the situation would have been different if the promoters of the respondent
company had come into an agreement and also if such agreement was warranted by the terms of
the company.

34 AIR 2010 SC 1806


35 Id at para 10
13

IDOLS OR DIETIES

The existence of Hindu idol as juristic person capable of having rights and discharging duties
through sevakars were established in the court of law as early as 1925. In Pramatha Nath
Mullick v. Pradyumna Kumar Mullick36. The court observed that One of the questions emerging
at this point is as to nature of such an idol, and the services due thereto. A Hindu idol is,
according to long established authority, founded upon the religious customs of the Hindus, and
the recognition thereof by Courts of law, a juristic entity. Therefore, it was ascertained that
idols have juridical status with the power of suing and being sued.
From the very inception in Hindu Culture the Idols are considered as personification of deity
itself and the image of the deity in the shape of idol which are often based on visualization is
bestowed with gifts and valuables by the worshippers. The gifts made to the idol are made in the
same manner as made to a natural person. The ascription of a legal personality to the deity
supposed to be residing in the image meets with all, practical purposes. The deity can be said to
possess property only in an ideal sense and the theory is, therefore, not complete unless that legal
personality is linked to a natural person.37 It would be correct to say that if we dont give idols a
juristic personality then there would be lot of practical difficulties in the matters of taxation and
allotment of land as well as on the subject to alienation of property.
In the case of Bishwanath & Anr. V Shri Thakur Radhaballabhji & ors38, the manager of a
temple alienated the idols property. A worshipper of the idol, who also assisted the manager in
his duties, filed a suit as next friend of the idol challenging the alienation. The appellant held that
only the shebait to the deity could file a case. The court, however, held that the suit was filed by
the idol for possession of its property from the person who was in illegal possession thereof and
therefore it was a suit by the idol to enforce its private right. Hence, it could be concluded that it
can be clearly inferred that the court recognised and accepted the principle of juristic personality
36Pramatha Nath Mullick v. Pradyumna Kumar Mullick, AIR 1925 PC 139
37 Hindu and Mohammedan Endowments, P. R. Ganapati Iyer, 2nd edn.
38 Bishwanath & Anr. V Shri Thakur Radhaballabhji & ors ,1967 SCR (2) 618
14

of idol otherwise; the procedural difficulties would not have allowed the plaintiff to claim back
the property, which was illegal in the possession of the person. Additionally, the court looked at
the case as if the property belonged to the idol and also the case was being filed by the idol itself.
The following assumptions or inferences have been made with respect to this propositiona. An idol of a Hindu temple is a juridical person;
b. When there is a Shebait, ordinarily no person other than the Shebait can represent
the idol;
c. Worshippers of an idol are its beneficiaries, though only in a spiritual sense.
B. K. Mukherjea summarises the legal proposition in the following manner in his book39.
(1) An idol is a juristic person in whom the title to the properties of the endowment vests.
However, it is only in an ideal sense that the idol is the owner. It has to act through human
agency, and that agent is the Shebait, who is, in law, the person entitled to take proceedings on its
behalf. The personality of the idol might therefore be said, to be merged in that of the Shebait.
(2)Where, however, the Shebait refuses to act for the idol or where the suit is to challenge the act
of the Shebait himself as prejudicial to the interests of the idol then there must be some other
agency, which must have the right to act for the idol. The law accordingly recognizes a right in
persons interested in the endowment to take proceedings on behalf of the idol.
It has become clear that an idol is treated as juristic person that is capable of having rights and
duties. The Idol has always enjoyed a good position in Hindu Mythology. Hindu Law recognises
Hindu idol as a juridical subject being capable in law of holding property by reason of the Hindu
shastras following the status of a legal person in the same way as that of a natural person. It is
not a particular image, which is a juridical person, but it is a particular bent of mind, which
consecrate the image. The reason behind personifying it as a juristic person are many such as
taxation purposes, assessment purposes, representation in a suit to defeat illegal claims.

39 The Hindu Law of Religious and Charitable Trust, B.K. Mukherjee, 2nd Edn p. 249.
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