Capacity to Enter Into a Contract

This Article is Written By Aayush Chadha BBALLB 4^th Semester of Himachal Pradesh National Law University, Shimla

ABSTRACT

Contracts, oral and written and made and performed by each and every person every day. The usage and value of contracts have increased immensely, be it in employment, commercial or general agreements. Contracts can be general and are sometimes formed without being express, that is they can be implied. However, contracts have certain requisite including consideration, promise and capacity to contract. Due to various reasons including age, mental capacity, financial condition etc which influence the competence and ability to fulfil promises of the contract, not every person is competent to directly enter into a contract. It is essential to evaluate and view who is competent to form a contract in order to ensure beneficial fulfilment of mutual obligations of the contract and to establish procedures ensuring that breach of contracts is prevented. 

Key words: Capacity, contract, privity, age, minor

OBJECTIVES 

The main objective of this article is to evaluate the principles of capacity of contract by discussing provisions of the Indian Contract Law and subsequent discussion of several relavent case laws dealing with the same. For the purpose of this article provisions and case laws dealing with the Indian Context will be discussed at length along with the role and need of the doctrine of capacity of contract.

INTRODUCTION

Capacity of contract or competency to contract can be basically defined as who can enter into a contract. Capacity of contract is an essential condition of forming a valid and legally binding contract and any person not possessing to enter into a contract is thereby restricted to enter into a contract. This is due to the fact that some persons by virtue of their age, mental capacity, political or financial position are disqualified to form a contract. This has been done to keeping in mind that some persons due to the above mentioned conditions are not competent to enter into a contract, and if they do enter into one the contract would result to be vitiated or breached.

Section 11 of the Indian Contract Act, 1972 deals with the question of who is competent to enter into a contract, the provision is produced hereunder-:

Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

It disqualifies three categories of people-

1. Any person who has not attained the age of majority- In India a person becomes an adult after they have competed the age of eighteen (18) years. A minor except in certain cases cannot enter into a contract.
2. A person who is of unsound mind- Any person who is not of sound mind, and is not able to understand and evaluate the obligations of the contract and the effect of the contract on his rights duties and interests cannot be allowed to enter into a contract. Section 12 of the Indian Contracts Act lays down the law for a sound mind.
3. Disqualified by law- there are certain persons who are directly disqualified to enter into a contract. Eg- insolvents, foreign aliens etc.

The aforementioned categories of people are restricted to enter into a contract except in certain exceptional circumstances, and a contract entered into by them would not in all circumstances be held to be legally valid.

CONTRACTS ENTERED INTO BY A MINOR

As per section 11 of the Indian Contracts Act, a minor does not possess the capacity or the competency to enter into a contract. In India as per Section 3 of the Majority act of 1875, the age of majority is eighteen (18) years. A minor is disqualified to enter into a contract due to the fact that a minor cannot be said to possess the requisite educational and mental capacity and knowledge to understand, evaluate and analyse the effect of the contract and the mutuality of obligations laid down. A contract made by a minor is hence void ab initio[1] and hence cannot be enforced by anyone in any court of law. This is due to the fact that the law of estoppel or going back on their word cannot be enforced on a minor[2].

When is a contract involving a minor enforceable-

1. When a contract is made involving a minor wherein the minor has fulfilled his part of the obligations then the contract can be enforced as against the other party and a defence that the minor did not possess the competency to enter into the contract cannot be entertained.
2. A minor can be the beneficiary of a contract. A minor cannot become a partner in a firm, and all liabilities associated will be limited to his share, but he will not be personally liable, but he will get all benefits. A minor also cannot be a principal but he/she can be an agent as the principal is vicariously liable for all acts of the agent.
3. A contract made by a guardian of a minor for necessities or contracts beneficial to a minor or to his/her interests.
4. A contract made with a minor for supply of necessities to him/her- If any person supplies necessities to a minor then the person can claim reimbursement for the same from the estate of the minor due to the fact that the supply of necessities is considered to be quasi-contractual obligation.

CONTRACTS ENTERED INTO BY A PERSON OF UNSOUND MIND

  A contract entered into by a person of unsound mind would be void ab initio as the person is incompetent to enter into a contract. Section 12 of the Indian Contracts Act defines sound mind, the provision of which is produced hereunder: –

A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.

A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.

Illustrations

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.

(b) A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts.

If a person is unable to form a rational judgement of his actions and to understand and evaluate the effect of a contracts upon his rights, duties and interest, then the person can be termed as to be of unsound mind. The burden of proving whether at the time of making the contract, a person was not of sound mind always rests with the person who alleges the same. There are various categories of people who are said not to possess a sound mind including lunatics, idiots, people suffering from epilepsy, and even people who at the time of making a contract are under the influence of alcohol, or any other substance.

1. Lunatics- People who are sometimes not of sound mind but possess their mental faculties at other times capable of understanding and possessing the ability to enter into a contract. If a person enters into a contract when they are in a state of mind where there are able to enter into a contract and possess sound mind as per legal requirements, then the contract will be held to be valid and legally enforceable.
2. Idiot- A person who does not possess the mental capacity or maturity to enter into a contract at any time. A contract entered into by such a person would be held to be void ab initio.
3. Influence of Alcohol or other substance- Influence of any substance which would be sufficient to deter the judgement of a person or effect their interests while entering into a would render the contract void.

The basic principle of unsoundness of mind is that if the person at the time of making the contract is able to understand and evaluate the nature, scope, obligations and purpose of contract, and possess the skill and aptitude to consent to the institution of mutuality of obligations, and the effect of the same on the rights, duties and interests of the person, then the person would be termed to be in a sound state of mind. A contract made by a person of unsound mind for the supply of necessaries for himself or for persons he is bound to support (old parents, wife, children) would be held to be valid as it resembles a quasi- contractual obligation.

PERSONS DISQUALIFIED BY LAW

There are several categories of people who do not possess the capacity to enter into a contract by reason of them being disqualified by law. They are-

1. Insolvents- An insolvent person can be defined as someone who has been adjudged as bankrupt or against whom insolvency proceedings have been initiated in a competent court of law. An insolvent person does not have any deciding vote over any of his/her assets or interests and hence cannot enter into a contract.
2. Convict- A convict is someone who is undergoing a prison sentence. Such a person loses their right to enter into any contract. The person cannot regain their right after they are released from prison and they have served their prison term fulfilling their duty to the society. A convict may enter into a contract if/when they have been granted parole.
3. Alien Enemy- A contract made with a resident or a citizen of a country with whom the home country is at war with are either void due to the conditions of war or if against public policy, and contracts made before the war remain suspended. Even a citizen of home country who is a resident of the enemy state will be recognised as an alien enemy and no contract could be entered between a resident of home country and such a person.
4. Foreign Sovereign- Ambassadors and foreign envoys enjoy several immunities and powers in the performance of their work and while they can sue for performance of contract, they cannot be sued for performance of contract without prior permission of the union government. Furthermore, due to several immunities and agreements, they cannot be prosecuted in courts (except in exceptional cases) until they submit to the jurisdiction of the court.

CONCLUSION

In this article various aspects related to contractual capacity and capacity to contract along with case laws, provision and illustrations were discussed in order to establish who can enter into a contract. Generally, as per section 11 of the Indian Contracts Act, minors (below the age of 18 years), people of unsound mind (at the time of making the contract), and other person statutorily disqualified by law do not possess the contractual capacity to enter in to a contract. A contract entered into by a minor and a person of unsound mind in void ab initio and cannot be enforced and ratified, the person cannot be made personally liable.  General rules and exceptional circumstances were discussed as to when a contract can be enforced as against a minor and a person of unsound mind.

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[1] Suraj Narain v.  Sukhi Aheer AIR 1928

[2] Mohori Bibee vs Dharmodas Ghose (1903)