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CAPACITY TO THE CONTRACT

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This article is written by Saloni Chandar Patil of 7th Semester of Adv. Balasaheb Apte College of Law, an intern under Legal Vidhiya

Abstract

The concept of capacity to contract is a fundamental principle in contract law, determining whether a party is legally capable of entering into a binding agreement. This article search through the complexities of capacity to contract, exploring the each different factors that affect an individual’s or entity’s ability to form a valid contract. The discussion encompasses the legal frameworks governing capacity, including age, mental capacity, intoxication, and duress, as well as the implications of incapacity on contractual validity. The article also examines the nuances of capacity in specific contexts, such as business transactions, consumer contracts, and international agreements. By providing a thorough examination of capacity to contract, this article aims to clarify the legal landscape and offer practical guidance for contracting parties, legal practitioners, and scholars alike.

Keywords

Capacity, Contract, Agreement, Minor, Age, Mental capacity, Intoxication

Introduction

“The capacity to enter into legally binding contracts is a fundamental aspect of personal and commercial relationships. However, not all persons have the legal capacity to enter into contracts, rendering their agreements invalid or voidable. The ability of a contract refers to human legal abilities to conclude a forced contract that requires a combination of mental, emotional, and legal abilities. This important concept understands the contract obligations and guarantees that only those who can defend are responsible. In this article, we delve deeper into the complexities of capacity to contract and explore the key elements, exceptions and implications of this important legal principle. We consider the various factors that determine capacity, including age, mental health and intoxication, and the consequences of entering into a contract with a person who does not have capacity. Understanding the complexities of contract law allows individuals and businesses to navigate the complexities of contract law with confidence and clarity.

What is Contract?

In ordinary terms, Contract means agreement by parties or agreement between persons. It is expected to fulfill the commitment by the parties who enter into contract. The Indian Contract Act provides a required legal framework for contract. “Jus In Personam” and not “Jus In Rem” are created by law of contract. This means that the right created is against a specified party and not against the world at large’[1]

Section 2(h)[2] defines contract as a agreement that is enforced by law. As per Section 2(e)[3] an agreement is an consideration of every promise or set of reciprocal promises. While Section 2 (b)[4], states that acceptance of Proposal is a Promise. It could also be said that- Acceptance of Proposal is an Agreement.

Thus, when a agreement is enforced by law, after the proposal is made by one the parties and accepted by the party to whom the proposal is made is called as contract between the parties. The parties involved in making a proposal and in acceptance of proposal are the parties to the contract.

Who can enter into a Contract?

The ‘competent’ parties can enter into a valid contract as per Section 10 of Indian Contract Act,1872. As per Section 10[5], the agreements are contract if they are made by parties who are competent to contract by getting their free consent , with a lawful object and for a lawful consideration and are not hereby expressly declared void.

Competency of Parties

The Section 11[6] give category for a person to be competent for contract. A person can be competent to the contract if they have attained the age of majority , the person who is of sound mind and the person who is not Disqualified by the law he is subject to.  The persons who are incompetent to the contract are-

[A] Minors Agreement:

To attain the age of majority is one of the main factors to enter into a Contract. As per Section 3[7] of the Indian Majority Act, 1875 ; the age of majority for an individual is 18 years , a person who has not completed the age of 18 is a minor . The exception to the above rule is – where a trustee or guardian has been appointed in respect to minor’s property[8] under ‘Guardian and Wards Act, 1890’ . Here the age of majority will be on completing the age of 21 years.

Rules regarding minor’s agreement are as follows:

Lawfully, the agreement made by a minor is  void from the initial stage of the agreement itself. This contract owns no legal weightage or legal meaning from initial stage or negotiation taken towards its proposed making. This contract can not be technically entered into but it is even void.

In the case of Mohori Bibee v/s Dharmodas Ghosh[9], the court stated that, a minor agreement is not only void but ‘void- ab- initio’. No legal action could be taken against the minor to make her liable in any circumstances even if the dealing were in a negotiation stage or preliminary. Therefore, the money lender was obliged to return her property papers and could not demand refund of money advanced.

In another case of Raj Rani v/s Prem Adib[10]  , the court held that  the minor and her father could not sue on promise. However, in some cases, the contacts which are to benefit of minor and under which minor is not required to bear any obligation may be enforced. However, the category of the beneficial contract does not include ordinary trade contracts which would still be void.

Estoppel is a legal doctrine that prevents a person from contradicting their own previous actions or statements, or from arguing facts that are contrary to their past claims. However, in the case of a minor’s agreement (contract entered into by someone under the age of majority, typically 18), estoppel does not apply.

The reasons for such restrictions are that, firstly the Minors are not considered to have the legal capacity to enter into contracts, so they cannot be estopped from denying or avoiding their agreements. Secondly, the law aims to protect minors from exploitation and unfair agreements. Allowing estoppel to apply would undermine this protection. And lastly, the Estoppel against a minor’s agreement would go against public policy, which favors the protection of vulnerable individuals like minors.

The consequences are , that a minor can avoid or repudiate their agreement at any time, even after reaching the age of majority and the other party cannot use estoppel as a defense against the minor’s avoidance or repudiation of the agreement. This rule ensures that minors are protected from unfair agreements and can avoid or repudiate contracts entered into without proper understanding .

In the case of , Leslie v/s Sheil[11], a minor misrepresented himself as an adult by lying about his age and obtained loan from money lender. The contention of the money lender that the doctrine of estoppel would apply and hence the minor should be made responsible was rejected by court stating that the doctrine of estoppel shall not apply in case of minor’s agreement.

Rectification is an  remedy by which the court can correct the fault of expression where a written document does not match the parties’ intention. However, in the case of a minor’s agreement (contract entered into by someone under the age of majority, typically 18), rectification is not available.The reasons for not permitting the rectification of contract are, that the Minors are not considered to have the legal capacity to enter into contracts, so their agreements cannot be rectified. Minor’s agreements are voidable at the option of the minor, and rectification would undermine this protection. Allowing rectification would potentially force minors to be bound by agreements they did not fully understand or intend to enter into.

The Minors cannot be held liable in tort as the agreement by minor is devoid of all legal effects. Even if such a tort is directly connected with the contract.

When a minor enters into an agreement, they are not bound by its terms. The doctrine of restitution aims to prevent unjust enrichment, where the minor would retain benefits without paying for them. Restitution is limited to the actual benefits received by the minor, not the full contract value. The minor is not required to compensate the other party.

 For example, A minor buys goods, but then repudiates the contract. They may be required to return the goods or pay for their value. Or a minor receives money under an agreement, but then repudiates it. The money may be required to be returned. .

The doctrine of restitution aims to strike a balance between protecting minors from unfair agreements and preventing unjust enrichment. It ensures that minors do not retain benefits without paying for them, while also not being bound by agreements they did not fully understand or intend to enter into.

A guardian can enter into a contract on behalf of a minor, but such contracts are subject to certain rules and limitations. The legal authority is required for the guardian to perform on behalf of the minor. The contract must be for the benefits of minor and, not for the personal gain of the guardian. The contract must be necessary and suitable for the minor’s needs. In some cases, court approval may be required for the contract. The contract may be rejected or confirmed when the minor reaches the age of majority.

A minor may be admitted to the benefits of a partnership firm. However, he can, under no circumstances, be made to share the losses or liability of the firm. Here, it is to be noted that a minor cannot be one of the parties who get together and form a partnership business. There has to be an existing partnership in which the minor is admitted .

 A minor may be appointed as an agent to act on behalf of another or represents him in dealings with third parties. The person who appoints him is known as the principal. If the act is authorized, the principal is bound to it. If the act is unauthorized , the principal is not bound to it.  However, the agent is not liable to any unauthorized act of the principal or third party to the contract.

A minor can be a beneficiary or a transferee under a contract.

A minor’s property may be liable for necessaries supplied. This is a Quasi contract.

[B] Persons of unsound mind:

The person need to be of sound mind in order to enter into a contract. The person of unsound mind cannot be stated in a exact way. There are various meanings, categories and definitions of insanity. It is necessary to possess stable mental capacity or ability in order to enter into a contract. According to Section 12[12], In order to make a contract, a person is considered to be of sound mind if he is capable of understanding the terms and conditions of the contract, and forms a rational judgement. The definition of unsound mind includes,- a lunatic, idiot, or a person in state of intoxication at the time of entering into the contract. However, a person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind; while a person who is usually of sound mind but occasionally of unsound mind, may not make a contract when he is in unsound mind.

[C] Person Disqualified by Law:

The categories of persons who may be said to be disqualified by law from contracting are –

  1. Insolvent Persons
  2. Convicted Criminals
  3. Alien Enemies – It could be a person, firm or body corporate belonging to a country which is at war with our country.
  4. Foreign sovereigns, ambassadors and representatives of international bodies such as United Nations or International Red Cross.

Conclusion

In conclusion, capacity to contract is a essential component of contract law, ensuring that only those with the required lawful capacity can enter into binding agreements. Through this article, we have explored the various aspects of capacity, including the legal frameworks, factors affecting capacity, and specific contexts. It is clear that capacity to contract is not a forthright concept, and its refinement require detailed consideration.

As the legal landscape continues to evolve, it is essential to remain vigilant in ensuring that contracting parties possess the necessary capacity. By doing so, we can prevent potential disputes, protect vulnerable individuals, and maintain the integrity of the contracting process.

Eventually,  understanding capacity to contract is important for those who are involved in forming or enforcing contracts. By grasping the complexities of this concept, we can navigate the intricacies of contract law with confidence and certainty, fostering a more just and equitable legal environment for all.

References

[1] Dr. Krishna Shetty, The Simplest Book on Contract Law, p. 1, (Naveen Publications )

[2] THE INDIAN CONTRACT ACT, 1872, § 2(h), No. 9, Act of Parliament,1872 ( India)

[3] THE INDIAN CONTRACT ACT, 1872, § 2(e), No. 9, Act of Parliament,1872 ( India)

[4] THE INDIAN CONTRACT ACT, 1872, § 2(b), No. 9, Act of Parliament,1872 ( India)

[5] THE INDIAN CONTRACT ACT, 1872, § 10, No. 9, Act of Parliament,1872 ( India)

[6] THE INDIAN CONTRACT ACT, 1872, § 11, No. 9, Act of Parliament,1872 ( India)

[7] THE INDIAN MAJORITY ACT, 1875, § 03, No. 9 , Act of Parliament,1875 (India)

[8] THE GUARDIAN AND WARDS ACT, 1890; No. 8, Act of Parliament, 1890 ( India)

[9] Mohori Bibee V/S Dharmodas Ghosh,  ILR (1903) 30 Cal 539 (Pc)

[10] Raj Rani v/s Prem Adib, (1949)51BOMLR256, AIR 1949 BOMBAY 215

[11] Leslie Ltd. V Sheill (1914) 3 K.B.607.

[12] THE INDIAN CONTRACT ACT, 1872, § 12, No. 9, Act of Parliament,1872 ( India)

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