NAVIGATING LEGAL BOUNDARIES: UNDERSTANDING CAPACITY TO CONTRACT IN INDIAN LAW

ABSTRACT

A cornerstone of Indian contract law is the idea of capacity to contract, which is intended to guarantee that parties to agreements are both legally and psychologically competent of comprehending and carrying out their obligations. Minors are those who are younger than the majority age (18 years old), and they are not legally capable of signing contracts. Any agreement made by a minor is considered void ab initio, which means it is null and void right away

According to the Indian Contract Act, those who are mentally incompetent are incapable of understanding contracts and making wise decisions about them. The burden of establishing unsoundness rests with the party making the claim, and the agreement with an insane person is deemed null and void. Many states, including insanity, insanity, or intoxication, can cause someone to become temporarily or irreversibly insane.

Safeguarding the interests of parties involved in contractual interactions in India requires an understanding of and adherence to these principles. Contracts with children are null and void from the beginning, but agreements with people who are mentally incompetent may nevertheless be valid depending on the specifics of each situation. Individuals and institutions can guarantee the development of legally sound contractual partnerships within the Indian legal system, promoting justice and security for all stakeholders, by carefully evaluating the parties’ capacity and abiding by the law.

KEYWORDS

Capacity, Minor, Unsound Mind, Disqualified by Law, Contract.

INTRODUCTION

A contract is an agreement legally enforceable by law. The purpose of a contract is to protect the parties if either party does not fulfill the promise. For a valid contract there are some essential conditions that should be fulfilled, that include there must be two or more parties, the parties must have the competency to contract, free consent of the parties, there must be a lawful consideration and lawful object and the agreement must not be expressely declared void. These conditions must be fulfilled by the parties to make an agreement legally enforceable by law.

The capacity to enter into a contract means that both the parties have a capacity to enter into a contract. According to the definition under Section 11 [1]of Indian Contract Act, 1872– Minors, Persons of unsound mind and persons disqualified from contracting by law do not have capacity to contract.

CAPACITY TO CONTRACT

It refers to the legal competency of parties to enter in a legally enforceable agreement. Competency in contract law means whether a person can enter into a valid contract or not. This is done for various reasons that include their immaturity and lack of understanding of transaction. For instance, a person below 18 years of age may not have full maturity to enter into a contract and hence involves parent or legal guardian who takes decision on behalf of the minor. The capacity to contract also include health conditions and mental stability of a person. Hence, a person with mental disorders or psychological impairments are considered incapable of entering into a contract.

CAPACITY OF MINOR

In India, the age of majority is 18 Years. However a person to whom a legally guardian is appointed by the court is minor until he/she attains the age of 21 Years. A minor has no legal competence to enter in a contract and hence any contract entered by a minor is void ab initio.

In the case of Mohori Bibee vs. Dharmodas Ghose[2], Dharmodas is a minor who mortgaged a property to Brahmo Dutt to take a loan. Attorney of Brahmo Dutt knew that Dharmodas was a minor. In this case Dharmodas is the plaintiff who filed an action for invalid agreement. According to the defendant the plaintiff misrepresented his age to get the loan and hence they sought remedy by applying doctrine of estoppel and also for repayment of loan amount. The court here held that a Dharmodas is a minor and hence not liable to repay the loan amount as the contract was void ab initio and the doctrine of estoppel cannot be applied as defendant’s agent knew that Dharmodas was a minor at the time of entering into the contract.

Effect of Minor’s Agreement

Doctrine of Estoppel cannot be applied

A minor could use minority as a defense to avoid liability under the agreement, even if he has fraudulently stated that he was of majority when the agreement was made. This is because applying the doctrine of estoppel would be equivalent to imposing a null and void agreement, which would go against the fundamental tenets of the statute.

Ratification is not allowed

An agreement made by a minor that is null and void from the start cannot be ratified when the minor reaches the age of majority. However, if the benefit is obtained partially while the individual is still in his minority and partially after becoming a majority, then a commitment to pay for both made after becoming a majority is legitimate and enforceable.

Liability for Compensation

Compensation is covered by Sections 39 and 41 [3]of the Specific Relief Act of 1963 as well as Sections 64, 65, and 70[4] of the Indian Contract Act. If the minor files a lawsuit seeking the cancellation of the instrument, the court may order him to repay any benefits received from it. He might be asked to reimburse the amount his estate has profited from, even if he is a defendant.

No Liability in Contract or in Tort Arising Out of a Contract

A minor who commits a tort bears the same liability as an adult. However, the child cannot be held liable if the tort is directly related to the contract violation. Nevertheless, the existence of a contract does not absolve the child of responsibility if the tort is unrelated to it.

A Minor can be a Beneficiary of a Contract

Section 30 [5]of the Indian Partnership Act, 1932 states that a minor may enjoy benefits from the partnership firm even though they are not allowed to become partners in the business. A Minor Is Always Allowed to Benefit from Being a Minor. Even if a child enters a contract or incurs debt while posing as a major, they are still able to claim their minority. The estoppel rule cannot apply to a minor. His minority status can work to his advantage.

Contract by Guardian

A minor is always entitled to benefits associated with being a minor. It is not possible for guardians to bind minors through a contract for the purchase of real estate; however, a contract for the sale of a minor’s property signed by a certified guardian appointed by the court and approved by the court may be enforced. This is due to the fact that a guardian may legitimately sign a contract on behalf of a minor under specific conditions.

Insolvency

A minor cannot be declared insolvent because he cannot access debts. Moreover, if the child has unpaid debts from his belongings for which he bears no personal liability.

Joint contract by a Minor and an Adult

If a guardian executes a joint contract on behalf of a minor and an adult, the adult is liable for the terms of the agreement.

CAPACITY OF PERSONS OF UNSOUND MIND

“Soundness of mind” is defined under Section 12 [6]of the Indian Contract Act of 1872. A person is considered to be of sound mind if, at the time of the contract, he is able to comprehend it and make an informed decision about how it will affect his interests. When in sound mind, a person who is normally of unsound mind but sometimes of sound mind may enter into a contract. The agreement with a person of unsound mind in India is void. To prove unsoundness of mind, one need only show that the person in question was behaving against their best interests by acting irrationally and without giving their actions enough thought. Medical documentation of a mental disease is not required.

It was highlighted in R. Lingaraj v. Parvathi [7]that a person’s simple mental state does not equate to “unsound mind,” nor does mere “weakness of intellect” fall within the concept of unsound mind.

Lunatic: An individual having an unbalanced mental capability is called a “Lunatic”. A lunatic does not always have to be insane; he may occasionally become insane.
Idiots: An “idiot” is someone who has completely lost all mental faculties. An accord struck by a fool is void since ignorance is a chronic ailment.
Intoxicated person: Because they are not in a state of mind that permits them to make a reasonable judgment, people who are intoxicated are not competent to enter into contracts.

In the case of Sudama Vs Rakshpal Singh[8], it was held that the burden of proof that a person is of unsound mind is on whom who alleges it.

COMPETENCY OF PERSONS DISQUALIFIED BY LAW

Certain categories of persons are not qualified to engage into contracts and are forbidden from doing so in whole or in part. These groups include foreign sovereigns, criminals, enemies of the nation, insolvent people, and so forth. Therefore, agreements established by these individuals are void.

Alien Enemies

Everyone who is not an Indian citizen is considered an alien. Aliens are friends with India when their sovereign or state is at peace with India. In the event of a conflict, on the other hand, he will be an alien enemy. No contract may be made with an alien country if there is a war between India and the alien country, unless the Indian government has given its prior assent.

Convicts

A criminal who has been found guilty or given a jail term by a judge in a legal proceeding is referred to as a convict. A prisoner cannot sign a contract or bring legal action while serving their sentence. However, when his term expires or he is pardoned, his incapacity will vanish.

Insolvents

Insolvents are not allowed to enter into contract until they have been freed by a court of law. The judge’s designee, who is in charge of managing the insolvent’s estate-related duties, is entitled to these people’s possessions.

Ambassadors and Foreign Sovereigns

Foreign sovereigns are the delegates of foreign governments. They have multiple advantages. In general, one cannot sue someone unless they agree to be subject to the jurisdiction of an Indian court. They are not allowed to enter into a contract unless an Indian citizen first receives authorization from the Indian government to file a lawsuit against them in an Indian court.

Body Corporate

Companies, including registered corporations and municipal bodies, are not allowed to do business, buy or sell real estate, file lawsuits, or appear in court without their seals. Limitations on a corporation’s authority are outlined in its charter or memorandum of association, which spells out what the company can and cannot do. Except for the ones that make sense in relation to the objectives, all of these agreements are supra vires, or null and invalid. A firm-wide resolution passed at a general meeting cannot sanction such contracts.

CONCLUSION

In India, the fundamental basis of a legally binding agreement is the concept of capacity to contract, which was created to prevent people from making commitments they are not legally or mentally capable of understanding or keeping. The Indian Contract Act, 1872, stipulates that three main groups of people are not allowed to enter into contracts: minors under the age of majority (18, or 21 if a guardian is appointed); people of unsound mind, which includes people with mental impairments, drunkenness, or not having the necessary comprehension of the nature and implications of the agreement; and lastly, people who are legally disqualified, like foreign sovereigns, alien enemies, criminals, alien ambassadors, and corporations acting outside their legal authority. On one hand the contract entered by a minor is void ab initio that is void from the beginning, while on the other hand, the contract entered by a person of unsound mind is not void ab initio but depends on the circumstances and differ from case to case. Through rigorously confirming the parties’ capacity and abiding by these set rules, people and institutions can protect not only their own interests but also legally sound contractual relationships within the Indian legal system, guaranteeing security and justice for all concerned.

REFERENCES

[1] Indian Contract Act, 1872, No. 11

[2] Mohori Bibee vs. Dharmodas Ghose, (1903) 30 Cal 539

[3] Specific Relief Act, 1963

[4] Indian Contract Act, 1872

[5] Indian Partnership Act, 1932, No. 30

[6] Indian Contract Act of 1872, No. 12

[7] R. Lingaraj v. Parvathi AIR 1975 Madras 285

[8] Sudama Vs Rakshpal Singh, 2013-99 ALL LR 351

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