CAPACITY TO CONTRACT

Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement that is enforceable by law. The ability or eligibility of partners to form a business contract is the most important aspect of a legitimate partnership arrangement. The legal ability of an individual or an entity to enter into a partnership is referred to as “capacity to contract”. Before signing a contract, the partner must be competent and meet the stipulated standards, according to business law. The capacity in contract law is defined under Section 11 of the Indian Contract Act, 1872. It categories the ability to make contracts in three ways:

  • Attaining specified age
  • Being of sound mind
  • Not be barred from engaging into a contract the basis of any law he is subjected to

Attaining the age of 18

The Indian Majority Act of 1875 governs the age of majority in India. An Indian citizen is said to have reached the age of majority when he or she has completed eighteen years of age, according to Section 3 of the Indian Majority Act, 1875. The majority of states in the United States and the United Kingdom have an age of majority of 18 years. If a person is under the age of 18 years and has been assigned a guardian, he will reach majority at the age of 21 years.

  • Sound mind

According to Section 12 of the Indian Contract Act, 1872, a person must be of sound mind, have a thorough comprehension of the contract terms and circumstances, and be able to assess the contract’s influence on his interests. The capacity of the contracting parties also applies to someone who is typically of unsound mind but occasionally of sound mind. In this scenario, however, the contract must be signed only when he is completely sound. According to the definition of capacity law, a contract made by a person of unsound mind is null and void. A contract is formed when a person is under the influence of any kind of intoxicant. Such individuals can make a contract only when they are sober and have a complete understanding of the considered incapable of contractual terms.

Illustrations-

  • A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
  • A sane person who is delirious from a fever or is so inebriated that he cannot grasp the terms of a contract or make a logical decision about how it affects his interests cannot contract while delirium or inebriation is present.

Person of unsound mind

  • Idiots- An idiot is a mental retardation condition in which a person’s mental age is less than that of a 3-year-old child. As a result, fools will be unable to comprehend the nature of the contract, and it will be null and void from the start.
  • A lunatic is a person who is of sound mind for a period of time and then becomes unsound for the remainder of the time. It is a legitimate contract when a lunatic enters into one while of sound mind, that is, when he is competent of understanding the nature of the bargain. Otherwise, it’s pointless.

Illustration– When A is of sound mind, he enters into a contract with B for the sale of goods. Later on, he becomes unsound mind. The contract is legally binding.

  • People under the influence of drugs- A contract executed while under the influence of drugs or alcohol may or may not be valid. The contract is void if a person is so inebriated at the time of entering into it that he is unable to comprehend its nature and consequences. It will be enforceable, however, if he is capable of comprehending the nature of the contract.

Illustration-A signs a contract with B while under the influence of alcohol. The burden of proof is on A to establish that he was unable to comprehend the consequences at the time of contracting and that B was aware of his condition.

Any law to which a person is subject should not disqualify him

Some people, in addition to minors and the unsound mind, may be prohibited from entering into any contract. Under current commercial rules, such individuals lack the legal power to contract. Disqualification under contractual rules could be for a variety of reasons, including politics, legal status, and so on. This can also happen if a foreign sovereign or national is an enemy, a convicted criminal, or an insolvent.

MINOR – A minor in India is a citizen of India who has not reached the age of eighteen. A minor is unable to comprehend the nature of the obligations emanating from a contract. As a result, a contract with a minor is void ab initio (void from the start) and cannot be enforced in court. As a result, a party cannot compel a minor to carry out his or her part of the agreements responsibilities (plead particular performance of an agreement/rule against estoppel).

Mohori Bibee v. Dharmodas Ghose[1]

  • Dharmodas Ghose, a minor, had mortgaged his property in favour of Brahmo Dutt, a moneylender, in order to secure a loan of INR 20,000/-.
  • Through a power of attorney, Mr. Brahmo Dutt had authorised Kedar Nath to enter into the deal. Mr. Kedar Nath learned that Dharmodas Ghose was a minor after receiving a letter from his mother.
  • The deed of mortgage, on the other hand, stated that Dharmodas Ghose had reached the age of majority.
  • The respondent’s mother filed a lawsuit alleging that his son’s mortgage was void since he was under the age of 18.
  • The respondent’s request for relief was granted, and the executors of Brahmo Dutt filed an appeal with the Calcutta high court. The same was brushed aside.

After that, an appeal was lodged to the Privy Council. According to the Privy Council:

  • A contract with a minor is void from the beginning.
  • A person competent to contract is competent to transfer a property, according to Section 7 of the Transfer of Property Act of 1882.
  • As a result, the respondent’s mortgage is void.

If a minor enters into a contract and fulfils his portion of the contract’s obligations, the other party can be forced to execute and fulfil its obligations as well, and the contract becomes legally binding.

Suraj Narain Dube v. Sukhu Ahir[2]
  • Suraj Narain lent money to a minor, Sukhu Ahir. In exchange for the money borrowed, the minor signed a promissory note.
  • When the minor reached majority after four years, he and his mother signed a second promissory note in favour of Suraj Narain for the original debt plus interest accrued over the years.
  • The court ruled that the parties’ original agreement is void since a juvenile is unable to contract. Under the terms of the arrangement, the youngster was not obligated to pay anything. The minor, on the other hand, made a pledge and handed up the promissory note, which amounted to consideration.
  • There was no consideration from the Plaintiff in the second agreement signed by the parties. There was no consideration for a second agreement in the original advance. Due to a lack of consideration, the second agreement is null and void.

In some cases, a contract entered into for the benefit of a minor by the minor or the minor’s guardian is lawful in the eyes of the law-

  • A marriage contract entered into by a minor or his guardian.
  • A contract entered into with a minor that allows him to participate in the benefits of a partnership.
  • The minor, on the other hand, cannot be held personally accountable for the damages.
  • If it is for the advantage of the minor, a contract relating to the child’s property entered into by his guardian.
  • An apprenticeship contract with a minor.
  • A contract that provides essential products and services to children.

Leslie v. Sheill

The defendant in this case was a child who acquired a loan from the plaintiff by lying about his age. Later, the plaintiff filed a lawsuit alleging that the child is liable for fraud and that he should be forced to repay the money in equity. However, the court disagreed, holding that requiring the youngster to pay an equivalent sum from his current and future resources would amount to the execution of a void contract, and hence could not be done, even if the newborn entered into the contract through fraud.[3]

Critical Analysis

After carefully examining the legal provisions under English and Indian law, it was discovered that the latter’s statute does not explicitly state whether a minor agreement is void or voidable. Though the Mohari Bibee case cleared it to the point of becoming void-ab-initio, it has sparked a lot of debate on this subject. However, in the absence of exceptional circumstances, India is unable to ratify. Again, there have been a slew of legal judgements on this subject, leaving the situation unsettled. Furthermore, an unsound person is competent to contract under English law, but he can avoid the contract if he can prove to the court that he was unable to understand and the other party was aware of his incapacity. In India, however, the situation is different, and a contract entered into by a unsound mind individual is declared void, i.e. absolutely invalid.

Websites like YouTube explicitly state in their terms and conditions that any minor utilizing their services represents that he has his parent’s or guardian’s consent to do so. Parents and guardians are responsible for their children’s online activities.

Alien enemy– An alien enemy is a citizen of a country with which India is at war. Any contracts established with an alien enemy during the conflict are null and void. Under contract law, an Indian citizen residing in an alien adversary’s territory is treated as an alien enemy. Contracts entered into prior to the wartime are either dissolved if they are against public policy, or they are suspended and resurrected once the war is finished, assuming they are not barred by limitation. IllustrationA, of nation X, places an order for products from B, of country Y. The commodities are on their way to Y, but before they arrive, country X declares war on Y. The contract between A and B is rendered null and void.

Convicts– A convict cannot enter into a contract while he is serving his sentence. However, he regains his capacity to enter into a contract upon completion of his sentence. Illustration– A is serving his sentence in jail. Any contract is void which is signed by him during this period.

Insolvent– A person who has been declared bankrupt or against whose insolvency proceedings have been initiated in court/a resolution professional has taken possession of his assets is referred to as an insolvent. Because the person has no control over his assets, he is unable to enter into transactions involving the property. Illustration- X and Y sign a contract for the selling of commodities. An insolvency action is initiated against X prior to the sale. During the insolvency proceedings, A sells the products to Y. The contract is legally binding.

Foreign sovereign– Diplomats and ambassadors from other countries are granted contractual immunity in India. It is not possible to sue them in Indian courts unless they consent to the jurisdiction of Indian courts. In such instances, the federal government’s approval is also required. The foreign sovereign, on the other hand, has the ability to enforce contracts against third parties in Indian courts.

Conclusion

One of the most basic prerequisites for an agreement to be legal and enforceable in a court of law is the parties’ ability to contract. A contract made by someone who lacks the mental capacity to comprehend the nature and consequences of the deal is null and void from the start. Contracts with lunatics or individuals under the influence of a narcotic, on the other hand, may or may not be void depending on the circumstances. When any of the disqualifications are removed, a person’s legal power to contract is restored. When companies agree to contracts with one another, they usually endeavour to protect their interests. The most typical terms used to guarantee that both parties are competent to contract are representation and indemnity.[4]


[1]Ilr (1903) 30 Cal 539 (Pc)

[2]AIR 1928 All 440;

[3] (1914) 3 K.B.607

[4] Blog.ipleaders.in; Legalservicesindia.com


Authored by: Suhasini Tahiliani, 2nd Year, BBA LLB (H), Manipal University Jaipur

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