Capacity to enter into a Contract under Indian Contract Act

What is the capacity to enter into a contract?

Meaning of Capacity to Enter into a Contract: – Capacity to enter into contract means the competency to enter into a valid contract legally. The capacity to contract binds the parties of the contract with a promise to oblige by it. But only certain persons have the competency or the capacity to make a contract. According to Section 11, “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.”

One of the essentials of a valid contract, mentioned in Section 10, of the Indian Contract Act, 1872, is that the parties to the contract should be competent to enter into a contract.

It means that the following three categories of persons are not competent to contract: –

A Person who has not attained the Age of Majority, i.e., one who is a Minor: – Since any person less than 18 years of age does not have the capacity to contract, any agreement made with a minor is void ab-initio (from the beginning). Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority since the contract is void ab-initio. And, a void agreement cannot be ratified.
A Person who is of Unsound Mind: – According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a contract, a person is said to be of sound mind if he is capable of understanding the contract and being able to assess its effects upon his interests.
A Person who has been Disqualified from Contracting by some law: – Apart from minors and people with unsound minds, there are other people who cannot enter into a contract. i.e. do not have the capacity to contract. The reasons for disqualification can include, political status, legal status, etc. Some such persons are foreign sovereigns and ambassadors, alien enemy, convicts, insolvents, etc.

What are the disqualifications from entering into a contract?

As per the Indian Contract Act, 1872, all persons who do not meet the criteria mentioned in section 11, are incompetent to contract.

However, some people aren’t able to enter into a contract, as they’re not capable. This includes the following:–

Those who are insane
Minors or infants
Those who are under the influence of drugs
Persons who are bankrupt
Disqualified person
An enemy alien

Explanation: –

Minor: –
- In India, a minor is an Indian citizen who has not completed the age of eighteen. A minor is unable to understand the nature of rights and liabilities arising from an agreement.
- In most states, minors are those who are under 18 years of age. They don’t have the capacity to make a contract, and if one signs a contract, they can either void the contract or honor the deal. There are some exceptions to this, however, most states don’t let a minor void a contract for clothing, lodging, good, and other necessities. A minor can also decide to void a contract only while they’re under the age of majority. Once they turn 18 years old and have taken no steps to void the contract, then the contract signed by them will be a valid contract.
- A contract with a minor is void ab initio (void from the beginning) and cannot be enforced in the court of law. The result is that a party cannot compel a minor party to perform its part of obligations to performance as mentioned in the agreement (specific performance of an agreement/rule against estoppel).
- In some cases, a contract entered into by a minor’s guardian for his or her benefit is valid in the eyes of the law: –
  - The marriage contract was done by the minor’s guardian.
  - Minor entered into a partnership contract for his benefits. But he will not be held liable for the losses incurred.
  - A contract relating to the property of a minor was entered into by his guardian if it is for the benefit of the minor.
  - Apprentice contract with a minor.
  - Contract supplying minors with goods and services necessary for life.
- Websites like YouTube explicitly mention in their terms and conditions that any minor while using their services indicates that he or she has the permission of his/her parent/guardian. Parents and guardians are held responsible for the child’s activity on such websites.

Person of Unsound mind: –
- A person who doesn’t have a capable mental capacity can void or have their guardian void a contract unless it’s for necessities. Most states use a standard they follow to test mental capacity that sees whether the person understands the meaning and effect of all words that make up the transaction or contract. This happens using a cognitive test, while some states use the affective test or the motivational test. Courts will measure the person’s mental ability to decide if they knew what they were doing when they entered into the contract.
- Idiots: – an Idiot, in medical terms, mental retardation is a condition where a person’s mental age is less than a child under 3 years of age. Therefore, idiots are unable to understand the nature of the contract and it will be void from the beginning. Hence idiots do not have the capacity to enter into a contract.
- Lunatic: – A person who is of sound mind for a certain period and is of unsound mind for the rest of the period of life is known as lunatic. When a sound mind enters into a contract with a sound mind, i.e., capable of understanding the nature of the contract, it is a valid contract. Otherwise, it is a void contract. Illustration: – ‘A’ enters into a contract with ‘B’ when he is of sound mind. Later, ‘A’ becomes unsound mind. The contract is valid.
- People under the Influence of a Drug: – A contract signed under the influence of alcohol/drugs may or may not be valid. If a person is so intoxicated at the time of entering into a contract that he is not in a position to understand the nature and consequences, then the contract is void. However, if he can understand the nature of the contract, it will be enforceable and is considered in the capacity to enter into a contract. Illustration: – ‘A’ enters into a contract with ‘B’ while he was drunk. Here, the burden of proof is on ‘A’ to show that at the time when was entering into the contract he was intoxicated and unable to understand the nature of the contract and ‘B’ was very well aware of his condition.

Persons Disqualified by Law: –
- Foreign Enemy: – A foreign enemy is a citizen of a country with which India is at war. Any contracts made during a period of war with a foreign enemy are void. An Indian citizen residing in the territory of a foreign enemy shall be treated as a foreign enemy under contract law. Contracts made before the war period are either dissolved if they are against public policy or remain suspended and revive after the war ends. Illustration: – ‘A’, a person of country ‘Y’ orders the goods of Country ‘X’. The goods are shipped and before they can reach ‘Y’, Country ‘X’ declares war with Country ‘Y’. The contract between ‘A’ and ‘B’ becomes void.
- Convicts: – A person who is convicted of any offence is incompetent to enter into a contract. However, he will regain his capacity after the completion of his punishment. Illustration: – ‘A’, serving his sentence in jail. Any contract signed by him in this period is void.
- Insolvent: – An insolvent is a person who is declared insolvent/against whom an insolvency proceeding has been filed in the court/resolution. Since the person has no power over his property, he cannot enter into a contract concerning the property.
- Foreign Sovereigns: – Diplomats and ambassadors of foreign countries enjoy contractual immunity in India. Unless they submit themselves to the jurisdiction of Indian courts, they cannot be sued in Indian courts. Additionally, approval from the central government is also required in such cases. However, the foreign sovereign has the right to enforce the contract against a third person in Indian courts.
- Body Corporate: – A company is an artificial person. The ability of a company to enter into a contract is determined by its memorandum and articles of association.

Competency to enter into a contract on behalf of another person

According to the Indian Contract Act, 1872 one person can appoint another who will enter into a contract with a third person on his behalf. The person in this example is known as the principal and the other person as the employed agent.

Any person can be employed as an agent. However, a minor or a person without a sound mind cannot be held liable for their acts.

An agent’s authority may be either: –

Express, i.e. orally or in writing;
Implied, i.e. derived from facts or circumstances.

Companies ensure each other’s competencies while entering into a contract

Most companies when they enter into a contract with each other, they want to ensure that the other party is competent to enter into a contract. This is necessary to avoid any future legal complications. This is mostly done through the inclusion of a representation clause in a contract, stating that the company, according to its memorandum and articles of association, can enter into a contract through its authorized representatives.

A copy of the Articles of Association may be attached to confirm the representation made by both parties. If the memorandum and articles provide otherwise, a prerequisite clause is incorporated into the agreement that the company will pass the necessary board resolutions to replace the articles of its association. A set date, called a long stop date, is given to the other party to comply with the conditions precedent failures that the agreement will hold.

A party may be asked to submit a copy of the board’s resolution so that the changes passed in the articles of association prove its compliance with the other party. It is mentioned in the agreement that the two parties condemn each other from any litigation, proceedings, or liabilities arising from the violation of the representation clause.

Case Laws under Capacity to enter into a contract

Khan Gul vs. Lakha Singh (1928) ILR9LAH701
- In this case, the defendant while still a minor, fraudulently concealing his age, contracted to sell a plot of land to plaintiff. He received the consideration of Rs. 17,500/- and then refused to perform his part of bargain. The plaintiff prayed for recovery of possession or refund of consideration. There could be no question of specific enforcement, the contract being void ab initio.
- There is no real difference between restoring the property and refunding the money, except that the property can be identified but cash cannot be traced.

Mohori Bibee vs. Dharmodas Ghose
- The defendant, Dharmodas Ghose, a minor, had mortgaged his property in favour of the moneylender, Brahmo dutta, for securing a loan of Rs. 20,000. Mr. Brahmo dutta authorized Kedar Nath to enter into the transaction through a power of attorney. Mr Kedar Nath was told about the fact that Dharmodas Ghose was a minor through a letter sent by his mother.
- However, the mortgage deed contained a declaration that Dharmodas Ghose was of the age of minority. The mother of the defendant sued on the ground that the mortgage executed by her son is void on the ground that her son is a minor.
- The relief sought by the defendants was granted and an appeal was made before the Calcutta High Court by the executors of Brahmo dutta. The same was rejected.
- Thereafter an appeal was made to the Privy Council. The Privy Council said that: –
  - A contract with a minor is void-ab-initio.
  - The Sec. 7 of the Transfer of Property Act, 1882 states that a person competent to enter into a contract is competent to transfer property.
  - Therefore, the mortgage executed by the defendant is void.
  - However, if a minor enters into a contract and commits part of its obligations, the other party may be forced to perform and fulfill its obligations, and in such cases, the contract is legally enforceable.

A.T Raghava Chariar vs. O.A. Srinivasa Raghava Chariar
- A minor entered into a contract for mortgage with a person of the age of majority.
- The minor extended the monetary amount and performed his part of the obligations.
- The other party refused to honor the agreement.
- The full bench of the Madras High court had to decide “whether a mortgage executed in favour of a minor who has advanced the whole of the mortgage money is enforceable by him or by any other person on his behalf.”
- The court ruled that: –
  - The agreement sought to be enforced is the promise of the mortgagor who is of full age to repay the money advanced to by the mortgagee.
  - The mortgagee (the minor) has already advanced the money which was the consideration for the promise of the mortgagor and performed his part of the obligations. There is nothing pending from his side.
  - Hence, the contract is enforceable.