Capacity to Contract – Indian Contract Act, 1872

By | February 12, 2019
Capacity to Contract

Capacity to Contract

An agreement enforceable by law is a contract.[2] Such an agreement creates an obligation between the parties and is enforceable by law. For entering into a contract, there are certain essentials-

  1. Agreement between two parties
  2. The intent of Legal obligation
  3. Lawful consideration
  4. The condition should be certain with a legal object
  5. Free Consent
  6. Competency of parties

Capacity to Contract means the persons entering the contract should have the ability to do so. Section 10 of the Indian Contract Act, 1872 requires that the parties to a contract shall be competent to contract and certain people are restricted by law from entering into a contract; if any of these persons still enter into a contract, it will not be enforceable in law i.e. void. The competence of the contracting parties is an essential element of a valid contract.

Persons Competent to Contract

Who are competent to contract.—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.[3] It means that a minor, person of unsound mind and a person disqualified by law cannot enter into a contract. It is presumed that these persons do not know what they are doing.

The general theory of law in regard to contracts made by parties affecting their rights and interests is that there must be full and free consent in order to bind the parties. Consent is an act of reason combined with deliberation. To constitute a valid and binding contract, a party contracting must have the capacity to arrive at a reasoned judgment, as to the consequences of the transaction he is entering into.[4]

Persons declared incompetent to contract:

  • Minor
  • Persons of Unsound mind
  • Persons otherwise “disqualified from contracting”

Capacity to Contract 2[5]

Minor

Age of Majority: As per the law, a minor is a person domiciled in India, under the age of 18 years. In computing the age of any person, the day on which he was born is to be included as a whole day and he shall be deemed to have attained majority at the beginning of the eighteenth anniversary of that day.[6] Contract by a minor is void ab initio. According to the Privy Council, section 11 should be literally construed and that only a person who is of the age of the majority is competent to contract. A minor’s contract is, therefore, ab initio and wholly void. In the view of the Privy Council, this was also in accordance with the Hindu Notion of a minor’s incompetence to contract.[7] If a minor enters in a contract, the same agreement cannot be ratified by him on attaining the age of majority.

False Representation: Law favors the minor in a way that even if minor falsely represents himself as a major, he can plead minority and rule of estoppel will not apply.

Agreement on behalf of a minor: A contract for the benefit of the minor can only be entered into by the guardian. A minor, if cannot enter into a contract, still can be a beneficiary of a contract. Contracts of the betrothal of minors by their parents and guardians have been upheld on the ground of the custom of the community.[8] The contract which the guardian enters into should be for the purpose of legal necessity.

In Raj Rani v. Prem Adib[9], a film producer entered into an agreement with a minor girl to act in a film, and the same agreement was entered into by the father of the minor on her behalf with the producer. On a breach of the agreement, the minor sued the producer through her father as next friend. The court held that the agreement with the father was void, seeing that the consideration moving from the father was the minor’s promise to act, and as the minor could not in law promise, there was no consideration. On the other hand, had the consideration moved from the father in the shape of an undertaking by him that his daughter should act; the father could have sued but could recover only the damages he had suffered.[10]

Person of Unsound mind

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. Similarly, a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.[11] The purpose of the law is that the contracting party should be able to understand the consequences of the contract.

There is generally a presumption in favor of sanity. Sanity implies the capacity to understand and of forming a rational judgment as to a person’s own interests.[12] Unless a person is adjudged as of unsound mind after severe interrogation, the presumption of sanity prevails. Extreme old age has always been considered to reduce sanity. The burden of proof to prove unsoundness of mind lies on the person who alleges it.

Disqualified Persons

Law provides certain rules for the following to enter into a contract:

  • Insolvent/Bankrupt: An Insolvent is a person who is unable to pay off his debts and such proceedings have been initiated by his creditors. For individual debtors, this means that their incomes are too low for them to pay off their debts. For companies, this means that the money flow into the business and its assets are less than its liabilities. Bankruptcy is a legal declaration of one’s inability to pay off debts.[13] Insolvents lose their status as creditworthy and can enter into contracts only after their liabilities are discharged. When a debtor is adjudged insolvent, his property is vested with the official assignee, only who can then enter into contracts relating to the property of the insolvent.
  • Convict: A convict cannot enter into a contract while he is serving his punishment. However, he can enter into a contract after completion of his punishment. A convict can also enter into a contract when he is on parole or has been pardoned by the court. An existing contract with a person who is undergoing imprisonment cannot be enforced until the conviction is complete unless permission can be obtained from the Central Government.
  • Foreign Sovereigns and Ambassadors: Foreign sovereigns are the representatives of foreign states. They and their representatives are bestowed upon with certain privileges and immunities in every country. In India, they cannot enter into a contract except through their agents residing in India. If they enter into a contract through their agent, that agent will have the entire liability. Foreign sovereigns and ambassadors can enter into contracts and enforce those contracts in Indian courts, but they cannot be proceeded against in courts without the sanction of the Central government.
  • Alien enemy: A person who is not a citizen of India is called an alien. The rights and liabilities of an alien to sue and be sued in respect of a contract generally depend on whether he is an alien friend or an alien enemy. An alien enemy is a person whose country is at war with the Republic of India. A contract with an alien enemy is void, but with an alien friend is valid. A contract entered with an alien friend during peace will be rendered void on the outbreak of a war with that country. In certain cases (if the chance of ending the war is within a short period), a contract made before the outbreak of the war may be suspended during the course of the war and shall be performed after the war is over. However, the government can put restrictions on the performance of such contracts if it considers it necessary, on the basis of national interest.[14]
  • Company or statutory bodies: A contract entered into by a corporate body or statutory body will be valid only to the extent it is within its Memorandum of Association. Memorandum of Association of a company is a legal document which is important to its formation. While entering into a contract, the company cannot go beyond the conditions mentioned in the memorandum of association.

Contract law holds that a contract made by an intoxicated person is voidable at his discretion, but only if the other party knew or had reason to know the degree of impairment as the person was incompetent at the time the contract was formed. Also, the capacity of a woman to contract is not affected by her marriage either under the Hindu or Mohammedan law. A Hindu female is not on account of her gender, absolutely disqualified from entering into a contract; and marriage, whatever other effects it may have, does not take away or destroy any capacity possessed by her in that respect. It is not necessary to the validity of the contract that her husband should have consented to it.[15] 

Conclusion

The Contract Act, 1872 has provisions that are made with the intention to favor one of the contracting parties so that the other party cannot take benefit of that party. Certain categories of people are presumed to be not aware of their decisions and are incapable of properly weighing the consequences. It is the duty of the legislature that the laws made, should protect the rights of the people who have a weaker position and can be manipulated by the people with whom they enter into a contract.


By – Srishti Arora

UPES, Dehradun


Sources

[1] https://media.defense.gov/2017/Apr/11/2001730347/-1/-1/0/170411-A-QY194-001.JPG

[2]Section 2(h) in The Indian Contract Act, 1872.

[3] Section 11 in The Indian Contract Act, 1872.

[4] Unsoundness of mind in contract by Aishwarya Padmanabhan,    http://www.manupatra.com/roundup/325/Articles/Unsoundness%20of%20Mind%20in%20Contract.pdf

[5] Pixabay

[6]Section 3 in The Majority Act, 1875.

[7] Mohori bibee v. Dharmodas Ghose, (1903) 30 Calcutta 539 PC

[8] Rose Fernandes v. Joseph Gonsalves, (1924) ILR 48 Bom 673

[9] (1949) 51 Bom LR 256

[10] Contract and Specific Relief by Avtar Singh, twelfth edition  

[11] Section 12 in The Indian Contract Act, 1872.                                

[12] Mulla on the Indian Contract Act, H.S. Pathak, Student’s Edition- Eleventh edition, N.M. Tripathi Pvt. Ltd., Bombay, 1990.

[13] The difference between insolvency and bankruptcy, https://www.greenwaybankruptcy.com/articles/the-difference-between-insolvency-and-bankruptcy/

[14] Persons disqualified by law, https://gradestack.com/Mercantile-Law-for-the-CA/Capacity-to-Contrract/Persons-disqualified-by/22681-4473-55922-study-wtw last accessed on 8 February 2019

[15] Contract and Specific Relief by Avtar Singh, twelfth edition 


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