Capacity to contract means that the individual can enter into various types of contracts as given under the Indian Contract Act. It comes under the essentials of a valid contract. We make many contracts in our daily life. Buying fruit from a shop and promising to pay money in return is also a form of contract. We usually don’t pay attention to the shop owner whether he can make the contract or not. But, in reality, the capacity of parties to the contract is the most important factor in the contract.
You must have seen many kids selling car accessories on Signal or any other things. These children work as child labour and as per law, an agreement with or by a minor is a void contract.
This article on the capacity to contract deals with the capacity of parties to enter into a legal contract.
Table of Contents
Capacity to contract
Section 11 of the Indian Contract Act deals with the definition of the capacity to contract. According to the definition of capacity to contract:
“A person who is major, sound mind and not disqualified by law has the capacity to contract.”
In simple words, a person who has a sound mind, major and is not disqualified by law can enter into a contract.
As per the capacity to contract definition, we have two parties which are:
- Parties Competent to contract
- Parties Incompetent to contract
Party competent to contract
The party that meets these three conditions for capacity to contract can enter into a contract. The conditions are:
- The person has attained the age of majority (18 or above)
- The person has a sound mind
- He is not disqualified by law from entering into the contract
Party incompetent to contract
For the formation of a valid contract, the given people are not eligible because they cannot contract:
- Minor who has not attained the age of 18 or above
- The person in an unsound mind
- The person is disqualified by the law
Who cannot enter into a contract?
The person who has no contractual capacity or is incompetent to contract cannot enter into the contract. Let’s discuss each disqualification for entering into a contract.
Minor
As per the Indian Majority Act, a person who has not attained the age of 18 shall be considered a minor. A person who is below the age of 18 years cannot contract. It means a contract with a minor is a null and void contract. The person has no right to sue the minor in a contract in case of breach of contract done by a minor.
The reason behind the removal minor from making the contract is that the minor is not capable of understanding the nature and liabilities arising from the contract. Hence, the contract with the minor becomes null and void ab initio and it is not enforceable by law.
There is a famous case of Mohori Bibi Vs Dharmodas Ghose. It deals with the contract with minors.
Facts of the case
- A minor, Dharmodas Ghose make the contract of the mortgage by mortgaging his property in favour of the moneylender to Brahmo Dutt for securing the money of 20,000 rupees.
- Kedar Nath, who was authorized by the Brahmo Dutt knew that he was doing the contract with minor.
- The minor’s mother filed the plaint in the court that the mortgage executed by her son was void as he was a minor.
Judgment
The Privy Council held that a contract with a minor is null and void. Hence, the mortgage executed by the minor is void.
Effects of the contract with minor
The contract with the minor is void ab initio. But, if the minor made the contract with another party by hiding his age, then there will be some effects on the contract such as:
- Minor is not liable to perform his duty in the contract
- The minor is not responsible in case of any mishap during the contract
- The person cannot sue him for the breach of contract done by a minor
- Another party can not ask him to pay expenses incurred by them while doing a contract with a minor
If a minor hides his age and purchases a property from a person who is the competent party in the contract, the purchased property will be returned to that person. But, if the minor has sold that property or made changes in the property, then the person cannot sue him for the same.
Can a minor be a surety?
No, the minor cannot be the surety or bank guarantor. Because he is not liable to pay under the contract.
Minor can enjoy the benefits of being a minor in a contract
If a minor enters into a contract even by hiding his age, he can plead for the minority. The doctrine of estoppel cannot apply to the minor.
The mutual contract between minor and adult
An adult person can make the contract with a minor. But the contract must be made in front of the parents or guardians of the minor. In the contract between the minor and adult, the liability of the contract will be held on the adult who is a party to the contract with the minor. Minor will not be liable in that contract.
The contract benefiting the minor is valid.
Though the contract with the minor is void if a person makes the minor a partner just to enjoy the benefits, the contract will be valid. But, this contract cannot make the minor liable to pay the loss incurred to the company.
Contract by Guardian
The guardian of the minor can enter into a contract on behalf of the minor for the benefit of the minor.
Claim for necessary supplies to minor
According to the quasi-contracts, if a person is not competent to contract and receives the necessity from another person, he must reimburse that person from the property. It means section 68 of the Indian Contract Act makes the minor liable to repay the person who provides him with the basic necessities. But, in this case, the person has to prove that he provided the necessities to the minor because they do not have sufficient supplies with them.
A minor can be an agent.
A minor can be an agent in a contract but he will not be liable to his principal.
Use of negotiable Instrument by minor
A minor can draw, endorse and deliver cheques of any other negotiable instrument. It only binds the other party to fulfil their part not minor. This means, that if a minor has sold goods to a person who is competent to contract, has to pay the money for it.
Can a minor open a bank account?
Various types of bank accounts can be used to save money. But, unfortunately, a minor cannot open an account without his guardian. He has to open a joint account which can be converted after attaining the age of majority.
A person of unsound mind
A person who has an unsound mind cannot enter into the contract. According to contract law, the mental incapacity of a person prevents the person from understanding the consequences of the contract and he is unable to fulfil his liabilities in the contract. A contract with an unsound-minded person is a void contract and not enforceable by law.
There are three types given under the law which is considered as the unsound mind:
Idiot
A mental stage of a person where the ability of the brain becomes as less than 3 years old child
Lunatic
A person who has a sound mind for a certain time and after that, becomes an unsound mind, such person is called a lunatic. It is the form of an unsound mind. The contract done by him in the condition of sound mind is valid whereas the contract made during the time of his unsound mind is void.
Intoxication
Intoxication is the stage where the person is drunk or consumed intoxication and becomes incapable of understanding the nature of the contract which he is doing. The contract made on the condition of intoxication is void. In such types of contracts, the burden of proof lies on the person who was in the condition of intoxication. He has to prove that he was incapable of understanding the nature of the contract due to his intoxication.
These are some major points of the person of unsound mind:
- A person who has an unsound mind but occasionally of sound mind can enter into the contract when he is in the state of sound mind.
- The unsound mind person can enjoy the benefit from the necessity given by another person.
- The property of the unsound mind person is liable to repay the person who provided him the necessity.
- Intoxication is also considered the unsound mind stage
- A person who is drinking or consuming any intoxicant is not the competent party for the contract.
A person disqualified by law
There are some people and identities who are disqualified by law to make the contract and they do not own the capacity to contract.
Alien Enemies
The citizen of another country that is in the condition of war with India is known as an alien enemy. The contract with these people at the time of peace is valid. But if the government declares war during the time of the performance of the contract, the contract will remain suspended till the end of the war.
Any contract with alien enemies during the time of war is a void contract.
Married Women
A married woman cannot enter into a contract that is related to her husband’s property. She can be the agent for that property.
Insolvent
The insolvent person can contract except for his property. He is capable of purchasing the property but he does not have the right to sell his property.
Pardanashin Women
The Pardanashin woman is not competent to contract as they are under undue influence. She does not have an understanding of the contract.
Judges, Legal Practitioners or Officers
The judges, public prosecutors and other legal practitioners are incapable of entering into a contract related to the property or actionable claim in which they have connections.
For example, a judge is dealing with the case of property owned by another person. The case is in proceedings. The judge cannot make a contract with that person to buy that property.
Patent Officers
The patent is a monopoly right given to its owner. The patent officers and other employees cannot have the capacity to take any right in the patent issued by them to its owner.
State Ambassadors
The ambassadors are incompetent to contract.
Company
There are different types of companies. The formation of a company is done under the law. The company is considered an artificial person. The company cannot have the capacity to contract outside the limits given under the memorandum of association.
Convict Serving Sentence
A person who is on bail or serving his sentence is disqualified by law to make any type of contract.
Competency of Parties to enter into an e-contract
The E-contracts are electronic-based contracts. According to the law, the party can enter into the contract if it satisfies section 11 and section 12 of the Indian Contract Act.
Contract on behalf of another person
The person can give the power of attorney to another person who can make the contract on his behalf. The power of attorney is the power given to another person to make the contract on behalf of his master. You can read the full article on power of attorney.
Conclusion
The contractual capacity of a party is the most important part of making the agreement valid and enforceable by law. Contract with a minor is void from the very beginning. The age of the majority for the contract is 18 years as per the law of the Indian Majority Act. A person can regain his capacity to contract with another person once he removes his disqualifications.
If a person does not take precautions to check the capacity of parties to the contract, the person can take losses in that contract.
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