Capacity to contract means that the individual has the capacity to 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 has the capacity to 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 is dealing 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, the person who is a sound mind, major and 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 has the capacity to enter into a contract. The conditions are:
- The person has attains the age of majority (18 or above)
- The person is 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 do not have the capacity to contract:
- Minor who has not attained the age of 18 or above
- The person in 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.
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 has no capacity to contract. It means a contract with minor is a null and void contract. The person has no right to sue the minor in 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 to understand the nature and liabilities arising from the contract. Hence, the contract with the minor become 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 minor.
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 is void as he was a minor.
The Privy Council held that a contract with 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 minor
- Another party can not ask him to pay expenses incurred to them while doing a contract with minor
If a minor hide his age and purchase 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 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 minor. But the contract must be made in front of the parents or guardian of the minor. In the contract between minor and adult, the liability of the contract will be held on the adult who is party to the contract with minor. Minor will not be liable in that contract.
Contract benefiting the minor is valid
Though the contract with the minor is a void contract if a person makes the minor as a partner just to enjoy the benefits, the contract will be a valid contract. 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 benefits of the minor.
Claim for necessary supplied to minor
According to the quasi-contracts, if a person is not competent to contract and receives the necessity from another person, he has the duty to reimburse that person from the property. It means section 68 of the Indian contract act make the minor liable to repay the person who provides him with the basic necessity. But, in this case, the person has to prove that he provided the necessity 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 principle.
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, if a minor has sold goods to the person who is competent to contract, has to pay the money for it.
Can a minor open a bank account?
There are various types of bank accounts that 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.
Person of unsound mind
A person who is an unsound mind cannot enter into the contract. According to contract law, the mental incapacity of a person prevents the person to understand the consequences of the contract and he is unable to fulfil his liabilities in the contract. A contract with an unsound mind 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:
A mental stage of person where the ability of brain becomes as less than 3 years old child
A person who is a sound mind for a certain time and after that, he becomes unsound mind, such person is called 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 a void contract.
Intoxication is the stage where the person is drunk or consumed intoxications and becomes incapable to understand the nature of the contract which he is doing. The contract made in the condition of intoxication is a void contract. 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 the intoxication.
These are some major points of the person of unsound mind that:
- A person who is 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 as 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.
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 a valid contract. 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.
A married woman does not have the capacity to enter into a contract that is related to her husband’s property. She can be the agent for that property.
The insolvent person has the capacity to contract except for his own property. He is capable to purchase the property but he does not have the right to sell his own property.
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 to enter into the 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 y another person. The case is in proceedings. The judge cannot make a contract with that person to buy that property.
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.
The ambassadors are incompetent to contract.
There are different types of companies. The formation of a company is done under the law. The company is considered as 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 the 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 the behalf of his master. You can read the full article on power of attorney.
The contractual capacity of a party is the most important part to make the agreement valid and enforceable by law. Contract with minor is void from the very beginning. The age of the majority for the purpose of 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.