Capacity to contract

Capacity to contract

This article is written by Puneet Kumar a Student of National Law University, Jodhpur interning at Law Justify for a duration of one month.

Introduction

We tend to involve in a number of transactions every day, almost all of which are contractual or can be said forms a contract. However, in terms of making a contract legally binging one needs to fulfil certain criteria mentioned in Indian Contract act, 1872. This article deals with the sections and complicacies that arise under the capacity to contract.

Legal requirements according to Indian Contract act, 1872

According to section 11 of Indian Contract act, 1872 one should fit in a specified criterion in order to become a part of a legally binding contract.

1.      The person should be a major according to the Indian Majority Act, 1875. (18 years)

However, in case a minor below 18 years of age is looked after by a guardian then in that case, his majority will be delayed by 3 years making, him/her major at the age of 21 year

2.      The person should be of sound mind (at the time he/she enters into a contract)

According to section 12 of the Indian Contract act,1872 a person is considered to be of sound mind if at the time they enter into a contract they can understand their actions and realize the consequences of obligations imposed on them.

3.      A person should not be disqualified under any law to which he is subject.

Disqualifications made under Indian Contract act,1872

According the criteria mentioned above one can simply say in a person can be declined to enter into a legally binding contract if he or she is minor (below 18 years of age or below 21 years of age if they have a guardian). Or if they are of unsound mind (according to section 12).

In case of minor

According to Indian law a minor can be defined as an Indian citizen who is below the age of eighteen and is not capable to understand the terms and conditions of a contract. Whenever a contract is initiated with any minor it is said to be void ab initio which means one cannot enforce that contract in court as it is void from the very beginning. This technically means a minor can be made a beneficiary in the contract but he cannot be held legally bound to perform his responsibilities.

Relevant case laws

Mohori Bibee vs. Dharmodas Ghose[1]

In this case a minor named Dharmodas Ghose mortgaged his property to secure a loan of Rs 20,000/-. After the deal was made a letter from minor’s mother reached the plaintiff which stated that the respondent is a minor but according to the contract made the minor named Dharmodas Ghose was a major plaintiff filed a suit and lost later filing a suit in the Privy Council, the judgment aging favoured the minor as the court stated that any contact with a minor is void ab initio and in his judgement the court further stated that if in a contract made with a minor, the minor fulfils his part of the deal then the other party becomes legally obligated to complete the deal by fulfilling their obligations towards the minor.

Person of unsound mind

According to Indian law if a person is considered to be of unsound mind, then his unsoundness is covered under the three headings listed below:

Idiot- According to the medical terms an idiot can be defined as a person who is mental age is equivalent to or less then 3 years, this clearly states that such a person cannot become a part of a contract a s he/she is unable to understand the term and conditions of the contract they enter into. This is a continuous unsoundness of mind.

Lunatic- Unlike idiot a lunatic is someone who is occasionally of unsound mind. Such person does have the capability to enter into a contract but there is one condition that during the time they enter into a contract they need be of sound mind.

People under the influence of drug- If a person is under the influence of any sort of  drug which makes him unable to understand the contract in such situation if a person enters into a contract, then that contract shall not be considered valid.

Persons disqualified by law

  • Alien enemy- An alien enemy can be defined as a citizen of a country with whom our country (India) is at war with. This provision states that any contract made with alien enemy during the war period will be considered void under the contract law. However, if there are contracts made before the war took place, such contract has high probability of getting dissolved and if by any chance they remain then they get suspended and are revived back to normal when the war is over.
  • Convicts- When a person is convicted by the Indian Courts in that case Indian Law clearly says that such a person cannot enter into a contract while he is serving his sentence. However, this restriction on him gets removed the day he ends his sentence.
  • Insolvent- An insolvent can be defined as a person who is declared bankrupt/ against whom insolvency proceedings have been filed in court/resolution professional takes possession of his assets. Such a person is disqualified to enter into a contract because he does not have any power over his assets.
  • Foreign sovereign- Foreign diplomats are covered under this list because they have contractual immunity in India. They cannot be sued in India unless they submit themselves to the jurisdiction of Indian courts. Additionally, sanction from the central government is also required in such cases.
  • Body corporate- A company in term of Indian law can be considered as is an artificial person. The capacity of a company to enter into a contract is determined by its memorandum and articles of association.

Conclusion

Indian Contract law has made a strict criterion to idealise who is compatible enough to enter into a contract. The competency of the parties making the contract is the most important component of the contract to make the contract valid and legally binding.

[1] (1903) 30 Cal. 539

Leave a Comment

Your email address will not be published. Required fields are marked *