Importance of Capacity to Contract 

By: Mariyah. S. Sariya

Abstract:

The following article deals with the profound study of the capacity to contract and briefly explains the relevant legal provisions, case laws, and critical analysis. To start with the term ‘capacity to contract’, Under English law, the term “capacity” refers to the ability of the contracting parties to enter into legally bound relations with one another. If either party fails to comply with this requirement, subsequent contracts may be considered void based on the facts and circumstances of the case. In short terms, A contract’s parties must have the legal ability to enter into it. Individuals who are declared incompetent owing to physical or mental disease do not have the competence to engage in contracts. For an instance, if an adult without legal ability purchases a few sweets from a kiosk, this is lawful because it is a subject of routine, modest financial transactions. A more in-depth examination of the subject may be found in the article below.

Keywords:

Limitations, Factors; Section 12 of The Indian Contract Act, 1872; Section 83 of the CPC; Landmark Cases.

Introduction:

  • The 6 vital elements of a contract are- Offer, Acceptance, Consideration, Capacity, Intent, Legality. In contrast to legal capacity, which everyone has from birth, contracting capacity is determined by a person’s age and mental state. This means that certain persons lack contracting capacity and are not considered to have legal competence. 
  • In other words, a person is deemed competent of entering into a legitimate contract if he meets three requirements set forth in the Ac, which are:

1. He or she must be of legal age.

2. He or she must not be of unsound mind.

3. He or she must not be barred from entering into a contract by any other law.

– But when it comes to children and minors under the age of 18, there is a limited legal capacity to contract such that the minors get to make regular, daily transactions without the need to seek permission from their legal guardians and what constitutes an everyday purchase varies depending on the circumstances. Children and teenagers may readily purchase items such as stationery, food, and movie tickets at any time – this is not regarded to be reliant on contracting capacity. Minors can sign into informal employment contracts, such as babysitting, gardening, or holiday jobs, and must provide agreed-upon services. Minors can also engage in legal contracts for part-time labor, depending on the state. But in some situations, the parent or legal guardian may be required to provide consent.

– Legally, everyone above the age of 18 is considered a major, with only a few exceptions, such as the use of alcoholic beverages. However, due to significant mental illness, a person’s legal ability may be completely or partially lost. Depending on the kind and degree of the disease, a person who is not a child but is unable to make some decisions may nevertheless be able to contract in other circumstances.

– If a person of full age is unable to make decisions for themselves due to illness or an accident, a legal guardian must be appointed. In most cases, these are the parents. It is also conceivable for an unrelated individual to serve as a representative for the affairs of an adult with limited contracting ability.

Factors that come under relevant legal provision:

  • Section 11 of the Indian Contract Act of 1872 defines a person’s ability to contract as being based on three factors: achieving the age of majority, being of sound mind, and not being barred from entering into a contract by any legislation to which he is subject.
  • The first consideration is the age of the majority. It states that a minor, or someone under the age of eighteen, is not competent to contract. It is assumed that a man is the best judge of his own interests, but this is not true when it comes to minors protecting themselves from fraud, deceitful dealers, and so on. As a result, with few exceptions, minor transactions under the Act are typically deemed invalid or voidable. As a result, minor agreements that are null and invalid cannot be ratified after the attainment of majority. Contracts benefiting minors are lawful under common law. For example, if a child enters into a contract in order to supply himself or herself with means of self-sufficiency, the contract is legal. A guardian, on the other hand, can step into the shoes of the minor to compensate for the minor’s inability to contract.
  • The second consideration is soundness of mind. Unsoundness of mind can be caused by a variety of factors, including insanity, intoxication, mental stupidity, and old age. Consent is regarded as a rational act that must be accompanied by thought. A man can act normally, yet he may be incapable of understanding the transaction and therefore unable to develop a reasonable judgement, resulting in unsoundness of mind. Section 12 of the Act states that a person is of sound mind if he is capable of comprehending and making a logical judgment when entering into a contract.
  • The final consideration is for those people who are disqualified by the law aka legally ineligible to engage in a contract. These individuals come in a variety of shapes and sizes. The first is alien foes; under Section 83 of the Civil Procedure Code (hereafter ‘CPC,’ no one is permitted to enter into a contract with an alien while a war is ongoing unless the government permits it. The second is about foreign sovereigns, which is enshrined in Section 86 of the CPC. Third, an insolvent individual cannot be bound by any contractual arrangement. And lastly, contracts with the government must also follow certain procedures, and if not, they are considered null and invalid.
  • As we have got to read enough about the factors, let’s try to discuss a hypothetical situation wherein Rajiv who has been in a mental institution for ten years, according to the doctors, is improving and there are periods when he interacts and behaves normally. He is also 25 years old. Is Rajiv capable of entering into a contract? Have you been able to solve the question? Well, if not then let’s have a look at the answer to this question: 

Since Rajiv has reached the legal age of majority and the physicians claim that he is of sound mind for short periods of time, he therefore, can engage in a contract when his mind is sound, i.e., when he has the ability to contract.

Few cases related to the concept:

1. Raghava Charier Vs. Srinivasa [ILR (1916) 40 Mad 308]:

The question, in this case, was whether or not a mortgage in favor of a minor who has advanced the mortgage money in full is enforceable in a court of law by the minor or any other person on his behalf. The Madras High Court ruled that a juvenile can enforce any contract that benefits him or her and does not impose any duty on him or her.

2. Sirkakulam Subramanyam v. Kurra Subba Rao [AIR 1948 PC 25]:

On behalf of the minor, a guardian entered into a contract to acquire specific immovable property. Later, in order to regain ownership, the minor sued the opposing party for specific performance. Any contract can be specifically enforced by or against a juvenile if it is for his or her benefit and the guardian who entered into the contract on behalf of the kid is competent to do so. The Doctrine of Maturity under Indian Contract Law was basically established by this judgment.

After carefully reviewing the legal rules under English and Indian law, it was discovered that under the latter, it is not explicitly stated in the legislation whether a small agreement is void or voidable.

3. Mohori Bibee Vs. Damodar Ghose [ILR (1903) 30 Cal 539 (Pc)]:

The issue that particularly rose, in this case, is whether a minor’s agreement is void ab initio. In the case, Damodar Ghose, the defendant, was the only owner of his property as a child. His mother was formally designated as his guardian. Mr. Brahmo Dutt, a moneylender, loaned Damodar Ghose Rs 20,000 at 12% interest per year through his agent Kedar Nath. The loan was obtained through mortgaging the property. Damodar Ghose’s mother informed the appellant on the same day that Damodar was a juvenile and that anybody who entered into an arrangement with him did so at his own risk. Damodar Ghose, according to Kedar Nath, lied about his age on the date of the deed’s execution, which proved out to be false. As a result, Brahmo Dutt’s appeal was denied, and his plea for the return of Rs 10,500 advanced to him was also denied. It was decided that a minor’s agreement is null and invalid from the start.

Conclusion: 

  • When engaging in an agreement, companies must also have capacity. If they don’t, there might be significant implications, especially when it comes to promises. When it comes to the broad principles that regulate a company’s legal status, there are commonalities across legal systems and nations. A corporation, as a defined legal entity, has the ability to engage in contracts with other parties and may be held accountable for its conduct. 
  • After going through the brief study, we can conclude by mentioning that a contract is a kind of dignified formal agreement where even a slight mistake can make a huge difference. When getting into a contract, one must be aware of the limits, allowances, and limitations because the world is full of con/fraud artists. The opposing party may be aware of information that you are unaware of, and the likelihood of him or her using such information is great. Maintain vigilance. Before you enter into a contract, be sure you read it. 

References: 

  1. Subodh Asthana, ‘Capacity of parties entering into a contract’ [Pleaders, June 1 2019] > https://blog.ipleaders.in/capacity-contract-ica-1872/> accessed 16th August, 2021.
  2. [Source: https://www.indiafilings.com/learn/capacity-to-contract/

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