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Capacity of parties to a contract is one of the most important essential elements of a valid contract. The parties to the contract should be able to perform and understand the terms and conditions of the valid contract. 

In our daily life, every transaction we make is a result of a contract. Like purchasing vegetables from the seller or buying pens, books from the stationary shop all are contracts.

For a valid contract, the parties to the contract must hold legal eligibility to enter into a contract and the legal capacity to perform the contract’s obligations.

What is Capacity to Contract?

The capacity to contract meaning, in Common Law, the word capacity means the ability. So, the capacity of a contract means the ability of the parties to enter into a contract that forms legally binding relations with each other.

If any party failed or is incapable to perform the conditions agreed by the parties to the contract, then the contract becomes invalid. So, the capacity of parties in business law is an essential element of a valid contract.

Example: A minor who is unable to understand the terms and conditions agreed in the contract, such person is incapable to enter into a contract. This is the capacity of parties example.

Who are competent to contract?

Who can enter into a contract? The parties who are competent to enter into a contract has been described under section 11 of Indian Contract Act, 1872 as; “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”.

Thus, section 11 of the Contract Act declares the following persons to be competent to a contract;

1. Who has completed the Age of Majority
2. Who is of Sound Mind 
3. Who has not been disqualified from entering into a contract by any law

So, as per section 11, the following persons/parties are incompetent and not eligible to enter into a contract and these are;

1. Who is minor
2. Who is unsound mind
3. Who is disqualified by law from entering into a contract.

Conditions for a person entering into a contract

Every person can enter into a contract who is of the age of majority, who is of sound mind, and who is not disqualified by law from entering into a contract. All these persons are eligible to enter into a contract.

So, every person is eligible to form a contract who is;

1. Attained the age of the majority
2. Sound mind
3. Not disqualified by law from entering into a contract

Let’s discuss in detail;

1. The Age of the majority

The age of majority in India is governed by the Indian Majority Act, 1875. As per section 3 of the Indian Majority Act, “Every person who is living in India shall be deemed to have attained the age of majority on his completing the age of eighteen (18) years.”

But, the person who is living under the guardian which is appointed by the court, then the age of the majority of that person is twenty-one (21) years.

For entering into a contract, if a person who is a day less than attaining the age of majority i.e. 18 years or 21 years old, he is said to be an incompetent person to a contract. 

Who is Minor in India?

Minor is a person living in Indian and has not attained the age of majority of eighteen (18) years or twenty-one (21) years under the court’s guardian, then the person is termed as a Minor.

So, the age of consent in India to enter into a contract is eighteen years old and twenty-one years old in the case of a guardian appointed to the minor.

A minor is incapable of understanding the duties and liabilities arising from the contract. Hence, any agreement made with a minor is void-ab-initio i.e. void from the beginning and it cannot be challenged in a court of law.

Mohori Bibee v/s Dharmodas Ghose:

Facts of the Case: 

Dharmodas Ghose, a minor mortgaged his property to the moneylender Brahmo Dutt for getting a loan of Rs. 20,000/-. The respondent declared his age of majority in the deed of mortgage. The respondent’s mother Mohori Bibee sent a letter to Brahmo Dutt stating that his son, the defendant is a minor. The contract is made between Dharmodas Ghose and Brahmo Dutt to mortgage the property. The respondent’s mother filed a suit on the ground that the mortgage is null and void.

Judgment:

In the Privy Council, it was held that the contract with a minor is void-ab-initio. Section 7 of the Transfer of Property Act, 1882 provided that the person who is competent to a contract is competent to the transfer of property. And, the executed mortgage is held null and void.

Effects of Minor’s Agreement

Here, we have discussed some points on the law and rules relating to minors agreement;

a) Agreement with Minor is Void-Ab-Initio

As earlier discussed, an agreement made with or by the minor is void-ab-initio i.e. the agreement is void from the beginning. Thus, such agreements cannot be enforced in a court of law.

The main reason behind this statement ‘The agreement with a minor is void-a-initio‘ is that a minor is not as mature as to understand the legal obligations arising out of the contract.

b) Minor can be a Beneficiary of Contract

As we discussed, a minor is not competent to a contract. But, for any contract which is made in the favour of the minor, then the contract is not invalid. Thus, a promissory note executed in favour of a minor is not void and can be sued upon by him. 

According to section 30 of the Indian Partnership Act, 1832, a minor could not be a partner in the partnership firm, but with the consent of all the partners in the partnership, the firm can give benefits to the minor.

c) Doctrine of Restitution

If any minor obtains property or goods pretending that he is not a minor, then the minor can be compelled to restore the property or goods which is in the possession of a minor. This is the doctrine of restitution. 

Consider, in the above example, if a minor sold some part of property or goods with another, thereafter the minor could not be compelled to repay the goods.

If a minor got the money instead of property or goods, then in this case the doctrine of restitution is not applicable.

d) No Estoppel Against Minor

Suppose, a minor made a contract with another person pretending that he is a major person and competent to enter into a contract, then the contract is void and the minor is not liable for this.

Therefore, no doctrine of estoppel is applied against the minor.

e) Minor can Always Plead Minority

A minor can plead his minority until he is a minor. Suppose, a minor enter into a contract with another person pretending himself not a minor and get a loan. Here, the person could not recover the loan amount given to the minor because nothing will stop a minor from pleading with his minority and the suit will dismiss.

But, in the case of transfer of property, if a minor sold property showing him as a major person then the court can declare such agreement as void.

f) Ratification on Attaining Age of Majority is not Allowed

If a minor enters into a contract with another person stating that he will perform the contract after attaining the age of the majority. Such contracts are void in nature.

g) Contract by Guardian

Since the agreement with a minor is void but under certain circumstances, the guardian of a minor can enter into a contract on behalf of the minor. 

If there is a guardian of a minor appointed by the court and he has the competence to enter into a contract on behalf of the minor then there can be a valid contract that a minor can enforce.

In another sense, this can be called a joint contract by a minor and adult person.

But, all contracts made by the guardian on behalf of the minor is not valid, these can be taken into consideration only in certain circumstances.

h) Liability for Necessaries

According to section 68 of the Indian Contract Act, 1872, ‘Claim for necessaries supplied to an incapable person of entering into a contract, or anyone whom he is legally bound to support, is supplied by the other person with all the necessaries suited to his condition in life, the person who has furnished such supply of necessaries is entitled to be reimbursed from the property of such incapable person.’

Any person who is entitled to reimbursement out of the minor’s estate for the necessaries supplied to him or to his family. Necessaries also include goods and services.

i) A Gift to Minor

A gift can be given to the minor donee. But the gift like the Onerous Gift could not be acceptable by the minor. Here, the onerous gift means a gift that arises from the obligations which bind the minor under some terms and conditions.

2. Sound mind

For entering into a contract, parties must be of sound mind means able to understand. A person whos is unsound mind is incapable of entering into a contract. And, the contract with an unsound mind person is void.

According to section 12 of the Indian Contract Act, 1872, a person is a sound mind who can understand the terms and conditions and who is capable of making a rational decision with the effects of the conditions mentioned in the contract.

The sound mind person can enter into a contract who is of occasionally sound mind person. This means, the person who is a sound mind for some time and later is unsound mind for some period, such persons are known as Occasionally Sound Mind and Occasianlly Unsound Mind.

The persons of unsound minds include Lunatics, Idiots and Intoxicated or drunkards.

a) Lunatics

Lunatics are the persons of unsound minds whose mental faculties are damaged. These types of persons are sometimes the sound mind and sometimes the unsound mind. 

The contracts with the lunatic person are void, but if it can be proved that during the formation of the contract the person was not lunatic and he was a sound mind person then the contract can be valid and can be enforced in the court of law.

b) Idiots

Idiots are the persons who lost their thinking capacity and they are unable to make rational judgments. So, the contract with an idiot person is void.

c) Drunkards / Intoxicated

A person who is under intoxication due to having alcohol or drugs is called a drunkard or intoxicated person. These types of persons are similar to lunatics. And, the contract with the intoxicated person is void.

3. Persons Disqualified by Law

Apart from minors and unsound mind person, the person who is disqualified or barred from entering into a contract by the law of land, Such a person cannot form or enter into a contract. Therefore contract made by or with the person who is disqualified by law from entering into a contract is void.

Here, are certain examples of persons who are disqualified by the law from entering into a contract;

a) Alien Enemy

There can be no contract with the person who belongs to a foreign country, against the war that has been declared. The person from the country against which the war has been declared is known as Alien Enemy.

For example, there is a war between India and China, and a person from India wants to contract with a person who is from china, at this situation, there can be no contract unless and until the prior permissions of the governments have been sought.

As per section 83 of the Civil Procedure Code, no person shall enter into a contract with an alien enemy unless and until the prior permission of the government has been taken.

b) Foreign Sovereigns

According to section 86 of the Civil Procedure Code, the diplomatic staff of the government has certain immunity in the aspect of contractual agreements. They can enter into a contract with certain privileges in which they can sue the party for non-performance of the contract, but cannot be sued unless and until special permission has been granted by the government or the court of law.

c) Prisoners

A person who is in the prison cannot enter into a contract unless and until the completion of his sentence.

d) Governments

The contract with the government must comply with certain formalities, if such formalities are not fulfilled then the contract would be void.

e) Corporations

Legal entities like Companies or Corporations, they can be sued and be sued. They can enter into a contract but according to section 21 of the Companies Act, they cannot do so without their seals.

f) Insolvent

An insolvent person is a person who is financially incapable to pay bills or obligations. So, there can’t be a contract with the insolvent person.

Conclusion

So, here we have concluded that the Indian Contract Act, provided the different sets and bars of people to make them capable to enter into a contract.

Referred Books:

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