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Importance Of Capacity To Contract (By: Aman Shakya)

Importance Of Capacity To Contract
Authored by: Aman Shakya

The term “contract” is defined under section 2(h) of the Indian Contract Act, 1872. A contract is legally binding document (agreement), when we start to discuss contract law, we see that the one of the most frequently used term is ‘capacity’.
In Today’s globalized world, it is very critical for a party who wish to form a contract is to have the ability to contract or no in order to engage in commercial transactions and others. In this article we discuss and get understanding on the how one person is competent to enter in a valid contract, with an eye on the Indian Contract Act, 1872, with the help of relating case laws, and with the critical analysis of the subject in the Indian Context.
A person is considered as a capable of entering or forming the valid contract if he/she meets the conditions which given under the Indian Contract Act 1872. These conditions which are as: (1) he/she must complete the age of majority i.e.,18 years, (2) he/she must be in sound mind while entering into a contract, (3) he/she must not be Involve in any illegal act(matter). However, thisis important that the subject matter of the contract’s which is formed between the parties should not be illegal or should not be void for the reasons of the public policy and for the government policy.

Keywords: Capacity to Contract, Sound Mind, Minor, Subject matter legally.

In our surroundings almost most transaction is the result of a contract. When we buy any item like grocery from any seller, we agree to pay them money in the exchange of our products which we buy. Same as If you are the owner of any firm, you need to enter into the two contracts: in which one is with manufacturer and second is with that person who will purchase or consume the goods from your firm, i.e., Customer or Consumer.

When we purchasing the grocery, we may not consider the whether the seller is competent to contract or not or he/she able to enter into a contract or not. However, if we are a retailer, we need to must ensure that the manufacturer or Supplier is legally capable or not of doing so. This is very critical if we want to hold the manufacturer is legally liable for any defaults if he/she commits during the term (tenure) of the contract.

A Contract is formed with containing their essentials elements, these all elements are defined and discussed under the Indian Contract India Act, 1872. The Formation of contract we need six elements which are as follows:

•    Offer [Section 2(a)] “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make proposal.”
•    Acceptance [Section 2(b)] “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes promise.”
•    Consideration [Section 2(d)] “When at the desire of the promisor, the Promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”
•    Capacity [Section 11] “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.”
•    Intention
•    Legality
There are many people who lack the capacity to enter into a legally binding contract:
•    Minors: Any person who are not attain the age of majority called as a minor. A minor person should lack the capacity of forming contract. If the person does enter into a contract before he/she completed his/her 18 years of the age, then there is usually the option to cancel while he or she is a minor. But there are some exceptions to this rule, Minors are allowed to enter into the various contracts like purchasing of their necessities like Clothing, Food and Accommodations. In some states the government and their rules allowed the people who are under the 18 years of age to obtain the bank accounts, which carry the strict terms and conditions regarding the use of the account.
•    Mental Disorder: If a person is not reasonable able to understand his/her authorities and responsibilities and their rights under the agreement, then they should lack the mental order(capacity) to form a contract. In some states they mental capacity as the ability to understand the all terms of the contract which formed.
•    Intoxication: If a person going to formed the Contract, he/she must not under the influence of drugs or alcohol because, if they are under this then they generally believed to lack the capacity If someone voluntarily takes the drugs and all themselves, then the court may order the party to uphold the obligation. This is tricky because many of the courts have also agreed a sober party shouldn’t take advantage of an intoxicated person.
When the parties/companies etc. entering into an agreement, companies must also have the capacity. If they don’t have the serious consequences, especially when it comes to guarantees. When it comes to the general rules that govern a company’s legal capacity, that there are many similarities across the legal system and jurisdictions.

Research Methodology:
To comprehend the legal provision of the capacity to make a contract, descriptive and secondary qualitative data-based analysis is carried out. Most the data of this paper was collected from the various books, law journals, annual reports published by the Indian government and some articles as well as various websites of related to law.
Review Of Literature:
Sec. 11 of the Indian Contract Act, 1872 enlisted the qualifications by which enable a person in India to enter into contracts-

•    A person who is attain the age of majority as per the law of the country of which he/she is residing or a citizen.
In India the age of majority is governed or considered by the Indian majority Act, 1875. As per section 3 of the Indian Majority Act, 1875, as an Indian citizen the act is said that the person is must to have the attained the age of majority.

In such a case if a person is below the age of 18 years or he/she is minor and the court has been appointed the guardian for him, he shall attain the age of majority at 21 years.
•    As per the section 12 of the Indian Contract Act, 1872. It states that a person should be in sound mind at the time of entering into a contract.
“ Section 12- A person is of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational a rational judgement as to its effect upon his interests”.

•    A person should not be disqualified by any law to which he is subject to entering a contract.

Competent To Contract:
Only the certain people are eligible to enter into a contract, who fulfill all the essentials of the contract. The Following are:
•    Those who are in sound mind
•    Those People who have crossed the majority age
•    Those people who are make contract because they are qualified under the act of Contracting law.

Incompetent To Contract:
Certain people are ineligible to make a contract. Those people who do not have the ability or those who do not follow or fulfill the essentials of the contract for entering into a contract or forming a contract.
These as follows:
•    Person with unsound mind
•    Person who has not crossed the age of majority means minor
•    Person who are disqualified under the Indian Contracting Law

A minor is a person who is under the age of majority according to their country rules and norms, or on the base of their constitutions and others policy etc. In India, the age of majority of the people is 18 years normally. But in such a case when court appointed the guardians for the person than the majority age is 21 years. A person who is under the age of majority (18 years) do not have the capacity to enter into a contract legally. A Contract or agreement made with a minor is null and void from the start, {Legal Maxim: Void Ab Initio (from the beginning)}and no one can sue them. The state can Granted civil and criminal immunities to the minors. It is all responsible for minor well-being and property. These immunities prevent minors from entering into a contract or forming a Contracts. When a minor enters into a contract with knowing of his incapability, that the contract shall operate independently of any other contract.

The contract governed by more than one law, if the two party from different country means one party residing in India and the other is from another country. TNS firm v. Muhammad Hussain is established the specific guidelines in such cases. The age of majority for ordinary mercantile transactions will be determined by the law of the country in which the contract is made. And the age of the majority for land transactions is determined by the law of the state in which the land is located.

Effects Of A Minor’s Agreement:

No one can prevent a minor from disclosing their age if he/she enters into a contract by misrepresenting their age. In such a case a minor is not liable for coercing another party for entering into a contract. To avoid a contract, the minor can claim infancy. Doctrine restitution serves as a minor’s agreement. In contrast, if a minor purchases a house while concealing his age, the purchased house will be returned. And, if he converted or sold them, the law cannot sue him.

Contracts Beneficial To Minor’s:
A minor could involve in a contract if the contract is beneficial to the minor. A minor is not barred from becoming an adherence to the rule or payee in a contract. A minor can purchase immovable property and sue for the possessions upon the tender of money. A specific performance of the any contract cannot be ordered against a minor.

Claim For Necessaries Supplied To Minors:
Section 68 of the Indian Contract Act 1872 states that, the person should receive the necessities from another person while a person does not have the capacity to enter into a contract. He /She has the authority to seek the compensation from the incompetent party or a person. Section 68 makes the minors liable for necessaries, but the section does not define the what those are necessaries. The necessities will be determined based on the facts of the case. The party providing the necessaries to the minor must demonstrate that they are good and reasonable.

The minor can become an agent. However, he is not accountable to principal. The apprenticeship contract is a contract for service which binds the minors by providing them benefits of that contract. A parent, guardian, makes such an apprenticeship contract for the minor by which the minor can get the benefits of that contracts.

Negotiable Instrument:
The minor has the authority to draw, deliver, endorse, and negotiate the instruments. This instrument is to bind all parties except the minor. Any person who receives the goods from a minor must pay for them. A minor cannot become a partner but he he/she can benefit from a partnership. A minor can become a member of the company with the fully paid shares. The minor’s guardian will be listed as a member if a minor can acquire shares through transmission.

Person Of Unsound Mind:
According to Contract law the definition/meaning of an unsound mind is defined or found in the medical dictionary. The mental incapacity prevents the any persons from comprehending the transactions as well as being aware of their implications. An agreement or contract make with a person who is of unsound mind remains ineffective and void. However, such a person will not be able to benefit from the contract, but such a person’s property is always liable.

In simple words intoxication means is a mental disorder. Only if the person can be proven by the person making the claim. If a person who has consumed the intoxicants cannot enter into a contract.

Person Disqualified By Law
When the law does not accept the any person, then the person does not have the capacity to enter into a contract. The person should qualify for them to be a part of contract, by law.
Alien Enemies
Other country people live in India or we can say that the foreign nationals living in India are the alien adversaries. During the times of peace only such people can enter into a contract with the Indians. This type of contract is also subject to the government restrictions. If his/her country and the territory of India declare the war on each other, at that time he/she will become an enemy, and he/she will unable to enter into a contract. Such a case if a foreign person entering into a contract before the declaration of war, the contract will be suspended during the war. If the contract is not barred or bound by the time limit or period of time, and this contract will be revived after the war’s end between the countries.

Convict Serving Sentence
A person who has been convicted or he’s doing such offence and he’s serving in the prison/jail at that time he/she has not the capacity to enter into a contract. He/she also obstructed from suing on such contracts entered into prior to his conviction. He will able to suit after his/her sentence of the prison or the offence which committed by him/her has expired.

Married Woman:
According to our Indian Constitution under Indian Contract Act, 1872. A married woman lacks the capacity to enter into a contract but she involving her husband’s property. However, the wife can act as her husband’s agent and bind his property if the husband fails to provide her with the necessities.
A person can take the plunge insolvent can enter into such types of contracts. The insolvent person can incur debts, work, and buy property. But he/she cannot sell the property, and he/she is ineligible to serve as a magistrate, as a company director, or as a member of a local body. The insolvent person has the capacity to contract except for his property. He becomes a regular citizen by following the order of discharge.

Pardanashin(Veil) Women:
A person who is under the veil and parda and set out of the house, then she is under the undue influence. She does not understand the implications and essentials and all of the contracts and so she will do not have the capacity to contract.

Corporation Incorporated Under a Special Act and Joint Stock Company:
Such corporation or company will be an artificial person formed by the law. It does not have the capacity to contract outside the powers of the MOA or the Special Act.

Judges, Legal Practitioners or Officers:
Those judges, legal practitioners or officers who have a connection with the business interest in actionable claims do not have the capacity to enter into a contract.

Officers And Employees of the Patent Office:
The officers and employees of the patent office have not the capacity to take rights, obtain or take an interest in the patent issued by them during the period of appointment.

Foreign Sovereign and Ambassadors:
The diplomatic immunity is granted to foreign sovereign, ambassadors and consulate employees under the international law. As a result, the contracts cannot be enforced by Indian law. They can sue the individuals who carry out the contracts with them, but they cannot be sued without central government’s permission.

Case Laws:
Hart v O’Connor [1985] 1 AC 1000
In this case a vendor sold the trust property (a farm) to Hart. Vendor was 83 years of age and he’s of unsound mind, but Hart did not know about that and was fair in his negotiations with vendor’s solicitors. Hart occupied and improved the land. When one of the vendor’s brothers (O’Connor) come and took over as trustee of the estate he sought to set aside the contract, according to the Australian Contract Law’.
In this case the court noted that if a person lacking the mental capacity subsequently regains capacity (even temporarily) they may ratify a contract entered into when insane.
Impairments Short of Incapacity
An insane person who appears sane can rely on the independent and separate ground of unconscionability which relieves abnormal mental weakness even short of incapacity is stated by the Privy Council.
Contract Capable of Binding a Minor
According to section 3 of the Sale of Goods Act, 1979, ‘Necessaries’ are defined as ‘goods suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery of the goods. Contracts to purchase necessaries are capable of binding a minor.
Contract For Necessaries
Necessaries are those things which a person immediately needs, such as food, cloth, water, medicines, etc. Necessaries are not the things which are not needs immediately like Car, bike, etc. And such things which they required to keep him alive but they extend to all such things as are reasonably necessary for him in the station of life to which he belongs. They exclude luxuries, and also a surplus of necessary items.

Example: A contract to buy two trousers would, probably, be binding but one for a dozen would not be.
•    Mohori Bibee V. Dharmodas Ghose (1903) 30 Cal 539 (Pc)
•    Campbell V. Hooper (1855)
•    Nash V. Inman (1908)
•    Srikakulam Subramanyam V. Kurra Subba Rao [AIR 1948 PC 25]

I have concluded that before entering into a contract both parties must understand the terms of the contracts each and every point of the contract. When the contract is entering between the two parties at that time parties should be aware of the concept ‘Capacity to contract in order to avoid loss in the future. Like in the Hart v O’Connor [1985] 1 AC 1000 case in which the Hart was not aware of the fact that vendor was unsound mind. So, it is better to look at the capacity of the person and fulfill the all needs of the contract before entering into a contract.


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