Abstract:

A Contract is a legally binding agreement. When discussing contract law, one of the most frequently used terms is ‘capacity.’ In today’s globalised world, it is critical for a party to have the ability to contract in order to engage in commercial transactions. This article will discuss how one person is or is not competent to enter a valid contract with another, with a focus on the Indian Contract Act, 1872 (hereinafter ‘the Act’), relating case laws, and a critical analysis of the subject in the Indian context. Furthermore, each Indian aspect will be discussed in conjunction with its origin in English law. A person is considered capable of entering a valid contract if he meets three conditions set out in the Act: he or she must be of legal age, he or she must not be of unsound mind, and he or she must not be barred from entering into a contract by any other law. However, it is important to note that the contract’s subject matter should not be illegal or even void for reasons of public policy. (Singh 2020)

Keywords: Capacity to Contract, Minor, Unsound Mind.

Introduction:

Almost every transaction in our surrounding is the result of a contract. When you buy vegetables from a seller, you agree to pay him money in exchange for the vegetables. If you own a store, you enter two contracts: one with the manufacturer of the goods and another with the customer who will purchase the goods from your store.

When purchasing vegetables, we may not consider whether the seller is competent to enter a contract. However, if you are a retailer, you must ensure that the manufacturer is legally capable of doing so. This is critical if you want to hold the manufacturer legally liable for any defaults he commits during the term of the agreement.

A contract must contain these six elements:

• Offer
• Acceptance
• Consideration
• Capacity
• Intent
• Legality

Some people lack the capacity to enter a legally binding contract:

• Minors: In general, anyone under 18 years old lacks capacity. If he or she does enter a contract before they turn 18, there is usually the option to cancel while he or she is still a minor. There are some exceptions to this rule, however. Minors are allowed to enter contracts for purchasing various necessities like clothing, food, and accommodations. Some states allow people under 18 to obtain bank accounts, which often carry strict terms and stipulations.
• Mental Incapacitation: If a person is not cognitively able to understand his or her responsibilities and rights under the agreement, then they lack the mental capacity to form a contract. Many states define mental capacity as the ability to understand all terms of the contract, while a handful of others use a motivational test to discern whether someone suffers from mania or delusions.
• Intoxication: Someone who is under the influence of drugs or alcohol is generally believed to lack capacity. If someone voluntarily intoxicated themselves, the court may order the party to uphold the obligation. This is tricky because many courts have also agreed a sober party shouldn’t take advantage of an intoxicated person.

When entering into an agreement, companies must also have capacity. If they don’t, there could be serious consequences, especially when it comes to guarantees. When it comes to the general rules that govern a company’s legal capacity, there are similarities across legal systems and jurisdictions. For example, both civil and common law jurisdictions recognise the legal theory that a business has a separate legal personality. This means that a company, as a defined legal person, has the ability to enter into contracts with third parties and can be held liable for its actions.This legal concept is recognised by countries other than the United States. France, a civil law country, has also adopted this concept. Ordinance n°2016-131, which went into effect in 2016, recently reformed legal capacity in relation to entities. According to French Civil Code Article 1147, a company’s lack of capacity is a ground for relative nullity, a defence that the aggrieved party can use to void the contract. The company would be the aggrieved party in this case. Furthermore, Article 1148 allows French companies that lack contracting capacity to legally enter contracts that are day-to-day acts authorised by usage or legislation. In Spain, there is a unique relationship between the church and the state. As a result, the church is governed by provisions of a specific concordat: Spanish Civil Code Article 37, which states that businesses have “civil capacity.”

Research Methodology:

To comprehend the legal provision of Capacity to contract, descriptive and secondary quantitative data-based analysis is carried out. Most of the data was gathered from various books, journals, articles, and annual reports published by the government, as well as websites of various federal and quasi entities.

Review of Literature:

Sec.11 of the Indian Contract Act, 1872 lists down the qualifications which enable a person in India to enter into contracts-

• A person should have attained the age of majority as per the law of the country of which he is a citizen.

In India, the age of majority is governed by the Indian Majority Act, 1875. As per Sec. 3 of the Indian Majority Act, 1875, an Indian citizen is said to have attained the age of majority upon completion of eighteen years of age. In the USA (many of the states) and the UK, the age of majority is 18 years as well.

Method:

If a person is below the age of 18 years and a guardian has been appointed for him, he shall attain majority at the age of 21 years.

• A person should be of sound mind at the time of entering into a contract.

As per Sec. 12 of the Act, a person can be said to be of sound mind when he can assess, understand his actions and realize the consequences of obligations imposed on him at the time of entering into a contract.

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

Competent to Contract:

Only certain people are eligible to make a contract. The following individuals have the ability to contract:

• Those with a sound mind
• People who have crossed the majority age
• Those who can contract because they are qualified under the contracting law

Incompetent to Contract:

Certain people are ineligible to make a contract. People who do not have the ability to contract are as follows:

• Those with an unsound mind
• Minors who have not crossed the majority age
• Those who cannot contract because they are disqualified under the contracting law

Minors:

A minor is anyone who is under the age of majority. In India, the age of majority is 18 years. A person under the age of 18 does not have the legal capacity to enter into a contract. A contract or agreement made with a minor is null and void from the start, and no one can sue them. Minors are granted civil and criminal immunities by the state. Furthermore, it is responsible for the minor’s well-being and property. These immunities prevent minors from entering into contracts. However, if a minor enters into a contract knowing of his incapability, that contract shall operate independently of any other contract.

If one party is from India and the other is from another country, the contract will be governed by more than one law. TNS Firm v. Muhammad Hussain established 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. The age of 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 or she enters into a contract by misrepresenting their age. The minor is not liable for coercing another party into entering into a contract. Even if an accident occurs, he is not to blame. However, he will be liable in certain mishaps. To avoid a contract, the minor can claim infancy. A minor’s agreement serves as a restitution doctrine. In contrast, if a minor purchases a property while concealing his age, the purchased property will be returned. However, if he converted or sold them, the law cannot sue him.

Contracts Beneficial to Minors:

A minor could be included in a contract if he is the contract’s beneficiary. A minor is not barred from becoming an adherence to the rule or payee in a contract. As a necessary consequence, a minor can purchase immovable property and sue for possessions upon the tender of money. A specific performance cannot be ordered against a minor.

Claim for Necessaries Supplied to Minors:

According to Section 68 of the Indian Contract Act of 1872, if a person does not have the capacity to enter a contract, he or she may receive necessities from another person. He has the authority to seek reimbursement from the incompetent person. Section 68 makes minors liable for necessaries, but it does not define what those necessaries are. The necessities will be determined based on the facts of the case. To be reimbursed for the necessaries, the party providing the necessaries must demonstrate that they are good and reasonable. They must also confirm that the provided necessities are the minor’s sole source of support and that they do not have an adequate supply with them.

Agents:

The minor has the potential to become an agent. However, he is not accountable to the principal. The apprenticeship contract is a service contract that binds minors by providing benefits to them. A parent or guardian, however, makes such an apprenticeship contract.

Negotiable Instrument:

The minor has the authority to draw, deliver, endorse, and negotiate negotiable instruments. This is to bind all parties except him. Anyone who receives goods from a minor must pay for them. A minor can benefit from a partnership but cannot become a partner. A minor can become a member of a company with fully paid shares. If a minor acquires shares through transmission, the minor’s guardian will be listed as a member.

Person of Unsound Mind:

The definition of an unsound mind is found in the medical dictionary, according to contract law. The mental incapacity prevents the person from comprehending the transactions as well as being aware of their implications. An agreement or contract with a person of unsound mind remains ineffective and void. However, such a person will not be able to benefit from the contract. Such a person’s property is always liable. It is liable for the necessities he receives or for anyone he is legally obligated to support. When a person is normally of unsound mind but occasionally of sound mind, he can contract. This is an example of lucid intervals.

Intoxication:

If there is intoxication incompetence, it is a mental disorder. Only the intoxication can be proven by the person making the claim. A person who has consumed intoxicants cannot enter a contract in such a state of mind.

Person Disqualified by Law:

If the law does not accept any person, then he does not have the capacity to enter a contract. The law should qualify a person for them to be a part of a contract.

Alien Enemies:

Foreign nationals living in India are the alien adversaries. Only during times of peace can such people enter into a contract with the Indians. Such a contract is also subject to government restrictions. If his country and India declare war on each other, he will become an alien enemy, and he will be unable to enter into a contract. If a person from a foreign country enters into a contract prior to the declaration of war, the contract will be suspended during the war. If the contract has not been barred by the time limit, it can be revived after the war’s end.

Convict Serving Sentence:

A person who has been convicted and is serving time in prison does not have the legal capacity to enter into a contract. He is also barred from suing on contracts entered into prior to his conviction. He is free to suit after his sentence has expired.

Married Women:

A married woman lacks the legal capacity to enter into a contract involving her husband’s property. However, the wife can act as her husband’s agent and bind his property if he fails to provide her with the necessities.

Insolvent:

An adjudicated insolvent can enter into certain types of contracts. The insolvent can incur debts, work, and buy property, but he cannot sell the property. He is ineligible to serve as a magistrate, as a company director, or as a member of a local body. Except for his property, the insolvent person has the capacity of a contract. Following the order of discharge, he becomes a regular citizen.

Pardanashin Women:

A person under the veil or parda and set out of the house, then she is under undue influence. She does not understand the implications of the contracts and so she does not have the capacity to contract.

Corporation Incorporated under a Special Act and Joint Stock Company:

Such a 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 Memorandum of Association or the Special Act.

Judges, Legal Practitioners or Officers:

The 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 the employees of the patent office do not have the capacity to take rights, obtain or take an interest in the patent issued by them during the period of appointment.

Foreign Sovereigns and Ambassadors:

Diplomatic immunity is granted to foreign consulate employees and ambassadors under 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 the Central Government’s permission. As a result, ambassadors and consulate employees are in a privileged position but are deemed incompetent to contract.

Case Laws:

• Mohori Bibee v. Dharmodas Ghose – Ilr (1903) 30 Cal 539 (Pc)

Mohori Bibee v. Dharmodas Ghose is a case involving a minor’s agreement. This case is essentially about a minor’s contract or a contract with a minor. In India, an agreement or contract with a minor (a person under the age of 18 yrs. or any person who has not legally completed the age of 18 yrs.) is void ab-initio (void from the start). Such rules and regulations are enacted because, according to law, such people do not have the capacity to enter into a contract or agreement. According to the courts, any person under the age of 18 or who has not completed the age of 18 yrs., i.e. a minor, cannot intend to create a contract or make major decisions. This case essentially taught us that because minors are legally incompetent to give their consent, they must deserve or be provided with protection in their dealings with other adults. Following this case, any contact or agreement with the minor was null and void from the start. Contracts of this type are “void ab initio.”In this case, the Privy Council declared that any contact by minors or any minor’s agreement is “absolutely void,” and it has been strictly followed and is still growing. What agreements are contracts, according to Section 10 of the Indian Contact Act of 1872? Section 11 states that a person who is competent to contract may do so.

Judgment:

According to the verdict of Trial Court, such mortgage deed or contract that was commenced between the plaintiff and the defendant was void as it was accomplished by the person who was an infant at the time of execution of mortgage. When Brahmo Dutta was not satisfied with the verdict of Trial Court he filled an appeal in the Calcutta High Court. According to the decision of Calcutta High Court, they agreed with the verdict that was given by Trial Court and it dismissed the appeal of Brahmo Dutta. Then he later went to Privy Council for the appeal and later the Privy Council also dismissed the appeal of Brahmo Dutta and held that there cannot be any sought of contract between a minor and a major person. He final decision that was passed by the Council were:

1.Any sought of contract with a minor or infant is void/ void ab-initio (void from beginning).

2.Since minor was incompetent to make such mortgage hence the contact such made or commenced shall also be void and is not valid in the eyes of law.

3.The minor i.e., Dahrmodas Gosh cannot be forced to give back the amount of money that was advanced to him, because he was not bound by the promise that was executed in a contract.

The court also through its verdict has propounded that, a contact with an infant shall be declared null and void it means that it is neither valid nor voidable. According to me, minors’ contract shall be avoided and stopped because it sometimes led to the harmful social, economic and legal effects on the lives and conditions of the minors. Any such person who commits such offence shall be strictly punished by court of law, either through imprisonment or with a fine or with according to the ambit of the offence committed by the major person. (Simran, n.d.)

• Raghava Chariar v. Srinivasa [ILR (1916) 40 Mad 308]
• Sirkakulam Subramanyam v. Kurra Subba Rao [AIR 1948 PC 25]
• Campbell v. Hooper [(1855) 3 Sm&G 153]

Suggestions:

 Minimizing Liability in Contracts:

Contracts take time and money to draught. Contracts require a significant amount of energy and are not an inexpensive undertaking, whether they are drafted or reviewed by a lawyer, or even if they are written by an HR professional. A lengthy contract and additional paperwork may be required depending on the type of contract, the agreement, or your business, taking time away from other responsibilities.

While contracts are intended to be clear, the language used is not always so. The language used in a contract may act as a barrier between the terms of the agreement and the party signing it,a plain-language contract avoids this problem. It avoids ambiguity by using simple, easy-to-understand language and clauses.

Finally, circumstances can change, which means that the terms agreed upon when the contract was signed may no longer be applicable or sustainable at some point in the future. Contract termination procedures could complicate matters even more, and the company could face financial penalties for terminating a contract early.

An employee contract, for example, should include the duration of the arrangement, pay, raise procedures, responsibilities, termination grounds, and other details. When signing, the employee agrees to all stipulations by disclosing all expectations and requirements.

It is critical to avoid implied conditions, which are conditions that are not explicitly written out. Otherwise, they are open to interpretation, which can result in litigation and liability. Additional paperwork, such as nondisclosure, noncompete, and assignment clauses, according to HG, may be required to reduce liability risk. It’s always a good idea to cover all your bases.

A limitation of liability clause may also be beneficial. This addition limits the number of damages that can be recovered if a problem arises. When drafting such a clause, be familiar with local state laws, as they must be carefully drafted and negotiated in order to be enforceable. Furthermore, keep copies of all revisions because limitation of liability clauses requires proof of negotiation.

Conclusion:

After carefully reviewing the legal provisions under English and Indian law, it was discovered that under the latter, it is not clearly stated in the statute whether a minor agreement is void or voidable. Though the Mohari Bibee case cleared it to the point where it is void-ab-initio, it has still sparked a lot of debate on this point. Meanwhile, the law in England is clear on the subject, stating that a minor can enter a contract that is voidable until he or she reaches the age of eighteen, implying that once they reach the age of majority, they can either enforce or terminate the contract. However, in the absence of exceptional circumstances, India is unable to ratify. Again, there have been several judicial decisions on this subject, making the situation unclear. Furthermore, an unsound person is competent to contract under English Law, but he can avoid the contract if he proves to the court that he was unable to understand, and the other party was aware of it. In India, the situation is different, and a contract made by an unsound person is void, i.e., completely invalid.

Finally, it should be noted that, while Indian Contract Law has its origins in English Law, the interpretation and positions in both countries differ in several ways, as previously stated. To be more specific, English law is comparatively clearer than Indian law because what needs to be interpreted is already codified, and grey areas are not left to be filled through judicial decisions, as they are in India.

References:

1. Asthana, Subhodh. 2019. “Capacities of Parties entering into a Contract.” iPleader. https://blog.ipleaders.in/capacity-contract-ica-1872/.

2. Simran. n.d. “Case Analysis-Mohori Bibee v. dharmodas Ghose.” Legal Service India. https://www.legalserviceindia.com/legal/article-232-case-analysis-mohori-bibee-v-s-dharmodas-ghose.html.

3. Singh, Jaanvi. 2020. “Law of Contract: Capacity to Contract.” LEXLIFE INDIA. https://lexlife.in/2020/06/06/law-of-contract-capacity-to-contract/.

B. CHERISHMA

DR.B.R. AMBEDKAR COLLEGE OF LAW

B.A.LLB

1st Year

Editor’s comments-

1. More citations recommended
2. Paper is good for publishing.