(1) Introduction:
Every transaction is made based on a contract, whether it is commercial or personal. We can say that most of the transactions are made for a specific purpose, which results in contracts.
The contract is used all over worldwide and globally, we can say that the capacity to contract is a significantly important part of every transaction. To the affirmation for a valid and effective contract, there is a basic requirement that the party who enters the contract must be capable of a result of a contract.
When we talk about the law of contract, the capacity of a party to make a contract is one of the prior requirements to establish its validity.
In this article, we discuss the capacity to contract according to the Indian Contract Act, 1872, and also know that due to lack of capacity, what is the effect of such a contract, and as per the provision of the contract act, in which circumstances the contract should be void or invalid.
(2) Definition of the capacity to contract:
In simple words, we can say that the person who enters a valid contract must be able to have legal competence. Here, legal competence means he/she is eligible to perform a part of the legal agreement. In this way, it is necessary for the person who enters a legal agreement to have a sound mind, as well as be legally qualified to make such an agreement.
Generally, infants or minors, insane persons, drug-addicted persons, bankrupt parties, etc are not eligible to enter into a legal agreement, as they are exempted according to the provisions of the Indian Contract Act.
(3) Who is competent to contract?
Here, before we know about the capacity of a contract, we should understand what a legal contract is as per the Indian Contract Act.
The answer to the question is given in Section 10 of the Contract Act, which deals with what kinds of agreements are a contract.
According to this provision, all agreements can be considered as a contract if made by a competent party with free consent and lawful consideration related to the object. If these requirements are not satisfied by law, the said contract should be declared void.
According to the provisions of the Indian Contract Act, 1872, Section 11 deals with who is competent to contract.
As per this section, these are mainly three criteria defined that are given below.
The party to the contract must be a major as per law.
The party to the contract must be of sound mind.
The party to the contract should not be disqualified by any law.
Now understand those aspects in detail.
(1) The age of majority:
The first aspect of a valid contract is that a party who is involved in the contract must be major by law, and his/her age must be Major at the time of the contract.
The Indian Majority Act, 1875, under section 3 (1), defines the age of majority of a person who is domiciled in India. This section clearly says that a person who completes the age of eighteen years and is domiciled in India is called to be a major.
Minor :
As above, we refer to the provision of the Indian Majority Act, Section 3, which states that a domiciled person in India who does not complete the age of eighteen years is called a minor.
According to the provisions of the Indian Contract Act, Section 11, A contract which is made by a minor is void by the eye of the law; it can not be enforced by law. Because a minor is not capable of understanding what kind of liabilities arise through the contract.
If the contract is executed on behalf of a minor, his liability can not be enforced by law in India. The court also protects the rights of minors against liabilities, if any arise due to executing such a contract.
Minor can be beneficiary in partnership:
The provision of the Indian Partnership Act, 1932 U/s 30 (2), deals with the admitted benefit of minors in the partnership.
This section lays down that a minor cannot become a partner without the consent of adult partners of the firm because he is admitted only for the benefit of the partnership.
This similar view is taken by the Supreme Court of India in the case of Commissioner of Income Tax v/s M/s.Dwarkadas Khetan & Co.(1961 AIR 680) (3). The court observed that a minor could be admitted to the benefit of a partnership; perhaps he can not become a partner.
The contract made by Guardian:
In some cases, a guardian of a minor can make a contract on behalf of him, such type of contract is valid per law, but one thing is that a guardian can enter into the contract only for the benefit purpose and no other than that.
A guardian can also enforce a contract on behalf of a minor for the same benefit purpose, and is enabled to manage the property; after getting prior permission of the court, he can sell the immovable property of the minor in the same manner.
Insolvency:
As we discussed above, when there is no legal validity of a contract with a minor, he is not capable of creating any debts or liabilities by himself. In that case, a minor can not be declared insolvent by law if some circumstances, liability is pending of the minor’s property, his direct involvement would not be counted, as he has not done as his capacity.
Joint contract of minor and adult:
In some cases, it happens that a party is jointly involved in the contract as an adult and minor. In that case, such a contract may be executed by the minor’s guardian on his behalf for the benefit of the minor but cannot be done to the detriment of the minor’s interest.
(2) Sound mind:
Here a sound mind person means who can understand the contract of a lawful object with an interest to get a judgment of such a contract. The Indian Contract Act U/s.12 deals with the criteria of a sound mind person according to the law.
In some cases, it happens that a person who enters into the contract due to his mental condition may be of unsound mind while making a contract, or in some cases, a person due to his mental unsoundness may be of sound mind while entering a contract.
In these situations, if a contract is made by a person who is of unsound mind, that type of contract is void by the eye of the law.
(3) Persons Who Are Disqualified by Law:
If any person who disqualified by law, he can not be entered into the capacity to contract. Mainly, we can define that type of person as below.
Idiot:
A person who can not understand or think of anything held; such a person cannot be capable of making a sensible decision, so a contract with that person is void by the eye of the law.
Lunatic:
A person who suffers from a lunatic can not understand anything during that period, and after that period, he will become normal. A contract with that ill person is void if a contract is made during a period of lunacy.
Drunken person:
A drunk person who has a habit of drugs, alcoholic products, or any other narcotic is not capable of easily understanding everything like a normal person. We can say that the mental condition of such a person is the same as that of a lunatic person.
A drunken person cannot understand the terms of the contract, and what shall result from entering the contract.
It may affect his interest and rational judgment of the contract due to his habit of drunkenness. That way, a drunk person can not enter into the contract.
(4) Conclusion:
Every contract has some specific purpose according to its requirements, and to fulfil that purpose, the parties to the contract mention their terms and conditions, which are clearly and legally binding on them.
Here, the capacity of the party is one of the most important requirements to make a valid contract. As we discussed above, only a valid contract can be enforceable in legal terms.
Therefore, a party that enters into a contract must have the capacity to contract; it makes an agreement valid, and it also protects the rights of parties.
When a disqualified party enters into a contract, it has no value in the eyes of the law in India.
Incapable parties like minors, drunken persons, lunatic persons, or those disqualified by law, etc., are not in the capacity of a contract to understand terms, as well as they are not capable of getting a rational judgment in legal terms.
That way, the competence of a party is a Basic requirement for making a legally valid and enforceable contract according to the provisions of the Indian Contract Act in India.
(5) Reference:
(1) The Indian Majority Act, 1875, under section 3.
(2) the Indian partnership act, 1932 U/s 30.
(3) Commissioner of Income Tax v/s M/s.Dwarkadas khetan & Co.(1961 AIR 680).
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