Law of Contract: Capacity to Contract

Reading time: 8-10 minutes.

An agreement enforceable by law is a Contract. ‘Capacity’ is one of those often used terms while discussing about Law of Contract. In today’s globalized era, it is of utmost importance for a party to have the capacity to contract in order to enter into commercial transactions. This article will be dealing with how one person is or is not competent to come into a valid contract with another, and will majorly revolve around the Indian Contract Act, 1872 (hereinafter ‘the Act’), relating case laws, followed by a critical analysis of the subject in the Indian context. Moreover, every Indian aspect will be dealt along with its origin in English Law as well.

What is capacity to contract?

The term ‘capacity’ under English Law refers to the ability of the contracting parties to come into legally binding relations with each other. If any party fails to comply by this condition, the subsequent contracts may be deemed to be invalid, relying on the facts and circumstances of the case. Since the Indian Contract Law is primarily based on the English Common Law, hence Capacity to Contract carries the same importance as under the latter law, and qualifies to be one of the most essential elements of a valid contract.

A person is considered as capable to enter into a valid contract if he satisfies three conditions under the Act, namely, person has to be major, he or she should not be of unsound mind, and lastly he or she should not be disqualified by any law from entering into a contract. However, it is pertinent to note that the subject of the contract should not be illegal or even void for the reasons of public policy.

Relevant legal provisions

The Act lays down three provisions which makes capacity as its centre of attraction. The first in order is Section 10, which states the pre-requisites of a valid contract. One of the conditions laid down is that, an agreement is a contract if they are made by the free consent of the parties who are competent to contract. Following this, Section 11 classifies the parties to contract into three categories who are competent to contract. And lastly, it is Section 12 which lays down the situations when a person is considered to be of unsound mind, in order to give clarity to Section 11.

The first factor is the age of majority. It provides that a minor i.e. eighteen years old, is not competent to contract. It is presumed that a man is the best judge of his own interests, but this is inapplicable with respect to minors to protect themselves from fraud, unscrupulous traders, etc. Hence, Minor contracts under the Act are generally considered to be void or voidable, barring exceptions. So, minor agreements, being void are not capable of being ratified after attainment of majority. Under common law, the contracts benefiting the minors are valid. For instance, if an infant enters into a contract in order to provide himself or herself with the means of self-support, then it shall be valid.

However, a guardian can step into the shoes of the minor to supplement for the minor’s incapacity to contract. When contract is entered into, on behalf of the minor, such as contracts of marriage, then those contracts have been held to be valid on the ground of customs. Also, a contract which is completely executed from the minor’s side can be enforced by the minor because there exists no liabilities and nothing needs to be done by him or her further, because it would end up as being for the benefit for the incapacitated persons. Furthermore, Section 68 of the Act is the provision which relates to the position of necessities supplied to the minor.

The second factor concerns with soundness of mind. Consent is considered to be an act of reason which has to be combined with deliberation. It is possible for a man to behave normally, but he may be incapable of understanding the transaction, and thus being unable to form a rational judgment, which results in unsoundness of mind. According to Section 12 of the Act, a person is considered to be one of a sound mind if he is capable of understanding and making a rational judgment at the time when he comes into a contract. This implies that a person who is usually of unsound mind and partially of sound mind, then he or she should come into a contract when he is of sound mind, and if it is vice-versa, then the person should avoid making a contract when he or she is of unsound mind. Unsoundness of mind goes on to further render the contract as a void one. But, sanity is presumed in favour of that person, which implies the capacity to understand and make rational decisions as to their interests. For instance, if a person alleges the other that the person has become incapable of understanding his business due to old age, then the onus is on the person to prove the unsoundness of mind of the other. Unsoundness of mind can be because of various reasons such as insanity, drunkenness, mental idiocy and old age.

The last factor is with respect to the persons disqualified by law to enter into a contract. These include several types of people. First is alien enemies i.e. according to Section 83 of Civil Procedure Code (hereinafter ‘CPC’), no one is allowed to come into a contract with an alien if any war is subsisting, unless the government allows for the same. The second is regarding the foreign sovereigns which is embodied under Section 86 of the CPC. The next is an insolvent person, who cannot be subject to any contractual agreement because when he is declared insolvent, his properties are with the official assignee and that he or she can only enter into a contract in correspondence with that property as per Section 141(1)(b) of the Insolvency and Bankruptcy Code, 2016. And lastly, contracts with the government is also to be complied with some formalities, and if not done, then it would be deemed to be void. This is not the exhaustive list, but some of the categories which come under the ones who are disqualified by law.

Case laws

Mohari Bibee v. Dharmadas Ghose [ILR (1903) 30 Cal]

In this case, the respondent was a minor who was the sole owner of an immovable property. His mother was the legal custodian. He misrepresented his age to a person and mortgaged his property. Later his mother clarified regarding his minority. But that person sought to enforce the contract of mortgage once he attained majority. The Calcutta High Court went on to hold that any contract entered into with a minor or an infant qualifies to be void-ab-initio. So, they held in the context of the case that the mortgage contract was void as it was entered into by the minor respondent.

Leslie v. Sheill [1914 3 KB 607]

Here, defendant was a minor who obtained a loan from the plaintiff by misrepresenting his age. Later, the plaintiff sued on the grounds that the minor is liable for fraud and he shall be compelled in equity to restore the money. But the court took a different view and held that making is compulsory for the minor to pay an equivalent sum out of his present and future resources would amount to enforcement of a void contract, and hence, it cannot be done even if the infant entered into the contract by fraud.

Raghava Chariar v. Srinivasa [ILR (1916) 40 Mad 308]

In this case, the issue which arose was, whether a mortgage which is in favour of minor who has advanced the mortgage money in full, is enforceable in the court of law by the minor or any other person on his behalf, or not. The Madras High Court came to a conclusion that a minor can enforce any contract which is of benefit to him or her, where there is no obligation to be borne by him or her.

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

A guardian entered into a contract to purchase a certain immovable property, on behalf of the minor. Later, the minor sued the other party for specific performance in order to recover its possession. It was concluded that any contract can be specifically enforced by or against the minor if: it is for his or her benefit, and if the guardian who has entered into the contract on behalf of the minor, is competent to do so. This case basically laid down the Doctrine of Maturity under the Contract Law of India.

Campbell v. Hooper [(1855) 3 Sm&G 153]

The mortgagee, in this case, obtained a decree to repay the debt. But there was evidence leading to a conclusion that the mortgagor was a lunatic at the time of entering the contract, and the mortgagee was unaware of the same. Under English Law, it was held that mere fact of lunacy cannot make a contract invalid, and if the other party had the knowledge of lunacy, then it would become voidable at the option of the lunatic. Thus, knowledge is an important factor under English Law.

Critical analysis

After critically going through the legal provisions under the English and the Indian law, it was noticed that under the latter, it is not clearly specified in the statute as to whether a minor agreement is void or voidable. Though, Mohari Bibee case cleared it to an extent that it is void-ab-initio, but it has still attracted a lot of controversy on this point. But, meanwhile the law regarding the same is pretty clear in England, where it is provided that the minor can enter into a contract which would be deemed as voidable till the time he or she does not reach eighteen which implies that after attaining the majority, upon their will, they can either enforce the contract or terminate it.

But in India, they cannot ratify in absence of some special circumstances. Again, there has been variety of judicial decisions on this point which makes the situation unclear. Further, it is pertinent to note that under English Law, an unsound person is competent to contract, but he can avoid the contract if he satisfies the court that he was incapable to understand and the other party was aware of it. In India, situation differs, and a contract by an unsound person is rendered as void i.e. completely invalid.

Conclusion

At the end, one point which comes to the notice is that though Indian Contract Law has its origin in the English Law, but the interpretation and the stands in both the countries differ on several aspects, as stated earlier. To be precise, English law is comparatively clearer than the Indian law, as what is to be interpreted is already codified and grey areas are not left to be filled through judicial decisions, as in India. Lastly, the English Common law proves to have a wider ambit as it deals with unsoundness under incapacity which even includes public corporations, minorities apart from intoxicated and mentally ill people.

Author: Jaanvi Singh from School of Law, Bennett University.

Editor: Dhawal Srivastava from Rajiv Gandhi National University of Law, Patiala.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s