What is Capacity to Contract?
The primary element of a valid partnership contract is the capability or eligibility of partners to form a business agreement. The capacity to contract here means the legal ability of an individual or an entity to enter into a partnership. According to business law, the partner must be competent and fulfill the specified criteria before signing a contract.
Section 11 of the Indian Contract Act, 1972 details the capacity in contract law. It defines the ability to form contracts based on three aspects. They are as follows.
Attaining specified age
Being of sound mind
Not be disqualified from entering into a contract on the basis of any law he is subjected to
Apart from contractual capacity, partnership contracts must also include the following.
Offer
Consideration
Intent
Legality
Acceptance
The meaning of contractual capacity can be understood in detail through norms and examples.
Refer to the official website of Vedantu for a detailed explanation.
Detailed Explanation of Capacity to Contract in a Business
Given below is a thorough explanation of the contractual norms to judge an individual’s capacity to enter into a contract.
1. Attaining the Age of 18
A minor does not hold the capacity of holding a contract in business. Any agreement made with a minor in business is void ab-initio, which means ‘from the beginning’. If any person aged below 18 years enters into a contract, he cannot ratify the agreement even when he turns 18. This means that an invalid agreement can never be ratified.
Minor being a Beneficiary in a Contract.
Even though a minor is prohibited from entering a contract, he can register himself as a beneficiary of an agreement. Section 30 of the Indian Partnership Act, 1932 mentions that a minor cannot participate as a partner in the business, but he can enjoy the benefits earned by the firm.
A Minor always enjoys the benefits of being a Minor
A minor gets to enjoy some extra benefits in business. This contractual benefit needs to be explained in terms of the capacity to contract with examples. For instance, if a minor pretends to be a major and enters into a contract, he can later plead the minority through some simple formalities. The rule of estoppel is not applicable to a minor.
Contract through the means of a Guardian
In some cases, a guardian can enter into a valid business contract on behalf of a minor individual. Here, the guardian has no right to bind a minor to buy any immovable property under the contract. However, with proper certification and approval, the minor’s property can be sold when required.
Insolvency
According to business law, a minor cannot be declared insolvent at any point in time. Even if the minor owes some dues to the firm, he will not be held personally liable for it.
Mutual contract by a Minor and an Adult individual
When a joint contract is signed between a minor and major, it has to be done in the presence of the minor’s guardian. In such contracts, the liability of the contract is held by the adult.
2. An individual has to be of Sound Mind
Section 12 of the Indian Contract Act (1872) necessitates a person to be of sound mind, have a complete understanding of the contract terms and conditions, and hold the ability to judge its impact on his interests.
Here, the capacity of parties to the contract also applies to an individual who is usually of unsound mind and occasionally in sound mind. However, in this case, the contract has to be signed when he is in a state of complete soundness. A contract made by an individual of unsound mind shall be considered as null and void according to capacity law definition.
A person under the influence of any sort of intoxication is considered incapable of entering into a contract. Such individuals can make a contract only when they are sober and have a complete understanding of the contractual terms.
3. People Disqualified under Law
Other than minors and people of unsound mind, some individuals might be restricted from entering into any contract as well. Such individuals do not hold the capacity to contract under valid business laws. Disqualification under contractual laws could include reasons related to politics, legal status, etc. This could also happen when a person is a foreign sovereign, national enemy, convict, or insolvent.
Alien enemies: people who are having citizenship in countries who don't have cordial relationships with India or in a war situation are called Alien enemies. People signing the contract during a war situation is not encouraged and a contract during a peace situation is valid.
Married women: married women are not allowed to enter a contract regarding their husband’s property.
Pardanashin Women: Pardanashin women who will be under influence are not eligible to be involved in the contract as they cannot understand the contract.
State Ambassadors: The ambassadors are incompetent to contract.
Convict Serving Sentence: People who are on Bail or serving their sentence are not allowed to sign a contract.
Patent Officers: People having patent rights are issued by their owners to them. A patent is a monopoly right given to its owner. Hence patent officers are not allowed to sign the contract.
Legal professionals: People who work as judges, advocates, public prosecutors are not allowed to sign a contract related to their connections.
For example, Advocate has taken a case from a Y person, the legal proceedings are going on. So advocates cannot sign a contract with that person in buying that property.
Insolvent: The insolvent person is allowed to purchase the property but cannot sell his own property.
Company: The company is formed under the law. Different companies are bound by different laws. Here, the company is considered as an artificial person. The company cannot sign contracts outside its limits.
4.Capacity contract limited due to Mental Illness
Persons with mental illness or disorders are also having limited capacity to contract irrespective of age. Some of the instances related to campsity are listed below-
Intellectual disability: People with intellectual disability are having an exception for capacity to contract, it also includes the severity of the disorder.
Advanced dementia: People suffering from dementia are exempted from involving or signing the contract.
Hallucinations and visions: People who are in hallucination and visualize things without any reference are exempted from signing the contract.
Affective disorders: People having depressions or bipolar disorder will have frequent mood changes. So people with these problems are not allowed to be involved in any contract.
Contracts signed by people with disabilities are considered to be null. Court will determine whether the contract is legal or illegal. To determine, as a part of the process, individuals' mental health is determined. People with stress and are mentally challenged are not allowed to be involved in any contract, if they are involved then it is invalid.
Based on legal capacity, affected people are categorized into different types. They are -
Partial legal incapacity: If a mental disorder or disability is restricted to a certain area and is normal in day-to-day life, then it is partial legal incapacity. For example, hallucinations.
Relative legal incapacity: Relative legal incapacity contradicts Partial legal incapacity. People who can perform normal activities like shopping, reading and cannot do long-term contracts are referred to this.
FAQs on Capacity to Contract: Legal Implications Explained
1. What is the meaning of 'capacity to contract' as per the Indian Contract Act, 1872?
According to Section 11 of the Indian Contract Act, 1872, 'capacity to contract' refers to the legal competence or ability of an individual or entity to enter into a valid, binding agreement. For a contract to be enforceable by law, all parties involved must possess this capacity.
2. What are the three main conditions for a person to be considered competent to contract in India?
A person is considered competent or having the capacity to contract if they meet the following three essential conditions:
- They have attained the age of majority (18 years in most cases).
- They are of sound mind at the time of making the contract.
- They are not specifically disqualified from contracting by any law to which they are subject.
3. Can a minor enter into a valid contract? Explain the legal position with an example.
No, a minor cannot enter into a valid contract. Any agreement made with a person below the age of 18 is considered void ab-initio (void from the very beginning) and is legally unenforceable. For example, if a minor takes a loan, the lender cannot sue to recover the money. However, a minor can be a beneficiary in a contract, meaning they can receive benefits without incurring liability.
4. What are the legal implications if a contract is made with a minor?
A contract with a minor carries specific legal implications:
- Void from the Start: The agreement has no legal value from its inception.
- No Ratification: The minor cannot validate the contract even after becoming an adult.
- Rule of Estoppel Doesn't Apply: A minor can always plead their minority as a defence, even if they falsely represented themselves as an adult.
- Beneficiary Status: While a minor cannot be bound by a contract, they can be a beneficiary and enforce a contract that benefits them.
5. Why can't a contract made during minority be ratified after attaining the age of majority?
A contract made by a minor cannot be ratified upon attaining majority because the original agreement was void ab-initio, meaning it never existed in the eyes of the law. Ratification can only apply to an act that was validly done in the first place. Since the agreement was a nullity, it cannot be given legal life later on. A fresh contract with new consideration must be made after the person turns 18.
6. What does 'soundness of mind' mean for contractual capacity, and what about people who are sometimes of sound mind?
As per Section 12 of the Indian Contract Act, a person is of 'sound mind' if, at the time of making the contract, they are capable of understanding its terms and forming a rational judgement about its effect on their interests. For individuals who are usually of unsound mind but occasionally of sound mind (e.g., a person with certain mental illnesses), they can enter into a valid contract during the intervals when they are of sound mind.
7. Besides minors and persons of unsound mind, who are some other individuals disqualified from contracting by law?
Certain individuals are disqualified from entering into contracts by other laws for reasons of status or public policy. Key examples include:
- Alien Enemies: Citizens of a country at war with India cannot contract with an Indian citizen without government permission.
- Convicts: A person serving a prison sentence cannot enter into a contract during their imprisonment.
- Insolvents: An individual declared insolvent is restricted from selling their property, as it vests with the Official Receiver.
- Foreign Sovereigns and Ambassadors: They have diplomatic immunity and cannot be sued in Indian courts unless they willingly submit to the court's jurisdiction.
8. How does the law treat a contract entered into by a person who is intoxicated?
A person under the influence of alcohol or drugs is treated similarly to a person of unsound mind. If an individual is so intoxicated that they are incapable of understanding the nature and consequences of the agreement, the contract is considered voidable at their option. They can choose to either reject or affirm the contract once they are sober and understand its terms.
9. Why is a company's capacity to contract limited, even though it is a legal entity?
A company is an 'artificial person' created by law, and its capacity to contract is not unlimited. Its contractual powers are strictly defined by the 'Objects Clause' in its Memorandum of Association. Any contract made by the company that goes beyond these defined powers is considered 'ultra vires' (beyond the powers) and is void. This is because a company can only legally act within the scope for which it was created.
