One of the Essentials of a Valid Contract is competency to enter the Contract. The Indian Contract Act, 1872 is the foundation of Contract Law in India, governing agreements and their enforceability. A valid contract requires the parties to be capable of entering into contractual relationship to furnish their free consent. Section 10 of the Act stipulates that only those who are competent to contract can form a valid one, further elaborated in Section 11 of the Act. This blog discusses the concept of capacity to contract under the Indian Contract Act, its legal framework and relevant judicial interpretations.
Indian Contract Act and Capacity to Contract – Provisions
Section 11 of Indian Contract Act ,1872 defines the capacity to contract emphasizing that a person is competent to contract if they :
1) Has attained the age of majority.
2) Is of Sound Mind
3) Is not disqualified by any law of which they are subject.
Section 11 of Indian Contract
Section 11 protects individuals and society from fraud, exploitation or unintentional harm due to incapacity. Let us explore the elements of Sec 11 in detail:
Attaining the Age of Majority
According to the Majority Act, 1875 , a person attains majority at the age of 18 years. People who have attained the age of Majority i.e., 18 years have the capacity to enter into contract.
Mathai Mathai v. Joseph Mary Alias Marykutty Joseph (2014)
In this Case, the Supreme Court ruled that a 15 year old could not enter into a valid contract in her own name, even for a mortgage deed. The Apex Court held that she can be represented by a Natural Guardian or a Court Appointed Guardian. The Court clarified that “A deed of mortgage is a contract and we cannot hold that a mortgage in the name of a minor is valid, simply because it is in the interests of the minor unless she is represented by her natural guardian or guardian appointed by the court. The law cannot be read differently for a minor who is a mortgagor and a minor who is a mortgagee as there are rights and liabilities in respect of the immovable property would flow out of such a contract on both of them.”
Mohori Bibee v. DharmoDas Ghose (1903)
The Privy Council ruled that a Contract entered into by a minor is Void-ab-initio, which means Void or invalid from the beginning. A contract with a minor is a void contract at the moment of the minor entering into the contract.This Judgement set a precedent for the treatment of contracts entered by Minors. If a Minor enters into a contract, he cannot ratify it even after attaining majority because a contract with minor is Void from the beginning (void ab initio).
Soundness of Mind
For a Contract to be valid, both parties must be of sound mind at the time of entering the contract. Sec 12 of the Indian Contract Act, 1872 talks about Soundness of Mind. A person is said to be of sound mind if he/she is:
a) Able to recognize the nature and consequences of the contract; and
b) Are capable of making rational decisions regarding the contract.
The provision further explains that a person who is usually of sound mind but occasionally of unsound mind may enter a contract when of sound mind. A Person of unsound mind includes those suffering from mental illness, intoxication or temporary insanity. It may be noted that Contracts made during the period of unsoundness are void.
Ashfaq Qureshi v. Aysha Qureshi (2010)
The matter involved intoxication of a Hindu girl being converted to Islam and gotten married while being intoxicated. The Court compared the requirements of marriage under Mohammedan Law being being those of a valid contract. The Court held that the Petitioner was not bound by Marriage because she entered into agreement when intoxicated and was incapable of adjudging the consequences of her actions. The Court explained that “The effect of one party being under intoxication would be that there was no contract marriage as a person under intoxication is undisputedly incompetent to give consent.”
Legal Disqualification from Contracting
This provision states that if a person is disqualified from entering into a contract by virtue of any law or statutory provisions, then that person is not competent to contract as a Party in India. The reasons for disqualifications may be because of Political Status, legal status etc. Some of such persons are foreign Sovereigns and Ambassadors, Convicts, Insolvents, Alien Enemy etc. The terms have been explained below for better understanding.
Insolvents
A person declared insolvent cannot enter into a contract as they lose the capacity to declare their assets. As Per Insolvency and Bankruptcy Code, 2016, An Insolvent cannot enter into a contract.
Alien Enemies
Citizens of a country at war with India are disqualified from entering into contracts during wartime unless permitted by the government.
Foreign Sovereigns and Ambassadors
Foreign Sovereigns and Ambassadors are generally immune from lawsuits and cannot contract without explicit approval of the Government.
O. Wuthrick v. David (1916)
In this case, the plea filed for recovery of rent by a lessee against the lessor of property in South Canara in British Territory. The defendant is a German Subject and declared as Alien Enemy in 1914 for British subject due to World War. The rent was for a mission to be used in British India. The Madras HC clarified that “During war all commercial intercourse and trading between enemies is illegal unless sanctioned by the authority of the Government. Persons in enemy country whatever their nationality are treated as enemies as far as relates to their trade. Their commercial domicile during war or the war domicile determines their enemy character.”
Effect of Incompetency in Indian Contract Act
Since we are talking about capacity to contract under the Indian Contract Act, 1872, it is crucial to understand what happens when a person lacking the capacity enters a contract. The possible consequences have been pointed out below:
Void Agreement
A contract entered into by incompetent persons are void ab initio. This means that they have no enforceability from the time they were entered. At no point, whether the contract was recently made, or significant time has passed, the same remains invalid.
No Estoppel Against Minor
A Minor cannot be estopped from Pleading Minority as a defense, even if they misrepresent their age. Thus, if a contract has been entered with a minor, all the responsibility goes to the other party for ignorance of fact of minority.
Restitution
It may be noted that the aforementioned pointer of estoppel is not the absolute rule. In some cases, the Courts may order restitution to prevent unjust enrichment, provided that the minor has not misused their incompetence to deceive the other party.
Contracts for Necessities
Section 68 of the Indian Contract Act makes an exception for individuals who are otherwise incompetent to contract as per Section 11 of the Act. If a minor or a person of unsound mind receives supplies necessary for their life or dependent obligations, the supplier is entitled to reimbursement from the property of the incompetent person.
For example: If a minor is provided food, shelter, or education, the supplier can claim reimbursement from the minor’s estate.
How Section 11 affects Third Parties?
1. Contracts with Minors or Incompetent Persons:
If a contract is entered with a minor or an incompetent person, the contract is void, and third parties cannot enforce or claim rights through such a contract. For instance, if a minor sells property to a third party, the original owner can challenge the transaction.
2. Third-Party Interests in Voidable Contracts
Contracts made by parties of unsound mind or under duress are voidable at the option of the incompetent party. This can affect third parties relying on the continuation of such contracts. Example: A person of unsound mind sells goods to a third party. If the contract is declared void later, the third party’s title may be invalidated.
3. Fraud or Misrepresentation
If a third party is involved in a transaction with a minor who fraudulently represents themselves as competent, the minor is not bound by the contract. This can create legal disputes for the third party.
4. Guardian Contracts
When a minor’s guardian enters into a contract on behalf of the minor, third parties must ensure the guardian acts within their authority and in the minor’s interest. Otherwise, the minor can repudiate the contract.
Conclusion
The capacity to contract is a fundamental principle under the Indian Contract Act, 1872, safeguarding individuals incapable of making rational decisions. The Act ensures a balance between protecting vulnerable individuals and upholding contractual sanctity. Understanding this aspect is vital for anyone dealing with contracts to avoid entering into agreements that may later be deemed void.
The concept of Capacity to Contract under Indian Contract Act has been simplified and explained by Mr Ramachandra Achanta, Legal Intern at Lawgical Shots. Ramachandra is bringing value through legal blogs for our readers.
