One very big essential of a valid contract is the competence of both the parties to enter into a contract. The Indian Contract Act, 1872 in its Section 11 defines the Capacity to Contract on the basis of three major aspects, they are-
- Attaining the majority age.
- Being of sound mind.
- Not disqualified by law to enter into a contract that he/she is subject to.
This article will focus on the importance of capacity to contract and cover everything briefly.
According to Section 11, “Every Person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law he is subject.”
Going by the definition, there are three main aspects, (i) attaining age of majority, (ii) being of sound mind, (iii) not disqualified from entering into a contract by any law he is subject to. Let’s talk about each of them briefly and why they are important.
Attaining age of majority
Indian Majority Act, 1875, defines the age of majority in India as 18 years of age. For any person to enter into a contract, it is very important for them to be over 18 years of age. Any person who is domiciled in India, and not attained 18 years of age will be treated as a Minor.
A contract made with a minor will be void. This is because of the simple fact that any minor entering into a contract will not understand the details of an agreement. Thus, making any agreement with a Minor, void-ab-intio.
Although a minor cannot enter into a contract, they sure can be a beneficiary to it. Section 30 of the Indian Partnership Act,1932 states that although a minor cannot be a partner in a firm, they can definitely enjoy the benefits of the firm.
Being a minor can play a big benefit as well, if a minor takes out a loan or enters into a contract by falsely representing themselves as a major, they can plead to a minority and the rule of estoppel cannot be applied against them.
There are certain provisions when a guardian of the minor can enter into a contract on behalf of the minor. Such a contract is usually for the benefit of the minor and can be enforced by the minor too. Similarly, a minor cannot be declared insolvent, this is because he cannot avail debts and if they are there, he will not be personally liable for them.
Person of Sound Mind
Section 12 of Indian Contract Act, 1872 states that for the purpose of entering into a contract a person has to be of sound mind. If they are capable of understanding the contract, and able to assess the effects upon his interest.
It should also be noted that a person who is occasionally of unsound mind, can also enter into a contract when he is in sound mind state. No person can enter a contract when he is of unsound mind, unsound mind contracts are void.
Minors and Unsound Mind individuals are not the only ones who are not allowed to enter into a contract, but there are also certain individuals who cannot enter into a contract if they are disqualified by law from entering into one. The reason for disqualification can be because of political status, legal status, etc. Some of these people are ambassadors, foreign sovereigns, alien enemy, insolvents, etc.
Capacity to contract comprises of three essentials and all the three have been discussed in great depth above, I hope you were able to understand it through this article.