The ability to enter into a legally enforceable contract is referred to as capacity to contract. The ability to contract binds the contract’s parties to their obligation to uphold its terms. However, not everyone is competent or capable of making a contract. This article focuses on the fundamental elements required for someone to be competent to establish a contract.

Competent to Contract

To make a contract, only certain people are eligible. The following are the people who have the capacity to contract:

• Those with a sound mind
• People who have crossed the majority age
• Those who can contract because they are qualified under the contracting law

Sec.11 of the Indian Contract Act, 1872 lists down the qualifications which enable a person in India to enter into contracts-

• A person should have attained the age of majority as per the law of the country of which he is a citizen.

In India, the age of majority is governed by the Indian Majority Act, 1875. As per Sec. 3 of the Indian Majority Act, 1875, an Indian citizen is said to have attained the age of majority upon completion of eighteen years of age.However, if a person is below the age of 18 years and a guardian has been appointed for him, he shall attain majority at the age of 21 years.

• A person should be of sound mind at the time of entering into a contract.

As per Sec. 12 of the Act, a person can be said to be of sound mind when he can assess, understand his actions and realize the consequences of obligations imposed on him at the time of entering into a contract. A person should not be disqualified under any law to which he is subject.

The general rule is that all natural persons have full capacity to make binding contracts except.

Minors,

Lunatics, and

Persons disqualified by any law.

Minors

Any person who is not of the age of majority is a minor. In India, 18 years is the age of majority. Below the age of 18 years does not have the capacity to enter into a contract. A contract or agreement with a minor is null from the beginning, and no one can sue them. The State provides the Minors with civil and criminal immunities. In addition to that, it takes custody of the well being and the property of the minor. These immunities do not let minors enter into a contract. But if a minor enters into a contract knowing his incapability, then such a contract shall work independently of any contract.

If a party is from India and another party from a foreign country, then there will be more than one law that will be applicable in the contract. In such cases, the TNS Firm v. Muhammad Hussain has set specific guidelines. The age of the majority for ordinary mercantile transactions will depend upon the law of the country where they make the contract. The age of the majority for land transactions will depend upon the law where the land is located.

Mohori Bibee vs. Dharmodas Ghose ILR(1903) 30 Cal. 539 (PC)

1. The respondent, Dharmodas Ghose, a minor, had mortgaged his property in favor of the moneylender, Brahmo Dutt for securing a loan amounting to INR 20,000/-.
2. Mr. Brahmo Dutt had authorized Kedar Nath to enter into the transaction through a power of attorney. Mr. Kedar Nath was informed of the fact that Dharmodas Ghose was a minor through a letter sent by his mother.
3. However, the deed of mortgage contained a declaration that Dharmodas Ghose was of the age of majority.
4. The respondent’s mother brought a suit on the ground that the mortgage executed by his son is void on the ground that her son is a minor.
5. The relief sought by the respondent was granted and an appeal was preferred by the executors of Brahmo Dutt before the Calcutta high court. The same was dismissed.
6. An appeal was then made to the Privy council. The Privy council held that-
   1.  A contract with a minor is void-ab-initio.
   2. Sec.7 of the Transfer of Property Act, 1882 states that a person competent to contract is competent to transfer a property.
   3. Hence, the mortgage executed by the respondent is void.

Effects of a Minor’s Agreement

if a minor enters into a contract by misrepresenting the age, then no one can stop him or her from disclosing their age. The minor is not liable for inducing another party into a contract. Even if any mishaps take place, he is not responsible. But in certain mishaps, he will be liable to it. The minor to avoid a contract can plead his infancy. An agreement of a minor stands as a doctrine of restitution. Whereas if a minor purchase a property by hiding his age, then the purchased property will be returned. But, if he has converted or sold them, then the law cannot sue him.

Contracts Beneficial to Minors

One can bring a minor into a contract if he is beneficiary for the contract. The minor does not have a restriction to be a promisee or payee in a contract. Thus a minor can purchase an immovable property and also can sue for the possessions upon the tender of the money. One cannot order a specific performance against a minor.

In certain instances, a contract entered into by the minor or by the minor’s guardian for his benefit is valid in the eyes of law-

1. A contract for marriage entered into by a minor/his guardian.
2. A partnership contract entered into with a minor admitting him to the benefits of a partnership. However, the minor cannot be held personally liable for the losses incurred.
3. A contract relating to the minor’s property entered into by his guardian if it is for the benefit of the minor.
4. A contract of apprenticeship with a minor.
5. A contract supplying the minors with goods and services necessary for life.

Person of Unsound Mind

• Idiots– An idiot, in medical terms, is a condition of mental retardation where a person has a mental age of less than a 3-year-old child. Hence, idiots are incapable of understanding the nature of the contract and it will be void from the very beginning.
• Lunatic– A person who is of sound mind for a certain duration of time and unsound for the remaining duration is known as a lunatic. When a lunatic enters into a contract while he is of sound mind, i.e. capable of understanding the nature of the contract, it is a valid contract. Otherwise, it is void.

• People under the influence of the drug- A contract signed under the influence of alcohol/drug may or may not be valid. If a person is so drunk at the time of entering into a contract so that he is not in a position to understand the nature and consequences, the contract is void. However, if he is capable of understanding the nature of the contract, it will be enforceable. 
• Intoxication

It is a mental disorder if there is the incompetence of intoxication. The person who alleges it can only prove the intoxication. A person drinking or consuming any intoxicants cannot enter into a contract in such an unsound mind state.

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.
• Corporation Incorporated under a Special Act and Joint Stock Company: Such a corporation or company will be an artificial person formed by the law. It does not have the capacity to contract outside the powers of the Memorandum of Association or the Special Act.

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-

1. Intellectual disability: People with intellectual disability are having an exception for capacity to contract, it also includes the severity of the disorder.
2. Advanced dementia: People suffering from dementia are exempted from involving or signing the contract.
3. Hallucinations and visions: People who are in hallucination and visualize things without any reference are exempted from signing the contract.
4. 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.

Competency to contract on behalf of another

As per the Indian Contract Act, 1872 a person can employ another who shall enter into contracts with the third person on his behalf. The person in this instance is known as the principal and the other person so employed is known as the agent.

Any person may be employed as an agent. However, a minor or a person of unsound mind cannot be held liable for their acts to the principal.

An agent’s authority may be either-

1. express, i.e. by word of mouth or documented in writing as in Power of Attorney  
2. Implied, i.e. it might be deduced from the facts and circumstances of the case

Conclusion

Competency of parties to contract is one of the most important requirements to make an agreement valid and enforceable in a court of law. 

A contract made by a person who does not possess the mental capacity to understand the nature and consequences of the contract is void ab initio. On the other hand, contracts with lunatics, people under the influence of the drug may/may not be void depending upon the circumstances surrounding the situation.

A person regains the legal capacity to contract upon removal of any of the disqualifications. Companies while entering into contracts with one another always try to safeguard their interests. Representation and indemnification are the most commonly used clauses to ensure that both the parties are competent to contract.