Capacity to Contract

Competency to a contract

A contract is formed when two or parties come together to form a legally binding agreement, for this legally binding agreement to be valid it is essential that both the parties are competent to understand the contract and its nature, this Contractual capacity when entering into a contract is often referred to as either “competency” or “capacity”. This capacity or competency is not found in every party while entering a legally binding contract. In brief, the parties entering into a contract must be competent enough for the agreement to turn into a legally binding contract.

Section 10 of the Indian Contract Act requires that the parties must be competent to contract. This competence is defined under Section 11 of the Indian Contract Act.

S.11. who are competent to contract.-Every person is competent to a contract who is of the age of maturity according to law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.

Thus, the section declares the following persons to be incompetent to contract -

1) Minors

2) persons of unsound mind, and

3) persons disqualified by law to which they are subject

1) MINORS

The age of majority is generally eighteen, except when a guardian of a minor’s person or property has been appointed by the court, in which case it is 21. The section 10 of the Indian contract act requires the parties to be competent in order to get into a legally binding contract, however, according to section 11 of the same act minors are disqualified from getting into contracts as the section 11 declares minors incompetent. The problem here arises because no section talks about whether the contract entered in by minors Is voidable at his opinion or void altogether, more light was shed on this when Lord Morton said that “Section 11 and the Mohiri Bibi case leave no doubt that a minor cannot contract and that if the guardian and the mother had taken part in this transaction it would be void.” A minor’s agreement being void, ordinarily, it should be wholly devoid of all effects. If there is no contract, there should, indeed, be no contractual obligation on either side. Consequently, all of the effects of a minor’s agreement must be worked out independent of any contract.

2) Persons of unsound mind

In English law, a person who is of unsound mind is considered competent to enter into a contract, although he may avoid his contract if he satisfies the court that he was not capable of understanding the contract and the other party knew it, then the contract becomes voidable at his opinion.

In India on the other hand, the agreement of a person of unsound mind is, like that of a minor, absolutely void. According to Section 12, “a person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it he is capable of understanding it and of forming a rational judgment as to its effect upon his interest”. However, a person who is of usually unsound mind may make a contract when he is of sound mind. But a person who is usually of sound mind may not make a contract when he is of unsound mind.

3) Persons disqualified by law to which they are subject

Contracts formed with people who are disqualified by law are deemed to be incompetent to enter into any contract.

Few of such examples are-

1) Alien enemies - Alien enemies are those people whose countries are at war with India, however, a contract with an alien enemy is void but a contract with an alien friend is deemed valid under the Indian Contract Act.

2) Convicts - A convict is a person who is sentenced by the court to serve a until death or even is just imprisoned. When the sentence is over, the incompetency is also considered over.

3) Insolvents - An insolvent person is disqualified from entering into a contract until the court deems him solvent again.

4) Foreign sovereigns and diplomats - Foreign sovereigns enjoy certain privileges, they cannot be sued unless they surrender themselves under the jurisdiction of the Indian court of law. Unless an Indian citizen has obtained prior sanctions from the government of India, a foreign sovereign and diplomat cannot enter into a contract.

5) Corporations - As a company is considered as an artificial person, it is competent to enter into a contract by itself but the power of contract is subject to the limitation which may be implied or expressed.

From the above write up, we have understood the Section 10 and Section 11 of the Indian Contract Act in detail. It is very important to understand the competency of a person before4 entering into a contract in order to avoid damages. Only people competent under section 11 of the act are capable of forming a valid contract.

Reference:

Indian Contract Act, 1872

Contract and Specific Relief, Avatar Singh, Twelfth Edition.