I. What do you understand by “Capacity to contract”?

Who are not competent

to enter into  a contract?

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 fulfil 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.

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-

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.

Persons incompetent to contract

When a person is said Minor, unsound and disqualified by law or intoxicated person is void, then he is said to
be competent to contract. Incompetency has a critical role in contracts. To avoid any legal consequences and
difficulty arising due to this, one should be cautious while entering into a contract.

Contractual Capacity of Minors

A person is said to be major when he has completed the age of eighteen. It has been defined in
Section 3 of The Indian Majority Act, 1875[1] as, “every person domiciled in India shall attain the age
of majority on his completing the age of eighteen years and not before. Minors are people below the
age of eighteen.” In India, minors are incompetent to contract. So when a minor signs a contract, it is
deemed void. An agreement entered by a minor is void ab initio. In Mohri bible v. Dhurmodas
Ghose, the Court held that the law makes it essential that all the parties should be competent and it
further stated that the Contract law in section 10 has mentioned that minors can’t enter into a
contract.
A minor is usually incompetent to enter into a contract but he can be made beneficiaries to one. This
has been inculcated in The Indian Partnership Act, 1932 which says that a minor cannot become
partners in a partnership firm but they can enjoy the benefits accrued from it.
In cases, where the minor has falsely shown himself as major and entered into a contract, he can
plead minority in defense and the rule of estoppels cannot be applied against him.

A minor’s contract by a guardian

In some cases, a guardian on behalf of a minor can enter into a valid contract for the benefit of the
minor. However, the guardian cannot bind the minor by the contract to buy immovable property.  
In Srikakulam Subramanyam v. KurraSubba Rao, The Privy Council held, the mother has the authority
to enter into a contract of sale for the benefit of the minor, as she is the guardian. Hence, a contract
entered for the benefit of a minor is a valid contract. 

The position of a minor’s agreement and its effect-

A contract made by minors cannot be ratified as it is void from the beginning itself.
A minor can be appointed as an agent, but he will not be personally liable for his acts.
If Minors are supplied with necessities of life, the person who has supplied them is entitled to get
reimbursement from the minor’s property. Section 68 of the Indian Contract Act, 1872, provides that
a minor is supplied with necessities, the person who furnished those necessities are entitled to
reimbursement from the property of the minor but the minor may not be liable for it personally,  

Unsound mind- incompetent to contract

Under Section 12 of the Indian Contract Act, 1872, a person is said to be a sound mind if, he is
capable of understanding it and forming a rational judgment. A person usually of sound mind and
occasionally of sound can enter a contract when in sound mind and a person who is occasionally of
unsound mind cannot enter a contract when he is of unsound mind. 

Persons of unsound mind under Law

Following persons are said to be of unsound mind-
1. Lunatics- A person whose mental power is unbalanced is called a Lunatic. It is not necessary
that a lunatic is always in the state of lunacy, he can have intervals of lunacy. Lunacy is
temporary, so the agreements entered with lunatics are void except the ones entered into
when the Lunatic was not in the unsound phase and it is made for supplies necessities.
However, in case of a contract made for the supply of necessities, the property of the lunatic
can be made liable but he does not have personal liabilities for such a contract.

2. Idiots- A person who has completely lost his mental well being is said to be an Idiot. Idiocy is a
permanent ailment; therefore an agreement by an idiot is void.

3. Intoxicated person- A drunken person is not in the correct state of mind for forming a rational
judgment, therefore he is incompetent to contract during intoxication. 

Disqualified persons are incompetent to contract

The disqualified persons are incompetent to contract due to many reasons like legal, political or
corporate status.
Following is a list of disqualified person-
 Alien Enemy
 Foreign Ambassadors
 Convicts
 Insolvents
 Company bodies
II. 1. An auctioneer advertised in a news paper that a sale of office furniture
would be held at Delhi.B, a broker from Mumbai reached Delhi on the
appointed date and time. The auctioneer cancelled the auction on that day.
The broker sues him for his loss of time and expenses. Will he succeed?

 The broker will not succeed. Because there is no contract concluded

 In sale by auction, goods are sold by inviting bids from bids from the prospective buyers.
 The bids are offers and invitation to people to participate in auction.
 Sale through advertisement is not a proposal but merely an invitation to offer.
 Hence, Broker will not succeed in claiming compensation for loss of time and expenses in reaching
Delhi for advertised auction sale cancelled later.

2. A tells his wife that he would commit suicide if she did not transfer her personal
assets to him. She does so under the pressure. Can the wife avoid the contract?
Voidable contract are those which is enforceable at the option of one or more of the parties but not at the
option of other party/parties. So wife can reject/repudiate the contract.

The wife could have avoided the contract.

 In the traditional case, because a contract is a legally binding arrangement, and both the
parties are required to satisfy the terms of the contract if they enter into a contract with
another person or enterprise.
 However, as per the law it is possible to render an different legal contract unenforceable.
 The contract has been carried out as a result of undue influence and can have been avoided.
The husband has taken an advantage of the situation and put pressure on his wife to sign
the contract. 
 The wife could have directly addressed the court to solve the matter.