Capacity of Contract
According to Section 11 of the Contract Act, “every person is competent to contract, who:
- Is of the age of majority, according to the law to which he is subject,
- Is of sound mind, and
- Is not disqualified from contracting by any law to which he is subject.
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As per the Indian Majority Act, of 1875, every resident of India attains a majority at the age of 18 years. However, when a guardian is appointed for a minor and the court takes charge of the property before the age of 18 years, he or she would attain the majority at the age of 21 years.
The law regarding minor agreements may be summed up as under:
- An agreement with a minor is void as the law cannot impose any legal obligation on the minor.
- A minor can be a beneficiary though he cannot be bound by any legal liability. A minor cannot become a partner in the partnership firm but he can be admitted to the benefits of the partnership.
- Any money due to a minor cannot be recovered. Even any false statement by him, he cannot be held liable.
- Any minor entering into an agreement and subsequently attaining the age of majority cannot validate or ratify the agreement. An agreement entered with the minor is void-ab-initio and cannot be validated after that minor becomes major.
- Though an agreement with the minor is void an agreement entered with the guardians of the minor for the benefit of the minor, is valid. But, the guardian must be competent to contract along with fulfilling all the required conditions associated with it and the contract should be entered only with intention of benefiting the minor.
The next important issue that arises in the capacity to contract is the person entering into a contract should be of sound mind. A person with an unsound mind is called a lunatic or insane.
A person is said to be of sound mind if at the time of making the agreement he or she is capable of understanding the terms and conditions of the contract and forming a rational judgment of entering into the contract. If a person is generally of sound mind, but at the time of making the contract, he is of unsound mind, he is not eligible for entering into the contract.
For example, a person entering into the contract under the influence of alcohol. Thus, the periodicity of lucidity is important. When the person is lunatic at the time of entering into the agreement, he cannot make a valid contract.
As per Section 12 of the Contract Act, “ 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 effects upon his interests.
A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind. A person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind.”
Disqualified Persons or Alien Enemy
An alien enemy, during a time of war, cannot enter into an agreement with any person in the country unless he or she is permitted by the government to do so.
Secondly, some of the body corporates or persons like sovereign states, ambassadors, and other diplomats are allowed to enter into the contract and they cannot be prosecuted by any court in India.
The third type of incompetent persons is those who are ‘disqualified from contracting by any law to which they are subject’.
They are as follows:
An alien (citizen of a foreign state) is a person who is not a citizen of India. When there is a war between India and another country, that country’s citizen becomes an alien enemy and cannot enter into the contract.
Foreign Sovereigns and Ambassadors
They can enter into contracts and enforce those contracts in court but they cannot be sued in the court without the sanction of the Central Government unless they choose to submit themselves to the jurisdiction of the court.
A convict is one who is found guilty by a court and is undergoing a sentence of imprisonment. During the period of his imprisonment, he is incompetent to contract and sues on the contract made before conviction.
Company or Corporation
A company/corporation is an artificial person created by the law. It cannot enter into the contract outside power, conferred upon it by its Memorandum of Association (object clause) or by the provisions of its Special Act.
When a person’s debts exceed his assets, he is adjudged insolvent and his property stands vested in the Official Receiver or Official Assignee appointed by the court. Such a person can not enter into contracts relating to his property.
Unlawful and Illegal Agreements
Unlawful agreements are those agreements that cannot be enforced through a contract due to unlawful object or unlawful consideration. The unlawful object is said when the objective of the agreement is forbidden by the law. If an agreement is made to effect injury to any person, then the object of the agreement is unlawful.
For example, if A and B entered into an agreement to kill B’s wife, the agreement entered between them is unlawful as it involves an illegal and unlawful object.
In an agreement in which the consideration is unlawful, the agreement is considered as unlawful agreement. Any agreement that is against the law of the country and is not in the interest of the public welfare is said to be illegal. The agreement to theft is an example of an illegal agreement. An agreement entered to supply the guns and bombs is also an illegal agreement.
The agreements that are void ab-initio come under the agreements that are void under the statute. An agreement made with a minor, an agreement made under a mutual mistake of fact, or an agreement made without consideration are examples of agreement void under the statute.