Capacity to Contract | Disqualification of person to contract

In today’s globalized era, the capacity to contract and enter into commercial transactions is one of the most important aspects of the liberalisation policy, which the govt implemented in 1991. Without this right, the forex earning of the country will deplete and it won’t be able to safeguard itself from the external financial shock.

So India Contract Act has defined who shall be able to contract and who are either temporarily barred or permanently barred. It has been described in Section 11 of the Act.

The section states, “Every person is competent to contract who is of the age of majority according to the law to which he is subject,1 and who is of sound mind and is not disqualified from contracting by any law to which he is subject. —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 to which he is subject”.

Now the essential aspect of Capacity to Contract i.e. disqualification of person to contract can be broken down into 3 considerations:-

1. Disqualification because of infancy
2. Disqualification because of insanity
3. Other methods of disqualification as prescribed by law

Now in this article, all the three aspects will be dealt with in a detailed and concise manner as to give a fair idea what are the basis and reason for creating such disqualifications by the Act.

I. Infancy

a) Age of majority

The first aspect regarding infancy is the determination of the age of infancy. This now is regulated as per the Indian Majority Act[1], wherein section 3 of the Act states that every person living in India shall be deemed to have attained majority only when he shall have completed 18 years of age.

This section can be analysed in two ways: a) either minor is incompetent to contract, in which case the agreement shall be treated as void agreement, or, that he is incompetent to contract only which means that the is not liable on the contract through the other party is, in which case there is voidable contract.

Now, if the first case is considered, then the agreement is taken as void and the minor can neither sue nor be sued and the covenant is not liable for ratification[2], and if the second scenario is taken, then the contract is voidable at the option of minor, which means minor can sue upon but, he cannot be sued by the other party.

b) Infancy

Now, to solve the discrepancy, the provisions of the section were compared to that of Common law, as the act was inspired by that. Under the common law, the contract with minor was a voidable agreement at his option, if it appears to the court that the agreement was entered into for the benefit of the minor and that it may be binding and especially if the contract was for the supply of necessities.

This principle was reiterated by the Judicial Committee in 1903, where they specifically declared that present section requires the age of majority be according to one’s personal law and suggested it was done to give effect to the Hindu law on the same subject matter.[3]

c) Agreement on behalf of the minor

Another aspect of the minor agreement is the agreement entered on behalf of the minor which includes formal contracts of getting married by their parents and/or guardians have been upheld on the ground of the custom of the community.[4]

Contracts on behalf of minors in respect of their property have been upheld provided it is competent for the guardians of the estate to do so and the transactions are for the legal necessity or for the minor benefit.[5]

d) Executed contract

Contracts which are completely executed on the minor’s side so that there are no further liabilities on his part can be enforced by the minor for the reason that nothing further remains to be done by him. The court in such circumstances only operates to enforce the rights of the minors, not the liabilities to protect the interest of the minor.

e) Necessaries

This aspect is further supplemented through section 68 of the Indian Contract Act, which deals with the supply of necessities to a person incapable of entering of contract on their own. Now a minor is unable to enter into a contract of their own and therefore minor property shall be used in paying the cost of necessities but no personal liability shall be incurred by the minor. The scope of necessity includes things which minor actually needs and luxury items can’t be considered as necessary.

f) Other miscellaneous provisions regarding the minor right to contract

1. Lease to minor: – A lease issued to minor shall be treated as void as a lease imports an agreement requiring minor to pay certain considerations like rent and also imposes other different types of reciprocal obligations.[6] Furthermore, the amendment to section 107 of the TOPA[7] makes it clear that a lease both by and to minor must be void.
2. A gift to minor: – a minor donee is competent to accept a gift. But acceptance of the onerous gift, i.e. gifts which are coupled with obligations cannot bind the minor unless upon being competent to contract and being aware of such obligations he retains the gifts as specified in sections 122-127 of Transfer of Property Act.[8]
3. Partnership with Minor: – a partnership agreement entered into to admit minor as a full-time partner would be invalid. But if, minor is admitted to the benefit of a partnership by his guardian provided it is supported by necessity or benefit then in that case that agreement is allowed by law.
4. Joint Documents: – Now, if documents are executed jointly by both minor and adult then, in that case, it would be considered void in case of a minor, but it shall be considered as a valid contract against the adult person provided there was a joint promise to perform certain obligations.
5. Ratification by minor: – as minor’s agreement is considered void from the beginning, so logically, it can’t be ratified by the minor, nor can it constitute valid consideration for a subsequent agreement.[9]

II. Disqualification by insanity

One of the important considerations to enter into the covenant is that the person should be of sane & competent mind. Section 12 of the Act provides a test of the soundness of mind for the purpose of making of a contract.

The section states, “A person is said to be of sound mind for the propose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interest. 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.”

It essentially means that a person should be of sane mind when he makes a contract so that he can analyse the terms & conditions of the agreement. So it doesn’t matter that person is unsound mind most of the time, what matters is at the time of concluding the contract whether he was of sound or of unsound mind so that it could be determined whether he used his rationale while entering into a contract or not.

Now there is a different category of insanity which has to be analysed differently to understand whether they fall under the blanket protections this act provides.

1. Idiots – are those people who are devoid of thinking capacities and thus are unable to make rational judgements. Contracts with such person are void, except for the necessities ones.
2. Lunatics– these are the persons whose mental faculties are deranged. These types of persons don’t have lunatic periods for a continuous period of time, but it exists for a sporadic moment. The contracts with them are void, except if it can be proved that it was entered when the person was having sound mind or contracts made for is necessities, in which case his estate will be liable.
3. Drunkards– a person who is under the impression of alcohol or drugs stands on the same footing as a lunatic person as above discussed. The fact that a person was drunk affords no ground for resisting a suit for the contract. But where the judgement of either party was affected because of the alcohol, then following the principles of equity-specific performance of the contract will generally be refused; this is the case for voluntary drunkenness. In the case of involuntary drunkenness, then if the terms of the contract are disproportionate, then it can be set aside.

III. Other special disqualification prescribed by law

Following are the list of persons who are not in the Capacity to Contract or were disqualified by law to make a contract;-

1. Alien enemy: – as per section 83 of civil procedure code[10] no person shall enter into a contract with an alien during the subsistence if war unless the prior permission of the government has been sought.
2. Foreign sovereigns: – as per section 86 of the Civil Procedure Code[11] diplomatic staff of the government enjoys certain privileges in the aspect of the contractual agreement. It’s stated that diplomatic people can enter into a contract but with special privileges, which is they can sue the party for contractual failure but they can’t be sued unless special permission is sought by the govt or they voluntarily submit themselves to the court.
3. Corporations: – Companies, which includes local bodies and city corporations, are legal persons and because of which they can acquire property, transact their business and are capable of suing and being sued. But they cannot do so without their seals as per section 21 of Companies Act.[12] Further, a contract entered by a statutory corporation is required to be within the object of the company, if it’s outside its object, then its ultra vires as per section 4 of Companies Act, 2013.
4. Insolvents: – an insolvent person cannot be subject to any contractual agreement. When any sundry debtor is declared as insolvent his property is vested with the official assignee. He can only enter in a contract relating to that property as per section 141 (1) (b) of Insolvency & Bankruptcy Code, 2016.[13]
5. Governments: – Contract with the government is required to comply with certain formalities, if such formalities are not complied with, such contract would be void. The same principles apply to municipalities. It can be found in Article 299(1) of the Indian Constitution.[14]
6. Professional persons: – this restriction is only applicable in England, where the barristers don’t have the authority to sue their clients for their non-payment of their professional fees. In India, no such restriction in this regards exists.

So it can be concluded that law has provided different bars for different sets of people in order to make them able to enter into a contract. This has been made by taking into account the public policy, their own benefits as chances are that their right may get affected.

Of all the three categories mentioned, minors are more likely to get exploited and laws have especially craved to make sure that their interest is not affected in any sense. In can be said that certain differentiation has been created by law to make sure that different sects of people’s interest get secured.

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[1] Indian Majority Act 1875

[2] Suraj Narain v. Sukhu Ahir (1928) 51 All 164.

[3] Mohori Bibi v. Dharmodas Ghosh (1903) 30 Cal 539

[4] Rose Fernandes v. Joseph Gonsalves 26 Bom LR 1035

[5] Gujoba v. Nilkanth (1957) 59 Bom 566

[6] Pramila Bali Das v. Jogeshar (1918) 3 Pat LJ 518

[7] The Transfer of Property Act 1882, s 107.

[8] The Transfer of Property Act 1882, s 122-127.

[9] Bhola Ram v. Bhagat Ram AIR 1927 Lah 24.

[10] Code of Civil procedure 1908, s 83

[11] Code of Civil procedure 1908, s 86.

[12] The Companies Act 2013, s 21.

[13] Insolvency & Bankruptcy Code 2016, s 141(1) (b).

[14] Constitution of India 1950, art 299.

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2. Historical Evolution of Contract Law in India