In order to create a valid contract, it is essential that the parties entering into the agreement are competent. Capacity of parties means the legal ability of a person to enter into a contract. The Indian Contract Act, 1872 specifies who is competent to contract and who is not.
Meaning of Capacity to Contract
According to Section 11 of the Indian Contract Act,
"Every person is competent to contract who is of the age of majority according to the law to which he is subject, who is of sound mind, and is not disqualified from contracting by any law."
Thus, three conditions must be satisfied:
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Majority age
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Sound mind
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No legal disqualification
(a) Age of Majority
A person must have attained the age of majority to enter into a valid contract.
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As per the Indian Majority Act, 1875, a person becomes a major upon completing 18 years of age.
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In special cases, such as when a guardian has been appointed, majority is attained at 21 years.
(b) Contract by a Minor
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A contract entered into by a minor (below 18 years) is void ab initio (void from the beginning).
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A minor cannot ratify a contract after attaining majority.
Example:
A 17-year-old boy signs an agreement to purchase a bike. This contract is void and cannot be enforced.
Key Point: However, a minor can be the beneficiary of a contract (i.e., he can receive benefits).
(c) Sound Mind
A person must be of sound mind to make a valid contract.
Definition
A person is of sound mind if, at the time of making the contract, they:
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Understand the terms of the agreement, and
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Are capable of forming a rational judgment about its effects on their interest.
(d) Unsound Mind Includes
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Persons of unsound mind permanently (e.g., mentally ill individuals)
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Persons temporarily incapable due to illness, intoxication, etc.
Example:
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A person under the influence of alcohol at the time of signing an agreement cannot form a valid contract.
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A mentally ill person during a lucid interval (a period of sanity) can make a valid contract.
Key Point: Temporary unsoundness (such as intoxication) at the time of agreement invalidates the contract.
Persons Disqualified by Law
Certain persons, though of majority age and sound mind, are disqualified by law from entering into contracts. These include:
(a) Alien Enemies
An alien enemy (a person from a country at war with India) cannot contract with Indian citizens unless permitted by the Government.
Example:
A citizen of an enemy country cannot enforce a contract in India during wartime.
(b) Foreign Sovereigns and Ambassadors
Foreign sovereigns and diplomats enjoy certain privileges and can contract only under specific conditions.
(c) Insolvents
A person declared insolvent (bankrupt) cannot contract in matters concerning his property.
(d) Convicts
A person undergoing a prison sentence cannot contract during the period of imprisonment.
Key Point: After the disability ends (e.g., sentence completion), the person regains full capacity to contract.
Special Situations Relating to Capacity
Minor's Contracts for Necessaries
If a minor is supplied with necessaries suited to his condition in life, the supplier can recover the cost from the minor’s property, but not personally from the minor.
Example:
Providing food, clothing, or education to a minor falls under necessaries.
Key Point: The claim is against the minor’s estate, not against the minor personally.
Conclusion
In conclusion, under the Indian Contract Act, 1872, only persons who are majors, of sound mind, and not disqualified by law are competent to contract. Any agreement made by a person lacking capacity is either void or unenforceable. Understanding the rules of capacity helps in ensuring that contracts are legally valid and binding.