Under what circumstances a person is incapable of entering into contracts?

Earlier, doing business was easy, two people agreed and business started. But the recent developments have complicated the whole procedure of starting a business or a trade, making contracts an essential part of our businesses. Contracts hold an important place, outlining the rights, duties of the parties and the remedies in case of default. Because of the fact that this is so important, one needs to understand the basics of contracts, who are competent and incompetent to contract, because competency plays a key role in contract formation. In thisarticlewe will discuss Who is Incompetent to Contract.

To get an understanding about people who have the capacity to contract and who are incompetent to contract lets first see the definition of Contracts. In simple terms, an agreement enforceable by law is a contract.

According to legal scholar Sir John William Salmond, a contract is “an agreement creating and defining the obligations between two or more parties”

Essentials of Contract

Section 10 of The Indian Contract Act, 1872, states that all agreements are contracts if they fulfill the below criteria-

1. Offer and acceptance
2. Free consent
3. Be Competent parties
4. Lawful consideration and object
5. Intention to enter into a legal obligation

On closer look at the essentials, the most important one is related to the competency of parties, because if the parties are incompetent to contract, the contract will cease to exist.

Persons competent to contract and incompetent to contract

Section 11 of the Indian Contract Act, 1872, states “when a person is said major, sound and not disqualified by law, then he is said to be competent to contract”.

So it is clear now, that the following persons are incompetent to 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.

What will happen if a minor enters into an agreement?

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-

1. Minor’s agreement is void ab initio
2. Law of estoppels is not applicable against the minor.
3. Section 70 of the Indian Contract Act state that the doctrine of restitution is not applicable in the case of minors.
4. A contract made by minors cannot be ratified as it is void from the beginning itself.
5. A minor can be appointed as an agent, but he will not be personally liable for his acts.
6. 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

Conclusion

Now, it is clear that person entering a contract must be legally competent to contract. Section 11 of the Indian Contract Act, 1872, states when a person is said major, sound and not disqualified by law, then he is said to be competent to contract. Contract with a minor, unsound or intoxicated person is void, as they are incompetent 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.

For more information on this and assistance in drafting Contracts, you can contact our team of experts at Enterslice.