Business Law

What Is Contractual Capacity Of Parties?

Contractual Capacity – An important element of a valid contract is that the parties to the contract should have the capacity to enter into a contract. For an ‘agreement’ to become a contract’, it is important that such agreement is between persons who have the capacity to contract. Capacity here means competence of the parties to enter into a valid 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, and who is of sound mind and is not disqualified from contracting by any law to which he is subject .”

(1) Minor

According to Section 3 of the Indian Majority Act, 1875, “a minor is a person who has not completed eighteen years of age.” But where a guardian of a minor’s person or property has been appointed under the Guardian and Wards Act, or where the superintendence of a minor’s property is by a Court of Wards, the person attains majority after twenty one years of age. In English law, the age of eighteen years is taken as majority age in all situations.

Being a minor, and as such not being competent to contract, cannot be called a disadvantage. On the contrary, it is an advantage that the law provides to protect minors against their own inexperience and the possible improper or unlawful designs of those more experienced.

And if a minor does enter into a contract, and makes a promise or commits a fraud, no suit can be filed against him, neither can a minor’s property be attached for non-performance of an obligation. A minor is liable to pay out of his property for necessaries’ supplied to him or to anyone whom he is legally bound to support. The claim arises not out of contract but out of what are called quasi-contracts. And then, it is the minor’s property which is liable for meeting any liability arising out of such contracts. The minor is personally not liable. The law has provided this exception intentionally. Were it not so, the law would not be protecting minors, it would make it impossible for minors even to live.

(2) Persons of Unsound Mind

Any person with an unsound mind is incompetent to contract; only a person with a sound mind can contract. The vital question is: who can be said to be of sound mind? Section 12 lays down the following criterion: A person is said to be of sound mind for the purpose of making a contract if, at the time he makes it, he is capable of understanding it and framing rational judgement as to its effect upon his interests.

Section 12 also clarifies that a person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. On the other hand, a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. Soundness of mind of a person depends upon:

  1. His capacity to understand the basics of the business concerned, and
  2. His ability to form a rational judgement as to their effect upon his interests.

If a person is incapable of both, he is of unsound mind. Whether a party to a contract is of sound mind or not is decided by the court.

(3) Other Disqualified Persons

(a) Alien enemy – An alien enemy, who is the subject of a foreign state, cannot make a contract with an Indian subject as per law. An alien enemy is one with whose country India is at war. If a contract has been made before the commencement of hostilities, it stands suspended and may be renewed after the hostilities are over. But in national interest, such contracts can be held void even after the state of war has ended. Even an Indian subject who resides voluntarily in a hostile country, or who is carrying on business there, would be treated as an alien enemy.

(b) Foreign sovereigns, diplomatic staff and accredited representatives: Foreign sovereigns, diplomats and accredited representatives are not governed by Indian law and are beyond the jurisdiction of Indian courts. They cannot, generally, be sued unless they submit to the jurisdiction of the court on their own. They can enter into contracts and enforce those contracts in our courts, but an Indian citizen has to obtain prior sanction of the Central Government to sue them in our law courts. As per Sections 80 to 87 of the Civil Procedure Code, such sanction is obtainable in the following situations:

  1. When the foreign sovereign, diplomat or accredited representative has filed a suit in a court against the person desiring to sue him.
  2. When the foreign sovereign, diplomat or accredited representative or his agent is carrying on trade within the jurisdiction of the court, and
  3. When the foreign sovereign, diplomat or accredited representative has immovable property in the jurisdiction of the court and is to be sued with reference to such property. 

(c) President of India – No Indian can file a suit against the President of the Republic in any court of law.

(d) Professional Ineligibility – Some persons cannot contract because of their high profession. For example:

  1. In England, a barrister cannot file a suit to claim his fee for professional service because of the so-called ‘professional etiquette’. In India also, a barrister could not claim his fee through a court of law, but after the Bar Council Act, 1927, a barrister can get himself registered as an advocate, and as an advocate can file a suit to claim his fee. The case of Nihal Chand vs. Dilawar Khan is an example.
  2. Till not very long ago, a physician in India was not allowed to file a suit to claim his fee, but the situation is changed now.

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