CMA Foundation – Capacity to Contract Lesson 2.4 (Part I)

Prepare for your CMA Foundation Paper 1 Business Laws and Business Communication. using our CMA Foundation Study Materials. Here is Lesson 2.4 Capacity to Contract. Since this lesson is quite big, we will learn this lesson in two parts. Part I – Capacity to contract and Part II – Free Consent.

Capacity to Contract (Section 11)

For a valid contract to exist under the Indian Contract Act, 1872, the parties involved must be competent to contract. Section 11 of the Act lays down the rules determining who is competent. It states that every person is competent to contract who is of the age of majority, of sound mind, and not disqualified from contracting by any law to which they are subject. Hence, capacity to contract is an essential element for the enforceability of any agreement.

The following persons are not competent to contract:

1. A person who has not attained the age of majority (Minor).

2. A person of unsound mind.

3. A person disqualified from contracting by any law.

Minor

Under Section 3 of the Indian Majority Act, 1875, every person in India is a minor if he has not attained the age of 18 years. However, if a guardian is appointed under the Guardians and Wards Act, 1890, or the property is under the superintendence of a court of wards, the age of majority becomes 21 years.

Rule 1: An Agreement with a Minor is Void ab Initio

A contract with a minor is void from the beginning, meaning it has no legal effect. Case: Mohiri Bibi vs. Dharmodas Ghose — A minor executed a mortgage for a loan, but later sued to cancel it. The Privy Council held that the contract was void ab initio, and money advanced to a minor cannot be recovered.

Rule 2: Law of Estoppel Does Not Apply to a Minor

A minor can always claim minority even if he misrepresented himself as a major.

Case: Leslie vs. Shiell — A minor obtained a loan by pretending to be of age. The court held that he was not liable, as the contract was void.

Rule 3: Doctrine of Restitution Does Not Apply

If a minor has received benefits under a void contract, he cannot be forced to restore them, since no valid contract exists.

Rule 4: No Ratification on Attaining Majority

A minor cannot ratify an agreement made during minority even after becoming a major. A fresh contract with new consideration is required.

Case: Indran Ramaswamy vs. Anthiappa Chettiar — A minor made a promissory note and renewed it after attaining majority; both notes were invalid.

Rule 5: Contracts Beneficial to Minor

A minor may enforce a contract that is beneficial to him.

Case: Roberts vs. Gray — A minor billiards player’s agreement to learn and compete under a professional was held valid as it benefited him.

Rule 6: Minor as an Agent

A minor can act as an agent and bind the principal, but cannot be personally held liable for any loss.

Example: If a minor sells an article below the instructed price, the sale is valid, but the minor cannot be made to pay the difference.

Rule 7: Minor’s Liability for Necessaries

A minor is not personally liable for necessaries supplied to him, but his property can be held liable.

Necessaries include goods or services essential to maintain one’s status in life—food, clothing, education, or medical expenses.

Case: Nash vs. Inman — A minor already well-supplied with clothes was not liable for purchasing more; the items were not “necessaries.”

Example: A loan taken by a minor to pay college fees can be recovered from his assets, not from him personally.

Rule 8: Minor Cannot Be Adjudged Insolvent

Since a minor cannot enter into a contract, he cannot be declared insolvent.

Rule 9: Joint Agreement by Minor and Adult

When a minor and adult jointly enter into a contract, the minor is not liable, but the adult party remains bound.

Sound Mind (Section 12)

A person is said to be of sound mind for contracting if, at the time of making the contract, he can understand its terms and form a rational judgment about its effect on his interests.

A person usually of unsound mind may contract during lucid intervals; conversely, a normally sound person cannot contract during periods of unsoundness (e.g., intoxication or illness).

Illustrations:

* A lunatic may contract during intervals of sanity.

* A drunk person cannot enter into a valid contract while intoxicated.

Conditions for Sound Mind:

1. Ability to understand the contract.

2. Ability to form a rational judgment about its impact.

Other Disqualified Persons

Certain persons, though of majority and sound mind, are disqualified from contracting due to their legal or political status.

(a) Alien Enemy

Contracts with citizens of an enemy country are void without government permission. Agreements made before war are suspended during the conflict.

(b) Foreign Sovereigns and Ambassadors

They enjoy immunity and cannot be sued in Indian courts without consent. Contracts must be made through authorized agents.

(c) Convicts

A convict cannot enter into a contract while imprisoned, but may do so after the sentence is completed.

(d) Insolvents

An insolvent cannot deal with his property once adjudged insolvent, as it vests in the official receiver.

(e) Companies and Statutory Bodies

Such entities can contract only within the powers granted by their Memorandum of Association and through authorized representatives.

(f) Drunken or Intoxicated Persons

Persons under intoxication cannot form valid contracts during that period, as they lack the ability to understand the contract.

Conclusion

Capacity to contract is a cornerstone of the Indian Contract Act. Only those who are of majority age, of sound mind, and not disqualified by law can enter into binding agreements. Minors, persons of unsound mind, and legally disqualified persons lack the legal ability to contract. The law ensures that such individuals are protected from exploitation while preserving fairness and certainty in contractual relations.

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