The term ‘capacity under English Law refers to the ability of contracting parties to enter into legally binding relations with each other. If any party fails to comply with the facts in this condition, the subsequent contracts may be deemed to be invalid, relying on the facts and circumstances of the case. Since the Indian Contract Law is primarily based on the English Common Law, hence Capacity to Contract carries the same importance as under the latter law and qualifies to be one of the most essential elements of a valid contract.
A person is considered as capable to enter into a valid contract if he satisfies three conditions under the Act, namely, a person has to be major, he or she should not be of unsound mind, and lastly, he or she should not be disqualified by any law from entering into a contract. However, it is pertinent to note that the subject of the contract should not be illegal or even void for reasons of public policy. With certain exceptions, anyone 18 years of age or over can enter into a contract.
People under 18
People under the age of 18 do not have the same full contracting power that adults do. They can still make contracts, but there are special rules.
In general, for a contract to be binding, the minor will have to affirm the contract, that is, agree to be bound by it after turning 18. Some contracts are binding on the minor without the minor affirming them. For example:
A minor can make a legally binding contract for goods or services that are usual or appropriate to their way of life (called necessities). These will be such things as food, clothing, accommodation, medical care, school requirements or sporting goods appropriate to their age and their standard of living. A minor can also make a valid contract for services of instructional or educational benefits, which could include such things as music lessons, sports coaching, educational tutoring, etc.
Contracts that give the minor continuing legal obligations.
These contracts are binding unless the minor chooses to opt out of the contract before, or reasonably soon after, they turn 18. Examples of these types of contracts are contracts of a business partnership, or contracts to lease land. If the minor avoids the contract, they are only responsible for the obligations which have already arisen, not for any future ones. They cannot avoid past obligations or get back the money they have paid out in respect of these. However, the minor may be able to get a court order for the return of their property, previously transferred under the contract, on fair terms.
Contracts made with the consent of a court
A minor may make a binding contract with the consent of a court. The minor’s parents can apply on the minor’s behalf if the minor wishes to be bound, or the other party can apply if they want to make the contract enforceable against the minor. If the court decides to approve the contract, it will then be legally binding [Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 6].
A minor’s performance of a contract may be guaranteed. If the adult party to a contract wants greater security in contracting with a minor, they can ask the parent (or another adult) to guarantee the minor’s performance of the contract. If the minor does not do as the contract requires, the other party has a separate right to sue the guarantor for any loss.
A person with a mental incapacity
A person with mental incapacity will not necessarily be precluded from making or agreeing to a contract.
However, a contract involving a person with mental incapacity will not be binding if it is set aside by a court. A court may set aside a contract in circumstances where the person with a mental incapacity was unable to understand the nature of the contract, or where the other party knew or should have realized this.
A contract where at least one party has a mental incapacity can still be binding in circumstances where:
The other person did not or could not have known about the person’s incapacity; or
Where a person has an incapacity, – if they were not affected by it at the time of making the contract; or
Where a contract was made at a time when the person was affected by the incapacity – the goods or services they have subsequently received a benefit from are necessities ie things reasonably necessary or appropriate to their way of life at the time.
Alien enemy- An alien enemy is the citizen of a country India is at war with. Any contracts made during the war period with an alien enemy are void. An Indian citizen residing in an alien enemy’s territory shall be treated as an alien enemy under the contract law. Contracts made before the war period either get dissolved if they are against public policy or remain suspended and are revived after the war is over, provided they are not barred by limitations.
Illustration- A, of country X, orders goods from B, of country Y. The goods are shipped and before they could reach Y, country X declares war on country Y. The contract between A and B becomes void.
Convicts- A convict cannot enter into a contract while he is serving his sentence. However, he regains his capacity to enter into a contract upon completion of his sentence.
Illustration- A, is serving his sentence in jail. Any contract signed by him during this period is void.
Insolvent- An insolvent is a person who is declared bankrupt/ against whom insolvency proceedings have been filed in court/resolution professionals takes possession of his assets. Since the person does not have any power over his assets, he cannot enter into contracts concerning the property.
Illustration- A enters into a contract for the sale of goods with B. Before the sale takes place, an insolvency suit is filed against A. A sells the goods to B during the pendency of insolvency proceedings. The contract is valid.
Foreign sovereigns- Diplomats and ambassadors of foreign countries enjoy contractual immunity in India. One cannot sue them in Indian courts unless they submit themselves to the jurisdiction of Indian courts. Additionally, sanctions from the central government are also required in such cases. However, the foreign sovereign has the authority to enforce contracts against the third person in Indian courts.
Body corporate- A company is an artificial person. The capacity of a company to enter into a contract is determined by its memorandum and articles of association.
Mohari Bibee v. Dharmadas Ghose [ILR (1903) 30 Cal]
In this case, the respondent was a minor who was the sole owner of immovable property. His mother was the legal custodian. He misrepresented his age to a person and mortgaged his property. Later his mother clarified his minority. But that person sought to enforce the contract of mortgage once he attained the majority. The Calcutta High Court went on to hold that any contract entered into with a minor or an infant qualifies to be void-ab-initio. So, they held in the context of the case that the mortgage contract was void as it was entered into by the minor respondent.
Leslie v. Sheill [1914 3 KB 607]
Here, the defendant was a minor who obtained a loan from the plaintiff by misrepresenting his age. Later, the plaintiff sued because the minor is liable for fraud and he shall be compelled in equity to restore the money. But the court took a different view and held that making it compulsory for the minor to pay an equivalent sum out of his present and future resources would amount to enforcement of a void contract, and hence, it cannot be done even if the infant enters into the contract by fraud.
Raghava Chariar v. Srinivasa [ILR (1916) 40 Mad 308]
In this case, the issue which arose was, whether a mortgage that is in favor of a minor who has advanced the mortgage money in full, is enforceable in the court of law by the minor or any other person on his behalf, or not. The Madras High Court concluded that a minor can enforce any contract which is of benefit to him or her, where there is no obligation to be borne by him or her.
Sirkakulam Subramanyam v. Kurra Subba Rao [AIR 1948 PC 25]
A guardian entered into a contract to purchase a certain immovable property, on behalf of the minor. Later, the minor sued the other party for specific performance to recover its possession. It was concluded that any contract can be specifically enforced by or against the minor if: it is for his or her benefit, and if the guardian who has entered into the contract on behalf of the minor, is competent to do so. This case laid down the Doctrine of Maturity under the Contract Law of India.
Campbell v. hoops [(1855) 3 Sm&G 153]
The mortgage, in this case, obtained a decree to repay the debt. But there was evidence leading to a conclusion that the mortgagor was a lunatic at the time of entering the contract, and the mortgagee was unaware of the same. Under English Law, it was held that it was a fact of liability that a contract could not be invalid, and if the other party had knowledge of settlement, then it would become void at the option of the lunatic. Thus, knowledge is an important factor under English Law.
Suraj Narain Dube vs. Sukhu Ahir
Suraj Narain lent money to Sukhu Ahir who was a minor. The minor executed a promissory note against the money borrowed.
After four years, when the minor attained majority, he and his mother executed a second promissory note in favor of Suraj Narain in respect of the original loan plus the interest accumulated over the years.
The court held-
The first agreement entered into by the parties is void as a minor is incompetent to contract. The minor had no liability to pay under this agreement. However, the minor made a promise and provided the promissory note, amounting to consideration.
A minor has no power to ratify the contracts entered into by him upon attaining the age of majority.
In the second agreement executed by the parties, there was no consideration from Plaintiff. The original advance was not considered for a second agreement. The second agreement is void due to want of consideration.
In certain instances, a contract entered into by the minor or by the minor’s guardian for his benefit is valid in the eyes of law-
A marriage contract entered into by a minor/his guardian.
A partnership contract was entered into with a minor admitting him to the benefits of a partnership. However, the minor cannot be held personally liable for the losses incurred.
A contract relating to the minor’s property is entered into by his guardian if it is for the benefit of the minor.
A contract of apprenticeship with a minor.
A contract supplying minors with goods and services necessary for life.
Websites such as YouTube expressly mention in their terms and conditions that any minor while using its services represents that he has the permission of his parent/guardian to do so. Parents and guardians are held liable for the child’s activity on such websites.
After critically going through the legal provisions under English and Indian law, it was noticed that under the latter, it is not specified in the statute as to whether a minor agreement is void or void. Even though the Mohari Bibee case cleared it to an extent that it is void-ab-initio, it has still attracted a lot of controversy on this point. But, meanwhile, the law regarding the same is pretty clear in England, where it is provided that the minor can enter into a contract which would be deemed as void till the time he or she does not reach eighteen which implies that after attaining the majority , upon their will, they can either enforce the contract or terminate it.
But in India, they cannot ratify in the absence of some special circumstances. Again, there have been a variety of judicial decisions on this point which makes the situation unclear. Further, it is pertinent to note that under English Law, an unsound person is competent to contract, but he can avoid the contract if he satisfies the court that he is incapable of understanding and the other party is aware of it. In India, the situation differs, and a contract by an unsound person is rendered void ie completely invalid.
In the end, one point which comes to the notice is that although the Indian Contract Law has its origin in English Law, the interpretation and the stands in both countries differ on several aspects, as stated earlier. To be precise, English law is comparatively clearer than Indian law, as what is to be interpreted is already codified and gray areas are not left to be filled through judicial decisions, as in India. Lastly, the English Common law proves to have a wider ambit as it deals with unsoundness under incapacity which even includes public corporations, and minorities apart from intoxicated and mentally ill people.