Who is Incompetent to Contract?

Shailja Singh

13 Jul, 2023

Overview

Contracts hold significant importance in the world of business and trade as they establish the rights, duties, and remedies of involved parties. In order to ensure the legality and enforceability of contracts, it is essential to have a clear understanding of competency in contract formation. This comprehensive guide explores the individuals who are considered competent to contract, delving into the legal prerequisites and limitations.

Defining a Contract

Before delving into the complexities of competency, let’s begin with a fundamental understanding of contracts. A contract is a legally binding agreement that establishes and defines the obligations between two or more parties. To be valid, a contract must fulfill certain essential elements, including offer and acceptance, free consent, lawful consideration and object, and an intention to be legally obligated.

Understanding Competency in Contract Formation

Competency, also referred to as contractual capacity, refers to an individual’s legal ability to enter into a contract. It ensures that the involved parties possess the necessary mental and legal capacity to comprehend the terms of the contract and be bound by them. According to Section 11 of the Indian Contract Act, 1872¹, a person is considered competent to contract if they meet the following criteria:

1. Age of Majority: The individual must have reached the age of majority as defined by the law. In India, the age of majority is 18 years.
2. The soundness of Mind: Competency also requires the individual to be of sound mind. This means they should possess the capability to understand the nature and consequences of the contract. An individual who is of unsound mind at the time of entering into a contract is not considered competent to contract.
3. Not Disqualified by Law: Additionally, the individual must not be disqualified from contracting by any applicable law. Various legal provisions can disqualify individuals from entering into certain types of contracts. Awareness of these legal restrictions is crucial to ensure the validity of the contract.

Minors: Incompetent to Contract

One category of individuals considered incompetent to contract is minors. According to Section 3 of the Indian Majority Act of 1875, a person below the age of 18 is considered a minor. However, if a court has appointed a guardian for their person or property, they remain a minor until the age of 21.

a)    Nature of Agreements with Minors

Regarding agreements with minors, the general rule is that they are considered void ab initio, meaning they are null and void from the beginning. This position was clarified in the well-known case of MohriBibee v. Dharmodas Ghosh. The court emphasized that the law deems it essential for all parties to be competent, and minors cannot enter into a contract as per Section 10 of the Indian Contract Act.It is important to note that in certain cases, an agreement made by a guardian on behalf of a minor can be valid. The guardian, acting on behalf of the minor, can enter into a contract that benefits the minor.

b)    Effect of a Minor’s Agreement

A minor’s agreement is considered void ab initio, rendering the contract null and void from the beginning. The legal principle of estoppel, which prevents a person from contradicting what they have previously stated, does not apply to minors. According to Section 70 of the Indian Contract Act, the doctrine of restitution, which enables the recovery of benefits conferred under a contract, does not apply to minors. Furthermore, a minor’s contract cannot be ratified as it is void from the outset. However, if a minor is provided with necessities of life, the supplier is entitled to reimbursement from the minor’s property under Section 68 of the Indian Contract Act.

Persons of Unsound Mind: Incompetent to Contract

Another category of individuals deemed incompetent to contract includes those who are of unsound mind. Section 12 of the Indian Contract Act defines a person of unsound mind as someone who is incapable of understanding the contract and its implications on their interests.

a)    Distinguishing Between Sound and Unsound Mind

As per Section 12, an individual is considered of sound mind if they possess the capacity to understand the contract and make rational judgments. This implies that an individual who is generally of sound mind but occasionally of unsound mind can enter into a contract during their sound mind periods. Conversely, an individual who is generally of unsound mind but occasionally of sound mind can only enter into a contract during their sound mind periods.

b)    Legal Position of Persons of Unsound Mind

Under the Indian Contract Act, individuals of unsound mind are regarded as incompetent to contract. Unlike English law, where mere unsoundness of mind does not serve as a defense, in India, a contract made by a person of unsound mind is void.

Disqualified Persons: Incompetent to Contract

Certain individuals are disqualified from entering into contracts due to their legal, political, or corporate status. These disqualified persons are also considered incompetent to contract. Let’s explore some of these categories:

1. Alien Enemy: An alien enemy refers to an individual whose country is at war with India. Contracts with alien enemies are void, whereas contracts with alien friends are valid under the Indian Contract Act. During wartime, no contract can be made with an alien enemy without prior approval from the Indian Government.
2. Foreign Sovereigns and Diplomats: Foreign sovereigns enjoy certain privileges and immunities. Generally, they cannot be sued unless they voluntarily submit to the jurisdiction of the Indian court of law. They are also restricted from entering into contracts unless an Indian citizen obtains prior sanction from the Government of India to sue them in an Indian court of law.
3. Convicts: Individuals who have been convicted and sentenced by a competent court to death or imprisonment are disqualified from entering into contracts while serving their sentence. However, once their sentence is over or they are granted a pardon, their competency is restored.
4. Insolvents: An insolvent is an individual who is unable to pay their debts as they become due. While there is no prohibition against an insolvent entering into a contract after insolvency proceedings have commenced but before adjudication, they are generally considered incompetent to contract until discharged by the court of law.
5. Corporations: The ability of a corporation to enter into contracts varies depending on its nature. A company, being an artificial legal entity, is generally competent to contract. However, its contracting power may be subject to certain limitations imposed by law or its constitution.

Conclusion

In conclusion, comprehending the concept of competency in contract formation is crucial to ensure the legality and enforceability of contracts. According to the Indian Contract Act, an individual must fulfill the criteria of reaching the age of majority, being of sound mind, and not being disqualified by law to be considered competent to contract. Minors are generally regarded as incompetent to contract, with their agreements being void ab initio. Persons of unsound mind and disqualified individuals are also deemed incompetent to contract. By understanding these legal requirements and limitations, parties can confidently enter into contracts and avoid potential legal complications.

FAQ

1. https://www.indiacode.nic.in/handle/123456789/2187?sam_handle=123456789/1362