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IMPORTANCE OF CAPACITY OF CONTRACT

INTRODUCTION

According to Salmond “a contract is an agreement creating and defining the obligations between two or more parties.” An offer when combined with acceptance becomes a promise. When the promise is combined with the consideration it becomes an agreement and finally, when the agreement becomes enforceable by law it becomes a contract. We all enter into contracts every day, knowingly or unknowingly. From ordering vegetables and fruits online to posting a picture on social media platforms, contracts are omnipresent. From carrying out business transactions to buying a property, contracts are inevitable.  They are can either oral or written.  Some contracts are express while some are implied. In this article we will understand what contracts are, requirements for a valid contract and capacity to enter contract.

The Indian contract Act, 1872 (hereinafter refer as “the Act”) provides the legal framework for the formulation of trade, business, and commercial relations, and transactions in which a contract is involved.[1] The Act came into force on 1st September 1872.  The Act was introduced with the objective to ensure that the Rights and other obligations arising out of the contract are fulfilled and legal remedies are available to affected party(s). Section2(h) of the Act defines a contract as “an agreement enforceable by law”. Each contract is an agreement but vice versa is not true. For an agreement to become a contract requires enforceability by law. An agreement is defined under section2(e) of the Act as a promise or set of promises along with consideration. A contract requires a minimum of two people. It doesn’t need to be written. Oral contact is also valid. However, it is advisable to have a written contract for agreements to pay debts, sale of property, medical insurance contracts, lease agreements, etc.

REQUIREMENTS OF A VALID CONTRACT

Section 10 of the Act, lists the essentials required to form a contract. An agreement will become a contract if it fulfills certain criteria, which are

  • Parties must be competent to contract

Section 11 of the Act talks about whom all are competent to contract which is a major which he is subject to, sound person and he should not be disqualified by law. In The Majority Act, 1875, the age of the majority is 18 and not below and 21 in the case when a guardian is appointed under Guardian and Wards Act, 1890.  So when a person attains the age of 18, he is very much capable of entering into a contract. In the case of Mohiri Bibi v. Dharmdas Ghosh, the Privy Council held that the minor’s agreement is void ab-initio.

 Section 12 states that a person should be of sound mind at the time of entering into a contract. By sound mind, it means a person who understands the contract and forms a rational judgment to protect his interest. Whether a person is occasionally of sound mind or occasionally of unsound mind is irrelevant as long as the person is of sound mind at the point of time of entering into a contract (Nilima Gosh v. Harjeet Kaur). In the case of Indar Singh v. Parmeshwardhari Singh, it was held that since the defendant was of unsound mind at the particular time of entering into the contract, the agreement is void and he should not be disqualified by the law which includes alien army, convicts, insolvent, foreign sovereign, body corporate.

  • Free consent of the parties

Section 13 of the Act explains that consent means the meeting of minds upon the same thing in the same sense. The maxim used is consensus ad idem. While section14 of the Act defines free consent as consent which not caused by coercion (section15 of the Act) or undue influence (section16 of the Act) or fraud (section17 of the Act) or misrepresentation (section18 of the Act) or mistake (section20 of the Act).

  • A contract must be done for a lawful consideration along with a lawful object

Section 23 of the Act deals with this essential. The term means ‘something in return i.e. quid pro quo.  The section states the situations when there is no lawful consideration and objects like they are specifically forbidden by law, are fraudulent, are opposed to public policy, the court has regarded them as immoral, involve injury to any other person, are such that they may defeat the purpose of the law. Every agreement for which there is unlawful consideration or object is said to be void.  

  • Are not hereby expressly declared void

It means agreements like restrictions on trade, marriage, etc. are void.

  • Legal intention

Though there is no section mentioning this requirement in the Act, however, it is an implied requirement. It is very important that the parties have legal intention to contract. This requirement arose in the landmark case Balfour v. Balfour. Where, it was held that husband and wife can’t enter into a contract because of lack of this essential.

  • Offer and acceptance

Offer is the first step to enter into a contract. It is defined in section 2(a) of the Act. An offeror is a person who offers and offeree is a person to whom offer is offered for acceptance (Section 2(c)). An offer must create legal relations (Balfour v. balfour) , clear and not vague (Meritt v Meritt), must be communicated to the offeree (Lalman Shukla v. Gauri Dutt ) ,may be conditional and can be specific or general.  

Without offer there is no acceptance. Acceptance is defined under section 2(b) of the Act. The acceptance must be communicated by the offeree to the offeror (Felthouse v. Bindley ) or to his agent(Powell v. Lees), should be absolute and unqualified(Hyde v. Wrench) and it should be made in some usual or reasonable manner unless stated in contract (LIC v. R. Vasireddy).

IMPORTANCE OF CAPACITY OF CONTRACT

Capacity or competency to contract is one of the essentials required to form a valid contract. But not everyone is capable of entering into a contract. A major person who is of sound mind and should not be disqualified by law is eligible to enter into a contract. And a person who does not fulfill either of the criteria is not competent to enter into a contract. A minor or a person of unsound mind or a person who is disqualified by law are not eligible. Minor’s contract is void ab initio. In the case Subrananyam v. Subha Rao it was held it is a valid contract if it is made for the minor’s benefit.

Understanding the meaning of the unsound mind is very important. A person might be intoxicated but he is capable of understanding the terms and conditions along with it forming a rational judgment to protect his interest is of not unsound mind. Whereas a lunatic who is incapable of understanding and can’t protect his interest is of unsound mind. Therefore a person must be of sound mind while entering into a contract.

There are different types of people who are disqualified by law. This includes –

  1. Alien army – An alien army is the citizen of a country with which India is at war. Any contract that is made during the war period with an alien enemy is void. Even an Indian citizen residing in an alien enemy’s territory would be treated as an alien enemy under the Act.
  2. Convicts – A convict is a person, who is punished with either a death sentence or imprisonment by the court. A convicted person cannot enter into a contract while undergoing a sentence. However, he can enter into a contract after the completion of his punishment.
  3. Insolvent – insolvent is a person who is declared bankrupt by the court and has no control over his assets.
  4. Foreign Sovereign – diplomats and ambassadors of foreign countries enjoy contractual immunity in India.
  5. Body Corporate – A company is an artificial person created by law and is very much competent to contract.

Section 68 of the Act explains that if a person is incapable of entering into a contract or any other person who is legally dependent on him, is supplied with necessaries by another person, he is entitled to give reimbursed from the property of the incapable person. The definition of necessities was given in the case of Chappel v. Cooper as “things without which an individual cannot reasonably exist.”

CONCLUSION

The importance of entering into contracts cannot be undermined. In today’s fast paced and ever growing world, contracts and agreements play a major role. The sole purpose of entering into a contract is to legally bind the parties and to protect each other’s interests. Any act or omissions on part of either of the parties can result in breach of the contract.  However, all the above mentioned essentials must be satisfied to form a valid contract including the capacity to enter into a contract. It shows that a person is major (he is mature enough to take wise decisions), of sound mind (whatever decision he is taking, it is done with all his senses) and he is not disqualified by law (he is legally capable of taking his own decision unlike convicts, insolvent, etc.).

Author(s) Name: Bhumi Khandelwal (Guru Gobind Singh Indraprastha University, Delhi)

 Reference(s):

[1] Avtar Singh, Contract & Specific Relief, ( twelfth edition, EBC 2017) preface.