Capacity to Contract

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The primary element of a valid partnership contract is the capability or eligibility of partners to form a business contract. The capacity to contract here means the legal ability of an individual or an entity to enter into a partnership. According to business law, the partner must be competent and fulfill the specified criteria before signing a contract.

Section 11 of the Indian Contract Act, 1972 details the capacity in contract law. It defines the ability to form contracts based on three aspects. They are as follows.

  • Attaining specified age

  • Being of sound mind

  • Not be disqualified from entering into a contract on the basis of any law he is subjected to

Apart from contractual capacity, partnership contracts must also include the following.

  • Offer

  • Consideration

  • Intent

  • Legality

  • Acceptance

The meaning of contractual capacity can be understood in detail through norms and examples.

Detailed Explanation of Capacity to Contract in a Business

Given below is a thorough explanation of contractual norms to judge an individual’s capacity to enter into a contract.

1. Attaining the Age of 18

A minor does not hold the capacity of holding a contract in business. Any agreement made with a minor in business is void ab-initio, which means ‘from the beginning’. If any person aged below 18 years enters into a contract, he cannot ratify the agreement even when he turns 18. This means that an invalid agreement can never be ratified.

  • Minor being a Beneficiary in a Contract.

Even though a minor is prohibited from entering a contract, he can register himself as a beneficiary of an agreement. Section 30 of the Indian Partnership Act, 1932 mentions that a minor cannot participate as a partner in the business, but he can enjoy the benefits earned by the firm.

  • A Minor always enjoys the benefits of being a Minor

A minor gets to enjoy some extra benefits in business. This contractual benefit needs to be explained in terms of the capacity to contract with examples. For instance, if a minor pretends to be a major and enters into a contract, he can later plead the minority through some simple formalities. The rule of estoppel is not applicable to a minor.

  • Contract through the means of a Guardian

In some cases, a guardian can enter into a valid business contract on behalf of a minor individual. Here, the guardian has no right to bind a minor to buy any immovable property under the contract. However, with proper certification and approval, the minor’s property can be sold when required. 

  • Insolvency

According to business law, a minor cannot be declared insolvent at any point in time. Even if the minor owes some dues to the firm, he will not be held personally liable for it.

  • Mutual contract by a Minor and an Adult individual

When a joint contract is signed between a minor and major, it has to be done in the presence of the minor’s guardian. In such contracts, the liability of the contract is held by the adult.

2. An individual has to be of Sound Mind

Section 12 of the Indian Contract Act (1872) necessitates a person to be of sound mind, have a complete understanding of the contract terms and conditions, and hold the ability to judge its impact on his interests.

Here, the capacity of parties to the contract also applies to an individual who is usually of unsound mind and occasionally in sound mind. However, in this case, the contract has to be signed when he is in a state of complete soundness. A contract made by an individual of unsound mind shall be considered as null and void according to capacity law definition.

A person under the influence of any sort of intoxication is considered incapable of entering into a contract. Such individuals can make a contract only when they are sober and have a complete understanding of the contractual terms.

3. People Disqualified under Law

Other than minors and people of unsound mind, some individuals might be restricted from entering into any contract as well. Such individuals do not hold the capacity to contract under valid business laws. Disqualification under contractual laws could include reasons related to politics, legal status, etc. This could also happen when a person is a foreign sovereign, national enemy, convict, or insolvent.

FAQ (Frequently Asked Questions)

1. How to define contractual capacity?

Ans. Contractual capacity meaning in business law is the competence of an individual to enter into a contract. Section 11 of the Indian Contract Act, 1872 clearly defines the capacity to contract. It broadly has three aspects, based on which it judges whether a particular person is capable or eligible enough to become a party to the contract.

2. What does Soundness of Mind under capacity to contract  mean?

Ans. As specified under Section 12 of the Indian Contract Act, it is mandatory for a person to be of sound mind to be able to sign a contract. This means he must be well-aware and have a complete understanding of the contractual terms. Thus, a lunatic or intoxicated person is usually held incapable of entering into a contract. He can make the contract when he is in a sound mind.

3. Do minors have the capacity to contract?

Ans. Minors do not enjoy the capacity to contract. However, they can join a contract as a beneficiary with proper guidelines. They can enter into the contract under the supervision of a guardian. A joint contract can also be signed between a minor and an adult.