Contracts are present everywhere. When you buy a product or when you log in to a website or when you order a meal or every time you swipe a card you are entering into a contract. It is important to know the basics of a contract because, in our day-to-day lives, we enter into a contract knowingly or unknowingly. We might not pay attention to who we are entering into a contract with. Nevertheless, it is important to check if we are entering into a contract with a legally competent person because if there is any default committed by the parties involved in the contract you know whom to hold liable for the same.
Section 10 of the Indian Contract Act, 1872 (ICA, 1872) establishes that the agreement which is formed by the competent parties on their own accord, for a justifiable fee/ payment and object has entered into a valid contract. It is a given that the agreement should not be nullified by law. The competency of parties is a must for an agreement to be a contract.
A competent person is someone who has the necessary natural or legal qualifications. According to Section 11 of ICA,1872 any person who is a major (above 18 years of age), is sane, and has qualifications as per law to enter into a contract is a competent person.
From this, we understand that if a person does not fall in the above-mentioned categories, they are incompetent to enter into a contract. This means that a minor (person below 18 years of age), an insane person, or a person who doesn’t have the qualifications under the law to enter into a contract are incompetent parties to the contract.
A person is said to be of full legal age if he has attained the legal age under the law he is subject to. An Indian citizen reaches the legal age on completion of 18 years of age. But the legal age could be considered to be 21 years if a court has appointed a guardian for a minor or on his property. Any agreement entered into with a minor is invalid from the start that is void ab initio. Such agreements can never be implemented in a court of law.
Disagreements regarding the nature of the minor’s agreement were answered in Mohori Bibee v. Dhramodas Ghose [ILR (1930) 30 Cal 539 (PC)]. In this case, the plaintiff had given a loan against mortgaged immovable property to the respondent. The respondent who is also the owner of this property was a minor. Even with the knowledge of incompetency of the respondent plaintiff lend money less than the originally agreed amount. The mother of the respondent brought suit against the plaintiff to revoke the contract. The case had been heard in Trial Court. The Trial Court held that the contract between plaintiff and respondent is void. Then the case was further appealed to Calcutta High Court as well as the Privy Council. Both the courts agreed with the Trial Court. The decision of the Privy Council was that a contract with a minor is void from that start because they are not capable of understanding the liabilities arising out of such contracts. They further explained that a minor cannot be forced to give back the amount of money he received as a loan and that such a mortgage itself is not valid in the eyes of the law.
Further, in the case of Suraj Narain v. Sukhu Ahir [ILR (1928) 51 All 164], it was explained that a person who is underage when entering into an agreement cannot validate the agreement even after being of the age. But there is no limitation as to a minor being a beneficiary in a contract. Similarly, if for the benefit of the minor the guardian enters into an agreement on behalf of the minor, such agreements can be enforced.
Additionally, a person who is below the age of majority cannot be a partner to a partnership or a shareholder of a company. But he can be an agent. Also, according to Johnson v. Pye [ (1665) 1 Sid 258: 82 ER 1091], A minor is definitely liable for the tort. In Leslie (R) Ltd v. Sheill [(1914) 3 KB 607 (CA), 618], it was held that a minor can be compelled to restore obtained goods/ property which he acquired by misrepresenting his age, but only so long as the same is traceable in his possession.
Section 12 of ICA, 1872, discusses who can be categorized as a person of sound mind. The section provides two conditions. A person who, at the time of making a contract, is able to understand the terms of the contract and is efficient enough to make a reasoned judgment with respect to his interests is said to be a person of sound mind. Accordingly, if a person is able to make rational judgments or is capable to understand the terms and conditions of the contract but at certain intervals is not be able to do the same then he may engage in contract whenever he is of a sane state of mind.
This means that an idiotic person, a lunatic, a drunken or intoxicated person, hypnotised persons, a person with mental decay, delirious persons, etc are not legally capable of forming a contract. Idiocy is an inborn or inherited defect and so there are almost no intelligible or lucid intervals. So, an idiot is a person who has an inalterably defective/ unreliable mind. Such a person is not a competent party to form a contract. A lunatic person is someone who is not mentally well because of some personal encounters or other mental pressure. He is different from an idiotic person because unlike in idiocy a lunatic person will experience a transition between a sane and an insane state of mind. Drunkenness is treated the same as lunacy is. Therefore, a lunatic person a drunken person, or an intoxicated person entering into a contract will make the contract null and void in nature.
Disqualification in Section 11 refers to the disqualification of a certain category of people. These categories of people are ineligible due to the law of the land. An alien enemy, convicts, companies and corporations, foreign diplomats, insolvents are not eligible parties to enter into a contract. Generally speaking, an alien is a person who is not a citizen of the land. So, any person who is of another nationality is considered to be an alien person. An alien can be categorized as an alien friend or an alien enemy. During peacetime, an alien can enter into contact and maintain those contracts but if the countries of contracting parties are at a war then contracting between such parties is forbidden. If a contract was formed before the start of the war, then during the time of war such a contract could either cease to exist or be put on hold during wartime.
During imprisonment, a convict is considered to be ineligible to form a contract. But after the release, he is eligible to enter into a contract as any average prudent person would. A corporation or a company is considered to be a legal/ artificial/ juristic person. Even though it is considered to be a person it is not competent to enter into a contract by itself. Whenever a company wants to contract with another party it has to do so via its agent
Foreign sovereigns, diplomatic staff, etc do have the right to enter into a contract. But the catch is that they cannot be sued in our courts unless they submit to the jurisdiction of our courts or there is authorization from the central government to do so. An insolvent person is also barred from being party to the contract. This ban will be dissolved when the person will be discharged from insolvency.
Also, a person can be a party to an e-contract as long as they satisfy the conditions laid down in Section 11 of the Act.
A person known as the Principal can employ another person, that is, an Agent to enter into a contract on his behalf. Any person can be employed as an Agent subject to Section 11 of the Act. This means that an agent who is below 18 years of age or a person who is not in a sane state of mind or a person who is not an eligible party to contract cannot be held liable for any act done by them on behalf of the interest of the Principal.
When we talk about the capacity to contract, the most essential element is the legal competence of parties to the contract. From this, it is clear that ‘competency’ is vital. It is an important ingredient in making agreements a legal contract. The competency of parties to contract is so important that even if either party is not competent according to Section 11 of the Act the contract could be void or voidable. A party to the contract should be able to understand the nature and consequence of the contract he is entering into. They should be able to form a rational judgment about the effects the contract has and its direct relation with the interest of the parties concerned. This legal competency is a personal qualification required. Thus, the competency of parties to contract is an essential feature in contracts that needs to be fulfilled.