FACULTY OF ENGINEERING AND SURVEYING

ENGINEERING LAW AND ETHICS : YEAR FOUR: GROUP 10 ASSIGNMENT

Capacity of the Parties to Contract

NAME REGISTRATION NUMBER SIGNATURE

NANJIYA ANITAH PATRICIA 18/1/328/D/736

NYANZI PAUL 18/1/328/D/504

OKUMU RONALD 18/1/328/D/429

KALULE EDRINE 18/1/328/D/720

BIRUNGI COLEX 19/1/328/D/667

MWESIGWA BENJAMIN 18/1/328/D/140

MWESIGWA GITA JOVAN 18/1/328/D/023

TWIJUKYE ALLAN 18/1/328/D/023

NABADDA EDITH 18/1/328/D/167

ANGALA EDWARD 18/1/328/D/575

CAPACITY TO CONTRACT

Capacity to contract means a party has the legal ability to enter into a contract. Capacity also means a
person has to be competent as defined by law. Someone's capacity is determined by whether or not
they have reached the age of majority and if they are mentally capable of understanding the applicable
contract terms.

Section 11 of the Indian Contract Act, 1872, defines the capacity to contract of a person to be
dependent on three aspects; attaining the age of majority, being of sound mind, and not disqualified
from entering into a contract by any law that he is subject to. In this article, we will look at all aspects in
a detailed manner. According to Section 11, “Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is of sound mind and is not disqualified
from contracting by any law to which he is subject.”

Who Doesn't Meet Criteria for Capacity

Some people lack the capacity to enter into a legally binding contract:

Minors: In general, anyone under 18 years old lacks capacity. If he or she does enter into a contract
before they turn 18, there is usually the option to cancel while he or she is still a minor. There are some
exceptions to this rule, however. Minors are allowed to enter into contracts for purchasing various
necessities like clothing, food, and accommodations. Some states allow people under 18 to obtain bank
accounts, which often carry strict terms and stipulations.

Mental Incapacitation: If a person is not cognitively able to understand his or her responsibilities and
rights under the agreement, then they lack the mental capacity to form a contract. Many states define
mental capacity as the ability to understand all terms of the contract, while a handful of others use a
motivational test to discern whether someone suffers from mania or delusions.

Intoxication: Someone who is under the influence of drugs or alcohol is generally believed to lack
capacity. If someone voluntarily intoxicated themselves, the court may order the party to uphold the
obligation. This is tricky because many courts have also agreed a sober party shouldn't take advantage of
an intoxicated person.

Contracts made with people who don't have legal capacity are voidable. The other person has the right
of rescission, the option to void the contract and all related terms and conditions. Courts may opt to
void or rescind a contract if one of the parties lacked legal capacity. If the court voids the contract, it will
attempt to put all parties back in the position they were in before the agreement, which may involve
returning property or money when feasible.

Capacity of Companies

Companies also have to have capacity when entering into an agreement. If they don't, there can be
serious consequences, particularly regarding guarantees. There are similarities across legal systems and
jurisdictions when it comes to the general rules that govern the legal capacity of companies. For
example, the legal theory that a business has a separate legal personality is recognized in both civil and
common law jurisdictions. This means that as a defined legal person, a company has the capacity to
enter into a contract with other parties and can be held liable for its actions.

Civil Law Countries

The United States isn't the only country that recognizes this legal concept. For example, France, a civil
law country, has also adopted this idea. Legal capacity regarding entities was recently reformed by
Ordinance n°2016-131, which went into effect in 2016. Under French Civil Code Article 1147, a
company's lack of capacity is a grounds for relative nullity, a defense that can be invoked by the
aggrieved party to void the contract. In this case, the aggrieved party would be the company.
Furthermore, Article 1148 allows French companies who lack capacity to contract to legally enter into
contracts that are day-to-day acts which are authorized by usage or legislation.

In Spain, there is a special relationship with church and state. As a result, the church is governed by
elements of a specific concordat: Spanish Civil Code Article 37, which says that companies enjoy “civil
capacity.”

Common Law Countries

In common law countries, a company's capacity is limited by the company's memorandum of

association. This document contains the clause that describes the commercial activities the business is
involved in, thereby delineating the company's capacity.

Under the ultra vires doctrine, a business cannot do anything beyond what is allowed by its statement of
objects. The ultra vires doctrine was initially seen as a necessary measure to protect a company's
shareholders and creditors. This doctrine gave rise to what's known as the constructive notice rule,
which states that any third party that entered into a contract with another company must have been
knowledgeable of that business's objects clause.

If you need help with what capacity to contract means, you can post your legal need on UpCounsel's
marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel
come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience,
including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

We majorly have three main aspects:

 Attaining the age of majority.

 Being of sound mind.
 Not disqualified from entering into a contract by any law that he is subject to.

1] Attaining the Age of Majority

According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years. For the
purpose of entering into a contract, even a day less than this age disqualifies the person from being a
party to the contract. Any person, domiciled in India, who has not attained the age of 18 years is termed
as a minor.

Let’s look at certain laws governing a minor’s agreement:

A Contract made with a Minor is Void

Since any person less than 18 years of age does not have the capacity to contract, any agreement made
with a minor is void ab-initio (from the beginning).

Example, Peter is 17 years and 6 months old. He needs some money to go on vacation with his friends.
He approached a moneylender and borrows Rs 25,000. As security, he signs some papers mortgaging his
laptop and motorcycle. Six months later, when he attains the age of majority, he files a suit declaring
that the mortgage executed by him when he was a minor is void and should be cancelled. The Court
agrees and relieves Peter of all liability to repay the loan.

Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority since the
contract is void ab-initio. And, a void agreement cannot be ratified.

A Minor can be a Beneficiary of a Contract

While a minor cannot enter a contract, he can be the beneficiary of one. Section 30 of the Indian
Partnership Act, 1932, also specifies that while a minor cannot become a partner in the partnership firm,
the benefits of the firm can be extended to him.

A Minor is always given the Benefit of being a Minor

Even if a minor falsely represents himself as a major and takes a loan or enters into a contract, he can
plead minority. The rule of estoppel cannot be applied against a minor. He can plea his minority in
defence.

Contract by Guardian

Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of the
minor. Such a contract, which the guardian enters into, for the benefit of the minor, can also be
enforced by the minor.

However, guardians cannot bind a minor by a contract for buying immovable property. But, a contract
entered into by a certified guardian of a minor, appointed by the Court, with approval from the Court for
the sale of a minor’s property can be enforced.

Insolvency

A minor cannot be declared insolvent as he cannot avail debts. Also, if some dues are pending from the
properties of the minor and he is not personally liable for the same.
Joint contract by a Minor and an Adult

In case of a joint contract between an adult and a minor, executed by the guardian on behalf of the
minor, the liability of the contract falls on the adult.

2] Person of Sound Mind

According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a contract, a
person is said to be of sound mind if he is capable of understanding the contract and being able to
assess its effects upon his interests.

It is important to note that a person who is usually of an unsound mind, but occasionally of a sound
mind, can enter a contract when he is of sound mind. No person can enter a contract when he is of
unsound mind, even if he is so temporarily. A contract made by a person of an unsound mind is void.

3] Disqualified Persons

Apart from minors and people with unsound minds, there are other people who cannot enter into a
contract. i.e. do not have the capacity to contract. The reasons for disqualification can include, political
status, legal status, etc. Some such persons are foreign sovereigns and ambassadors, alien enemy,
convicts, insolvents, etc.

References

Toppr (Indian Contract Act 1872: Part II)

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