Session: 2022-2023

Topic: - capacity of contract

SUBMITTED BY: SUBMITTED TO:

Nischay choudhary Mr. Vijit Singh
B.A. LLB (Hons.) Assistant Professor
1st Year, 1st Semester ICFAI Law School
ILS22233 The ICFAI University, Jaipur
 ACKNOWLEDGEMENT

In preparation for my assignment, I had to take the help and guidance of

some respected people, who deserve my deepest gratitude. As the
completion of this assignment gave me much pleasure, I would like to
show my gratitude towards Mr. Vijit Singh, Assistant Professor, ICFAI
Law School, Jaipur for giving me a good guideline for assignment through
numerous consultations.
I am also thankful to him for his constant encouragement, invaluable
supervision and timely suggestions. I am also thankful to The Head of the
Department Dr. Pratima Soni, Associate Professor, ICFAI Law School,
Jaipur for granting us access to valuable sites related to the concerned
topic.
Many people, especially my classmates, have made valuable comment
suggestions on my assignment which gave me an inspiration to improve
the quality of the assignment.
Lastly, I would also like to expand my gratitude to all those who have
directly and indirectly guided me in writing this assignment and helped
me out in the successful completion of this project work.
What is capicity of contract ?
The primary element of a valid partnership contract is the
capability or eligibility of partners to form a business
agreement. 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.

Refer to the official website of Vedantu for a detailed

explanation.

Detailed Explanation of Capacity to Contract in a Business

Given below is a thorough explanation of the 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.
 • Alien enemies: people who are having citizenship in
countries who don't have cordial relationships with India
or in a war situation are called Alien enemies. People
signing the contract during a war situation is not
encouraged and a contract during a peace situation is
valid.
• Married women: married women are not allowed to enter
a contract regarding their husband’s property.
• Pardanashin Women: Pardanashin women who will be
under influence are not eligible to be involved in the
contract as they cannot understand the contract.
• State Ambassadors: The ambassadors are incompetent
to contract.
• Convict Serving Sentence: People who are on Bail or
serving their sentence are not allowed to sign a contract.
• Patent Officers: People having patent rights are issued by
their owners to them. A patent is a monopoly right given
to its owner. Hence patent officers are not allowed to sign
the contract.
• Legal professionals: People who work as judges,
advocates, public prosecutors are not allowed to sign a
contract related to their connections.

For example, Advocate has taken a case from a Y person, the

legal proceedings are going on. So advocates cannot sign a
contract with that person in buying that property.
 • Insolvent: The insolvent person is allowed to purchase the
property but cannot sell his own property.
• Company: The company is formed under the law.
Different companies are bound by different laws. Here, the
company is considered as an artificial person. The
company cannot sign contracts outside its limits.

4.Capacity contract limited due to

Mental Illness
Persons with mental illness or disorders are also having limited
capacity to contract irrespective of age. Some of the instances
related to campsity are listed below-

1. Intellectual disability: People with intellectual disability

are having an exception for capacity to contract, it also
includes the severity of the disorder.
2. Advanced dementia: People suffering from dementia are
exempted from involving or signing the contract.
3. Hallucinations and visions: People who are in
hallucination and visualize things without any reference
are exempted from signing the contract.
 4. Affective disorders: People having depressions or bipolar
disorder will have frequent mood changes. So people with
these problems are not allowed to be involved in any
contract.

Contracts signed by people with disabilities are considered to

be null. Court will determine whether the contract is legal or
illegal. To determine, as a part of the process, individuals'
mental health is determined. People with stress and are
mentally challenged are not allowed to be involved in any
contract, if they are involved then it is invalid.

Based on legal capacity, affected people are categorized into

different types. They are -

• Partial legal incapacity: If a mental disorder or disability

is restricted to a certain area and is normal in day-to-day
life, then it is partial legal incapacity. For example,
hallucinations.
• Relative legal incapacity: Relative legal incapacity
contradicts Partial legal incapacity. People who can
perform normal activities like shopping, reading and
cannot do long-term contracts are referred to this.