A contract is a legally binding document that recognizes and governs the rights and duties of the

parties to the agreement.1 A contract is legally enforceable because it meets the requirements and
approval of the law. A contract typically involves the exchange of goods, service, money, or
promise of any of those.

So, Indian Contract Act has defined who shall be able to enter into a contract or who is
competent to contract and who are either temporarily barred or permanently barred. It has been
described in Section 112 of the act – “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.”

Before ensuring the parties have fulfilled all the formal elements of a contract, a more
fundamental issue to consider is whether both parties have capacity to enter into a contract.
Capacity refers to a party’s legal ability to enter into a contract. It will not assist a party if
they’ve simply made a mistake or misunderstood a contract. Rather, the requirement is intended
to protect people from being taken advantage of who may not fully understand what they’re
doing by reason of age, mental disability or intoxication. As a starting point, there is a
presumption that a contracting party has full capacity. If it does become an issue after a contract
has been entered into, it will be the job of the party alleging incapacity to prove capacity was
absent at the time the contract was entered into. Although it is not always possible to ascertain
capacity, it is an important consideration to keep in mind and may be worth double-checking
before entering into a contract.

Age

The age of majority is 18 years old. Once a person reaches this age, absent any other
incapacitating factors, they are presumed to have capacity to enter into contracts.

A minor is one who has not attained the age of 18, and for every contract, the majority is a
condition precedent. By looking at the Indian law, minor’s agreement is a void one, meaning
thereby that it has no value in the eye of the law, and it is null and void as it cannot be enforced
by either party to the contract. And even after he attains majority, the same agreement could not
be ratified by him. Here, the difference is that minor’s contract is void/null, but is not illegal as
there is no statutory provision upon this.

Mohiri Bibi v. Dharmodas Ghosh3

The law dealing with minor’s agreement is based on two principles:

a) The law must protect the minor against his own inexperience, which may enable an adult
to take unfair advantage of him or to induce him to enter into a contract which in itself is
1
 Ryan, Fergus (2006).  Round Hall nutshells Contract Law. Thomson Round Hall. p.  1. ISBN 9781858001715.
2
The India Contract Act,1872
3
Ilr (1903) 30 Cal 539 (Pc)
 fair, is simply imprudent. (eg- if the minor for a fair price buys something which he
cannot afford)
b) The law should not cause unnecessary hardship to adults who deal fairly with minors.

Keeping in mind this fact the privy council changed its stand later into a more equitable one in
the landmark judgement of case, Srikakulam Subramaniam v. SubbaRao4– To pay off, the
promissory note and mortgage debt of his father, minor and his mother, the minor sold a piece of
land to the holders of the promissory note in satisfaction of the debt. He paid off the mortgage
and got possession of the land. But later the minor claimed that because of his minority the
contract was void, and he demanded the possession of land. But the court held that this contract
was for the benefit of the minor and was entered into by his guardian; his mother and thus was a
valid one.

Mental Disability

Capacity may also come into question if a contracting party has a mental disability. A person
with a mental disability will not necessarily lack capacity and is subject to the same presumption
of capacity as everyone else. If their capacity is brought into question, it must be shown that they
understand the broad nature and effect of the transaction when it is explained to them. They
don’t necessarily have to comprehend the finer details of the arrangement, if they can understand
its broad significance and importance i.e, in simple terms a person should be of sound mind to
enter into an contract as described in Section 125 – “A person is said to be of sound mind for the
purpose of making a contract, if, at the time when he makes it, he is capable of understanding it
and of forming a rational judgment as to its effect upon his interests. A person who is usually of
unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind.”

This also often becomes an issue when dealing with elderly people with dementia or people with
intermittent mental illnesses whose conditions cause capacity to fluctuate. It is possible for such
people to validly contract during a lucid interval.

Intoxication or other mental impairment

A person whose mental faculties have been impaired as a result of drugs or alcohol may also
suffer from a lack of capacity. A similar test to mental disability is used when deciding whether
an intoxicated person has capacity to enter into a contract, requiring that they understand the
general nature and significance of the contract.

Generally, where there is incapacity due to mental disability or intoxication, the court will only
set aside the contract if the other contracting party knew or ought to have realised the person’s
mental incapacity.
4
(1948) 50 BOMLR 646
5
The Indian Contract Act, 1872
Bankrupts

When people are bankrupt they still have general capacity to enter into contracts. However they
are subject to some limitations and their trustee in bankruptcy can intervene and disclaim
contractual obligations for a number of reasons. Therefore, it is important to be cautious when
conducting contractual dealings with a bankrupt.

Corporations

A corporation has its own legal personhood separate from the people who run and make up the
company. Therefore, a corporation has capacity in itself to enter into contracts with other
corporations or natural persons. A corporation can enter into contracts:

 as itself - by execution of the contract by a certain number of company officers; or

Corporations need to be especially careful in authorising agents to enter into contracts on its
behalf. It is often difficult to back out of contractual arrangements if an agent oversteps the
authority granted to them, if the other party believed the agent was acting with authority of the
corporation.

Just because a party lacks capacity, this doesn’t necessarily mean they were taken advantage of
or didn’t want the contract. In most cases, if a contracting party is found to lack capacity, the
contract is not automatically void. It is only voidable, giving the incapacitated party a chance to
affirm the contract if they or their authorised representatives desire. If there is any question in
your mind about a person’s capacity, it is always safer to err on the side of caution, whether this
be insisting on proof of age, having a health assessment or requiring proof of authorisation.