Competency to contract as per Indian Contract Act

One of the essential elements of a valid contract is that the parties entering into it must have the legal capacity or competency to do so. The Indian Contract Act 1872 defines the competency of parties in Section 11 as 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.

From this definition, we can infer that there are three conditions that must be fulfilled for a person to be competent to contract:

He must have attained the age of majority
He must be of sound mind
He must not be disqualified from contracting by any law

Let us examine each of these conditions in detail and also look at some case laws that illustrate them.

Age of Majority: The age of majority is the age at which a person acquires all the rights and responsibilities of an adult. In India, the age of majority is governed by the Indian Majority Act 1875, which states that every person domiciled in India shall attain majority on completing 18 years of age, except if a guardian has been appointed for his person or property, in which case he shall attain majority on completing 21 years of age.

Position of Minor under Indian Contract Act: A person who has not attained the age of majority is called a minor. A minor is not competent to contract and any agreement made by him is void ab initio (from the beginning). This means that a minor cannot sue or be sued on a contract, nor can he ratify a contract after attaining majority. However, a minor can be a beneficiary of a contract if it is for his benefit or made on his behalf by his guardian or parent.
The leading case on this point is Mohori Bibee vs. Dharmodas Ghose (1903), where a minor mortgaged his property to a money lender and later sued to set aside the mortgage on the ground of his minority. The Privy Council held that the mortgage was void and not merely voidable, and that the money lender could not recover the money advanced to the minor.
Another important case is A.T Raghava Chariar vs. O.A. Srinivasa Raghava Chariar AIR 1923 where a minor was admitted as a partner in a firm with the consent of his guardian. The court held that the minor was not liable for the debts of the firm, as he was not competent to contract. However, he was entitled to his share of profits from the firm.

Sound Mind: The second condition for competency to contract is that the person must be of sound mind at the time of making the contract. Section 12 of the Indian Contract Act 1872 defines sound mind as 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 suffers from mental illness, insanity, idiocy, lunacy or intoxication may not be of sound mind if his mental condition impairs his ability to understand and judge the nature and consequences of the contract. However, such a person may be competent to contract during lucid intervals or when he is sober, provided he meets the test of sound mind as given above.

The burden of proving that a person was not of sound mind at the time of making the contract lies on the party who alleges it. The court will look at the facts and circumstances of each case to determine whether the person was capable of contracting or not.

A relevant case on this point is Suraj Narain Dube vs. Sukhu Ahir AIR 1934 All 795, where a person executed a sale deed in favour of another person while he was suffering from delirium tremens (a severe form of alcohol withdrawal). The court held that the sale deed was void, as the person was not of sound mind at the time of making it.

Disqualification by Law: The third condition for competency to contract is that the person must not be disqualified from contracting by any law to which he is subject. There are certain laws that prohibit or restrict certain persons from entering into contracts, either for their own protection or for public policy reasons. Some examples are:

Alien enemies: A person who is an enemy alien (a citizen or subject of a country with which India is at war) cannot enter into contracts with Indian citizens during wartime, unless with the permission of the Central Government.
Foreign sovereigns and ambassadors: A foreign sovereign or ambassador enjoys diplomatic immunity and cannot be sued in Indian courts without the consent of the Central Government. Therefore, they cannot enter into contracts that are enforceable in India, unless they waive their immunity.
Convicts: A person who is undergoing imprisonment cannot enter into contracts that require his personal performance or presence, as he is deprived of his civil rights and liberty.
Insolvents: A person who is declared insolvent by a court cannot enter into contracts that involve dealing with his property or assets, as they vest in the official receiver or assignee for the benefit of his creditors.
Corporations: A corporation is an artificial person created by law and can enter into contracts only within the scope of its objects and powers as defined by its charter, memorandum or statute. Any contract that is ultra vires (beyond the powers) of the corporation is void and not binding on it.

These are some of the examples of persons who are disqualified from contracting by law. There may be other laws that impose specific disqualifications on certain persons or classes of persons from entering into certain types of contracts.

Conclusion: Competency to contract is one of the essential elements of a valid contract. It ensures that the parties entering into a contract are legally capable of understanding and fulfilling their obligations and rights under the contract. The Indian Contract Act 1872 lays down three conditions for competency to contract: age of majority, sound mind and no disqualification by law. Any person who does not satisfy these conditions is not competent to contract and any contract made by him is void.