Capacity to Contract

CAPACITY TO CONTRACT

UNSOUND MIND

One of the essential conditions of competency of parties to a contract is that they should be of sound mind.

• Section 12 reads as follows :• “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 & of forming a rational judgement. ”

• 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.

• Soundness of mind of a person depends on 2 facts

• (i) his capacity to understand the contracts of business concerned.

• (ii) his ability to form a rational judgement.

• eg. A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.

• Contracts of persons of unsound mind

LUNATICS

• A lunatic is a person who is mentally deraged due to some mental strain or other personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts during the period when he is of sound mind.

IDIOTS

• An idiot is a person who has completely lost his mental powers. He does not exhibit understanding of even ordinary matters.

• Idiocy is permanent whereas lunacy denotes periodical insanity.

• An agreement of an idiot, like that of a minor, is void.

DRUNKEN PERSON

• A drunken or intoxicated person suffers from temporarily incapacity to contract i.e. at the time when he is so drunk that he is incapable of forming a rational judgement.

• The position of drunken or intoxicated person is similar to that of a lunatic.

OTHER PERSONS

• ALIEN ENEMIES

• An alien is a person who is not a subject of Republic of India. He may be :

• (a) An alien friend

• (b) An alien enemy

• Contracts with an alien friend, subject to certain conditions, are valid.

• Contracts with an alien enemy may be studied under 2 heads:

• (i) contracts during the war

• (ii) contacts made before the war

• (i) During the war an Indian citizen cannot enter into a contract with an alien enemy. He can do so only after he receives a license from Central Govt.

• (ii) Contracts made before the war may either be suspended or dissolved. They will be dissolved if they are against the public policy or if their performance would benefit the enemy.

FOREIGN SOVEREIGNS AND REPRESENTATIVES OF A FOREIGN STATE

• They can enter into contracts & enforce these contracts in our Courts. But they cannot be sued in our courts without the prior sanction of the Central Govt.

CORPORATIONS

• The contractual capacity of a statutory corporation is limited by the statute governing it. As regards a company registered under the Companies Act, 1956 its contractual capacity is regulated by its Memorandum of Association & Companies Act, 1956.

INSOLVENTS

• When a debtor is adjudged insolvent he is deprived of his power to deal in his property. It is only the Official Receiver or Official Assignee who can enter into contracts relating to his property & sue & to be sued on his behalf.

CONVICTS

• A convict when undergoing imprisonment is incapable of entering into a contract. This incapacity to contract, or to sue on a contract, comes to an end when the period of sentence expires or when he is pardoned.