The capacity or eligibility of partners to enter a business agreement is the fundamental component of a legally binding partnership contract. Here, “capacity to contract” refers to a person’s or an entity’s legal ability to form a partnership. Business law states that before a partner signs a contract, they must be qualified and meet certain requirements.
The Indian Contract Act, 1972, specifically addresses capacity in contract law under Section 11. It outlines three criteria that determine the capacity to create contracts. They are listed below.
- Attaining specified age
- Being of sound mind
- Not be prevented from signing a contract because of any legislation to which he is subject
Partnership contracts also need to contain the following, in addition to contractual capacity.
- Offer
- Consideration
- Intent
- Legality
- Acceptance
Through standards and illustrations, the definition of contractual capability may be thoroughly comprehended.
Explanation of Contracting Capacity in a Business
A detailed description of the contractual criteria used to assess an individual’s competence to engage into a contract is provided below.
- Minor
- Attaining the age of 18
A minor lacks the legal competence to enter into a business deal. Any business deal signed with a minor is invalid ab-initio, which means “from the start.” If a person under the age of 18 enters into a contract, he cannot ratify the agreement even if he reaches the age of 18. As a result, an invalid agreement can never be approved.
Minor being a Beneficiary in a contract: Even if a kid is not allowed to engage into a contract, he can register as a beneficiary of one. According to Section 30 of the Indian Partnership Act of 1932, a minor may not engage as a partner in the business, but he may enjoy the advantages obtained by the firm.
- A Minor always benefits from being a Minor: A minor receives certain additional advantages in business. This contractual benefit must be described in terms of contracting ability using instances. For example, if a minor impersonates a major and enters into a contract, he can subsequently plead the minority by following certain basic procedures. The law of estoppel does not apply to minors.
- Contract with the help of a Guardian: In rare instances, a guardian can engage into a legally binding commercial contract on behalf of a child. In this case, the guardian has no authority to obligate a minor to purchase any immovable property under the contract. When necessary, the minor’s property might be sold with proper confirmation and consent.
- Insolvency: A minor cannot be declared insolvent at any moment, according to commercial law. Even if the youngster owes the company money, he will not be held personally accountable.
- Mutual agreement between a Minor and an Adult: A joint contract between a minor and a major must be signed in the presence of the minor’s guardian. In such arrangements, the adult bears the contract’s obligation.
- Unsound mind
- The person must be of sound mind
Section 12 of the Indian Contract Act (1872) says that a person must be of sound mind, fully understand the terms and conditions of the contract, and be able to decide how they will affect his own interests.
In this case, the ability of the parties to the contract also applies to a person who is sometimes of sound mind and sometimes not. In this case, though, he has to sign the deal when he is completely healthy. According to the meaning of ability law, a contract signed by someone who is not of sound mind is not valid.
Anyone who is drunk or high is not able to sign a contract. If someone is like this, they can only sign a contract when they are sober and fully understand what it says.
- Mental illness limits the ability to sign a deal (Unsound mind)
No matter their age, people with mental illnesses or problems also have trouble contracting. Here are some examples of things that happened because of capacity:
- Intellectual disability: People who have an intellectual disability are exempt from the ability to contract. This includes how bad the problem is.
- Advanced dementia: People with dementia are not allowed to be involved or sign the contract.
- Visions and hallucinations: People who are hallucinating and seeing things that don’t exist are not required to sign the contract.
- Disorders of the emotions: People with bipolar disorder or sadness will have mood swings often. This means that people with these issues can’t sign any contracts.
- Person of unsound mind
The Contract Act section 11, says that each person to a contract must be of sound mind for it to be legal. Contracts made by people who are not mentally sound are not valid. When it comes to signing a contract, Section 12 talks about what it means to be of sound mind. It says that a person is of sound mind when he or she signs a contract if, at the time of signing, they can understand it and make a reasonable decision.
Unsoundness of thought can be caused by:
- Idiocy (Being stupid): His mental abilities to understand even simple things are gone because his brain hasn’t grown enough. The deal with a fool is null and void.
- Lunatic (Crazy): A crazy person loses his or her mental abilities because of mental illness or stress. When he is of sound mind, he can sign a deal during that time.
- Drunkenness (Being drunk): As long as the man is drunk, it makes him temporarily unable to do anything. He is on the same level as a crazy person.
- Mental decacy (Loss of mind): It’s because of old age, etc. Thus, a deal with someone who is not mentally sound is not valid. But Section 68 says that person’s property is always responsible for providing necessities to that person or to someone he is legally required to support.
- Disqualified person
- People who are not allowed by law (Disqualified Person)
Besides children and people who are not of sound mind, there are other people who might not be able to sign any contracts. Legal business rules say that these kinds of people can’t sign contracts. Under contractual rules, you could be disqualified for things like politics, your legal position, or other things. This could also happen if the person is a foreign ruler, a national enemy, a prisoner, or has no money.
- An enemy: In a war situation or when India doesn’t get along with other countries, people who are citizens of those countries are called “alien enemies.” It’s not a good idea for people to sign contracts when there is war going on, but contracts signed when there is peace are valid.
- Women who are married: women who are married can’t sign a contract about their husband’s property.
- Pardanashin Women: Pardanashin women who will be under the influence can’t sign the contract because they won’t be able to understand it.
- State Ambassadors: The ambassadors are not qualified to sign contracts.
- Person on Bail or Serving Time: People who are on bail or serving time cannot sign a contract.
- Patent officers: People who have patent rights are given them by the people who own the patents. A patent is a right that only the owner can use something. Because of this, patent officers can’t sign the deal.
- Legal professionals: People who work as judges, lawyers, or public officials are not allowed to sign a contract that has anything to do with their relationships. As an example, Advocate has taken a case from person Y, and the court case is still going on. That means advocates can’t sign a deal with that person to buy that land.
- Person who is bankrupt: This person can buy the property but not sell his own property.
- Company: The law makes the company. There are different rules that each company has to follow. In this case, the company is thought of as a fake person. The company can’t sign deals that aren’t within its rights.
