Capacity of the parties

In one minute

Capacity means the legal power to bind yourself by a contract. Section 11 gives three tests. The person must be of the age of majority, of sound mind, and not disqualified by any law.

Capacity is about legal permission, not intelligence. A bright 17-year-old lacks it, and a simple adult has it. In exams this is a regular 15-mark question. In real life it decides whether a shopkeeper can sue a teenager or a patient for the price.

Exam focus

Frequency: Occasionally asked
Usually asked as: Long answer (10 to 15 marks)

Legal provision

Section 10: an agreement is a contract only if the parties are competent to contract, among other conditions.
Section 11: a person is competent to contract if three things are true. He is of the age of majority under the law he is subject to. He is of sound mind. No law he is subject to disqualifies him.
Section 12: a person is of sound mind if, when making the contract, he can understand it and form a rational judgment about its effect on his interests.
Indian Majority Act, 1875, section 3: majority is reached at 18 years. It is reached at 21 years in two cases. A court appointed a guardian of the person or property before the age of 18. Or a Court of Wards took charge of the property before 18.

Meaning and definition

A person who can make a binding contract is said to be competent, or sui juris (of full legal capacity). The law asks about the person, not the bargain. A fair price does not cure a missing capacity.

The rule protects those who cannot protect themselves, and it protects the other side by giving a clear test. Three questions decide it: how old, what mind, and what legal bar.

Is this person competent to contract?How to read this: go down the boxes in order. A "No" answer sends you to the result beside the box.

1. Is the person of the age of majority? section 11, Indian Majority Act, 1875
No: a minor. The agreement is void (Mohori Bibee v. Dharmodas Ghose).
2. Is the person of sound mind when making the contract? section 12
No: no valid contract can be made while the unsoundness lasts.
3. Is the person free of any legal disqualification? section 11
No: the bar depends on the kind of disqualification.
All answers "Yes": the person is competent to contract.

Detailed explanation

Step 1: the age of majority

Section 11 refers to the age of majority "according to the law to which he is subject". For a person domiciled in India, that law is the Indian Majority Act, 1875. The age is 18. It is 21 if a court guardian was appointed, or the Court of Wards took charge of the property, before 18.

Example. Meena turns 18 on 1 June. A mobile shop sells her a phone on 2 June under a written agreement. She is competent. Her friend Kiran, also 18, has a guardian appointed by the High Court at age 15. Kiran stays a minor until 21.

Step 2: soundness of mind

Section 12 tests the mind at the moment of contracting. The test is practical and tied to one contract. A diagnosis does not decide it.

A person who is usually of unsound mind but sometimes of sound mind may contract in the sound intervals.
A person who is usually of sound mind but sometimes of unsound mind may not contract while unsound.

Example. The Act's illustration (b): a sane man who is delirious from fever, or so drunk that he cannot understand the terms, cannot contract while that lasts. Ravi, drunk at a wedding, signs a sale deed for his bike. He could not understand the terms, so he cannot contract.

Step 3: disqualification by law

Some adults of sound mind are still barred by law. Examples are an alien enemy during war and an undischarged insolvent. Each case has its own rule, which is covered in the note on persons disqualified by law.

Step 4: what follows when capacity is missing

Section 10 makes competence a condition of every contract. Without it there is no contract. The effect differs for each ground, as the table below shows.

Don't confuse: minor, unsound mind and disqualified person

All three lack full capacity, but the law does not treat them alike. Do not write "void" for all three without the detail.

Point	Minor	Unsound mind	Disqualified by law
Test	Age under 18 (21 with a court guardian)	Cannot understand the contract or judge its effect (section 12)	A specific legal bar
When tested	Date of the agreement	The moment of contracting	The period of the disqualification
Effect	Void from the start	Cannot contract while unsound	Depends on the category

Inside the idea. A 16-year-old signs a hire-purchase agreement for a motorbike. He lacks capacity because of age, so the agreement is void.

Just outside it. A 30-year-old of sound mind buys the same motorbike but is tricked by the dealer. He has capacity. His problem is free consent, and the contract is voidable, not void.

Common mistakes

Equating capacity with intelligence. Capacity is a legal status.
Saying majority is always 18. Add the 21-year rule for a court guardian.
Treating soundness of mind as permanent. Section 12 looks at the moment of contracting.
Confusing lack of capacity (void) with lack of free consent (usually voidable).

Apply it

Problem

Ramu, aged 17, buys a smartphone worth Rs 40,000 from a dealer on an EMI plan of 12 instalments. He pays three and stops. The dealer sues him for the balance. Is Ramu liable?

Issue. Did Ramu have capacity to contract?

Rule. Section 11 requires the age of majority. Section 10 makes competence a condition of a contract.

Application. Ramu was 17 on the date of the agreement and had no guardian appointed by a court. He was a minor, so he lacked capacity.

Conclusion. The agreement is void. The dealer cannot recover the balance as a contract debt from Ramu.

Leading case laws

Mohori Bibee v. Dharmodas Ghose (1903)
Facts. An infant mortgaged his houses for Rs 20,000 to a money lender whose attorney knew he was under age. A High Court guardian had been appointed for him. He sued to cancel the mortgage.

Principle. Competence to contract is essential under the Act. An infant is not competent, so his agreement is not a contract and the mortgage was void.

Why it matters. It is the leading authority that incapacity of a minor makes the agreement void.

How to write this answer in the exam

5-mark answer

State section 11 in one sentence.
Name the three tests: age of majority, sound mind, no disqualification.
Give 18 and 21 years under the Indian Majority Act.
State the section 12 test.
State the effect: no valid contract.

10-mark answer

Sections 10 and 11, and why capacity matters.
Age of majority with the 21-year exception.
Section 12 with the lucid-interval and delirium illustrations.
Disqualified persons in one line each.
Comparison table of the three.
Mohori Bibee v. Dharmodas Ghose and a short problem example.

Key points to remember

Section 11 has three tests: age of majority, sound mind, no legal disqualification.
Majority is 18, or 21 if a court guardian or the Court of Wards was involved before 18.
Section 12 looks at the mind at the time of contracting, not at a general label.
A usually unsound person may contract in a lucid interval. A usually sound person may not while unsound.
Capacity is a condition of a contract under section 10.

Quick self-test

1. What are the three tests of competence in section 11?

Age of majority, sound mind, and no disqualification by any law the person is subject to.

2. When is majority reached at 21 and not 18?

When a court has appointed a guardian of the person or property, or a Court of Wards has taken charge of the property, before the age of 18.

3. May a person who is usually of unsound mind ever contract?

Yes, during an interval when he is of sound mind (section 12).