Chapter 3

Capacity to contract
One of the elements of a contract we will focus on is capacity. Capacity means
that a person is legally able to enter into a contract. There are several things that
make a person legally able to do so, including age and state of mind. Usually
the capacity to contract refers to the capacity to enter into a legal agreement and
the competence to perform some act.

The contracts that a business enters into with its customers and other individuals
are important to its long-term growth and profitability. However, certain
individuals lack the capacity or legal ability to enter into contracts. The law
defines who these people are and prevents other individuals and businesses
from having valid contracts with those who are said to lack capacity
When two people enter into a contract, six elements must be met. Those
elements include:

 Offer that specifically details exactly what will be provided

 Acceptance (the agreement by the other party to the offer presented)
 Consideration (the money or something of interest being exchanged
between the parties)
 Capacity of the parties in terms of age and mental ability
 Intent of both parties to carry out their promise
 The object of the contract is legal and not against public policy or in
violation of law

According to section 11 of the Contract Act, 1872 “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.”

Minors
The law protects minors’ against their own inexperience and against the
possible improper designs of those more experienced.
As a general rule, anyone under the age of 18 is said to lack capacity to enter
into contracts. From a business standpoint, however, there are a number of
important exceptions to the law prohibiting minors from having capacity.
As an example minor mortgaged his house in favour of a money lender to
secure a loan of Rs.20, 000/- Subsequently the minor sued for setting aside the
mortgage, stating that he was underage when he executed the mortgage. Held,
the mortgage was void and, therefore, it was cancelled. Further the money
lender requested for the repayment of the amount advanced to the minor as part
of the consideration for the mortgage was also not accepted (Mohiri Bibi vs.
Dharamodas Ghose)
A minor is allowed to enter into contracts -- that is, to purchase -- for necessities
such as food, clothing and accommodation.
Mental Incapacitation
Mental incapacitation is a legal term that refers to individuals who cannot enter
into contracts because of psychological disabilities. In the majority of
jurisdictions, mental capacity is defined as the ability to understand the full
meaning and effects of the contract. If the person is not able to cognitively
delineate all of her rights and responsibilities under the contract, then he is not
of legal capacity to enter the contract. A person, who is usually of unsound
mind, but occasionally of sound mind, may make a contract when he is of sound
mind. The main factors are whether he is capable of understanding the terms of
the contract when he entered.
Disqualified by any law
Law sometimes disqualified someone from entering into a contract. In case of a
Convicts: A convict cannot enter into a contract while he is undergoing
imprisonment. An Alien enemy cannot enter into a contract. Lunatics, Idiots are
disqualified by any law for the time being in force. Insolvents - When a person
is declared insolvent, it is only the Official Receiver or Official Assignee who
can enter into contracts relating to his property and sue and be sued on his
behalf. Thus, as soon as a person is declared insolvent, he loses his contractual
capacity.
Termination of a contract
A contract is a legal document that binds at least two parties to one another. A
contract requires one or both parties meet obligations detailed in the contract
before it is completed. In some instances, contract termination can occur that
will make the contract void of legal binding. Only the parties involved in the
agreement may terminate a contract.
Impossibility of Performance
A contract typically requires one or more parties to do something, which is
called performance. For example, a company may hire and sign a contract to
have a public speaker talk at a company event. Once the public speaker fulfills
his duties agreed upon in the contract, it is called performance. If for some
reason it is impossible for him to fulfill his duties, it is called impossibility of
performance. The company has the right to terminate the contract in the case of
an impossibility of performance.
Breach of contract
When a contract is intentionally not honored by one party, it is called a breach
of contract and is a ground of termination of contract. A breach of contract may
exist because one party failed to meet his obligations at all or did not meet his
obligations fully. A material breach of contract allows the hiring party to seek
monetary damages,
For example, if you purchased a product that did not arrive until a day after
the agreed upon delivery date, that is immaterial breach of contract. However,
if your order did not come until two weeks after the delivery date and it affected
your business, then that is a material breach of contract.
Prior Agreement
You may terminate a contract if you and the other party have a prior written
agreement that calls for a contract termination because of a specific reason. The
agreement must give the details of what qualifies as a reason for contract
termination. It should also state what actions need to take place for one of the
parties to terminate the contract. In most cases, one party must submit a written
notice to the other party to terminate the contract.
Rescission of the contract

A rescission of a contract is when a contract is terminated because an individual

misrepresented, acted illegally or made a mistake.

For example, if you bought a house but after further inspection you discover
that the seller intentionally hide the poor physical condition of the home, you
may possibly rescind the contract

Completion of the Contract

A contract is essentially terminated once the obligations outlined in the contract

are completed. Parties should keep documentation showing that they fulfilled
their contract duties. Documentation is helpful if the other party tries to later
dispute the fulfillment of your contract obligations.

Frustration

In the situation where a contract cannot be completed because of unanticipated

circumstances, frustration can release the parties from their obligations. To
prove frustration, it is proved that neither party can be the cause of the
frustration and the event must not have been foreseeable by either party.

For example, seizure of property by a foreign government would be considered

an unanticipated circumstance.

Breach of Contract
Breach of contract is a legal cause of action  and a type of  civil wrong in
which a  binding agreement or bargained-for exchange is not honored by one or
more of the parties to the contract by non-performance or interference with the
other party's performance. Breach occurs when a party to a contract fails to
fulfill his or her obligation as described in the contract, or communicates an
intent to fail the obligation or otherwise appears not to be able to perform his or
her obligation under the contract.

There are two main ways a party can breach a contract:

1. Where a party fails to actually do what a clause states must be done by the
time agreed, or if no time is provided, within a reasonable time; and

2. Where a party’s conduct manifests unwillingness or inability to perform the

contract; if this occurs before the performance is due, it is considered to be an
anticipatory breach.

For example, A is required to deliver a container of goods within seven days of

signing a contract with B. If, a couple of days before the delivery (i.e. the
performance) is due, A tells B that he has run out of those goods and will not be
able to deliver them within the seven-day period, A is in anticipatory breach of
the contract. Once the delivery is due, A is in actual breach of the contract.

There are three main remedies for breach of contract that you can obtain from a
court:

1. Damages:
 A breach of contract – whether it is a breach of a condition, or an
intermediate term, or a warranty – entitles the wronged party to damages,
regardless of whether or not the breach has caused loss. If no loss can be
proven, the wronged party is still entitled to “nominal damages”

According to section 73 of The Contract Act 1872 ,”When a contract has been
broken, the party who suffers by such breach is entitled to receive, from the
party who has broken the contract, compensation for any loss or damage caused
to him thereby, which naturally arose in the usual course of things from such
breach, or which the parties knew, when they made the contract, to be likely to
result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or
damage sustained by reason of the breach.”

Examples, A contracts to repair B's house in a certain manner, and receives

payment in advance. A repairs the house, but not according to contract. B is
entitled to recover from A the cost of making the repairs conforming to the
contract.

According to section 74 of The Contract Act 1872 ,”When a contract has been
broken, if a sum is named in the contract as the amount be paid in case of such
breach, or if the contract contains any other stipulation by way of penalty, the
party complaining of the breach is entitled, whether or not actual damage or loss
is proved to have been caused thereby, to receive from the party who has broken
the contract reasonable compensation not exceeding the amount so named or, as
the case may be, the penalty stipulated for.

Explanation : A stipulation for increased interest from the date of default may
be a stipulation by way of penalty.

 Example: A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on
a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A
such compensation, not exceeding Rs. 1,000, as the court considers reasonable.

According to section 75of The Contract Act 1872.”A person who rightfully
rescinds a contract is entitled to consideration for any damage which he has
sustained through the non-fulfillment of the contract.”

Illustration
‘A, a singer, contracts with B, a manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her
10000 taka for each night's performance. On the sixth night, A willfully absents
herself from the theatre, and B, in consequence, rescinds the contracts. B is
entitled to claim compensation for the damage which he has sustained through
the non fulfilment of the contract.

2. Specific performance:
A wronged party can seek orders from a court compelling the party who
breached the contract to perform the contract.
For example, if A is in breach of a contract by failing to attend
settlement to transfer land to B, B can seek a court order forcing A to
attend settlement and transfer the land to B.
3. Termination:
A breach may entitle the wronged party to terminate the contract in the
following circumstances:

– where the contract provides a right to terminate in the case of such a

breach;

– when a party shows an intention to no longer be bound by the contract, or

to only perform it in a manner that is substantially inconsistent with their
obligations;

– where a party breaches a condition and fails to perform an obligation that

is considered an essential term of the contract;

– where a party breaches an intermediate term and fails to perform an

obligation that causes substantial loss of benefit to the wronged party.