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Besides minors and persons of unsound mind, Section 11 of the Indian Contract Act, 1872 recognises a third category of persons who may be incompetent to contract. These are persons who are “disqualified from contracting by any law to which they are subject.”

The incapacity of such persons does not arise because of their age or mental condition. It arises because some other law places a restriction upon their contractual capacity. The disqualification may be partial or complete, depending upon the nature of the person and the applicable law.

The important classes of persons who may be disqualified from contracting are foreign sovereigns and ambassadors, alien enemies, convicts, insolvents and corporations or statutory bodies, subject to the particular law governing them.

1) Foreign Sovereigns and Ambassadors

Foreign sovereigns and diplomatic representatives enjoy certain privileges and immunities under international law and domestic law. They cannot ordinarily be sued or made subject to legal proceedings in the same manner as ordinary persons, except where the applicable law permits it. Therefore, their contractual capacity and liability depend upon the nature of the transaction and the relevant law governing sovereign or diplomatic immunity.

  • Procedural Protection under Section 86, CPC: While foreign sovereigns and diplomatic representatives are competent to enter into contracts, they cannot be sued in an Indian court without the prior consent of the Central Government, certified in writing by a Secretary to the Government of India (Section 86, Code of Civil Procedure, 1908). They may, however, waive this immunity and file suits on their own behalf to enforce contractual rights.

2) Alien Enemy

An alien means a person who is a citizen of a foreign country. An alien is generally competent to contract in India in ordinary circumstances. However, when a state of war exists between India and that foreign country, the person may become an alien enemy. Contracts with an alien enemy are subject to restrictions imposed by law. Contracts entered into during war with an alien enemy may become unenforceable or prohibited, particularly where they involve dealings with the enemy or are contrary to government restrictions. Thus, the incapacity of an alien enemy depends largely upon the political circumstances and the law applicable during the period of hostility.

Pre-War vs. Post-War Contracts:

  • Contracts Made During War: Any agreement entered into with an alien enemy during an ongoing war without the express permission of the Central Government is completely void, as it involves trading with the enemy.
  • Contracts Made Before War: Contracts validly entered into before the outbreak of war are either suspended during the period of hostilities or terminated if their performance would assist the enemy or run counter to public policy.

3) Convicts

A person who is undergoing imprisonment is subject to certain legal disabilities. During the period of imprisonment, his capacity to enter into and enforce certain contracts may be restricted by law. However, imprisonment does not necessarily make every contract entered into by a convict void. The extent of the disability depends upon the applicable law and the nature of the transaction.

4) Insolvents

An insolvent is a person whose insolvency has been legally recognised under the applicable insolvency law. The commencement of insolvency proceedings may restrict his power to deal with his property because his assets may come under the control of an insolvency professional, official assignee or other legally authorised person. Therefore, an insolvent may be restricted from entering into transactions concerning property which is subject to the insolvency process. The disability is not necessarily an absolute incapacity to enter into every contract.

5) Corporations and Companies

A company or corporation is an artificial legal person. Its capacity to contract depends upon the law under which it is incorporated and the powers given to it by its constitutional documents and the relevant statute. A corporation cannot enter into a contract beyond the powers conferred upon it by law. Such acts are generally described as ultra vires acts. In the case of corporations created by a special statute, such as certain statutory corporations, their contractual powers are determined by the provisions of the statute establishing them. Thus, the contractual capacity of a corporation is different from that of an individual. It can act only through its authorised officers, agents or representatives and within the limits of its legal powers.

  • The Doctrine of Ultra Vires: Under company law, any contract entered into by a company that exceeds the powers specified in its Object Clause of the Memorandum of Association is ultra vires (beyond powers) and strictly void ab initio. Such a contract cannot be ratified even by the unanimous vote of all shareholders (Ashbury Railway Carriage & Iron Co. v. Riche).

Position of Disqualified Persons

The important point is that disqualification under Section 11 is not necessarily the same for every person. The extent of incapacity depends upon the particular law applicable to that person. A person may be completely prohibited from entering into certain transactions, or may merely be restricted from dealing with particular property or enforcing particular rights.

Therefore, the third requirement of Section 11 ensures that even a person who has attained majority and is of sound mind may still lack contractual capacity if some other law has imposed a legal disability upon him.

In short, capacity to contract depends not only upon age and soundness of mind but also upon the absence of any legal disqualification. The three requirements under Section 11 must therefore be considered together before determining whether a person is competent to enter into a valid contract.