Concept of capacity to contract

The legal ability of a person to enter into a contract is known as contractual

capacity or it is also known as party’s ability to understand contractual obligations.

Sec 2(c) of National civil code states that "person" means a natural person and this
term includes a legal person.

Sec 42 of National Civil Code states that Legal person to acquire competency: A
body corporate incorporated pursuant to law shall obtain legal personality, and
obtain legal competency in the same capacity. In order to obtain legal competency
anybody shall be registered in accordance with law.

In general, all people have legal power to enter into any contract but the person
under incapacity cannot enter into a contract.

Personality simply means holding of rights and bearing duties. Here the capacity of
a person is associated with the personality. Personality means right to identity,
right to property and right to contract. If a person does not acquire the right to
contract then he/she is considered of not having a personality.

According Section 506 of National Civil Code Every person other than the
following persons shall be competent to conclude a contract:

(a) One who is a minor.

(b) One who is of unsound mind.

(c) Person disqualified by law.

Person not competent to do a contract

1) Minor

a) General Rule : Minor is not capable to do contract. ( Section 506 (1)(a)).Minor

is a person who has not attained the age of 18 years. Section 32 of civil code states
that “ To attain competency: (1) Every person who attains eighteen years of age
shall be considered to become a major, and shall, in the same capacity, be
considered to be legally competent.

(2) A person who is competent under sub-section (1) may, subject to law, exercise,
bear and discharge any right, obligation and duty whatsoever”.

Also in definition part under sec 2(e) civil code has defined “minor” means a child
who has not attained eighteen years of age,

b) Exception:

Guardian or representative can do contract on behalf of legally incompetent or

partially competent person. According to sec 506(3) of civil code “In concluding a
contract on behalf of a person who is incompetent or quasi-competent, his or her
guardian or curator may conclude such a contract”.

But if the contract is concluded on behalf of another person on a matter not

authorized by such minor or concluded beyond the authority given, such kind of
contract is not enforceable by the court. Section 519(2)(c) states that Where a
contract is concluded on behalf of another person, the contract is concluded on a
matter not authorized by, or concluded beyond the authority given by, that other
person is unenforceable contract.

A contract made by a minor is not enforceable against the minor but is enforceable
against the adult for any rights resulting from a contract entered in between minor
and adult.

Person who is not capable to do contract according to this law may be capable by
virtue of any other law. Section 506(5) states that if a person deemed to be
incompetent to conclude a contract under this Chapter on any particular matter is
competent by other law to conclude a contract on such a matter, such a person shall
be deemed to be competent to conclude a contract on that matter. For example any
person who has attained at least 14 years of age may be employed in a work with
his/her consent. ( Section 640 (1)
Principles
1st principle: The law must protect minor against his/her inexperience, which may
enable adult to take an unfair advantage from them, or induce him/her to enter into
a contract which though in itself fair, is simply provident. This principle is the
basis of the general rule that a minor is not bound by his/her contracts.

2nd principles: The law should not cause unnecessary hardship to adults, who deal
fairly with minors. Under this principle, certain contracts with minors are valid
while others are voidable, in the sense that they bind the minor unless he/she
rejects/deny and a minor may be under some liability in tort and in restitution.

Rules Regarding Minors

● Guardian or curator can do the contract on behalf of minor.

● Contract done by minor is void. It does not have validity in the eyes of
law. National civil code Section 517 2(j).
● Contract for necessaries: sometimes, the necessary things or goods may be
provided to the minor then, at that time, the guardian of such minor should
pay the necessary amount. Such contract is binding on both the adult party
and the minor. In a Nash v Inman case: Inman a minor who was
undergraduate at Cambridge bought eleven fancy waist coats from Nash. He
was at the time adequately provided with clothes. Held, the waistcoats were
not necessaries and Inman was not liable to pay for any of them. The
extravagant clothing could not be classified as ‘necessary’. Accordingly the
plaintiff could not claim the price for the goods.
● Minor agreement cannot be ratified: As a contract done with minor is
void, so such void contract cannot be ratified once the minor attains the age
of a major. Once the contract is void, it cannot be made valid in future. For
 example contract done at the age of 15 years cannot be made valid at the age
of 16 years.
● The principle of estoppels does not apply to a minor: According to
Black’s law dictionary estoppels means a bar that prevents one from
asserting a claim or right that contradicts with what one has said or done
before or what has been legally established as true. The principle of
estoppels does not apply to a minor. As the policy of law of contract is to
protect the minor from contractual liability.
● Minors cannot be declared as Bankrupt

● Minors cannot enter into contract of partnership

● Contract by minor and adult jointly: where a minor and an adult jointly
enter into an agreement with another person, the minor has no liability but
the contract as a whole can be enforced against the adult. So, a contract
made by a minor with an adult is binding on the adult and not the minor.
● Parent’s have to bear liability of tort but are not liable for minor’s
debts: The father and mother jointly living with a minor below fourteen
years of age, or if there is no father or mother, the person who exercises
paternal authority over him or her are liable for a tort committed by such a
minor. But, the parents or guardians are not liable for minor’s debts.

2) person of unsound Mind

Person of unsound mind is not capable to do the contracts. Section 506(1) (b).
Section 33 of National Civil Code states that unsound mind is a state of mind in
which a person is not aware about one’s own actions and its consequences
because of his/her physical or mental illness.

According to section 506(1)(b) clarification (a) “ A person who is normally

mentally unsound but might be sound at time can conclude a contract when
he/she is sound”.
According to section 506(1) (b) clarification (b) “ A person who is normally
mentally sound but might be unsound at times cannot conclude a contract when
he/she is mentally unsound.

Guardian or representative of legally incompetent person or partially competent

person can conclude the contract on their behalf. ( section 506(3).

In context of conclusion of contract on behalf of legal person any entity or a

person legally authorized to manage or operate the legal person or person
authorized by entity can conclude the contract. Section 506(4).

Rules Regarding Unsound Mind

● Person of unsound mind can conclude a contract: A person can conclude
a contract when he/she is in sound mind at the time of signing the
contract, although he/she is in unsound mind occasionally or usually.
● Test of soundness: capacity to understand the purpose of contract, and the
ability to form a rational judgment as to its effect on the person of the
interest.
● Burden of proof: Plantiff has prove the claim. Burden of proof lies to
claimaint.
● Guardian can do contract on behalf of person of unsound mind: for the
sake of interest of the unsound mind.
● Supply of necessity : liability created by supplies of necessaries to the
person of unsound mind lies on the property of such person.

Consequences
Void: The contract done by a person of unsound mind is void. (section
517(2)(j).
3)Person disqualified by law
A person who is disqualified by law is not capable of do contract. Sometimes,
the person may be disqualified to conclude the contract by the specific law, for
example, anyone who has committed an act of moral turpitude and was
convicted in the criminal case.

For example:

Restriction on transfer of immovable property to a foreigner (section 432):

There is a restriction to transfer immovable property to a foreigner without the
permission of the GON. If any person transfers any immovable property to a
foreigner then the relevant deed will ipso facto be void, and such property will
be transferred to the GON.

Mortgage not to be given to any foreigner (Section 451):

No person can mortgage any immovable property to a foreign citizen other than
those having obtained a non-resident Nepali Citizenship, without prior approval
of the GON

Public Procurement Rules, 2076 amendments

States that any bidder-firm or individual that faces a corruption case in court as
per the law cannot bid for projects either as an individual or in the form of a
joint venture unless the court gives a clean chit.
Lakpa Tamang v. Commission for the Investigation of Abuse of Authority,
Tangal and others, NKP 2073 D.N: 9706

Rule 29(e) of the Education Rules, 2049 has prohibited any person being
convicted of a crime of moral turpitude from being the chairperson of the
school management committee. The decision of the court in the case of
homicide issue should be considered as determining the ineligibility of Lakpa
Tamang to be the chairperson of the school Management committee.

Alien Enemy
● An alien is a person (both natural and artificial) who can make a valid
contract.
● But in the case of war he becomes an alien enemy and cannot enter
into a contract.
● Contract made before the war is either suspended or dissolved.

Illegal Contracts
A contract is illegal if it is concluded on a matter which is prohibited by law or
simply in an illegal manner or subject matter.

A contract is illegal if it involves doing something that is of criminal act or civil

wrong.

An illegal contract is an agreement that violates the law because its fulfillment
requires the parties to engage in illegal activity. Such a contract is void and
unenforceable. Thus, if the contract is breached, neither party will be entitled to
any compensation or held liable.
 Types of Illegality in Contract Law1

● expressly or impliedly forbidden by statute: It is illegal for a simple reason

the legislature said that the type of contract is not permitted.

● Illegality at formation: An intention to make a contract with knowledge of

its illegality at the time it was made.

● Illegal purpose or object: The purpose or object of the contract is to

achieve some unlawful end. The illegal purpose may be known to one or both
of the parties. The illegality does not need to appear in the wording of the
contract.
● entered into with the intention of committing an illegal act

● Entered with no unlawful intention, but then is performed with an

unlawful purpose or object. : A perfectly valid contract which doesn’t
require an illegal act and wasn’t made for an unlawful purpose becomes illegal
when it is performed in an illegal way. The illegality can arise by the conduct
of one or both of the parties, and whether they knew about the illegality or
not.
So there’s no reason why a perfectly valid contract can’t become illegal due to
an illegal purpose developing between the parties mid-stream, after the
contract was made.
Even then, when there is some illegality involved doesn’t always mean all
parties are deprived of all remedies. It depends on a range of factors, such as
the seriousness of the illegality and how the illegality relates to the main
purpose of the contract.

Consequences of illegal Contract

● Void
● Unenforceable

1 https://hallellis.co.uk/illegal-contracts-agreements/
Refer website reference mentioned on footnote for more detail.

Contracts forbidden by statutes

Contracts are concluded on the subject matter which is forbidden by statute.
The statute has expressly forbidden such a contract.

For example, A does contract with c to kill B.

The statute prohibits killing somebody so a contract to kill somebody becomes

a contract which is expressly forbidden by statute and hence such contract
becomes illegal.

Example A concludes contract to smuggle narcotics from Zogbani with B.

Example A conclude contract with B to Rob D’s house.

Contracts contrary to public policy

According to the doctrine of illegality, not all contracts are enforceable

Contracts contrary to good morals. For example, contracts that promote sexual
immorality. (Having sex in public place)

Contracts that are contrary to the marriage institution. For example contract
concluded to marry within the prohibited degree (incest marriage).

Contract for the commission of a crime

Contracts which are prejudicial to the administration of justice. For example

obstruction in case proceeding of rape case.

Contracts that are contrary to public relations. For example contracts for the
sale of public property.( contract to sell ambulance)