1

Introduction

In every walk of life we are entering into contract either knowingly or unknowingly.
Contract is basis of transaction. Thus, Contract, in law, an agreement that creates an
obligation binding upon the parties involved. The essentials of a contract are as follows:
mutual assent; a legal consideration, which in most instances need not be money-related;
the parties having legal capacity to make a contract; absence of fraud or duress; and a
subject matter that is not illegal or against public policy.
In general, contracts may be either oral or written. Certain classes of contracts, however,
in order to be enforceable, must be written and signed. These include contracts involving
the sale and transfer of real estate, and contracts to guarantee or answer for the
miscarriage, debt, or default of another person.1

Contractual capacity2

In general all persons have full legal power to enter into any contract which is not
prohibited by law of a nation they wish and thus bind themselves; but a few groups of
persons do not have this in full. And they are said to be under incapacity. The groups
concerned are minors, persons lacking mental capacity, drunkards and corporations.3
Nepalese Contract Act, 2056 B.S. Section 3 says “the person of unsound mind and minor
are not eligible or capable to enter into contract.”
Indian Contract Act 1872 A.D. Section 11 “every person is competent to contract is
which is 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.”
Thus both the acts define contractual capacity in a same manner and mention below may
conclude contracts:
1. one who has not attained (complete) 16 years of age (minors)
2. one who is of unsound mind (insane)
But the guardian of minors and insane may, in their interest, conclude contracts on behalf
of minors and insane.
3. on who is disqualified by law.4

Even the usual conditions essential to the valid conclusion of a treaty are that the
contracting parties must have the requisite capacity to enter into international
engagements, the plenipotentiaries who negotiate the treaty must be properly authorized,
and freedom of consent on the part of the signatory powers must exist. It is now
recognized that a treaty is void if its conclusion has been procured by the threat or use of
force in violation of the principles of international law embodied in the United Nations
(UN) Charter.5
1
“Contract”, Microsoft® Encarta® 2007 [CD]. Microsoft Corporation, 2006.
2
Sec. 3 of Neplease Contract Act, 2056 B.S.
3
Upex Robert, Davies on Contract (Sweet and Maxwell Ltd. 7th edition, 1995) p. 159
4
Adhikari Ashish and Gautam Sudeep, Business Law in Nepal (Dhaulagiri Books and Stationeries, 1 st
edition 2006) p. 53
5
Levene, Simon. “Treaty”, Microsoft® Encarta® 2007 [CD]. Microsoft Corporation, 2006
 2

Mental disability6

In order to make a valid, enforceable contract both parties must be regarded as having
capacity in law to enter into such an agreement. But unfortunately Neplease Contract Act
did not define who unsound minded person is.
Section 12 of Indian Contract Act defines unsound mind as “a person is said to be of
sound mind for the purpose if making a contract if, at the time when he makes it, he is
capable of understanding it and of forming a rational judgment as to its effect upon his
interest.”
“A person who by reason of mental incapacity…is incompetent to contract.”7
In Nepal and India the agreement of a person of unsound mind is absolutely void.
However, under English Law person of unsound mind is competent to contract,, although
he may avoid his contract if he satisfies the court that he was incapable of understanding
the contract and the other party knew it.
The contract done by unsound mind is voidable at unsound minded person’s option. It
becomes binding on him if he affirms it.8

The contract of a person mentally impaired, or a person so under the influence of

psychotropic (mind-altering) drugs or alcohol as to be incapable of a free exercise of will
is sometimes said to be wholly void. In recent cases, however, such contracts have
usually been regarded as merely voidable; and in some instances they are enforced if the
other contracting party is unaware of the incompetency and the terms are fair. The
contract of a minor, usually a person under the age of 18, is not void, but voidable, and it
may be affirmed by that person on attainment of full age.9
In the case, person whose property is not subject to the control of the court under the Act,
mental incapacity is not a ground for setting aside the contract, unless the incapacity was
known to the other party where the incapacity is not known to the other party and the
affliction is not apparent, the validity of the contract must be judged by the same
standards as a contract made by a person of sound mind and may only be set aside on the
same principle.10
A person is competent to contract only if s/he is of sound mind. Thus, an agreement of a
person of unsound mind is absolutely void.11
A person, who is usually of unsound mind, but occasionally of sound mind, may make a
contract when he is of sound mind.12
A patient in a lunatic asylum, who is at intervals of sound mind, may contract during
those intervals.13

6
Stone Richard, Principle of Contract Law, 4th edition, p. 26
7
Sale of Goods Act 1979, s. 3
8
Insperial Loan Co. v. Stone, (1892) 1 QB 599.
9
“Contract”, Microsoft® Encarta® 2007 [CD]. Microsoft Corporation, 2006.
10
Hart v. O’Connor 1985, P.C.
11
Machaiman v. Usman Beari (1907) 17 Mad LJ 78
12
Bajaj Amit And Bajaj Puneet, Law of Contracts, (Macmillan India Ltd. 2005) p. 70
13
ibid
 3

Thus, a sane man, who is delirious from fever, or who is so drunk that he cannot
understand the terms of a contract, or from a rational judgment as to its effect on his
interests, cannot contract whilst such delirium or drunkenness lasts.
A property worth about Rs. 25,000 was agreed to be sold by a person for Rs. 7,000 only
by a sale deed. Mother of the vendor pleaded that he was of an unsound mind, a
congenital idiot who was incapable of understanding the transaction and thus, prayed for
setting aside the sale transaction, the said contentions were duly proved and hence he sale
transaction was set aside.14
The burden of proving that when the transaction was entered into, the executant was of
unsound mind lies on the person who relies on such a contention to set aside the
transaction.15
Thus, the person entering into the contract must be a person who understands what he is
doing and is able to form rational judgment as to whether what he us about to do is to his
interest or not. The crucial point, therefore is to find out whether he is entering into the
contract after understanding it and he decided tot enter into that contract after forming a
rational judgment in regard to his interest. It does not necessarily mean that a man must
be suffering from lunacy to disable him from entering into a contract. A person may to all
appearances behave in a normal fashion, but at the same time, he may be incapable of
taking independent judgment, as to whether the act he is about to so is to his interest or
not. Thus, ‘the relevant time’ when the person should be intelligent enough to form a
rational judgment is the time when the transaction is entered into.16

Intoxication17
Incompetent to contract presumably means unable to understand the nature of the
transaction. Beyond this, there appears to be little authority on contracts made by those
who are intoxicated.18 It is assumed however, that similar rules apply as in the case of
incapacity through mental disability. This means, amongst other things that, in contract to
the position in relation to minors there must be an awareness of the incapacity on the part
of the other party before the contract will be unenforceable.
Extreme drunkenness is a defense to an action on a contract if it prevents the defendant
from understanding the transaction, and if the claimant knows this. 19 The drunkard is
liable if s/he ratifies the contract when s/he becomes sober. 20 He is also liable for
necessaries in the same way as a mental patient.
Thus, in England, if some one makes a contract while drunk, s/he may, when sober, elect
to avoid the contract or to affirm it. 21 In India, if drunkard make contract will be void but
in Nepal, there is no clear cup provision regarding this matter.

14
Inder Singh v. Parmeshwardhari Singh AIR 1957 Pat 491
15
Trilok Chand v. Mahandu AIR 1933 Lah 458.
16
Ram Sundar Shah v. Raj Kumar (1928) 15 Cal 285.
17
Stone Richard, Principle of Contract Law, 4th edition, p. 27
18
ibid.
19
Gore v. Gibson (1843) 13 M. and W. 623.
20
Matthews v. Baxter (1873) C.R. 8 Ex. 132
21
Adhikari Ashish and Gautam Sudeep, Business Law in Nepal (Dhaulagiri Books and Stationeries, 1 st
edition 2006) p. 57
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Burden of proof

The rules regarding the burden of proof are summarized as:

1. Where a person is usually of sound mind…The burden of proving that he was of
unsound mind at the time of contract lies on the person who challenges the
validity of contract.
2. Where a person is usually of unsound mind…The burden of proving that was of
sound mind at the time of contract lies on the person who affirms it.
3. In case of drunkenness or delirium from fever or other causes… the burden of
proving that he was delirious from fever or was of drunk at the time of contract,
lies on the person who challenges the validity of the contract.

Position of Agreements with Person of Unsound Mind22

The position of agreements of person of unsound mind is summarized as:

1. lunatic( i.e. a person who is mentally deranged due to some mental strain or other
personal experience but who has some lucid intervals of sound mind)
 While he if of unsound mind, he cannot enter into any contract. Any
agreement entered into by him during this period is altogether void and he
cannot be held liable thereon.
 While he is of sound mind, he can enter into any contract and he is liable
for such contracts.
2. Idiots (i.e. a person who is permanently of unsound mind), he cannot enter into
any contract. Any agreement entered into by him is altogether void and he is not
liable thereon.
3. drunken person (i.e. a sane person who is delirious from fever or who is so drunk
that he cannot understand the terms of a contract or form a rational judgment as to
its effect on his interest), he cannot contract while such delirium or drunkenness
lasts.

Exceptions the position of contracts with persons of sound mind is identical with that of
contracts with minors. Thus, the position of contracts with persons of unsound mind is as
under:
a) he may enforce a contract for his benefit;
b) his properties shall be attachable for realization of money due against him
for the supply of necessaries to him or to any of this dependents.

22
Tlsian P.C. Business Law (Tata McGraw-Hill Publishing Co. Ltd. 2nd edition 2002) p. 3.5