Understanding Capacity to Contract in Nepal

The legal ability of a person to enter into a contract is known as contractual capacity or it is also known as the party's ability to comprehend and understand contractual obligations. 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. Simply, from the jurisprudential point of view, we can understand that right to 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 not to have a personality.

Minors, persons of unsound mind, and persons disqualified by law are considered as not having the capacity to do a contract.

According to the National Civil Code, 2017, sec 506, every person is capable of doing contract except a minor, a person of unsound mind, and a person disqualified by law.

A person not competent to do a contract

A. Minor

General rule

Minor is not capable of entering into a contract. Minor is a person who has not attained the age of 18 years. Also, the National Civil Code, 2017, in the definition part has stated that a child who has not attained eighteen years of age is minor.

Exception

Guardian or representative can do contract on behalf of a legally incompetent or partially competent person. 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,

A contract made by a minor is not enforceable against the minor. However, a minor may enforce a contract against an adult for any rights resulting from a contract entered into between the minor and the adult. That is, the contract is binding on an adult, the adult cannot escape the contract by pleading the child's incapacity. Any entity or a person legally authorized to manage and operate a legal person or authorized by the entity can conclude the contract on behalf of a legal person.

A person who is not capable of entering into a contract according to this law may be capable by virtue of any other law. For example, any person who has attained at least fourteen years of age may be employed in a work with his or her consent, but a person who has not attained sixteen years of age cannot be employed in a hazardous business or work,

Minor cannot conclude contract and such contract is void. It is based on two principles:

1st principle: The law must protect the minor against his/her inexperience, which may enable the adult to take an unfair advantage from them, or induce him/her to enter into a contract which, though in itself fair, is simply improvident. This principle is the basis of the general rule that a minor is not bound by his/her contracts.

2nd principle: 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 repudiates, and a minor may be under some liability in tort and in restitution,

Rules regarding Minors

The following are the rules regarding minors:

• Guardian or curator can do the contract on behalf of minor: The guardian or curator can do the contract on behalf of minor. The National Civil Code, 2017, sec 640(1) states that a guardian or curator can conclude the contract on behalf of a minor for his/her behalf.
• Contract done by minor is void: The contract done by the minor is void. 315 It is null. It does not have validity in the eyes of law.
• 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,

  provided that the terms of the contract are not harsh or oppressive.

• Minor as the agent: A minor can act as an agent. She/he can draw, deliver and endorse negotiable instruments with herself/himself being liable. Here, the minor's principal may be held liable for the acts of him/her (the agent). The parents are liable on their child's contract unless the child acts as the agent.
• Minor agreement cannot be ratified: As a contract done with a minor is void, so no such void contract can be ratified once the minor attains the age of a major. Once the contract is void, it cannot be made valid in the future. For example, a contract with one of the parties as a 15-year-old minor cannot be made valid once he/she attains the age of 18 years.
• The principle of estoppel does not apply to a minor: Estoppel means a bar that prevents one from asserting a claim of right that contradicts with what one has said or done before or what has been legally established as true, According to the Evidence Act, 2031, when a person has, by writing, oral or conduct, acted or caused to act another person to believe a thing to be true and to act upon such belief, such person is not allowed to deny the truth of that thing'. The principle of estoppel does not apply to a minor. As the policy of the law of contract is to protect minors from contractual liability, naturally the doctrine of estoppel cannot be used to defeat that policy.
• Minors cannot be declared as bankrupt: Minors cannot be declared as bankrupt because he/she is not liable for contracting debts. The contract with a minor is void.
• Minor cannot enter into a contract of partnership: To register a partnership firm in Nepal, the age of the partners is very important. So, a minor cannot enter into a 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.
• Parents 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,322 But, the parents or guardians are not liable for minor's debts.

B. Person of Unsound Mind

A person of unsound mind is not capable of doing the contract. Unsound mind is a state of mind in which a person is not aware of their actions and their consequences because of his/her physical or mental illness. He/she is unable to act in a reasonable manner and the other party has reasons to know about his/her condition. It is the question of fact decided by the court.

i. A person of unsound mind is:

A person who is normally mentally unsound but might be sound at a time can conclude a contract when he/she is mentally sound.

A person who is normally mentally sound but might be unsound at times cannot conclude a contract when he/she is mentally unsound.

Guardians or representatives of a legally incompetent person or a partially competent person can conclude the contract on their behalf. In the context of conclusion of a contract on behalf of a legal person, any entity or a person legally authorized to manage or operate the legal person or person authorized by the entity can conclude the contract.

Rules regarding unsound mind

• A 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: The test of soundness of mind is the capacity to understand the purpose of contract and the ability to form a rational judgment as to its effect on the person of interest.
• Burden of Proof: The Plaintiff has to prove the claim. The burden of proof lies with the claimant.
• Guardians can do a contract on behalf of a person of unsound mind. Guardians of the person may conclude a contract for the sake of the interest of the person of unsound mind.
• Supply of necessity: Liability created by the supply of necessaries to the person of unsound mind lies on the property of such person.

Causes of unsound mind

The following are the causes of unsound mind:

• Personal insanity (idiocy);
• Lunacy or insanity (temporarily sound and temporarily unsound),
• Drunkenness (unsound up to the effect of drinks);
• Hypnotism (unsound for a certain period because of another's tactics);
• Mental decay (incompetence caused by old age or over excitement or other physical defects).

Consequences

Void: The contract done by a person of unsound mind is void332. It has no legal validity.

C. Person disqualified by law

A person who is disqualified by law is not capable of entering into a 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 a criminal case.

For example:

I. Restriction on transfer of immovable property to foreigners.

There is a restriction to transfer immovable property to a foreigner without the permission of the Government of Nepal. 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 Government of Nepal.

II. Mortgage not to be given to any foreigner.

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 Government of Nepal. 336

III. Disqualification of trustee:

The following person is not qualified to be a trustee:

• A person who is not competent to make a contract;
• A person who has embezzled a property in his or her custody,
• A person who has been convicted by a court for the offense of corruption,

IV. Disqualification relating to contract:

Section 10 of the Amount and Governmental Contract Arrangement Act, 2020 (1963) states that a governmental contract or contract of another work is not awarded to any of the following persons and such persons cannot take the contract:

A person who is convicted as an offender in the offense of theft, robbery, burglary, forceful theft, secret theft, forgery, fraud, or homicide and sentenced for the same,

A person who was unable to repay a loan to creditors and became insolvent; or

A person who has not been able to repay governmental dues,

The capacity to contract is a fundamental principle in contract law, ensuring that only individuals and entities with legal competence can enter into binding agreements. In Nepal, the National Civil Code, 2017 explicitly defines who can and cannot contract, reinforcing protections for minors, persons of unsound mind, and individuals disqualified by law.

Minors are generally prohibited from contracting, except under specific circumstances where their guardian or representative acts on their behalf. Similarly, individuals with unsound minds can only contract when they are in a state of mental competence. Additionally, certain individuals are disqualified by law; such as those convicted of crimes involving moral turpitude are restricted from forming contracts to maintain legal integrity and prevent misuse.

These legal restrictions are rooted in principles of justice, fairness, and protection, ensuring that vulnerable individuals are not exploited while maintaining contractual stability in commercial and legal transactions. By defining and enforcing these limitations, Nepalese law aligns with global best practices in contract law, balancing individual rights with societal interests.