Parties entering into contracts must be capable. Capacity of parties emphasises that the parties entering into a contract should be capable of understanding it and forming a rational judgment as to its effect upon their interests.
It is possible only when the parties are mature enough to understand the effect of an agreement. For this purpose law insists that the parties should be major, i.e., they should have attained the age of eighteen years. Again, even if the parties are mature they should be in their senses, otherwise they will not understand properly the effect of a contract entered by them. Therefore, law requires that the parties should have sound mind.
Only a person with a sound mind can properly understand the implications of a contract. Thus law does not allow an agreement with an idiot or a drunken person because he will not be able to understand the consequences of the agreement entered into by him.
Similarly, law does not allow certain persons to enter into an agreement in public interest. Such persons are disqualified by law to enter into contracts. For example, a contract with an alien enemy (a person whose Government is at war with the Government of India) is not in the interest of our country. Likewise, a person undergoing imprisonment is disqualified by law to enter into contracts.
Sec. 11 of the Indian Contract Act provides that “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. “We can easily explain the persons incapable of entering into a contract.