A person is said to be of sound mind for the purpose of 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 interests.
A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
Illustrations
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
(b) A sane man, 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 interests, cannot contract whilst such delirium or drunkenness lasts.
Legal Commentary & Landmark Judgments: Section 12
Section 12 of the Indian Contract Act, 1872 defines mental capacity for contracting, establishing a rigorous dual test: the promisor must possess the cognitive capacity to understand the terms of the transaction and the rational judgment to evaluate its impact on their financial and legal interests.
The evidential burden of proving that a transaction was executed during a lucid interval rests heavily on the party asserting the validity of the contract.
In commercial and corporate governance, while corporate entities contract through formal board resolutions and power of attorney holders, Section 12 remains central in challenges against personal guarantees, promoter indemnity undertakings, and shareholder agreements executed by elderly directors or individuals under medical incapacity. Under Section 68, suppliers of necessary goods or medical services to an incapacitated individual can only seek reimbursement in rem from the person's estate, without creating personal liability.