Contract Law A - LAW2101Semester 1, 2014

Stream 5Jennifer Paneth

Week 6: Capacity

Is there a contract?Material elements:

1.Agreement (Offer and Acceptance) – have the parties reached consensus?

2.Consideration – have the parties struck a bargain?

3.Intention to create legal relations – do the parties intend for their agreement to be legally binding?

4.Certainty – have the parties clearly identified their rights and responsibilities? There should not be any doubt as to what each party is obliged to do in terms of the agreement

By people with capacity to enter into the contractWith some types of contracts, certain formalities must be followed in order for the contract to be legally enforceable

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General principles A contract that is otherwise properly made may still not be binding if one of the parties

lacks capacity to contract

Certain classes of people are deemed to lack contractual capacity:

– Minors

– Mentally incapable persons

– Intoxicated persons

Contracts made with a person lacking capacity are generally voidable at the option of the

person lacking capacity

Different rules apply for necessaries

Legislation has modified the common law

Justification: protection from consequences of acts they may not be competent to assess

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MinorsWho is a minor?

Age of majority is 18: Age of Majority Act 1977 (Vic) s 3(1)

Persons under that age = minors

Different jurisdictions

NSW has legislation comprehensively dealing with contracts made by minors

Rest of Australia has mix of common law and statute

This unit looks at law of Victoria

Law differentiates between contracts:

Contracts which are binding absolutely on the minor (contracts for necessaries; contracts are legally binding even if the minor wishes to avoid it)

Contracts which are binding unless repudiated by the minor (ie contract is valid until the minor denies its validity)

Contracts which are only binding if ratified by the minor (ie upon turning 18, the person must declare himself / herself bound by the contract entered into as a minor)

Contracts which are void absolutely (ie never binding, cannot be ratified)

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Binding on minor - contracts for necessities Under the common law, contracts for the supply of necessary goods and

services are binding on minors

s.7 Goods Act (Vic) 1958: only must pay a reasonable price for those goods

“Capacity to buy and sell is regulated by the general law concerning capacity to contract and to transfer and acquire property: Provided that where necessaries are sold and delivered to a minor or to a person who by reason of mental incapacity or drunkenness is incompetent to contract he must pay a reasonable price therefore.

Necessaries in this section mean goods suitable to the condition in life of such minor or other person and to his actual requirements at the time of the sale and delivery”

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Binding on minor - contracts for necessitiesWhat are necessaries?

S.7: “necessaries in this section mean goods suitable to the condition in life of such minor or other person and to his actual requirements at the time of the sale and delivery”

Examples include:

– Food and drink to maintain life

– Services of a lawyer

– Medical services

– Apprenticeship

– Transportation: bicycle!!!

Consider: is a car a necessary?

If the minor already has an adequate supply, there is no necessity

The Goods Act (Vic) 1958 provides that a minor must pay a ‘reasonable price’ for necessaries ‘sold and delivered’ so an unperformed (executory) contract for goods may not impose an obligation upon the minor

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Binding unless repudiatedBinding contract unless repudiated - voidable

Some contracts are binding unless repudiated by the minor before they turn 18 or within a reasonable time of reaching 18. Such contacts are sometimes described as voidable at the option of the minorRepudiation – may be by words or conductIncludes contracts with continuous obligations, eg where a minor acquires a leasehold interest in landUncertain whether contracts for the sale and purchase of land will be binding unless repudiatedEffect of repudiation: generally a minor will not be liable for obligations in the future

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Contracts binding if ratified Other contracts (ie other than necessaries or contracts that have been

repudiated) cannot be enforced against minor unless ratified by minor after turning 18

At common law, ratification may be inferred from minor continuing to perform the contract

Legislation restricts the possibility of ratification: Supreme Court Act 1986 (Vic) s.50

Note that the contract may (even if not ratified) still be relied on and enforced by the minor by way of a damages claim (not specific performance)

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Limitations on ratificationSupreme Court Act 1986 (Vic) s 50:

(1) No proceeding can be brought to charge a person -

(a) on a promise made after full age to pay a debt contracted during minority; or

(b) on a ratification made after full age of a promise or contract made during minority.

(2) This section applies whether or not there was any new consideration for the promise or ratification

Note: a new promise supported by consideration and in the same form as a promise made during minority will be enforceable except in relation to a debt.

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Void contractss.49 Supreme Court Act 1986 (Vic):

“The following contracts entered into by a minor are void-

(a)contracts for the repayment of money lent or to be lent;

(b)contracts for payment for goods supplied or to be supplied, other than necessaries;

(c)accounts stated”

Common view: minor can enforce the contract. Not void in the ordinary sense

Same result as would have been applied under s.50 – contract cannot be ratified

s.51 Supreme Court Act 1986 (Vic):

(1)If a minor who has contracted a loan (a contract for the repayment of which is void under this

Division) agrees after full age to repay all or part of that loan, that agreement and any instrument

relating to it is, subject to subsections (2) and (3), void against everyone.

(2)…

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Mental Incapacity and Intoxication A contract made with a person with impaired mental capacity or a person who is

intoxicated may be voidable at the option of that person

The person seeking to set aside a contract on grounds of mental incapacity must show that:

– s/he was incapable of understanding the contract at the time that it was made; and

– that the other party to the contract knew or ought to have known of the incapacity

Exception: necessaries (s.7 Goods Act 1958 (Vic))

Contract may also be voidable on grounds of unconscionable conduct (covered in Contract B)

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Week 6 – private revision issuesCapacity

Minors

– What contracts are binding on minors?

– What is a contract for necessaries?

– What contracts are binding on minors unless repudiated?

– What types of contracts are binding on minors if ratified under common law? In Victoria?

– What types of contracts with minors are void under s49 of the Supreme Court Act?

– What is the effect of a contract being void or not binding? Can the minor still enforce it?

Persons with impaired mental capacity or intoxicated

– What is the status of a contract entered into with an intoxicated person or person with an impaired mental capacity?

– What about contracts for necessaries?

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