Contracts 101 – Part 9: Capacity
Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.
Having discussed the first two elements of the contract in the agreement, which consists of an offer (as distinguised from an invitation to treat) and acceptance, and secondly consideration, the discussion of Contracts 101 moves to the third element of the contract – capacity. This is a critical area to be aware of when entering into contractual arrangements because the capacity of a person or entity may dramatically affect the outcome.
Capacity is the legal ability of a person or corporation to enter into a contract. Corporations are legal entities in their own right… Saloman v Saloman (1897), in the fashion of an artificial person and so can also enter into contracts. Those incapable of being legally bound by contracts are considered disabled in certain situations and the list includes minors… Nash v Inman (1908); Doyle v White City Stadium Ltd (1935), people suffering mental illness, sentenced convicts (at least in Tasmania), the intoxicated… Blomley v Ryan (1956), and bankrupts.
In cases of necessities minors are bound by contract, taken on suitability of their lifestyle at the time rather than bare survival necessities… Sale of Goods Act s7(2). Common Law also allows contracts with minors for valid employment, training and education provided they are of benefit to the minor. However, up until shortly after turning 18 minors can repudiate a contract making it a voidable contract. Therfore, if you lend money to a minor or take an IOU then it is not enforceable.
Mentally ill and intoxicated people must prove that the other person was aware of their incapacity to understand what they were doing at the time. This means they were intoxicated to the extent they were not aware AND the other person knew this to be the case.
Also note that corporations require an agent to sign on their behalf due to their status as an artificial person created by legislation.
As you can see there is a lot to be said for thinking about who is entering the contract and their capacity. Particularly, you might show some restraint if you suspect the other person may be suffering from mental illness. By that I mean, beyond the legality of entering into that contract, you also have a moral obligation to society not to exploit people who walk into your business – for example, signing up a manic depressive for $3000 worth of non-refundable goods and services just to rack up a sale. Not only is that unethical, oneday it might come back with a fancy lawyer and cost you several years defending yourself in the courts. Is it worth the sale? Similarly, is it worth trying to exploit a minor when they may simply forfeit the debt?
Another point to take away from the capacity element of contracts is that when you deal with corporations you need to be sure that you are dealing with somebody appropriately authorised to act as an agent on their behalf.
The next installment of Contracts 101 will very briefly discuss the fourth element of the contract – legality of object. This covers the area of illegal and void contracts as well as restraint of trade.
Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.
Installments in Contracts 101
- Contracts 101 – Part 1: Outline
- Contracts 101 – Part 2: Which Contract?
- Contracts 101 – Part 3: The Six Elements
- Contracts 101 – Part 4: The Agreement
- Contracts 101 – Part 5: The Offer
- Contracts 101 – Part 6: The Acceptance
- Contracts 101 – Part 7: Battle of the Forms
- Contracts 101 – Part 8: Consideration
- Contracts 101 – Part 9: Capacity
- Contracts 101 – Part 10: Legality of Object
- Contracts 101 – Part 11: Possibility of Performance
- Contracts 101 – Part 12: Genuine Consent
- Contracts 101 – Part 13: Promissory Estoppel
- Contracts 101 – Part 14: Ending the Contract
- Contracts 101 – Conclusion: Protect your Business
