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CAPACITY TO MAKE A CONTRACT

In order for a contract to be valid and enforceable, the party to it must have the legal capacity
to enter into a binding agreement. S. 11 of the Contract Act 1950 provides that in order for a
party to be competent to contract, he must be of the age of majority, of sound mind and is not
disqualified by law from making a contract. In Malaysia, S. 2 read together with S. 4(c) of the
Age of Majority Act 1971 provides that the age of majority in Malaysia shall be 18 years
unless there is a provision in a specific written law which fixes a different age of majority for
the purpose of that specific written law. A contract with and by minor is void ab initio as has
been made clear by the Privy Council in the case of Dharmodas Ghose v Mohiri Bibi [190,
30 Ca. 539] except in certain circumstances 1. S.12 of the Contract Act 1950, which elaborates
on the requirement of sound mind, provides that a person is said to be of sound mind if at the
time of making it, he is capable of understanding it and is sufficiently rational to judge the
contracts effect upon his interests. Finally, a person wishing to contract must also not be
disqualified by law from doing so. This is illustrated by S.109 (1) (m) (ii) of the Malaysian
Bankruptcy Act 1967 which disqualify a bankrupt person from generally enter into any
contract in furtherance of any trade or business without the consent of the Director General of
Malaysia Insolvency Department.
The position is equally the same under the Australian law where age of majority, soundness
of mind and disqualifications under any law will have bearing on the competency of a person
to enter into a contract. Various legislations in Australia provide that a person has capacity to
contract when he reaches 18 years of age 2.Initially, the age of majority was 21 years at
common law but statutes in all states and the Australian Capital Territory (ACT) have
reduced the bar to 18 years of age3. In Australia, contracts which are entered with minors are
not enforceable against them except in two classes of contracts. The first are contracts for
goods and services which are reasonably necessary such as food, clothing and
accommodation. Another are beneficial contracts of service e.g. contracts for employment,
education, apprenticeship and training contracts which are for the minors benefit and not
oppressive4. Unsoundness of mind due to mental illness and intoxication will also render the
afflicted person incompetence to enter the contract at the time he is mentally ill or intoxicated
1

Mathur, S.B. (2010). Business Law. New Delhi : Tata McGraw Hill, p.45

Latimer, P. (2009) Australian Business Law 2009, Australia : CCH Australia Ltd, p. 327

Healey, D. (2009) Sport and the law, Sidney : University of New South Wales Press Ltd, p. 255
Supra, note 2, p. 328

and such a contract is voidable by him thereafter subject to certain conditions 5. In Australia, a
bankrupt person may make a contract, however legislation may restrict the nature of contracts
a bankrupt person may enter into (for example, the limit of credit they may obtain) and makes
it a punishable offence for a bankrupt person to enter into some types of contract without
disclosure of his status as a bankrupt6.

REFERENCES
5

Supra, note 2, p. 332


Clarke, J. (2010), Capacity to contract, [Online], available at
http://www.australiancontractlaw.com/law/formation-capacity.html (accessed on 05 January 2011).
6

Malaysian Contracts Act, 1950


Malaysian Age of Majority Act, 1971
Malaysian Bankruptcy Act, 1967
Mathur, S.B. (2010). Business Law. New Delhi : Tata McGraw Hill
Latimer, P. (2009) Australian Business Law 2009, Australia : CCH Australia Ltd
Healey, D. (2009) Sport and the law, Sidney : University of New South Wales Press Ltd
Clarke,

J.

(2010),

Capacity

to

contract,

[Online],

available

at

http://www.australiancontractlaw.com/law/formation-capacity.html (accessed on 05 January


2011)