Chapter 3 Capacity

The chapter discusses the legal position of contracts formed by minors, now
under 18 previously under 21, mentally incapacitated, this includes both having
permanent mental disability or incapacity caused by drunkenness and
Corporations.
Topics Covered:
Minor
Mentally Incapacitated
Corporations
Minor:
A contract made by minor is not void; and although the minor is not normally
bound, the other party will be bound by the contract made with a minor.
The basic common law rule is that a minor is not bound by a contract which
enters into during his minority (minority means his age before he turns 18).
This general rule is subject to three principal exceptions.
1: Contracts for the supply of necessaries
2: Employment or other similar contract which are beneficial for minor
3: Contracts valid unless repudiated at majority e.g. contracts to acquire shares
in a company.
Exception 1: Contracts for Supply of Necessaries are Binding on Minor
(Enforceable)
The first exception to the rule that contracts are not enforceable on minor is the
contract for the supply of necessaries. Common law adopts a broad definition of
necessaries
Under the Sale of Goods Act 1979 s. 3(2) necessaries means goods suitable to
the condition in life of the minor or other person concerned and to his actual
requirements at the time of sale and delivery.
Court will assess the need of that particular good/service, whether it can be
considered a necessary for a person of that particular status. This means that
higher the status of a minor more things can be included in his necessaries.
Court is particularly interested in two things when defining necessaries.
1: The goods are of general use for that particular minor.
2: At the time of contract the minor should not already possess adequate supply
of that good.

If the above the two conditions are fulfilled then it is considered a necessary for
a minor and thus binding him legally.
The purpose of common law rules relating to minor is not to avoid contract but to
protect minors from any harm. The above Sale of Goods Act 1979 definition of
necessary serves the following two purposes:
To allow minors to enter into contracts beneficial to them
To prevent unscrupulous businesses from taking advantage of their youth
and inexperience.
Generally minors are bound for their consumer contracts and not bound by
commercial contracts.
Case: Nash v Inman (1908)
Here a tailor sued a minor to whom he had supplied clothes, including 11 fancy
waistcoats. It was decided that, as the minor was an undergraduate at
Cambridge University at the time, the clothes were suitable according to the
minor's station in life. Unfortunately for the tailor, however, it was further
decided that they were not necessary, as he already had sufficient clothing.
Minors are only under a legal obligation to pay for things necessary for their
maintenance although even then they will only be required to pay a reasonable
price for any necessaries purchased - so no contact was enforceable.
The same rule is adopted for necessary services that the contract will be upheld
if the services involve a necessary service.
Case 2: Chapple v Cooper
A minor whose husband had recently died contracted with undertakers for his
funeral. She later refused to pay the cost of the funeral, claiming her incapacity
to contract. The court held her liable to pay the bill. The funeral was for her
private benefit and was a necessary as she had an obvious obligation to bury her
dead husband.
Even if the contract fulfils the tests of necessaries, if the court finds the
contract prejudiced or onerous against the minor, it will not be enforceable
against him.
Case: Fawcett v Smethurst (1914)
A minor was held not to be bound by a contract for the hire of a car, even though
it was a necessary service in this case, because the contract included a term
making him liable for damage to the car in any event that is, whether or not
the damage was his fault.
Exception 2: Eomployment and Other Similar Contract Beneficial for
Minor are Binding for the minor (enforceable):

The second exception to the rule that contracts are not binding on minors are
those contracts which involve employment or other similar contracts and are
generally beneficial to the minor.
Case: Francesco v Barnum (1890)

A 14 year old girl entered into a 7 year apprenticeship with DeFrancesco to

be taught stage dancing. By the apprenticeship deed the girl agreed that
she would be at DeFs total disposal during the 7 years

Onerous conditions
1) She would accept no professional engagements except with DeFs express
approval.
2) He was under no obligation to maintain her or to employ her.
3) Payments were extremely low.
4) She cannot marry without with his permission.
5) DeF may terminate their arrangement whenever he wished.
The girl accepted other work but DeFs action failed to prevent it. The Court held
that the apprenticeship deed were unfair and unenforceable against her. They
were not substantially to her benefit.

Conclusion:

Contracts for necessaries and beneficial contracts of service such as

employment are enforceable against the minor

If goods or services are not necessaries or the contract terms are

detrimental to the minor contracts will be voidable.

Exception 3: Contracts Valid unless Repudiated at Majority e.g.

Contracts to Acquire Shares in a Company:
There are certain contracts that are valid and binding upon the minor
(enforceable) unless he repudiates liability before majority or within a reasonable
time thereafter. Once a reasonable time has passed after majority the agreement
will be binding and enforceable on the person who made the contract as minor.
This option of repudiation is only available with the minor and not with the adult.
At all times such contracts remain enforceable for adults before their repudiation
by the minor.
Example: If a minor acquires an interest in land or purchase shares in a company.
Similar to this a partnership agreement where minor is a party will also remain
voidable.
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For the repudiation of contract to be effective, it should be followed by complete

surrender of interest in the property/shares. The minor will not receive his
payments back unless there has been total failure of consideration against those
payments.
Case: Where there is total failure of consideration: Corpe v Overton
(1833)
Minor agreed to enter into a partnership which would be formed in the future, he
paid a 100 deposit which would be lost if he did not get through with it. He
repudiated the contract. It was held that he was entitled to have the 100 deposit
returned because there was no consideration as he had received nothing in return.

Case: Where there was consideration: Steinberg v Scala (Leeds) (1923)

A minor brought shares in Scala, the shares were not fully paid up, and the issuing
company could demand the rest of the payment latter. They didn't but Ms S paid a
further 250. She later rejected the contract and wanted her 250 back. Her claim
failed, held, termination meant free from future obligation but not instilled to 250
because she had not been a total failure of consideration as she had received the
shares in return for her money.

Mentally Incapacitated:
This section covers people suffering from mental disability which covers both mental
illness and mental handicap. In addition to mentally disable person the section also
covers the validity of contracts made in a state of drunkenness.
Legal Principle:
Contract made with someone mentally incapacitated will be valid unless at the time
when the contract is made, the person is incapable of understanding the nature of
the transaction and the other party knows this. In such circumstances the contract is
voidable: the party suffering from mental disability or drunkenness can choose
whether or not to terminate it.
Where one party is incapable, through drunkenness or mental disability, of
understanding the nature of the transaction, but the other party does not realise this,
the courts will ignore the incapacity
Case: Hart v OConnor (1985):
Jack O'Connor sold a farm to Hart. Jack was 83 and of unsound mind, but Hart did not know this and
was fair in his negotiations with Jack's solicitors. Hart occupied and improved the land. When one of
the Jack's brothers (Joseph O'Connor, the respondent) took over as trustee of the estate he sought to
set aside the contract. O'Connor was successful at trial, which Hart appealed.

Corporations:
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1: Companies Registered/Incorporated under the Companies Act 1985:

A company incorporated under the Companies Act 1985 has separate corporate
personality, i.e. it is a legal entity independent of the identity of its respective
members.
For such a company, its contractual capacity is currently limited by the scope of
its object clause (the objects for which it was set up, as set out in the
memorandum of association). A company which acts outside its object clause is
said to be acting ultra vires (outside its capacity). Contracts which were ultra
vires the company were held to be void (CASE: Ashbury Railway Carriage and
Iron Co v Riche (1875)).
The recent Company Law Review recommended that companies should be given
unlimited capacity by means of a statutory provision to this effect. Clause 18 of
the Company Law Reform Bill 2005 provides that a companys objects are
unrestricted unless the articles specifically restrict them.

2: Limited Liability Partnerships:

Limited liability partnerships are corporate bodies (registered under s. 1(2) of the
Limited Liability Partnership Act 2000) i.e. they have separate legal personality
and they already have the unlimited capacity proposed for registered companies
(s. 1(3)).