Law of Contract

Capacity of Parties and Assignment of Rights

Session 7
© NU 2019
Objectives
Explain the meaning of capacity at law
Explain the effect of contracts made by minors
Explain the effect of contracts made by persons with
mental disorder and by drunkards
Explain the effect of contracts made by corporations
Explain the effect of an assignment of rights
The Nature and Purpose of Capacity
The general principle of law is that anyone can bind
himself by a contract, as long as it is not illegal, or
void for public policy.
Exception to the Rule
There are however, exceptions to the general rule of
which the most important are contracts made by the
followings persons:
◦ Minors - those under the age of 18
◦ Mentally unsound or disordered persons
◦ Drunkards
◦ Corporations
Nature of Contract law
The policy behind the law of capacity to contract is to
protect the interests of persons who because of their
deficiencies or disabilities in their mental build up, are
not expected to be in a position to make sound
judgments concerning their own interests.
Nature of Contract Law
Also the law of contract is aimed at protecting certain
types of persons who may enter a contract either for
their own protection or for the protection of the party
who contracts with them.
It also avoids unfair advantage being taken by a party
in a superior position.
Persons with Capacity
The law distinguishes between natural persons and
artificial persons, the latter being corporation of
whatever type.
In case of natural persons there are three categories
who may be affected by capacity.
◦ Minors
◦ Drunkards
◦ Mental patients
Capacity and Minors’ Contracts
Minors’ contracts are divided into three categories
namely:
(1)Contracts that are valid and therefore enforceable
against the minor.
(2)Contracts that the minor may enter but can also back
out of if required and which are therefore voidable.
(3)Contracts that are unenforceable against the minor
and which in practical terms therefore may be difficult
for him to make.
Contracts Valid or Enforceable
Against Minors
A contract to supply a minor with necessaries is binding
upon the minor where the contract as a whole is for the
benefit of the minor.
In Chapple v. Cooper [1844] 3 M & W 252: A minor
whose husband had recently died contracted with the
undertakers for his funeral. She later refused to pay the cost
of the funeral, claiming her incapacity to contract.
The court held that she was liable to pay the bill. The
funeral was for her private benefit and was necessary as she
had an obvious obligation to bury her dead husband.
Necessaries
The word ‘necessary’ in this context is a very specific
legal term.
Section 2 of the Sale of Goods Act 1893 defines
‘necessaries’ as goods suitable to the condition in life
of such infant or minor or other person, and to his
actual requirements at the time of the sale and
delivery.
Nash v. Inman [1908] 2 KB 1
A Cambridge undergraduate, the son of an architect, was
supplied with clothes to the value of 122 pounds by a Savile
Row tailor. These included 11 ‘fancy waistcoats’ priced at 2
guineas each. While the court was prepared to accept that
the supply of such clothing could be appropriate to the
station in life of the undergraduate, the contract was still
held to be unenforceable because facts showed that the
minor was already adequately supplied with clothes.
Therefore those that the tailor supplied could not classed as
necessaries.
Nash v. Inman
While the court was prepared to accept that the supply
of such clothing could be appropriate to the station in
life of the undergraduate, the contract was still held to
be unenforceable because facts showed that the minor
was already adequately supplied with clothes.
Therefore those that the tailor supplied could not
classed as necessaries.
Peters v. Fleming (1840) 6 M & W 42
The minor was an undergraduate whose father was ‘a
gentleman of fortune and a Member of Parliament’,
rings, a breast pin and a watch chain were held to be
necessaries.
What is necessary varies according to the minor’s
background. Therefore, what is ‘necessary’ for the son
or daughter of CEO of a large public company may not
be a ‘necessary’ for the son of a driver in the same
company.
Section 3 of the Sale of Goods Act
provides 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 therefor’.
Thus a minor is only liable to pay for the goods that are
actually supplied. This may mean that executory
contracts are unenforceable.
Fawcett v. Smethurst [1914] 84 KB 473
The minor hired a car in order to transport luggage. A
term in the contract stated that a minor was to be held
absolutely liable for any damage to the car regardless of
how that damage was caused.
The court held that the contract was too onerous and
therefore unenforceable against the minor.
Beneficial Contracts of Service
A minor may need to support himself financially, and
therefore must have the capacity to enter contracts of
employment.
Such a contract would be prima facie valid and
therefore enforceable. However, from an early time the
courts accepted that the contract would be binding on
the minor only if, on balance, the terms of the contract
were substantially to the benefit of the minor.
Clements v. London and North Western
Railway Co [1894] 2 QB 482
the minor, Clements, was employed by the railway
company as a porter. Under the contract of employment, he
had given up his right to claim for personal injury under the
Employer’s Liability Act 1880 but had, instead, acquired
rights under an insurance scheme. Although, under the
insurance scheme, the payments were generally lower, it did
not require the injury to have resulted from the Employer’s
negligence. Clements was injured and claimed under the
1880 Act.
It was held that the contract as a whole was beneficial to
Clements. He was bound by it and could not claim under the
1880 Act.
Roberts v. Gray [1913] 1 KB 520
The defendant, a minor, with a view to becoming a
professional billiards player, had entered an agreement with
the plaintiff, himself a leading professional, to accompany
the plaintiff on a world tour.
The plaintiff spent time and money organising the tour, but
following a dispute the defendant refused to go. The
plaintiff sought damages of 6,000 pounds for breach of
contract.
The Court of Appeal held that the contract was for the
defendant’s benefit, being in the nature of a course of
instruction in the game of billiards. The plaintiff was
awarded 1,500 damages.
Doyle v. White City Stadium [1935] 1
KB 110
A minor who was a professional boxer entered into a
contract with the British Boxing Board of Control. The
contract provided that the minor would lose his ‘purse’
(the payment for the fight) if he were disqualified.
The agreement was held to be binding on the minor
since it was to encourage not only clean fighting but
also proficiency in boxing, and was therefore for the
benefit of the minor.
Chaplin v. Leslie Frewin (Publishers)
Ltd [1966] Ch 71
The beneficial principle was extended to a contract to
write an autobiography. This was held to be similar to a
contract for services and was beneficial to the minor,
and so was binding on him.
Since contracts for necessaries and beneficial
contracts of service are enforceable against the
minor, if the goods or services are not necessaries or
if the contract of service is not beneficial then these
contracts are voidable by the minor.
Beneficial Contracts of Service
In a contract which is not generally beneficial to the
minor, it will not be binding on the minor.
In other words where the contract is made up of terms,
which are predominantly detrimental to the minor, the
court will have no choice but to invalidate the contract
as a whole.
De Francesco v. Barnum (1890) 45 Ch
D 430
A 14 year old girl entered into a seven year
apprenticeship with De Francesco, to be taught stage
dancing.
By the apprenticeship deed the girl agreed she would
accept no professional engagements except with his
express approval. He was under no obligation to
maintain her or to employ her. In the event that he did
employ her, the scales of pay were set extremely low.
De Francesco’s
She was also obliged not to marry except with his
permission. Finally, De Francesco was able to
terminate their arrangement without notice whenever
he wished. When the girl was set to accept other work,
De Francesco’s action to prevent it failed.
The provisions of the apprenticeship deed were held to
be unfair by the court and therefore unenforceable
against her. They were not substantially for her benefit.
Voidable Contracts by Minors
This type of contracts made by minors refers to those
contracts which, though the minor might enter with perfect
validity, he may nevertheless avoid the contract by
repudiating his obligations under the contract while still a
minor or within a reasonable time after reaching the age of
18.
Voidable contracts are contracts that bind the minor until he
decides to reject them.
The minor must repudiate the contract before reaching the
age of majority, that is, 18, or within a reasonable time after
becoming 18. The main effect of repudiation is to release
the minor from all future liabilities or obligations.
Four kinds of contracts
Contracts to lease property

Contracts to purchase shares in a company

Contracts to enter a partnership

Contracts of marriage settlement.

Edwards v. Carter [1893] AC 360
A minor sought to repudiate an agreement under a marriage
settlement by which he agreed to transfer the money he
would inherit from his father’s will to the trustees under the
settlement. He tried to repudiate more than a year after his
father’s death and four-and-a-half years after actually
reaching the age of majority.
His argument that he was incapable of repudiating until he
knew the full extent of his interest under his father’s estate
failed. The court held that his repudiation was too late in
time to be reasonable.
Contracts Void and Unenforceable
Against Minors
The first section of the infants Relief Act 1874 provides:
“All contracts, whether by specialty or by simple contract,
henceforth entered into by infants for the repayment of
money lent or to be lent, or for goods supplied or to be
supplied , other than necessaries, and all accounts stated
with infants, shall be absolutely void”.
Under this section, all loans of money made to an infant are
irrecoverable, and any mortgage of land or goods executed
by him as security for the repayment of money lent is
absolutely void.
CAPACITY OF MENTALLY
DISORDERED PERSONS
In considering the capacity of mentally disordered
persons to contract, the first question for the court to
determine is whether at the time of contracting that
party was actually suffering from a mental disability to
the extent that he was incapable of understanding the
nature of his act when forming the contract.
If this is the case then the contract will be voidable by
the party with the mental disorder rather than void
Where necessaries are supplied to a person who is
suffering from a mental illness then section 3 of the
Sale of Goods Act will apply.
The person will be obliged, as usual, to pay a
reasonable price for the goods and it will not matter
whether the other party is aware of the disability.
CAPACITY AND DRUNKNESS
In Gore v. Gibson [1845] 13 M & W 621; 153 E.R.
260, it was held that a contract made by a person so
intoxicated as not to know the consequences of his act
is not binding on him if his condition is known to the
other party.
Matthews v. Baxter (1873) LR 8 Ex. 132
However, the party making the contract may later ratify
such a contract.
It was held that if the drunken party, upon coming to
his senses, ratifies the contract, he is bound by it.
Where necessaries are supplied to a drunken party or
person then section 3 of the Sale of Goods Act will
apply.
CAPACITY OF CORPORATIONS
A company may come into existence by registration
under the Companies Act, 2017, or by an Act of
Parliament.
The capacity of a company to make contracts is
regulated by law. The act of Parliament that establishes
a company would set out its contractual capacity.
Ultra Vires Doctrine
Ultra vires means beyond or outside the powers of the
company. A company’s articles of association is a document
which sets down the objects, functions and purposes of the
company.
Any contract that is made outside the company’s objects
will be ultra vires and void.
The doctrine of ultra vires is a means of preventing the
company from doing anything that was not empowered by
its objects clause.
Any ultra vires act would be void and therefore
unenforceable by either party to the transaction..
Ashbury Railway carriage Co v. Riche
(1875) LR 7 HL 653
The objects of the appellant company, as stated in the
memorandum of association, were ‘to make, sell or lend on
hire, railway carriages and wagons, and all kinds of railway
plant, fittings, machinery and rolling stock; to carry on the
business of mechanical engineers and general contractors; to
purchase, lease and sell mines, minerals, land and buildings;
to purchase and sell as merchants, timber, coal, metals or
other materials, and to buy and sell any such materials on
commission or as agents’.
The directors agreed to assign to a Belgian company a
concession which they had bought for the construction of a
railway in Belgium.
It was held that this agreement, since it related to the
construction of a railway, a subject matter not included
in the memorandum, was ultra vires, and that not even
the subsequent assent of the whole body of
shareholders could make it binding. Thus an action
brought by the Belgian company to recover damages
for breach of the contract failed.
Assignment
Assignment is the act of transferring obligations or
rights under a contract to another person, not a party to
the original contract.
Originally, the common law forbade the assignment of
rights or obligations under contracts, whereas equity
would permit them. So, statute stepped in to regulate
the apparent absurdity.
Robson and Sharpe v. Drummond
(1831)
Sharpe undertook to paint annually, and keep repaired a
carriage which he hired to Drummond for five years.
After three years, Sharpe retired, and he informed
Drummond that, henceforward, his partner Robson
would be responsible for the painting and repair.
Robson was not a party to the original contract.
Drummond, therefore, refused to accept this, and he
returned the carriage. HELD: He was entitled to do so.
Statutory Assignment
By the Law of Property Act 1925, Section 136, "any
absolute assignment by writing under the hand of the
assignor of any debt or other legal thing in action, of which
express notice in writing has been given to the debtor, is
effectual in law to pass and transfer from the date of such
notice:
(a) the legal right to such debt or thing in action;
(b) all legal and other remedies for the same; and
(c) the power to give a good discharge for the same without
the concurrence of the assignor".
Equitable Assignments
Equity does not insist on the formality of written notice
before the assignment of a debt or other "thing in action" is
valid. Plainly, it is sensible to do so – but not essential. In
equity, an assignor can assign a right arising under the
contract in two ways:
By transferring the right to receive something, be it payment
or the performance of the contract, to his/her assignee;
By instructing the other party to the contract (the debtor) to
discharge his/her debt to, or give performance to, the
assignee.