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Law

Contract Law A - LAW2101


Semester 1, 2014
Stream 5
Jennifer 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 contract
With 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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Minors
Who 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 necessities
What 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 repudiated
Binding 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 minor
Repudiation may be by words or conduct
Includes contracts with continuous obligations, eg where a minor acquires a
leasehold interest in land
Uncertain whether contracts for the sale and purchase of land will be binding
unless repudiated
Effect 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 ratification

Supreme 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 contracts
s.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 issues
Capacity
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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