Capacity, Genuine Consent &

Legality

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 What is Capacity?
• The ability of a party to fully understand the
rights and obligations of an agreement they
have made.
• Various groups are presumed by law to have
no capacity or limited capacity. This means
contracts they make may be completely or
partially unenforceable.

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 Minors
• A minor is somebody under 18 years.

• Under common law, they have a limited

capacity to enter contracts.

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Valid Contracts with Minors

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 Valid Contracts with Minors
Under common law 3 types are valid:
1. Contracts for cash.
2. Contracts for necessaries: Parties trying to
enforce contract must prove goods or
services not paid for were necessary:
a) For minor’s existence e.g. food; basic
clothing, and
b) Given minor’s circumstances.

 See Bojczuk v Gregorcewicz, p 317.

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 Valid Contracts with Minors
3. Beneficial Contracts of Service: e.g.
apprenticeships. These contracts must
provide ‘an overall benefit’.
• See Roberts v Gray, p 318.

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Voidable Contracts with Minors

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Ratification of Contracts by Minors
Under Common Law:
• Business contracts and contracts for non
necessaries are void (invalid) unless minor
ratifies (approves) them soon after becoming
18.

• Different state laws regarding ratification of

debts by minors.

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Ratification of Void Contracts

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Ratification of Void Contracts
Contracts are void if they involve:
• Trade (business), or

• Supply of non-necessities.

• But valid if ratified (approved) in reasonable

time after the minor becomes adult.

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Mentally Unsound and Intoxicated
Persons
• They are legally bound by contracts they
enter unless they can prove:
They did not understand what they were
doing, and
Other party was aware, or should have been
aware, of their condition.

 See Hart v O’Connor, p 325.

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Mentally Unsound and Intoxicated
Persons

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 Capacity of Companies
• May enter contracts but not for personal
service e.g. companies cannot be employees.
• Parties who contract with a company knowing
the company or its representative lacks
authority cannot enforce the contract. See Ch
5.
• NB. Companies no longer required to have a
memorandum.

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 Bankrupts
• Cannot enter into contracts worth more than
$4000 approx. unless they declare their
bankruptcy.

• Cannot act as a director of a company while

bankrupt.

• Other restrictions also apply. See Ch 22.

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 Genuine Consent
• Parties to a contract must genuinely agree about
nature & scope of the contract.
• If one party does not consent, contract could be:
• Void
 Contract not valid.
 No legal obligations.
• Voidable
 Contract may be terminated.
 Damages available.

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5 Main Causes for Absence of
Consent
1. Mistake common, mutual, unilateral,
and nature of document.
2. Misrepresentation: Fraudulent, innocent
and negligent.
3. Duress (pressure)
4. Undue (too much) influence.
5. Unconscionable conduct.

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Mistake

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Common Mistake

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 Common Mistake
• Same mistake made by both parties.
Pritchard v Merchant’s Mutual Life, p. 332.
A life insurance contract was void because it
covered a dead man. Both the person paying
the premium and the insurance company
wrongly believed the person insured was alive
when they made their agreement.
• Contract usually void.

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 Common Mistake
• No common mistake if:
One party reasonably relied on the other’s
representation (promise) that the subject
matter existed. Mcrae v Commonwealth
Disposals Commission, p 333.
 (Sunk Oil Tanker)
Mistake concerned with quality or
character of subject matter. Leaf v
International Galleries, p 333.
 (Painting art – work of famous painter Constable)
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Mutual Mistake

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 Mutual Mistake
• Each party makes a different mistake.
• Contract void.
• No damages awarded.
• See Raffles v Wichelhaus, p 334. Supplier & buyer
agreed to send goods on ship ‘Peerless’. Supplier
sent by wrong ship. Wichelhaus believed the ship
to depart in October and the Seller Raffles believed
the ship departing in December. Buyer refused to
accept. Supplier suffered loss. – no contract.

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Unilateral Mistake

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 Unilateral Mistake
• Only one party mistaken. Party A knows party
B is mistaken about a term of contract or identity
of B, but says nothing.
• Contract usually void.
• Unilateral mistake regarding a term.
If contract written - contract may be voidable.
Taylor v Johnson, p 334.
 10
acres of land for $15,000, whereas, the seller
knew the contract was $15,000 per acre = $150,000

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 Unilateral Mistake
Unilateral Mistake Regarding Identity
• Since contract is void, goods sold by A (deceptive
party) to innocent 3rd party can be reclaimed by B.
Cundy v Lindsay, p 335.
• When Mr Blenkarn ordered goods from Lindsay by mail,
he claimed to represent a well-known business firm,
Blenk-iron & Co, and gave address similar to theirs. After
Lindsay delivered goods to that address, Blenkarn failed
to pay and sold goods to Cundy, who knew nothing of the
fraud. Lindsay sued to recover the goods from Cundy.
• The Court held that Cundy has not acquired good title
because the apparent contract between Lindsay and
Blenkarn was void on the grounds of unilateral mistake.
Lindsay had intended to do business with Blenk-iron &
Co, not Blenkarn.

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Quiz:
Assume you look very similar to Orlando Bloom
(actor), and you are in possession of a stolen cheque.
You intend to buy a car from Jeffery. Jeffery, requested
for your identification, which you provided as a letter
signed by a JP with no stamp. Jeffery proceeds with
the sale, and by the time he had discovered the
cheque was stale, you had already sold the car to
Habibi. Jeffery goes to police to complain about this
matter and comes for advise, if he can recover the car
from Habibi?

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• If A and B meet face to face & B ‘intended’ to deal with
other party contract may be voidable. This gives A the
right to pass good title to innocent third party.
 See Lewis v Avery, p 336. A car bought from B & legally sold it to
an innocent third party before B rescinded the contract.
• Contract may be voidable if A and B meet face to face
& B (mistaken party) ‘intended’ to deal with other
party.
• Until contract rescinded (withdrawn) A may have
right to pass good title to innocent third party.
 See Lewis v Avery, p 336. Swindler posing as actor bought car
from Lewis & legally sold to Avery before contract rescinded

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 Unilateral Mistake
Lewis v Averay [1972]
• A swindler posing as Richard Greene, a well-known actor,
purchased a car from Lewis with a stolen cheque. Lewis
accepted very poor identification, but the swindler did
look like Greene. The car was then sold to an innocent
third party, Averay, before Lewis discovered that the
cheque had been dishonoured. He sued Averay to recover
the car.
• Court held that Lewis intended to deal with the person in
front of him at the time and confirmed this by letting the
car be driven away before clearing the cheque. There, was
therefore, no unilateral mistake. The contract was
voidable and the title had been passed to Averay before
rescission. Lewis could not recover the money.

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Unilateral Mistake

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Mistake about Nature of Contract
Document

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Mistake about Nature of Contract
Document
• Party signs contract fundamentally different from one
they believed they signed.

• Contract void if innocent party suffered severe

disability e.g. blindness, illiteracy. PT Ltd v Maradona
Pty Ltd; Petelin v Cullen, p 337.
‘Not my deed’ – non est factum
There is severe disability, such as blindness or illiteracy,
which forces one to rely on others advice about what they
are signing.
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 Misrepresentation
• A false statement about past or present facts – not
future facts.
• Made with intention of inducing (persuading) other
party into contract.
• Induces the other party into the contract.
NB: These common law actions largely
replaced by actions under consumer
protection legislation.

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3 Types of Misrepresentation

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 Fraudulent Misrepresentation
• Also known as “false misrepresentation”.
• Party making representation knew it was false,
or was reckless with the truth.
• Other party suffered losses by relying on it.
• Remedies:
 Contract voidable.
 Damages available.

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Innocent Misrepresentation
• Party making representation did not know it
was false, and was not reckless about truth.
• Other party relied on the representation.
• Other party does not need to have suffered
losses for innocent misrepresentation to
occur.
• Remedies
Contract voidable.
No damages payable, even where other
party has suffered losses.

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 Negligent Misrepresentation
• Also known as “negligent misstatement”.
• False statement made unintentionally by party
claiming special knowledge/skill.
• Party making representation did not issue
disclaimer.
• Reasonably foreseeable it would be relied upon.
• Other party relied upon it.
• Losses suffered.

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Negligent Misrepresentation
• Remedies
 Negligent misrepresentation is a tort action.
 Damages available.

• See Esso v Mardon, p 339. Mardon leased

service station based on incorrect statistics
supplied by Esso (without checking their
accuracy) and sued for resulting losses. Court
ruled he was entitled to rely on Esso’s
expertise. Awarded damages.

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 Duress
• Illegal pressure to induce (persuade) a person
to enter a contract.

• Remedies
Contract voidable and
Unenforceable.

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 Duress
3 categories
1. To a Person
• Violence or false imprisonment (or
threat to do either). Contract void if
duress only one reason for entering a
contract. Barton v Armstrong, p. 340.
2. Duress to Goods
3. Economic Duress

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 Undue Influence
• One party is induced to enter a contract
because of the influence of a stronger party
who receives a benefit from the contract.

• Remedies:
• Rescind contract; damages.
• Right to rescind may be lost if plaintiff takes
too long to commence action. Allcard v
Skinner, p 341.

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 Legality
• A contract is not valid if its object (purpose) is
unlawful.
• Unlawful contracts can be classified as illegal
or void by law.
Illegal Contract: Totally void, unenforceable,
often attract penalties.
Void Contract: Do not attract penalties, can
be valid if the void term is severed.
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Unlawful Contracts

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Contracts Illegal under Common Law
• Agreements that provide serious threats to public
good are illegal and therefore unenforceable.
Includes contracts that:
 Cause a crime, tort or fraud to be committed.
 Promote corruption in public life.
 Prejudice (harm) administration of justice.
 Defraud government of revenue.
 Prejudice public safety.
 Sexually immoral.

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Contracts Void under Common Law
• Less serious threats to the public good.

• Two main types.

Attempts to prevent the administration of
justice.
Contracts in restraint of trade.

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 Restraint of trade
• Contracts with ‘restraint of trade’ clauses are void
unless they are:
Reasonable, and
In the public interest - society will benefit or not
suffer a loss.
• Court will consider
Type of trade or business.
Geographical extent.
Time duration.
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Restraint of Trade

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 Restraint of Trade: Employment
• Contracts that restrict activities during and after
employment can be valid if:
 They are reasonable measures to protect the employer.
 Not intended to limit competition.
• See A Schroeder Music Publishing Co Ltd v
Macaulay, p 354. Contract not valid because
harsh and unfair, not protecting legitimate
interests and due to employer’s superior
bargaining power.

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Restraint of Trade: Employment
• Post employment contracts:
Most restraints relate to time duration and
geographical areas.
Employers often fail to prove clauses are
reasonable and in public interest.
 See:
 Attwood v Lamont, p 355.
 Arnott’s Ltd v Bourke, p 355.

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Contracts for the Sale of Business
• Clauses that restrain the seller from competing
with the purchaser for a specific period and
within a specific area are valid:
If they are reasonable and
Do not harm the public interest, particularly
in regard to beneficial competition.
• Nordenfelt v Maxim Nordenfelt Guns and
Ammunition Co, p 356.

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Contracts Illegal by Statute
• Contracts that breach statutes that uphold
important public policy will be illegal if:
 The contract is expressly prohibited.
 The contract is illegal by implication.
• Can be:
 Illegal at formation e.g. from time it was made.
 Illegal after formation, because one of both parties
performed the contract in a way prohibited by
statute.

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 Contracts Void by Statute
Innocent parties to void contracts may
enforce their rights in two situations:
1. If the stature did not intend to deprive
parties of rights.
2. If the contract was only ‘partially void by
statute’ against a particular class of person
e.g. Commissioner of Taxation.

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