Chapter 2C:

Formation of
Contract -LEGAL
CAPACITY
 1. Why legal capacity is important to a
contract?

If a person enters into what is supposed to be a contract,

but he does not have the capacity to do so,
unenforceable agreement.

Legally, he will not be able to demand that the promise(s)

made to him under the agreement to be fulfilled.
 2. Who are those with capacity to
contract?

 According to Sec.11, CA 1950, any person who is

able to satisfy 3 criteria shall have the legal
capacity person to enter into a contract.
 The criteria are :-
• Attainment of the age of
1. majority

• Possession of a sound mind

2.

• Not being legally disqualified

3.
3. What do the 3 criteria in Sec 11,
Contracts Act 1950 mean?
A) Attainment of the age of majority
 age of majority 18 years old.

 This means that persons who are not yet 18

years old (referred to as minor) will not
satisfied this criterion.
 Minors
1. Minors are a group that do not meet section 11 because
they have not attained the age of majority (i.e., 18 years)

2. Section 2, Age of Majority Act 1971 – Subject to section 4,

the minority of all males and females shall cease and
determine within Malaysia at the age of eighteen years and
every such male and female attaining that age shall be of
the age of majority

(Note: Section 4 provides for exceptional cases where the

legal capacity of a person is determined differently, but
cases involving contracts are not within the exceptions)
NOTE:

But minors are NOT ABSOLUTELY INCAPABLE

of entering into any contract.

Minors are able to make CERTAIN

CATEGORIES OF CONTRACTS
 If minors are not totally
prevented from entering into
contracts, what are the
contracts they may enter
into???
 minor is allowed to enter into certain classes of
contract, they may said to have “LIMITED” legal
capacity.

 Basically minors are allowed to enter into 5 classes of

contracts.

1. Contracts of 2. Beneficial 3. Contract for

employment contracts necessaries

4. Life
5. Scholarship
insurance
contracts
contracts
Under these exceptions, the contracts become
valid and binding, even though the contracting
parties are minors. The minors can enforce such
contracts and also bound to any obligations or
contractual terms of the agreements.
Whenever there is a breach, minors can sue or be
sued under such contracts.
i. Contracts of Employment
 Is an agreement that specifying terms and conditions under
which a person (employee) consents to perform certain duties
as directed and controlled by an employer in return for an
agreed upon wages and salary.

Children & Young Persons Act 1966: Any child or young person
shall be competent to enter a contract of service..otherwise
than as an employer
Child: below 14 years
Young person: 14 to 16 years
Contract of service (not as an employer)
Employment – performance of tasks as a servant
(employee) for reward
Apprenticeship – performance of tasks as an apprenticeship
(trainee) to learning a skill
i. Contracts of Employment

Minors above 16 years: capacity is implied and also

exists if employment is beneficial
(refer Clements v London & N.W.Railway)
Clements v. London and North Western
Railway
A minor entered into a contract of employment in which he
agreed to participate in the insurance scheme of his employer
and will not sue his employer under the Employers’ Liability Acts.

The minor was injured, but because the employer’s insurance

scheme would result in a smaller payment to him, he decided to
sue the employer under the Acts.

HELD : the minor would be bound by the terms of his

employment contract as he had the capacity to enter into it.
 ii. Beneficial Contracts
 A contract that is on the whole beneficial to a minor.

 A minor is allowed to enter into a contract that is

considered beneficial to him/her
(See Roberts v. Gray)

 A minor is not allowed to enter into a contract that is

considered not beneficial to him/her
(see De Francesco v Barnum)
 Roberts v. Gray
A professional billiard player agreed to train a minor, who
was also a billiard player, and he made arrangement for the
minor’s benefit. Later, some disputes took place between
them and the minor decided to break their agreement. The
professional billiard player sued the minor.

HELD : the minor was liable to pay damages as the

agreement was a valid contract, it being beneficial to the
minor as a whole.
 DeFrancesco v Barnum
 A fourteen-year-old minor bound herself by an apprenticeship deed in
which she would be taught stage dancing for seven years. She agreed,
inter alia, that she would entirely be at the disposal of her master and would
not accept professional engagements elsewhere without the master's
permission.

 In addition, she would get no pay unless he actually employed her, which
he was not bound to do. The master further reserved the right to send her
abroad and the master could terminate the apprenticeship if, after a fair
trial, he found her unsuitable for stage dancing.

 The minor accepted a professional engagement with the defendant without

the master's consent.

 It was held, by Fry J., that the master could not sue the defendant for
inducing a breach of apprenticeship deed, as it was unreasonable harsh
and thus invalid
 iii. Contract for Necessaries
• It is important to note that “necessaries” and not “necessities”.
• If an item qualifies as a necessary in relation to a minor, then that
minor has the legal capacity to enter into a contract to buy that
item.
• Necessaries are NOT the to be confused with necessities
• Necessaries – Things suitable to the station in life of a minor and
for which there is a real need.
•Issue of “suitability” to that minor after having regard to his station
in life.
◦ Ryder v. Wombwell
◦ Elkington v. Amery
• Issue of “real need” – Nash v. Inman
i. Whether it is suitable to that minor after having regard to his
station in life.

Ryder v. Wombwell
Wombwell, who was from a wealthy family, received a yearly
allowance of £500. Ryder sold a pair of solitaires worth £25 and an
antique goblet worth £15 to Wombwell, who was going to give them
away as presents. When Wombwell failed to pay for them he was
sued by Ryder.
HELD : the action of Ryder would fail as the solitaires and the goblet
were not necessaries. In spite of his wealthy background, they were
not suitable to his station in life.

Elkington v Amery
The defendant a wealthy minor , purchased 2 items of jewellery and
a gold vanity bag. The jewellery comprised 2 rings which the court of
appeal held to be necessaries as an engagement and a wedding
ring for his fiancée. The gold vanity bag was held not to be a
necessary.
 ii. Whether he has an actual need for the item.
Nash v. Inman (1908)
Nash, a tailor, had supplied Inman, an
undergraduate, a large quantity of clothes
(including 11 fancy waistcoats) when Inman failed
to pay the price for the clothes supplied, Nash
sued him.

HELD : Inman would not be liable as there was

evidence that he had no actual need for the
clothes. He already had an adequate supply of
clothes suitable to his station in life. In other
words, the clothes supplied by Nash were not
necessaries
 iv. Life insurance contracts
The legal effects of Sec.153, Ins. Act 1996 can be described as follows:

- Sec.153 (1) Ins. Act 1996:

- Minor age bet. 10 years old & below 16 years – may enter into a contract of life
insurance with the consent of his parent/guardian “conditional” legal
capacity on a minor

Section 153. Capacity of minor to insure.

(1) Notwithstanding any law to the contrary, a minor who has attained the age of
ten years but has not attained the age of sixteen years, with the consent in writing
of his parent or guardian-

(a) may effect a life policy upon his own life or upon another life in which he has an
insurable interest; or

(b) may assign the life policy on his own life.

iv. Life insurance contracts

(2) A minor who has attained the age of sixteen years-

(a) may effect a life policy upon his own life or upon another
life in which he has an insurable interest; or

(b) may assign the life policy on his own life,

*Due to this, the minor is bound to observe all the terms of the
insurance policy. He himself is bound to pay the reasonable
insurance premium as required by the policy.
*The minor also entitled to whatever benefits as promised by
the insurance policy.
Minors below 10 years- The Ins. Act 1996 does not have
any provision relating to the legal capacity of a minor
who is below 10 years old. The absence of such provision
may be interpreted to mean that the law has no intention
of giving a minor such a tender age legal capacity to
effect life insurance. - No capacity

NOTE: We are talking about LIFE INSURANCE here. The

position of the legal capacity of a minor in relation to
general insurance is not all affected by the section 153
Ins. Act 1996
 Note: (Section 153, IA 1996)
The provisions pertaining to the legal capacity of a
minor to enter into a contract of life insurance under
section 153 of the Insurance Act 1996 is no longer in
force. It has been repealed and in now replaced by
paragraph 4 of Schedule 8 of the Financial Services
Act 2013, which contains similar provisions
v. Scholarship Contracts

Minors may enter into scholarship contracts under the Contracts

Amendment Act 1976

Scholarship agreement not invalid by reason of minority

Scholarship includes loan, award, sponsorship, leave or facility for

the purpose of education

The scholarship is provided by the federal or a state government, a

statutory body or educational institutions.

Minors may enter into scholarship contracts where they are

beneficial.
Government of Malaysia v
Gurcharan Singh
The defendant furthered his studies in UK by
scholarship from the government. One of the condition
for the scholarship that is that he has to work with the
government for the period of 5 years. After working for
3 years and 10 months, then the defendant decided to
quit the job. The plaintiff sued for breaching the
contract. The defendant claimed that the scholarship
contract was void since he entered in while he was 17
years old.
Held: the contract was valid because it was a
scholarship contract. Education is a necessity to a
minor nowadays.
ii. Possession of a Sound Mind
A sound mind implies a normal functioning of mind.
1. Section 11, CA ’50 refers to “sound mind.” Thus, a
person with unsound mind fails to meet this
stipulated condition.
2. But, not all persons with mental abnormalities (e.g.,
insanity, being drunk, eccentricity, etc.) are
considered to be of unsound mind
3. Section 12(2) and (3) – A person who is usually of
unsound mind may enter into a contract when he is
of sound mind & vice versa
 Eg. an eccentricity(odd behavior) in itself does not
prevent a person from entering into a contract.

 Referring to Sec 12(1), CA 1950 a person is only

deemed to be of unsound mind (and thus unable to
enter into contract) if at the time of entering into the
contract, he is unable to
i) Understand the agreement
ii) Also form a rational judgment as to its effect on
his interest
C) Not Being Legally Disqualified
Two cases of disqualification are important:

1.Bankrupt 2.Ultra vires

persons transactions
i. Bankrupt person
 A person who is a bankrupt is LEGALLY
DISQUALIFIED from entering into any transactions
to dispose of his property.

 The power to dispose the property of a bankrupt will

be vested in the trustee in bankruptcy.

 Any contract of sale personally entered into by a

bankrupt person that affects his property will be
invalid as a result.
ii. Ultra vires transactions

 Companies registered under CA 1965 are allowed to carry out

transactions as permitted by the objects described in their
Memorandum of Association.
 Companies may have no legal capacity to enter into contracts
that are ultra vires (i.e., beyond its power, as determined by its
objects)

 E.g. :
MEMORANDUM OF ASSOCIATION of
IJM CORPORATION BERHAD
 (6) To carry on the trade and business of land developers, builders,
and contractors for, construction of houses, flats, factories,
workshops, commercial office, industrial and other buildings,
roads, bridges, canals, reservoirs, sewerage, drainage,
sanitation and conveniences of all kinds
 A company is prohibited from indulging in transactions outside
its prescribed objects (Memorandum of Association)

 Such transactions are termed ultra vires, which means they are
“outside the power” of the company.

 Generally, a company is not allowed to enter into a contract

which is not within the scope of its objects.

 Companies have no legal capacity to enter into contracts that

are ultra vires (eg. Act 125 Companies Act 1965 Section 20
Ultra Vires Transaction)
 REFERENCES
Legal principle (2015), The Malaysian Insurance Institute, 1 st Edition.