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Lack of legal capacity is a legitimate means to avoid accountability under an otherwise binding contract.” Discuss Essay Example

  • Category:
    Law
  • Document type:
    Essay
  • Level:
    Undergraduate
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Legal Capacity

The parties to a contract should possess contractual capacity for the contract to exist. Certain categories of individuals do not have the required capacity to form contracts. The contracts formed by such persons are, as a result, unenforceable against them. The outcome, in many instances, of fear of being prone to exploitation has given rise to lack of capacity.1 This is an area that involves considerable intricacy, on account of statutory changes, which in turn have generated a plethora of rules.

With the exception of New South Wales, contracts with infants in Australia are enforceable if they are for necessaries and if they are beneficial contracts of service. The status enjoyed by the infant determines what constitutes necessaries. It is necessary for the supplier of the goods or services to prove that these could be necessaries. This was the ruling in Bojczuk v Gregorcewicz.2

In addition, the goods or services should have been necessaries for the infant at the time of their sale or delivery, respectively. In Scarborough v Sturzaker, the court held that this was a question of fact.3 Furthermore, it is sufficient for the infant to pay a reasonable price for necessaries. Onerous terms, in such instances, render the contract invalid, and what constitutes a reasonable price is to be determined on the basis of all the available facts.4

Several cases relating to contracts with minors are discussed hereunder.

In Scarborough v Sturzaker a minor had bought a bicycle from the defendant, in order to travel to his place of employment, which was around 12 miles from his residence. The court held that the minor had to pay the defendant, as it was necessary for his daily employment.5 However, in Sultman v Bond, where the minor had obtained a loan for the construction of a dwelling, the court did not make the minor liable. The court ruled that the burden placed on the minor, due to the loan repayments was onerous.6

Similarly, in Bojczuk v Gregorcewicz, the relative of a minor girl provided her with funds to emigrate to Australia from Poland. The court ruled that the minor was not liable to the relative, as these funds did not constitute a conferral of what was required for her survival. In addition, the court noted that the minor had been satisfactorily employed in Poland and that she had not emigrated to Australia, in order to obtain a means of support.7

Nevertheless, in Roberts v Gray, the court held that the minor had to repay the amount provided to him. In this case, the minor had participated in a world billiard playing tour. As this tour would have provided the minor with instruction, experience and exposure that would promote his career, he was required to repay the amount.8

As decided in De Francesco v Barnum, beneficial contracts of service are those in which the beneficial terms prevail over the onerous terms.9 It was clearly pointed out in the ruling in Mercantile Union Guarantee Corp Ltd v Ball that providing a benefit, in such contracts, was of paramount importance.10

Likewise, in McLaughlin v Darcy, a minor formed a contract, in order to obtain a passport and thereafter pursue a career in professional boxing in the US. As this would have provided him with considerable benefit in his career, the court held the contract to be binding upon the minor.11

Moreover, contracts relating to the purchase and lease of land, purchase of shares in a company and partnerships are binding, in the absence of repudiation. Such repudiation has to be done by the infant during its infancy or within a reasonable period of time, subsequent to its achieving adulthood.12

Some of the important features of repudiated contracts are enumerated below. In Steinberg v Scala (Leeds) Ltd, it was held that obligations that had already accrued were to be satisfied and that future liability was inapplicable after rescission of the contract.13 In Corpe v Overton, the court held that the total failure of consideration was to be established, if the money paid by the infant was to be recovered.14

As such, an infant cannot be held liable on a contract relating to the repayment of a loan, even if that loan had been provided for the purchase of necessaries. This was the position at common law in all the territories and states of Australia. This immunity had also extended to a cheque or bill of exchange. However, this common law position has undergone change, by means of statute, in all the jurisdictions.15

Some contracts have to be ratified, if they are to be binding. Such contracts do not have a continuing nature, and a minor is not bound by them, unless he affirms it within a reasonable period of time, subsequent to attaining majority. An instance of such contracts is provided by a contract for the supply of goods that are not necessaries. In Tasmania and Victoria such contracts are deemed to be void and cannot be ratified by the minor on attaining the age of majority. However, South Australia and New South Wales have enacted legislation that addresses a minor’s capacity to contract.16

In accordance with the decision in O’Connor v Hart, a contract is voidable under the following circumstances. A party to a contract is mentally unstable or intoxicated to the degree, at the time of formation of the contract that it becomes impossible for that party to comprehend the nature of the contract, and if the other person knows about this or should have known about it.17

It has been the traditionally accepted notion that a person forming a contract is an adult, sober and sane person. Any deviation from this norm brings into play issues related to the capacity of the individual to carry out the contractual obligations. A welcome change in this area has been the elimination of the condition that married females are ineligible to shoulder contractual responsibilities.18 However, a measure of protection is afforded to the mentally impaired and the intoxicated..

A contract formed by a person who is drunk to the extent that he cannot understand the transaction can be nullified, provided the other party to the contract is aware of the extent to which the first party is intoxicated. However, such an intoxicated person is liable to make good a reasonable amount for necessaries obtained through the contract. In addition, if that person ratifies the contract on becoming sober, then he is to be bound by the contract.

Moreover, a contract that is made during a period of clear thinking or that is confirmed when the intoxication or mental instability has passed is valid. With regard to contracts for the supply of necessaries, the intoxicated or mentally imbalanced person will be required to part with a reasonable amount towards them.19

In order to protect individuals of unsound mind or intoxicated persons, whose capability to form contracts is severely hindered, the law attempts to provide a measure of protection to them. Thus, legislation relating to mental guardianship has been enacted in all the States and Territories of Australia. Statute in combination with the common law regulates the legal capacity of such persons to form contracts.20

As such, a person of unsound mind or under the influence of intoxicants will be bound by a contract, unless the following can be established. First, the mental state of the person prevented that individual from understanding the consequences of his actions. Second, the other party to the contract had been aware of the impaired mental condition of that person. Such contracts can be rescinded by the impaired individual, who has to prove his incapacity. In addition, the contract has to be repudiated within a reasonable period of time of becoming sane or sober. 21

For example, in York Glass Co Ltd v Jubb, the defendant entered into a contract with the plaintiff to purchase the latter’s business. At the time of forming the contract the defendant, unknown to the plaintiff, was insane. Subsequently, Jubb was committed to a lunatic asylum. The court held that Jubb’s estate had to pay damages to the plaintiff for failure to perform the contractual obligations, as it could not be established that the plaintiff was aware of Jubb’s lunacy.22

In Gibbons v Wright, the court ruled that if an intoxicated or mentally imbalanced person affirmed a contract, on achieving normalcy, then that person could not contend that he was not bound by the contract.23

On the other hand, a contract formed by an individual who was mentally imbalanced or intoxicated at the time of formation of the contract, can be ratified by that person on becoming sane or sober. In such instances, the contract cannot be rendered null and void. This, is illustrated by Matthews v Baxter, in which, an inebriated Baxter agreed to purchase a property at an auction.24

On becoming sober he affirmed the contract. Subsequently, he attempted to rescind the contract on the grounds of deficiency in capacity to form a contract, due to a state of drunkenness, at the time of forming the contract. The court rejected his defence on the grounds that he had confirmed the contract in a state of sobriety. Hence, he was precluded from rescinding the contract.25

The contractual capacity of an individual does not come to an end, on the declaration of bankruptcy. All that is required under the Bankruptcy Act 1966 is that if the credit to be obtained by the bankrupt exceeds $3,000, then that individual has to reveal that he is an undischarged bankrupt.26 Failure to reveal this fact attracts a term of imprisonment that does not exceed 3 years.27 The danger inherent in entering into a contract with an undisclosed bankrupt is that such contract may not be binding upon the trustee in bankruptcy.28

An entity that has become bankrupt enjoys limited capacity to enter into contracts. For instance, such entities have to intimate their position to a lender if the value of goods or services involved is greater than $3,000. This is enjoined under the provisions of the Bankruptcy Act 1966.29 In addition, bankrupts are disallowed from functioning as company directors or to participate in the management of the company.

In addition, corporations are not much different from natural persons, in the context of legal capacity. In general, contracts that fall beyond the purview of the replaceable rules are nevertheless subject to the provisions of the Corporations Act 2001.

The legal capacity of a corporation while making contracts is discussed below.

A corporation is an artificial entity that can sue, own property or be sued. It can form contracts only through individuals, and enjoys the same power as an individual to form contracts. However, the individual making a contract on behalf of the corporation should be suitably authorised to form the contract. Under the common law, the contracts formed by an unincorporated company could not be ratified by the company, subsequent to its ratification. This situation was rectified by the Corporations Law.30

A question arises as to who is liable for contracts formed, prior to registration. In such instances, the Corporations Act 200131 provides the necessary clarification.32 In instances, where the company ratifies the pre – registration contract on registration, within the time agreed upon by the other party and promoter, or in the absence of any such agreement within a reasonable period, then the pre – registration becomes binding.33 This effectively rescinds the common law rule that disallows ratification of a pre – registration contract. In this situation the company is liable for any breach of the contract.

As such, the promoter of a company could be directed by the court to pay all or part of damages that the company had been instructed to pay.34 This transpires, whenever a company breaches its contractual obligations, with regard to a pre – registration contract that it had ratified.35Furthermore, the promoter is liable for damages, if the company is not registered or subsequent to registration it does not ratify the pre – registration contract.36

Bibliography

A Articles/Books/Reports

Barron, Margaret and Richard Fletcher, Fundamentals of Business Law (McGraw Hill, 2003).

Richards, Paul, Law of contract (Pearson Education, 9th ed, 2009).

Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations law in Australia (Federation Press, 2002).

Bojczuk v Gregorcewicz [1961] SASR 128.

Corpe v Overton [1833] 3 LJCP 24.

De Francesco v Barnum (1890) 45 Ch D 430.

Gibbons v Wright (1954) 91 CLR 423.

Matthews v Baxter (1873) LR 8 Exch 132.

McLaughlin v Darcy (1918) 18 SR (NSW) 585.

Mercantile Union v Ball [1937] 2 KB 498.

O’Connor v Hart [1985] 1 NZLR 159.

Roberts v Gray [1913] 1 KB 520.

Scarborough v Sturzaker (1905) 1 Tas LR 117.

Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452.

Sultman v Bond [1956] QSR 180.

York Glass Co Ltd v Jubb [1925] All ER Rep 285.

C Legislation

Bankruptcy Act 1966 (Cth).

Corporations Act 2001 (Cth).

Clarke, Julie, Capacity to contract (2010) <http://www.australiancontractlaw.com/law/formation-capacity.html>.

Step 4: Capacity of the Parties (2010) <http://wps.pearsoned.com.au/au_be_gibson_bizlaw_2/0,9957,1788821-content,00.html>.

1
Julie Clarke, Capacity to contract (2010) <http://www.australiancontractlaw.com/law/formation-capacity.html>.

2
Bojczuk v Gregorcewicz [1961] SASR 128.

3
Scarborough v Sturzaker (1905) 1 Tas LR 117.

4
Step 4: Capacity of the Parties (2010) <http://wps.pearsoned.com.au/au_be_gibson_bizlaw_2/0,9957,1788821-content,00.html>.

5
Scarborough v Sturzaker (1905) 1 Tas LR 117.

6
Sultman v Bond [1956] QSR 180.

7
Bojczuk v Gregorcewicz [1961] SASR 128.

8
Roberts v Gray [1913] 1 KB 520.

9
De Francesco v Barnum (1890) 45 Ch D 430.

10
Mercantile Union v Ball [1937] 2 KB 498.

11
McLaughlin v Darcy (1918) 18 SR (NSW) 585.

12
Step 4: Capacity of the Parties (2010) <http://wps.pearsoned.com.au/au_be_gibson_bizlaw_2/0,9957,1788821-content,00.html>.

13
Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452.

14
Corpe v Overton [1833] 3 LJCP 24.

15
Step 4: Capacity of the Parties (2010) <http://wps.pearsoned.com.au/au_be_gibson_bizlaw_2/0,9957,1788821-content,00.html>.

16
Margaret Barron and Richard Fletcher, Fundamentals of Business Law (McGraw Hill, 2003) 229.

17
O’Connor v Hart [1985] 1 NZLR 159.

18 Paul Richards, Law of contract (Pearson Education, 9th ed, 2009) 93.

19
Step 4: Capacity of the Parties (2010) <http://wps.pearsoned.com.au/au_be_gibson_bizlaw_2/0,9957,1788821-content,00.html>.

20
Ibid 232.

21
Ibid 233.

22
York Glass Co Ltd v Jubb [1925] All ER Rep 285.

23
Gibbons v Wright (1954) 91 CLR 423.

24
Matthews v Baxter (1873) LR 8 Exch 132.

26
Margaret Barron and Richard Fletcher, Fundamentals of Business Law (McGraw Hill, 2003) 234.

27
Bankruptcy Act 1966 (Cth) s 269.

28
Margaret Barron and Richard Fletcher, Fundamentals of Business Law (McGraw Hill, 2003) 234.

29
Bankruptcy Act 1966 (Cth) s 269(1)(bb).

30
Margaret Barron and Richard Fletcher, Fundamentals of Business Law (McGraw Hill, 2003) 234.

31
Corporations Act 2001 (Cth) ss 131 – 133.

32
Roman Tomasic, Stephen Bottomley and Rob McQueen, Corporations law in Australia (Federation Press, 2002) 218.

33
Corporations Act 2001 (Cth) s 131(1).

34
Ibid s 131(4).

35
Roman Tomasic, Stephen Bottomley and Rob McQueen, Corporations law in Australia (Federation Press, 2002) 220.

36
Corporations Act 2001 (Cth) s 131(2).