Capacity to Contract – Detailed Study Notes

INTRODUCTION TO CONTRACTUAL CAPACITY

• “Capacity” = a person’s legal ability to enter into a contract.
• Contract-law policy balances two competing aims:
  • Protect the vulnerable (minors, mentally incapacitated persons ("MIPs"), drunk persons, companies’ shareholders) from their own inexperience or inability.
  • Protect innocent third parties who deal in good faith with those lacking full capacity.
• Four classes with statutory / common-law limits:
  • $\textbf{Minors}$ (formerly “infants”).
  • $\textbf{Mentally incapacitated persons (MIPs)}$.
  • $\textbf{Drunk persons}$.
  • $\textbf{Companies}$.

CONTRACTUAL CAPACITY OF MINORS

(A) Sources of Law

• Common law + Family Law Reform Act $1969$ (FLRA) + Minors’ Contracts Act $1987$ (MCA) + Sale of Goods Act $1979$ (SOGA).
• Age of majority: reduced from $21$ to $18$ by s.$2$ FLRA $1969$.

(B) Two Fundamental Common-Law Rules

1. Valid & binding on both parties only if:
   • (a) contract for “necessaries”; or
   • (b) “beneficial contracts of service.”
     ➔ Minor can sue and be sued.
2. All other contracts: voidable at minor’s option; binding on the adult. Minor may:
   • (i) affirm and sue;
   • (ii) rescind during minority or within “reasonable time” after $18$;
   • (iii) plead minority as a defence when sued.

(C) Contracts for Necessaries

• No exhaustive definition; generally sale or supply of goods or services that are (i) suitable to the minor’s “condition/station in life,” and (ii) needed in light of actual requirements at time of supply.
• S.$3(2)$ SOGA $1979$ codifies liability: minor must pay a “reasonable price” for necessaries sold & delivered.
• Executory contracts for necessaries remain unenforceable (nothing “delivered”).

Key Cases

• Peters v Fleming (rings, watch-chain, pins):

• Rich undergraduate; goods/services deemed necessaries → minor liable.
• Ratio: Not confined to items supporting life; includes items needed for status/degree unless “purely ornamental.”

• Nash v Inman (Savile Row tailor, fancy waistcoats):

• Minor already had adequate wardrobe → second limb (actual requirement) failed → tailor’s claim failed.

• Chapple v Cooper (funeral expenses):

• Widow-minor liable for husband’s funeral; burial a “necessity in private benefit.”
• Luxuries excluded but “luxurious necessaries” sometimes allowed.

Statutory Points from SOGA 1979 s.$3$

• Liability only when goods “sold and delivered.”
• Recovery limited to reasonable price; contract price recoverable only if reasonable.

(D) Beneficial Contracts of Service

• Binding if on balance beneficial; voidable if oppressive.
• Typically cover employment, apprenticeship, education, training.
• NO general rule that “all contracts beneficial to minor are binding.”

Key Cases

• North-Western Railway v McGuire (insurance scheme within employment):

• Whole employment contract beneficial → binding; waiver of statutory rights acceptable.

• De Francesco v Barnum (stage-dancing apprenticeship):

• Master had inordinate power; contract oppressive → voidable; injunction refused.

• Chaplin v Leslie Frewin (publishing life story):

• Analogous to service; judged at formation date; financially beneficial → valid, copyright vested in publishers.

• Robinson v Greenwood (billiards world tour):

• Contract for professional education & income; overall beneficial → minor liable in damages.

• Proform Sports Management v Proactive (Wayne Rooney):

• Player-agent “representation” deal not essential to training/livelihood; not analogous to service; unenforceable against minor ➔ no tort of inducing breach.

(E) Other (Voidable) Contracts & Remedies

• Minor may rescind non-necessary / non-beneficial contracts before $18$ or within reasonable time after.
• Cowern v Nield: trading contracts unenforceable; adult purchaser could not recover money.

Transfer of Property & Restitution

• Contract passes property both ways.
• Upon rescission:
  • Minor may recover money/property if total failure of consideration (received no benefit).
  • Adult historically could not compel restitution unless fraud; MCA $1987$ s.$3$ now allows court, if “just & equitable,” to order minor to return property or its traceable proceeds ➔ prevents unjust enrichment (e.g. fancy waistcoats in Nash).
• Whittington v Halse (deposit to start partnership): total failure → minor recovered £$100$.
• Valentine v Henry (company shares): not total failure (shares allotted) → no recovery.

Fraud by Minor

• R Leslie Ltd v Sheill: lender sued in deceit after minor mis-stated age; claim failed ➔ cannot enforce contract indirectly; restitution only if property still identifiable.
• Equity may void minor’s property rights procured by fraud (e.g. lease of premises) but cannot order repayment once money dissipated.

CONTRACTUAL CAPACITY OF MENTALLY INCAPACITATED PERSONS (MIPs)

(A) Common-Law Rule

• Contract voidable at MIP’s option if:
  1. At contracting time MIP incapable of understanding transaction;
  2. Other party knew (or ought to have known) incapacity.
• MIP’s choices mirror minors’: affirm, rescind, or plead incapacity as defence.
• Imperial Loan Co v Stone: burden on MIP to prove both incapacity and other party’s knowledge; fair contract stands if knowledge absent.

Hart v O’Connor (PC)

• Lunatic vendor; purchaser unaware → contract upheld; no unconscionability; same standards apply as for sane persons.

• MIP liable to pay “reasonable price” for necessaries (SOGA $1979$ s.$3$).

(B) Mental Capacity Act $2005$ (MCA ’05)

• Applies where decision-making impaired by disturbance of mind/brain.
• s.$1(2)$ Presumption of capacity unless proved otherwise.
• s.$2$ Person lacks capacity if unable at material time to decide.
  • Condition may be permanent or temporary.
• s.$3$ Inability = cannot understand, retain, use/​weigh, or communicate relevant information.
• s.$7$: Person lacking capacity who receives necessary goods/services must pay reasonable price. “Necessary” = suitable to condition in life & actual requirements when supplied.

CONTRACTUAL CAPACITY OF DRUNK PERSONS

Common-Law Position (Gore v Gibson)

• Contract voidable iff:
  • Drunk party so intoxicated he did not understand nature/effect and
  • Other party knew of this condition (treated as “actual fraud”).
• Analogy: signing while sleep-walking.
• Drunk person liable for reasonable price of necessaries under SOGA $1979$ s.$3$ & MCA $2005$ ss.$2$, $7$.

CONTRACTUAL CAPACITY OF COMPANIES

(A) Ultra Vires Doctrine (Pre-2006)

• Company’s powers limited to objects clause in constitution.
• Acts beyond objects = ultra vires; previously void & unenforceable ➔ protected shareholders but harmed outsiders.

(B) Reform by Companies Act $2006$

• s.$39$ CA $2006$: Validity of an act not to be questioned for lack of capacity.
  • Innocent third-parties acting in good faith may enforce ultra vires contracts.
• Shareholders retain internal remedies:
  • May restrain impending ultra vires act or sue directors for breach of duty.
  • Company’s external capacity thereby still indirectly limited through governance mechanisms.