chapter 5 capacity

1. Introduction to Capacity

• General Principle: For a contract to be enforceable, the parties involved must have the legal capacity to contract.

• Capacity refers to a party's legal ability to enter into binding obligations.

• Some individuals or legal persons lack capacity or have restricted capacity either completely or in specific circumstances.

Legal Categories Affected:

1. Minors (under 18 years)

2. Persons lacking mental capacity (due to illness or intoxication)

3. Corporations (contracting through artificial legal personality)

2. Minors

2.1 Common Law Rule

• A minor is not bound by a contract unless it falls within a specific exception.

• However, the other party remains bound and may be sued.

2.2 Exceptions: Binding Contracts for Minors

(i) Contracts for Necessaries

• Definition (under s 3(3) Sale of Goods Act 1979):

  • Goods must be suitable to the condition in life of the minor,

  • And to their actual requirements at the time of sale/delivery.

• Includes necessary goods and services.

• Does not mean absolute essentials; what qualifies depends on the minor’s social status and personal needs.

Example:
A 16-year-old from a wealthy family buys an expensive school blazer. If he already owns several, the blazer may not be a "necessary". But if he needs one for school, it may qualify.

(ii) Contracts of Service Beneficial to the Minor

• Includes contracts of employment or apprenticeship if they benefit the minor as a whole.

• Contract must provide training, experience, or other long-term benefit.

Case: Proform Sports Management Ltd v Proactive Sports Management Ltd [2006] EWHC 2903 (Ch)

• Wayne Rooney entered into an agent agreement at age 15.

• Court held it was not enforceable as it was not a contract for necessaries nor beneficial to the minor.

2.3 Non-Enforceability by Minor

• Minors can enforce contracts against adults.

• Adults cannot enforce most contracts against minors, unless within an exception.

3. Mental Incapacity

3.1 General Rule

• A contract entered by a person suffering from mental impairment or intoxication is binding unless:

  • At the time, the individual could not understand the contract's nature and effect, and

  • The other party knew or ought to have known of the incapacity.

3.2 Consequences

• If both conditions are satisfied: the contract is voidable.

  • It remains binding unless and until the incapacitated party chooses to rescind it.

Example:
Jack, who suffers from senile dementia, enters into a contract with Hansaj. Hansaj is unaware of Jack's condition. The contract is binding, because Hansaj did not know of the incapacity.

4. Corporations

• Corporations are legal persons and may enter into contracts in their own name.

• Not all associations have legal personality (e.g., unincorporated associations like informal clubs).

4.1 Unincorporated Associations

• Have no separate legal personality.

• Cannot be sued or sue in their own name.

• Contracting liability falls only on:

  • The individual who made the contract, and

  • Anyone else who authorised them to do so.

5. Types of Corporations and Their Capacity

5.1 Registered Companies (Companies Act 2006)

• Created by registration under Companies Act 2006.

• Section 31 CA 2006: Companies can carry out any lawful activity (object clauses are now mostly symbolic).

• Section 39 CA 2006: Abolishes ultra vires doctrine in relation to third parties. A contract cannot be challenged by an outsider on the ground that it was beyond the company's capacity.

• Section 40(1) CA 2006: Third parties dealing in good faith with directors can rely on their authority to bind the company.

5.2 Statutory Corporations

• Created by specific statutes (e.g. local authorities).

• Statute sets out the scope of permissible activities.

• Any contract outside those powers is ultra vires and void.

  • No doctrine of apparent authority can validate it.

5.3 Limited Liability Partnerships (LLPs)

• Created by the Limited Liability Partnerships Act 2000.

• LLPs have separate legal personality and benefit from unlimited contractual capacity.

6. Summary Chart: Capacity in Contract Law