Capacity+of+Parties (1)

8/6/2019 Capacity+of+Parties (1)

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CAPACITY OF PARTIES

Even though all 3 elements of a valid contract are present there may still bequestions about its validity. The parties to the contract must have thecapacity to make a legally binding agreement.

The capacity of the parties refers to their ability to fully understand the termsand obligations contained in a contract.

The law recognizes that certain people are either wholly or partly incapable ofmaking a contract. These include minors and individuals with unsoundability.

Law recognizes that there are certain classes of people in society who neitherhave the maturity nor the capacity to fully understand the nature and extentof agreements that they make with others. The law provides such protectionby simply refusing to enforce certain contracts against them. These included

in the category are: Minors (under 18) unless contracts of necessaries and beneficial

contracts of service

Mentally Incapable

Drunkards

General PrincipleMentally ill and drunkards may be liable under contracts for the provisions ofnecessaries but all other contracts they enter into during periods ofincapacity will be voidable by them. The general principle is subject to 2qualifications:

They must have been incapable of understanding the nature of whatthey were agreeing to at the time that they contracted and

The other party must have been or should have been aware of theircondition and the consequent incapacity.

MinorsA minor is a person who is not yet 18 years of age. The law protects minorsin relation to contracts made by them. In situations where a minor pays cashfor goods or services s/he is bound by that contract. In other circumstanceswhere the minor is still to pay, the contract will only enforceable if it is acontract for necessaries or a beneficial contract of service.

As a general rule, any person may enter into a valid contract. Howeverspecial rules apply to certain persons in respect of their ability to enter intocontracts.

A person under the age of 18 years has a restricted capacity to enter acontract.

The basic rule is that if a minor makes a contract s/he can choose betweenenforcing the contract or abandoning it. The contract will be enforceable by


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the minor but not against the minor. There are 2 contracts that areenforceable against a minor:

1. Contracts for necessaries and

2. Contracts for the infants benefits.

Contracts for Necessaries

A minor must pay a reasonable price for necessaries that are sold anddelivered.

Necessaries are items that are needed for the reasonable comfort of a minor.Necessaries are defined as goods suitable to the condition in life of the infantand to the infants actual requirements at the time of the sale and delivery.Food, clothing, medicines and board have been held to be necessaries.

A contract for a luxury item would generally not be regarded as a necessary.Contracts entered into by infants for non necessaries are absolutely void.

Contracts for infants benefitContracts which when looked at as a whole, are regarded as being for thebenefit of the infant are enforceable against, as well as by, the infant.Beneficial contracts of service refer to contracts such as apprenticeships orcontracts that provide education and training are judged to be for the minorsbenefit.

Such contracts include contracts of service or employment, apprenticeship,training and cadetships.In Mercantile Union v Ball [1937] 2 KB 489Ball was aged 20 years at a time when the age of adulthood was 21. Heentered into an agreement to purchase a truck for his haulage business butdefaulted on the payments.

The court held that because the contract was not for necessaries Ball couldnot be bound by it.

In Victoria legislation has also had a significant effect on the position ofminors. The Supreme Court Act 1986, Section 49 provides that certaincontracts entered into by minors are absolutely void, meaning they have nolegal effect. These include:

Contracts for the repayment of money lent

Contracts for the payment of goods other than necessaries

Accounts stated ( a statement of account which the parties

acknowledge is correct)

Mental CapacityThe law assumes that a person who is mentally unsound or under theinfluence of alcohol or other drugs, does not have the mental capacity toenter into a binding contract. The exception to this rule is if the contract isfor necessaries when the law will require the person to pay a reasonableamount for the goods or service.


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Any contracts entered into by persons suffering from a mental disorder orunder the influence of alcohol or drugs are voidable at the option of the otherparty. A contract for matters other than necessaries can be avoided by animpaired person if it can be proved that s/he did not understand what wasinvolved because his/her condition. This must be done in a reasonable timeafter the contract was formed.

If however, the person has no reason to believe that the other party is drunkor mentally disordered the contract will be enforceable.

A person who entered into a contract while temporarily impaired can confirmthe agreement will be honored when that person returns to a normal state.

In the case of Matthews v Baxter [1873] LR 8 Exch 132, Baxter was drunkwhen he agreed to buy a property at an auction. When he became sober heconfirmed the contract but later tried to avoid it on the grounds of hisintoxication. The court said it was too late, he had confirmed it and could notchange his mind again.

REALITY OF CONSENT

MistakeMisrepresentationDuressUndue InfluenceUnconscionability

The consent of the Parties

A basic principle in contract law is that there must be real consent by theparties. In any agreement, the consent of the parties to the terms of thecontract must be genuine and freely given.

Consent is the term used to describe the state of mind of each party to thecontract at the moment agreement is reached. If the consent of one party orboth parties is obtained by means of a:

1. mistake of fact2. misrepresentation or through3. duress or undue influence

the agreement may not be enforceable because it lacks genuine consent.

The contract in this case is void (invalid) or voidable (able to be avoided). Thepassing of legislation by both federal and state parliaments to protectconsumers has resulted in fewer disputes about consent.

MistakeWhen a contract is entered into because one or other (or both) of the partiesare under some misapprehension (or are mistaken) about something formingthe basis of their agreement, it can be argued that there is no true consent( no true agreement) and that, consequently, there can be no binding


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contract. Because of this the law has long been prepared to set suchcontracts aside where it is clear that they would have been entered into butfor the mistake.

If there is a mistake on the part of one or both of the parties, then a contractmay be deemed to be devoid of legal effect. One or both of the parties mayhave made a mistake about the subject matter of the contract.

A party may enter an agreement under a mistaken belief. Certain mistakeswill render a contract void. Mistakes can be divided into 2 broad categories mistakes of law and mistakes of fact.

Mistake of LawA mistake made by a person about a legal right or obligation is a mistake oflaw and it will not make a contract void. The reason is that everyone ispresumed to know what the law is. The expression ignorance of the law isnot excuse is correct.

Mistake of FactA person who enters a contract for the holiday of a lifetime may have built upa mental picture of a beautiful tropical beach with luxury accommodation,only to find there has been a mistake. The accommodation is far from luxuryand there is no sand at the beach, just rocks. In such cases the courts arevery reluctant to grant any relief to the aggrieved party.A person who enters a contract for the holiday of a lifetime may have built upa mental picture of a beautiful tropical beach with luxury accommodation,only to find there has been a mistake. The accommodation is far from luxuryand there is no sand at the beach, just rocks. In such cases the courts arevery reluctant to grant any relief to the aggrieved party.

There are not many types of mistake that enable a person to invalidate acontract. For instance, a person cannot rely on mistake to avoid contract justbecause the quality of an item is not to their liking (for example, buying newclothes then deciding the colour is a mistake). Basically it depends on thenature of the mistake as to whether or not the contract can be avoided. Ifboth parties make a mistake about the content of a contract then there hasnot been a true agreement so the contract is void.

Types of Mistake

Common Mistake

A common mistake is where both contracting parties make the samemistake. Mistake about the existence of subject matter or about a fact goingto the root of the contract will render a contract void.

Mutual MistakeA mutual mistake is where both contracting parties are mistaken but theymake different mistakes. A contract entered because of a mutual mistakemay be rendered void if it can be shown there was no offer and acceptance.


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Unilateral MistakeA unilateral mistake is where one party to the contract is mistaken and theother party knows or ought to know of this mistaken belief. The contract maybe able to be avoided.

Non est Factum

A person who signs a document that is radically and fundamentally differentfrom what that person believed they were signing may rely on the defence ofnon est factum (it is not his deed). The party must show that they exercisedreasonable care when signing the document.

MisrepresentationA misrepresentation is a false statement of fact made by one party toanother to induce or entice that party to enter into a contract. It is astatement of fact that is untrue. It does not have to be a term of the contractand may be an oral statement to draw the person into the contract.Misrepresentations can either be made fraudulently or innocently.

A person who in all honesty, mistakenly represents a 2001 model car as a2003 car would be liable for an innocent misrepresentation and purchaserwould have the right to get his or her money back.

A party alleging misrep must normally prove 4 things1. that a false statement was made2. that that statement was one of fact3. that it was addressed to the party misled4. that it was intended to induce and did actually induce the contract.

A False statement

Silence does not constitute misrep. 5 exceptions to this rule1. Distortion of a positive representation2. Subsequent discovery that the statement was false3. A statement becomes untrue4. Parties in a fiduciary relationship5. Contracts not made in good faith.

Only statements of fact can constitute a misrepFor a false statement to give rise to an action in misrep, it must be astatement of existing or past fact. It cannot be a

Statement of opinion

A statement of intention or a promise as to the future.

Addressed to the Party misledOnly intended representees may sue the plaintiff was the intendedrecipient. Those who hear and act upon false information can be

Those to whom it was communicated directly

Those to whom it was communicated indirectly

Those who otherwise became aware of it


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Duress refers to the use of violence or threats to make a person agree tobecome a party to a contract. A contract can be avoided if it can be shownthat consent was obtained by threatening the property or personal safety ofthe person or his or her family members. The victim of duress will not be heldto the terms of a contract and may avoid the contract.

Duress only available where the coercion is in some extreme form. Undueinfluence operates where one party uses the influence that s/he has over theother party to obtain some undue benefit.

2 types of relationships to be considered:

Special relationships high degree of influence1. parent and child2. guardian and ward3. doctor and patient4. solicitor and client5. agent and principal6. trustee and beneficiary7. religious advisor and disciple

Other relationships

In Barton v Armstrong [1974] 3 ALR 355Barton wanted a number of contracts between himself and Armstrong setaside. He claimed that Armstrong has threatened to murder him and hisfamily. The appeal court held that duress was one of the reasons Bartonentered into the contracts, therefore the contracts were voidable.

Undue Influence may occur in circumstances where one person has thepower to influence another in an unacceptable manner, therefore genuineconsent is missing.

Where one person exercises domination or power over another to such anextent that the other is not able to exercise free will and judgment, there issaid to be undue influence.

Should this undue influence be used to entice a person into a contract, thevictim may avoid the contract at his or her option.

The courts have recognized that the power to unduly influence may arise invarious relationships including doctor and patient, parent and child, religiousleader and followers and solicitors and clients.

REVISION QUESTIONS

1. Ned suffers from a mental illness. Recently he thought he hadinherited a large amount of money so he signed a contract to buy anew high powered speed boat. Will he be legally bound by thecontract. Give reasons.


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2. Nicole aged 16 years purchased some jewellary on an internet auctionwebsite. Does the purchase constitute a legally binding contract. Whyor Why not?

3. Robert signed a document believing it to be a guarantee for hisdaughters house mortgage. In reality the document was a promise byRobert to repay his daughters mortgage within two years. After 24

months the bank now seeks to recover the money from Robert. Whatdefence could Robert potentially raise? What are the chances ofsucceeding with this defence?

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Capacity+of+Parties (1)