8 Capacity of the parties
Learning objectives
By the end of this chapter, you should be able to:
- Explain the common law rules regarding contracts entered into by minors (infants).
- Outline the common law rules regarding capacity to contract corporations, the mentally ill and those under the influence of alcohol.
Key Terms
You will notice these key terms, which are mentioned throughout the chapter, to help you to better understand and remember the material:
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- Beneficial contracts of service: contracts that are for the minor’s benefit and are not oppressive, including employment, education, apprenticeship and training contracts.
- Corporation: a legal entity (also known as a legal person) created by the Corporations Act 2001 (Cth); also known as a ‘company’.
- Infant: a person under the age of 18 years; also known as a ‘minor’.
- Necessaries: goods or services that are reasonably necessary to the ‘station in life’ of an infant and their actual requirements (defined in the Goods Act 1951, s 4).
- Void: of no legal effect.
- Voidable: an agreement that may be affirmed or rejected at the option of one of the parties.
Introduction
In this, and the next two chapters on consent and legality, we look whether the contract that you created is valid, voidable, void or unenforceable. In other words, is the contract you created (or working with, valid?) This chapter will also introduce you to the rules regarding the capacity of the parties to a contract and whether they fully understand the terms and conditions of the contract. Under both common law and statute law there are certain types of people who are considered to be incapable, either partly or completely, of understanding the rules and obligations associated with them entering into a contract. However, this is not the end of the story. You still need to know whether there is real consent to the contract by one or both of the parties (Chapter 9) and whether the purpose of the contract is legal (Chapter 10) before you can say with any confidence that the contract is valid. And even though we might have a valid contract, don’t assume that is the end of contract law because problems can still arise as to exactly what have the parties agreed to (Chapter 11) and what happens if one of the parties doesn’t comply the terms of the contract, in other words, they breach the contract (Chapter 12).
Step 4: Capacity to contract
Do the parties to the contract have full contractual capacity?
Only a normal, sane, sober adult person (s 17 of the Companies Act 1997 gives a company the same legal capacity as an ‘individual’ until it is deregistered) has full capacity to make a contract. Only adult persons, as in, those persons over the age of 18 have the capacity or ability to understand what it is they are entering into.
Having capacity is more than just having the ability to sign the contract. You need to consider a number of factors concerning the party you are dealing with including:
- Do they understand all the f