Legal capacity
Not all people are completely free to enter into a valid contract. The contracts of the groups of people listed below involve problematic consent, and are dealt with separately, as follows:
- people who have a mental impairment;
- young people (minors);
- bankrupts;
- corporations (people acting on behalf of a company); and
- prisoners.
Generally speaking, people are free to enter into contracts even though they may have a mental impairment, or are temporarily disabled by drugs or alcohol. They are, however, sometimes vulnerable to being bound by contracts they do not fully understand. The question of capacity to make the contract often arises only after the contract is in place.
People with disabilities and their advocates will find some protection in the rule that a contract is not valid and enforceable unless there was genuine consent to its making.
Capacity to give consent involves a general understanding of the nature of the contract (not necessarily its fine details). A person with a mental impairment, for example, may have the capacity to understand some contracts (for example, buying a loaf of bread), but not to understand other, more complicated contracts (for example, buying a car on credit).
Where a person with a disability did not understand the general nature of the contract, a court can intervene to set aside the contract only if:
- the other party knew (or ought to have known) of the disability or lack of capacity and it would be unfair for them to take advantage of that; and
- the benefit received by the other person has not been sold to a third party who did not know the previous transaction might not be valid. Generally, to escape the consequences of a contract, the other party should be notified of the intention not to be bound by the contract within a reasonable time.
Some people with disabilities (temporary or long-term) are assisted by an administrator appointed by the Guardianship List of the Victorian Civil Administration Tribunal (VCAT). For further information on the role of an administrator, see: Chapter 16*6 Guardianship and Administration. People with disabilities who have an administrator appointed to act on their behalf are generally not free to enter into contracts, unless this is approved in writing by their administrator or an order of the Guardianship List of VCAT.
A person with an intellectual or psychiatric disability will be liable to pay only a reasonable price for necessaries sold and delivered (s.7 Goods Act 1958 (Vic.)). "Necessaries", and the rules applicable here, are dealt with in "Young people", below (because the definition is the same for both groups).
The term young person is used here to refer to anyone under the age of 18 years (s.3 Age of Majority Act 1977 (Vic)). Sometimes legal writing refers to minors or infants.
The exact capacity of young people to bind themselves and be bound by contract is limited but also unclear, because no Act of Parliament completely covers this area of law. The Supreme Court Act 1986 (Vic) in sections 49 to 51, "Contracts of Minors", is the most useful reference on this question.
Contracts for the supply of "necessaries" will generally be binding. There are no hard and fast rules to identify what is "a necessary", but it does include the sorts of things the young person needs to live a reasonable lifestyle. It includes basics such as:
- food;
- clothing;
- a place to live;
- medicine,
and so on.
It will also include any contracts relating to the young person's education, apprenticeship or something very similar, if it can be shown to be of benefit to the young person. While a court has not yet considered the issue specifically, mobile phones are probably not necessaries.
The young person contracting in this situation will be held bound to pay a reasonable price (although that may not be the contract price) for necessaries actually sold and delivered. ("Delivery" is a technical term. Generally, delivery takes place when the seller has given the buyer the power to take the goods away.) Where necessaries have been sold but there has been no delivery, the young person does not have to take delivery or pay for the goods.
Two classes of contracts are not binding on a young person, namely:
- contracts which are not for necessaries; and
- contracts for the repayment of money lent or to be lent (that is, any form of credit contract).
Where a young person has already paid money under a non-binding contract, that money will not be recoverable unless no benefit has been received by the young person. The young person can, however, refuse to make any further payments under the contract. It is not certain who then owns goods that are not necessaries. It appears that they become the property of the young person unless the young person has fraudulently misrepresented their age.
Even after turning 18, a person cannot confirm a prior contract and then become bound by it. Any money paid by a young person under such circumstances may be recovered.
Bankrupt people are not deprived of their general capacity to contract. However, there are provisions of the Bankruptcy Act 1966(Cth) ("Bankruptcy Act") that relate to dealings and contracts by bankrupts. For example, obtaining credit of $4,965 (as at 28 April 2011) or more without disclosing your bankruptcy is an offence and liable to penalty under section 269 of the Bankruptcy Act (see: "The effect of bankruptcy on debts", in Chapter 8*3 Bankruptcy).
A corporation is an artificial body created by law. The corporation has a legal existence separate from the individual people who comprise it. However, a company has the legal capacity of a natural person and therefore has the capacity to enter contractual relations (see: s.124 of the Corporations Act 2001 (Cth)). This is so even if there is an express prohibition contained in the company's constitution. Such transactions are not deemed void and beyond the company's powers simply because the exercise of such powers is in breach of the restrictions placed in the company's constitution (s.125(1)).
A company has the capacity to enter contractual relations, but such relations are only binding on the company if those acting on behalf of the company do so with the company's express or implied authority (s.126(1)). The courts have been quite liberal in their interpretation of implied authority. It has been found that in cases where directors with express authority have acquiesced and allowed a director with no authority to frequently enter contractual relations on behalf of the company, that such directorshave implied authority and therefore can contractually bind the company.
During their imprisonment, prisoners may enter contracts, including contracts to buy and sell property. The usual restrictions about supervision and censorship of anything coming into the prison still apply, so that the permission of Corrections Victoria is required before a prisoner may sign for, deliver or receive any document. (For further information, see:"Employment and money" and "Communication with prisoners", in Chapter 4*5 Prisoners.)
Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing. In other words, the consent of each of the parties to a contract must be genuine. Only where the essential element of proper consent has been given is there a contract which is binding upon the parties. The ultimate consequences of establishing that no proper consent was given to enter the contract are matters dealt with when considering remedies for breach of contract (see:Chapter 12*4 Consumer Remedies).
Proper consent may be affected by any of the following matters:
- mistake;
- false statements;
- duress; and
- undue influence/unconscionability.
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