Throughout the world, people are entering into contracts everyday. Majority do so either knowingly and unknowingly. A contract refers to an agreement between two or more persons to the effect that the parties shall execute certain responsibilities or legal consequences will attach. However, a contract has to be legitimate. Therefore, the parties involved must reach a consensus as a way of preventing future conflicts1. Two things constitute such a treaty: there must be an offer and a party willing to accept it. A contract exits only upon the acceptance of the tender from a participant by the other2. The offer in this case is a final statement or proposal by one person (offer or) to another person, (offeree) under which the offer or is content to be contractually bound3. On the other hand, an acceptance is an absolute and unqualified assent to all the terms stipulated in the offer4. It is necessary that the offeree accept the offer in the form and state in which the offer or presents it. To accept the offer with conditions or to introduce new terms results in the occurrence of a counteroffer this cancels out the original offer.
However, another very important element that is necessary in the valid formation of a contract is capacity. Capacity here refers to the ability to make individual choices. It requires that a person is able to go through the motions of comprehensive though processes that will facilitate his / her understanding of the avoidable options in terms of general information and possible options. Such a person should also be in a position to understand the consequences of a certain course of action and then go ahead to make and communicate his / her decision to follow that course of action5. The law recognizes the differences between minors and adults, especially pertaining to minors’ capacity to pass sound judgment. Young people make decisions based on their feelings and emotions rather than on rational thought. This may at times prove risky for them especially if for instance an adult wishes to take advantage.
With this in mind, the law provides for the protection of the youth by rendering them mostly ‘incapable’ of entering into contractual obligations. Inexperience and lack of good judgment in the youth render them vulnerable to exploitation and manipulation by fraudsters and other criminals. Moreover, it is unfair to attach the legal consequences of an adult’s actions to the actions of the youth6. Consequently, if a person cannot go through the reflective mentions described above and finally reach a rational decision, then that person lacks capacity7. Contractual capacity is a relative concept and different categories of people possess it in different or varying degrees. These degrees range from full contractual capacity, through limited contractual capacity, and finally to no contractual capacity8. Under common law, there exist certain exceptions that render contracts void or voidable. These include contracting with minors, intoxicated persons, mentally impaired persons, aliens, bankrupt people, and corporations. This paper provides an in-depth discussion of each one of these groups of persons as related to the concept of unenforceability or invalidity of contracts, void, and avoidable contracts as pertains to incorporated persons.
Using the common law language, a minor is any person, male of female, under the age of 21 years. However, presently, all Australian states have 18 to be the age of minority9. Both common law and statutory law govern the concept of the contractual capacity of minors. However, in this paper emphasis is on common law. According to the common law rules, the minor’s contract appears in three different strata. Among them are the minor’s requisite treaties, which are mostly agreements for the provision of essentials and valuable contracts of overhaul that bind on minors unless renounced, and those not necessary for the minors unless ratified10. The structures of these contracts are such that they protect the persons who entered into them in good faith and enable minors to benefit from contractual relations as well as their binding nature or capacity.
Contracts binding on minors
Minors generally lack the capacity to contract. This is both for their own protection in terms of preventing other people from taking advantage of their irrational decisions and ideas, while also protecting those people who enter into a contract with a minor in good will and the minor ends up taking advantage of this kindness at the expense of the ‘good’ person. The presence of a minor as a party in a contractual agreement does not necessarily deem that contract void. The contract is voidable at the minor’s option but whichever adult the minor entered into an agreement with remains bound regardless of the minor’s intentions. A good case of this prospect appears when a minor purchases faulty goods from a manufactures and then sues the manufacturer under a manufacturer warranty11.
Contracts for necessaries
Such contracts are valid in relation to the supply of goods12. Necessaries refer to the things that a person requires. He/she cannot live without such things. He/she must have them within his/her proximity to live a considerable life. They include the basic needs, which are food, shelter, clothing and medical care13. The courts have the discretion to decide what fits the definition of a ‘necessary’ for a particular minor as this is a question of fact14. Apart from goods supplied, services rendered can also fall under the definition of a ‘necessary’. if one can prove that the services in question was critically essential for that particular minor, such as transportation, or medical care, the minor becomes bound by law to produce monetary recompense for the services15.
In McLaughlin v Darcy  18 SR (NSW) 58516, a minor entered into an agreement with an adult that raised the question of what constitutes a ‘necessary’ the minor, a professional boxer wanted to travel to America to further his professional career and receive some instruction on boxing but he lacked a passport and so could not leave Australia. He agreed with the plaintiff that the plaintiff should travel to Melbourne to acquire the passport for him and that regardless of whether he got one or not, the minor was to pay him. The minor travelled to America but he died before paying the plaintiff who sued his executors for compensation. The court found the passport to be a necessary in law and directed the jury to determine the question of fact, that is, whether it was a necessary to this particular minor. The jury found in the affirmative.
Necessaries as mentioned above could also mean services such as transportation, medical care and legal services needed by a particular manner. Providing education is also a service as determined in Robert v Gary  1 KB 52017 where Robert, a professional billiard player entered into an agreement with Gary, a minor, that they would go on a world billiard tour together. Robert made the necessary arrangements for this tour expending money and effort but they had a disagreement with Gary that led to the cancellation of the tour. Consequently, Robert qualified when he took the step of suing for breach of the contract. The court held that the contract was binding on Gary as it involved the provision of necessaries. Gary had benefitted in terms of instruction from Robert and Robert’s terms were far from unreasonable. Moreover, Gary could not repudiate the contract.
Determining what fits the definition of a ‘necessary’ is mostly a simple task for courts especially when the issues in the case involve the obvious basic needs that are food, shelter, clothing, education, and medical care. The difficulty arises when the elements of time and place come into play confounding the situation. At this point, what constitutes a ‘necessary’ becomes a relative concept subject to change depending on the dynamics of the specific case. A good instance of this is a car in the 1930s, which courts of that age would not deem ‘necessary’ but today one can make a solid argument on the necessity of a vehicle18. Whether an article is a ‘necessary’ for a particular minor is a question of fact. Therefore, the courts apply a comprehensive analysis of the particular minor’s needs at the time. In addition to this, the courts will consider the goods that are already in the minor’s possession to make constructive conclusions on the necessity of those in question19.
In Nash v Inman  2KB 120, the suspect under 21 bought 11 fancy vests from the claimant. The defendant was a minor in college at the time and the plaintiff needed to prove to the court that the issues in the case satisfied the two-fold test (the questions of law and of the fact). The plaintiff failed to prove the question of fact or the test of whether the waistcoats were actually a ‘necessary’ to that particular minor. The minor’s father provided him with sufficient clothing and so the waistcoats had not been a ‘necessary’ at the time of purchase. The action did not succeed.
Liability of minors
If the court finds a contract that involves the supply of ‘necessaries’ binding on a minor, the minor has a legal obligation to pay for the supplied goods or services. However, the amount required by law is a ‘reasonable amount and not necessarily the price stipulated under the contract. In the event that some terms in a contract to supply necessaries are harsh, onerous to the minor or generally unreasonable, the contract automatically becomes void21. If a minor requests a person to purchase necessaries on his / her behalf, the minor will have a legal obligation to repay the person the amount incurred in such a purchase. However, if the goods or services procured are not ‘necessaries’ either in law or as a question of fact, the contract is not enforceable and that person cannot recover the cost of these goods and services from the minor22. Where a minor acquires a loan to purchase necessaries, he/she is under no legal obligation to repay the loan but he/she will still be liable under contract to supply necessaries23. This means that the minor needs to actually buy those necessities or risk transfer of title in equity from loaner to supplier (of the person who gave the loan). This means that in equity, if a minor gets a loan to purchase necessaries and does not in fact purchase the necessaries, the lender is the supplier of necessaries with whom a contract to supply necessaries has been officiated, thereby obliging the minor to pay back the loan24.
Valuable treaties of service
These contracts govern employment. As far as minors are concerned, they include all those contracts of employment by which a minor earns an income for self support, or that enable the minor to obtain sufficient training or education to prepare him/her for his/her future profession or trade. Simply put, they are contracts under which a person undertakes to serve another25. There is no specific prescription of what comprises enforceability of these beneficial contracts of service. It follows then that an employer cannot force an employee to remain in employment or to execute the duties that constitute his / her job description. The best cause of action for the employer is to bring an action for breach of the contract and sue for damages. In case of a major breach, the employer can dismiss the minor employee and then subject him / her to the same standards as he would an adult employee. For these major briefs, minor employees do not get the protection of “lack of full age”26. In Hamilton v Lethbridge  14CLR 23627, the defendant was initially under the employment of the plaintiff and the articles of clerkship (and a covenant therein) restricted the defendant from practicing as a solicitor with 50 miles of Toowoomba. This contract also provided for the assignment of the articles. The defendant set up practice in Toowoomba within a year of starting his own practice in obvious breach of the contract. The claimant opted for an enjoinment. The court held that despite having some onerous terms, the contract was enforceable.
Contracts that do not hold on minors unless sanctioned
More often than not, contracts entered into by minors are not binding unless and until the minors ratify them within a reasonable time of attaining adulthood. These contracts are not routinely void. However, one can nullify them based on the discretion of the minor28. Ratification refers to the act of confirming the terms of a contract or intentionally recognizing a contract entered into as a minor after becoming an adult. If after becoming an adult the person still does nothing in the equivalent of ratifying the contract, it remains non-binding. Examples of these contracts include contracts for non-necessaries, loan arrangements, and trading contracts among others.
Contracts that hold on minors unless renounced
This genre covers contracts that are of a permanent nature in that their execution is transient and therefore takes the form of continuous action by the parties to the contract. Examples include purchasing of shares, leasing out land, and partnership agreements. Such contracts hold on other minors unless and until disowned while either still in minority or within a considerable period of becoming an adult29. The authority on what constitutes ‘reasonable’ is Rain v Fullerton  21 LR NSW EQ 311 where the court found that a person could not repudiate a mortgage contract entered into in minority two years after attaining majority30. Repudiation takes the form of an indication by the minor that he/she has no concerns of executing the terms of the contract31. As mentioned above, the reasonable test is subjective, subject to the dynamics of the case in question. If a minor successfully repudiates a contract, he / she will never have the legal duty to execute the contract’s terms. However, it is mandatory that he / she fulfill all obligations that arose during the validity of that contract. These obligations could take the form of rent payments under a lease or a call for payment of shares.
By extension, the other party can enforce any liabilities that arose before repudiation. Unfortunately, a minor’s chances of recovering any payments made are slim unless the minor can prove that consideration was absolutely lacking in the contract, for instance, that he / she did not make any profits from the payments made. In adjudicating such a matter, the court will also assess the possibility of total restitution for the minor32.
In Steinberg v Scala (Leeds) Ltd  2 Ch 45233, the petitioner under 21 years requested for shares in the suspect’s company. She had been allotted these shares after she paid the amounts necessary for the allotment and the first call. However, beyond that, she n ever received any dividends, or attended any company meeting and her share stagnated at a discount. She repudiated the contract one and a half years later while she was still a minor and sought to recover the payments she had made. The test for a total lack of consideration failed hence she could not recover her money. The court held that the company had provided sufficient consideration by allotting her the shares, which was the only consideration necessary under the law.
Liability of a minor in tort
A minor can be liable for tortuous misconduct such as defamation, conversion or negligence. However, if the tortuous conduct occurs during the transaction of a contract, which under the law is not binding on minors, then liability will not attach in tort. To determine the existence of such a connection (tort-contract), one needs to consider if the contract contemplates the misconduct in clear and unequivocal terms. If it does, tortuous liability will not attach. However, if it does not, one can bring an action in tort34. In Burnard v Haggis  14 CNBS 4535, a minor hired a four-wheel-drive vehicle for a weekend trip but damaged the vehicle through negligent driving. Consequently, the question of liability arises and under this principle, the minor cannot be liable in negligence because too do so would be to recognize and enforce a contract of hire, which is unenforceable on minors36. However, if at the beginning of the transaction the other party informed the minor that the contract prohibited him from driving on the breach and the minor ignores this prohibition ion breach of the contract resulting in the damage of the vehicle, he will be liable in negligence. This is because driving on the breach was not an option among the terms of the contract and the other party made this clear from the onset.
Fraud by a minor
A minor who fraudulently obtains a loan from another party by misrepresenting his / her age as being in the majority will not be liable in the tort of deceit or in a contract of loan. This is because allowing a tortuous action would be indirectly enforcing an otherwise unenforceable contract, thus unjust. In the case of R Leslie Ltd v Sheill  3KB 60737, Sheill, under 21 years got several loanwords from the petitioner. The plaintiff realized that Sheill’s minority rendered him incapable of entering a loan contract and so he brought an action in the tort of deceit and alternatively, in restitution for monies had and received. The court rejected the claim holding that despite minors being capable of liability in tort, attaching liability in this case would be indirectly enforcing an otherwise unenforceable contract. Furthermore, restitution in equity was not an option because it would only require Sheill to return the borrowed amount if he still possessed the exact notes and coins that he took from the plaintiff. It is necessary to analyze this concept in relation to the case of a minor who borrows money to purchase a necessary.
In Mercantile Credit Ltd v Spinks , QWN 6738 where the defendant fraudulently acquired a loan from a finance company after misrepresenting his age too be over 21 years. The minor was a sales representative and he needed a car too execute his professional duties. After acquiring the loan, he topped it up with some of his own money and bought a car. The plaintiff took as security for the loan a bill of sale over the vehicle, which eventually enabled them to repossess the vehicle after the defendant forfeited repayment. The plaintiff sued in claim of the balance of the unpaid principal on the loan. Under equity, the doctrine of restitution frowns upon anyone benefitting from fraudulent activities. Therefore, it would dictate that the person relinquish any property still in his possession. However, if a minor obtains goods fraudulently then proceeds to sell them, equity cannot allow the legitimate owner of the goods to obtain the proceeds from the sale39.
Intoxication and mental incapacity
Mental disorders render contracts voidable at the option of the person with the disorder40. Those that are drunk or insane at the time of the formation of the contract have the option of repudiating those contracts except if they are contracts for the supply of necessaries. Nevertheless, for the option of repudiation to stand, such persons need to prove that they were actually insane or drunk at the time they entered into the contract thus making them incapable of understanding the nature of their action, and secondly that the other party was aware of their incapacity41. In O’Conner v Hart  1 NZLR 15942, Jack O’Conner, a trustee of a trust established under his father’s will agreed to sell to Hart three blocks of land from part of the trustee estate. O’Conner lacked sufficient mental capacity to enter into such an agreement but this fact was not apparent too Hart at the time he entered into the contract. Subsequently, the replacement trustees sued for the contract to be set aside. The burden of proof fell on the claimant too prove both his incapacity and the defendant’s awareness of his condition. As such, the claimant could not prove that Hart was aware of O’Conner’s mental incapacity and so the court held that the contract was enforceable. In Imperial Loan Co v Stone  1 QB 55943, Lord Esha MR brings the issue of an individual entering into a contract. If such person was not mentally upright upon the time of his/her action, he/she remains bound by the contract.
The onus of proof rests on the person raising the defense of intoxication or insanity. This may prove to be a difficult task for lunatics that are apparently having a lucid moment at present but idiots and drunkards have a lighter burden44. When proving incapacity, the defendant need only prove that he / she was not in a position to pass rational judgment on the specific terms of the contract at the time that he/she entered into it. He needs not prove that he could not understand at all what was transpiring45. In Blomley v Ryan  99 CLR 36246, Ryan owned a grazing land outside Goodiwindi and had taken to excessive drinking later in his life. During one of his sprees, the plaintiff’s father offered to buy this property and after some negotiations, Ryan signed a contract to that effect. The terms of the contract were unfair in terms of excess generosity and inaccurate evaluation of the property. The plaintiff demanded performance stating that Ryan’s incapacity was not such that he could not understand the general nature of his actions. The court set aside that contract holding that despite this partial awareness of the general nature of the contract, it was apparent that Ryan was not in a position to form a rational judgment about the specific terms of the contract.
Insanity and intoxication only make the contract voidable at the option of the drunkard or the lunatic. The other party has no legal obligation to set aside the contract if they are aware of such incapacity47. In Gibboons v Wright  91 CLR 42348, the plaintiff, Gibbons, owned land jointly with her sisters-in-law, Olinda and Ethel. The joint ownership was so that in case of the passing of any one of the sisters, the property would automatically shift to the remaining two and at the death of one of the remaining two; the entire interest of the land would belong to the sole survivor. In December 1945 when the sanity of Olinda and Ethel was in question, these two decided to transfer their respective interests too each other, which if valid would change their ownership to common ownership. A year later, both of them passed away leaving Gibbons as the sole survivor. The question was whether the transfer of interest was valid under the law since it occurred when the parties were insane. The courts held that a contract entered into by an insane person becomes voidable at the option of that person or his/her personal responsibility. In the present case, none of the sisters had opted to make the contract void and so the common ownership remained, which meant that Gibbons was only entitled to her 1/3 interest. The principle behind this judgment is that insanity does not automatically negate a contract. It also does not confer rights on anyone else other than the insane person or a personal representative.
It is possible to procure a later ratification of a contract and therefore, make it binding on the parties apart from the instance of minors ratifying contracts when they reach the age of majority. Such ratification is binding if at the instance of ratification the lunatic, drunkard, or idiot is capable of comprehending both the specific terms and the general nature of the contract49. In Matthews v Baxter  LR 8 Exch 13250 the defendant bid for and knocked out certain houses and land to the plaintiff during a clearly apparent drunk bout. After he sobered up, he proceeded to ratify these contracts but subsequently failed to complete them. The plaintiff sued for performance and the court held the defendant liable due to this subsequent ratification.
Section 3 of the Sale of Goods Act (1979) holds both the mentally incapable and drunkards liable to pay a reasonable price for goods provided and services rendered under a contract for supply of necessaries during the period of their contractual incapacity51. The only exception for the enforcement of this provision is when the goods and services were charitable supplies. In case of charity, these goods and services are gifts for which no payment is necessary52. In Re Rhodes  44 Ch D 9453, Rhodes was a resident at a private lunatic asylum from 1855 to 1881 when she died. The annual fee for keeping her there was 140 pounds and her brother used her annual income of 96 pounds plus his own money to sustain her until his death in 1875. Thereafter, his children continued to top up the deficiency and upon her death, the sued for compensation from their aunt’s estate. The courts rejected this claim holding that they topped up her income every year charitably and not on loan.
Aliens (Foreign Nationals)
Contracts entered into with aliens during peacetime are generally enforceable without much difficulty54. However, in times of war where Australia is contending with the mother country of an alien, the alien loses any contractual capacity to enter into an agreement with an Australian national. Secondly, the foreign national loses his/her capacity to enforce any contract even if the alleged contract came too be before the onset of the war55.
An insolvent person has the capacity to enter into a contract56. However, his/her legal status is significant to any such contract because it affects the execution of these contracts entered into while bankrupt. According to the Bankruptcy Act 1966 (Cth), contracts entered into after the onset of bankruptcy retain validity so long as the other party was bona fide and they provided good consideration. It is also necessary to certify that the parties completed transactions before the intervention of the trustee in bankruptcy57.
Corporation law dictates that upon incorporation, a company’s existence becomes legal and separate from individual persons. The company then acquires the legal capacity of a natural person, which enables it to enter into contractual relationships as provided for under sections 123 (2) and 161 of the Corporations’ Law. Such a company can acquire and own property, sue, and or be sued among other qualities. It is critical that companies analyze the effect of their actions on other persons, of other people’s actions on them, and of their leaders’ actions58. Ideally, an incorporated company’s constitution should have at least its memorandum and an article of association. Previously, companies incorporated under the Companies’ Act were restricted to contracting only under the objects mentioned in its memorandum, and any action that did not have its bearings on the memorandum was automatically ultra vires (against the law) and void59.
Contracts are agreements between parties intending to be legally bound to perform the respective responsibilities arising out of the agreement, generally known as the terms of the contract. It is therefore necessary that the law provides protection too those parties that lack the capacity to make rational decisions when entering into a contract that is binding in nature. Consequently, it protects minors from exploitation by adults, as well as insane and intoxicated persons. However, even these minority groups have certain responsibilities that attach subject too contracting for the supply of particular goods and services that the law deems ‘necessary’ for survival in society. The same law requires that persons who enter into contracts while mentally insane or intoxicated prove their incapacity and the other party’s awareness of their condition. As such, the law provides a balance and a high standard of justice. Several factors affect a person’s liability in contract
- 1 – Australian Contract Law, Agreement. 2011. Web.
- 2 – Chris field, Elements of a contract, Offer and Acceptance. 2010. Web.
- 3 – Jeffrey F. Beatty, Susan S. Samuelson, Essentials of Business Law (Thomson Learning, 3rd Ed, 2008) 231
- 4 – Geoff Monahan, Essential contract law (Cavendish Publishing, 2nd Ed, 2001). 12
- 5 – Asia Yousaf, What Exactly Is Mental Capacity? Legal Capacity and Clinical Capacity. 2008. Web.
- 6 – Queensland Law Reform Commission, Minors’ Civil Law Capacity (1996). Web.
- 7 – Yousaf, above 5
- 8 – Peter Radan, John Gooley, Principles of Australian contract law (Lexis Nexis Butterworths, 2nd Ed, 2010) 128
- 9 – Above n 8, 128
- 10 – Sam Cusumano, Leanne Wiseman and Sharon Christensen, Contracts (Lexis Nexis Butterworths, 3rd edition, 1999) 104
- 11 – Ibid 105
- 12 – Jeannie Paterson, Andrew Robertson and Peter Heffey, Principles of Contract Law (Law book Co, 2nd edition, 2005) 146
- 13 – Stephen Graw, An Introduction to the Law of Contract (Thomson Law book Co, 6th edition, 2008).153
- 14 – Cusumano, Wiseman and Christensen, above n 9, 105
- 15 – Ibid.
- 16 – McLaughlin v Darcy (1918) 18 SR 585
- 17 – Roberts v Gray  1 KB 520
- 18 – Cusumano, Wiseman and Christensen, above n 9, 106
- 19 – Ibid.
- 20 – Nash v Inman  2 KB 1
- 21 – Cusumano, Wiseman and Christensen, above n 9, 109
- 22 – Ibid 107
- 23 – Ibid.
- 24 – Cusumano, Wiseman and Christensen, above n 9, 107
- 25 – Graw, above n 12, 160
- 26 – Ibid
- 27 – Hamilton v Lethbridge (1912) 14 CLR 236
- 28 – Paterson, Robertson and Heffey, above n 11, 150
- 29 – Cusumano, Wiseman and Christensen, above n 9, 109
- 30 – Cusumano, Wiseman and Christensen, above n 9, 108
- 31 – Paterson, Robertson and Heffey, above n 11, 148
- 32 – Paterson, Robertson and Heffey, above n 11, 149
- 33 – Steinberg v Scala (Leeds) Ltd  2 Ch 452
- 34 – Richard Stone, The Modern Law of Contract (Cavendish Publishing Limited, 5th edition, 2002) 185
- 35 – Burnard v Haggis (1863) 14 CBNS 45
- 36 – Cusumano, Wiseman and Christensen, above n 9, 109-110.
- 37 – R Leslie Ltd v Sheill  3KB 607
- 38 – Mercantile Credit Ltd v Spinks  QWN 67.
- 39 – Cusumano, Wiseman and Christensen, above n 9, 110
- 40 – Paterson, Robertson and Heffey, above n 11, 154
- 41 – Graw, above n 12, 172
- 42 – O’Connor v Hart  1 NZLR 159
- 43 – Imperial Loan Co v Stone  1 QB 559
- 44 – Graw, above n 12, 172
- 45 – Graw, above n 12, 173
- 46 – Blomley v Ryan  99 CLR 362
- 47 – Graw, above n 12, 173
- 48 – Gibbons v Wright  91 CLR 423
- 49 – Graw, above n 12, 174
- 50 – Matthews v Baxter  LR 8 Exch 132
- 51 – Graw, above n 12, 175
- 52 – Stephen Graw, An introduction to the law of contract (4th edition, 2002).
- 53 – Re Rhodes  44 Ch D 94
- 54 – Radan, Gooley, above n 8, 143
- 55 – Ibid
- 56 – Cusumano, Wiseman and Christensen, above n 9,112
- 57 – The Bankruptcy Act 1966 (Cth) s26
- 58 – Cusumano, Wiseman and Christensen, above n 9,112-113
- 59 – Cusumano, Wiseman and Christensen above n 9, 113