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LAW OF CONTRACT (DL2)

LECTURE 7 CAPACITY OF PARTIES (II)



6. OTHER CONTRACTS

1. Minor Not Bound
Contracts which are neither valid nor voidable, do not bind the minor but
have a number of legal effects.

2. Other Effects
(a) Other Party Bound
Contracts in this group bind the other party: Farnham v Atkins (1670) 1
Sid. 446
However, remedies available to minor are restricted, i.e. he cannot claim
specific performance of the contract. => minor cannot seek s.p. from
adult as well
Conformed: Flight v Boland (1828) 4 Russ. 298

(b) Ratification
Minor will be liable on the contract if he ratifies it after reaching full age.
Ratification may be express or implied from conduct. => continues to act
as if he was in contract after majority (imply)
Hence, these contracts do not bind minor unless he ratifies.

(c) Executed Contracts
If minor has actually performed contract, he cannot recover back money
paid or property transferred by him unless there has been a total failure of
consideration: Wilson v Kearse (1800) Peake Add. Cas. 196.

(d) Passing of Property to Minor
Stocks v Wilson [1913] 2 KB 235
Held: where goods have been delivered to minor, property can pass to
minor under a contract which does not bind him. Minor has good title to
the goods
Why?
It is to protect the innocent 3
rd
party from being in trouble???? Vice versa

(e) Passing of Property from Minor
Property can pass from minor under a contract which does not bind him:
Chaplin v Leslie Frewin (Publishers) Ltd [1966] Ch 71

7. LIABILITY IN TORT

1. G.R. Minors are liable in tort in same way as adults there is no age limit
in relation to tortious liability.
However, the courts will not allow a tort action to be used as a means of
indirectly enforcing an otherwise unenforceable contract. => If a tort
directly connected to the contract, minor cannot be held liable
Why? =>
If sued in tort, he can set up the invalidity of the contract as a defence to
the tort claim.
Fawcett v Smethurst (1914) 84 LJ KB 473 => minor hired a car
J ennings v Rundall (1799) 8 TR 335 => minor hired horse to be
moderately ridden, minor rode it and injured it by riding it too hard. Court
disallow the owner to bring an action to the minor.
Burnard v Haggis (1863) 14 CB (N.S.) 45 => minor hired horse for
riding, contract expr that the horse is not to be jumped as it is unfit to do
so. Minor used it and killed the horse. The court held Minor was liable.
(Minor is liable if it is not authorised by contract)
Ballett v Mingay [1943] KB 281=> minor hired microphone and gave it
away. Court held he was liable.
*Minor will be liable in tort if it arises independently from the contract or
the conduct is outside the ambit of the contract.

2. Rule that minor is not liable in tort applies, not only where he commits a tort
in breaking the invalid contract, but also where he commits a tort in
procuring it.

R Leslie Ltd v Sheill [1914] 3 K.B. 607 => minor entered into contract by
loaning money and misrepresented that he was of age. Misrepresentation
can be sued in court for tort of deceit where the adult was induced to
enter into the contract. *Minor is not liable. Bcos if he is liable for the
tort, he would be seen to be part of the contract.
Held: Minor could not be sued in tort of deceit for inducing an adult to
lend him money by fraudulently misrepresenting his age.
Stocks v Wilson
Minor could not be sued in deceit for inducing an adult by such
misrepresentation to sell & deliver goods to him.



8. LIABILITY IN RESTITUTION (Restoration/Refund)

1. POSITION AT COMMON LAW (Before 87)
Where a contract did not bind a minor (either because contract was for
non-necessaries or one which had been validly repudiated), a minor
could be held liable to restore certain benefits received by him under
such a contract.
A minor who has obtained benefits at expense of an adult, may be
liable to make restitution to adult.
This remedy is available as of right.
This remedy is expressly preserved by S3(2) MCA.
Such a liability was imposed in equity if minor was guilty of fraud
(eg. Tort of Deceit) and in certain other cases at common law.

2. POSITION AFTER Minors Contracts Act 1987 (MCA).
S3(1) MCA gives court a discretion to order minor to transfer to adult
party any property acquired by minor under a contract which does not
bind him.
S3(2) MCA nothing in S3 shall be taken to prejudice any other
remedy available to the adult party to the contract. => Common Law
principles or equitable rule are still applicable.
Thus in cases which fall outside S3(1), or in cases where the court
declines to exercise its discretion under the subsection, it remains open to
adult to seek restitution under the old rules of equity or common law.



(i) S3(1) MCA

(a) SCOPE (ie when does it apply)
Applies where a contract has been made with a minor & contract is
unenforceable against [the minor] (or he repudiates it = voidable
contracts) because he was a minor when contract was made.
In such a case, the court may if it is just & equitable to do so, require
[the minor] to transfer to the [other party] any property acquired by the
[minor] under the contract, or any property representing it. => No
necessity for the adult to proof fraud.
The provision leaves issue of restitution to discretion of the court.

o Restoration of property acquired.
Subsection would most obviously apply to a case like Nash v I nman.
Minor could be ordered to return the fancy waistcoats to the seller.
No need to show fault or fraud.

o Proceeds of property acquired.
S3(1) note : court can order minor to transfer either the property
acquired under the contract or any property representing it.
However, S3(1) would not apply where the minor had dissipated the
property acquired under the contract or its proceeds. As courts will not
minors to pay up with his general assets, this would means that the
contract is enforceable if he was made to pay.

But NOTE: 3(1) only empowers court to order minor to transfer either
the property acquired under contract or property representing it.
Court cannot order him to pay either the price or the reasonable value of
what he has obtained out of his other assets.

(b) DISCRETION OF THE COURT
S3(1) does not entitle adult party to transfer of property as of right.
Transfer of property can be ordered only at discretion of court.

(ii) EFFECTS OF FRAUD
(a) COMMON LAW Minor not liable even if he committed fraud.
(b) EQUITY relief granted to other party on ground of minors
fraud.
o Restoration of Benefits
o Under equity, minor could be made to restore benefits obtained
under an unenforceable contract.
o This equitable relief is expressly preserved by MCA: S3(2)
o Statutory remedy is more favourable:
- Statutory remedy is available even though the minor was not
guilty of fraud;
- Statutory remedy extends to proceeds of thing obtained under
contract (any property representing it); Contrast with
equitable remedy remedy not available in respect of such
proceeds.
o But necessary to look pre-MCA cases to determine factors courts
will take into account in deciding whether to exercise statutory
discretion to order minor to transfer property acquired under the
contract, or property representing it.




o Stocks v Wilson [1913] 2 KB 235
o Minor obtained goods under a contract induced by fraud & had
disposed of some of those goods.
o Held: he was liable to account to the original seller for the proceeds
of the goods. => Because he still has the proceeds from the
sales.(Prop reps it)
o Cf R Leslie Ltd v Sheill [1914] 3 KB 607
o Minor had by fraud obtained a loan of 400.
o Held: he was not liable in equity to restore the money. => Money
had been spent and no question of tracing it.
o Note in this case, there was no question of tracing the money, i.e.
of showing that it, or some asset representing it, was still in the
hands of the minor.
o The only type of order that can be made against the minor is one to
restore the property acquired, or its proceeds, in equity, or to
transfer it under S3(1).
o He cannot be made liable to pay for the property acquired or to
account for its proceeds by a personal judgment enforceable
against his general assets.

Court will only allow restitution if there can be tracing of monies or
properties.
Common law: ??
Common v mca : restitution is as of right.
Fraud: restitution is of courts discretion.

9. MENTAL INCAPACITY (MENTAL PATIENTS)
1. LACK OF CAPACITY
S1(2) Mental Capacity Act 2005 A person must be assumed to have
capacity unless it is established that he lacks capacity.
S2(1) Mental Capacity Act 2005:
A person lacks capacity in relation to a matter if at the material time he
is unable to make a decision for himself in relation to the matter
because of an impairment of, or a disturbance in the functioning of, the
mind or brain.
S3 : a person is unable to make a decision for himself if he is unable:
(a) To understand the information relevant to the decision;
(b) To retain that information;
(c) To use or weigh that information as part of the process of making the
decision; or
(d) To communicate his decision (whether by talking, using sign language or
any other means).
The test prior to MCA 2005 - whether a person had an understanding of
what was going on & what was involved in the transaction involved.
So test under 2005 is consistent with common law test.
2. GENERAL RULE
A contract with a person lacking mental capacity (M) is valid, except in
case where Ms incapacity is known to other party.
A party dealing with M is protected if he or she did not know of lack of
capacity.
3. EXCEPTION
Incapacity Known to other Party
If other contracting party knows of Ms incapacity, the contract is
voidable at Ms option: Imperial Loan Co v Stone [1892] 1 QB 599.
I.e. M can elect either to avoid the contract or to affirm it, in latter case, it
is binding on M.
Burden is on M to show that:
(i) His incapacity prevented him from understanding the transaction:
Re K [1988] Ch 310; S1(2) MCA - A person must be assumed to
have capacity unless it is established that he lacks capacity; &
(ii) The other party knew this.
But M will be bound if he ratifies contract after he is no longer suffering
from the incapacity: Birkin v Wing (1890) 63 L.T. 80.
Where the other party does not know of Ms incapacity, contract is valid
even if the contract may in some sense be regarded as unfair: Hart v
OConnor [1985] AC 1000.
Thus, for the agreement to be set aside on the basis of mental disability, it
must be shown that this disability was apparent to the other party at the
time of the contract.
Contract is enforceable against M if other party is unaware of his
incapacity.
Contract in unenforceable if parties are aware and lead to ratification.
The only exception to the above rules relates to contracts for necessaries.


4. CONTRACTS FOR NECESSARIES

The Mental Capacity Act 2005 applies the same rule to contracts for
necessary goods and services as the SOGA 1979 applies to minors.
Thus, a person who lacks capacity to contract for the supply of such
goods and services must pay a reasonable price for them if they are
supplied: S7 MCA. => when he is not bound by the contract
S7 MCA 2005 If necessary goods or services are supplied to a
person who lacks capacity to contract for the supply, he must pay a
reasonable price for them.
Necessary means suitable to a persons condition in life and to his or
her actual requirements at the time when the goods or services are
supplied: S7 MCA.

(i) What is effect of S7 on a Binding Contract on M?
If contract is binding on M under Items 1 & 2 above (ie M is either
mentally disabled under S1 and/or S3 MCA 2005 & his incapacity is
unknown to other party), his liability for necessaries is not affected by S7.
I.e. a person who supplies necessaries to M without knowing of his
incapacity can enforce contract he is not limited to an action for a
reasonable price.
(ii) What is effect of S7 on a Non-Binding Contract on M?
If M is not bound by contract under para 1 & 2 above, he is liable under
S7.
Thus a person who supplies necessaries to M knowing of his incapacity
cannot enforce the contract he can only recover a reasonable price.
(iii) Loans (For knowledge purpose)
Re Beavan [1912] 1 Ch. 196
Person who loans money to M knowing of his incapacity cannot enforce
contract but can recover so much of the money as has actually been spent
on necessaries.

10. DRUNKARDS/DRUNKEN PERSONS

Imperial Loan Co v Stone [1892] 1 QB 599; Gore v Gibson (1843) 13 M
& W 623
Contract of a drunken person is not binding if it can be shown that at time
of making contract:
(i) He/she was incapable of understanding general nature of what was
being done (unable to understand general nature of the transaction);
&
(ii) Other party was aware of this incapacity.

Such a contract is voidable at option of drunken person, who can elect
either to avoid the contract or to ratify it, in which case it is binding.
So drunkard is liable if he ratifies the contract when he becomes sober:
Matthews v Baxter (1873) L.R. 8 Ex 132
S3 SOGA 1979 - Drunken person is also liable for necessaries. Then,
hell have to pay reasonable sum.


11. CORPORATIONS (NOT EXAMINABLE)

1. What is a Corporation?
Where two or more persons associate in order to enter transactions, their
association may be incorporated or unincorporated.
(a) Unincorporated Associations
If it is unincorporated by a general partnership then it cannot contract,
or sue or be sued in its name.
But a contract entered into by or with an unincorporated association is not
necessarily invalid.
The person or persons who actually made the contract, e.g. the secretary
or committee of a club, may be held to have contracted personally & be
personally liable on the contract: see Bradley Egg Farm Ltd v Clifford
[1943] 2 AER 378.s
(b) Incorporated Associations
An incorporated association is a company incorporated under the
Companies Acts of 1985 or 2006.
It is an artificial person recognised by law & therefore has legal capacity.
It has capacity to enter into contracts and sue or be sued in its own name.
Their members cannot sue or be sued although they are the ones making
contracts on behalf of corporation.

2. What Limitations are placed on a corporations contractual
capacity?
When a company is incorporated by registration as a Company under the
Companies Acts, each company on formation has to register certain
documents for public inspection.
One of these documents is the memorandum of association that includes
one important part called the objects clause which specifies the
purposes for which the company has been set up.
If the company enters into a contract outside the scope of this clause, it is
void.
A company which acts outside its objects/authority is said to act ultra
vires and such actions will be illegal.
Ashbury Railway Carriage & I ron Co v Riche (1875) LR 7 HL 653
Company was incorporated with the object (set out in the MA) to make,
& sell, or to lend on hire, railway wagons & carriages & other rolling
stock.
The company bought a concession for the construction of a railway in
Belgium & then contracted to assign this concession to another Belgian
company.
Company failed to honour the agreement & the Belgian company sued to
enforce the agreement.
Held: by HL that the contract, being related to the actual construction of a
railway, as opposed to railway stock, was ultra vires the objects in the
memorandum & void.

(i) Reason for Ultra Vires Rule/Disability
Company incorporated under statute & so it can only exercise those
powers as are conferred by statute.
Rule was required to protect investors in & creditors of the company.

(ii) Injustice of Ultra Vires Rule
Persons who entered into an ultra vires contract with a company could not
enforce it.
In theory, before entering into the contract with the company, such
persons would first scrutinise the MA to ascertain the extent of the
companys powers.
In practice, however, they did not do so, but were nevertheless deemed to
have constructive notice of the contents of the MA despite the fact that
they had no actual knowledge of them.

(iii) Statutory Modification of Ultra Vires Doctrine
Due to criticism of the ultra vires doctrine, rule has now been modified by
statute.
S39(1) Companies Act 2006 validity of an act done by a company
shall not be called into question on the ground of lack of capacity by
reason of anything in the companys constitution.
Effect of this section a transaction entered into by a company cannot be
held invalid merely because it falls within any restriction on the objects
listed in the companys articles of association.
With respect to constructive notice discussed above, S40(2)(b) CA
2006 a party to a transaction with a company is not bound to enquire as
to any limitation on the powers of the board of directors to bind the
company or authorise others to do so.
Effect of S40(2)(b) the doctrine of constructive notice is now a dead
letter.
Person dealing with the company in good faith need not be concerned
about whether the directors are acting within the terms of the companys
constitution.
Such contracts will be valid and enforceable.
3. Limited Liability Partnerships
These partnerships are formed under the LLP Act 2000.
They have separate legal personality & unlimited capacity.
So are not subject to ultra vires rule: S1(3).