TOPIC 3(a): CAPACITY
Classes of legal identities where a capacity issue may arise are -
Minors Convicts Partnerships
Mentally Ill Persons Corporations Unincorporated
Intoxicated Persons Pre-Incorporation Associations
Aliens Contracts Business Names
Bankrupts Incorporated Associations
MINORS UNDER STATUTE
Minors (Property and Contracts) Act (NSW) 1970.
Change common law view: contracts with minors were unenforceable by the other party.
Changed so most contracts with minors will be valid;
A minor can’t argue the defence of minority against enforcement.
For the Act to apply to determine the legal status of a contract 3 elements must be satisfied:
the disputed transaction must be a “civil act” as defined by section 6. “Civil Act” includes a contract.
a party must be under 18 years at the time they entered into the transaction – section 8
the minor must have an understanding of the transaction –section 18.
See Homestake Gold of Australia v Peninsula Gold (1996) Aust Contracts Reporter 90-066
If the Act applies, then the question: whether the subject transaction is “presumptively binding” or not.
Subject to usual defences of mistake, misrepresentation, unconscionability
Legally bound to the contract as if he or she was an adult.
It can be enforced by or against the minor.
PRESUMPTIVELY BINDING CATEGORIES
The categories enumerated by the Act as types of transactions that would be presumptively binding are:
A contract for the minor’s benefit; (section 19) – net benefit.
A property purchase contract (both real and personal) where the price the minor pays is not excessive
A property sale contract (both real and personal) where the money received by the minor is adequate
(section 20 (2))
When the minor makes a reasonable gift (s21)
A contract is to invest in government securities; (section 23)
A contract approved by the Supreme Court (section 26)
A contract less than $10,000 that has the prior approval of a Local Court. The court must be satisfied
that the contract was for the minor’s benefit; (section 27)
A contract for the sale of property that was signed before an independent solicitor or the Public Trustee
not more than seven days before the date of the contract; (sections 28, 29)
NON PRESUMPTIVELY BINDING CONTRACTS
If contract does not fall within presumptively binding category, then minor may bind contract by:
ask court to affirm on his/ her behalf – s30
affirm upon reaching 18 years (affirmation can be by notice or conduct) - s30
If in a non-presumptively binding category and the minor wishes to get out of transaction:
minor must repudiate transaction – s31
by notice in writing (s33)
court can repudiate while minor <18 (s34)
When to repudiate
while a minor (s31)
before minor’s 19th birthday (s31)
If fail to repudiate
then contract will automatically become binding on minors 19th birthday (s 38)
Adjustment of rights
Court has the power to adjust the rights following repudiation (s 37)
A guarantor is legally bound (s 47)
Minor may be liable for tort connected with a contract (s48)
STEPS TO ADVISE NSW CLIENT WHEN MINOR:
1. Go to Minors (Property and Contracts Act) NSW 1970
2. Did they understand what they were doing in entering into the contract?
3. Is the contract presumptively binding?
4. If not, then has it become binding due to ratification/affirmation(s31)/lack of repudiation(s38)?
5. If contract not valid, does there need to be an adjustment of rights (s37)?
MINORS UNDER COMMON LAW:
A minor is not bound by her / his contract if entered into while a minor (but the minor could still enforce
the contract against the other party, that is, the contract is voidable)
Exceptions to the general rule –
when a valid contract is created with a minor:
supply of ‘necessaries’
beneficial contracts of service
when a voidable contract is created with a minor either:
binding until repudiated
non-binding, which becomes binding when ratified by minor
Supply of Necessaries
What are ‘necessaries’? Ask two questions:
Are the delivered goods or services suitable to the minor’s station in life? (question of law)
Were the goods or services in the fact necessary at the actual time of delivery? (question of fact – to be
decided by the jury)
Scarborough v Sturzaker (1905) 1 Tas LR 117:
Necessaries depends on circumstances.
Stur (minor) liable to pay for new bike which he purchased from plaintiff. Evidence showed Stur had to
cycle to place of work and he used old bike as part payment for new one. Court found for Stur but
balanced benefit (bike) with detriment of regular payments (in proportion) to P.
Bojczuk v Gregorcewicz  SASR 128:
Earlier Tas case, where P was not so fortunate.
Minor D living/working in Poland. Wished to immigrate to Aus, asked P (relative in Aus) to pay for her
passage and promised to repay. Did not repay, D sued for debt. Court held was not contract for
necessities (Ross J: already had job in Poland), even though it was beneficial to D.
Valid Contract/Beneficial Contracts of Service
The contract must satisfy 2 additional pre-requisites -
1. the contract must involve service or apprenticeship by the minor; and
2. the contract must be beneficial to the minor.
De Francesco v Barnum (1890) 45 Ch D 430:
Plaintiff, De Francesco employed minor in a 7 year contract to learn stage dancing. Minor agreed not to
marry during that time or accept any professional engagements without P’s permission. P was not bound
to provide for her in periods of unemployment or salary while employed. P could also repudiate contract
if he believed girl to be unfit for stage dancing. Minor left P and started employment with competitor
promoter B. P sued B for inciting minor to breach contract.
Court held: there was service, but not beneficial (on the whole).
OTHER EXCEPTIONS TO THE COMMON LAW RULE
Valid contract exists, but one party has right to cancel it.
Minor has choose to enforce contract (Bruce v Warnick (1815) U.K)
Generally, only get damages, not specific performance. SP requires mutuality, which is absent because
of voidable contract (Flight v Booth (1828) U.K)
There are 2 categories which exist:
a contract which is binding until it is repudiated (positive act) by the minor
o Contracts where minor obtains an interest of a permanent nature eg. leases, purchasing shares,
o Must repudiate during minority or within reasonable time after majority (i.e. after turning 21 at
common law, or 18 under the statute).
o Rain v Fullarton (1900) 21 LR (NSW) 11: P worked nearly 2 years after majority before
proceedings to make voidable a mortgage he entered into as minor. Court held, not effective
because of delay.
a contract which is not binding but becomes binding when ratified (positive act) by the minor.
o Contracts of purchases of non-necessaries and trading contracts.
o Must ratify within reasonable time of majority.
o May be done by simply continuing on with contract performance. Williams v Moor (1843) 152
The consequence of repudiation.
Cannot be held liable for any future obligations i.e. obligations which arise subsequent to the repudiation
Liable for obligations that arose prior to any repudiation.
Money paid by minor pursuant to repudiated contract only recoverable by total failure of consideration
(has not received any benefit). Courts reluctant to find this.
Steinberg v Scala (Leeds) Ltd  2 Ch 452: P (minor) applied for shares in company. Paid amount
due on allotment and first call made on shares. 18 months after, still a minor, repudiated contract and
sought to recover paid money. Held: not entitled to money. Even though no dividends declared, the
company had done all that it had bargained to do and P could have gotten some value by selling them.
Torts and contacts.
General rule: minors liable for any torts they commit.
Exception: cannot be held liable for a tort if it is directly connected to a contract which, because of his or
her minority, is unenforceable against him or her.
Connection determined by: was wrongful act of a kind contemplated by contract?
Cannot be sued in tort for deceit over fraudulent representation of age. R Leslie Ltd v Sheill  3
KB 607: S (minor) got loan from P’s company, fraud that he was of full age. Tort for deceit rejected,
since to allow tort would be indirect means of enforcing an unenforceable contract. P would have to go
for equity via restitution instead.
No capacity. Diagnosed as seriously mentally ill have affairs managed by officials under state mental
health legislation, if no declaration is made the common law takes over.
Principle: Incapacity of mental illness or intellectual disability cannot succeed unless:
o Prove that at time of contracting, was so disabled that he was not able to understand.
o Prove that the other party was aware or ought to have been aware of his condition.
Onus of proof is on person pleading mental disability.
Result: contract is voidable at his option. May repudiate or ratify.
s7 of the Sale of Goods Act, 1923 (NSW): if goods are supplied as necessaries to a person of unsound
mind the receiver must pay a reasonable price.
Imperial Loan Co v Stone  1 QB 599:
ILC bought action against S (was guarantor of loan made by ILC to another person). S signed as a surety
then. S alleged, he signed – was insane and incapable of understanding.
Court held: S liable. Lopes LJ: person must not only prove their incapacity but that the other’s
knowledge of that fact.
Onus of proof is on person pleading mental disability.
Gibbons v Wright (1954) 91 CLR 423:
3 sisters owned a property as joint tenants but 2 sisters then signed a contract changing it to tenants – in
–common. They died. The surviving sister was trying to change back to the original joint tenancy by
arguing the 2 dead sisters were incapacitated at the time they signed the contract. The court held that
there was evidence of incapacity, thus creating a voidable contract, not a void contract.
Same as mentally ill: defendant must prove that at time of contracting, they were so intoxicated that they
did not understand what they were doing AND other party knew/ought to have been aware of his
intoxicated condition. Molton v Camroux (1849) 154 ER 1107
May be repudiated/ratified within reasonable time of regaining sobriety
Degree of intoxication determines contractual capacity. If not affected that much, remedy may still exist
as intoxication may be factor in assessing unconscionability of other party’s acts equity. Blomley v
Ryan (1956) 99 CLR 362.
ALIENS: foreign nationals
No problem in peacetime except perhaps foreign ownership restrictions in land assets.
If there is a state of war between Australia and the country of that foreign national 2 consequences
(i) foreign national is without contractual capacity to enter into a contract
(ii) foreign national may not enforce a contract even if it had been made before outbreak of war.
Limited capacity: is subject to the provisions of the Bankruptcy Act 1966 (Cth).
Cannot carry on business under another name without disclosing the fact of bankruptcy to who they deal
with section 269(a).
May not obtain credit or hire purchase goods or amounts over $3000 either individually or with other
persons without disclosing the fact of bankruptcy - section 269(b)
New South Wales the Felons (Civil Proceedings) Act 1981 (NSW): convict can enter a valid contract
and sue under a contract while undergoing sentence.
Before (doctrine of ultra vires): only make a valid contract relevant to the powers set out in its
memorandum of incorporation, otherwise invalidated.
Now: full contractual capacity as if it were an individual. (sections 124, 125 Corporations Act). If it
does make a contract in excess of the powers set out in its memorandum, the other party may still
enforce the contract.
PRE INCORPORATION CONTRACTS
Contract entered into by the promoters of a company, on its behalf, but before the company has been
formed. They contract on the company’s behalf with the intention that the company will assume
responsibility for the contract after incorporation.
Before, common law: not enforceable against the company. Kelner v Baxter (1866) LR 2 CP 174:
company could not ratify the action of the promoters and so become bound by the terms of a pre-
incorporation contract under the doctrine of ratification.
Now, Section 131 of the Corporations Act: provides that a non-existent company may ratify a pre-
incorporation contract within a reasonable time of it becoming formed.
State legislation (Associations Incorporation Act, 1984, NSW): allows incorporation of non- profit
associations so they can be separate legal entities and hence protect individual members from personal
liability. Liddle v Aboriginal Legal Aid Service (1999) 150 FLR 142 involved a former employee of
the service which ran a voluntary association registered under the Associations Incorporation Act, 1963,
NT seeking a declaration against the service.
No separate legal capacity to enter into a contract. Contract must be made with the individual members.
If a contract is made on behalf of the association, no member is bound unless they were a party to it
personally – Ex Parte Goddard, re Falvey (1946) NSWLR
Partners as each others agents can bind each of the other partners to a contract (Partnership Act, 1962,
Not a separate legal entity; only the owner of the business name can enter into binding contracts.