CAPACITY OF PARTIES

Even though all 3 elements of a valid contract are present there may still be questions about its validity. The parties to the contract must have the capacity to make a legally binding agreement. The capacity of the parties refers to their ability to fully understand the terms and obligations contained in a contract. The law recognizes that certain people are either wholly or partly incapable of making a contract. These include minors and individuals with unsound ability. Law recognizes that there are certain classes of people in society who neither have the maturity nor the capacity to fully understand the nature and extent of agreements that they make with others. The law provides such protection by simply refusing to enforce certain contracts against them. These included in the category are: Minors (under 18) unless contracts of necessaries and beneficial contracts of service Mentally Incapable Drunkards General Principle Mentally ill and drunkards may be liable under contracts for the provisions of necessaries but all other contracts they enter into during periods of incapacity will be voidable by them. The general principle is subject to 2 qualifications: They must have been incapable of understanding the nature of what they were agreeing to at the time that they contracted and The other party must have been or should have been aware of their condition and the consequent incapacity. Minors A minor is a person who is not yet 18 years of age. The law protects minors in relation to contracts made by them. In situations where a minor pays cash for goods or services s/he is bound by that contract. In other circumstances where the minor is still to pay, the contract will only enforceable if it is a contract for necessaries or a beneficial contract of service. As a general rule, any person may enter into a valid contract. However special rules apply to certain persons in respect of their ability to enter into contracts. A person under the age of 18 years has a restricted capacity to enter a contract. The basic rule is that if a minor makes a contract s/he can choose between enforcing the contract or abandoning it. The contract will be enforceable by the minor but not against the minor. There are 2 contracts that are enforceable against a minor: 1. Contracts for necessaries and

2. Contracts for the infants benefits.

Contracts for Necessaries A minor must pay a reasonable price for necessaries that are sold and delivered. Necessaries are items that are needed for the reasonable comfort of a minor. Necessaries are defined as goods suitable to the condition in life of the infant and to the infants actual requirements at the time of the sale and delivery. Food, clothing, medicines and board have been held to be necessaries. A contract for a luxury item would generally not be regarded as a necessary. Contracts entered into by infants for non necessaries are absolutely void. Contracts for infants benefit Contracts which when looked at as a whole, are regarded as being for the benefit of the infant are enforceable against, as well as by, the infant. Beneficial contracts of service refer to contracts such as apprenticeships or contracts that provide education and training are judged to be for the minors benefit. Such contracts include contracts of service or employment, apprenticeship, training and cadetships. In Mercantile Union v Ball [1937] 2 KB 489 Ball was aged 20 years at a time when the age of adulthood was 21. He entered into an agreement to purchase a truck for his haulage business but defaulted on the payments. The court held that because the contract was not for necessaries Ball could not be bound by it. In Victoria legislation has also had a significant effect on the position of minors. The Supreme Court Act 1986, Section 49 provides that certain contracts entered into by minors are absolutely void, meaning they have no legal effect. These include: Contracts for the repayment of money lent Contracts for the payment of goods other than necessaries Accounts stated ( a statement of account which the parties acknowledge is correct) Mental Capacity The law assumes that a person who is mentally unsound or under the influence of alcohol or other drugs, does not have the mental capacity to enter into a binding contract. The exception to this rule is if the contract is for necessaries when the law will require the person to pay a reasonable amount for the goods or service. Any contracts entered into by persons suffering from a mental disorder or under the influence of alcohol or drugs are voidable at the option of the other party. A contract for matters other than necessaries can be avoided by an

impaired person if it can be proved that s/he did not understand what was involved because his/her condition. This must be done in a reasonable time after the contract was formed. If however, the person has no reason to believe that the other party is drunk or mentally disordered the contract will be enforceable. A person who entered into a contract while temporarily impaired can confirm the agreement will be honored when that person returns to a normal state. In the case of Matthews v Baxter [1873] LR 8 Exch 132, Baxter was drunk when he agreed to buy a property at an auction. When he became sober he confirmed the contract but later tried to avoid it on the grounds of his intoxication. The court said it was too late, he had confirmed it and could not change his mind again. REALITY OF CONSENT Mistake Misrepresentation Duress Undue Influence Unconscionability The consent of the Parties A basic principle in contract law is that there must be real consent by the parties. In any agreement, the consent of the parties to the terms of the contract must be genuine and freely given. Consent is the term used to describe the state of mind of each party to the contract at the moment agreement is reached. If the consent of one party or both parties is obtained by means of a: 1. mistake of fact 2. misrepresentation or through 3. duress or undue influence the agreement may not be enforceable because it lacks genuine consent. The contract in this case is void (invalid) or voidable (able to be avoided). The passing of legislation by both federal and state parliaments to protect consumers has resulted in fewer disputes about consent.

Mistake
When a contract is entered into because one or other (or both) of the parties are under some misapprehension (or are mistaken) about something forming the basis of their agreement, it can be argued that there is no true consent ( no true agreement) and that, consequently, there can be no binding contract. Because of this the law has long been prepared to set such contracts aside where it is clear that they would have been entered into but for the mistake.

If there is a mistake on the part of one or both of the parties, then a contract may be deemed to be devoid of legal effect. One or both of the parties may have made a mistake about the subject matter of the contract. A party may enter an agreement under a mistaken belief. Certain mistakes will render a contract void. Mistakes can be divided into 2 broad categories mistakes of law and mistakes of fact. Mistake of Law A mistake made by a person about a legal right or obligation is a mistake of law and it will not make a contract void. The reason is that everyone is presumed to know what the law is. The expression ignorance of the law is not excuse is correct. Mistake of Fact A person who enters a contract for the holiday of a lifetime may have built up a mental picture of a beautiful tropical beach with luxury accommodation, only to find there has been a mistake. The accommodation is far from luxury and there is no sand at the beach, just rocks. In such cases the courts are very reluctant to grant any relief to the aggrieved party. A person who enters a contract for the holiday of a lifetime may have built up a mental picture of a beautiful tropical beach with luxury accommodation, only to find there has been a mistake. The accommodation is far from luxury and there is no sand at the beach, just rocks. In such cases the courts are very reluctant to grant any relief to the aggrieved party. There are not many types of mistake that enable a person to invalidate a contract. For instance, a person cannot rely on mistake to avoid contract just because the quality of an item is not to their liking (for example, buying new clothes then deciding the colour is a mistake). Basically it depends on the nature of the mistake as to whether or not the contract can be avoided. If both parties make a mistake about the content of a contract then there has not been a true agreement so the contract is void. Types of Mistake Common Mistake A common mistake is where both contracting parties make the same mistake. Mistake about the existence of subject matter or about a fact going to the root of the contract will render a contract void. Mutual Mistake A mutual mistake is where both contracting parties are mistaken but they make different mistakes. A contract entered because of a mutual mistake may be rendered void if it can be shown there was no offer and acceptance. Unilateral Mistake

A unilateral mistake is where one party to the contract is mistaken and the other party knows or ought to know of this mistaken belief. The contract may be able to be avoided. Non est Factum A person who signs a document that is radically and fundamentally different from what that person believed they were signing may rely on the defence of non est factum (it is not his deed). The party must show that they exercised reasonable care when signing the document.

Misrepresentation
A misrepresentation is a false statement of fact made by one party to another to induce or entice that party to enter into a contract. It is a statement of fact that is untrue. It does not have to be a term of the contract and may be an oral statement to draw the person into the contract. Misrepresentations can either be made fraudulently or innocently. A person who in all honesty, mistakenly represents a 2001 model car as a 2003 car would be liable for an innocent misrepresentation and purchaser would have the right to get his or her money back. A party alleging misrep must normally prove 4 things 1. that a false statement was made 2. that that statement was one of fact 3. that it was addressed to the party misled 4. that it was intended to induce and did actually induce the contract. A False statement Silence does not constitute misrep. 5 exceptions to this rule 1. Distortion of a positive representation 2. Subsequent discovery that the statement was false 3. A statement becomes untrue 4. Parties in a fiduciary relationship 5. Contracts not made in good faith. Only statements of fact can constitute a misrep For a false statement to give rise to an action in misrep, it must be a statement of existing or past fact. It cannot be a Statement of opinion A statement of intention or a promise as to the future. Addressed to the Party misled Only intended representees may sue the plaintiff was the intended recipient. Those who hear and act upon false information can be Those to whom it was communicated directly Those to whom it was communicated indirectly Those who otherwise became aware of it Intended to induce the Contract

In 4 situations, Untrue representation does not give rise to action in misrep because it did not induce the contract: 1. Where the representee is not aware of the representation 2. Where the representee knows the representation to be false 3. Where the representee does not act on the representation 4. Where the representation is not material to the contract CATEGORIES OF MISREPRESENTATION Classification of a particular misstatement as either fraudulent, negligent or innocent will depend upon the knowledge and intention of the representor at the time that the untrue statement was made. Fraudulent Misrepresentation A fraudulent misrepresentation is made when the person making the statement knows it is false or is indifferent as to its truth or falsity. Fraudulent misrepresentation False representation is made knowingly Without belief in its truth Recklessly careless whether it be true or false Innocent Misrepresentation An innocent misrepresentation is made when a person makes a false statement of fact believing it to be true. Innocent misrepresentation Where a false representation induces the contract but the representor was neither fraudulent nor negligent in making it. Where statements are made in the honest but mistaken belief that they are correct Silence Silence can amount to misrepresentation if it is a factor that induces a party to enter a contract. Negligent Misrepresentation A person giving information and professing to be skilled in a particular area can be held liable for a negligent misrepresentation if the information given is correct. For liability to arise a duty of care must be established. Negligent misrepresentation If a person deliberately held out as competent to give information and advice, and realizes or ought to realise that they are being trusted to give information, and it is reasonable in the circumstances for the other party to act on the information or advice, the representor will be liable. Duress and Undue Influence

Duress refers to the use of violence or threats to make a person agree to become a party to a contract. A contract can be avoided if it can be shown that consent was obtained by threatening the property or personal safety of the person or his or her family members. The victim of duress will not be held to the terms of a contract and may avoid the contract. Duress only available where the coercion is in some extreme form. Undue influence operates where one party uses the influence that s/he has over the other party to obtain some undue benefit. 2 types of relationships to be considered: Special relationships high degree of influence 1. parent and child 2. guardian and ward 3. doctor and patient 4. solicitor and client 5. agent and principal 6. trustee and beneficiary 7. religious advisor and disciple Other relationships In Barton v Armstrong [1974] 3 ALR 355 Barton wanted a number of contracts between himself and Armstrong set aside. He claimed that Armstrong has threatened to murder him and his family. The appeal court held that duress was one of the reasons Barton entered into the contracts, therefore the contracts were voidable. Undue Influence may occur in circumstances where one person has the power to influence another in an unacceptable manner, therefore genuine consent is missing. Where one person exercises domination or power over another to such an extent that the other is not able to exercise free will and judgment, there is said to be undue influence. Should this undue influence be used to entice a person into a contract, the victim may avoid the contract at his or her option. The courts have recognized that the power to unduly influence may arise in various relationships including doctor and patient, parent and child, religious leader and followers and solicitors and clients. REVISION QUESTIONS 1. Ned suffers from a mental illness. Recently he thought he had inherited a large amount of money so he signed a contract to buy a new high powered speed boat. Will he be legally bound by the contract. Give reasons.

2. Nicole aged 16 years purchased some jewellary on an internet auction website. Does the purchase constitute a legally binding contract. Why or Why not? 3. Robert signed a document believing it to be a guarantee for his daughters house mortgage. In reality the document was a promise by Robert to repay his daughters mortgage within two years. After 24 months the bank now seeks to recover the money from Robert. What defence could Robert potentially raise? What are the chances of succeeding with this defence?