CAPACITY (TO MAKE A CONTRACT) CHAPTER 12 CAPACITY (TO MAKE A CONTRACT) 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

CAPACITY TO CONTRACT Some people have a limited mental ability to make a contract, including: minors (children under 18 years of age) persons suffering mental illness or mental instability due to drink/drugs/illness/age/accident Some parties have restrictions placed on their physical or financial ability to make a contract, including: Bankrupts Enemy aliens Prisoners Companies (where their constitutions limit what they can do) 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

IMPORTANT STATUTE LAW IN NSW The Minors’ (Property and Contracts) Act 1970: reduced the age for full contractual capacity to 18 years; described a person under 18 as a MINOR; Nominated various classes of contract that are presumed to be binding on a minor. This means that an adult wishing to enforce a contract against a minor must establish that the contract is one that is recognised and approved by the Act. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

SECTION 19 OF THE MINORS ACT Generally a minor will be presumed bound by a contract if: 1. The minor had the necessary understanding or ability to comprehend the legal rights/obligations/nature of the contract. 2. The contract was for the minor’s benefit (fair and reasonable depending on the overall circumstances). 3. In the event a contract is presumed binding then it cannot be avoided by the minor due to their age. However, a contract can be challenged on any other legal grounds. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

LACK OF CAPACITY DUE TO DRINK/AGE/ILLNESS/DRUGS/ACCIDENT Where a plaintiff wants to avoid a contract due to lack of mental capacity because of drink/drugs etc, then they must prove it and the standard of proof is a civil standard (on the balance of probabilities) To succeed, a plaintiff must prove BOTH of the following two elements: They were unable to understand the nature of their agreement or what they were doing at that time; and The other contracting party knew or ought to have known of their mental disability. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

BINDING CONTRACTS UNDER THE ACT Contracts for the minor’s benefit (fair and reasonable) Contracts for sale or purchase of property by a minor at a reasonable consideration (section 20) Contracts that have obtained prior court approval Contracts made by a minor after being granted the necessary capacity Contracts for investments in government securities Contracts that are not otherwise binding but have not been repudiated by the minor before they attain the age of 19 years 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

Repudiation of contracts by a minor Where an agreement is not presumed binding on a minor it may be repudiated by the minor at any time before reaching 19 years old To be effective the repudiation must be Written Signed Served on the other contracting party On repudiation the court is granted very wide powers to adjust the rights of the parties under the contract 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

Minors in South Australia Section 4 of the Minors Contracts (Miscellaneous Provisions) Act 1979 provides that: where a contract is unenforceable against a minor due to their age it remains unenforceable against the minor unless they ratify the contract in writing on or after turning 18 years of age The Act recognises that contracts are binding on a minor in the following situations Contracts bindlng unless repudiated within a reasonable time after reaching 18 years Contracts binding when ratified within a reasonable time after reaching 18 years 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition