Seri Stamford – Diploma in Law

Notes on Capacity

DIL 1103 – Contract Law

CONTRACT LAW I (Cont.)

CAPACITY
The capacity to contract or to come into a contract, is the ability to do so. When capacity is
mentioned in regards to a contract it generally will fall under the field of whether or not one
is capable or is mentally sound enough to enter into a contract. Of course, this would
include any adults or any persons that are above sui juris. The law provides that any under
sui juris would be considered as infants and therefore incapable of entering into legal and
enforceable contracts on their own. The law is such that those who do not have the legal
capacity to contract are infants, mentally disabled and those who are incapable to contract
at the time (incapacitation).

Capacity is an issue and element altogether due to the fact that one must be of the same
mind in regards to terms and conditions before one can enter into a contract with another
party; a contract is a meeting of minds and therefore if one is immature or incapable of
understanding, processing and reciprocating the terms, conditions and obligations of a
contract, there can be no valid contract. As such, alongside that of consideration, any
contract with those who are incapable will be void.

In Malaysia’s Contracts Act 1950, S11 dictates that “every person is competent to contract
who is of the age of majority according to the law to which he is subject, and who is of
sound mind, and is not disqualified from contracting by any law to which he is subject.”

Of course, in Malaysia the age of majority is eighteen (18) years of age as per the Age of
Minority Act 1971. In cases such as Mohori Bibeev v Dharmodas Ghose [1903] 1 LR 30 Col.
539, children (infants) were held by the Privy Council to not be able to enter into any
contract whatsoever. This is compounded in the case of Tan Hee Juan v Teh Boon Keat
[1934] FMSLR 96 that no child can ever be party to a transfer of land. As such, in both cases,
the contracts were void due primarily and mainly by the fact that children cannot enter into
contracts. The similar Act in the United Kingdom would be the Family Reform Act 1969. In
England, contracting with a minor for necessities would fall under the purview of S3 Sales of
Goods Act 1979 where it reads: “where necessities are sold and/or delivered to a minor… he
must pay a reasonable price for [them].”

However, there are exceptions as many things do, and children may enter contracts for
necessities. These necessities include shelter, food, water, bandages, etc. Anything that is to
be considered to be luxurious (i.e. not a necessity for life) would not adhere to this
exception. This exception, while making allowances for that of children, does not extend too
well to that for those of the mentally disabled or the incapacitated.

One particular method or pseudo-test as to how a court would view whether or not a
contract with a minor is legitimate would be if the contract were to be of the benefit and
necessity of the child. This is seen in the case of De Francesco v Barnum (1890) 45 CH D 430
where a child (of fourteen (14) years of age) was trained under contract to be a dancer. The
court held that the child, while agreeable to have been trained, the contract was not
entirely beneficial to said child; as the contract was not fully beneficial to the child, the court
held the contract to be invalid and therefore void. As the contract was void, it was not
binding.

Connected with aforesaid case, would be that of Proform Sports Management Ltd v
Proactive Sports Management Ltd & Stretford [2006] EWHC 2903 where the court had to
look back at the contract between famous football star Wayne Rooney with his agent - this
contract was signed by Rooney when he was aged seventeen (17). In such a circumstance,
the court held that the contract was actually voidable and not void as it was not an
agreement to contract one into apprenticeship, education and service (not beneficial).

To the case once more on De Francesco v Barnum (1890) 45 CH D 430, should an infant
choose to enter employment (a contract) and of course be bound by such a contract, it
should be for their own general benefit - as necessities would also be for the infant’s
benefit. Should an infant choose to work and was injured, the infant is still entitled to
damages as per Clements v London and North Western Railway Co [1894] 2 QB 482.

Keep in mind that a voidable contract can be ended. The contract itself is still valid, but the
infant is well within their rights to legally terminate the contract even before reaching sui
juris. What should happen if money or other obligations were already given and/or provided
to an infant prior to contract reaching the court? Traditionally, if money was already
given/sent/provided to the infant, the money would not be recoverable unless the party
that did give money to the minor is able to prove to the court that the contract which the
money was transferred under was not beneficial to the infant. Moreover, should the infant
in question enjoy the benefits of goods and/or services, then seeks to terminate the
contract and recover the money already paid, the infant cannot be reimbursed (essentially
“vice versa”).

In both Malaysia and the United Kingdom, the Age of Minority Act, Family Reform Act and
the Minors’ Contract Act 1987 are to protect children from unnecessary, superfluous and
damaging litigation and legal action for what could be a misunderstood action of an
immature mind. Such Acts also provides strict guarantees for minors who do indeed
contract with adults. This would generally have the contract bind the adult but not the
minor. However of course, should the minor reach legal age and ratify the contract (or have
a new contract; terminating the old one, etc.), then they would be legally bound. The minor
would also be bound if they were to make a promise before legal age and contract on said
promise after they reach legal age. It is worth noting that a contract, while a minor, is not
void - as again, any monies paid would not be recoverable (such rescission would be for
voidable contracts). However, as much in law, there are exceptions to the rule and would
each go by a case by case basis - be they necessities or employment or any other contract.
Apart from not being of legal age, those who are mentally incapable or incapacitated, are
also considered to be incapable of entering into any contract. This cuts both ways: one may
truly be mentally incapable of entering a contract and would not like to be bound or one
might have been mentally capable but wishes to feign incapability to escape legally binding
obligation. The general rule in claiming that one was indeed mentally incapable (claiming
mental incapacity) one must show and prove that any impairment (be it drugs, alcohol or
other medical diagnoses) was sufficient to have one be at a point where they could not
understand what they were doing and they could not appreciate or understand their actions
and situation and the other party was aware of such incapacitation. Such a rule was found
in Hart v O’Connor [1985] UKPC 1. While originally a case from New Zealand, it is dominant
and important to that of English Common Law, and by that extension, Malaysian Common
Law.

In Hart v O’Connor, Lord Brightman held the following: “... the validity of a contract entered
by a [lunatic] who is ostensibly sane is to be judged by the same standards as a person
contracting with a sound mind, and is not voidable by the lunatic or his representatives by
reason of ‘unfairness’ unless such unfairness amounts to equitable fraud which would have
enabled the complaining party to avoid the contract even if he were sane.”

In the United Kingdom, mental incapability outside that of minors would be dealt with
under the Mental Capacity Act 2005. It is a general rule that people who are intoxicated
under the effect of alcohol or any other substance be deemed incapable of entering any
legally binding agreements. While individuals may have placed themselves in such a
situation where they had given up mental cognisance to contract, the other (sober) party
had chosen to contract with what is an obviously incapable party. The courts are actually of
the opinion that if one elects to be voluntarily intoxicated, one should not be allowed to
avoid legal and contractual obligations - however, this opinion is tempered by the fact that
the other sober party had elected to contract with an intoxicated party, presumably to take
advantage of. This general rule falls under the idea that a contract is a “meeting of minds”
and one cannot meet the mind of a lunatic, or as put by Lord Ellenborough in Pitt v Smith
(1811) 3 Camp 33, one cannot be a contracting party with people of “no agreeing minds”. A
drunken person, of course, may elect to ratify a contract once sober and such a contract
would then be binding (under the Sales of Goods Act (UK) and is a general rule in Malaysia).