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 infant’s 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 infant’s 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 minor’s
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 daughter’s 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?