Introductory & Contract Law
Capacity to Contract
Week 6
Copyright Guy Harley 2004
Capacity to Contract
 Diminished capacity
 Children (Minors)
 Mental Disability
 Community Protection
 Bankrupts
 Criminals
 Outlaws
Copyright Guy Harley 2004
Contracts with Minors
 Minor – Anyone under 18 years of age
 Contracts with minors can be
 Valid – legally enforceable by both parties
 Voidable – legally enforceable until repudiated
by the minor
 Void – no legal effect
Copyright Guy Harley 2004
Valid Contracts
 Contracts enforceable against a minor
 Supply of Necessaries
 Contract of Beneficial Service
 All other contracts are “voidable” unless:
 Obtained under duress
 Obtained by Undue influence
 Obtained by misleading and\or deceptive conduct
 Unconscionable bargains
 Etc. (as for all contracts)
Copyright Guy Harley 2004
Supply of Necessaries
 Contract for the supply of goods and services
that are suitable to the condition in life of the
minor and to his actual requirements at the time
of sale and delivery
 Includes:





Food
Clothing
Education
Medical care
Shelter
Copyright Guy Harley 2004
Supply of Necessaries
 Two part test
 Is the thing capable of being a necessary?
 Chapple v Cooper (Outline p6-11)
 Is it necessary for this particular person?
 Onus is one person seeking to enforce contract
against minor
 Nash v Inman (Outline p6-11)
 Reasonable price not contract price
Copyright Guy Harley 2004
Beneficial Contracts of Service
 E.g. apprenticeships
 Must be for the overall benefit of the minor
 Leng & Co v Andrews (Outline p 6-12)
 Roberst v Gray (Outline p 6-12)
Copyright Guy Harley 2004
Ratification
 Repudiation
 Voidable contracts must be repudiated within a
reasonable time of child attaining majority – otherwise
enforcable against person
 Davies v Beynon-Harris (Outline p 6-12)
 Nicholson v Nicholson (Outline p 6-12)
 Ratification by Minor after turning 18 prevents
repudiation and contract becomes valid and enforceable
 Statutory modification
 NSW - Minors (Property and Contracts) Act 1970
Copyright Guy Harley 2004
Aliens
 Same contractual capacity as Australian citizens
 Cannot take a majority shareholding in certain
public companies
 In wartime
 Cannot make a contract with an Australian
citizen
 Cannot take action in Australian courts to
enforce a contract
Copyright Guy Harley 2004
Mental Disability
 Valid contract unless it can be shown that:
 Person was wholly incapable of
understanding the nature of the contract
 Other party was aware of the mental condition
 See Imperial Loan Co v Stone (Outline p 6-12)
 Also applies to drunks
 See Matthews v Baxter (Outline p 6-13)
Copyright Guy Harley 2004
Community Protection
 Bankrupts
Cannot enter into contracts involving more than
$500 without Trustee in Bankruptcy’s permission
 Diplomatic Representatives
Contracts are binding but cannot be sued in
Australian court unless they submit to the
jurisdiction
 Outlaws
A person sentenced to death is a non-person
and cannot sue (Dugan v Mirror Newspapers
(Outline p 6-13)
Copyright Guy Harley 2004
Community Protection
 Criminals
If sentenced to more than 3 years gaol, need
Public Trustees permission to enter into
contracts
Copyright Guy Harley 2004
Intention
Copyright Guy Harley 2004
Intention to Contract
 Parties must intend their agreement to be legally
binding i.e. enforceable by a court
 An intention to be morally binding is not enough
 Objective test
 Distinction between
 Social/domestic agreements
 Commercial agreements
Copyright Guy Harley 2004
Intention
 Subjective intention
The person’s actual state of mind
 Objective intention
Concludes, on the basis of what a person said
and did, what a reasonable person in the same
circumstances would have intended
 Contract law uses objective tests
 See Smith v Hughes (Outline p 6-4)
 Clarke v Dunraven (Outline p 6-4)
Copyright Guy Harley 2004
Domestic Agreements
 Court presumes that parties did not intend to
contract
 Presumption may be rebutted
 Balfour v Balfour (Outline p 6-3)
 Riches v Hogben (Outline p 6-3)
Copyright Guy Harley 2004
Domestic Agreements
 Court will look at
 Terms of agreement
 Circumstances surrounding the agreement
 Effect of the agreement on the parties
 Parties conduct subsequent to agreement
Copyright Guy Harley 2004
Commercial Agreements
 Courts presume that the parties intended to
contract
 Clear words are needed to rebut the
presumption
 Onus is on party seeking to disprove the
contract
 Rose & Frank v J R Crompton (S&O p95)
 Edwards v Skyways (S&O p95)
Copyright Guy Harley 2004
Fundamentals of Law
Consideration
Copyright Guy Harley 2004
Two Types of Enforceable Agreement
 Deeds
 Contracts that comply with special rules
 Do not require consideration
 Simple contracts
 Do require consideration
Copyright Guy Harley 2004
Deed
 In writing
 Maker of deed must sign, seal and deliver the
document
 Independent witness
 Special attestation clause
SIGNED SEALED AND DELIVERED )
by the said JOE BLOGGS
)
in the presence of:
)
Copyright Guy Harley 2004
Consideration
 Every simple contract must be supported by
consideration
 The law will not enforce a gratuitous or bare
promise
 Lack of consideration may be overcome by the
equitable doctrine of estoppel
Copyright Guy Harley 2004
What is Consideration
 Consideration must flow from both sides of the
contract
 Can be:






A promise to do something
A promise not to do something
A benefit for the promisee
A benefit for a third person at the promisee’s direction
A detriment to the promisor
Anything of real value to the promisee
Copyright Guy Harley 2004
Consideration Cannot Be Past
 A promise can be executed (i.e. present execution) or
executory (i.e. future execution) but cannot be past
 A promise must be paid for but if consideration has
already been given then there is nothing being paid for
the new promise
 Roscorla v Thomas (Outline p 6-5)
 Anderson v Glass (outline p 6-5)
 Settling unsettled aspects of a past transaction may be
consideration
 Re Casey’s Patents: Stewart v Casey (S&OR p104)
Copyright Guy Harley 2004
Consideration Must Move From Promisor
 Only the person who has “paid” for the promise
can enforce it
 Dunlop v Selfridge (S&OR p101)
Dunlop
Contract
Wholesaler
(bought tyres from Dunlop, sold to retailers)
Contract
Selfridges
(broke promise to wholesaler not to discount)
 Called “Privity of Contract”
Copyright Guy Harley 2004
Consideration Need Not Move to Promisor
 It is not imperative that the consideration move
to the promisee
 Official Trustee in Bankruptcy v Arcadiou
(Outline p 6-6)
Copyright Guy Harley 2004
Consideration Need Not Be Adequate
 Consideration must be sufficient i.e. have some
value in the eyes of the law
 Chappell & Co v Nestle (Outline p 6-6)
 Need not be equal in value to the promisor’s
promise
 The very nature of contract law is to let the
parties make their own bargain
 However, doctrine of unconscionable conduct
has developed to overcome resulting injustices
Copyright Guy Harley 2004
Consideration Must Be Sufficient
The following will not be sufficient consideration:
 Moral obligations
 Illusory consideration
 Performance of a public duty imposed by law
 Performance of an existing contractual duty
owed to the promisor
Copyright Guy Harley 2004
Illusory Consideration
 The consideration must be definite
 It cannot be so nebulous as to be illusory
 White v Bluett (Outline p 6-7)
Copyright Guy Harley 2004
Moral Obligations
 A moral obligation is not sufficient
 Eastward v Kenyon (Outline p 6-7)
Copyright Guy Harley 2004
Promises Not to Sue
 Forbearance to sue (i.e. an offer not to sue) is
good consideration provided
 The claim (defence) was reasonable
 The promisee had an honest belief that the claim had
a reasonable chance of success
 The promisee has not concealed any facts that might
affect the validity of the claim
 Hercules Motors v Schubert (Outline p 6-8)
Copyright Guy Harley 2004
Performance of a Public Duty
 Where a person is obliged by law to perform a
public duty
 The promise to perform the duty cannot be
sufficient consideration
 Collins v Godefroy (Outline p 6-8)
Copyright Guy Harley 2004
Existing Contractual Obligation
 Promising to perform an existing contract is not
consideration
 To be binding, there must be a promise to do
something additional to contracted duty
 Stilk v Myrick (Outline p 6-8)
 Hartley v Ponsonby (Outline p 6-8)
 Promise to perform an existing contractual duty
to a third party is sufficient consideration
 Shadwell v Shadwell (Outline p 6-10)
Copyright Guy Harley 2004
Renegotiating a Debt
 Renegotiating a debt will not be consideration as
 the debtor is already obliged to pay the full amount
 Doing something less cannot be consideration
 Pinnel’s Case (Outline p 6-9)
 Approved by House of Lords in Foakes v Beer
(Outline p 6-9))
 Exceptions
 Composition with creditors
 Payment by third party
 Ways around
 Deed
 Payment in kind
Copyright Guy Harley 2004
Exceptions to Pinnels Case
 Promissory estoppel
 Fraud on a third party
 Shadwell v Shadwell (Outline p 6-10)
Copyright Guy Harley 2004
Promissory Estoppel
Elements
1. Assumption
The promisee, on reasonable grounds, believes that a
particular legal relationship exists or will exist
2. Inducement
The promisor created the assumption
3. Reliance
Promisee acts in reliance on promise
4. Detriment
Promisee alters its position to its detriment
Copyright Guy Harley 2004
Promissory Estoppel


Applies where
 No consideration exists
 Formalities of making a contract have not been
satisfied
Walton Stores v Maher (textbook)
Copyright Guy Harley 2004
Consideration Must Be Sufficient




$1 for a Rolls Royce
“I promise to be an honest public servant”
“I’ll give up my legal claim against you”
“I will pay you less than I owe you if you forget
the rest”
 “In love and affection”
 “I promise to carry out my contractual
obligations”
Copyright Guy Harley 2004