4. Capacity

4.1 Reasons for Limitations on Capacity

It has been seen that the idea of ‘agreement’ plays a central role in the classical law of contract. Much of the law is based on the presumption that parties enter into agreements of their own free will, and that therefore the courts’ primary concern can be to determine, and then give effect to, what the parties themselves have agreed. There are certain situations, however, where despite the fact that an agreement has apparently been made, the courts have felt the need to intervene so as to deny or limit its effect as a contract. One of these situations arises where for some reason one of the contracting parties is felt to need protection. It is in this context that the rules relating to ‘capacity’ can come into operation. In order to make a valid, enforceable contract, both parties must be regarded as having capacity in law to enter into such an agreement. The reason for intervention on the basis of ‘lack of capacity’ may relate to the need to protect the contracting party from him or herself, or to the need to ensure that a contracting party is not being ‘exploited’ because of his or her mental state. Three aspects of this topic are considered in this lecture, namely minors’ contracts, mental disability and intoxication.

There are other problems of ‘capacity’ which relate to the question of whether one party has the power or authority to make the contract, or is acting ultra vires. This sort of problem can arise in connection with agency arrangements. It can also arise in relation to the ability of incorporated bodies to make particular contracts. This aspect is not considered here, since it is regarded as more appropriately the concern of texts on company law.

4.2 Minors’ Contracts

Those who have not reached the age of 18 are regarded in English law as ‘minors’ and as such have limited capacity to enter into contracts. The choice of age for this purpose is inevitably somewhat arbitrary, but follows the general law as to the age at which a person attains ‘majority’ for many purposes of the law. It indicates that the object of the rules is largely paternalistic - that is, it is intended to protect minors from the consequences of their own actions. If they were concerned with the question of whether the minor had genuinely consented to the agreement, and understood its consequences, there would be an argument for an approach based on an inquiry into the individual minor’s capacity, rather than having a general rule. Even within the paternalistic approach, the result is somewhat unsophisticated, since different age groups might be thought to need different types of protection. Children under the age of 10, for example, are unlikely to appreciate what is involved in undertaking legal obligations, and might at first sight appear to be in need of the greatest protection. In practice, however, they are less likely to be the target of unscrupulous adult contractors than teenagers, who may well have money combined with an over-estimation of their understanding of the way the world works. A simple age ‘cut-off’ for contractual capacity is therefore probably the best compromise.

One result of the current approach is that the law can sometimes appear to operate harshly against those who contract with minors. In particular, the adult party who is unaware that the other contracting party is a minor may still find the contract unenforceable.

The law starts from the presumption that all minors’ contracts are either void or voidable. There are two main exceptions to this, namely contracts for ‘necessaries’, and ‘beneficial contracts of service’. Such contracts may be fully enforceable. In addition, certain contracts which involve a minor obtaining an interest in property which involves continuous or recurring obligations may be voidable. The scope of these various categories will be considered next, before moving on to the consequences of entering into a contract with a minor.