5

Validity

1. INTRODUCTORY REMARKS

So far we have explored the manner in which a contract is concluded and the various methods used in determining its content. We will concentrate in the following two chapters on the validity of a contract and the possible grounds on which to set a contract aside at the request of one of the parties. It should be stressed that in this (and the next) chapter we are concerned only with the invalidity of the contract as a whole. So far as individual terms of a contract are concerned, German law provides a range of subtle mechanisms for policing the content of a contract. One example of this was given earlier (in chapter 3) in relation to standard terms of business. Furthermore, good faith has provided a springboard for the courts to imply in certain circumstances terms into a contract beyond the actual intentions of the parties for no better reason that they are regarded as ‘just’ by the courts. Generally speaking, the rules and principles discussed here presuppose that the process of formation of the contract has been completed and that the content of the contract has been determined in accordance with the rules explained in chapter 3. For instance, as we have already seen, the courts will seek to avoid a construction of the contract that would lead to its illegality. Only if all mechanisms discussed in the previous chapter fail will the court step in and, as a measure of last resort, declare the contract void for being contrary to ‘good morals’. Also, the objective method of interpretation must be applied first before one can establish a difference between (objective) declaration and (subjective) will which may justify rescission for mistake.

The reader should be aware that the grounds for invalidity could be presented in various ways. One way of analysing the material is from the perspective of ‘procedural’ versus ‘substantive’ contractual justice. This would not however allow for clear lines of demarcation and would produce a kaleidoscopic image of German law, as the following remarks readily illustrate.

Defects in the contracting process are commonly referred to as problems of ‘procedural’ contractual justice. Accordingly a number of ‘procedural’ standards have been set up to which the parties must adhere in addition to reaching agreement through offer and acceptance. ‘Substantive’ contractual justice is—on a theoretical level—independent from issues raised by the contracting process; this sort of argument attempts to measure the fairness of the end result of that process. If one were to apply an exchange standard of justice one could for instance claim that the terms of a contract are unfair for one party if that party receives less than the equivalent value of what he gives up. (See, for a useful exposition of these basic concepts of contractual justice, von Mehren, International Encyclopedia of Comparative Law Vol. VII chapter

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1, p 64 et seq.) While German law provides a confusing variety of mechanisms to deal with ‘procedural’ contractual justice, it does not recognise a general exchange standard as a sufficient reason for setting a contract aside. And yet, in combination with procedural defects, onerous terms of the contract may well lead to the invalidity of the contract as a whole.

The rules relating to incapacity, mistake, deception, other forms of ‘misrepresentation’ and coercion are centred on procedural justice. A new form of procedural standard is set up by the rules of consumer protection. These rules, however, border on substantive justice. Likewise, some cases of ‘misrepresentation’ are more concerned with the fairness of terms of the contract than with any deficiency of consent. Aspects of substantive justice become the focus of attention when it comes to contracts void under § 138 II BGB, a provision which presupposes a violation of the exchange standard, but crucially in addition also requires the existence of grave procedural flaws.

There is, finally, another category of reasons for declaring a contract void which is independent of what has been said so far. These reasons are directed at the content of the contract, but unlike ‘substantive’ contractual justice are largely independent of the fairness of the exchange of values. These are external, ie extra-contractual, reasons and therefore not to be confused with the exchange standard of justice. In German law contracts contrary to statutory prohibitions, eg, § 134 BGB, fall under this heading. Contracts contrary to ‘good morals’, § 138 I BGB, seem to imply an external standard, but in some cases (as we shall see) it is the contracting process as well as the exchange standard that forms the basis of the intervention of the court in much the same way as they form the basis for judicial interference under § 138 II BGB (usury).

Another more obvious way to organise the material is by differentiating according to the consequences of the deficiency of the contract, ie according to whether the contract is void or can merely be set aside at the request of one party, which in effect gives that party a choice whether to back out of the contract or to accept it. Thus, the contract is void according to rules of capacity, illegality, and public policy, but only voidable (ie, may be set aside if the aggrieved party exercises a right to set the contract aside), under the rules of consumer protection, mistake, the removal or disappearance of the foundation of the transaction, fraud, and duress. This way of proceeding seems most convenient and is adopted here. Issues of validity are discussed in the present chapter; and the various rights to set a contract aside are examined in chapter 6.

It should be stressed from the outset however that once again the picture is more complex than is apparent at first sight. The rules of capacity declare contracts void but in some cases keep the contract in ‘suspended animation’ to allow the legal representative to decide whether to give his consent and ‘validate’ the contract. Consumer rights, if they are exercised, do not make the contract void retroactively, yet the effects of performance are to be reversed under § 346 BGB. A contract affected by (unilateral) mistake becomes, if rescinded, void retroactively and this leads to the application of § 812 BGB (on unjustified enrichment). The doctrine of the foundation of the transaction requires an adjustment of the contract and only where this is not possible does it allow for the termination of the contract according to principles similar to those applicable in consumer protection cases. Illegal contracts, or contracts contrary to public policy, finally, are void ab initio and thus lead (like rescission for mistake) to the application of the rules of unjust enrichment.

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2. CAPACITY

Beitzke, ‘Mündigkeit und Minderjährigenschutz’ AcP 172 (1972) 240: CoesterWaltjen, Überblick über die Probleme der Geschäftsfähigkeit’ Jura 1994, 331; Hartwig, ‘ “Infants”Contracts in English Law: with Commonwealth and European Comparisons’ (1966) 15 ICLQ 780; Petersen, ‘Die Geschäftsfähigkeit’ Jura 2003, 97; Stürner, ‘Der lediglich rechtliche Vorteil’ AcP 173 (1973) 402; Treitel, The Law of Contract (11th edn, 2003), chapter 13; W Zimmermann and J Damrau, ‘Das neue Betreuungsund Unterbringungsrecht’ NJW 1991, 538.

(a) Preliminary Observations

Every contractual relationship of obligation consists of at least two declarations of intention: offer and acceptance (as to which see chapter 2). The declaration of intention is the nucleus of self-determination and as such presupposes the capacity for uninhibited rational decision-making. The starting point of the BGB is the presumption that every person possesses the required quality for entering into contractual relationships. This general principle is qualified in three respects.

First, the BGB stipulates for different degrees of capacity for different brackets of age; only children younger than seven years are regarded as lacking such contractual capacity altogether. Children between the age of seven and eighteen are at least for some respects treated as capable of forming a free will (§§ 106–13, 165 BGB), while after reaching the age of eighteen no restrictions apply whatsoever. As with all rules that generalise in such a sweeping fashion, drawing a line at a certain age, will necessarily be arbitrary. The justification for this approach is nevertheless strong. Security of legal transactions would be seriously endangered if, in individual cases involving children of more than average maturity, the rules could be questioned. The rules are thus strict.

In English law, the clear starting point is that in general a minor is not bound by his contracts. While also adhering to the age of eighteen as the end of a child’s ‘minority’ (following section 1 of the Family Law Reform Act 1969), English law does not differentiate within minority by reference to age brackets, but instead by reference to the nature of the contract entered into and/or the basis on which liability may be incurred by children towards adults. The relevant rules are drawn from the common law, as modified by the Minors Contracts Act 1987 (implementing the Law Commission’s report, Minors’ Contracts, Law Com No 134, 1984). It should be appreciated that a very large proportion of the English cases that developed the law on minors’ contracts concerned young people between the ages of 18 and 21. Thus, the change in the age of majority in 1969 removed much of the practical importance of the rules relating to the contractual capacity of minors, Although some key issues still remain, eg, contracts for young professional sportsmen or entertainers, as well as employment contracts more generally for those leaving school before the age of 18.

Secondly and thirdly, the BGB distinguishes between persons who due to mental illness that is of a certain duration, are incompetent to exercise a free will (§ 104 Nr. 2 BGB) and persons who lack capacity because of a more temporary mental

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disturbance or due to unconsciousness (§ 105 Nr. 2 BGB). In all these cases however the declaration of intention is void under § 105 BGB. The English law on mental incapacity grants broad powers to the court where the property of the incapacitated person is subject to the control of the court under Part VII (particularly section 94) of the Mental Health Act 1983 (see Fridman (1963) 79 LQR 502 and (1964) 80 LQR 84). Otherwise, contracts concluded with those suffering from mental incapacity are generally subject to the rules of the common law.

The rules on capacity are all contained in the General Part of the BGB. This is sensible for they concern one of the basic preconditions of every declaration of intention, not only contractual relationships of obligation. They are supplemented by special rules of representation from the family law part of the Code. It is essential to read the rules on capacity in conjunction with the family law rules. In order to avoid a legal ‘vacuum’ the law must provide a mechanism of representation for those who are deemed incapable of articulating or forming their will and nominate persons who act on their behalf or provide for procedures which lead to the appointment of such persons.

(b) Age-related Distinctions—Minors

Persons up to the age of seven are deemed to be incompetent: § 104 Nr. 1 BGB. Their declarations of intention are void: § 105 I BGB. Legal representation is entrusted to those person(s) who are legally in charge of the welfare of the child and its upbringing, ie normally the parents of the child (elterliche Sorge): §§ 1629, 1626 BGB. If the parents are not legally responsible for the child, the so-called ‘Vormundschaftsgericht’ (guardianship court), a special division of the Amtsgericht, appoints a Vormund or guardian for the child, who will then act as its legal representative: §§ 1773–95 BGB. From the number of provisions it can immediately be seen that the BGB devotes special care to the definition of the duties of the Vormund in the interest of the child. It suffices here to point out that certain legal transactions require the express permission of the court for their validity (eg, § 1821 I Nr. 1 BGB: the disposition of land belonging to the child must be sanctioned by a court order of the guardianship court). Some of these restrictions also apply in relation to the parents of the child. Certain legal transactions, which include the example of the disposal of land belonging to the child, are subject to the assent of the guardianship court, § 1643 BGB.

English law has long been prepared to enforce what is known as a ‘contract for necessaries’ even against children of this age. Indeed, at common law, such contracts were the only type to which the status of minority did not afford the child some defence. The old common law position (for which see eg, Peters v Fleming (1840) 6 M & W 42; 151 ER 314 and Nash v Inman [1908] 2 KB 1) has now been placed on a statutory footing by section 3 of the Sale of Goods Act 1979. In section 3(2) it is provided that ‘[w]here necessaries are sold and delivered to a minor or to a person who by reason of mental incapacity or drunkenness is incompetent to contract, he must pay a reasonable price for them.’ ‘Necessaries’ are ‘goods suitable to the condition in life of the minor or other person concerned and to his actual requirements at the time of sale and delivery.’ (Section 3(3) of the 1979 Act.) These terms reproduce those developed in the case law (see Peters and Nash, cited above) and show that ‘necessaries’ are not synonymous with ‘necessities’ (see Law Com No 134, paras 5.4–5.6). These cases also illustrate that the courts will not be quick to hold extravagant or frivolous articles to

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be ‘necessaries’ for this purpose. (See for instance, the purchases of crystal, ruby, and diamond solitaires and an antique goblet in silver gilt, by a minor who ‘moved in the highest society’ (Ryder v Wombwell (1868) LR 3 Ex 90, affd (1869) LR 4 Ex. 32) were not covered by the term ‘necessaries’.) This underlines that fact even here a strong protective function is at work vis-à-vis the minor; and the same is indicated by the rule that the minor will only be liable to pay a ‘reasonable price’ for such necessaries. (This may not necessarily be the same as the contract price.) Finally, it should be noted that modern legislation relating to parental duties to maintain a child even when the parent is absent (section 1(1) of the Child Support Act 1991), or allowing the courts to make orders against parents to provide financial support for their children (section 15 and Schedule 5 of the Children Act 1989), may have the result that the child is well provided. Such a finding would mean that the later supply of goods and services may not be able to be characterised as a supply of ‘necessaries’ in the sense given, above. (Treitel, The Law of Contract, p 543.) Contracts other than those discussed here fall under the general rules and will be discussed alongside the German law that covers the next age bracket.

In German law, from the age of seven to the age of eighteen (§§ 2, 106 BGB), children are subjected to the rules relating to minors (Minderjährige). As is the case with children below that age, the parents are legally empowered to represent the child and enter into contracts as ‘agent’ on behalf of the minor. Likewise, a Vormund or guardian may be appointed.

German law however also recognises a partial capacity of minors to exercise a free will. Thus, minors may under certain circumstances validly conclude contracts. This guiding principle seems evidently sensible—at any rate if the legal transaction in question does not entail any legal disadvantage. In such a case it is valid: § 107 BGB. On closer inspection, however, the concept of ‘legal (dis-)advantage’ raises doubts, and indeed has given rise to many controversies in German law. It seems easy to apply if equated with whether the minor incurred an obligation by entering into the legal transaction. Yet difficulties start to emerge once one starts to differentiate between immediate legal disadvantage and more remote disadvantages. For instance, the making of a gift entails only legal benefits. However, if the gift consists of a piece of land, then the transaction may entail a number of consequential ‘public’ duties such as the payment of tax. Is this still a legal advantage? The answer of German law tends to be formalistic in the interest of certainty. Thus, the transaction may indeed be commercially disadvantageous—so long as it does not impose any ‘immediate’ duty on the minor it is valid under § 107 BGB. (See for details, Medicus, Allgemeiner Teil, § 39 II.)

There are also so-called ‘neutral’ transactions, which are treated as valid. An example is provided by § 165 BGB in the context of agency. The minor may act as agent as this provision expressly stipulates. No obligation is incurred, for in the case of a valid authorisation the contract is between principal and third party. Further, if the minor is a falsus procurator he is nevertheless not personally liable in damages. For in this case § 179 III 2 BGB makes an exception to the general rule in the interest of the minor. This rule is in fact typical of the desire of the BGB to provide comprehensive protection to minors in the sphere of private law. Reliance on legal transactions performed by minors is consequently deemed not to be justified. A contracting party that contracts with a minor without the consent of his representative thus runs a considerable risk that the contract is invalid and no damages can be claimed.

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In English law, an employment or training contract can also be binding on a minor, provided that it operates on the whole to the minor’s benefit (see eg, Clements v London & North Western Railway Co [1894] 2 QB 482), although it must be remembered that certain statutory provisions now also cover such contracts entered into by children. (Thus, see the Employment of Children Act 1973, as amended by the Employment Act 1989 and the Children Act 1989.) If however such a contract is more onerous than beneficial to the minor, then it will not impose liability on the minor: see De Francesco v Barnum (1890) 45 Ch D 430. It is also clear that ‘if the contract as a whole is beneficial, the infant cannot pick and choose and adopt those terms which are clearly beneficial while rejecting those terms which are not beneficial or not clearly beneficial.’ (per McNair J in Slade v Metrodent Ltd [1953] 2 QB 112.) Such an assessment of the contract must be undertaken by the court looking ‘at the whole contract, having regard to the circumstances of the case.’ (De Francesco, cited above, at 439.) Again, contracts for necessaries will be valid and enforceable against minors in this age bracket and the case law shows that it is not just goods that are covered. Medical assistance may fall within this definition at common law (Dale v Copping (1610) 1 Bulst 39; 80 ER 743 and see Gillick v West Norfolk and Wisbech Area Health Authority

[1986] 1 AC 112, at 166–7, 183 and 195). However, this category does not include trading contracts, even though they may be of benefit to the minor in the sense that they allow him to carry out his business (Cowern v Nield [1912] 2 KB 419). In difficult borderline cases, this distinction between exercising a profession and earning a living as a trader can be difficult to justify (indeed, some authors see cases such as Chaplin v Leslie Frewin (below) as blurring the distinction still further. (See Beatson, Anson’s Law of Contract (28th edn, 2002), pp 219–20, and generally, Treitel, The Law of Contract, p 545.)

As in German law, the decision whether a contract is, on the whole, to the benefit of the minor can create many difficult problems of assessment (particularly given the result, noted above in conjunction with the Slade v Metrodent Ltd case, that if the contract as a whole is beneficial then it is also enforceable as a whole, including the detrimental elements). The case of Chaplin v Leslie Frewin (Publishers) Ltd [1966] Ch 71 provides an excellent example of the problem and (along with other decisions such as the Clements case, above) also illustrates nicely that the approach taken by the English courts in assessing benefit or detriment in such cases is very far from formalistic. The plaintiff, who was the son of the famous silent film star Charlie Chaplin, was a minor and he sought to repudiate his assignment to the defendant of the exclusive right to publish the plaintiff’s autobiography when the completed work showed him (so he alleged) to be a ‘depraved creature.’ He had received considerable advance royalties for the assignment. The Court of Appeal split on whether this contract could be said to have been beneficial to the plaintiff. While Lord Denning MR felt that it could hardly be beneficial for the minor ‘that he should exploit his discreditable conduct for money’ (at 88), Winn and Danckwerts LJJ preferred the view that the contract gave him a start as an author and ‘[t]he mud may cling but the profits will be secured’ (per Danckwerts LJ at 95). As Treitel points out (The Law of Contract, p 544, note 62) in that case it may have been significant that royalties had already been paid in advance and that it was difficult to see how in practice the defendant would have been able to recover them had the plaintiff been allowed to repudiate the assignment.

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Beyond these cases relating to necessaries and beneficial contracts relating either to issues analogous to necessaries or to employment or training, the basic approach of the common law was that all minors’ contracts were voidable at the option of the minor, either before or after reaching majority. Some such contracts were binding until the minor disclaimed them. (They were christened ‘positive voidable contracts’ in Anson’s Law of Contract (28th edn, 2002), p 216.) This category of contracts relates to the acquisition by the minor of an interest of a continuous or permanent nature, such as an interest in land. All other contracts were not binding unless ratified by the minor within a reasonable time after reaching majority. (Known in Anson as ‘negative voidable contracts,’ albeit recognising that to use the term ‘voidable’ here will offend some, since ‘the essence of a voidable contract is that it is binding unless it is repudiated whereas these contracts were not binding unless affirmed. However, the terminology is a convenient one, and it would be inadvisable to reject it merely on purist grounds’. See, p 216, note 58 and cf Treitel, The Law of Contract, p 549.) We will return to the operation of this approach below.

In German law, if the legal transaction is neither solely legally advantageous nor at least neutral to the position of the minor, § 107 BGB stipulates that the consent of the legal representative is necessary. If the consent was declared beforehand the BGB speaks of Einwilligung (§ 183 BGB). In this case the declaration of intention of the minor is perfectly valid. If the consent was not actually obtained prior to the contract entered into by a minor, then the contract is neither (immediately) void nor valid. This strikes one as odd, but the BGB defines some middle ground between the seemingly exclusive pair of values. The best way to translate the respective term of ‘schwebende Unwirksamkeit’ is perhaps ‘suspended invalidity.’ As § 108 I BGB stipulates, the validity depends on the subsequent consent (Genehmigung, § 184 BGB) of the legal representative. If the consent is denied, the declaration is invalid; if it is granted it is (retroactively) valid. Under certain conditions, the other party is given by § 109 BGB a right to terminate the period of suspension by revoking his declaration of intention. It should be noted that in the interest of security in the law unilateral legal transactions require prior consent for their validity: § 111 BGB.

The English approach to negative voidable contracts creates a similar ‘suspended invalidity,’ in that failure to ratify the contract on reaching majority would operate as a repudiation of the contract by the minor. Such contracts generally concerned isolated acts that were not continuous in nature and this category operates as the default rule, in the absence of any of the other categories covering the situation. During his minority, although the minor is not bound by such contracts, the other party is bound (Bruce v Warwick (1815) 6 Taunt 118; 128 ER 978). The minor cannot secure the specific performance of such a contract, since the court will not order this if it is not available to both parties (see eg, Lumley v Ravenscroft [1895] 1 QB 683 and Treitel, p 1037), but damages for breach of contract will be available. Thus, the consent that can perfect the transaction is that of the minor himself; but it can only be given on reaching majority. This raises the difficult question of the position of the other party in the interim period, but here it seems that the law on personal property can fill much of the gap. It would seem that property passes to the minor on delivery (Stocks v Wilson [1913] 2 KB 235 at 246) and also that the minor can validly pass property to the other party by delivery (see the Chaplin case, above). As Treitel points out (p 550), this analysis has the beneficial effect of protecting innocent third parties who later acquire the property thus passed.

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A number of typical situations of consent have been specifically dealt with in the German Civil Code. Thus, § 110 BGB declares such contracts valid which have been fulfilled with the financial means provided to the infant for this purpose or for his free disposition (‘pocket money’). § 112 BGB provides that if the minor is authorised by his legal representative and the guardianship court to carry out a gainful occupation, he may perform all acts within the scope of that occupation. Similarly, § 113 BGB provides that the minor may perform legal transactions in connection with a contract of employment entered into with the consent of the legal representative. Finally, the consent of a legal representative is not sufficient in those cases in which the representative is not legally authorised to act on behalf of the minor without the support of the guardianship court. A good example of this situation is if the minor seeks to become a partner in a company that is run as a profit-making enterprise. Under § 1822 Nr. 3 BGB, the minor needs both the consent of the legal representative and of the guardianship court. (See, as to problems resulting from a lack of consent: Maultzsch, ‘Die “fehlerhafte Gesellschaft”: Rechtsnatur und Minderjährigenschutz’ JuS 2003, 544.)

In English law, it is clear that a minor may become a partner during his minority and, while bound by the partnership agreement, cannot be made liable during his minority for any debts that the partnership incurs. Such liability can accrue only once he reaches majority and fails to repudiate his partnership (see Goode v Harrison (1821) 5 B & Ald 147; 106 ER 1147), thus making this an example of a positive voidable contract: ie a definite act of repudiation is required for the minor to avoid being bound once he reaches majority.

In the light of the above, one could say that the essence of the German provisions is to enable the minor to participate in the legal community by entering into contracts. However, the law is at pains to ensure that the minor does not enter into dangerous contracts without proper control by his parents and occasionally a neutral institution solely concerned with the best interests of the child. By contrast, the English approach has been to provide the minor with an opportunity to repudiate contracts entered into during his minority (subject to the exceptions already discussed relating to necessaries and the like) in certain cases. Outside those categories, the minor is not bound by the contract at all, unless he later ratifies the contract on reaching his majority (Williams v Moor (1843) 11 M & W 256; 152 ER 798).

The problems raised by this approach are usefully illustrated by BGHZ 78, 28 = case no 75. In this case the parents intended gratuitously to transfer residential property, a flat (Wohnungseigentum) to their child. The contract of obligation containing the gift was legally advantageous as it did not impose any obligations on the minor (§ 107 BGB). However, the court stated that the contract of transfer in the case at hand entailed legal obligations which would not be compatible with the purpose of § 107 BGB to protect the child. By the entry of the minor into the community of the owners of flats in the building the transferee minor implicitly accepted a number of obligations which went beyond what was imposed by law. As a result the valid conclusion of the contract of transfer required the consent of the legal representative. The parents gave this consent. However, the parents now acted on both sides of the bargain: as transferors and as legal representatives of the transferee. § 181 BGB prohibits this form of representation because of the potential conflict of interest. Unfortunately this is not the end of the story. For § 181 BGB also makes an exception in relation to

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contracts of transfer. Here, a so-called ‘internal transaction’ (Insichgeschäft), is allowed. This would have meant that since the contract of obligation (gift) was valid the parents could validly transfer property, even though this constituted a legal disadvantage for the minor. The court argued that such a result would not comply with the purpose of § 107 BGB and therefore, exceptionally, the contract of transfer and the contract of obligation were to be construed together. This approach has attracted harsh criticism as it involves a relaxation of the principle of separation (discussed in chapter 1; see Medicus, Allgemeiner Teil, Rn. 565; Bork, Allgemeiner Teil, Rn. 1002). As a result, since the parents themselves may not legally represent the minor on this occasion, to effect the valid transfer of the property there is a need to obtain the consent of a so called Ergänzungspfleger, ie a neutral person appointed for this particular occasion by the guardianship court, § 1909 BGB.

In English law, the subject matter of the fact scenario in BGHZ 78, 28 = case no 75 would fall under the heading of positive voidable contracts since it related to the transfer of an interest in land. Thus, unless he repudiates a lease, a minor is liable to pay the rent due: Keteley’s Case (1613) 1 Brownl 120; 123 ER 704 and Davies v Beynon-Harris (1931) 47 TLR 424. The latter case makes clear that, although the minor cannot hold a legal estate in land (as a result of sections 1(6) and 19 of the Law of Property Act 1925), he can still hold an equitable interest and so be bound in exactly the same way. This is as a result of section 26(6) of the Settled Land Act 1925 for land acquired prior to 1997, and section 2(6) and Schedule 1, para 1 of the Trusts of Land and Appointment of Trustees Act 1996 for land acquired after 1996. Under the latter statute, any such attempted conveyance of the legal freehold or leasehold estate operates as a declaration that the transferor holds the property in trust for the minor. (On these matters see, generally, Harpum, Megarry and Wade: The Law of Real Property (6th edn, 2000), pp 1289–96.)

The other major example of this category of minors’ contracts is the acquisition of shares in a company. So long as the shares are held, the minor remains liable for any calls on the shares unless he expressly repudiates that holding. (North Western Railway Co v M’Michael (1850) 5 Ex. 114; 155 ER 49.)

Finally, despite these highly detailed rules for the protection of the minor, not all aspects of the law relating to minors have been laid down in the BGB and it may be appropriate to illustrate one of these regulatory gaps of the BGB—namely the absence of rules protecting minors in the law of restitution. In particular, the legal consequences of the provision of luxury services to minors have raised a number of interesting questions, which are well illustrated by the so-called ‘Travel-by-air decision’ (Flugreisefall): BGHZ 55, 128. In this case a minor, who had flown from Munich to Hamburg with a valid ticket, managed to step on board a flight to New York without this time having a valid ticket. On arrival he was denied entry into the US and the airline flew him back. The airline claimed the market price for such a return flight. The airline recovered the price for the return flight under negotiorum gestio rules (as to which see chapter 3) for it was in the interests of the child and the parents for him to be transported back to Germany.

More interesting is the reasoning for allowing recovery of the price for the flight to New York. The question was what the airline was entitled to by way of unjustified enrichment? Generally speaking, § 818 II BGB provides that where the object cannot be returned, as was the case here with the service provided by the airline, the debtor is

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obliged to return the value of the service. There is considerable controversy as to what exactly the enrichment of the minor is in such a case. Let us, however, assume that he was at least no longer enriched because he did not save the expense for the service; he would not have flown to New York anyway.

It is generally accepted that such a change of position under § 818 III BGB cannot be invoked if the debtor knew that he was not entitled to the service. This is derived from § 819 I BGB. A similar result is achieved in the English law of restitution by requiring that the party claiming to have changed his position must have done so in good faith (see Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, at 558, 568 and 578) and not running the risk that he might not have been entitled to receive the benefit conferred (South Tyneside Metropolitan Borough Council v Svenska International Plc [1995] 1 All ER 545, at 569). (See generally, Nolan, ‘Change of Position’ in Birks (ed), Laundering and Tracing (1995) and Virgo, The Principles of the Law of Restitution (1999), p 709 ff. and the references cited therein.) In other words, if the debtor is aware of the fact that he is being enriched without any ‘justification’ he cannot raise the defence of change of position. He is treated as remaining enriched.

In the case of minors however the situation is slightly more complex. For §§ 107 et seq BGB require the consent of the legal representative for incurring an obligation. If consent is absent the minor ought to be free of liability. This principle also ought to prevail in relation to unjust enrichment claims. It is therefore the knowledge of the legal representative that should determine whether the minor becomes liable. This reasoning applies in relation to void contracts. For other claims of unjust enrichment not pursuant to a failed contract the delictual capacity (§§ 827, 828 BGB) may be the appropriate yardstick for holding the minor liable. In the Flugreisefall, the court regarded the minor as enriched and liable for returning the value of the service because he acquired it through an intentional tort. (See, for a critical discussion of the case, eg, Medicus, Bürgerliches Recht, Rn. 176 with references.)

The English material relating to awards of restitution against minors is complex due to a number of overlapping possible bases of claim for the other party. Restitution may be possible at common law, in equity (where the minor has acted fraudulently), or under section 3 of the Minors Contracts Act 1987—indeed, section 3(2) of the 1987 Act explicitly preserves other remedies available to the claimant. Interestingly for comparative purposes, it seems that much of the case law on this subject has provided a significant level of protection for minors from restitutionary claims (although whether this has always been justifiable in the various circumstances is a matter of some contention among commentators).

For example, the common law rules on fraud prevented the other party to a contract induced by the minor’s fraud from suing the minor on that contract (see eg, Bartlett v Wells (1862) 1 B & S 836; 121 ER 63). Equity did step in to offer relief to plaintiffs against fraudulent minors, typically (and perhaps only—see Treitel, The Law of Contract, p 554) relating to a misrepresentation by the minor of his true age. (See the cases of Stocks v Wilson [1913] 2 KB 235 and R Leslie Ltd v Sheill [1914] 3 KB 607 and their discussion in Beatson, Anson’s Law of Contract, pp 226–7; McKendrick,

Contract Law, p 792; Virgo, The Principles of the Law of Restitution (1999), pp 759–61 and Jones, Goff & Jones: The Law of Restitution (6th edn, 2002), paras 25-002–25-011 (especially 25-010)), although this case law is difficult to reconcile in an internally consistent manner. For Treitel, in such fraud cases, ‘the purpose of the equitable . . .

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remed[y] is to ensure that the minor is not enriched as a result of the transaction which is not binding on him; but the remedy should not diminish such general resources as he had apart from the transaction’ (The Law of Contract, p 555). Thus, for Treitel, decisions such as R Leslie Ltd v Sheill are supportable because the money lent (or any asset representing it) was no longer identifiable in the hands of the minor: as a result, the Court of Appeal refused to order the minor to repay the sum borrowed. This would seem to operate as a kind of relaxed change of position defence (see, in apparent agreement, Virgo, The Principles of the Law of Restitution, p 760) for the minor, interpreted in the light of the purpose of protecting the minor’s general assets. A similar construction can be placed on section 3 of the Minors Contracts Act 1987: ‘the court may, if it is just and equitable to do so, require the defendant to transfer to the plaintiff any property acquired by the defendant under the contract, or any property representing it’ (section 3(1)). Both the equitable and the statutory remedies are available only at the discretion of the court and not for the claimant as of right, although there is no need to show fraud to rely on section 3(1). (On the 1987 Act, see Treitel,

The Law of Contact, pp 551–4.)

The other example of the common law operating in a protective manner towards minors in the sphere of restitution is the care taken by the courts to ensure that the grant of a restitutionary remedy would not amount to the indirect enforcement of a contract made void by the policy of the law of protecting minors. Where restitution is available at common law, it is available to the claimant as of right, but not if this would effectively allow the claimant to circumvent the lack of contractual capacity of the minor by simply framing the action as one for restitution (see the alternative ground of claim for money had and received in the R Leslie Ltd v Sheill case, cited above, at 621). However, some of the older cases (such as Cowern v Nield [1912] 2 KB 419) seem in their reasoning to turn on the court’s refusal to imply a contract for the minor to repay the purchase price, on the basis that this would amount to indirect enforcement of the original contract that (due to the protective policy relating to minors’ contracts) could not be enforced. Insofar as English law has since turned its back on the ‘implied contract theory’ of restitution and instead bases liability on ‘unjust enrichment’ (United Australia Ltd v Barclays Bank Ltd [1941] AC 1 and Lipkin Gorman, above), an action for the recovery of the purchase price should in principle be available against the minor, subject to the defence of change of position (as discussed above).

Overall, therefore, it seems that the common law developed some fairly strong protective tendencies towards awards of restitution against minors. While the 1987 Act has extended the equitable discretion to order the return of property acquired under the transaction to cover cases where no fraud is present, this remains subject to the condition that the property thus transferred has not been consumed or lost. This restriction exists to avoid the effective enforcement of the contract against the minor, which is the very thing that the protective policy seeks to avoid (see Law Com No 134, para 4.23). Arguably, viewing these issues from the relatively unified perspective of unjust enrichment theory will allow current English law to develop a more consistent approach to the situations where such returns of property are to be required, whether the basis for the claim is at law, in equity or under statute (although there are those who might question this unified approach on other grounds).

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(c) Individual Lack of Capacity

As explained, the BGB distinguishes between transitory lack of judgment (§ 105 Nr. 2 BGB) and lasting impairments of the capacity to exercise a free will (§§ 105 Nr. 1, 104 Nr. 2 BGB). While the former category of temporary ‘blackouts’ does not pose many problems of general importance, the second category is worth discussing in more detail.

Some features, however, apply to both categories. It is not necessary that the other party could in some way know that the promisor was not acting with full responsibility. Thus, the interest of legal certainty is sacrificed and the objective approach abandoned in order to protect those who are not capable of exercising a free will. This is a prerequisite of the will theory, but one should bear in mind that the defect must be truly considerable to hold the acts of a certain person void for lack of capacity. It must negate fully the capacity for autonomous decision making. This is not only in the interest of legal certainty, but also—and foremost—in the interest of the person concerned. Treating them as incompetent, means denying them the ability to be responsible for their own self-determination. This harsh verdict must be reserved for clear and extreme cases. In practice, this will rarely if ever occur without the hearing of an expert opinion before a court in which the validity of the legal transaction in question is contested.

This approach in German law accords with that of Scots law where the mental incapacity of a party can, in itself, give rise to a claim in restitution. (See John Loudon & Co v Elder’s Curator Bonis 1923 SLT 226). At English common law however it is clear that two conditions must be satisfied. First, the party relying on mental incapacity must show that this prevented him from comprehending the nature and effect of the transaction in question (see eg, Re K [1988] Ch 310). Secondly, it must also be shown that the other party to the transaction was aware of that incapacity. (See Imperial Loan Co Ltd v Stone [1892] 1 QB 599, at 601, affirmed by the Privy Council in Hart v O’Connor [1985] AC 1000.) This second requirement could be said to leave those suffering from mental incapacity in a rather vulnerable position and has (arguably) led the courts to stretch the facts in trying to find some indications of the other party’s knowledge of that incapacity (see eg, the unreported case of Ayres v Hazelgrove, 9 February 1984, discussed in Birks, Restitution—The Future (1992), pp 50–1). Further, McKendrick has suggested (Contract Law, p 802) that this desire to preserve the contractual capacity of the elderly and infirm may have the paradoxical effect of encouraging their relatives to seek a power of attorney so as to protect them from exploitation. This could be seen as just as serious an incursion into their selfdetermination as a more protective policy in the general legal regime. In all events, where the other party is unaware of that incapacity then the only possible grounds for avoiding the contract are those that are available to persons of normal capacity, such as undue influence or unconscionable bargains. (See Hart v O’Connor, above, and Irvani v Irvani [2000] 1 Lloyd’s Rep 412, at 420, and Treitel, The Law of Contract, pp 408–23.) Only in these senses can the ‘unfairness’ of the bargain be challenged under English law (cf the views of McMullin J in Archer v Cutler [1980] 1 NZLR 386 (noted by Hudson [1984] Conv 32) and in O’Connor v Hart [1983] NZLR 280 (on which see Hudson, ‘Mental Incapacity Revisited’ [1986] Conv 178, which also discusses the decision of the Privy Council on the appeal in Hart v O’Connor).

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The exception to this basic position is that, as with minors, contracts for ‘necessaries’ those concluded with someone suffering from mental incapacity lead to that person being required to pay a reasonable price for them. (Section 3(2) of the Sale of Goods Act 1979—see p 230 above, section 2(b), for discussion of this general point, and Treitel, The Law of Contract, pp 558–9.) Of course, if the recipient of such necessaries would be bound by the contract in any case (eg, if the provider did not know of their incapacity), then the contract governs the situation (Baxter v Portsmouth (1826) 5 B & C 170; 108 ER 63). But even if the provider of such necessaries was aware of that incapacity, section 3(2) allows the recovery of a reasonable price.

Incapacity need not be total. It may be limited to certain types of transactions, socalled ‘partial’ incapacity, such as for instance in relation to marriage/divorce in the case of ‘abnormal’ jealousy (BGHZ 18, 184). The issue whether the incapacity can be limited not only as to the type of contract, but also within one category of contract as to the complexity of the transaction is controversial. The great majority of German courts does not recognise such ‘relative’ incapacity, for it would ‘destroy’ legal certainty. (See Palandt-Heinrichs, § 104 Rn. 6; Larenz and Wolf, Allgemeiner Teil, § 6 Rn. 25 with references.) § 105a BGB declares transactions of trivial nature (necessaries) to be valid. This poorly drafted provision has sparked controversy, which need not concern us here being of little practical significance. (See, Larenz and Wolf, Allgemeiner Teil, § 25 Rn. 8 for details.) Arguably, the approach in English law that requires proof of an inability to understand the nature and effect of the relevant transaction could operate so as to allow this kind of ‘partial’ incapacity, although whether this is the case will obviously depend on the facts of each individual case and contract.

In relation to persons with lasting disabilities that affect rational thinking, a need arises to provide for legal representation. Originally, there existed a procedure by which a person could be formally declared ‘incompetent’, known as Entmündigung, and another person could be declared his guardian (Vormund). This procedure was (in relation to adult persons, guardianship still exists in relation to children, see above) abolished by the Betreuungsgesetz (BGBl 1990 I, 2002; in force since 1 January 1992) and replaced by another legal instrument regarded as more flexible and at the same time less ‘discriminatory’ towards those inhibited in their capacity to act rationally. Since this reform took effect the legal representation of adults (called Betreuung, a special form of guardianship, regulated in §§ 1896–1908k BGB) and individual lack of capacity do not necessarily coincide. The reason for this separation was to preserve as much of the autonomy of the individual as possible. Thus, where a person needs assistance, it is now possible to provide that without necessarily declaring that person to be incompetent. As a matter of fact, persons in need of a guardian may also lack capacity and once a lack of capacity has been acknowledged, this will invariably prompt the guardianship court to appoint the so-called Betreuer. For in such a case the criteria laid down in § 1896 BGB would then be fulfilled. Where an adult cannot take care of his affairs totally or partially due to being disabled, the court appoints a ‘guardian’ at his request or ex officio. The scope of the guardianship is strictly limited to those affairs where there is a clear need for assistance and it is only to this extent that the guardian also acts as the legal representative, § 1902 BGB. Again, a court order is required for certain far-reaching legal transactions (§§ 1904 et seq BGB). The person for whom a guardianship has been ordered remains capable of entering into contracts unless the conditions of § 104 Nr. 2 BGB are met, namely if a lack of capacity is