Principles of Business Law - Contract Formation - Capacity to Contract (PDF)

Principles of Business Law TOPIC 4: CONTRACT FORMATION CAPACITY TO CONTRACT Capacity to contract: overview  A contract can only be made by persons with the capacity to acquire legal rights and take on legal responsibilities.  Adult persons (those aged 18 years and over) who are of...

Principles of Business Law TOPIC 4: CONTRACT FORMATION CAPACITY TO CONTRACT Capacity to contract: overview  A contract can only be made by persons with the capacity to acquire legal rights and take on legal responsibilities.  Adult persons (those aged 18 years and over) who are of sound mind, and artificial persons such as corporations, have full contractual capacity.  Corporations have the same legal capacity as an adult person: s 124 Corporations Act 2001 (Cth)  Persons with a cognitive disability are bound by agreements unless at the time the agreement was reached, their disability prevented them from understanding what they were doing, and the other party was aware, or ought to have been aware of this  In certain situations, a contract with a minor (someone under the age of 18) will be binding. Capacity to contract: minors  Minors may be bound to pay a reasonable price for goods acquired pursuant to contracts for ‘necessities’ (eg food, shelter, transport to work)  Scarborough v Sturzaker  “Beneficial” contracts of employment can also be enforced against a minor.  Hamilton v Lethbridge Capacity to contract: minors  Minors may be bound to pay a reasonable price for goods acquired pursuant to contracts for ‘necessities’ (eg food, shelter, transport to work)  Scarborough v Sturzaker  “Beneficial” contracts of employment can also be enforced against a minor.  Hamilton v Lethbridge Capacity to contract: minors What are necessities? Scarborough v Sturzaker FPBCL p 416 Facts  Scarborough purchased a bicycle from Sturzaker. He traded in his old bike.  Scarborough used the bike to travel to and from work (a 12-mile journey each way).  Scarborough reneged on the promise to pay Sturzaker.  As Scarborough was under the age of 18, the agreement would only be enforceable as a contract if the bike was a ‘necessity’. Legal issue:  Given Scarborough already owned a bike (the one he traded in), was a new bicycle a necessity? Capacity to contract: minors What are necessities? Scarborough v Sturzaker (ctd) Decision  The contract was legally binding. Reasoning  Given the distance Scarborough lived from his place of employment, a bike was a necessity.  While he still had his old bike, a new bike would not be a necessity.  However, because he traded in his old bike, the new bike was held to be a necessity. Capacity to contract: minors When are employment contracts beneficial? Hamilton v Lethbridge FPBCL p 360-1 Facts  L (a minor) entered into a five-year contract, under which he was to serve as an articled clerk for H, a practising lawyer.  The contract included a restraint of trade clause that prevented L from practising law within 50 kilometres of Toowoomba (where L had worked for H).  L argued that he was not bound by the contract (including the restraint of trade clause) because he was a minor at the time he entered the agreement. Legal issues:  Was the contract legally binding?  Was the employment contract beneficial? Capacity to contract: minors When are employment contracts beneficial? Hamilton v Lethbridge (ctd) Decision  The contract was legally binding Reasoning  Although some stipulations in the contract benefitted H (eg the restraint of trade clause), overall the contract was for L’s benefit.  Such a contract will be enforceable unless the court identifies a provision which makes the entire contract unfair, in which case the contract will be void.  The contract in question included no such provision.