CHAPTER 3 Achieving Contract Validity Capacity refers to

CHAPTER 3 Achieving Contract Validity

Capacity refers to the ability of a person to fully understand, and therefore freely agree to, the rights and obligations involved in entering a contract. Only sane, sober, adults have full capacity to enter into a contract. People who lack full legal capacity to enter into contracts include: • • • Minors. People who are mentally unsound. People who are intoxicated. Corporations (in specific circumstances). Bankrupts.

Capacity

CAPACITY Contracts for the Supply of Necessaries Contracts for necessaries are contracts for goods or services deemed necessary to maintain the minor’s particular lifestyle – those a minor is accustomed to having in their life and are deemed necessary. EXAMPLES: - food - clothing - accommodation - medical treatment - education If the minor already has an adequate supply of such goods and services, they will not be considered necessaries because the minor’s specific requirements have already been met. REFER TO CASES: - Nash v Inman (1908) 2 KB 1 Bocjczuk v Gregorcewicz (1961) SASR 12

CAPACITY Beneficial Contracts of Service • The issue of enforceability depends on whether the contracts are actually beneficial contracts of service or simply trading contracts. • An adult wishing to enforce the contract has the burden of establishing that the contract, as a whole, benefits the minor. REFER TO CASES: De Francesco v Barnum (1890) 45 CH D 430 Roberts v Gray (1913) 1 KB 520 Proform Sports v Proactive Sports (2007) 1 All ER 542

Minors The age of “majority” in Australia is 18 - when a young person is no longer considered a child and the law recognises their ability to make their own decisions and be responsible for their own actions. Apart from exceptional circumstances, an agreement with a minor may be unenforceable against them and is voidable by the minor. The minor, on the other hand, may enforce the contract against the adult. There following contracts between a minor and an adult fall within a special, ‘exceptional’ category: • Cash contracts. • Contracts for the supply of ‘necessaries’. • Beneficial contracts of service.

People who are of Unsound Mind and Intoxicated Persons If a person is of unsound mind or is intoxicated due to drugs or alcohol and they enter into a contract for non-necessary items, the contract is voidable by the person if: • That person can show that she or he did not understand what they were doing as a consequence of their condition and; • The other party was aware of that condition and; • They withdraw from the contract within a reasonable time of their regaining their sanity or sobriety.

Bankrupts A person who has been declared bankrupt has limited legal capacity to enter into certain contracts: • A bankrupt must disclose their bankruptcy when applying for, or buying, goods or services on credit or by cheque for a sum greater than $5, 068 as at 4/9/2012 (CPI indexed). • If the bankrupt trades under any other name than their own, they must inform everyone with whom they deal that they are a bankrupt. • A bankrupt cannot remain in a partnership. • A bankrupt cannot be a company director or have a management role without the permission of the court.

Genuine Consent Genuine consent means that all parties to the contract honestly and genuinely agree to the terms of the contract. Without consent there is no agreement and therefore the contract may be either void or voidable. Genuine consent may be absent because of: • Mistake • Fraudulent or innocent misrepresentation • Duress • Undue Influence • Unconscionable conduct

Mistake A ‘mistake’ must be distinguished from an error of judgment. Two types: (a) Mistake of law - does not make a contract void (b) Mistake of fact - Makes the contract void in the following circumstances: • Common mistake - both parties have made the same mistake about the existence of something fundamental to the contract. • Mutual mistake - both parties make a mistake but each makes a different mistake. • Unilateral mistake - one party makes a mistake of fact, but the other party knows, or ought reasonably to know of the mistake, and does not inform the mistaken party. • Non est factum – One party believes that the document they signed is radically and fundamentally different from the actual document signed and there is an absence of negligence

Genuine Consent 1. COMMON MISTAKE VOID 2. MUTUAL MISTAKE VOID 3. UNILATERAL MISTAKE 4. NON EST FACTUM (NOT MY DEED) USALLY VOIDABLE VOID

Misrepresentation • Genuine consent will be absent from a contract that has been entered into due to a misrepresentation. • A representation is a statement of fact. A misrepresentation is a statement of fact that is untrue. • A misrepresentation occurs when a person is induced to enter a contract because of reliance on a false statement of fact, as a consequence of which they suffer loss. Three types: • Fraudulent (deliberate) misrepresentation. • Innocent misrepresentation. • Negligent misrepresentation.

Genuine Consent

Genuine Consent

Duress to the person occurs when there is actual physical violence or the threat of physical violence to obtain consent to a contract. The violence or threat may be directed towards the coerced party or their family. The person who has allegedly suffered the duress must prove: • The duress interfered with the free exercise of a coerced party’s will. • The duress prevented the parties from meeting and negotiating on equal terms. • As a result of the duress the coerced party did not genuinely consent to the contract.

Duress Where a party is coerced into entering a contract because of threats to seize or destroy property, the contract is voidable on the grounds of duress to goods. Where illegitimate economic pressure is exerted on business people to enter a contract, it may be voidable on the grounds of economic duress. An economic threat is one that, if put into effect, would cause monetary loss to the party entering the contract.

Undue Influence Undue influence is grounds for alleging that genuine consent is absent from the contract. Undue influence is the improper use of influence by a dominant party to obtain consent to a contract by the weaker party, which will benefit the dominant party. If the defendant occupied a legally recognised position of influence over the plaintiff, there is a presumption of undue influence, e. g: • Parent and child. • Trustee and beneficiary. • Doctor and patient. • Solicitor and client. • Guardian and ward. • Religious advisor and devote

Genuine Consent Undue Influence Where a Special Relationship is Presumed to Exist • The defendant can rebut the presumption by proving the plaintiff understood the contract and entered it voluntarily, otherwise the contract is voidable at the option of the innocent party. REFER TO CASE: Farmers’ Co-operative Executors &Trustees Ltd v Perks (1989) 52 SASR 399

Unconscionable Conduct A contract may be voidable on the grounds of unconscionable conduct if the plaintiff can prove: • They had a special disadvantage or disability at the time of entering the contract; e. g. poverty, need, sickness, age, illiteracy, etc. • This special disadvantage or disability substantially lowered their ability to protect themselves. • The defendant must have known or should have known of the disability and has taken advantage of it. • The actions of the defendant were unconscionable

Legality of Object The object of the contract must be legal to support a valid and enforceable contract. The purpose of the contract may be unlawful if it contravenes the provisions of a statute or principles established in common law. A contract that has an unlawful purpose will be classified as either void or illegal. A contract which only affects the parties to the contract is merely void. A contract is illegal when its legal effect spreads beyond the contract itself.

Legality of Object Contracts Illegal under Common Law Examples include: • Contracts to commit a crime or tort. • Contracts which hinder the administration of justice. • Contracts which are sexually immoral. • Contracts which adversely affect the relationship of one country with another. • Contracts which encourage unnecessary litigation. • Contracts to defraud public revenue. • Contracts which promote corruption in public life. • Contracts in restraint of trade, unless exceptional.