Parties: capacity of the parties

For a contract to bind both parties it must have been made between parties with the legal capacity to make it. In general terms minors, those under 18, and those lacking mental capacity are not bound by contracts in that they are voidable at their election. However, a party that enters into a contract with a minor etc, cannot avoid the contract by reason of it being entered into with a person who lacked capacity. The party with capacity may not elect to avoid it.

i. Minors

The above principle of a contract been voidable at the minor’s election is subject to an exception regarding contracts for ‘necessaries’. Although a common law term, ‘necessaries’ are defined consistently with it in the Sale of Goods Act 1979 as goods ‘suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery’. (1) Hence, the definition extends beyond essentials such as food and clothing and will depend upon the minor’s particular circumstances at the time the contract is entered into. Furthermore, a contract of apprenticeship, education or training may bind a minor if it was, for example, suitable to his needs. (2)

ii. Mental incapacity

Mental incapacity may arise from a variety of causes such as senile dementia or drunkenness. For contracts to be voidable by the mentally incapacitated person there must have been, at the time it was entered into:

• incapacity, such that the person with whom it was made was incapable of understanding the nature of the transaction, and

• knowledge of that fact by the other party.

iii. Corporations

It is long-established that two or more individuals may create a corporation which has its own legal identity (sometimes called legal personality). As such this corporation, rather than the individuals behind it, may enter into contracts. (3) There are three main types of corporation:

• Registered companies: are formed and registered under the Companies Act 2006. Under this Act the ‘validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.’ (4)

• Statutory corporations: are created by and have powers established by statute. They include local authorities.(5) Any contract entered into that is beyond the stated powers will be ultra vires and void.

• Limited liability partnerships: are created under the Limited Liability Partnerships Act 2002. (6) They enable the partners to limit their liability to the amount they put into the business. Hence, creditors cannot go after a partner’s personal assets or income.

(1) Sale of Goods Act 1979, s3(3).

(2) In Proform Sports Management Ltd v Proactive Sports Management [2006] EWHC 2903 (Ch), the footballer Wayne Rooney was able to terminate a contract with Proform to act as his agent, which he had entered into aged 15, when playing for Everton FC. This contract, unlike his one with Everton FC, was not ‘a contract for necessaries or analogous to a contract of apprenticeship, education or service’ and hence it fell within the general rule that contracts with minors are voidable. (§47)

(3) Aron Salomon v A Salomon & Company Ltd [1897] AC 22, HL, Lord MacNaghten:
The company is at law a different person altogether from the subscribers to the [company’s] memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them.

(4) Companies Act 2006, s39.

(5) For example, the Local Government Act 1972.

(6) Limited Liability Partnerships Act 2000.