Capacity in English law
Encyclopedia
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Capacity in English law refers to the ability of a contracting party to enter into legally binding relations. If a party does not have the capacity to do so, then subsequent contract
s may be invalid; however, in the interests of certainty
, there is a prima facie
presumption that both parties hold the capacity to contract. Those who contract without a full knowledge of the relevant subject matter, or those who are illiterate or unfamiliar with the English language
, will not often be released from their bargains.
It is recognised however that minors, and those who are deemed mentally incapacitated, may need to be able to create binding agreements, when acquiring essential items for living, or for employment. Thus, contracts for necessaries (goods or services deemed necessary for ordinary living) will always be legally binding. Equally, minors have the capacity to enter into contracts for employment, when the terms of such an agreement are of general benefit to them. If not, then they may elect to avoid the contract and have their property returned. Companies were also significantly limited in the range of contracts they could bind themselves to under their objects clause, until reform in the Companies Act 1989. If the directors, or the officers of a company enter an agreement with another person or business, and that agreement is beyond the list of business tasks set under the company's constitution, then the contract will be invalid if the third party in bad faith has knowingly taken advantage of the company. Otherwise, under the Companies Act 2006
, the contract will remain valid, and shareholders must sue the director or officer for losses.
, a minor is any individual under the age of 18 years old. Historically, the age had been 21, until the Family Law Reform Act 1969. As a general rule, a minor is not bound by contracts he makes, though the adult party whom he contracts with is. Once a minor reaches the age of majority however, he can elect to ratify a contract made as a minor in full capacity. This rule is subject to several types of contracts which a minor will be bound by, and his right to repudiate such contracts.
Minors are legally bound where a contract supplies them with "necessaries", or goods and services which are deemed necessary or beneficial to them. This obligation is codified in the Sale of Goods Act 1979
, in section 3, where it is stated:
Whilst the onus of proof that a contract is for necessaries falls upon the supplier, contracts in this form have been found in a wide range of situations, including expensive and far reaching purchases. The definition of necessaries includes obvious purchases, such as food and clothing, but also services or goods which are in furtherance of education or apprenticeship. The necessaries of one minor will not necessarily reflect those of another. The particular circumstances, such as age and immediate needs, may lead to differing outcomes. For example, in Peters v Fleming, it was found that a gold ring
and watch chain were necessaries, for the child of a Member of Parliament
. However, a contract may not be for necessaries where a minor's needs are adequately satisfied, or a purchase can be seen as unnecessary. This is demonstrated by Nash v Inman, where a tailor
's claim that a child's purchase of 11 waistcoat
s was for necessaries failed, on the grounds that he already owned adequate clothing.
Although it is clear that contracts for necessaries can legally bind minors, the terms of such a contract may defeat it. Where a contract contains particularly burdensome or unfair terms, the courts may decide that a minor does not have the capacity to be bound by them. Where a minor hired a car and crashed it through no fault of his own, the owner could not recover on the grounds that a contract term put the car entirely at the minor's risk.
– whilst still an infant – was deprived of pay for a fight (totalling £3,000) for breach of standard boxing rules, such sanctions were enforceable, as the necessity of upholding sporting rules was generally beneficial to him. Where this is not the case, as in De Francesco v Branum, contractual obligations may be void. Here, a girl of 14 contracted with a professional dancer, to become their apprentice. The contract stated that the girl could not accept dancing engagements for herself, and was not required to be paid except for performances she gave. Their agreement was held not to be binding, due to these unreasonable terms.
Such an approach differs from that taken with minors, where the other contracting party need not know they are dealing with a minor, in order to be bound. Whilst there is no absolute standard for a party to be deemed capable of contracting, they must at least know the principles of what they are contracting for, to legally bind themselves. As with minors however, an incapacitated person is bound by statute regarding contracts for necessaries. This obligation falls under Section 7 of the Mental Capacity Act 2005
, assuming the role of Section 3 of the Sale of Goods Act 1979
. Those incapacitated may also choose to ratify a contract at a later date, if their mental incapacity ends.
Individuals who are clearly intoxicated - by alcohol
or otherwise - are generally deemed not to be able to enter legally binding agreements. Lord Ellenborough stated that such persons have "no agreeing mind", though similar principles apply as to those who are otherwise incapacitated. A drunken person can choose to ratify a contract once they are again sober
, and under the Sale of Goods Act 1979, they are legally bound with regard to contracts for necessaries.
, it was necessary for all companies to spell out the "objects" or the legitimate range of tasks of their business. A company might have an objects clause
, for instance "to create software for, and maintain an online encyclopaedia". If companies acted outside their objects then this would be an ultra vires
act, and until 1989, this used to make the action wholly void. In Ashbury Railway Carriage and Iron Co Ltd v Riche
, the company had the objects clause "to make and sell, or lend on hire, railway-carriages". But then the directors gave out a loan
to build railways in Belgium
. The House of Lords held, simply, the act was ultra vires
and consequently void. This policy was thought to protect shareholders and creditors, whose investments or credit would not be used for an unanticipated purpose by disobedient directors. However, it soon became clear that the ultra vires rule restricted the flexibility of businesses to expand to meet market opportunities. Void contracts might unexpectedly and arbitrarily hinder business. In an attempt to circumvent the rule, companies began to draft ever longer objects clauses, often adding an extra provision stating all objects must be construed as fully separate, or the company's objects include anything directors feel is reasonably incidental to the business.
The first set of reforms, in the Companies Act 1989 was to stipulate that contracts remained valid and third parties were unaffected if an agreement is ultra vires. It is only if a party contracting with a company has acted in callous bad faith
with the knowledge that a company exceeded its capacity, that a contract may still cease to be valid. The second set of reforms came in the 2006 Act
. Now companies are deemed to have unlimited objects, unless they opt for restrictions. This means companies no longer need to draft massive objects clauses. The 2006 reforms have also clarified the legal position that if a company does have limited objects (which is likely to become increasingly rare), an ultra vires act will cause the directors to have breached a duty to follow the constitution under section 171. So a shareholder who disagreed with an action outside the company's objects must sue directors for any loss.
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Capacity in English law refers to the ability of a contracting party to enter into legally binding relations. If a party does not have the capacity to do so, then subsequent contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s may be invalid; however, in the interests of certainty
Certainty in English contract law
Certainty in English contract law set out rules for how judges will interpret, sever or put contracts into effect.If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law...
, there is a prima facie
Prima facie
Prima facie is a Latin expression meaning on its first encounter, first blush, or at first sight. The literal translation would be "at first face", from the feminine form of primus and facies , both in the ablative case. It is used in modern legal English to signify that on first examination, a...
presumption that both parties hold the capacity to contract. Those who contract without a full knowledge of the relevant subject matter, or those who are illiterate or unfamiliar with the English language
English language
English is a West Germanic language that arose in the Anglo-Saxon kingdoms of England and spread into what was to become south-east Scotland under the influence of the Anglian medieval kingdom of Northumbria...
, will not often be released from their bargains.
It is recognised however that minors, and those who are deemed mentally incapacitated, may need to be able to create binding agreements, when acquiring essential items for living, or for employment. Thus, contracts for necessaries (goods or services deemed necessary for ordinary living) will always be legally binding. Equally, minors have the capacity to enter into contracts for employment, when the terms of such an agreement are of general benefit to them. If not, then they may elect to avoid the contract and have their property returned. Companies were also significantly limited in the range of contracts they could bind themselves to under their objects clause, until reform in the Companies Act 1989. If the directors, or the officers of a company enter an agreement with another person or business, and that agreement is beyond the list of business tasks set under the company's constitution, then the contract will be invalid if the third party in bad faith has knowingly taken advantage of the company. Otherwise, under the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, the contract will remain valid, and shareholders must sue the director or officer for losses.
Minors
In English contract lawEnglish contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
, a minor is any individual under the age of 18 years old. Historically, the age had been 21, until the Family Law Reform Act 1969. As a general rule, a minor is not bound by contracts he makes, though the adult party whom he contracts with is. Once a minor reaches the age of majority however, he can elect to ratify a contract made as a minor in full capacity. This rule is subject to several types of contracts which a minor will be bound by, and his right to repudiate such contracts.
Contracts for necessaries
| "..the classes being established, the subject-matter and extent of the contract may vary according to the state and condition of the infant himself. His clothes may be fine or coarse according to his rank; his education may vary according to the station he is to fill; and the medicines will depend on the illness with which he is afflicted, and the extent of his probable means when of age. So, again, the nature and extent of the attendance will depend on his position in society." |
| Alderson B Edward Hall Alderson Sir Edward Hall Alderson was an English lawyer and judge whose many judgments on commercial law helped to shape the emerging British capitalism of the Victorian era.... , in Chapple v Anne Cooper (1834) 153 ER 105 |
Minors are legally bound where a contract supplies them with "necessaries", or goods and services which are deemed necessary or beneficial to them. This obligation is codified in the Sale of Goods Act 1979
Sale of Goods Act 1979
The Sale of Goods Act 1979 is an Act of the Parliament of the United Kingdom which regulates English contract law and UK commercial law in respect of goods that are sold and bought. The Act consolidates the original Sale of Goods Act 1893 and subsequent legislation, which in turn had codified and...
, in section 3, where it is stated:
Where necessaries are sold and delivered to a minor ... he must pay a reasonable price for them.
Whilst the onus of proof that a contract is for necessaries falls upon the supplier, contracts in this form have been found in a wide range of situations, including expensive and far reaching purchases. The definition of necessaries includes obvious purchases, such as food and clothing, but also services or goods which are in furtherance of education or apprenticeship. The necessaries of one minor will not necessarily reflect those of another. The particular circumstances, such as age and immediate needs, may lead to differing outcomes. For example, in Peters v Fleming, it was found that a gold ring
Ring (jewellery)
A finger ring is a circular band worn as a type of ornamental jewelry around a finger; it is the most common current meaning of the word ring. Other types of metal bands worn as ornaments are also called rings, such as arm rings and neck rings....
and watch chain were necessaries, for the child of a Member of Parliament
Member of Parliament
A Member of Parliament is a representative of the voters to a :parliament. In many countries with bicameral parliaments, the term applies specifically to members of the lower house, as upper houses often have a different title, such as senate, and thus also have different titles for its members,...
. However, a contract may not be for necessaries where a minor's needs are adequately satisfied, or a purchase can be seen as unnecessary. This is demonstrated by Nash v Inman, where a tailor
Tailor
A tailor is a person who makes, repairs, or alters clothing professionally, especially suits and men's clothing.Although the term dates to the thirteenth century, tailor took on its modern sense in the late eighteenth century, and now refers to makers of men's and women's suits, coats, trousers,...
's claim that a child's purchase of 11 waistcoat
Waistcoat
A waistcoat or vest is a sleeveless upper-body garment worn over a dress shirt and necktie and below a coat as a part of most men's formal wear, and as the third piece of the three-piece male business suit.-Characteristics and use:...
s was for necessaries failed, on the grounds that he already owned adequate clothing.
Although it is clear that contracts for necessaries can legally bind minors, the terms of such a contract may defeat it. Where a contract contains particularly burdensome or unfair terms, the courts may decide that a minor does not have the capacity to be bound by them. Where a minor hired a car and crashed it through no fault of his own, the owner could not recover on the grounds that a contract term put the car entirely at the minor's risk.
Contracts for employment
A minor may enter into a contract for employment, and be bound by it, where it is for his general benefit. Where an infant chose to work under terms which would lower any compensation he may have received for injury, and this was obviously to his disadvantage, he would not be bound by employment. If such terms were held to be generally to his advantage, as he would be insured against more types of accidents, his employment contract would be binding.Furmston, Cheshire, Simpson, Fifoot, 554 Equally, where a professional boxerBoxing
Boxing, also called pugilism, is a combat sport in which two people fight each other using their fists. Boxing is supervised by a referee over a series of between one to three minute intervals called rounds...
– whilst still an infant – was deprived of pay for a fight (totalling £3,000) for breach of standard boxing rules, such sanctions were enforceable, as the necessity of upholding sporting rules was generally beneficial to him. Where this is not the case, as in De Francesco v Branum, contractual obligations may be void. Here, a girl of 14 contracted with a professional dancer, to become their apprentice. The contract stated that the girl could not accept dancing engagements for herself, and was not required to be paid except for performances she gave. Their agreement was held not to be binding, due to these unreasonable terms.
Repudiation
Where a minor contracts for the purchase or lease of land, or for a service which carries with it ongoing obligations (such as marriage settlements, or the purchase of shares), such a contract will be binding upon the minor upon reaching the age of majority, should they not choose to repudiate it within a reasonable amount of time. The amount of time which is deemed reasonable is circumstantial, though it is clear from Carnell v Harrison that acting upon an agreement while not knowing of the right to repudiation is not sufficient reason to invalidate a contract. Financial obligations which fall before repudiation are binding on minors. A minor in an agreement to rent a flat may be sued for non-payment of rent.Furmston, Cheshire, Simpson, Fifoot, 555 Additionally, in Steinberg v Scala Ltd, the recovery of payments made in a share agreement were denied, only future obligations were extinguished by repudiation.Lack of mental capacity
In order for an individual to succeed in claiming mental incapacity, they must prove that any impairment was such that they did not understand what they were doing, and that the other party was aware of this. Lord Brightman stated in Hart v O'Connor,Such an approach differs from that taken with minors, where the other contracting party need not know they are dealing with a minor, in order to be bound. Whilst there is no absolute standard for a party to be deemed capable of contracting, they must at least know the principles of what they are contracting for, to legally bind themselves. As with minors however, an incapacitated person is bound by statute regarding contracts for necessaries. This obligation falls under Section 7 of the Mental Capacity Act 2005
Mental Capacity Act 2005
The Mental Capacity Act 2005 is an Act of the Parliament of the United Kingdom. Its primary purpose is to provide a legal framework for acting and making decisions on behalf of adults who lack the capacity to make particular decisions for themselves....
, assuming the role of Section 3 of the Sale of Goods Act 1979
Sale of Goods Act 1979
The Sale of Goods Act 1979 is an Act of the Parliament of the United Kingdom which regulates English contract law and UK commercial law in respect of goods that are sold and bought. The Act consolidates the original Sale of Goods Act 1893 and subsequent legislation, which in turn had codified and...
. Those incapacitated may also choose to ratify a contract at a later date, if their mental incapacity ends.
Individuals who are clearly intoxicated - by alcohol
Alcohol
In chemistry, an alcohol is an organic compound in which the hydroxy functional group is bound to a carbon atom. In particular, this carbon center should be saturated, having single bonds to three other atoms....
or otherwise - are generally deemed not to be able to enter legally binding agreements. Lord Ellenborough stated that such persons have "no agreeing mind", though similar principles apply as to those who are otherwise incapacitated. A drunken person can choose to ratify a contract once they are again sober
Sober
Sober usually refers to sobriety, the state of not being under the influence of alcohol or other drugs. It may also refer to:-Computers:* Sober , variety of computer virus* SOBER , family of synchronous stream ciphers...
, and under the Sale of Goods Act 1979, they are legally bound with regard to contracts for necessaries.
Companies
Up until reforms in the Companies Act 2006Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, it was necessary for all companies to spell out the "objects" or the legitimate range of tasks of their business. A company might have an objects clause
Objects clause
An objects clause is a provision in a company's constitution stating the purpose and range of activities for which the company is carried on. In UK company law up until reforms in the Companies Act 1989 and the Companies Act 2006, an objects clause circumscribed the capacity, or power, of a company...
, for instance "to create software for, and maintain an online encyclopaedia". If companies acted outside their objects then this would be an ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
act, and until 1989, this used to make the action wholly void. In Ashbury Railway Carriage and Iron Co Ltd v Riche
Ashbury Railway Carriage and Iron Co Ltd v Riche
Ashbury Railway Carriage and Iron Co Ltd v Riche LR 7 HL 653 is a UK company law case, which concerned the objects clause of a company....
, the company had the objects clause "to make and sell, or lend on hire, railway-carriages". But then the directors gave out a loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
to build railways in Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
. The House of Lords held, simply, the act was ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
and consequently void. This policy was thought to protect shareholders and creditors, whose investments or credit would not be used for an unanticipated purpose by disobedient directors. However, it soon became clear that the ultra vires rule restricted the flexibility of businesses to expand to meet market opportunities. Void contracts might unexpectedly and arbitrarily hinder business. In an attempt to circumvent the rule, companies began to draft ever longer objects clauses, often adding an extra provision stating all objects must be construed as fully separate, or the company's objects include anything directors feel is reasonably incidental to the business.
The first set of reforms, in the Companies Act 1989 was to stipulate that contracts remained valid and third parties were unaffected if an agreement is ultra vires. It is only if a party contracting with a company has acted in callous bad faith
Bad faith
Bad faith is double mindedness or double heartedness in duplicity, fraud, or deception. It may involve intentional deceit of others, or self deception....
with the knowledge that a company exceeded its capacity, that a contract may still cease to be valid. The second set of reforms came in the 2006 Act
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
. Now companies are deemed to have unlimited objects, unless they opt for restrictions. This means companies no longer need to draft massive objects clauses. The 2006 reforms have also clarified the legal position that if a company does have limited objects (which is likely to become increasingly rare), an ultra vires act will cause the directors to have breached a duty to follow the constitution under section 171. So a shareholder who disagreed with an action outside the company's objects must sue directors for any loss.