Reasons for limitations on capacity

2. Minors’ contracts

· Contracts for necessaries

· Beneficial contracts of service

· Contracts related to work

Effects of entering into a contract with a minor

· Void contracts

· Voidable contracts

· Enforceable contracts

4. Minors’ liability in tort

Mental disability

Intoxication

It has been seen that the idea of ‘agreement’ plays a central role in the classical law of contract. Much of the law is based on the presumption that parties enter into agreements of their own free will, and that therefore the courts’ primary concern can be to determine, and then give effect to, what the parties themselves have agreed. There are certain situations, however, where despite the fact that an agreement has apparently been made, the courts have felt the need to intervene so as to deny or limit its effect as a contract. One of these situations arises where for some reason one of the contracting parties is felt to need protection. It is in this context that the rules relating to ‘capacity’ can come into operation. In order to make a valid, enforceable contract, both parties must be regarded as having capacity in law to enter into such an agreement. The reason for intervention on the basis of ‘lack of capacity’ may relate to the need to protect the contracting party from him or herself, or to the need to ensure that a contracting party is not being ‘exploited’ because of his or her mental state. Three aspects of this topic are considered in this lecture, namely minors’ contracts, mental disability and intoxication.

There are other problems of ‘capacity’ which relate to the question of whether one party has the power or authority to make the contract, or is acting ultra vires. This sort of problem can arise in connection with agency arrangements. It can also arise in relation to the ability of incorporated bodies to make particular contracts. This aspect is not considered here, since it is regarded as more appropriately the concern of texts on company law.

Minors’ contracts.

Those who have not reached the age of 18 are regarded in English law as ‘minors’ and as such have limited capacity to enter into contracts. The choice of age for this purpose is inevitably somewhat arbitrary, but follows the general law as to the age at which a person attains ‘majority’ for many purposes of the law. It indicates that the object of the rules is largely paternalistic - that is, it is intended to protect minors from the consequences of their own actions.

One result of the current approach is that the law can sometimes appear to operate harshly against those who contract with minors. In particular, the adult party who is unaware that the other contracting party is a minor may still find the contract unenforceable.

The law starts from the presumption that all minors’ contracts are either void or voidable. There are two main exceptions to this, namely contracts for ‘necessaries’, and ‘beneficial contracts of service’. Such contracts may be fully enforceable. In addition, certain contracts which involve a minor obtaining an interest in property which involves continuous or recurring obligations may be voidable.

The first major exception to the rule as to unenforceability relates to contract for ‘necessaries’. The reasoning here is that a total rule of unenforceability would act to the minor’s disadvantage. If traders knew that any contract with a minor would involve the risk of the minor deciding not to honour it, they would be reluctant to enter into such contracts at all. The trader who is ignorant of the minor’s situation will not be protected. The decision is made by looking at matters entirely from the minor’s point of view.

As a consequence, the minor might have difficulty acquiring the basic requirements of everyday life, such as food or clothing. In reality, of course, the majority of transactions of this type take place on the basis of the simultaneous exchange of goods and payment, where there is little or no risk to the trader. In relation to more complicated transactions, and particularly those which do not involve payment on the spot, the question of whether the contract concerns ‘necessaries’ will still be important. The same limitation almost certainly applies to services.

According to Alderson B. in case Chappie v Cooper, ‘necessaries’ include not only things which are absolutely necessary for survival, but also all those which are required for a reasonable existence. Food and clothing are obviously covered, but so are medical assistance and education. Once the goods or services are of a kind which can be put in the general category of ‘necessaries’, there is then a further question as to whether they are appropriate to the particular minor.

The approach of the common law is confirmed as far as goods are concerned by s 3 of the Sale of Goods Act (SGA) 1979, which states:

... ‘necessaries’ means goods suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery.

The second exception to the rule as to unenforceability relates to beneficial contracts of service. People who are under the age of majority, and in particular those who are over the age of compulsory full time education (that is, those who are 16 or above), must have the possibility of being able to earn a living. Consequently the law recognises that contracts of employment, training or apprenticeship may be enforceable. The contract, taken as a whole, must not, however, be oppressive.

The rules about beneficial contracts of service extend to contracts related to the way in which the minor earns a living.

Thus in Chaplin v Leslie Frewin the court upheld a contract relating to the production of the minor’s autobiography (he was the son of Charlie Chaplin). The contract enabled the minor to earn money, and to make a start as an author, and for that reason was to be regarded as beneficial.

Trading contracts, on the other hand, will not be enforced. In Mercantile Union Guarantee v Ball, the court refused to enforce a hire purchase contract made by a minor who ran a haulage business. The minor businessperson is therefore at a considerable disadvantage, as compared with the minor employee. Once the age of the minor is known to others with whom he or she wishes to trade, it is unlikely that any contracts will be forthcoming. The reason for this is in line with the general paternalistic approach taken in this area, in that it is felt undesirable that the minor should enter into contracts carrying the high financial risks which will often be involved in business agreements, on the other hand, it poses severe restrictions on the teenage entrepreneur who wishes to set up a business producing and dealing in, for example, computer software.

What are the consequences of entering into a contract with a minor? For example, can property transferred be recovered if the contract is void? And, if the contract is for necessaries, is the minor obliged to pay the full contract price? The answers to these questions will be discussed as they operate in relation to void, voidable and enforceable contracts.

The first point to note is that, since the passage of the Minors’ Contracts Act (MCA) 1987, it is possible for a void contract to be ratified (expressly or impliedly) on the minor’s attaining majority. If this is done, then the contract will take effect as normal, with full enforceability on both sides.

If the contract remains void at the time when a dispute arises, the position is more complicated. The Infants Relief Act 1874 declared most such contracts ‘absolutely void’, but this was an inaccurate representation of reality, and has been repealed by the MCA 1987. The position now is that a contract which has been fully executed will be effective to transfer the ownership of any money or other property which has changed hands under it. A minor who purchases non-necessary goods for cash is not entitled to demand to be allowed to return them. If the minor has performed, it seems that he or she will be able to claim damages (though not specific performance) from the adult party. Money or property transferred will only be recoverable by the minor, however, if there has been a total failure of consideration. If the adult party has performed, in whole or in part, then, if it is services that have been provided, the adult is without a remedy. If property has been transferred, the common law said that it was irrecoverable, but the position has been altered by s 3 of the MCA 1987. This empowers the court, ‘if it is just and equitable to do so’, to require the minor to return to the adult any property transferred, or any property representing it. This is a broad discretion, and the court is given no guidance as to how it should be exercised, but it does provide the opportunity to prevent a minor taking advantage of the situation, and gaining unjust enrichment. Not all such cases are covered, however. As has been noted, the section has no application where it is non-necessary services that have been provided, nor will it provide a remedy where goods, or the proceeds of their sale, have been consumed by the minor.

Certain contracts are regarded as being valid, unless the minor repudiates them, either during minority or within a reasonable time of becoming 18. These are, in general, contracts which involve the minor obtaining an interest in property which involves continuous or recurring obligations. So, this rule applies, for example, to contracts involving obligations of shareholding, such as the duty to pay ‘calls’; partnership agreements; marriage settlements; and contracts relating to interests in land, such as leases. In relation to the last category, it should be noted that s 1(6) of the Law of property Act 1925 prevents a minor from holding a legal estate in land. The interests concerned will therefore always be equitable.

The repudiation of one of the above contracts during minority is always possible. What constitutes the period after reaching 18 for which this right subsists is not easy to determine.

The House of Lords in Edwards v Carter simply felt that repudiation must occur within a ‘reasonable’ time, and that in the particular case, a period of four years and eight months was too long to be reasonable. It is likely to be regarded as a question of fact in each case as to what is acceptable, and it does not seem possible to lay down any clear rules on this point.

If a minor repudiates a voidable contract, this will not affect obligations which have already fallen due and have been performed. Money or property transferred by the minor will be irrecoverable, unless there has been a total failure of consideration. The position as regards liabilities which have fallen due, but have not been performed at the time of the repudiation is less clear.

Where a minor has received necessary goods and services, what is the obligation as regards payment? As far as goods are concerned, the position is governed by s 3(2) of the SGA1979, which states that:

Where necessaries are sold and delivered to a minor ... he must pay a reasonable price for them.

Two points emerge from this. First, the liability only arises after delivery. The fact that ownership has passed under the SGA 1979 rules for ‘passing of property’ is irrelevant. Secondly, the liability is only to pay a reasonable price, which is not necessarily the contract price.

Although it is perfectly possible for a minor to be liable in tort, there being no age limit in relation to tortious liability, the courts will not allow such an action to be used as a means of indirectly enforcing an otherwise unenforceable contract. It is for this reason that it has been held that a minor who has misrepresented his or her age in order to obtain a loan, or non-necessary goods, cannot be sued in deceit. In other situations, it may be more difficult to decide exactly when indirect enforcement of the contract would result from a successful tortious action.

Insofar as there is immunity, it extends not only to torts committed in the course of a contract, but also fraud which induces a contract. Thus, fraudulent misrepresentation of the minor’s age will not stop the minor from pleading lack of capacity, and avoiding the contract. Nor will it give the adult party a right to bring an action in tort for deceit. Where property had been transferred as a result of such fraud, equity had developed remedies in certain situations to allow the adult party to recover it. Although this equitable remedy is still available in theory, the enactment of the more general provision relating to restitution in s 3 of the MCA 1987 means that it is of virtually no practical importance, and so is not discussed further here.

Mental Disability.

The law also provides protection for those who make contracts while under some mental disability. There are, of course, degrees of mental disability, unlike the position in relation to minors, where the person is either under 18 or over 18. English contract law recognises three categories. First, there are those whose mental state is such that their affairs are under the control of the court, by virtue of the Mental Capacity Act 2005. Since the court effectively takes over the individual’s power to make contracts, any contracts purported to be made personally by the individual will be unenforceable against him or her. Secondly, there are those whose mental state is such that, although they are not under the control of the court, they are unable to appreciate the nature of the transaction they are entering into. Contracts made by people in such a condition will be enforceable against them (even if the contract may in some sense be regarded as ‘unfair’), unless it is proved that the other party was aware of the incapacity.