Contract Law - Capacity Revision Sheet and Key Cases

Introduction

Contract law is a foundational subject of legal studies, providing the framework for understanding how agreements are formed, enforced, and interpreted. There are five elements of a contract:

• Offer and acceptance

• Consideration

• Intention to create legal relations

• Certainty of terms

• Capacity

For any student studying contract law, mastering the key legal principles and cases is essential for academic success. This article serves as a no-nonsense guide to capacity and provides a table of landmark cases that have shaped this area of English contract law. Familiarity with these key principles and cases will help equip students with the necessary tools to navigate the complexities of contract law and provide the foundations to succeed in their exams.

Revision Sheet

🔑 Core Principles

o      What is Capacity?

o      Contracts with Minors

o      Mental Incapacity

o      Intoxication o      Capacity of Organisations

📌 What is Capacity?

Capacity refers to a person’s legal ability to enter into a contract. As a general rule, adults have full contractual capacity. However, the law provides protection for certain individuals whose ability to understand or appreciate the consequences of a contract may be limited.

💡Example: A 35-year-old purchases a television under a finance agreement. As an adult with full mental capacity, the contract will generally be enforceable.

📌 Contracts with Minors

A minor is a person under the age of 18. The general rule is that contracts entered into by minors are not binding unless they fall within a recognised exception.

The main exceptions are:

• Contracts for necessaries.

• Beneficial contracts of service.

In Nash v Inman [1908], a tailor supplied a Cambridge student with expensive clothing. It was held that the contract was not enforceable because the student was already adequately supplied with suitable clothing.

✅ Exam Tip

• Is one party under 18?

• If so, does one of the recognised exceptions apply?

Contracts For Necessaries

A minor is liable to pay a reasonable price for goods or services that are necessaries and suitable to the minor’s condition in life and actual requirements at the time of sale (Section 3(2) of the Sale of Goods Act 1979).

In Peters v Fleming [1840], a minor purchased a gold watch, chain and other items suitable for his social status. It was held that the goods were capable of amounting to necessaries because they were appropriate to the minor’s condition in life.

Beneficial Contracts of Service

Contracts that are substantially for a minor’s education, training or employment will generally be enforceable if they are for the minor’s overall benefit.

💡Example: A 17-year-old signs an apprenticeship agreement providing vocational training and paid employment. The contract is likely to be enforceable because it benefits the minor.

In Doyle v White City Stadium Ltd [1935], a professional boxer under the age of 18 entered into a boxing licence agreement and later sought to enforce its terms. It was held that the agreement was enforceable because it was a beneficial contract of service that was for the minor’s overall benefit.

By contrast, in De Francesco v Barnum [1890], a young dancer entered into an apprenticeship agreement containing oppressive restrictions. It was held that the agreement was not enforceable because it was not substantially for the minor’s overall benefit.

Voidable Contracts

A contract that does not fall into either of the above two categories will be voidable at the minor's option. This means that it is not binding on the minor but is binding on the other party.

When a minor turns 18 years of age, they can ratify the contract made during their minority and it will be fully binding despite there being no new consideration.

📌 Mental Incapacity

The general rule is that a contract entered into by a person lacking mental capacity may be voidable where:

• They were unable to understand the nature of the transaction; and

• The other party knew or ought to have known of their incapacity.

In Imperial Loan Co v Stone [1892], a man entered into a contract while suffering from mental incapacity. It was held that the contract could be avoided because he was incapable of understanding the nature of the transaction and the other party knew, or ought to have known of his incapacity.

Assessing Mental Capacity

In Fehily v Atkinson [2016], the High Court, having reviewed previous case law on contract capacity, identified five principles to assess an individual's mental capacity to contract:

• Recognising the issue. A person needs the mental capacity to recognise the issues that must be considered, to obtain, receive, understand and retain relevant information, and to weigh the information in the balance in reaching a decision.

  
  

• Capacity for specific issue. The question of whether a person lacks capacity is issue-specific and should be judged in relation to the particular decision or activity in question. As some transactions are more complicated or important than others, the person may have sufficient capacity for one type of decision but not another. For example, a person can have sufficient capacity to decide to authorise someone else to deal with their property, but may not have sufficient capacity to decide for themselves about what should be done to the property.

  
  

• Capacity may be time specific. If a person's capacity varies over time, the court must consider the issue in relation to the specific times when those decisions were made.

  
  

• Ability to understand. The question is not whether the person actually understood the transaction; instead it is whether the person had the ability to understand the transaction if the consequences had been fully explained. However, if the person did understand the transaction, then obviously they had the capacity to understand it and this could be evidence of their actual understanding, which may be highly relevant.

  
  

• Getting help with understanding. Getting help to understand the transaction does not prevent the person from having the capacity to understand it.

Factors Which Are Not Mental Incapacity

While assessing whether an individual had mental capacity to contract is case-specific, the following factors are unlikely to make a contract unenforceable for reason of lack of mental capacity:

• Not understanding the nature of the transaction but having the ability to understand it.

• Immaturity of reason, even in an adult.

• Mere absence of skill on the subject of the particular contract.

📌 Intoxication

The general rule is that a contract entered into by an intoxicated person may be voidable where:

• The intoxicated person could not understand the nature of the transaction; and

• The other party knew, or ought to have known, of the intoxication.

In other words, the test for assessing whether a drunk person had the capacity to contract appears to be the same as that for persons lacking mental capacity

In Gore v Gibson [1845], a man entered into a contract while intoxicated. It was held that the contract could be avoided because he was incapable of understanding the nature of the transaction and the other party knew, or ought to have known of the intoxication.

 ✅ Exam Tip

• Mere drunkenness is not enough.

• The intoxication must prevent the person from understanding the transaction.

📌 Capacity of Organisations

Most organisations have legal capacity to enter into contracts. However, the rules governing their contractual capacity depend on the type of organisation.

Registered Companies

Companies incorporated under the Companies Act 2006 are separate legal entities and generally have unrestricted contractual capacity. A company’s acts cannot generally be challenged on the ground that it lacked capacity.

The company’s directors or other authorised persons must have authority to enter into contracts on the company’s behalf, which will usually be governed by the company’s Articles of Association and the Companies Act 2006.

Section 39(1) of the Companies Act 2006 provides that the validity of a company’s acts cannot generally be challenged on the ground of lack of capacity.

Limited Liability Partnerships

A Limited Liability Partnership (LLP) is a separate legal entity that can enter into contracts in its own name.

Section 1(1) of the Limited Liability Partnerships Act 2000 provides that an LLP is a body corporate with legal personality separate from its members. As with companies, the key issue is usually whether the member entering into the contract had authority to bind the LLP.

Statutory Corporations

Statutory corporations (such as local authorities) derive their powers from legislation. Unlike registered companies, they may only enter into contracts that fall within the powers granted by the relevant statute.

Contracts made by local authorities are void unless they relate to functions which the authority is authorised, expressly or impliedly, to perform, or unless the acts done are calculated to facilitate, or are conducive or incidental to, the discharge of those functions (Local Government Act 1972, Section 111).

🔑 5 Step Exam Checklist

1. Identify the contracting party

Is one of the parties:

→ a minor

→ a person lacking mental capacity or intoxicated

→ an organisation

2. Consider whether an exception applies to minors

Is the contract for necessaries?

Is it a beneficial contract of service?

3. Consider mental incapacity and intoxication

Did the person understand the nature of the transaction?

Did the other party know, or ought to have known, of the incapacity or intoxication?

4. Consider the capacity of organisations

Is the organisation a registered company, statutory corporation or LLP?

Does it have contractual capacity to enter into the contract?

5. Consider authority

Did the person entering into the contract have authority to bind the organisation?

Key Cases

Case Name	Facts	Legal Principle
Chapple v Cooper [1844]	A widow arranged for the funeral of her deceased husband and later refused to pay the funeral expenses.	Necessaries include both goods and services, provided they are suitable to the person's condition in life.
De Francesco v Barnum [1890]	A young dancer entered into an apprenticeship agreement containing oppressive restrictions.	A beneficial contract of service will only be enforceable if it is substantially for the minor's overall benefit.
Doyle v White City Stadium Ltd [1935]	A professional boxer entered into a boxing licence agreement.	Beneficial contracts of service entered into by minors are generally enforceable where they benefit the minor overall.
Gore v Gibson [1845]	A man entered into a contract while intoxicated.	A contract entered into by an intoxicated person may be voidable if they lacked capacity and the other party knew, or ought to have known, of the intoxication.
Imperial Loan Co v Stone [1892]	A man entered into a contract while suffering from mental incapacity.	A contract may be avoided where the person lacked capacity and the other party knew, or ought to have known, of the incapacity.
Nash v Inman [1908]	A tailor supplied expensive clothing to a Cambridge student who already possessed sufficient suitable clothing.	A minor is only liable for necessaries that are suitable to their condition in life and actual requirements at the time of the contract.
Peters v Fleming [1840]	A minor purchased a gold watch, chain and other items suitable for his social status.	Goods may amount to necessaries if they are appropriate to the minor's condition in life and actual requirements.