Contractual Capacity

Introduction

Contractual capacity sets out who can enter a binding agreement and when a deal can later be challenged. In England and Wales, the law aims to protect those who may not fully understand what they are agreeing to, while keeping day‑to‑day commerce reliable.

The main categories are minors (under 18), persons with mental impairment, and those intoxicated at the time of contracting. Separate rules apply to companies. In general, an adult with full capacity is bound by their contracts; a person with reduced capacity may not be. The details matter: contracts for “necessaries” can still bind a minor or someone lacking capacity, and a fair transaction with a person whose incapacity was not apparent will often stand.

This guide sets out the tests, key authorities, and practical steps so you can assess capacity quickly and apply the rules with confidence.

What You'll Learn

• Who has capacity to contract and who is protected
• When contracts with minors are binding (necessaries and beneficial employment)
• The common law test for mental incapacity and how the Mental Capacity Act 2005 fits in
• How intoxication affects whether a contract is voidable and the role of ratification
• How company capacity works under the Companies Act 2006
• Leading authorities including Nash v Inman, Imperial Loan v Stone, Hart v O’Connor, and Matthews v Baxter
• Practical checks for businesses, advisers, and exam preparation

Core Concepts

Capacity of Minors

• Who is a minor: A person under 18 (Family Law Reform Act 1969, s.1).

• General rule: A minor’s contract is not usually enforceable against the minor. The minor may enforce it against the adult.

• Necessaries: A minor is liable to pay a reasonable price for “necessaries” sold and delivered. This covers goods and also services essential to the minor’s condition in life and actual requirements at the time.

  • Authority: Sale of Goods Act 1979, s.3(2)–(3).
  • Key points from case law:
    • The goods must be suitable and actually needed at the time of supply, not merely desirable.
    • Nash v Inman [1908] 2 KB 1: “Fancy waistcoats” supplied to an undergraduate who already had ample clothing were not necessaries; no liability.

• Employment and training contracts: Contracts of employment, apprenticeship, or education that are for the minor’s benefit can bind the minor. Courts look at the contract as a whole.

  • If overall fair and advantageous, it is enforceable; if harsh or one‑sided, it is not.
  • Doyle v White City Stadium [1935] 1 KB 110 (boxing contract): enforceable where terms protected the young boxer.
  • De Francesco v Barnum (1890) 45 Ch D 430: dance apprenticeship with restrictive conditions was not for the minor’s benefit.
  • Proform Sports Management Ltd v Proactive Sports Management Ltd [2006] EWHC 2903 (Ch): a long‑term agency deal with a minor footballer was not a contract of service and was not enforceable against him.

• Loans, credit and non‑necessaries: Agreements for non‑necessaries, including ordinary loans or credit, are usually not enforceable against a minor. A guarantee of a minor’s agreement, however, can be enforceable against the guarantor (Minors’ Contracts Act 1987, s.1).

• Misrepresentation of age: An adult cannot sidestep the rules by suing the minor in tort for deceit to recover the contract price.

  • Leslie v Sheill [1914] 3 KB 607: no claim in tort to enforce what is, in substance, a contractual liability.
  • The court may order restitution where property still exists or has been traceably substituted (Minors’ Contracts Act 1987, s.3).

Mental Capacity

• Common law test: A contract made by a person who, by reason of mental incapacity, did not understand the nature and effect of the transaction is voidable if the other party knew of the incapacity (or had reason to appreciate it at the time).

  • Imperial Loan Co v Stone [1892] 1 QB 599: knowledge of the incapacity is key; without it, the contract stands.
  • Hart v O’Connor [1985] AC 1000 (PC): a fair bargain made without knowledge of the incapacity is valid. The focus is on the other party’s knowledge and whether the deal was fair.

• Burden and timing: The person seeking to avoid the contract must prove they lacked understanding at the moment of agreement and that the other party was aware (or should have been). Subsequent deterioration does not help if capacity existed at the time.

• Mental Capacity Act 2005: Provides a general test for decision‑making capacity and how it should be assessed (ss.2–3). A person lacks capacity if, at the material time, they are unable to understand, retain, use or weigh relevant information, or communicate a decision, due to an impairment of the mind or brain.

  • Contracts are still judged primarily by the common law test above.
  • Where capacity is lacking, liability for necessaries remains (Sale of Goods Act 1979, s.3(2)).

Intoxication

• Threshold: To avoid a contract for intoxication, the intoxicated party must show they were so affected by drink or drugs that they did not understand the transaction, and the other party knew (or should have known) of that condition.

• Effect: Such a contract is voidable at the intoxicated person’s option. It is not automatically void.

• Ratification: Once sober, if the person affirms the contract (expressly or by conduct), it becomes binding.

  • Matthews v Baxter (1873) LR 8 Ex 132: a contract made while drunk was later affirmed when sober; the party was held to it.

• Necessaries: Even when intoxicated, a person remains liable to pay a reasonable price for necessaries sold and delivered (Sale of Goods Act 1979, s.3(2)).

Corporate Capacity

• Old rule (ultra vires): Historically, a company’s acts outside its stated objects were void.

  • Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653.

• Modern position: The Companies Act 2006 has largely removed ultra vires as a defence to outsiders dealing with a company.

  • Section 39: The validity of a company’s acts cannot be challenged for lack of capacity by reason of anything in the company’s constitution.
  • Section 40: A person dealing with a company in good faith is protected, even if the directors exceed internal limits on their authority.

• Practical effect:

  • Third parties can rely on contracts with UK companies without investigating internal restrictions.
  • Capacity restrictions in a company’s constitution mainly create internal issues (e.g., director breach of duty), not invalidity of the contract with a third party.
  • Charitable companies and CIOs may have specific statutory constraints, but third‑party protections still apply widely.

Key Examples or Case Studies

• Nash v Inman [1908] 2 KB 1

  • Context: Undergraduate supplied with several waistcoats.
  • Key point: Not necessaries as he already had adequate clothing; no liability.
  • Use in practice: Check both suitability and actual need at the time of supply.

• Doyle v White City Stadium [1935] 1 KB 110

  • Context: Boxer’s licence and promotional terms.
  • Key point: Contract of service that protected the young boxer was binding.
  • Use in practice: Employment or training contracts for minors should be overall beneficial and not oppressive.

• Leslie v Sheill [1914] 3 KB 607

  • Context: Minor obtained loans by lying about age; lender sued in deceit.
  • Key point: No tort claim to enforce a minor’s contractual liability; consider restitutionary routes instead.
  • Use in practice: Take guarantees from adults and avoid relying on tort to recover price.

• Imperial Loan Co v Stone [1892] 1 QB 599

  • Context: Mental incapacity and a loan.
  • Key point: Contract voidable only if the other party knew of the incapacity.
  • Use in practice: Where capacity is in doubt, record your due diligence and ensure terms are fair.

• Hart v O’Connor [1985] AC 1000 (PC)

  • Context: Sale of land by a person with senile dementia.
  • Key point: Deal upheld because the buyer had no knowledge of the incapacity and the terms were fair.
  • Use in practice: Fair bargains without notice of incapacity are generally safe.

• Matthews v Baxter (1873) LR 8 Ex 132

  • Context: Sale made while drunk; later conduct affirmed it.
  • Key point: Contracts made while intoxicated are voidable, not void; ratification binds.
  • Use in practice: Avoid relying on a customer’s intoxicated state; they may later affirm.

• Ashbury Railway Carriage v Riche (1875) LR 7 HL 653; Companies Act 2006, ss.39–40

  • Context: Corporate capacity then and now.
  • Key point: Ultra vires curtailed for companies; third parties in good faith are protected.
  • Use in practice: Obtain evidence of authority but rely on statutory protection for external validity.

Practical Applications

• Working with minors

  • Supply only what is genuinely necessary and keep records showing suitability and need.
  • For employment or apprenticeship, ensure the contract is overall for the minor’s benefit: fair pay, reasonable hours, training, health and safety, termination rights.
  • Avoid onerous restraints or long tie‑ins. Consider shorter terms with review points.
  • Use an adult guarantor where appropriate; ensure the guarantee complies with the Minors’ Contracts Act 1987.

• Dealing with potential mental incapacity

  • Use plain language and check understanding; keep notes of explanations and responses.
  • If capacity is doubtful, consider postponing or suggesting independent legal advice.
  • Where a lasting power of attorney or deputy is in place, contract with the attorney/deputy within their authority.
  • Price and terms should be fair; avoid complex or high‑risk products unless capacity is clear.

• Intoxicated customers or clients

  • Do not complete contracts if the person appears unable to understand the deal.
  • Offer to complete the transaction at a later time.
  • If an order is taken in error, do not rely on it being void; the person may ratify it once sober.

• Company counterparties

  • Ask for the company’s registered name and number; check Companies House.
  • Obtain evidence of authority (e.g., board resolution or confirmation from a director). Although s.40 protects you in good faith, these checks reduce disputes.
  • For charities and other not‑for‑profits, confirm any statutory or constitutional limitations relevant to the specific deal.

• Litigation and problem‑solving

  • For minors: consider recovery in restitution (Minors’ Contracts Act 1987, s.3) if identifiable property remains.
  • For incapacity: focus on knowledge at the time, fairness of terms, and contemporaneous evidence.
  • For intoxication: identify whether there was subsequent ratification.

Summary Checklist

• Identify the party’s status: adult, minor, corporate entity, or person with possible incapacity.
• Minors are not generally bound, except for necessaries and beneficial employment/training contracts.
• Necessaries must be suitable and actually required at the time; price must be reasonable (SGA 1979, s.3).
• Employment or apprenticeship contracts with minors must be fair overall; avoid harsh terms.
• No tort workaround for minors’ contracts (Leslie v Sheill); consider restitution and adult guarantees.
• Mental incapacity renders a contract voidable only if the other party knew (Imperial Loan; Hart v O’Connor).
• Intoxication: high threshold; contract is voidable if incapacity was apparent; ratification when sober binds (Matthews v Baxter).
• Companies: acts are valid despite internal limits; third parties in good faith are protected (CA 2006, ss.39–40).
• Keep clear records of explanations, needs, and authority to reduce disputes.
• When in doubt, pause the transaction and suggest independent advice.

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