Capacity

Question 1

Minors

Answer 1

The basic common law principle is that minors are not bound by contracts they have
entered – the other party is bound and can be sued, but not the minor

Question 2

Exception

Answer 2

Contracts for ‘necessaries’ binds minors.

‘Necessaries’ are defined under the SGA 1979 as goods ‘suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery’

‘Necessaries’ therefore extend beyond the absolute essentials (such as food and clothing). What is ‘necessary’ for a particular minor will depend to an extent on their social status and their actual requirements at the time of purchase.

Minors are also bound by contracts of service that are on the whole beneficial to them. As long as on the balance the contract is more favourable than not to the minor.

Question 3

Mental incapacity

Answer 3

Generally, contracts made with someone in either state will be valid unless at the time the contract was made the person was incapable of understanding the nature of the transaction and the other party knew that to be the case.

Question 4

Corporations - What is a corporation?

Answer 4

If two or more people form themselves into an association for the purpose of some concerted enterprise (eg a club or a trading company), the association is in some cases regarded by the law as being an independent person called a corporation.

Question 5

Three types of corporation

Answer 5

• Registered companies
• Statutory corporations
• Limited liability partnerships

Question 6

Registered companies

Answer 6

s 39 provides that an act undertaken by the company with an outsider (such as entering a contract) cannot be challenged if it is beyond the powers granted in the company’s constitution.

Both the company and the other party to the transaction are bound by the Act. This is backed up by s 40(1), which states that the powers of the directors to bind a company (eg by entering a contract) are deemed to be free of any limitation under the company’s constitution in favour of a person dealing with the Contract company in good faith.

Notwithstanding that, parties looking to enter into a contract with a company are still best advised to check the company’s capacity.

Question 7

Statutory corporations

Answer 7

The statute creating each corporation will set out the purposes for which the corporation may enter contracts.

Any contract entered outside of the stated powers will be declared ultra vires and therefore void

Question 8

Limited liability partnerships

Answer 8

This form of corporation was created by the Limited Liability Partnerships Act 2000 and such partnerships benefit from unlimited capacity