Contract Law - ICLR & Capacity(CH2&5)

Question 1

Why is an intention to create legal relations important?

Answer 1

In order for an agreement to be legally enforceable, at the time of contracting - the parties MUST have an intention for it to be a legally binding agreement.

Question 2

What is the presumption for commercial contracts?

Answer 2

Very strong presumption that the parties intend to create legal relations.

Question 3

When can the presumption be rebutted for commercial agreements?

Answer 3

If there is a
- clear, express statement that the agreement is NOT meant to be legally binding.

And that the agreement is ‘binding in honour’ only.

Question 4

How is there a legally binding agreement?

Answer 4

To create a legally binding contract, there must be
1) Common intention of the parties to enter into legal obligations
2) Mutually communicated expressly or impliedly.

Question 5

How is ‘ICLR’ assessed - what is the court approach?

Answer 5

The court will use an objective test.

Intention of the parties is determined by what the actions of the parties in the circumstances suggest, rather than by taking evidence from the parties of what was actually in their minds.

Question 6

Where does the burden lie in respect of proving that ‘there was no intention to create legal relations’

Answer 6

The burden falls on the person asserting that position.

Commercial agreements - quite difficult to prove this.

Question 7

How can a party to a commercial agreement rebut the presumption of ICLR?

Answer 7

1) Clear words or a ‘statement’ can be used in the agreement to indicate the parties do not intend to create ICLR.

E.g. if there is a statement making it clear that the parties do not intend the agreement to have contractual effect, but rely on each other’s honour.

2) ‘Subject to contract’ - strong inference the parties do not intend to create ICLR until formal execution of a contract.

3) Uncertainty in the agreement terms: If the terms of the agreement are so uncertain that it is not clear how the parties should perform their respective obligations under the contract - courts will interpret this as evidence to rebut the presumption.

4) Advertisements - evidence from an advertiser of an intention to perform the promise, such as providing holiday insurance or depositing money into an account to serve as a reward - will serve as evidence of intention to the person who acts in response to the advertisement (not a commercial contract).

Question 8

What is the presumption of ICLR in domestic situations?

Answer 8

There is no presumption to create legal relations.

Domestic situations include family members, immediate as well as uncle, aunt, nephew, counsin etc.

Question 9

Is there ICLR in a married couple?

Answer 9

No.

Balfour case - promise to pay a wife money whilst abroad was not held to demonstrate ICLR because the couple were happily married at the time, martial arrangements are not the place of the law.

Question 10

What is the rule about minors and capacity?

Answer 10

Minors: Generally, a person is not bound by a contract entered into under the age of 18 even if the other party contracting does not know this or the minor has lied about their age.

Question 11

Examples of things that will rebut the presumption for ICLR in Domestic Agreements?

Answer 11

1) Husband and Wife - Solicitors are settling the financial terms of their divorce - Yes (agreement will be formalised by solicitor)

2) Two friends on how they will contribute joint-business venture - Yes (A lot of money would be at stake)

3) Brother and Sister expressly agree that their agreement will be legally binding - Yes (Presumption would be rebutted as the parties have reached express agreement)

4) Two cousins - once sells their house to the other - Yes (relationship is not particularly close but the agreement is about an asset of considerable worth and will have been formalised)

Question 12

Can a person without capacity enter into a contract?

Give examples of who has incapacity.

Answer 12

General rule:

If a person does not have capacity to enter into a contract, a contract is unlikely to bind them.

Examples:
1) Minors
2) Mental incapacity
3) Intoxication

Question 13

What is the exception regarding minors and capacity?

Answer 13

Exceptions to the rule that minors do not have capacity:

1) Necessaries :
A minor is bound by a contract to supply necessaries to them if the contract is for their benefit.
- A minor must pay a reasonable price for these rather than the actual costs of the necessaries supplied.

S3(3) Sale of Goods Act 1979-necessaries means goods suitable to the condition in life of the minor or other person concerned and to their actual requirements at the time of sale and delivery.

2) Contracts of employment, apprenticeship or education:

A minor is bound by a contract of employment, apprenticeship, education but only if it is for their benefit.

Aylesbury Football Club v Watford-contract not beneficial and could not be enforced-player received no extra training or experience, terms were onerous and they restricted his freedom and payment of wages depended on will of employer.

Minor can enforce contract against the other parties.

If a minor ratifies a contract once they reach the age of 18-contract will be binding on them.

Question 14

What is the position regarding someone with mental incapacity and necessaries?

Answer 14

A person with mental incapacity must pay a reasonable price for goods and services that a person requires at the time they enter the agreement necessaries.

Question 15

What remedies are available to a person who entered into a contract but had mental incapacity?

Answer 15

1) May exercise the remedy to set the contract aside-not be bound by contract.

Question 16

Can an agreement be made voidable if someone is intoxicated?

Answer 16

Yes.

An individual who becomes so intoxicated that they do not understand what they are doing will have to pay a reasonable price for necessaries but will not be bound by any other contract they make.

Question 17

What is a corporation?

Answer 17

If two or more people form themselves into an association for the purpose of some concerted enterprise (e.g. 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 18

What are the main types of corporation?

Answer 18

1) Registered companies
2) Statutory corporations (incorporated by the state)
3) Limited Liability partnership.

Question 19

What is the rule regarding registered companies and capacity?

Answer 19

Section 31 of the CA 2006 allows a company to carry on whatever activity it wants (within the law, of course).

S 39 of the CA 2006 effectively abolishes the ‘ultra vires’ doctrine with regard to
third parties dealing with the company. In other words, 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.

S40(1)- 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 company in good faith. Notwithstanding this, parties looking to enter into a contract with a company are still best advised to check the company’s capacity.

Question 20

Statutory corporations and capacity?

Answer 20

Created by statute - examples include, local authorities.

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 21

Limited liability partnerships and capacity?

Answer 21

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

Question 22

What is the two-fold test to be satisfied to prove that a person has mental incapacity?

Answer 22

1) Person must prove that he did not have mental capacity at the time he entered into the agreement

2) Person must prove that the other party knew or should have known that this was the case.

If both tests are satisfied, contract is voidable (contract has legal effect until the party chooses to set it aside).

Question 23

How do you know if a person lacks mental incapacity?

Answer 23

A person lacks capacity under s2 Mental Capacity Act 2005 if he is unable to make a decision for himself in relation to the matter at the time the contract is made.

S31(1) a person is unable to make a decision if he is unable to:
oUnderstand the information relevant to the decision.

oRetain that information.

oUse or weigh that information as part of the process of making the decision.

oCommunicate his decision

Question 24

How can the presumption be rebutted in a domestic case?

Answer 24

If there is evidence to indicate that the parties did in fact intend to be bound by their agreement.

1) Mutual reliance the party placed on the agreement: if a party acts in reliance on the agreement to his detriment - this is evidence that the parties intended the agreement to be legally binding.

2) Certainty of the agreement : lack of certainty that the parties did not intend to create ICLR

3) Agreement is serious:
if agreement between spouses/partners living together on friendly terms is sufficiently serious - this can rebut the presumption.

4) Parties are not on friendly terms when the agreement is made:
Law presumes that family members and close friends did not intend to create ICLR - this may be rebutted if the parties are not on friendly terms when the agreement was made.