Contractual Capacity

Question 1

What is the requirement of the capacity of the principal?

Answer 1

The relationship arises by a contract (so parties require capacity). Clear the principle must have contractual capacity to enter into the contract with the third party via the medium of his agent. By appointing an agent a person without legal capacity does not become legally competent. Principle must have contractual capacity at the time the agent enters into the contract.

Question 2

Tinevelly Sugar Refining Co v Mirlees Watson & Yaryan Co Ltd (1894)

Answer 2

This case considers the example of the promotor of a non existent company in case above [ I.e. a person is trying to set up a company and set up contracts for this non existent company. (purporting to act on behalf of a company not yet formed)

Partner had entered into contract with defendant to supply certain pieces of machinery. The machinery was defective and caused loss to pursuers (company) the company raised an action to cover the loss and the court held: the company did not have title to sue.

The reason was the company was not registered thus had no existence at the time the contract was entered into. The promoter partnership could not have entered as the company’s agent as at the time the contract entered into the principle did not exist.** Example of lack of capacity - it did not exist so despite the partnership purporting to act as the agent, the company could not enter into the contract.
[Look this case up - bad explanation]

Question 3

S 51 of the Companies Act 2006

Answer 3

States that since the company has not yet formed, the promoter cannot create contracts[ And even if the principal is subsequently formed, the contract cannot be later ratified.] for this non-existent company and as such the promoter becomes personally bound to any contracts they enter into.
⁃ If it is not expressly stated to the contrary that the company does not exist - then you acting as the “agent” will be legally bound in that contract.

Question 4

Does the principal require capacity?

Answer 4

⁃ Generally the principal must have capacity to contract - this allows them to enter into the principal - agent and principal - third party contracts.
⁃ Therefore the principal[ If the principal did not exist then it could not have capacity.] must be in existence:

Question 5

Does the agent require capacity?

Answer 5

⁃ Because the agent is simply acting as an intermediary, his or her lack of capacity is not thought to be important. This is because the agent will not be part of the contract – see Macgregor, Agency, paras 3-17 - 3-18. So his lack of capacity does not affect the formation of contracts. However, this may be an issue where the agent acts on behalf of an undisclosed principal and the other party sought to argue that a contract had been formed between agent and third party.

• When we think about the effect of a third party relationship - the whole point is for the principle to become bound. This is called the External Relationship (relationship between principle and third party).
• It is clear however that if there is any issue about an agent’s capacity but they nonetheless enter into a contract that will be a binding contract on the principle provided the principle has capacity.