Topic 7: Contract Law: Capacity, Legality, Consent
Commercial Law
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Overview of this topic:
Formalities;
Capacities to contract;
Illegality;
Privity Of Contract;
Unenforceable contracts: lack of consent
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Learning Outcomes:
Do contracts always have to be in writing and signed?
Can a child form a contract? What about someone who is intellectually disabled, mentally ill or intoxicated?
What if the contract is for an illegal purpose?
Who can enforce a contract, and when can they do so?
What if the other party to the contract made a mistake? What if they were pressured or threatened or manipulated by the party seeking to enforce the contract? What if the party seeking to enforce the contract took advantage of the other party? Is the contract still enforceable?
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Reading materials
Chapter 7 pages 243-254 of Nickolas James’s Business Law (Wiley, 5th ed, 2020) and Chapter 9 pages Chapter 9 pages 287-296
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Formalities
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Written contracts
Legislation requires certain contracts to be in writing and signed in order to be effective and enforceable, including:
Arbitration agreements;
Cheques;
Consumer credit contracts;
Real estate contracts; and
Transfers of shares.
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Written contracts
Even when a contract is not required by law to be in writing or signed by the parties, such formalities may still be desirable:
To encourage deliberation and reflection and to emphasise that the transaction has significant legal consequences,
To ensure the availability of reliable evidence about the existence of the contract,
To ensure the availability of reliable evidence about the terms of the contract, and
To indicate that the agreement was intended to be legally enforceable.
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Capacity to contract
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Capacity
A contract will only be enforceable if both parties have the legal capacity to enter into contracts. As a general rule, a party will not have legal capacity to contract if they are:
A minor, or
A person lacking intellectual capacity.
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Minors
The three types of contract that may be enforceable against minors are:
contracts for necessaries: Bojczuk v Gregorcewicz [1961] SASR 128
beneficial contracts of service: Hamilton v Lethbridge [1912] HCA 20; 14 CLR 236 and
contracts where the minor acquires a continuing interest or undertakes a continuing obligation (leases, the purchase of shares)
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Persons lacking intellectual capacity
If a party lacks intellectual capacity and purchases goods that are necessaries, they can be compelled to pay a reasonable price for those goods.
If the contract is not for the sale necessaries, the contract will still be enforceable against a person lacking intellectual capacity unless:
the person was not capable of understanding the nature of the agreement they were entering into, and
the other party knew or should have known of their lack of capacity.
Hart v O’Connor [1985] 1 AC 1000
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Legality
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Illegality under common law
Certain contracts categorised by the common law as illegal and unenforceable include:
Contracts to commit a crime or a tort,
Contracts that promote corruption in public office,
Contracts intended to evade the payment of tax, and
Contracts that prevent or delay the administration of justice.
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Statutory illegality
An agreement may be illegal because it breaches a statutory prohibition. The effect of breach of a statutory provision upon the validity and enforceability of the contract depends upon the wording of the statute itself. The statute may:
penalise the conduct of the parties but not invalidate the agreement,
invalidate the agreement but not penalise the parties, or
penalise the parties and invalidate the agreement.
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Privity Of Contract
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Privity Of Contract
As a general rule, a person who is not a party to the contract (a third party) cannot sue or be sued for breach of the contract. Only the parties to the contract may sue and be sued under that contract.
This is known as the doctrine of privity of contract: Price v Easton (1833) 4 B&Ad 433.
There are time limits placed on the time available for suing for breach of contract. Each State and Territory has relevant legislation dealing with this issue.
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Statutory Time Limits
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Privity Of Contract
One notable exception to this rule is that of the situation dealing with insurance contracts where even if someone is not party to such contracts, that party is nonetheless able to sue on that contract provided the party has been nominated in the insurance contract as one or a member of a class to which protection was intended to be extended [third party beneficiary].
Trident General Insurance Co Ltd v Mcniece Bros Pty Ltd (1988) 165 CLR 107
See also: s 48 Insurance Contracts Act (Cth) which has adopted this common law principle in that Act.
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Unenforceable contracts: lack of consent
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UNENFORCEABLE CONTRACTS: Lack of Consent
A contract will only be enforceable if both parties have entered into the contract willingly.
Matters involving a lack of consent are matters which have a negative impact on the contract.
They affect either the validity or the enforceability of that contract.
What one of the parties is arguing is that at the time of entering into the contract, that party did not genuinely and willingly consent to that contract because that party had been influenced by one or more of the following:
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UNENFORCEABLE CONTRACTS: Lack of Consent Mistake
1. Mistake:
Unilateral,
Common or
Mutual.
2. Duress – either physical and/or economic
3. Undue influence
4. Unconscionable conduct.
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UNENFORCEABLE CONTRACTS: Lack of Consent Mistake
1. Mistake
This doctrine does not use the term ‘mistake’ in the same way as it used in every day speech.
In order for the doctrine to apply, each type of mistake has pre-requisites which must be satisfied.
If the doctrine of mistake applies – irrespective of the type of mistake – the effect is that the contract is void from the beginning (void ab initio).
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UNENFORCEABLE CONTRACTS: Lack of Consent Mistake
This is important because if the contract no longer exists, then generally, monies previously paid under it, may be reclaimed because they no longer belong to the person to whom they were previously paid.
Because of the extreme effect the application of this doctrine has on a contract, courts are reluctant to grant relief on the basis of this doctrine.
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UNENFORCEABLE CONTRACTS: Lack of Consent Mistake
Unilateral Mistake
This occurs where only one of the parties makes a serious mistake about a fundamental aspect of the contract.
The other either knows or should know of the mistake made and they seek to take advantage of that mistake unfairly.
Unilateral mistake therefore, generally, though not always, involves the commission of a fraud.
Phillips v Brooks ltd [1919] 2 KB 243
Cundy v Lindsay (1878) 3 APP CAS 459
Hartog v Colin and Shields [1939] 3 ALL ER 566
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UNENFORCEABLE CONTRACTS: Lack of Consent Mistake
Common Mistake:
Both parties are mistaken as to a fundamental aspect
of the contract
They both make the same mistake as to the existence of
the subject matter prior to the completion of the contract.
Scott v Coulson [1903] 2 CH 249
Mutual Mistake:
The parties believe they have reached an agreement but in
fact there has been no meeting of minds.
Raffles v Wichelhaus (1864) 2 H & C 906
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UNENFORCEABLE CONTRACTS: Lack of Consent Duress
2. Duress
If one party compels the other party to enter into the contract by threatening negative consequences, they are said to have engaged in duress and the contract is voidable.
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UNENFORCEABLE CONTRACTS: Lack of Consent Duress
The threat may be:
To the personal safety of the other party or to that of their loved ones,
To the safety of the other party’s goods or property – either is known as physical duress or
To the other party’s economic or financial well being, known as economic duress:
North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705
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UNENFORCEABLE CONTRACTS: Lack of Consent Undue influence
3. Undue Influence
If one party has influence over the other party in a relationship which existed for some time and/or is currently in existence and ongoing, and they take advantage of that influence such that the other party is not really exercising their independent judgement, the contract will be voidable on the grounds of undue influence.
Johnson v Buttress (1936) 55 CLR 113
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UNENFORCEABLE CONTRACTS: Lack of Consent Undue influence
There are two types of undue influence:
1. Fiduciary Relationships which are based on confidence and trust. Examples include:
doctor and patient,
lawyer and client,
trustee and beneficiary,
parent/guardian and child, or
religious leader and follower.
Allcard v SkinneR (1887) 36 Ch D 145
In such relationships undue influence will be presumed.
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UNENFORCEABLE CONTRACTS: Lack of Consent Undue influence
2. Non-fiduciary relationships
Where the relationship is non-fiduciary, it will be up to the party claiming undue influence to establish that the other party had a controlling influence over their decision-making – that there was undue influence.
Examples include:
Spouse and spouse.
Principal and agent.
Employer and employee
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UNENFORCEABLE CONTRACTS: Lack of Consent Unconscionability
4. Unconscionable Conduct (at common law)
A contract will be voidable due to unconscionability if one party has unfairly taken advantage of a special weakness or disadvantage on the part of the other party:
Commercial Bank of Australia Ltd v Amadio [1983] HCA 14
Louth v Diprose (1992) 175 CLR 621
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UNENFORCEABLE CONTRACTS: Lack of Consent Unconscionability
4. Unconscionable Conduct (under Statute)
The doctrine of unconscionability has now been incorporated into the Australian Consumer Law (ACL): sections 20 – 23 (discussed later).
The ACL also seeks to address the use of unfair terms in consumer contracts: section 23 requires the term to be unfair and that the contract is a standard form contract.
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Takeaways from today?