Chapter 16

Capacity

16.1 Introduction

Adults of sound mind have full contractual capacity. On the other hand, minors, the
mentally incapacitated and companies have limited contractual capacity. In the case
of minors and the mentally incapacitated, contract law seeks to protect such persons
from the consequences of their own inexperience or inability. The limitations placed
upon the contractual capacity of companies raise rather different issues, to which we
shall return at Section 16.4.
Although contract law seeks to play a role in protecting minors and the mentally
incapacitated, a competing policy is that the law does not wish to expose to hardship
those who deal fairly and in all good faith with such persons. We shall see that the
rules of law reflect an uneasy compromise between these competing policies. We
shall begin our analysis by a consideration of the contractual capacity of minors
(Section 16.2), then we shall discuss the contractual capacity of the mentally
incapacitated (Section 16.3) and, finally, we shall analyse the contractual capacity of
companies (Section 16.4).

16.2 Minors

A minor is a person under the age of 18. The law adopts a particularly protective
attitude towards minors, often at the expense of those who deal with them in all good
faith. The general rule is that a minor is not bound by a contract which he enters into
during his minority. But this general rule is subject to three principal exceptions.
The first is that a contract to supply a minor with ‘necessaries’ is binding upon the
minor where the contract as a whole is for the benefit of the minor; where its terms
are harsh or onerous it is not binding upon the minor. The definition of ‘necessaries’
is a wide one. In the case of a contract for the sale of goods, necessaries have been
defined in section 3(3) of the Sale of Goods Act 1979 as ‘goods suitable to the
condition in life of the minor … and to his actual requirements at the time of the sale
and delivery’. At common law a wide definition of necessaries has also been adopted.
Regard must be had to the station in life of the minor; the higher the status, the
greater the range of necessaries. So in Peters v Fleming (1840) 6 M & W 42, rings,
pins and a watch chain were held to be necessaries for an undergraduate who had a
rich father. But there is a trap for the trader here because, in deciding whether a
particular article is a necessary, a court will have regard to the status of the minor and
his actual needs at the time of entry into the contract. Thus, in Nash v Inman [1908] 2
KB 1, a tailor sold 11 fancy waistcoats to a minor, who was a Cambridge
undergraduate. The minor refused to pay for them. The tailor’s action for payment
failed because he could not establish that the defendant was not already amply
supplied with clothing; the waistcoats were not therefore necessaries. Although a
minor is bound by an executed contract for necessaries, it remains unclear whether a
minor is bound by an executory contract for necessaries (contrast Nash v Inman and
Roberts v Gray [1913] 1 KB 520).
Secondly, a minor is bound by a contract of employment if that contract is
generally for his benefit (contrast Clements v L & NW Rly [1894] 2 QB 482 and De
Francesco v Barnum (1890) 45 Ch D 430). This principle, however, is confined to
contracts of employment and analogous contracts (such as a contract to give
publishers the exclusive rights to publish the minor’s memoirs, see Chaplin v Leslie
Frewin (Publishers) Ltd [1966] Ch 71). But there is no general principle of law that a
contract with a minor is binding simply because it is for his benefit.
Thirdly, certain contracts with minors are not void but are only voidable; that is to
say, the contract is valid and binding upon the minor unless he repudiates liability
before majority or within a reasonable time thereafter. Only the minor can repudiate;
the adult is bound by the contract. For example, a contract under which a minor
acquires an interest in land or shares in a company is voidable, as is a partnership
agreement to which a minor is a party. The effect of the repudiation is to release the
minor from his obligations to perform in the future. But the minor can only recover
money paid under such a contract where there has been a total failure of consideration
(Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452). A total failure of consideration
arises where the basis upon which the minor paid the money has wholly failed, that is
to say, he has received no part of the performance for which he has bargained.
Outside these three categories, the general rule is that, as we have noted, minors are
not bound by the contracts into which they enter. However, a minor may incur
liability to an adult in a number of other ways. In the first place, the minor will be
liable on the contract if he ratifies it after he has reached majority. Secondly, where a
contract is unenforceable against the minor or he has repudiated it, the court may, ‘if
it is just and equitable to do so’, require the minor to transfer to the other party any
‘property acquired’ by the minor under the contract, or any ‘property representing it’
(Minors’ Contracts Act 1987, s 3(1): it should be noted in this context that the Act
contains no definition of ‘property’; in particular, it is unclear whether ‘property’
includes money). The aim of this section is to prevent the unjust enrichment of the
minor in cases such as Nash v Inman, by enabling the court to order the minor to
restore to the vendor the fancy waistcoats. But the court cannot order the minor to
return the property where he has disposed of it and obtained nothing in return for it.
This limitation has been criticised on the ground that it should be irrelevant that the
benefits conferred are no longer identifiable in the minor’s hands. Nevertheless, this
provision is to be welcomed in so far as it reduces the possibility of the unjust
enrichment of the minor. But it should be noted that the Act did not abolish the
existing common law rules (see Stocks v Wilson [1913] 2 KB 235 and Bristow v
Eastman (1794) 1 Esp 172), so that the adult may still have resort to these rules
where, for some reason, a remedy is not available to him under the 1987 Act.
However, it is unlikely that an adult will wish, in future, to have resort to the pre-
1987 common law because section 3(1) of the Act generally improves the position of
the adult vis-à-vis the minor.
Thirdly, a minor who has actually performed his side of the contract may be unable
to recover the benefits which he has conferred upon the other party. At first sight this
seems rather anomalous. The foolish minor enters into improvident bargains; the very
foolish minor actually carries through his side of the bargain. The courts have,
however, approached this issue from a different perspective. Their approach has been
to allow minority to act as a defence to a claim brought against the minor by an adult
(as in Nash v Inman), but they have refused to allow that same minority to be used as
the foundation for an active claim by the minor: that is to say, they have refused to
recognise that minority can act as a factor rendering the conferral of a benefit unjust
so as to trigger an unjust enrichment claim. On the contrary, a minor who seeks to
recover the value of a benefit which he has conferred upon an adult must satisfy the
same requirements as an adult making a restitutionary claim (except that, where the
claim is based on a total failure of consideration, the minor can make out a
restitutionary claim even though the adult was ready and willing to perform his side
of the bargain). It is for this reason that we find in the cases that minors have relied
upon traditional grounds of restitution, such as total failure of consideration (see, for
example, Steinberg v Scala (Leeds) Ltd). The failure to recognise minority as a
ground of restitution presents an odd contrast with the case of mental incapacity (see
Section 16.3), where it is clear that it is the incapacity (together with the knowledge
of the other party) which constitutes the factor which renders the enrichment unjust.
There is much to be said for the view that minority should also constitute a ground of
restitution subject to the requirement that the minor make counter-restitution to the
adult (that is to say, the minor must restore to the adult any benefit which he has
obtained at the expense of the adult). Indeed, this may have been the view that
English law originally adopted in Valentini v Canali (1889) 24 QBD 166, before the
case was (wrongly) interpreted as an authority for the proposition that the minor must
establish the existence of a total failure of consideration.
Fourthly, a contract with a minor is effective to pass property to the minor
(Minors’ Contracts Act 1987, s 3(1)); similarly it is effective to pass property from
the minor to the adult. Finally, a minor may incur liability in tort or in restitution, but,
where the effect of the tort action or the restitutionary action would be to undermine
the protection afforded by the law of contract, then the tort or restitutionary action
will also be barred. In R Leslie Ltd v Sheill [1914] 3 KB 607, a minor obtained a loan
of £400 by fraudulently misrepresenting his age. It was held that the minor could not
be sued in the tort of deceit because the effect of granting damages in the tort action
would be indirectly to enforce the contract and thus undermine the protection
afforded by the law of contract. But it must be doubted whether Leslie would be
followed today. It has been sharply criticised (for example, by Burrows, 2010, 581–
82) on the ground that a restitutionary action to recover the value of a benefit
conferred is not the same thing as an action to enforce the contract of loan, a point
recognised in another context by the House of Lords in Westdeutsche Landesbank
Girozentrale v Islington London BC [1996] AC 669, 718. The measure of recovery in
a restitutionary claim is the value of the benefit conferred (here the loan) subject to
the defence of change of position, whereas in the contractual claim it is the principal
sum together with the contractually agreed rate of interest.
Despite the enactment of the Minors’ Contracts Act 1987, the law relating to the
contractual capacity of minors remains in a confused state. The rules relating to
necessaries can act as a trap for persons who deal in all good faith with minors. On
the other hand, given that in the vast majority of cases a minor can avoid liability
without the need to repudiate, it is difficult to understand why certain contracts are
treated as voidable so that the minor can only avoid liability by a timely repudiation.
The rules of law remain in need of further rationalisation in an effort to provide a
better balance between, on the one hand, the protection of minors and, on the other
hand, the interests of those who deal in all good faith with them.

16.3 Mental incapacity and drunkenness

The law relating to mental incapacity underwent significant change as a result of the
coming into force of the Mental Capacity Act 2005. The law is here seeking to strike
a delicate balance. On the one hand, we do not wish to deprive people of their
contractual freedom unless it is strictly necessary to do so. On the other hand, we do
not want to leave the weak and vulnerable to exploitation by those who would take
advantage of them. A further consideration is the desire to provide a protective
regime within which the assets of an incapable person can be properly administered.
Section 1(2) of the Act places the initial emphasis on capacity rather than incapacity.
It provides that a person must be assumed to have capacity unless it is established that
he does not. Lack of capacity is the subject-matter of section 2 of the Act. A person is
stated to lack capacity ‘in relation to a matter if at the material time he is unable to
make a decision for himself in relation to the matter because of an impairment of, or a
disturbance in the functioning of, the mind or brain’ (s 2(1), as further defined in s 3).
The impairment or disturbance can be temporary or permanent (s 2(2)). A person is
not to be treated as unable to make a decision unless all practicable steps to help him
to do so have been taken without success (s 1(3)); nor is he to be treated as unable to
make a decision merely because he makes an ‘unwise decision’ (s 1(4)). Further, a
lack of capacity cannot be established merely by reference to a person’s age or
appearance or by a condition of his, or an aspect of his behaviour, which might lead
others to make unjustified assumptions about his capacity (s 2(3)). If necessary goods
or services are supplied to a person who lacks capacity to contract for the supply, he
must pay a reasonable price for them (and necessaries, for this purpose, are defined to
mean ‘suitable to a person’s condition in life and to his actual requirements at the
time when the goods or services are supplied’) (s 7). The Act also makes provision, in
Part 2, for the Court of Protection which has wide powers to make decisions in
relation to the conduct of life of a person who lacks capacity.
At common law mental incapacity is not a ground for the setting aside of a contract
or for the return of benefits conferred under a contract, unless the incapacity is known
to the other party to the contract (Imperial Loan Co v Stone [1892] 1 QB 599) or the