Legal Environment

Contract 5
Consideration
Capacity to Contract
Intention to Create Legal Relations
Learning Objectives
Quick Review
The requirement of consideration
What is capacity to contract?
How it applies to
 Adults
 Minors

 People who have a mental disease

 People under the influence of alcohol or drugs

Intention to create legal relations 2

Quick Review
A contract is a legally binding agreement
In order to create a valid contract which is
legally enforceable, there must be an offer
and an acceptance

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Requirement of Consideration
In addition to an offer and acceptance, we
also need consideration in order to create a
contract
Only contracts made by deed do not require
consideration

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Requirement of Consideration (cont.)

Basically, one party benefits in some way

or the other party is responsible for doing
something (or both)
Paying (or promising to pay) money in
return for the goods or services is the most
common form of consideration

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Capacity to Contract
In addition to offer/acceptance and
consideration, capacity to contract is also
needed to create a valid contract
Capacity to contract means the ability to
enter into a contract
Let us see how this applies to different
groups of people

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Adults
All adults of sound mind (ie they are not
mad) have the capacity to contract

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Minors
A minor is a person who is under the age of
18 years old
As they have less experience, the law tries
to protect minors from situations where
they might enter into contracts which do not
benefit them

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Minors (cont.)
Contracts with minors can be
 Valid
 Voidable

 Void

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Valid Contracts with Minors
The following kinds of contracts can be
enforced against a minor as they are valid
contracts:
Contracts for Necessaries
Beneficial Contracts of Service

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Contracts for Necessaries
Necessaries are things necessary to
maintain the minor
The Sale of Goods Act 1979 defines these
as
“Goods suitable to the condition in life of
the minor and to his actual requirements at
the time of sale and delivery”

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Contracts for Necessaries (cont.)
Necessaries includes things like food and
clothes
It would not include things like jewelry and
DVD players and other luxuries
The minor is only required to pay a
reasonable price for necessaries

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Contracts for Necessaries (cont.)
What qualifies as necessaries depends on the
circumstances of each case
If the minor is quite wealthy then quite
expensive goods may be necessaries so long as
they are useful
If the minor already has a good supply of a
particular thing (eg clothes) then more of these
may not be necessaries even though they are
useful and within the minor’s usual income

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Contracts for Necessaries (cont.)
The Sale of Goods Act 1979 only applies to
goods
However, the common law applies to
services and it follows the Sale of Goods
Act

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Contracts of Service
A contract of service, apprenticeship (ie
training) or education with a minor is valid
so long as it benefits the minor
Ordinary trading contracts are not valid as
the minor may lose a lot of money

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Voidable Contracts
A voidable contract is binding on the minor
unless s/he takes action to declare it void (ie
invalid)
The minor can do this while s/he is still a
minor or within a reasonable time after
reaching 18 years old
This would apply to contracts to buy shares
in companies, leases of property and
partnerships
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Void Contracts
Under the terms of the Minors’ Contracts
Act 1987 certain contracts are void (ie
invalid) unless they are ratified
Ratified means that the minor confirms that
the contract is valid when s/he reaches 18
This applies to loans and contracts for non-
necessary goods

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Mental Incapacity and Intoxication

A contract made with a person who has a

mental disease or who is under the
influence of alcohol or drugs is valid unless
that person can show
At the time they made the contract their
mind was incapable of understanding what
they were doing, and
The other party knew (or should have
known) about their disability
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Mental Incapacity and Intoxication

If the person who is incapable due to mental

incapacity/drink/drugs enters into a contract
for necessaries then s/he must pay a
reasonable price for them

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Intention to Create Legal Relations
In addition to offer/acceptance,
consideration, and capacity to contract, the
parties must also intend to create legal
relations before there can be a valid
contract
In other words, a court will only give effect
to a contract if it is satisfied that the two
parties intended to create a contract which
would be legally enforceable
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Domestic and Social Agreements
Usually, a court will say that there is no
intention to create legal relations in
domestic and social agreements
This applies to agreement between husband
and wife, for example
And between employees, such as in lottery
syndicates
Because there is no contract the parties
cannot enforce the agreement
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Domestic and Social Agreements
(cont.)
However, it is possible to convince a court
that there was intention to create legal
relations
The best way to do it is to create a formal
written document signed by the parties

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Commercial Agreements
In this type of agreement, a court will
usually assume that there was an intention
to create legal relations because it involves
business
One party would have to show that there
was no intention

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Summary – Part 1
Parties to a contract must have the capacity
to contract
Adults of sound mind have the capacity to
contract
Contracts with minors may be
 Valid
 Voidable
 Void

Depending on the type of contract

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Summary – Part 1 (cont.)
In order to avoid a contract, people who
enter into contracts when they have a
mental disease or are affected by alcohol or
drugs have to show that they could not
understand what they were doing and that
the other person knew that

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Summary – Part 1 (cont.)
A valid contract also requires that the
parties to the agreement had the intention
to create legal relations
Usually, there is no intention in the case in
domestic and social agreements
Usually, there is intention in commercial
agreements

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Summary – Part 2
A contract is a legally binding agreement
In order to create a valid contract, there
must be
 An offer
 An acceptance

 Consideration

 Capacity to contract

 Intention to create legal relations

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Reading
(MacIntyre) Pgs. 66-68
(Kelly) 146-148

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