Capacity & Intention in a contract

Group No.2
BS120-Business Law
Presentation

Team Members
David MICHAEL
Group Leader
Charlie ANJO
Assistant
Kellis ANGASAMBI
Editor
Abigail RALEWA
Researcher
Ritha KUMB
Research Analyst

Learning Objectives:
By the end of this presentation, you should be able to;
i. Know the definition of the word contract
ii. Explain the history of contract
iii.Understand the word intention and capacity in
relation to contract
iv.Describe the relationship between capacity and
intention in a contract
v. Understand the capacity of the parties
vi.Understand valid infant contract
vii.Distinguish between void and voidable contract
viii.Identify and understand void infant contract

What is a Contract?
 A Contract is binding agreement between two or more
parties.
A Contract arises when an offer is accepted with contractual
intent (the intent to make a binding agreement) and the
acceptance is communicated properly (SlideShare, 2018).
A contract must have the six (6) essential elements to be a
Valid Contract (Kimuli, 1994).
The six essential elements are; Genuine Agreement, Capacity,
Intention, Consideration, Legality, and Formalities.
Contract maybe declared void, voidable or unenforceable if
any of the above essential elements is missing.
Essentially, a contract is an agreement which the courts will
enforce (Daniel & Yvonne, 1995).

Brief History of a Contract
 In the 19th century, the principles of economics which developed
alongside the Industrial Revolution was “Laissez faire.” This led to the
development of contract law, as with the increase exchange of
resources, parties to agreements needed assurances that obligations
and promises would be honoured (Wikipedia, 2017).
 Therefore, contract law developed significantly during this time period
to balance the interests of the developing free market and the
protection of the weaker parties to contracts.

Essential elements of a contract
Valid
Contract
Capacity
Intention
Genuine
Agreement
ConsiderationLegality
Formalities

What is a Capacity in a Contract?
Capacity to contract means the legal competence of a person to enter into a valid
contract. Usually the capacity to contract refers to the capacity to enter into a legal
agreement and the competence to perform some act. (USLEGAL, 1997)
Legal capacity refers to the ability for an individual to rationally understand the
legal implications of any processes they may be involved in (LGM Advisors, 2016).
Courts will generally not enforce contracts that include one or more parties who
lack legal capacity. This means that they are cognitively different from the norm,
and therefore should not be treated as normal parties to a civil agreement (LGM
Advisors, 2016).
The most common examples of cases that involve parties who lack legal capacity
are contracts that involved minors without parental consent or contracts that were
made during intoxication or other mental impairment (LGM Advisors, 2016).
Essentially, capacity in a contract determines the person capabilities of thinking,
reasoning, and understanding the legality of agreements.

Capacity of the Parties
 A valid contract requires that all parties be legally able to enter into the agreement.
Therefore, Capacity of parties is one of the requirements for a valid and binding
contract. (PRESERVE ARTICLES, 2012)
 Certain class of people that are exempted from valid contracts are,
i. Minors,
ii. the mentally insane, and
iii. persons who are under the influence of drugs, alcohol, etc…
 Parties entering into contracts must be capable. Capacity of parties highlights that the
parties entering into a contract should be capable of understanding it and forming a
rational judgment as to its effect upon their interests (PRESERVE ARTICLES, 2012).
 It is impossible only when the parties are not mature enough to understand the effect
of an agreement. For this purpose, law claims that the parties should not be minor,
i.e., they should have attained the age of eighteen years.

Capacity of the Parties (Continue…)
 Even though, the parties are mature they should competent, or else they will not
understand the consequence of a contract entered by them. For that reason, law
requires that the parties should have sound mind.
 Only a person with a sound mind can properly understand the implications of a
contract. Thus law does not allow an agreement with an idiot or a drunken person
because he will not be able to understand the consequences of the agreement entered
into by him. (PRESERVE ARTICLES, 2012)
 Likewise, law does not permit certain people to enter into valid agreement regarding
public interest. Such persons are disqualified by law to enter into contracts (PRESERVE
ARTICLES, 2012).
 For example, a contract with an alien enemy is not in the interest of our country.
Similarly, a person undergoing imprisonment is disqualified by law to enter into
contracts (PRESERVE ARTICLES, 2012).

Capacity of the Parties (Continue…)
 Sec. 11 of the Indian Contract Act provides that "Every person is competent to
contract who is of the age of majority according to the law to which he is subject
and who is of sound mind and is not disqualified from contracting by any law to
which he is subject. "We can easily explain the persons incapable of entering into a
contract” (PRESERVE ARTICLES, 2012).

Drunkards
 A valid contract is a contract that is recognised by law and is binding to
both contracting parties.
 Contract arguments involving intoxicated individuals are voidable contract
and can be avoided by the party that was under the influence at the time
of agreement.
 During contract arguments, the intoxicated party may prove that the
contract should be declared as voidable, because they were intoxicated
and they were not aware of the legal consequences of entering into the
contract. If this can be proven, then the court may establish that the
contract violates the contract law basics. Specifically, the parties must be
competent to enter the contract.
 The principle of contract do not distinguish between voluntary and
involuntary intoxication (PRESERVE ARTICLES, 2012).

Drunkards (Continue…)
 From the list of all the valid elements of contracts capacity is the most important of all.
For a contract to be valid both parties must have “mental ability” to fully understand
rights and obligations.
Drunkards
Therefore, a contract will be voidable if done with “drunkards” or other people with
“mental illness”. Drunkards may be caused by alcohol or other intoxication drugs
From the pictures below which person is suitable for a “valid contract”

 If you were about to make a contract which person would you
choose the one on the right or the one on the left side. I prefer the
left because have fully metal ability and contract signed would
probably a valid contract.
 Is a party, when he enters into a contract, in such state of
drunkenness or intoxication as not know what he is doing, and the
fact is appreciated by the other party, the contract is voidable at his
instances.
 Therefore, to be successful in contract, choose the parties wisely
because if you choose a drunkard definitely the contract is
voidable.

 If the courts have ruled that a contract is voidable due to the contracting party's
being intoxicated, then the intoxicated party has the right to void the contract.
 The right to void a voidable contract can be renounce by ratification, such as when a
party entered into a valid contract while drunk becomes sober and states their
intention to continue the use of the contracted service.

What is an Intention in a Contract?
Intention refers to an objective of entering a contract and create legally binding agreement.
Intention to create legal relations is one of the necessary elements in formation of a
contract. It is because, intention to create legal relations consists of readiness of a party to
accept the legal systems of having entered into an agreement. (Law Teacher, 2003)
In most cases, the court will not view agreements made between family members or close
associates as being made with the intention to enter legal relations. However, in
commercial situations, this is usually to understood to be at the core of most relationships
and agreements (LGM Advisors, 2016).
Illustration
If you promised a family member that you would pay them a certain amount and failed to
do so, the court may rule that a contract does not exist as you did not intend to form
legally binding relations. However, if you promise a company that you will pay for certain
goods, then the court will almost certainly rule that a contract exists (LGM Advisors,
2016).

The Relationship between Capacity and Intention
 Capacity is the mental ability of a person to fully understand
the rights and obligations of entering into a contract. When
there is mutual understanding than each party of the contract
will be ready and willing to accept the legal consequences for
non -performances of his/her part of the agreement or term
of the contract. Therefore, capacity to contract and intention
to create legal relations work hand in hand.

Valid Infant Contracts
What is a Valid Contract?
 In order to define and understand what is a valid infant contract, we first
examine what a valid contract is. According to investor words, an online
dictionary, it defines valid contract as “a contract that complies with all the
essentials of a contract and is binding and enforceable on all parties”
(Definition, n.d.).

Valid Infant Contract (Continue…)
This implies that this contract is recognized by the law as legal and it comprises of
the six major elements of a contract that is
 Capacity
 Intention
 Consideration
 Formalities
 Legality
 Genuine agreement (Andy Gibson, 2009)

 What is a Valid Infant/Minor Contract?
Therefore, a valid infant contract is a contract entered into by a minor/infant that is
enforceable by law. So if ever that contract is breached by the minor the other
party can take the matter to court and the minor can face the consequences
according to the jurisdiction of that country.
 Examples of Valid Infant Contract?
(Wayne Pendleton, 2000) Wayne P and Roger V, are authors or Australian Business
Law third edition provides two types of contracts regularly entered into by minors.

1. CONTRACT FOR NECESSACITIES
“Necessaries include items and services that are necessary to the minors health and safety,
such as food, lodging, shelter and clothing” (Andy Gibson, 2009).
In order for minors to access these essential necessities they will have to obliged to certain
terms and conditions of the party/parties providing the necessities.
EXAMPLE: Janice and Fred marry and purchase a home. They are both minors. To obtain
a mortgage, Fred lies about his age to get a loan from the seller. Six months later Janice
and Fred separate; Janice moves back home with her parents. Fred has second thoughts
about the mortgage and sues the seller to recover payments made on the mortgage. The
seller counter sues to foreclose on the mortgage. The court held that Fred was liable for
the mortgage, although he signed the contract as a minor. Since housing falls into the
category of necessaries, Fred cannot just walk away from his obligation to pay the
mortgage. (Law Shelf Educational Media, n.d.)

 Breach of this contract:
If ever the minor is not fit to fulfill the requirements of the contract, like in the example
Fred sues the seller to recover the payments made on the mortgage. In this case the court
must be able to prove two points:
1. Are the unpaid goods or services capable of being necessaries?
2. Are the goods or services necessaries in the particular circumstances?
If is established that goods and services are necessaries, the minor only needs to pay a
reasonable price for them but if not the court will decide the appropriate settlement for
the plaintiff. (Andy Gibson, Necessaries, 2009)

2. “Contracts for services (employment contract) which benefit the minor are also valid.
Apprenticeship and traineeship and all other contract of services are prime examples”
This statement indicates that an employment contract is in the interest of a minor is valid and
legal. If ever the contract is breach by the minor in any way that disagree with their
agreement, the minor is liable to compensate the injured party, in this case the employer.
EXAMPLE: Jackie was 11-years-old when she got a part on a soap opera. Her mother made
sure to get judicial approval for the contract at the time it was signed. When Jackie turned
19, she wanted to void a few provisions of the contract, citing the fact that she was a minor
at the time the contract was signed. Given the fact that the contract was approved by the
court, Jackie has no grounds to disaffirm any aspect of the contract. (Law Shelf Educational
Media, n.d.)

 Breach of contract:
When the contract is breached by the minor in any way that goes against
the terms of the contract, the court of law must establish that the
contract was in the interest of the minor, therefore, the minor will not
avoid the contract just because he/she is a minor. If the court rule in favor
of the employee, it will order restitution by compelling the minor to
restore the benefits he/she previously received from the owner. (David
Parker, 2008)

Voidable Contracts
In contracts, voidable is a term typically used with respect to a contract that is valid
and binding unless avoided or declared void by a party to the contract who is
legitimately exercising a power to avoid the contractual obligations (Legal Dictionary,
2003).
A voidable contract is a valid contract (different from void Contract) which may be
either accepted or rejected at the option of one of the parties. Ultimately, one party
to the contract is bound. The unbound party may not agree to the contract, at which
the contract becomes void (Wikipedia, 2017).
Reasons that can make a contract voidable (Investopedia, 2018)
• Failure by one or both parties to disclose a material fact
• A mistake, misrepresentation or fraud
• Undue influence or duress
• One party’s legal incapacity to enter a contract
• One or more terms that are unconscionable
• A breach of contract

Voidable Contracts (Continue…)
There are two types of voidable contracts
1. Contracts signed without capacity
 A claim of lack of capacity will make a contract voidable, but only at the option of the party
lacking capacity, not at the option of the other party to the agreement (Wise GEEK, 2003).
 People such as minors and drunkards are mentally incompetent to enter into contracts. If
do so, the contract is treated as voidable at the option of the other party and sometimes it
becomes void.
 It cannot become valid unless the contract is ratified by a legal guardian. A person who is
drunk, can claim a lack of capacity once returned to his senses (Wise GEEK, 2003)
Elements regarding 1.
• Minors have no capacity to contract
• Mental Incapacity
• Alcohol and Drugs

2. Contracts signed without mutual assent
 Mutual assent is also a vital element in a valid contract. A lack of meaningful assent
on the part of one of the parties will make the contract voidable at the option of the
other contracting party (identity (Wise GEEK, 2003).
 A contract signed under a pressure, or mutual friends manipulation and influence is
held by the court and will find that, the contract was never meant to be made
regarding the desire to enter into a contract.
 An example of this type of voidable contract is a marriage contract entered into by a
person induced by misrepresentations regarding the spouse’s identity (Wise GEEK,
2003).

 Capacity and Mutual assent are two crucial legal elements of a valid and enforceable
contract (Wise GEEK, 2003).
 Examples of voidable contracts reflect instances where a person would be at a distinct
disadvantage in making a decision to enter into any binding agreement or where his
ability to understand the consequences of his actions are in question (Wise GEEK, 2003)
Element(s) regarding 2.
• Offer and Acceptance

Void Infant Contract
 An infant is a person who has not completed the age of 18 years
(Wikipedia, 2017).
 An infant does not have enough knowledge and experience (unsound
mind) to understand and distinguish right from wrong.
 One of the concept of capacity to contract is, a person who is
incompetent cannot enter into a valid contract. Therefore an infant is
said to be an incompetent person, which he or she cannot enter into a
valid contract. If do so, then the contract will be treated as void or
unenforceable.
 The ruling behind incompetency to enter into a valid contract is due to
lack of understanding legal binding agreements.
 That is why an infant contract is absolutely void at the very beginning,
and it cannot be enforce by law.

Void Infant Contract (Continue…)
 Law protects the infant and their rights, because their mind is immature. They
don't have the capacity to judge what is good and what is not good for them.
Therefore, if the other contracting party is charged an infant for not
performing is duty, the agreement is considered as void.
 Illustration
A minor executed a mortgage for K20,000 and received K8,000 from the
mortgagee.
The mortgagee filed a suit for the recovery of his mortgage money and for
sale of the property in case of default. The court held that an agreement by a
minor was absolutely void as against him and therefore the mortgagee could
not recover the mortgage money nor could he have the minor's property sold
under his mortgage (PRESERVE ARTICLES, 2012)

No ratification on attaining the age of majority:
 Ratification means the subsequent adoption and acceptance of an actor agreement
(PRESERVE ARTICLES, 2012). Therefore, an infant contract being a void at the beginning of
agreement does not exits in the eyes of law and cannot be ratified by an infant when
reaching the age of majority.
 However, if the infant is entering a contract and promise to continue the contract when he
or she attains the age of majority, then the contract will be treated as valid and
enforceable since ratification refers back to the date of agreement.
 Furthermore, if an advance is made to an infant during his infantry and he or she
continuously received further advance until he or she attains the age of majority and made
a promise to pay for such amount as a whole, then it would be treated as valid and
enforceable contract (PRESERVE ARTICLES, 2012).

 Illustration
Andrew is a infant and he borrowed a sum of money from a creditor by executing a
promissory note, and after reaching the age of majority, he executed a second bond in
against the initial loan. The court executed a second bond against the initial loan, and
held that the contract is valid and enforceable. That is because he ratify the contract
when he attained the age of majority.

Void Infant Contract (Continue)
The rule of estoppels does not apply to an infant:
 Estoppel is a legal principle that bars a party from denying or alleging a certain fact owing
to that party's previous conduct, allegation, or denial (Legal Dictionary, 2003)
 The rule of estoppel does not apply to an infant because, an infant is not estopped from
pleading his infancy in order to avoid a contract, even if he has entered into an agreement
by falsely representing that he was of full age (PRESERVE ARTICLES, 2012).
 In other words, an infant can falsely state his age and enter into contract, because the law
of estoppel has no effects on infant contract. That is because infant contract is void at the
beginning of agreement.

Void Infant Contract (Continue)
 If the property that the minor took is traceable, then the court may give order to the
minor to restore the property to the other contracting party.
 On fair considerations, for 'minors can have no privilege to cheat men'(PRESERVE
ARTICLES, 2012). Whenever, the infant is still holding on any property in which he has
obtained by his fraud, he will still be made to return it to its former owner.
 However, the minor may not be made to repay or restore the money which he has spent,
because it is untraceable. Only traceable property can be restored.
Illustration
 Joe obtains a loan by faking his age and purchases a laptop, although the loan transaction
is void, the court may order Joe to restore the laptop to the lender.

 Exceptions to contract made by an infant is void:
Despite the rule, there are several exceptions where an infant can enter into
valid contract
 Contracts for necessaries (e.g. Food)
 Contracts for scholarship
 Contracts made by a parent or a guardian of an infant
 Insurance contract
 Employment contract
 Marriage contract

Case Study
1. This case involved the sale of a Land by Ryan to Nizel. At the time the contract was
entered, Ryan was drunk. Nizel knew that Ryan was drunk but went ahead with the
contract. Ryan try to call of the sale but Nizel took him to court.
What type of contract is this? Void or Voidable. Explain your answer?
The contract is voidable because both party are mature. The court will
order Ryan to hand over his land to Nizel and not compensation
because money is untraceable.

Summary
A contract is an agreement which is enforceable by law
Contract may be declared void, voidable or unenforceable if one of its
element is missing.
Essential elements of contract include, genuine agreement, capacity,
intention, legality, and formalities.
The contracting party must be competent to enter into contract.
People such as, infant, insane person and drunkards may be exempted from
entering contracts.
Both contracting party must create legal relation upon their agreement.
Infant contract are declared as void and cannot be enforced by law.
Minors contract may become valid through contract of necessity.
The rule of estoppel and ratification does not apply to an infant.

Thank you Ms. Karai & Students for your
time and participation

References
Daniel, K., & Yvonne, S, Y. (1995). Understanding Contract Law (4th ed.). Australia: Butterworths.
Derek, R., Dhirendra, K, S, & John N. (1984). THE CONTEXT OF CONTRACT IN PAPUA NEW GUINEA. Papua New Guinea: University of
Papua New Guinea Press.
Kimuli, M. A. (1994). Business Law in Papua New Guniea . Port Moresby : The Institute of Business Studies Press.
Andy Gibson, D. F. (2009). Business Law. In D. F. Andy Gibson. New South Wales: Pearson Education Australia. Retrieved March 15,
2018
Andy Gibson, D. F. (2009). Business Law. In D. F. Andy Gibson, Business Law (4th ed., p. 312). New South Wales, Australia: Pearson
Education Australia. Retrieved April 4, 2018
David Parker, G. B. (2008). Business Law for Business Student 2008. In G. B. David Parker. NSW, Australia: Lawbook.com. Retrieved
April 6, 2018
USLEGAL. (2003). Capacity to Contract Law and definition. Retrieved April 4, 2018, from https://definitions.uslegal.com/c/capacity-
to-contract/
Wikipedia. (2017). History of Contract Law. Retrieved April 4, 2018, from
https://en.wikipedia.org/wiki/History_of_contract_law#Industrial_revolution
SlideShare. (2018). Capacity to Contract. Retrieved April 4, 2018, from https://www.slideshare.net/tabrezahmad/contracts-with-
the-minor?qid=c560b1a1-7c5d-45e9-99e4-e754749cd454&v=&b=&from_search=2

Reference (Continue)
LGM Advisors. (2016). Contract Law Case Studies. Retrieved April 8, 2018, from http://www.lgmadvisors.com.au/contract-law-
case-studies/
hg.org. (n.d.). Retrieved March 20, 2018, from https://www.hg.org/article.asp?id=34024
Investorwords.com. (n.d.). Retrieved March 13, 2018, from http://www.investorwords.com/13998/valid_contract.html
Law Shelf Educational Media. (n.d.). Retrieved April 4, 2018, from https://lawshelf.com/courseware/entry/contracts-of-minors
Wayne Pendleton, R. V. (2000). In Business Law (3rd ed., p. 227). New South Wales, Australia: Pearson Education Australia. Retrieved
March 15, 2018
PRESERVE ARTICLES. (2012). Short notes on the Meaning of Capacity Parties. Retrieved April 9, 2018, from
http://www.preservearticles.com/2012012621639/short-notes-on-the-meaning-of-capacity-parties.html
Legal Dictionary. (2003). Estoppel. Retrieved April 4, 2018, from https://legal-dictionary.thefreedictionary.com/estoppel
Investopedia. (2018). Voidable Contract. Retrieved April 4, 2018, from https://www.investopedia.com/terms/v/voidable-contract.asp
Wise GEEK. (2003). What are the different types of voidable contracts. Retrieved April 4, 2018, from http://www.wisegeek.org/what-are-
the-different-types-of-voidable-contracts.htm

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