Signing a contract is common in several areas of life, from buying a car to signing a lease. Unless you can prove otherwise, the law will assume you or your business have contractual capacity to enter into contracts. However, not just anyone can sign a legal contract, persons under 18 years of age are one example. In this case, the courts may find the contract voidable, meaning it is not enforceable. This article explores capacity when signing a legal contract.
Who Might Lack Capacity When Signing a Contract
Capacity is a cornerstone element of a contract. Contractual capacity signifies that you understand your rights and obligations under the agreement. In Australia, there is no universal standard for capacity. The Court ultimately determines if you have the mental capacity to enter into a contract or not. When making this decision, the Court weighs the complexity of the contract against your perceived level of mental capacity.
Legal capacity can be decision-specific. A person may have a mental impairment, yet they may still have the capacity to enter a standard contract. A contract such as this could include a contract to buy a mobile phone. However, you may not have the mental capacity to enter into a complex contract such as a home loan contract.
Classes of Persons & Entities that Lack Capacity
The law considers the following classes of persons and entities to lack capacity, subject to certain exceptions.
Minors
If you are under 18 years of age, you are considered a minor and not yet an adult. Generally speaking, minors do not have the legal capacity to sign contracts; however, certain exceptions do apply. Such exceptions include where you are a minor and enter a contract for necessities (such as food). Another exception is when you are a minor and enter an employment contract, provided the contract is fair.
Mentally Incapacitated Persons
If you suffer from mental impairments, you may not have the capacity to enter into that contract.
Intoxicated Persons
If you are intoxicated by drugs or alcohol, you temporarily lose the capacity to sign contracts.
Bankrupt Persons
If you are bankrupt, you still have a general contractual capacity to enter into contracts. However, bankruptcy legislation may limit your ability to enter into particular agreements and require you to disclose any instances where you have been classified as “bankrupt”.
Companies
Companies have the same legal capacity as individuals, but they lack the capacity to enter into contracts that are not permitted by their Company Constitution (a corporate governance document that governs the management of the company). However, companies can continue to enter into contracts using their common seal or an agent acting on the company’s behalf.
Continue reading this article below the formLegal Implications of Entering Into a Contract Without Capacity
If you sign a contract but you lack capacity, the contract can be deemed void and unenforceable. To prove you lacked capacity at the time of signing a contract, you must prove that:
1. you did not have the capacity to enter into the contract; and
2. that the other party should have been aware of this fact.
A party looking to void the contract must successfully demonstrate two elements. Firstly, the party must prove they lacked capacity at the time of entering the contract. Secondly, the party asserting they lacked capacity must prove the other party should have been aware of this. Failure to successfully prove both elements will result in the contract remaining binding and enforceable.
Protections for People Who Lack Capacity to Enter Into a Contract
Contracts can be voided if a person can prove they lacked capacity. A Court-appointed guardian will help protect vulnerable individuals by signing financial and lifestyle documents on their behalf.
You may need to prove your capability to enter into an agreement with additional documentation or witnesses. This may depend on the State or Territory. An example is entering into a Power of Attorney (POA) agreement.
Additional protections for vulnerable people are provided by Australian consumer protection laws. These activate if there is evidence of undue influence or unconscionable conduct by one of the contracting parties.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
Before your business enters a commercial contract with another party, it is vital to assess whether they have the capacity to enter into the agreement. If a person is either a minor, has a mental impairment or is bankrupt, it is likely they do not have the necessary contractual capacity. Understanding capacity is essential for seamless business operations. A contract will likely be deemed voidable if the Court finds a party lacked capacity to enter into the contract.
If you believe you might have entered into a contract with a party who lacks capacity or have any questions, contact our experienced contracts lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Legal capacity refers to when a person knows and understands the contract they are entering into. People who generally lack the capacity to enter into contracts include minors, mentally incapacitated persons, intoxicated persons, and bankrupt persons.
If they can prove they lacked capacity, and the other party knew of this, then the contract can be voided.
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