Contracts are used in a broad range of industries for a variety of different purposes. In essence, they are used to bind two or more parties to a range of terms and conditions that both parties agree to.

So can anyone sign a legal contract? The simple answer is no.

If you want your contract to be valid, it must satisfy certain criteria. Generally, there must be:

  • an agreement between two or more parties to enter into the contract;
  • intention to create legal relations;
  • consideration (being an amount of money promised by one party to another in exchange for carrying out the terms of the contract); and
  • evidence that the parties entering into the contract have the capacity to agree to the relevant terms and conditions.

As such, it is the issue of capacity that will determine if a party can sign a legal contract and be bound by the terms of the agreement. If a party without capacity signs a legal contract then this contract will be invalid and cannot be enforceable under Australian law.

How do I know if a person has capacity?

It is useful to know that there are general classes of people who, under law, are considered to lack capacity to enter into a contract. These classes exist to prevent vulnerable parties from being bound by terms and conditions which may exploit them. They will also help to prevent you entering into a contract with a person who may be unable to understand it’s terms, leading to the contract being voidable and you potentially suffering damages as a result.

Minors: Generally, persons under the age of 18 will not be able to sign legal contracts. However, there are many exceptions to this rule that make determining the capacity of minors quite complicated. For example, contracts that have been created for the benefit of minors or that are contracts for necessities may be valid and enforceable. Contracts for beneficial services may include contracts for employment, education and training. Necessities can include contracts for food, clothing or accommodation. In New South Wales, contracts will be presumed to be binding on a minor unless it is shown that the contract is not for the benefit of the minor. 

Mental disability: A contract is voidable if a party to it suffers from a mental disorder, which prevents them from understanding their rights and obligations under the contract. Even if you believe the contract to be fair and reasonable towards the person, if the person does not understand the general nature of his or her involvement in the contract, then it will not be a valid agreement.

Intoxication: A person who is intoxicated cannot sign a legal contract if he or she is unable to understand the nature of the contract being made due to his or her state of intoxication. If a person can prove that he or she was intoxicated when signing a contract and that you should have been aware of his or her intoxication, then the contract will be voidable.

Bankruptcy: There are also specific rules that relate to the types of contracts that a person who has declared bankruptcy can enter into. This is generally because of the fact that a person who is bankrupt may not be able to uphold many commercial obligations under a contract.

Can I enter into a contract with a company? 

Under Australian law, companies are considered to be entities with the same legal capacity as an individual. As a result of this, you can enter into a contract with a company and a company will be able to sign a legal contract.

A company may sign a legal contract by using its common seal, through an agent acting on its behalf or to authorising a person to act on its behalf. The latter option is generally the most common.

Conclusion

If you are entering into a contract with another party, it is a good idea to do some background checks to ensure that this party has the necessary capacity to enter into legal relations. This is because, if the other party can prove that you should have known or suspected that this party did not have the requisite capacity, the contract could be voidable. In order to ensure that any contract that you enter into is valid, you could speak with a contract lawyer and obtain some legal advice as to your options.

Lachlan McKnight

Ask Lachlan a Question

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.