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Contracts are used in a broad range of different business relationships for a variety of different purposes. If you have a valid and binding contract, you must carry out your obligations under it. Interestingly, not everyone can sign a legal contract. In these circumstances, the contract may be non-binding and unenforceable. In this article, we look at three factors that come into play in determining whether someone can sign a contract: 

  • what makes a contract valid;
  • whether a party to a contract has the capacity to sign it; and
  • the implications of entering a contract with a company.

Making a Contract Valid

For a contract to be valid, it must satisfy specific criteria. Generally, there must be:

  • an agreement between two or more parties to enter into the contract;
  • the intention to create a legal relationship;
  • a promise from each party to provide something to the other. For example, Party A will pay Party B, in exchange for Party B providing services to Party A; and
  • evidence that the parties entering into the contract have the capacity to agree to the relevant terms and conditions.

How to Determine if a Party Has Capacity

If a party does not have the capacity to sign a legal contract, they will not be bound to the terms of the agreement. There are classes of people who the law considers to lack the capacity to enter into a contract. Four of these classes are: 

  1. minors;
  2. people with a mental disability; 
  3. people who are intoxicated; and
  4. those who are bankrupt. 

These classes exist to prevent vulnerable parties from being bound by contracts which may exploit them. 

1. Minors

People under the age of 18 may not be able to sign legal contracts. However, minors can be bound to contracts that someone has created for their benefit. This might include contracts for: 

  • employment;
  • education; and
  • training. 

Further, contracts that are for necessities may also be valid.

Necessities can include contracts for: 

  • food;
  • clothing; and
  • accommodation.

If you sell products and services online, you may unknowingly enter contracts with minors. Therefore, it is best practice that a lawyer drafts or reviews your online terms and conditions to ensure that they are valid.  

2. Mental Disability

You will not be able to enforce a contract if one of the parties to it has a mental disability which prevents them from understanding their rights and obligations under the contract. Even if you believe the contract is fair and reasonable for the other party, this party will need to understand the contract for the contract to be valid. 

3. Intoxication

A person who is intoxicated cannot sign a legal contract if they are unable to understand the nature of the contract due to their intoxication. If it can be proven that they were intoxicated when signing a contract and that you should have been aware of his or her intoxication, then the contract will not be enforceable.

4. Bankruptcy

There are specific rules that relate to the types of contracts that a person who has declared bankruptcy can enter into. A bankrupt person may not be able to uphold their obligations under a contract. 

Entering a Contract With a Company

Australian law considers companies to be entities with the same legal capacity as people. As a result, 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 someone acting on its behalf; or
  • authorising a person to act on its behalf.

The latter option is generally the most common.

Key Takeaways

When entering into a contract with another party, you should double-check that this party has the necessary capacity to enter into legal relations. If the other party can prove that you should have known or suspected that they did not have the capacity, the contract could be unenforceable. If you have any questions about ensuring that your contracts are valid, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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