Topic 4 Law Of Contract (capacity To Contract)

Topic

4

Law of Contract (Capacity to Contract)

LEARNING OUTCOMES By the end of this topic, you should be able to:

G

1.

Identify the importance of contractual capacity of a minor to contract;

2.

Describe the types of contract validly entered into by a minor;

3.

Examine the effect of a minor contract;

4.

Explain the importance of mental capacity for purpose of contract; and

5.

Discuss the status of contract made by an unsound mind person.

G INTRODUCTION In forming a valid contract, it is important that the person who enters into the contract must have the full capacity in terms of age and mind. This means, the person who has not reached the age of majority or unsound mind cannot make a valid contract (Refer to Figure 4). This is provided by Section 11 of the Contracts Act 1950, „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‰. The following

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discussion will also look into the status of a contract entered into by a minor and an unsound mind person.

Figure 4.1: Persons who cannot make valid contract

TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)

4.1

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MINORS

A minor or an infant is a person who is below the age of majority. Under the Age of Majority Act 1971, the age of majority is 18 years. With regards to the minorÊs contractual capacity, the general rule is that all contracts entered into by a minor are void. The authority derived from the following Indian case of:

Mohori Bibee v. Dhurmodas Ghose (1903) I.L.R. 30 Cal. 539. The Privy Council held that: the combined effects of sections 10 and 11 of the Indian Contracts Act (which is similar to the same sections of the local Act) rendered the contracts void.

The local case that applied the decision in the Mohori BibeeÊs case was the case of:

Tan Hee Juan v. Teh Boon Keat [1934] MLJ 96. The plaintiff in this case was an infant. The infant executed transfers of land in favour of the defendant. The transfers were witnessed and registered. Later, the plaintiff applied to the court for an order to set aside the transfers and for incidental relief. The Court ruled that: the transactions were void and ordered the restoration of the property to the minor. Normally, when a contract is void, under Section 66 of the Contracts Act 1950, „any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it‰. However, the Privy Council in Mohori BibeeÊs case decided that a party who is a minor cannot be compelled to repay any moneys which he has received in the contract. Thus, Section 65 of the Indian Contracts Act (similar to Section 66, Malaysian Contracts Act) does not apply to a minor contract. It applies to a contract between competent parties, whereas in a case involving a minor, the contract never exists from the beginning.

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In the case of Tan Hee Juan, the plaintiff (minor) had received the purchase price for the transfers of land to the defendant. However, when the court made an order declaring the transfers void, the court refused to order the minor to refund the purchase price paid by the defendant.

4.1.1

Valid Contracts (Exceptions to Minors)

There are certain exceptions available to contracts entered into by a minor. It includes those exceptions under the: Exceptions to Minors Age of Majority Act 1971 (including matters relating to marriage, divorce, dower, adoption; religion and religious rites and usages of any class of persons within Malaysia; and any other written law fixing the age of majority). Contracts Act 1950 (contract for necessaries). Contracts (Amendment) Act 1976 (contract of scholarships). Insurance Act 1963 (Revised 1972) (contract of insurance). (a)

Exceptions under the Age of Majority Act 1971 The Age of Majority Act provides exceptions to the general rule that minor contracts are void. The exceptions include: (i)

The capacity of any person to act in matters relating to marriage, divorce, dower and adoption;

(ii)

The religion and religious rites and usages of any class of persons within Malaysia; and

(iii) Any other written law fixing the age of majority. The above provision shows that minors can enter into contracts of promise of marriage and the contracts are valid. Apart from marriage contracts, etc., minors can also make a valid contract depending on the statute that provides the age of majority for particular purposes. For example, the age for voting is 21 years, and the age of a young person to join a trade union is above 16. An example of case where a minor entered into a valid contract of promise of marriage is the case of:

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Rajeswary & Anor. v. Balakrishnan & Ors. (1958) 3 MC 178. The parties in this case were Ceylonese Hindus. They entered into a marriage agreement according to customary practice that provides for a dowry and a penalty for breach, and they went through a customary ceremony. Later, the first defendant repudiated the promise of marriage and the plaintiffs then brought an action for breach of promise of marriage. The defendant pleaded that the first plaintiff had no capacity to enter into the marriage contract because she was a minor. The High Court held that: the age of majority for entering into a marriage contract differed from other minor contracts and were not affected by the general principle established in the Mohori BibeeÊs case.

In the above case, the contract was a valid contract and enforceable although the party to the contract was a minor. (b)

Contract for Necessaries Contract for necessaries is another exception to the general rule. A minor who enters into a contract for necessaries is liable for the contract. According to Section 69 of the Contracts Act 1950, „if a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person‰. It is important to observe the principles in Section 69 as follows: The necessaries have been supplied to a minor. The minor is also liable for necessaries supplied to his dependants (wife and children). The supplier of necessaries may only claim for reimbursement (a reasonable price). The minor is not personally liable and this means he is liable to pay only if he has the property to do so. The above principles will therefore apply to contract for necessaries entered into by a minor. The contract will be valid if the minor has been supplied with articles which are considered as necessary to the minorÊs actual requirements and suited to the minorÊs condition in life. For example, food,

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shelter, clothing, medical services, and education. The Contracts Act 1950 does not define the word ÂnecessariesÊ but the concept has been mentioned by the Lordship in the case of Government of Malaysia v. Gurcharan Singh & Ors [1971] 1 MLJ 211, by holding that education was ÂnecessariesÊ for the minors.

In Government of Malaysia v. Gurcharan Singh & Ors [1971] 1 MLJ 211, The Government sued the first defendant (the minor) and the second and third defendants (the sureties) for breach of contract. The amount of claim was Rm11,500.00, being the sum spent by the Government for the minorÊs education. At the time when the contract was made, the first defendant was a minor. The Court held that: The contract was void but since education was ÂnecessariesÊ, the minor was liable for the repayment of a reasonable sum spent on him. The amount ordered as payment to the Government was Rm2,683 because the minor has served the Government for three years and ten months out of the contractual period of five years. An example of contract for the minorÊs benefit was the case of:

Roberts v. Gray [1913] 1 KB 520. The defendant in this case wished to become a professional billiards player and entered into an agreement with the claimant, a leading professional, to go on a joint tour. The claimant went to some trouble in order to organise the tour, but a dispute arose between the parties and the defendant refused to go. The claimant now sued for damages of £6,000. The Court held that: The contract was for the minorÊs benefit. Thus, the claimant could continue the action for damages for breach of contract. Damages of £1,500 were awarded. As far as the goods or services are concerned, if the goods or services have a utility value, such as clothing, and are not merely things of luxury (e.g. a diamond tiara), then they are basically necessaries. However, if the minor is well supplied with the particular articles, then they will no longer be

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necessaries even though they are useful for the minor. As illustrated by the following case:

Nash v. Inman [1908] 2 KB 1 The claimant was a Savile Row tailor and the defendant was a minor undergraduate at Trinity College, Cambridge. The claimant sent his agent to Cambridge because he had heard that the defendant was spending money freely, and might be the sort of person who would be interested in high-class clothing. Following the agentÊs visit, the claimant supplied the defendant with various articles of clothing to the value of £145. The clothes included 11 fancy waistcoats. The claimant then sued the minor for the price of the clothes. There was evidence that the minorÊs father was in a good position, being an architect with a town and country house, and it could be said that the clothes supplied were suitable to the defendantÊs position in life. However, the father proved that the defendant was adequately supplied with such clothes when the claimant delivered the clothing. It was held that: The claim failed because the claimant had not established that the goods supplied were necessaries. The above case shows that a minor will not be bound by a contract of goods supplied, which are not of necessaries for the minor. The burden to prove that the goods supplied are necessaries for the minor is on the supplier or the seller. (c)

Contract of Scholarships Another exception to the minorÊs contract is the contract of scholarships. The rule relating to scholarship agreements is provided in the Contracts (Amendment) Act 1976. Section 4(a) provides that no scholarship agreements shall be invalidated on the grounds that the scholar entering into such agreement is not of the age of majority‰. The „Scholarship Agreements‰ have been defined as any contract or agreement between an appropriate authority and any person, with respect to any: Scholarship Award Bursary Loan Sponsorship

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Appointment to a course of study Facility for the purpose of education or learning. „Appropriate authority‰ includes: The Federal Government A State Government A statutory authority An educational institution. The above rule, however, is not applicable to contract of scholarships between minors and private organisations. (d)

Contract of Insurance Contract of insurance also constitutes an exception to the minorÊs contract. Section 153 of the Insurance Act 1963 (Revised 1972) provides that „a minor over the age of ten may enter into a contract of insurance but if he or she is under sixteen years, the written consent of the parents or guardians is essential.

4.2

PERSON OF SOUND MIND

With regards to capacity to contract, it is important that at the time of making the contract, the contracting party must not suffer from mental disability. Section 11 of the Contracts Act 1950 states that „every person is competent to contract...who is of sound mind, and is not disqualified from contracting by any law to which he is subject‰. Section 11 is followed by Section 12(1) of the Contracts Act 1950 which provides that „a person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests‰. Further, Section 12(2) and (3) state that „a person who is usually of unsound mind, but occasionally of sound mind, may make a contract during the period when he is sound. Conversely, a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind‰. The examples of contracts covered under Section 12 can be seen in Illustrations (a) and (b) as follows:

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Illustration (b) A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts.

Illustration (a) A patient in a mental hospital, who is at intervals of sound mind, may contract during those intervals.

In Matthews v. Baxter (1873) LR 8 Exch 132, Matthews agreed to buy houses from Baxter. He was so drunk as not to know what he was doing. Afterwards, when sober, he ratified and confirmed the contract. It was held that both parties were bound by it.

The Contracts Act 1950 does not state the status of contracts entered into by persons of unsound mind. Under the English common law, the contract is voidable if the fact of mental disorder or intoxication can be proven, and the other party knew this. Thus, the drunken person can ratify contracts when sober, as in the above case of Matthew.

SELF-CHECK 4.1 (a)

What is the legal effect of a contract entered into by a minor?

(b)

Is there any exception to the above principle?

(c)

What are the important principle laid down in Section 69 of the Contracts Act 1950?

(d)

Can the contracting party sue a contract for necessaries?

(e)

What is the effect of a contract entered into by a person who is of unsound mind?

minor for damages under

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ACTIVITY 4.1 Discuss the following cases by applying the principles of law on capacity to contract: (a)

Alan is a college university student, aged 17. He had difficulty in coming to the college and decided to purchase a Modenas (the national motorcycle of Malaysia) from Ismail. Alan paid RM500.00 as the deposit for the motorcycle and promised to pay the balance of the purchase price in two weeks time. After two weeks, Alan failed to come with the balance and Ismail wanted to claim from Alan for the payment. At the same time, Alan, who was in need of money, had disposed the motorcycle to his other friend, Rani. Can Ismail succeeded in his claim? Discuss.

(b)

Norman, aged 17, enters into a contract of apprenticeship with Roy to become a successful enterpreneur in health product. For that purpose, Norman is given a training on the marketing aspect of the product. An outlet is provided for Norman to carry out his tasks and goods worth RM10,000 are ordered for Norman. Later, Roy has some difficulties in supervising NormanÊs training and disagreement arises between them. Norman is not happy and decides to withdraw himself from the training. Roy is not happy either and brings an action for damages for breach of contract of RM20,000. Discuss the legal action that can be taken by Roy against Norman.

Contracts made by minors are void. Marriage contract, contract for necessaries, contract of scholarship and contract of insurance constitute valid contracts for minors. Contract for necessaries include contract to supply goods or services to the minors which suited to his condition in life. However, the supplier of necessaries may only claim a reasonable price from the minor. A minor is only liable to pay from his property and he is not personally liable.

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The burden to prove that goods or services supplied are necessaries is on the supplier. A person who is competent to contract includes a person who is of unsound mind. A person may make a contract during the period when he is sound.

Capacity Minor Necessaries Reimbursement

Marriage contract Scholarship Insurance Sound mind

Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Keenan, D. (2006). Smith and KeenanÊs Law for Business (13th ed.). UK: Pearson and Longman. Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases:

Government of Malaysia v. Gurcharan Singh & Ors [1971] 1 MLJ 211. Matthews v. Baxter (1873) LR 8 Exch 132. Mohori Bibee v. Dhurmodas Ghose (1903) I.L.R. 30 Cal. 539. Nash v. Inman [1908] 2 KB 1. Rajeswary & Anor. v. Balakrishnan & Ors. (1958) 3 MC 178. Roberts v. Gray [1913] 1 KB 520. Tan Hee Juan v. Teh Boon Keat [1934] MLJ 96.