Chapter 3

Question 1

What four contracting parties have limited capacity?

Answer 1

1) Minors
2) Mentally incapacitated persons
3) Intoxicated persons
4) Corporations

Question 2

What four contracting parties have limited capacity?

Answer 2

1) Minors
2) Mentally incapacitated persons
3) Intoxicated persons
4) Corporations

Question 3

Which law stipulates what is a minor?

Answer 3

Family Law Reform Act 1969

Question 4

What is the general rule regarding contracts with minors?

Answer 4

1) They are not enforceable against minors
2) They are enforceable against the other (non-minor) party
3) They are voidable at the minor’s petition

Question 5

Which contracts are valid with minors?

Answer 5

1) Contracts for necessary goods and services
2) Contracts which are beneficial to the minor
3) Other contracts related to earning a living

Question 6

When are contracts for necessary goods and services enforceable against minors?

Answer 6

When they have utility value and they are not mere indulgences. In other words, contracts for necessities are binding if they confer an overall benefit on the minor.

Question 7

Contracts for necessary goods and services for minors, where are the limits?

Answer 7

If it’s not generally beneficial for the minor, Fawcett v Smethurst (1914) 84 LJKB 473
Luxurious articles of utility or gifts, Ryder v Wombwell (1868) LR 4 Exch 32

Question 8

Fawcett v Smethurst (1914) - relating to minors. What was the case?

Answer 8

In Fawcett v Smethurst (1914), a minor made a contract for the hire of a car. Under the circumstances, it was capable of being a contract for a necessary. The minor crashed the car without any fault on his part. The owner tried to allege that the minor was liable. He claimed that it had been a term of the contract that the car was entirely at the minor’s risk. The court did not accept that there was any such term but held that if there was, it would have prevented the contract from being enforceable against a minor. Even a contract for necessaries cannot be enforced unless it is generally beneficial to the minor.

Question 9

The Sales of Goods Act (SOGA) 1979 verified the common law’s approach to goods how?

Answer 9

It defined contracts for necessary goods as those “suitable to the condition in life of the minor.. and to his actual requirements at the time of the sale and delivery”

Question 10

There is a rule regarding contracts of employment, training, and education for minors. What is it and which two cases have to be known? What is crucial to know about these cases?

Answer 10

Contracts of employment, training, and education for minors maybe be enforceable if, on the whole, they are beneficial to the minor.

In favor of: Roberts v Gray [1913] 1 KB 520 (young aspirant with professional billiard player)
Against: De Francisco v Barnum (1982) LR 43 CH D 165 (stage dancer who was not allowed to marry and have professional without the instructor’s consent)

Both of these rulings were before the Child and Young Persons Act 1933

Question 11

What laws and regulations restricting the employment of minors? What ages?

Answer 11

Ages 13-16

1) Child and Young Persons Act 1933
2) Employment of Children Act 1973
3) Children (Protection at Work) (No. 2) Regulations

Question 12

Two cases in which courts upheld that contracts for employment with minors are enforceable are Doyle v White City Stadium (1935) 1 KB 110 and Chaplin v Leslie Frewin [1996] Ch 71; [1965] 3 All ER 764. What were these cases about?

Answer 12

Doyle v White City Stadium (1935): An infant boxer entered into a contract to fight for £3,000. The terms of the contract stated that the infant boxer will not be entitled to the prize money of £3,000 if he is disqualified for breaching the rules of the fight. The infant boxer breached the rules, and got disqualified, but sought to claim the prize money. The court stated that the rules of the fight were to protect the infant boxer and were thus for his benefit. The terms of the contract were thus considered binding on him.

Chaplin v Leslie Frewin (1996): The defendant agreed to publish a minor’s autobiography which was to be written by journalists from the information they received from the minor and his adult wife. The minor, Charlie Chaplin’s son, approved the final proofs and received advanced royalties from the defendants. Before the publication of the book the plaintiffs claimed that the book was inaccurate and he applied for an injunction to prevent the books publication. It was held that the contract enabled the minor to become an author and so was on the whole for his benefit. The court decided that an injunction would not be granted..

Question 13

Can minors hold a legal estate in land?

Answer 13

No, s. 1(6) of the Law of Property Act 1925.

Question 14

What are calls on shares?

Answer 14

A “call on shares” refers to a situation where a company exercises its right to demand payment from shareholders for the unpaid portion of their subscribed shares. In this context, “call” means a request or demand for payment.

When a company issues shares, shareholders typically pay for their shares in installments or as specified by the company’s articles of association. If the company needs additional funds or wants to collect the remaining unpaid amount on the shares, it can issue a call on shares to the shareholders. The call specifies the amount to be paid, the payment due date, and the payment instructions.

Question 15

What are three types of voidable contracts involving minors?

Answer 15

1) Buying shares in a company
2) Entering into a partnership
3) Buying or leasing property

Question 16

What does holding a legal estate in land mean?

Answer 16

Holding a legal estate in land refers to having a legally recognized ownership interest or right in a piece of real property. It signifies that a person or entity has a legal and enforceable claim to the property, which grants them certain rights and responsibilities as defined by the applicable laws and regulations.

When someone holds a legal estate in land, they possess both the title and the accompanying legal rights associated with the property. These rights typically include the right to occupy, use, sell, lease, mortgage, or transfer the property, subject to any legal restrictions or obligations.

The legal estate in land is evidenced by a legally recognized document, such as a deed, title certificate, or land registry entry, depending on the jurisdiction’s practices. The specific requirements and processes for establishing and transferring a legal estate may vary based on local laws and regulations.

It’s important to distinguish between legal estate and equitable interests in land. While a legal estate provides the full legal ownership and rights, an equitable interest refers to an interest that may arise from a trust or other equitable arrangements, granting the holder certain entitlements or beneficial interests in the property.

Question 17

Buying shares in a company, entering into a partnership and buying or leasing property, are these contracts involving minors valid?

Answer 17

Yes, unless the minor repudiates them, either during minority or within reasonable time of attaining majority.

Question 18

Can a minor repudiate contracts if they are not aware?

Answer 18

Yes, Edwards v Carter [1893] AC 360.

Question 19

What does it mean “to repudiate a contract”?

Answer 19

To repudiate a contract means to reject, renounce, or refuse to fulfill the obligations or terms of a contract. It is an action taken by one party to indicate that they no longer intend to be bound by the contract or perform their duties under it.

Question 20

Two cases involving minors (A) for lease and (B) buying shares in a company
What did these cases say?

Answer 20

A) Blake v Concannon IR 4 CL 323 (1870)
B) Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452

In both cases, the contracts against the minors could be enforced until they were repudiated by the minors.

Question 21

What happens after a contract is repudiated? It can no longer be enforced?

Answer 21

When a contract is repudiated, it does not automatically render the contract unenforceable. Repudiation is considered a breach of contract, indicating that one party has indicated an unwillingness or inability to fulfill their obligations under the contract. However, the consequences and enforceability of the contract depend on the response of the innocent party and the circumstances surrounding the repudiation.

Question 22

If a minor is in a partnership with a major person, is the minor person liable for the debts suffered by the partnership?

Answer 22

No, Lovell and Christmas v Beauchamp [1894] AC 607

Question 23

What is the difference between liability and accountability?

Answer 23

Liability primarily focuses on legal responsibility and the determination of legal consequences, whereas accountability encompasses a broader notion of being answerable or justifying one’s actions, whether legal or not.

Question 24

If a minor transfers money or property under a contract, can this money be recovered?

Answer 24

Only if the minor can prove that there has been a failure of consideration. In other words, the minor must prove that they did not receive any benefit whatsoever under the contract (Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452)

Question 25

Importance of the case Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452

Answer 25

Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452 is a notable case in UK law that dealt with the repudiation of a contract and the consequences thereof. Here is a summary of the case:

Facts: The claimant, Ms. Steinberg, had acquired shares in a company called Scala (Leeds) Ltd. The company made calls on those shares, requiring shareholders to make additional financial contributions. Ms. Steinberg repudiated the contract after being unable to meet the future calls on the shares.

Issue: The key issue in the case was whether Ms. Steinberg was entitled to have her name removed from the share register and recover the money already paid.

Decision: The court held that Ms. Steinberg’s claim failed, and she was not entitled to the remedies she sought.

Reasoning: The court reasoned that there had not been a total failure of consideration in the contract. Although Ms. Steinberg was unable to meet the future calls on the shares, the allocation of the shares had already conferred a benefit on her, as they still held some value. Therefore, the court held that Ms. Steinberg was not entitled to repudiate the contract and recover the money already paid or have her name removed from the share register.

Significance: The case of Steinberg v Scala (Leeds) Ltd highlights the principle that a contract may not be repudiated if there has not been a total failure of consideration. The court considered the benefits already received by the claimant in determining the consequences of repudiation.

Question 26

In cases where a minor is not obliged to execute a contract but may still be liable to make restitution to an adult with any enrichment resulting from the adult’s performance of the contract, what considerations does the law give to minors?

Answer 26

(R Leslie Ltd. v Sheill [1914] 3 KB 607, per Lord Summer at 612).

1) Liability of Minors: In general, minors (persons under the age of majority) are not bound by contracts they enter into. This means they cannot be compelled to fulfill their contractual obligations. The law recognizes the vulnerability or “weakness” of minors and seeks to protect their interests.

2) Restitution for Enrichment: Despite not being legally bound by a contract, a minor may still be liable to make restitution (compensate) to an adult for any benefit or enrichment resulting from the adult’s performance of the contract. This principle aims to prevent the unjust enrichment of the minor at the expense of the adult.

3) Safeguarding the Weakness of Minors: The quote from R Leslie Ltd. v Sheill emphasizes the overarching aim of the law to safeguard the vulnerability and interests of minors as a whole. Although there may be cases where a minor engages in dishonest or fraudulent conduct, the law generally takes a protective stance toward minors to ensure their well-being.

4) Juvenile Knave: The reference to a “juvenile knave slipped through” suggests that despite legal protections, there may be instances where a minor behaves deceitfully or dishonestly. These cases are exceptions rather than the norm, as the law primarily aims to protect minors from exploitation and disadvantage.

Question 27

Stocks v Wilson [1913] 1 KB 235 and R Leslie Ltd. v Sheill [1914] 3 KB 607 both covered liability of minors involved in fraudulent activity. How did they differ?

Answer 27

In R Leslie Ltd. v Sheill [1914] 3 KB 607, a minor falsely represented his age to obtain credit and used the proceeds for his own benefit. The question before the court was whether the minor could be held liable for the debt. The court stated that if both the property and the proceeds obtained through the fraud are gone by the time the action is brought, a court of equity would have no jurisdiction to intervene. Essentially, the court would not enforce a contractual obligation against the minor if they had squandered the money and no longer possessed the property or proceeds. Lord Summer’s stated that while equity required the minor to restore ill-gotten gains or release the deceived party from induced obligations, it would not enforce contractual obligations entered into by the infant through fraud. Restitution would only go as far as repayment.

In Stocks v Wilson [1913] 1 KB 235, a minor had obtained goods by misrepresenting his age, and had later sold them. He was held accountable for the proceeds of sale. Because the minor’s obligation to restore funds only survived as long as the proceeds remained in the minor’s hands.

Question 28

There exists a restitutionary liability for minors in a statute, which one is it?
When can it be applied?

Answer 28

Minors’ Contracts Act (MCA) 1987
It provides a statutory method of ordering children to make restitution where the contract is not enforceable
The court may order the minor, if it is just and equitable to do so, to transfer to any other party any property acquired by the minor under the contract or any property representing it.

The minor must, therefore, offer up any goods acquired in exchange for non-necessary goods if ordered to do so by the court, although the minor cannot be sued for the price. The tradesman recovers the goods in the state he finds them and may not demand that the minor pay compensation, even if the goods are damaged.

Question 29

In which law is mental capacity stipulated?

Answer 29

Mental Capacity Act (MCA) 2005

Question 30

A person lacks mental capacity under the Mental Capacity Act 2005, does this lack have to be temporary or permanent?

Answer 30

Both (can be either temporary or permanent)

Question 31

How is impairment defined in section 3(1) of the Mental Capacity Act 2005?

Answer 31

the inability to

a) to understand the information relevant to the decision
b) to retain the information
c) to use or weigh that information as part of the process of making the decision
d) to communicate the decision (talking, sign language or other means)

Question 32

Is a mentally incapacitated party liable to pay a reasonable price for necessary goods and services?
Does the same apply to intoxication?

Answer 32

Yes, Mental Capacity Act.
The same applies to intoxication.

Question 33

Are contracts with mentally incapacitated parties?

A) Invalid
B) Voidable

Answer 33

B) Voidable if the party can prove that he did not understand the nature of the contract and the other party was aware of the impairment.

Question 34

“Imperial Loan Co v Stone” [1892] 1 QB 599 - incapacitated parties - what was the significance of this case?

Answer 34

Held, that a contract made with a party who is insane, is binding on him unless he ran prove that at the date of the contract his insanity was known to the other party.
(Principle was upheld in Hart v O’Connor [1985] AC 1000, case in New Zealand).

Question 35

For intoxication, what rules apply?

Answer 35

Same as for mental incapacity. Voidable if the person did not understand the nature of the contract and the other party was not aware of the intoxication.

Question 36

If the intoxicated person later ratifies or confirms the contract after sobering up and they are capable of understanding the implications of their actions, will the contract be valid?

Answer 36

Ratification: If the intoxicated person later ratifies or confirms the contract after sobering up and they are capable of understanding the implications of their actions, the contract becomes binding on both parties. Ratification generally requires a clear and voluntary affirmation of the contract.

The case of Matthews v Baxter (1873) LR 8 Exch 132, as mentioned, involved a situation where a drunk individual entered into a contract to purchase property and later ratified the contract when sober. The court held that both parties were bound by the contract because the intoxicated party, after regaining sobriety, had willingly confirmed and affirmed the contract.

Question 37

Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653 is a UK company law case, which concerned the objects clause of a company’s memorandum of association. Why is it important?

Answer 37

Incorporated under the Companies Act 1862, the Ashbury Railway Carriage and Iron Company Ltd’s memorandum, clause 3, stated that its objects were “to make and sell, or lend on hire, railway-carriages…” and clause 4 stated that activities beyond this needed a special resolution. But the company agreed to give Riche and his brother a loan to build a railway from Antwerp to Tournai in Belgium. Later, the company repudiated the agreement. Riche sued, and the company pleaded that the action was ultra vires.

The House of Lords held that if a company pursues objects beyond the scope of its memorandum of association, its actions are considered ultra vires (beyond the powers) and void. Lord Cairns, speaking for the House of Lords, emphasized that the intention of the legislature, as expressed in the Companies Act, was to prohibit corporations from entering into contracts outside the scope of their memorandum of association. Therefore, such contracts could not be ratified by unanimous assent.

The statement “such contracts could not be ratified by unanimous assent” means that contracts entered into by a company that go beyond the scope of its memorandum of association cannot be validated or confirmed by the unanimous agreement of all the members or shareholders of the company. In other words, even if all the members of the company agree to ratify or approve such contracts, their unanimous assent would not make those contracts legally binding or valid.

Question 38

At common law, those acts or contracts beyond the powers conferred on a company by the memorandum (now articles) of association were ultra vires and therefore void (see Ashbury
Railway and Carriage and Iron Co. v Riche [1875] LR 7 HL 653). How did the Companies Act 1985 (now Companies Act 2006) change this?

Answer 38

The Companies Act 1985 (now replaced by the Companies Act 2006) introduced provisions, including Section 35 (now Section 39), which addressed the enforceability of contracts beyond a company’s objects. Section 35 of the Companies Act 1985 (now Section 39 of the Companies Act 2006) provides that such contracts are not automatically void.

According to Section 35 (Section 39), contracts that are ultra vires in nature, meaning they go beyond the objects of a company, are not automatically unenforceable. The provision essentially allows for the enforceability of such contracts unless the other party to the contract had actual knowledge of the company’s limitations or lack of authority. This provision introduced statutory protection for third parties who entered into contracts with companies, providing them with a certain level of assurance and enforceability.

Therefore, while at common law, ultra vires contracts were considered void, the Companies Act 1985 (now Companies Act 2006) introduced provisions that generally make such contracts enforceable, except in cases where the contracting party had knowledge of the company’s limitations.

Question 39

Section 171 Companies Act 2006 imposes a statutory duty on the directors, what is the duty?

Answer 39

Section 171 of the Companies Act 2006 indeed imposes a statutory duty on directors to comply with the company’s constitution, which includes the memorandum and articles of association. This means that directors are obligated to act in accordance with the company’s governing documents and respect any limitations on the company’s capacity that are specified in the memorandum of association.

If a shareholder disagrees with an action taken by the company that goes beyond its objects or exceeds its authorized powers, the usual course of action would be for the shareholder to bring a legal claim against the directors for any loss suffered. This is because the directors have a duty to act within the company’s constitutional boundaries and can be held liable for a breach of that duty if they fail to observe the limitations set out in the memorandum of association.

Question 40

The effects of ss. 39-42 Companies Act 2006 practically eliminate the doctrine of ultra vires in relation to a third party who deals in good faith with a company, making its contracts valid and enforceable. What is the exception?

Answer 40

In the case of a company that is a charity, Sections 39 and 40 of the Companies Act 2006 do not generally apply, except in specific circumstances where a person who interacts with the charity company meets certain criteria.

Sections 39 and 40 would apply in favor of a person who:

(a) Does not know at the time the act is done that the company is a charity; or
(b) Gives full consideration in money or money’s worth in relation to the act in question and does not know:

(i) That the act is not permitted by the company’s constitution; or
(ii) That the act is beyond the powers of the directors.

In other words, if a person interacts with a charity company without knowledge that it is a charity, or if they provide full consideration in money or money’s worth for an act and are unaware that the act is not permitted by the company’s constitution or exceeds the directors’ powers, then Sections 39 and 40 may still apply to protect the validity and enforceability of the contract or transaction in question.