General principles of contracts series; (part 5) capacity of the parties

This is the second requirement for a valid contract. For the contract to be binding, the parties must have the legal capacity to bind themselves. Legal capacity is a status bestowed on you by law. For our purposes, if you are an adult, sane, sober individual who has never been declared incompetent, insolvent or prodigal by a court, you probably have full contractual capacity. But as you will have guessed by now, there are certain things that can affect one's capacity to be bound to a contract, and therefore affect the validity of the contract. For our purposes, they are: age (the most important one), insanity, intoxication and prodigality.

Age

Some reading this article might be under the age of 18. This section of the law is therefore very relevant to you. Furthermore, the "child star" phenomenon has become very widespread in the music business.

For years, a "minor" was defined in South African law as someone under the age of 21. In 2002, this law changed by the Births and Deaths Registration Amendment Act (No 1 of 2002), and a minor was further defined in section 17 of the Children's Act No 38 of 2005. Today, a minor is someone under the age of 18 years (to be more precise, for contractual and criminal law purposes, a person between the ages 7 and 18).

In terms of South African law, you are generally entitled to conduct your own affairs and enter into contracts as soon as you turn 18. By contrast, a child under the age of 7 has no contractual capacity and his contracts are void (thus a guardian will have to contract on his behalf).

Between the age 7 and 18, the minor has "limited" contractual capacity, which means that, as a general rule, his contracts, if unassisted by his guardian, are voidable (not void). There are some exceptions to the above general rules, including personal life insurance policies, opening bank accounts, taking up medical aid and so on (various age exceptions apply to these various things). Also, a minor may enter into a unilateral contract, such as accepting a gift, donation or other benefit, unassisted.

Unassisted Minor's Contracts

When a minor enters into a contract without his guardian's consent or assistance, the other party to the contract is bound, but the minor is not. Since the contract is voidable, the minor can choose to go on with the contract or repudiate it. If he chooses to repudiate it, he cannot be forced to perform any obligation he agreed to. In addition, the guardian (and the minor, after reaching the age of majority) can recover any money or property made over, subject to the minor returning what he received.

So take the following example: Viktor, who is 17 years old, purchases a Kramer bass guitar from Vincenzo for R25,000, and Viktor's guardian (his father, Van) knows nothings about the transaction. Vincenzo will have to return the money if Viktor decides to take the bass guitar back. A person who contracts with a minor in the mistaken belief that the child is old enough to enter into contracts does not have a case. This is the risk a major takes when he contracts with a minor and does not get the consent of the minor's guardian.

However, if you are a minor reading this, don't start jumping for joy, going out entering into all sorts of contracts and taking people for a ride: if a minor knowingly deceives the other party into believing he is a major, or, it has been suggested, the minor takes advantage of his minority to lead the other party into a contract knowing it is voidable, he may be liable for damages in the law of delict. (This has not been authoritatively decided by our courts, but appears to be the correct approach).

So if Viktor purchased the bass from Vincenzo knowing either that Vincenzo thought he was a major, or knowing that the contract was voidable, used the bass for a few weeks and perhaps cost Vincenzo a sale to another person, it is believed that Viktor will be liable to Vincenzo for damages in delict. The law of minor's contracts exists to protect the minor from unscrupulous dealers taking advantage of his lack of experience. It is not there to give him an opportunity to take advantage of others.

Where the guardian gives consent

Whenever a minor contracts with the consent of a guardian, the contract is binding as if the minor was a major, and the contract can be enforced against a minor (with the exception of 'inherently prejudicial transactions', which can be set aside by the courts).

The guardian may give the minor a general consent to enter into contracts falling within a particular category, such as anything to do with his education, carrying on a business, etc. Alternatively, a guardian may give his consent only to an individual transaction, such as buying a guitar. If the minor buys the guitar without prior consent, the guardian can still give his consent later on. Such later consent is called "ratification" (or "ratifying" the contract). It works retrospectively, and is as good as if the guardian was there when the guitar was purchased. The guardian may also contract on behalf of the minor, in certain situations and with certain limitations.

If the guardian, acting in bad faith or unreasonably, refuses to give consent to a contract that would be advantageous to the minor, the minor can apply for a court to give its consent on the minor's behalf.

Setting aside an assisted contract

If an assisted minor's contract is inherently prejudicial, it can be set aside by a court. ('Inherently prejudicial' would imply that the contract was bad enough to conclude that the guardian was either acting in bad faith or was a fool). This remedy has the effect of restoring the minor and the other party to the contract to their pre-contractual positions.

The transaction must have been inherently prejudicial to the minor, meaning that the actual transaction itself caused prejudice - not that there was a subsequent accident or mishap. For example, the sale of a defective guitar amp (or an amp priced at twice its real value) to an assisted minor could be set aside, but not the sale of a guitar amp that was damaged when it was dropped by a roadie at a gig that night.

If the court set aside an assisted contract, each party must return what they received, as well as any enrichment derived from the other party's performance. If full restoration cannot be made, for example, because of damage to goods, as above, the minor must make up the shortfall by financial compensation (i.e. paying for the repair to the amp).

On becoming a major, a former minor may ask the court to set aside an inherently prejudicial contract, within three years of attaining majority. However, the former minor must not have waived the right to have the contract set aside after reaching the age of majority, which he would do if he carried on using the amp in that period, for example.

Insanity

A person who is so mentally unwell that he cannot appreciate the fundamental terms of a contract he has entered into, is not bound to that contract. The contract is void because he could not appreciate the consequences of his actions, therefore consensus is not reached. Generally, a person lacking contractual capacity due to insanity will be placed under 'curatorship' (similar to guardianship).

Intoxication

The news is that intoxication (whether caused by alcohol or other substances) can affect the validity of an otherwise binding contract. But we're not talking a couple of beers here. Depending on your body weight, we're probably talking about a whole bottle of whiskey. Put it this way, for a contract you have entered into to be void due to intoxication, it has to be proved that you were so drunk that you could not appreciate that you were entering into a contract at all.

So let's say that Harry and Hazel are in the pub one night. Hazel has drunk enough alcohol to make Kid Rock blush, and she is so truly intoxicated that she cannot appreciate her actions. During this time, she agrees to sign with Harry's management agency. The next morning, Hazel wakes up with a very sore head and a very angry call from her manager at the William Morris agency (who thought he had signed Hazel the week before, but then got a gloating call from Harry that morning). Is Hazel bound to Harry, and is she now in breach of contract to the William Morris agency? Not if it can be proved that she was so drunk when she agreed to sign to Harry that she did not know what she was doing.

But be careful with this. Don't think that you can just go around making promises when you've had a few drinks, and not having to keep them. Firstly, the burden of proving you were intoxicated rests on you, and this is not an easy thing to do. Secondly, the level of intoxication you have to prove, as I've pointed out, is very high. (Finally, you might be liable in the law of delict if you knowingly manipulated the law of intoxication to mislead the other party). So don't do it.

Prodigality

A person lacks full contractual capacity if he has been declared a 'prodigal' by the High Court. If he is declared a prodigal, he will be placed under curatorship and therefore needs his curator's assistance to enter into binding contracts, like a minor. A prodigal is a spendthrift - a person who cannot meet his obligations to his dependents, often a gambler or drug addict, sometimes just a highly irresponsible person who wastes his money on the high life instead of taking care of his family. Usually, for obvious reasons, it is his dependents who will apply to have him declared a prodigal.

Other factors affecting capacity to contract

There are some other factors that can affect a person's capacity to contract, including insolvency and marriage in community of property. Insolvency is probably the more far-reaching of the two, but the principles are quite involved. For our purposes, all we need to know is that a person who has been declared insolvent (sequestrated) has limited capacity to contract.