Legal capacity and contracts in Australia

By Vivian Michael | Startup Contracts

Capacity simply means that a person is legally able to enter into a contract. 

To enter a contract, all parties to a contract must have contractual capacity.

The rules for capacity can vary by state in Australia so you should always get legal advice or research the rules that will apply in detail before you start your venture.

Below is an overview of what you need to be aware of when it comes to capacity and your contracts.

Intoxication

A contract is void if as a result of intoxication, the person is unable to understand the contract being made.

Bankruptcy

There are laws that limit which contracts bankrupts may enter and may also make non-disclosure of bankruptcy an offence.

Tip: bankruptcy is usually covered off as a warranty in contract and also as a contract termination trigger.

Example warranty: Each party warrants that they are not bankrupt.

Example clause for termination: All parties agree that this contract may be terminated if either party is ordered by court to be wound up, declared bankrupt or that a provisional liquidator or receiver or receiver and manager be appointed.

Mental disorder

A contract is void if a mental disorder means that a person cannot understand a contract that was made. The rule is that the other person was or ought to have known of the other person’s disability.

Tip: You may be able to test mental capacity in some cases by asking questions before someone enters into a contract to test their understanding of key terms.

Minors

Both common law (case law) and statute (e.g. Acts and Regulations) restrict the capacity of minors to contract. There are some differences between the states.

Minors and necessities

A contract for the sale of goods and services that are deemed necessities of life will bind the minor in all Australian jurisdictions except NSW.

And, in case  you were wondering, necessities are things like accommodation, food, clothing, medicine, education; and instruction (like music lessons and sport coaching) 

But, it's not just the bare necessities, the courts consider what would be normal for the minor to maintain their existing lifestyle at the time the contract was entered. 

Minors and employment contracts

Also, a contract of employment with a minor (that’s fair and not oppressive) will be binding unless they repudiate it when they turn 18.

Companies

A company only has contractual capacity to enter a contract if its constitution gives it power to enter into a contract by its constitution.

Tip: you can have a warranty clause in your contracts that states that each party warrants they are authorised to enter into the contract and there are no restrictions in the company constitution that would stop that party from entering into the contract.

With any contract, the key is to understand possible risks and to manage them with some well drafted clauses. 

Do you have questions or comments? Be sure to leave them below.

I wish you every success in all your ventures!


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About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to Australian businesses that would otherwise DIY, rely on legacy contracts or go without.

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