Unpacking contractual capacity

This is a continuation from last week’s article

THE purpose of restricting contractual capacity is to protect individuals who may be vulnerable or lack the necessary capability to fully understand the implications of entering into legally binding agreements.

Here are some key reasons for the restrictions:

1. Protection of the vulnerable: Certain groups of individuals — such as minors, mentally incapacitated persons or individuals with limited cognitive abilities — are considered more susceptible to exploitation or manipulation in contractual matters. By limiting their contractual capacity, the law seeks to shield them from potentially harmful or unfair agreements. 2. Preventing unfair advantage: Imposing restrictions on contractual capacity helps prevent individuals with greater bargaining power or knowledge from taking advantage of those who are less informed or in a weaker position. It helps maintain a balance of power and promotes fair dealing between parties.

3. Avoiding economic harm: Limitations on contractual capacity are also aimed at preventing individuals from entering into agreements that could lead to significant financial harm or insurmountable obligations. For example, individuals facing insolvency or financial hardship may be restricted from making further financial commitments that could worsen their situation. 4. Upholding public policy: Restrictions on contractual capacity serve to uphold public policy objectives, such as protecting public health, safety or morals. For example, certain contracts that are deemed contrary to public policy, such as those for illegal activities, may be void or unenforceable regardless of the parties’ consent. 5. Ensuring judicial efficiency: Limitations on contractual capacity can help reduce the number of disputes and legal challenges stemming from agreements made by individuals who lack the capacity to fully understand their implications. Preventing such contracts from being formed or enforced promotes the efficient functioning of the legal system. Contractual capacity — exclusions 1. Insane persons: Sometimes referred to as “imbeciles”, individuals with mental illnesses or incapacities at the time of contracting are generally considered to have no contractual capacity at all.

This rule is in place to ensure the interests and rights of vulnerable individuals are protected. By acknowledging their impaired mental states, society acknowledges the need to shield them from potential exploitation or unfair agreements. It emphasises the importance of securing valid and equitable contracts while upholding the principle of compassion and fairness.

2. Intoxicated persons: As a general rule, an intoxicated person is considered to lack contractual capacity. Similar to the concept of mental illness, the determination is whether the individual was so intoxicated at the time of entering into the contract that they were unable to form a consensus and make informed decisions.

The issue is not merely whether their judgement was affected, but whether they were unable to fully understand and appreciate the terms and consequences of the contract.

When assessing contractual capacity in cases of intoxication, courts typically consider the level of impairment caused by the intoxicating substance.