Capacity in English law

Capacity in English law refers to the ability of a contracting party to enter into legally binding relations.

Those who contract without a full knowledge of the relevant subject matter, or those who are illiterate or unfamiliar with the English language, will not often be released from their bargains.

[1] It is recognised however that minors, and those who are deemed mentally incapacitated, may need to be able to create binding agreements when acquiring essential items for living, or for employment.

[7] The definition of necessaries includes obvious purchases, such as food and clothing, but also services or goods which are in furtherance of education or apprenticeship.

This is demonstrated by Nash v Inman,[10] where a tailor's claim that a child's purchase of 11 waistcoats was for necessaries failed, on the grounds that he already owned adequate clothing.

Where an infant chose to work under terms which would lower any compensation he may have received for injury,[13] and this was obviously to his disadvantage, he would not be bound by employment.

[21] Additionally, in Steinberg v Scala Ltd,[22] the recovery of payments made in a share agreement were denied, only future obligations were extinguished by repudiation.

[20] In order for an individual to succeed in claiming mental incapacity, they must prove that any impairment was such that they did not understand what they were doing, and that the other party was aware of this.

That case is difficult to follow, but in Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1 Lord Templeman referred to it, and summarised the decision: "That report, although largely incomprehensible in 1990, has been accepted as 'express authority' that at common law it is an incident to a corporation to use its common seal for the purpose of binding itself to anything which a natural person could bind himself and to deal with its property as a natural person might deal with his own.

"[30] That decision was accepted as correct but modified in Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653.

This policy was thought to protect shareholders and creditors, whose investments or credit would not be used for an unanticipated purpose by disobedient directors.

However, it soon became clear that the ultra vires rule restricted the flexibility of businesses to expand to meet market opportunities.

[31] The first set of reforms, in the Companies Act 1989 was to stipulate that contracts remained valid and third parties were unaffected if an agreement is ultra vires.

The 2006 reforms have also clarified the legal position that if a company does have limited objects (which is likely to become increasingly rare), an ultra vires act will cause the directors to have breached a duty to follow the constitution under section 171.