Page 59 - W01TB8_2017-18_[low-res]_F2F_Neat

Chapter 3 Contract and agency 3/3

A contract may be declared invalid or set aside if it is missing any of these elements. The legal term for
this is void ab initio (from the beginning).
All parties to a contract must act in good faith and not mislead one another. However, it is for the buyer
to satisfy themselves regarding the quality of the product (although there are legal requirements relating
to the quality of products supplied).
We will now discuss the basic legal principles of intention to create legal relations, capacity to contract,
offer and acceptance and consideration.

B Intention to create legal relations Chapter

For a contract to be legally binding, both parties must have shown the intention to create legal relations; 3
otherwise, the agreement becomes not binding. In other words, a contract will only be binding if the
parties to the contract have reached a final agreement. The agreement then becomes the foundation of
the rights and obligations that bind them at law. The usual method of determining whether an agreement
has been reached is to establish whether one party (the offeror) communicated an offer to the other
party (the offeree) and whether the offeree communicated his intention back to the offeror.
Sometimes an agreement is so vague or unclear that it seems it cannot give rise to a binding contract.
However, the courts are not likely to void the contract on the ground of ambiguity alone and will instead
attempt, wherever possible, to give meaning to vague or unclear words and phrases in a contract. For
example, if there is a dispute between an insured person and the insurer as to whether a certain loss is
covered, the court will attempt to interpret the relevant contract wording to decide whether or not the
loss is in fact covered.

C Capacity to contract

Capacity to contract refers to the ability of someone to enter into a legally binding relationship. If one of
the parties to a contract does not have the capacity to do so then that contract can be made invalid. Reference copy for CII Face to Face Training
It is recognised that in some cases contractual capacity is restricted and these are now dealt with below.

C1 Minors

Under English law a minor is a person below the age of 18 and subject to certain exceptions contracts
made by minors are not enforceable against them, although minors may be able to enforce them.

Contracts made by minors fall into three categories:
• Contracts which are binding, e.g. a contract of employment or a contract of apprenticeship. The
contract is binding provided that is on the whole for the minor’s benefit.
• Contracts which are binding unless repudiated, e.g. a partnership and the holding of shares in a
company. The minor may cancel the contract either during their minority or within a reasonable time
afterwards.
• Contracts which are not binding on the minor. All other contracts fall in this category and include
contracts to borrow money. Although these contracts do not bind the minor they do bind the other
party. The minor can therefore sue if the other part does not keep to the contract.

C2 Persons with mental health conditions

In general, a contract made with a person with a mental health condition is binding on that person if the
condition was not known by the other party. They can, however, repudiate (cancel) the contract if the
condition was known to the other party.

C3 Undischarged bankrupts

Bankrupts are in an unusual position in that while they have the capacity to be contractually bound,
their capacity to complete their contractual obligations is affected by their bankruptcy. In general, a
bankrupt’s contractual rights vest in the trustee in bankruptcy for the benefit of any creditors. The
trustee has discretion to renounce unprofitable contracts and creditors have the right to apply to the
court to determine what will happen to contracts that they have made with the bankrupt.