LAW5002 · Principles of Contract Law A
Capacity
This chapter of Monash University LAW5002 Principles of Contract Law A covers capacity — the requirement that a party be legally competent to be bound. Even where offer, acceptance, consideration, intention and certainty are all present, the law protects three groups from bargains they may not be competent to assess: minors (under 18), the mentally incapable, and the intoxicated. You learn the three-tier scheme for a minor's contracts, the necessaries rule and reasonable-price obligation, and the two-limb test that makes a contract voidable for incapacity — all argued the IRAC way the exam problem questions demand, assuming the law of Victoria.
What this chapter covers
- 011. Who lacks full capacity, and why the law protects them — minors, mentally incapable persons, and the intoxicated
- 022. Who is a minor — a person under 18 (Age of Majority Act 1977 (Vic) s 3(1)); the common-law age was 21
- 033. Tier 1 (binding) — contracts for necessaries and beneficial contracts of service (employment / apprenticeship)
- 044. The two-stage necessaries test — suitable to the minor's condition in life AND matched to actual requirements
- 055. The reasonable-price rule — a minor pays a reasonable price for necessaries sold and delivered (Goods Act 1958 (Vic) s 7), which may differ from the contract price
- 066. Tier 2 (binding unless repudiated) — permanent-interest contracts with continuing obligations (lease, partnership, partly-paid shares)
- 077. Tier 3 (not binding) — all other contracts; no ratification in Victoria; the minor may still enforce
- 088. Mental incapacity and intoxication — the two-limb test (no understanding at the time AND the other party knew or ought to have known); voidable, not void; ratification once capacity returns
- 099. How capacity is examined — usually one issue layered onto a larger formation-and-terms problem, argued in IRAC
Capacity: is a minor bound, and for how much?
- +1Issue and starting rule. Leo is under 18, so he is a minor (Age of Majority Act 1977 (Vic) s 3(1)). Most of a minor's contracts are not enforceable against them; the exceptions that bind are necessaries and beneficial contracts of service.
- +1Is the laptop a necessary? Apply the two-stage test: it must be suitable to the minor's condition in life (a student who needs it for the course) AND matched to his actual requirements (he had no adequate laptop). Both limbs are met, so the laptop is a necessary.
- +1The laptop was sold AND delivered, so Goods Act 1958 (Vic) s 7 applies: the minor must pay a reasonable price, which is not necessarily the contract price.
- +1Value the reasonable price. The fair market figure is $700, not the invoiced $1,100. So Leo is bound to pay $700, not $1,100.
- +1The sneakers are a non-necessary, and the contract is executory (undelivered), so no Goods Act obligation arises. This is a Tier-3 contract: not binding on Leo, and it cannot be ratified in Victoria.
- +1Conclusion. The laptop binds Leo but only for a reasonable price of $700; the sneakers contract does not bind him. Note that Leo could still enforce either contract against the retailer if he chose to.
Key terms
- Minor
- A person who has not turned 18 (Age of Majority Act 1977 (Vic) s 3(1)). At common law the age of majority was 21. Most of a minor's contracts are not enforceable against them.
- Necessaries
- Goods (and, at common law, services) that are both suitable to the minor's condition in life and matched to their actual requirements at the time of sale and delivery. If the minor is already adequately supplied, the item is not a necessary.
- Reasonable price (Goods Act 1958 (Vic) s 7)
- For necessaries sold and delivered to a minor (or to a person incompetent through mental incapacity or drunkenness), the price payable is a reasonable price — which may differ from the agreed contract price.
- Beneficial contract of service
- A contract of employment or apprenticeship that is overall for the minor's benefit. It binds the minor, even if it contains some disadvantageous clauses, provided the balance is beneficial (harsh clauses may be severed).
- Binding unless repudiated
- The status of a minor's contract that acquires an interest of a permanent nature with continuing obligations (a lease, partnership, or partly-paid shares). It binds the minor unless repudiated during minority or within a reasonable time after turning 18; obligations accrued before repudiation remain payable.
- Voidable (mental incapacity / intoxication)
- A contract is voidable at the protected party's option where both limbs are met: the party could not understand the transaction at the time AND the other party knew or ought to have known. It is not automatically void — a fair dealing made without knowledge stands.
- Ratification
- Adopting a contract once capacity is regained. A party who was incapacitated or intoxicated can ratify (affirm) the contract on becoming capable — but in Victoria a minor's non-binding contract cannot be ratified after turning 18.
- Repudiation
- In this context, a minor disavowing a binding-unless-repudiated contract by words or conduct. It releases the minor from future obligations but not from obligations that had already accrued.
Capacity FAQ
Is a contract with an intoxicated or mentally incapable person void?
No — it is voidable, not void, and only where two limbs are satisfied: the person could not understand the nature of the transaction at the time, AND the other party knew or ought to have known of the incapacity. If both are met, the protected party may rescind, provided they act promptly on regaining capacity and do not affirm the deal. A fair, arm's-length contract made without any knowledge of the incapacity remains binding. Calling it automatically 'void' is a common exam reversal.
Does a minor have to pay the full contract price for necessaries?
No. Under the Goods Act 1958 (Vic) s 7, a minor is liable to pay a reasonable price for necessaries that were sold and delivered — and a reasonable price can be lower than the agreed contract price. Remember two limits: the item must actually be a necessary (suitable to the minor's condition in life and matched to their actual requirements), and the obligation bites only on goods sold and delivered, not on an undelivered (executory) order.
Can AI help me with capacity in LAW5002?
Yes, as a study aid. Sia is an AI tutor that explains capacity step by step — it can walk you through the three tiers of a minor's contract, the two-stage necessaries test, and the two-limb test for intoxication or mental incapacity, and can check your IRAC structure on practice problems you write. It does not sit your assessment or hand you answers: the LAW5002 final is an electronic eExam where no generative AI is permitted, so use Sia to build understanding before the exam, and always confirm the current rules and format on Moodle.
Studying with AI? Sia — free AI law tutor works through LAW5002 step by step.
Exam move
Treat capacity as a two-part checklist you can run in seconds. For minors, sort the contract into one of three tiers: binding (necessaries and beneficial service contracts), binding unless repudiated (a permanent interest with continuing obligations — lease, partnership, partly-paid shares), or not binding (everything else, with no ratification in Victoria). Drill the two-stage necessaries test and the reasonable-price point, because that is where the easy marks and the arithmetic sit. For mental incapacity and intoxication, memorise the two limbs — no understanding at the time, AND the other party knew or ought to have known — and remember the contract is voidable, not void, and can be lost by ratification once capacity returns. Because capacity is usually one issue layered onto a bigger formation-and-terms problem, practise spotting it quickly, naming the exact section (Age of Majority Act 1977 (Vic) s 3(1); Goods Act 1958 (Vic) s 7) and arguing both sides in IRAC. Rehearse full timed answers in the revision week before the exam period, and confirm the current exam duration and format on Moodle.
