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.

This evaluation may involve determining whether the individual was in a state of extreme intoxication, unable to think clearly or lacked the ability to understand the rights and obligations associated with the contract.

It is important to note that intoxication must be significant enough to impair the individual’s cognitive abilities and prevent them from making rational decisions. Mere intoxication or impaired judgement may not necessarily invalidate a contract unless it can be conclusively demonstrated that there was a complete lack of capacity to understand and consent to the terms.

Contractual capacity assessments are conducted on a case-by-case basis, taking into account the specific circumstances and degree of impairment caused by intoxication.

3. Insolvents: An insolvent individual is someone who has had a sequestration order issued against them by the High Court due to their inability to repay their debts. In general, insolvents can only enter into contracts through their appointed trustees.

The Insolvency Act imposes several restrictions on the contractual capacity of an insolvent:

(a) Disposal of property: An insolvent person is prohibited from disposing of any property without the written consent of their trustee. This helps ensure the assets of the insolvent estate are properly managed and preserved for the benefit of creditors.

(b) Directorship restrictions: The Insolvency Act also restricts an insolvent person’s ability to serve as a director of a company. This limitation is in place to prevent them from engaging in activities that could potentially harm the interests of creditors or hinder the process of resolving their insolvency.

(c) Liquor licence: Insolvent individuals are generally prohibited from holding a liquor licence. This restriction is in place to safeguard against potential misuse of funds, protect the interests of creditors and minimise the risk of financial harm during the insolvency process.

Furthermore, the Insolvency Act stipulates that an insolvent person may not enter into any contract that is likely to have an adverse effect on their estate, unless they obtain written consent from their trustee. This requirement ensures that any contracts entered into by the insolvent person are carefully reviewed and approved by the trustee, who acts in the best interests of both the insolvent individual and their creditors.

It is important to note that these restrictions are specifically outlined in the relevant insolvency legislation and may vary slightly depending on the jurisdiction. Therefore, it is crucial for insolvent individuals and their trustees to consult the applicable laws and seek appropriate legal advice to ensure compliance with the specific regulations in their jurisdiction.

LEGAL DISCLAIMER: The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.

Arthur Marara is a practising attorney, author, human capital trainer, business speaker, thought leader, law lecturer, consultant, legal proctor (University of Zimbabwe), notary public and conveyancer. He is passionate about promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email [email protected]