This question deals with the validity of contracts. The main issue in the case study pertains to the validity of the employment contract entered into by the Managing Director and Lee, the jockey hired. A contract is a promise or set of promises that is legally binding. Under a contract, one person undertakes to do something or to refrain from doing something if another person does something or refrains from doing something. In order for the contract to be legally binding, there must be an agreement, consideration, intention to create legal relations, the legal capacity of the parties to contract, a lawful purpose, a legal subject matter, and finally the compliance with relevant legal formalities. If any of these requisites is not present, the contract will not be binding.
REQUIREMENTS OF A BINDING CONTRACT
The first requirement for a valid contract is an agreement. Normally, an agreement consists of two stages: offer and acceptance. The agreement generally involves a consensus, or “meeting of the minds” between the parties. It is essential that the agreement be definite. An agreement which is ambiguous or which is a mere agreement to agree cannot be enforced.
The second requisite is consideration. Consideration is what the promisor is asking for in exchange for the promise. Many countries do not require consideration in order for a contract to be valid. Often, the fact that parties formed a binding agreement is sufficient to enforce a contract. However, under common law, in order for an agreement to be binding, there must be a consideration (usually a price or payment) in exchange for the promise made.
3. Intention to Create a Legal Relation
The third requisite is the intention to create a legal relation. As a general rule, this is evidenced by the existence of consideration. This is because the fact that the promisor has specified a price or payment carries with it an intention that the parties be legally bound. Despite this, the intention of the parties to be bound is a separate, though related element in proving the validity of the contract. This is because there may not have been an intention to enter into a legal relation despite the existence of consideration. In the past, the Court presumed the intention to be bound existed with regard to commercial contracts but presumed the intention did not exist with regard to social contracts. However, the High Court has held that presumptions should not be used when determining intent. In Ermogenous v. Greek Orthodox (2002) 209 CLR 95, the High Court held that the use of presumptions could lead to the erroneous conclusion that there was no intention to be bound. The High Court held the circumstances surrounding the particular contract must be given full consideration.
As a general rule, parties to commercial agreements intend that the contract entered into be legally binding. In order to determine the intention, the objective of the parties must be considered. However, as an exception, parties may use “Honour clauses” in order to indicate that the agreement is not binding under law, but in honour only. In Rose and Frank & Co. v. Cromption (1923) 2 KB 261, the Court held that the agreement clearly showed that the parties did not intend to be legally bound and that the contract was not binding as it lacked the requisite of intent.
4. Capacity of Parties
The fourth requisite is the capacity of the parties to enter into contracts. In general, when parties who lack capacity to enter into a contract, the resulting contracts are not enforceable against them. Recent developments in law have made this are extremely complex due to the varying rules established by state statutes. Capacity is particularly relevant when dealing with the following groups of parties: minors, the Crown, the mentally incapacitated and intoxicated, bankrupts and companies.
The capacity of minors to enter into contracts is restricted by both common law and statutes. The myriad of common law principles and different state legislative rules has added to the complexity of the enforceability of contracts entered into by minors.
Under common law, as a general rule, a contract made by a minor (defined as a person under 18) is voidable. As an exception to this rule, a contract for necessities is binding on both parties. Necessities are those that are determined to be essential for the maintenance of the minor’s existence lifestyle. In Victoria, this is required by Section 7 of the Goods Act (1958), which provides that where necessities are sold and delivered to an infant or minor or to a person who, by reason of mental incapacity or drunkeness, is incompetent to contract, he must pay a reasonable price, therefor. Nash v Inman (1908) 2 KB 1 provides that for a contract for necessaries to be enforceable, two conditions must be satisfied. The contract must be for goods reasonably necessary for the support of minor’s station in life, and the minor must not already have a sufficient supply of said necessaries.
Another instance in which a contract entered into with a minor is binding is under a beneficial contract of employment. If the contract by a minor for employment is not unfair or oppressive, it is generally binding on the minor.
Contracts not falling within the above exceptions are generally voidable. This means that they are valid until they are avoided by the minor. Thus, the minor is bound to fulfill the promise or promises maid until the point the minor assails the validity of the contract. The minor may repudiate such contracts within a reasonable of attaining the age of majority (18 years old).
Certain contracts entered into with minors are absolutely void, which means that they are without legal effect. Examples of such contracts are those instances wherein the minor is too young to understand the nature of the contract, or those instances where the contract is prejudicial to the minor.
Under Section 49 the Supreme Court Act 1986 (Victoria) certain contracts entered into by minors are void. The statute expressly states that contracts for the repayment of money lent or to be lent, contracts for payment for goods supplied or to be supplied other than necessaries and accounts stated are void.
The same statute goes on to provide that no proceeding can be brought on ratification of minor’s in certain instances. Section 50 states that no proceeding can be brought to charge a person on a promise made after full age to pay a debt contracted during minority; or on a ratification made after full age of a promise or contract made during minority. This section applies regardless of the existence of consideration. In order for the agreement to be valid, a new contract must be entered into.
Under Section 19 of the Minors (Property and Contacts) Act 1970 of New South Wales, where a minor participates in a civil act and his or her participation is for his or her benefit at the time of his or her participation, the civil act is presumptively binding on the minor. Section 6 of the same act includes contracts as included in the definition of civil acts.
5. Compliance with Legal Formalities
Finally, in order for a contract to be valid, the fifth requisite is the compliance with the relevant legal formalities. As a general rule, contracts do not need to comply with any sort of formalities. Oral contracts are still valid despite the difficulties which may arise in proving the existence of the terms. Implied contracts are essentially defined as contracts that do not have any written or standard formalities yet are still presumed to be not only existing but binding as well due to the nature of contracts in general. Remember that a contract is essentially defined as a meeting of the minds between parties with regard to a particular subject and consideration. The most important part of every contract therefore is that there is a “meeting of the minds” or agreement. People are generally free to stipulate as to any terms or conditions in a contract subject to certain limitations such as public policy, morals and public good. There is no fixed form for contracts as such may be oral or written. Given the complexity of the transactions at present, most contracts are in written form, but this does not preclude the existence of implied-in-fact contracts that are agreed upon by non-verbal conduct. When contracts are determined solely by the allegations or verbal agreements of the parties, there is usually trouble in establishing what the proper rights and responsibilities of the parties are.
However, certain contracts, in order to be valid, require certain terms to be written and signed. Contracts for the sale of land and contracts of guarantee are required to be in writing and signed by the parties. Contracts which do not comply with this requirement are merely unenforceable and not void.
6. Legality of Subject Matter
Another important consideration is the subject matter as the essence of the contract. As one of seven essential requisites, the subject matter must be licit or at least existent. Contraband items are not allowed as legal subject matters. Analogous to this would be non-existent items because these cannot be considered as subject matters.
7. Lawful purpose
It must be remembered that one of the important requisites for the legality of a contract has to do with the legality of subject matter and lawful purpose of the contract. Under no circumstances can an illicit contract be entered into. The reason for this is that all contracts are under the basic legal concept that they must abide by all laws, regulations, public morals and safeguards. As such, a contract that has an illegal prestation must be considered as void.
LIABILITY OF KEN LEE
In the case study, as Managing Director, I signed up Ken Lee, as a jockey. The main issue in this case is whether or not the employment contract entered into is a valid contract. Application of principles of law to the facts provided show that the employment contract was indeed valid. All the requisites of a valid contract are present.
Despite the fact that no express mention was made of an offer, the fact that Lee signed the contract shows that there was a definite agreement between the Managing Director and Lee. There is no mention of a consideration made, but for the sake of argument, consideration is presumed to exist in this case. The intention of the parties to enter into a legal relation is shown by the fact there is a written and signed contract. The doubt with regards to the validity of the contract can be mainly attributed to the capacity of the contracting parties.
At the time Lee signed the agreement, he was only seventeen years old, and was thus still a minor. Under common law, as a general rule, a contract entered into with a minor is voidable. This case is not related to necessaries, thus the contract is not necessarily binding. However, the nature of the contract is one of beneficial employment. Thus, even though Lee was a minor at the time he entered into the contract, it is generally binding on him.
However, if Lee can prove that the contract was unfair or oppressive, he may be released from liability, and will not be bound by the contract. It is interesting to note that the facts mention that Lee signed the contract at age seventeen a year ago. This means that Lee has reached the age of majority since he signed the contract. If it can be shown that Lee did not assail the validity of the contract within a reasonable time since he reached the age of majority, he may be considered to have impliedly ratified the contract, and may no longer be able to claim the contract was unfair or oppressive since he may be in estoppel.
INCORPORATION OF STATEMENT IN CONTRACT
Lee’s claim that as Managing Director I told him that if he was unhappy after a year he would be released from the contract must be proven. If it can be proven that I actually made the statement, it can be considered to be included in the contract. Oral agreements can be considered as contracts. Although these are generally binding on the parties, if Lee fails to prove his claim, he may not use it as grounds to be released from the contract. If there is a clause in the written contracts supporting Lee’s claim, Lee will no longer be bound by the contract. However, if there is no clause and Lee cannot prove that an oral contract existed between us, he will still be bound by the contract.
In conclusion, despite his minority at the time he signed, Lee is bound by the employment contract unless he can show that the contract was unfair or oppressive. However, if Lee did not assail the validity of the contract within a reasonable time since he reached the age of majority, he will be in estoppel and will be bound by the contract. If there is a clause in the contract stating that if Lee were unhappy he would be released after a year, or if he can prove that an oral contract to such effect existed, Lee will no longer be bound by the contract. Otherwise, Lee will be bound by the contract.
Miles, Christine , and Warwick Dowler. A Guide to Business Law . Australia: Lawbook Co., 2008.
Ermogenous v. Greek Orthodox (2002) 209 CLR 95
Rose and Frank & Co. v. Cromption (1923) 2 KB 261
Goods Act (1958)
Nash v Inman (1908) 2 KB 1
Supreme Court Act 1986 (Victoria)
Minors (Property and Contacts) Act 1970 of New South Wales