Capacity in English law

Capacity in English law refers to the ability of a contracting party to enter into legally binding relations. If a party does not have the capacity to do so, then subsequent contracts may be invalid; however, in the interests of certainty, there is a prima facie presumption that both parties hold the capacity to contract. 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.^[2] Thus, contracts for necessaries (goods or services deemed necessary for ordinary living) will always be legally binding.^[3] Equally, minors have the capacity to enter into contracts for employment, when the terms of such an agreement are of general benefit to them.^[4] If not, then they may elect to avoid the contract and have their property returned. Companies were also significantly limited in the range of contracts they could bind themselves to under their objects clause, until reform in the Companies Act 1989. If the directors, or the officers of a company enter an agreement with another person or business, and that agreement is beyond the list of business tasks set under the company's constitution, then the contract will be invalid if the third party in bad faith has knowingly taken advantage of the company. Otherwise, under the Companies Act 2006, the contract will remain valid, and shareholders must sue the director or officer for losses.^[5]