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Capacity

Parties to an enforceable contract must have the capacity to be party to its creation. Problems arise with certain categories of persons, for example corporations and minors.

Under statute, a corporation will have the capacity to enter into binding contracts even though the natural persons acting on its behalf may have exceeded their powers under the company’s constitution. This will not apply if the other contracting party had notice of the irregularity. Parties dealing with corporations are entitled under statute to assume that those acting on behalf of the corporation have the requisite authority. This common law rule, known as the “Indoor Management Rule”, has been incorporated into the Corporations Act 2001 (Cth) as ss 128 and 129.

With minors, much will depend on the jurisdiction in question. Most Australian jurisdictions operate under the common law, with or without statutory modifications, which holds that contracts are generally voidable at the minor's option, unless they are contracts for necessaries or beneficial contracts of service. In NSW, statute has abrogated the common law position and made all minors bound to civil acts that are for their benefit, as long as the minor understood the nature of the transaction and the consideration was not manifestly excessive or inadequate.

See Capacity.