Business/commercial law revision kit question and answer

Discuss the contractual capacity of:
(i) Persons of unsound mind
(ii) Undischarged bankrupts
(iii) Corporations
• If a person who is of unsound mind enters into a contract such a contract is voidable at his option establishing that
o He was too insane to understand the nature or effects of his acts.
o The other party was aware of his mental condition
• By proving these facts the party escapes liability. As was the case in Imperial Loan Co. LtdV. Stone where the defendant escaped from liability on the ground of insanity.
• Under the Sale of Goods Act if a person of unsound mind is supplied with necessaries he is liable to pay a reasonable price.


Undischarged bankrupts are persons who have been declared bankrupt of a court of competent jurisdiction. Their contractual capacity is restricted the provisions of the Bankruptcy Act.


The contractual capacity of artificial persons is determined law. In the case of statutory corporations, contractual capacity is conferred statute. It can only enter the transactions stipulated the statute and those that are reasonably incidental thereto.

The contractual capacity of registered companies is determined the objects clause of the memorandum. At common law a registered company can only enter into transactions set forth in its objects and those that are reasonably incidental to the attainment or pursuit of those objects. Other transactions are ultra vires and therefore null and void. It was so held in Ashbury Railway Carriage Ltd V. Riche. In Attorney General V. Great Eastern Railway (1880) it was held that in addition to the express objects, a company had capacity to enter into transactions reasonably incidental to the attainment or pursuit of those objects. An ultra wires transaction is not capable of being ratified.

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