T8 W9: CAPACITY & PRIVITY OF CONTRACT

Question 1
Discuss the relevant cases for the following situations given: (Minimum 2 cases for each situation. Your cases must
consist Malaysia and Common Law cases)

1. an agreement to which an unsound mind is a party

2. an agreement to which a minor committed fraud
3. an agreement to which a stranger/third party who is not the party of the contract claim for rights

Common Law

Imperial Loan Company Ltd v Stone

F : Defendant when lunatic (unsound mind) signed a promissory note as surety upon which plaintiff brought an action and
defendant took the defense of insanity.

I : Whether the defendant can successfully claim insanity as a defense ?

Held :

1. Defendant must prove that he was so insane at the time of executing the deed such that he was incapable of understanding
the implications of the agreement.

2. At the time of the contract his insanity was known to the plaintiff.

The burden of proof must lie on the defendant.

Hart v O’Conner

Fact

- Vendor sold trust property to Hart.

- Vendor was 83 and of unsound mind.
- Hart did not know this and was fair in his negotiations with Vendor’s solicitors.
- Hart occupied and improved the land.
- When one of the Vendor’s brother took over as trustee of the estate he sought to set aside the contract.

Held : The Board held that a contract made by a party of unsound mind, but who appears to be of sound mind, with another
party (having no knowledge of the unsoundness) is valid.

Also : Unconscionable conduct was not present as Hart did not know of the dementia and the terms were set out by Hart’s
solicitor and merely accepted by Hart, then in turn O’Connor.
Malaysia

Asia Commercial Finance (M) Sdn Bhd v Yap Bee Lee

- The defendant signed a letter of guarantee for the benefit of the plaintiff.
- Plaintiff obtained a judgment in default against the first defendant.
- The defendant’s husband applied as her guardian ad litem for the judgment in default to be set aside on the ground
that the defendant was of unsound mind at the time she signed the guarantee.
- Letter from a hospital held that the defendant had bipolar depression.
- P opposed the application on the ground that they was not informed that the defendant was of unsound mind.

Held : A person of sound mind who intended to rescind a contract which he had entered into, on the grounds of unsoundness
of mind must prove two things, that :-

1. He was of unsound mind.

2. The fact of the unsoundness of his mind was known to the other party at the time of entering into the contract.

Chemsource (M) Sdn Bhd v Udanis bin Mohammad Nor

- Defendant suffered from Parkinson’s disease.

- The plaintiff was fully aware of the defendant’s condition at all material time.
- The plaintiff took advantage of the Defendant’s disease and had induced the defendant to execute various
agreements for the benefit of the plaintiff and to the detriment of the defendant.

Held : It is important to determine :-

1. Whether the defendant at the time of contracting was suffering from such degree of mental disability that he was so
incapacitated and incapable of understanding the nature of the contract.
2. If he was incapable of understanding the nature of the contract, then the contract was not void but voidable provided
that THE PLAINTIFF KNEW OF THE MENTAL DISABILITY OF THE DEFENDANT.
3. If the contract was made during the lucid interval, then the contract would be binding not withstanding that his
disability was known to the plaintiff.

Common law

Stocks v Wilson

- Defendant minor fraudulently represent himself full age, induced plaintiff to sell and deliver to him certain goods.
- Plaintiff failed to discharge burden showing these goods are necessaries, thus could not sue for the price.

Held : Defendant was no estopped from proving his true age, if minor obtain property by fraud he can be compelled to
restore it, if he had money obtained he can be compelled to refund.

Khan Gul v Lakha Singh

- A minor fraudulently concealed his age and contracted to sell a plot of land to another.
- The minor then received the consideration and then refused to fulfil his part of the bargain,
- The other party prayed for possession or refund of consideration.

Held :

- Even if the defendant had induced the plaintiff to enter into the agreement with her, by falsely representing that she
was of full age, she was not estopped from avoiding the agreement by pleading her minority.
- Minor’s contract is void, specific performance was not granted but refund of the consideration was ordered.
Malaysia

Natesan v Thanaletchumi & Anor

- Defendant is a minor.
- He contracted with plaintiff after making false statement about his age.
- When sued, he used lack of capacity to contract as reason.
- Plaintiff claimed that Defendant cannot use that defense as Defendant made false statement of his age.

Held : Misrepresentation of age does not obstruct the minor from using lack of capacity as defense.

Common Law

Tweddle v Atkinson

- A couple were getting married.

- The father of the bride entered an agreement with the father of the groom that they would each pay the couple a
sum of money.
- The father of the bride then died without having paid.
- The father of the son also died so was unable to sue on the agreement.
- The groom made a claim against the executor of the will.

Held : The claim failed. The groom was not party to the agreement and the consideration did not move from him.
Therefore he was not entitled to enforce the contract.

However in Malaysia, this rule does not apply in Malaysia, as under section 2(d) of contract act, consideration can be
move from the promise or any other person.

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd

- Dunlop, the appellant sold tyres to a distributor, under the agreement that they would not be sold to consumers at a
price below their list price.
- The distributor resold some tyres to the respondent.
- The respondent sold tyres at a price below the list price.
- The appellant sued to recover the agreed damages.

Held :

1. Only a person who is a party to a contract can sue on it. Dunlop was a third party to the contract between the retailer
and the distributor, therefore there could be no enforcement. Dunlop had not give any consideration to Selfridge.

Malaysia

Kepong Prospecting Ltd v Schmidt

- Mr Tan agreed to pay Schmidt, the appellant, 1 % of the price that all ore from the land was sold, in consideration
of Schmidt’s assistance to obtain a permit to start mining operations.
- In 1954, the respondent company agreed to work the land and undertake Mr Tan agreement to Schmidt.
- Appellant was not a party to this agreement.
 - In 1955, the respondent company made an agreement with the appellant agreeing to pay the appellant the 1 %
tribute.
- The appellant claimed against the respondent company payment of the 1 % tribute due to him under the 1954 or
1955.

Held : The appellant cannot claimed under the agreement between Mr Tan and the respondent company as he was not a
party to that agreement. However, Schmidt was deemed to have given consideration under Malaysian law for the agreement
between himself and KP. Therefore Schmidt could sue for the sum that was owed on the agreement between himself and
KP.

Lim Foo Yong & Sons Realty Sdn Bhd v Datuk Eric Taylor

- The appellant bought shares from the respondent.

- As part of the purchase price, he agreed to discharge the title deed of the respondent’s land in Cheras but he failed
to do so.
- The respondent’s wife was the administrator of the respondent’s estate.
- She claimed that the appellant’s failure to discharge the title deed had caused financial hardship on her and her
family.
- As a result, she was forced to sell her matrimonial house and rent another place.

Held :

1. The respondent’s wife was not party to the contract, thus she could not take any legal action on it despite the fact
that she had suffered losses because of it.
2. The respondent’s wife could only sue on behalf of her husband’s estate for losses suffered by him alone.
3. Any other additional claim will fail due to the doctrine of privity of contract. Thus, the respondent’s wife can only
sue as her husband’s representative.