Capacity 

Some parties lack the legal capacity to bind themselves fully by contract. The rules protect people whose ability to judge a bargain the law treats as impaired, and they do so by making the contract voidable at the option of the protected party rather than void outright — the protection is a shield, not a trap for the other side.

Minors

A person under 18 is generally not bound, with two important exceptions:

• Necessaries — goods and services suited to the minor's actual condition in life and needed at the time. The minor must pay a reasonable price, not necessarily the contract price.
• Beneficial contracts of service — employment, apprenticeship or training arrangements taken as a whole for the minor's benefit.

Other contracts are voidable: the minor may generally avoid them, and may ratify them on reaching majority. Several jurisdictions have legislation modifying the common law position, so check the applicable Act before relying on the general rule.

Mental incapacity and intoxication

A contract may be avoided where a party was, at the time, unable to understand the nature of the transaction — measured against that transaction, not capacity in the abstract¹ — and the other party knew or ought to have known it. Both limbs matter: incapacity alone does not defeat a bargain struck with someone who had no reason to suspect it.

The same framework applies to severe intoxication. In practice these cases often run alongside unconscionability, which addresses the stronger party's exploitation of a special disadvantage and is frequently the more useful route.

Corporations and public bodies

A company's capacity is now largely a matter of statute, and modern corporations legislation protects outsiders dealing in good faith from internal limits on authority. The live questions usually concern authority — whether the person purporting to act could bind the entity — rather than capacity as such. Statutory bodies are different: their powers come from their enabling Act, and an act beyond those powers may be ineffective.

What Gibbons left open has been answered by intermediate authority. In Hanna v Raoul [2018] NSWCA 201² Beazley P stated the requirement as knowledge: "[i]t is also necessary, for a transaction entered into by a person without the required capacity to be voidable, that the other party to the transaction have knowledge of the incapacity". Do not treat knowledge and merely unfair circumstances as interchangeable.

Applying this in a problem question

1. Identify the party said to lack capacity and the basis for it.
2. For a minor, ask whether the contract was for necessaries or a beneficial contract of service before treating it as voidable.
3. For mental incapacity or intoxication, address both limbs — understanding, and the other party's knowledge.
4. Check the relevant State or Territory legislation, which frequently modifies the position.
5. Remember the consequence is usually voidable, not void, and consider what restitution follows.

Where the authority sits

A mix of common law and State and Territory statute. Because the legislation differs between jurisdictions, identify the applicable jurisdiction before stating the rule.