Capacity – Mental disability

An Introduction

The law provides protection for those who make contracts while under some mental disability.  There are of course, degrees of mental disability, unlike the position in relation to minors, where the person is either under 18 or over 18. English contract law recognises three categories.

Mental Capacity Act 2005

First there are those whose mental state is such that their affairs are under the control of the court, by virtue of the Mental Capacity Act 2005. Since the court effectively takes over the individual’s power to make contracts, any contracts purported to be made personally by the individual will be unenforceable against him or her. 

Incapacity but not under control

Second, there are those whose mental state is such that, although they are not under the control of the court, they are unable to appreciate the nature of the transaction they are entering into. Contracts made by people in such a condition will be enforceable against them (even if the contract may in some sense be regarded as ‘unfair’), unless it is proved that the other party was aware of the incapacity. This was the view taken in Imperial Loan Co v Stone. In New Zealand, some authorities suggested that a contract with such people might be unenforceable, even if the other party was unaware of the disability, if the contract could be said to be ‘unfair.’ This line of authority was rejected by the Privy Council in Hart v O’Connor, which involved the sale of property at significantly less than the market value. It was there held that ImperialLoan Co Ltd v Stone still represented the true position under common law. In other words, for the agreement to be set aside on the basis of the mental disability, it must be shown that this disability was apparent to the other party at the time of the contract.

Lord Bingham summed up the position as follows:

‘…the validity of a contract entered into by a lunatic [sic] who is ostensibly sane is to be judged by the same standards as a contract made by a person of sound mind, and is not voidable by the lunatic or his representatives by reason of ‘unfairness’ unless such unfairness amounts to equitable fraud which would have enabled the complaining party to avoid the contract even if he had been sane.’

Capable of understanding

The third category consists of those people who are capable of understanding the transaction, but who are, as a result of some mental disability, more susceptible to entering into a disadvantageous contract. Contracts made by such people are binding, unless affected by the rules relating to ‘undue influence.’

The only exception to the above rules relate to contracts for necessaries. The Mental Capacity Act 2005 applies the same rules to contracts for necessary goods and services as the Sale of Goods Act 1979 applies to minors. Thus a person who lacks capacity to contract for the supply of such goods and services must pay a reasonable price for them if they are supplied. ‘Necessary’ means suitable to a person’s condition in life and to his or her actual requirements at the same time when the goods or services are supplied. These rules will apply to people in both of the first two categories listed above.