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 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.
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