To enter into a binding contract, both parties must be capable of doing so. By capable I mean that the parties are of sufficient age and have sufficient mental capacity to do so. Mental capacity often comes up when parties are trying to escape the effects of a contract. This is particularly so where the executors of an estate are dealing with the legal legacy of a recently deceased elderly relative. While there is a basic definition of mental capacity within the Mental Capacity Act 2005, how do Courts actually go about assessing whether someone has sufficient capacity?
Fehily v Atkinson
This was a problem for the Court in the recent case of Fehily -v- Atkinson  EWHC 3069 [CH]. This case concerned a Debtor who entered into an Individual Voluntary Arrangement (IVA) but who had not complied with its terms. She was subsequently made bankrupt. The Debtor argued that the IVA was ineffective as she had lacked the mental capacity to enter into it at the time it was agreed. She brought annulment proceedings before the Country Court. However, these were rejected by the Judge who decided that debtor in fact did have sufficient capacity to enter into the IVA. Further, in any event, there would be no point in annulling the IVA as there was substantial outstanding debt and the Debtor would be made bankrupt in any event. The debtor appealed the matter to the High Court.
High Court’s decision
The High Court took the opportunity to thoroughly review the authorities relating to the assessment of mental capacity. It concluded that there are five general principles that are relevant when a Court is asked to determine whether a party has sufficient mental capacity to enter into a contract:
- A person needs the mental capacity to recognise the issues that must be considered, to obtain, receive, understand and retain relevant information, and to weigh the information in the balance in reaching a decision;
- A person may have capacity for one type of decision but not another;
- Capacity may vary over time and should be assessed at the specific time when the decision was made;
- The key issue is whether the person has the ability to understand the transaction, not whether he actually understood it; and
- Although help might be needed to understand the transaction, this does not prevent the person having the capacity to understand it. The person needs the insight and understanding to realise that advice is needed, the ability to find and instruct an appropriate adviser, and the capacity to understand and make decisions based on that advice.
Based upon these principles, the High Court decided that the County Court had been correct; the Debtor had sufficient capacity at the time the IVA was entered into. Consequently, the appeal was dismissed.
This case is a useful restatement of the principles relating to the determination of a party’s mental capacity. Although the five principles may seem quite difficult to follow, there is a golden thread that runs around all five; a person should be assumed to have capacity unless the person alleging lack of capacity is able to prove otherwise.
Fundamentally, as long as the person making the decision is able to understand the issues concerned and process the relevant information, then whether they actually understood the decision they were making is irrelevant. Further, capacity must be assessed at the time of the decision not at a subsequent point. Therefore, it is usually very difficult to succeed with an allegation of lack of capacity unless there is compelling medical evidence from the relevant time.
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