Incapacity - Lecture notes PDF

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Incapacity Professor Annick Masslot Meaning of Capacity   

Capacity (to contract) means that a person is legally competent to enter a contract in terms of age and mental capacity. For a contract to be valid, both parties must be “sui juris” (of full legal capacity). Contracts formed with minors, persons of unsound mind, or drunken persons may or may not be enforceable.

General Principles The following are legally incapable of entering contractual obligations:  Protecting individuals: o Minors. o Persons of unsound mind. o Drunken persons.  Protecting society: o Bankrupts. o Corporations (in certain circumstances).  Common issue: whether the contract was entered by one of the above is enforceable. Not concerned with the validity of the contract, but the enforceability of it.

Minors 

“Minor” means a person who has not attained the age of 18-years; and a person is of full age if they have reached the age of 18 years – s.85 CCLA 2017. o Various definitions of “minor” depending on which area of law is being addressed. o For purposes of contract law, “minor” means 18.

Contract and Commercial Law Act 2017   

In NZ, CCLA now governs contracts made/entered by a “minor” after 1 st January 1970. It replaces the rules of common law and of equity relating to contractual capacity of a minor. Other statutes are not limited or effective by the Act.

Morrow v Benjamin Ltd v Whittington [1989] HC  Described as NZ response to deal with the age problem of people.  This case looked at how to protect minors.

Categories of Minor’s Contracts 

There are three categories of minor’s contracts under the Act.

1. Court Approved Minor’s Contract (ss.98-101)  Minors contracts which are preapproved by DC under ss.98-101. This category of contract will have effect as if the minors were of full age.  There’s a presumption, but the court will decide if the contract is enforceable.  Note – there’s no longer a distinction between a married and non-married minor. 2. Minor’s Contract Presumptively Enforceable (ss.92-94)  Presumptively enforceable against minor in absence of unconscionability of oppression.  This category covers two kinds of contracts: o Life insurance on minor’s own life entered by minor who is 16-years-old+. o Contract of service entered by minor.  Under s.92 CCLA, every contracted entered by a minor will have the same effect as though the contract was entered by someone who is of full age. This is only a presumption.  Court may intervene if consideration given for minor’s promise was so inadequate as to be unconscionable, or where provisions of imposed a harsh/oppressive obligation on the minor.  If the courts find there’s no consideration, then it’s possible the courts can bring an action under s.93 (cancel contract, decline to enforce it, make declaration of unenforceability, order for compensation/restitution of property).  National Bank of NZ Ltd v Ram (1992): o R was an 18-year-old school student who was a shareholder in his brother’s company. The company needed a loan from the plaintiff ADD FACTS o Held: R was 18 years and 7 months, so was not a minor. There was nothing inherently harsh in the contract, therefore R was liable to pay the debt. 3. Minor’s Contracts Presumptively Unenforceable (ss.86-91)  This includes all other minor’s contracts. The presumptive unenforceability is subject to the court’s discretion to enforce the contract and/or order remedies.  Contracts are presumed to be unenforceable against the minor. It’s enforceable against the other party who is of age.  Court can consider fairness and reasonableness at the time the contract was entered (s.87).  Under s.90 CCLA, court has been given several factors, and they consider these factors to see what is a reasonable contract (e.g. age of minor).  Court may cancel the contract under s.89 if it wasn’t fair and reasonable.

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If it was fair and reasonable, court may enforce contract under s.88 or make other orders.

(a) Morrow v Benjamin Ltd v Whittington [1989] HC:  Between 1985-1987, defendant (aged 15) bought and sold shares on credit on families’ stock broker of the company. Share market collapsed in 1897, W owed $30,000 to stock broker.  W brought an order under s.87 CCLA that the contract is unenforceable against him. Court held that the contract wasn’t entered in an unfair or unreasonable way. Stock broker was aware their client was a minor and that the stock market was volatile. o Court found this was taking advantage of the minor. o Court found the stock broker didn’t implement the credit control. There was an element of risk and the behavior of the stock broker was causal and arrogant. o Court used its discretion and decided to not enforce the contract. o Court is looking at what is now s.92 and s.96, and is noticing the difference between what is enforceable against the minor. (b) HC held the discretion of the court under ss.86-91 is to be exercised in two stages  Stage 1 (‘threshold test’): court shall determine whether the contract was fair and reasonable at the time the contract was entered. To do this, the court shall consider the factors listed in s.90.  Stage 2: after having determined the question of the fairness and reasonableness of the contract, the court shall exercise its discretion in making orders under ss.88 or 89. (c) Factors listed in s.90 includes:  The circumstances surrounding the making of the contract.  The subject matter and nature of the contract.  In the case of a contract relating to property, the nature and the value of the property.  The age and the means (if any) of the minor.  All other relevant circumstances. (d) Wine Country Credit Union v Rayner [2008]  Court used Marrow to consider circumstances around making of a contract.  There was a loan agreement given to two 17-year-olds for $15,000. They stated their proper age and that they had low income. R was 17 years and 9 months, partner was under 18.  Loan officer miscalculated the age of R, thus the loan, but the loan was granted. Lender brought an action under Minor Contract 1969 (now ss.86-87 CCLA) for remainder of money.  HC: dismissed the contract, using their discretion under s.95 CCLA: o Found the contract wasn’t reasonable under factors laid out in s.90. o Found the appellants had been careless in its treatment of the loan/miscalculation of the age of R and his partner. o They should’ve known on these two grounds to not grant the loan. Who May Seek Relief? s.95 CCLA provides that the following persons may apply to the court under s.92 or s.866 for relief: a) Any party to the contract; or b) A guarantor or indemnifier under a contract of guarantee or indemnity; or c) Any person claiming through/under/behalf of any such party, guarantor, or indemnifier.

Persons of Unsound Mind 

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Contracts entered by a person of unsound mind during a period of incapacity will be voidable by the person subject to two requirements: o The person must have been incapable of understanding the general nature of what s/he was agreeing to at the time of the contract (Scott v Wise). o The other party must have known of/have had the greatest reason to believe that the person was of unsound mind (Hart v O’Connor). During a period of lucidity (often brief and temporary) when a mentally incapacitated person regains enough mental capacity to understand the general nature of the document s/he is signing, a contract made by him/her can be valid.

Exceptions 

Contacts entered by mentally incapacitated person are binding in these situations: o The contract is a contract of necessaries. o The person is subject to a property order. o Contract is affected by an order under the Protection of Personal and Property Rights Act 1988.

Protection of Personal and Property Rights Act 1988 Section 53:  Every content entered by a person of unsound mind can be voided on the demand of the manager except if the contracts are necessary.  When someone finds that a person they made a contract with is of unsound mind and they have a manager, that person can ask for the contract to be continued. If the manager doesn’t say the contract should be voided, it becomes legally binding after 28 days of the contract being concluded, and is in full force.  The other party can apply to the court, who has the discretion to make any order they see fit to adjusting the right of the party (e.g. transfer of property). if no property order is made, the principle of common law and equity of a person of unsound mind will apply.

Voidable and Void Contracts 

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A voidable contract is a contract which is valid and enforceable unless and until it’s avoided or cancelled at the option of one of the parties to the contract. A void contract is a contract which isn’t enforceable. A contract may be void at the formation or becomes void after the formation.

Archer v Cutler [1980] PC   

Contract of sale of land by a 72-year-old lady who sold her land without taking legal advice, and the price she sold it for was below its true value. Could the contract be enforced? One of the leading NZ cases. Held the contract was unfair, as the land was sold under market value and sold without any independent legal advice. McMullin J: contract made with person of unsound mind avoidable if 1 of 2 factors shown: o Other person knew of unsoundness (mental capacity). o Whether the contract is (objectively) unfair.

O’Connor v Hart [1985] PC   

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Contract for sale of land by an 84-year-old man suffering from dementia. Once he died, the rest of the family realised what he’d done and tried to have the contract set aside. CA affirmed Archer approach, but on appeal, PC changed the rules slightly, rejecting the second factor in Archer. This made NZ judiciary unhappy. Thus, contract couldn’t be set aside and wasn’t voidable, as the other party didn’t know the man had dementia and was of unsound mind/lacked capacity, and he’d conducted the sale in a way that was above reproach (he behaved sane in the negotiation of contract): o If entered by a person ‘ostensibly sane’ (other person believes them sane), contract to be adjusted as to whether fair/unfair on same grounds as person of sound mind. o General equitable doctrines of undue influence and unconscionability apply. Must be a stronger element than unfairness; there must be pressure or something similar.

Nichols v Jessup [1986] CA   

A contracting party can be treated as having constructive knowledge of the disadvantageous position of the other by reason of serious contractual imbalance or unfairness. In such a case, the contract can be set aside and ruled unconscionable. Somerfield J: you can set aside bargains that are unfair to protect a person’s assets.

What is Unsound Mind? Scott v Wise [1986] CA  S was in his 70s and entered a complex transaction regarding the ownership of his farm. The sale of a trust at government valuation, and included the option for his grandson to purchase it. Later, everyone discovered S was suffering from semi-dementia and was admitted to hospital under Mental Health Act.  S’s guardian tried to get an order setting aside the contract on grounds of incapacity. Court held that the test is whether the person understands the nature of the contract when explained to them; just the basics, not the details. Here, contract wasn’t set aside. o E.g. does the party have the capacity of understanding nature of a mortgage? It doesn’t mean they understand all of it, but do they understand what a mortgage is and how it works in general?  Court made a distinction between a contract and a gift. Plaintiff thought the contract was purely voluntary, and the court accepted such a transaction could be avoided in relation to gifts without knowledge of incapacity. o Gift: the part where S was giving the chance for his grandson to have the land. o For this part, there was no need for the other party to know there was unsound mind. For the mortgage part, this wasn’t a gift.  Degree of knowledge of a lack of understanding: o Contracts: must show party of full capacity knows of lack of capacity of other party. o Gifts: only need to show a lack of capacity.

Gifts and Voluntary Transactions 

Gifts or voluntary transactions made by a person who lacks mental capacity are void at the instance of the person or his/her representatives.

Dark v Boock [1991] HC:  D, 87-years-old, signed a document granting B the right of the property in the event of his death. D had dementia. They applied to have the contract set aside.  Defendant argued that there was consideration from D that in exchange for leaving the house for the rest of the life of D, B would look after their affairs.  Held: wasn’t proper consideration and D lacked capacity to understand the document and the transaction it contained. It was essentially a gift and therefore voidable. Contract of Necessaries  A contract for the supply of necessaries to a person who lacks contractual capacity (due to unsound mind or drunkenness) is binding on that person. The person is obliged to pay for the goods supplied even though s/he lacks contractual capacity (subject to s.124(2) CCLA). o People lacking capacity are obliged to pay, but it’s more in terms of restitution that it is contractual.  Necessaries defined in s.124(3) CCLA: “goods suitable to the condition in life of the person, and to his actual requirements at the time of the sale and delivery” (Peters v Fleming). o This is a question of fact and what applies to a certain person. o Here, one of the things outlined was that the gold rings and watch chains were necessary as he was a member of Parliament. o Necessaries are necessary to maintain a person’s conduct and station of life, not just needed for survival.  These contracts are enforceable, but it’s always possible to argue against it.  Onerous of establishing item is necessary falls on the plaintiff, and is a two-part question: o Whether it’s reasonably suitable for a person to have these things/be with these things in relation to their station of life. o If it is established they are necessaries, whether the sale was necessary in the circumstances and what was required for the defendant.  There will still be an issue looking at whether contract is fair/reasonable to an extent.

Drunken Persons  

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Same general principles of contractual capacity applicable to persons of unsound mind applies to drunken persons. Contract entered by a drunken person is enforceable unless they can prove that at the time they were incapable of understanding the nature of the contract, and that the other party was not aware of the incapacity. There is a distinction drawn between the very drunk and the not so drunk.

Peeters v Schmanski [1975] SC 

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Two people entered an agreement for the purchase and sale of land. Party had agreed that if the consent was going to be obtained by the 31st August 1933, that the contract was to be void unless the party agreed to another time. Vendor had an alcohol problem. Consent was given on time and so the contract went ahead, but the vendor claimed it was voidable as his signature was obtained when he was drunk. He then claimed the contract had come to an end. Court held the vendor was affected by alcohol to some degree when the agreement was signed/concluded. But they also held that he knew what he was doing and could even read the fine print despite the fact he was drunk. Court refused to set aside the contract, and ordered an injury into what damage would be awarded to the purchaser. Extreme drunkenness leads to the removal of the constant in which case the contract is now void. There may be no contract at all in these cases. The equity might grant some relief where it’s apparent to the other party that the party is drunk; equity wouldn’t void or enforce the contract but would grant relief if it can be shown the other person drunk and the situation was taken advantage of.

Kurth v McGavin [2007] 

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Agreement for sale and purchase of property. vendor was too drunk to consider the offer on the day it was communicated to him. The next day, when he was apparently sober, he concluded the sale after some negotiations. Shortly after the sale, he regretted it and attempted to get out of the contract. purchaser sued for specific performance and for the contract to be redone. Vendor claimed that when he signed the agreement he was too drunk to have the required intention and consciousness to sign it. A person that is just a little drunk; in this case, the contract is voidable. In either case, it is a prerequisite to granting relief to the drunken party that his condition was known to the other party at the time the contract was made. On the evidence here, the vendor had entered the contract when his senses were dull, but he was not so intoxicated as to be incapable of forming an intention regarding the contract. Neither the purchaser nor the vendor’s agent had any idea of the extent of the vendor’s intoxication. Therefore, the court found the contract was not voidable and was binding.

Onus of Proof  Onus of proving the existence of both incapacity and knowledge of that incapacity rests with the person seeking to rely on it and avoid the contract.  With persons of unsound mind in an apparently lucid period where the incapacity is not apparent, proving the other party knew of the persons’ incapacity may be a problem. With drunken persons, the incapacity is usually apparent.  On the onus of proof, the person is required to show that s/he was incapable of forming a rational judgment about the terms of the specific transaction when the contract was entered. Proof of a total inability to understand what was happening isn’t necessary....