Capacity to enter into a contract

The law on capacity to enter into a contract is complex. The starting point is that the law presumes everyone can contract. However, in certain circumstances, this can be rebutted and the contract will not be enforceable. One of the ways that a person can rebut the presumption is by demonstrating that they lack the requisite mental capacity to enter into a contract.

There is no fixed standard of mental capacity that is required for all transactions, but if it is appropriate in the circumstances, the Court can decide to adopt the test for capacity set out in the Mental Capacity Act 2005. What is necessary in each case, is that the individual has an understanding of the general nature of what they are doing. Where there is a substantial amount of money involved, it is common for the party seeking to rely on the contract to dispute the fact that the person did not have capacity.

Imperial Loan Co Ltd v Stone [1892] 1 QB 599 established that a person who lacks mental capacity is bound by the contract unless they can evidence that:

1. Their lack of capacity meant they did not understand what they were doing; and
2. The other party knew of the incapacity.

Where both of these conditions are satisfied, the contract is voidable at the person’s option.

In Dunhill v Burgin [2014] UKSC 18 the Supreme Court provided authority for the proposition that a contract may be avoided where the other party to the contract had only constructive rather than actual knowledge of the incapacity.

However, each case turns on its facts, as shown by the High Court case in the same year of Josife v Summertrot Holdings Ltd [2014] EWHC 996, where the court held that the correct test was to consider whether it would have been obvious to the other person that the person lacked capacity.

We have been instructed to act in many cases for vulnerable and elderly persons where they did not have capacity to enter into a contract. Capacity can be very complex and must be considered on a case-by-case basis. An example of such a case was recently published in this article by This is Money.

At Anthony Gold we have a firm commitment to protecting the vulnerable from exploitation, as shown by our sponsorship of Hourglass, which is a charity that campaigns to safeguard the vulnerable. If you would like our advice on capacity to enter into a contract, please contact the Civil Litigation Team at Anthony Gold by email at mail@anthonygold.co.uk or call us on 020 7940 4060.