Capacity to Contract
Eccentricity or lack of prudence is not incapacity. In the words of Diana Romano:
“The lawyer’s task when considering the legal standard of competency is to be able effectively to distinguish foolish, socially deviant, risky, or simply “crazy” choices made competently from comparable choices made incompetently. “
People generally have the freedom to contract. Nevertheless, sometimes the law deems people unable to make decisions in their best interest. Minors, people with a mental disability, those who are in bankruptcy or people who have impaired judgment due to illness, disability, hypnosis, alcohol or drugs do not have capacity to contract.
In order to be bound by a contract, a person must have the legal ability to form a contract in the first place. This legal ability is called the capacity to contract. A person who is unable, due to age or mental impairment, to understand what she is doing when she signs a contract may lack capacity to contract.
If a person has a legal guardian and a court has made a determination that he or she is incapacitated, that person completely lacks the capacity to contract. Any contract signed by a person who has a legally appointed guardian is void. Many courts have held, however, that a person who is under legal guardianship may make a will if the person has testamentary capacity. The legal capacity required to make an enforceable contract is higher than that required to make a will.
A person may have a physical condition or illness which prevents him or her from performing at the levels expected of other persons of comparable age. If such a person cannot care for himself or herself, or acts in ways that are against his or her interests, such a person is entitled to the protection of the state to make sure they are not abused or exploited. Examples of physical conditions that can cause the loss of capacity to make contracts include paralysis, delirium, strokes, Huntington’s disease, Alzheimer’s disease, or dementia. Merely having the condition does not make the person incapacitated. The condition must have sufficiently affected the intellect so that the person cannot comprehend the nature and character of the transaction. If the person cannot comprehend the nature and character of his acts, any contracts or agreements such a person makes are voidable. Any contract may be ratified or disaffirmed by the person when he or she regains full capacity, or it can be ratified or disaffirmed by the person’s agent acting under a power of attorney. If the person’s condition is severe enough, the court may appoint a legal guardian.
Legal capacity is a flexible concept. A diagnosis of Alzheimer’s suggests diminished capacity, but you can not assume that a person is incompetent to contract because of such a diagnosis. Capacity must be viewed in terms of a person’s ability to perform a specific task. A person may be competent for some tasks, but lack capacity for others.
In the Pennsylvania case of Taylor v. Avi, 272 Pa. Super. 291 (1979) 1. 415 A.2d 894plaintiff sought to void a release she had signed after a car accident in which she sustained a head injury which left her with impaired memory, decreased ability to concentrate on such things as reading, and increased irritability. Citing a 1929 will case, Lawrence’s Estate, 286 Pa. 58, 65, 132 A. 786, 789 (1926), the court said that “"[f]ailure of memory does not prove incapacity, unless it is total or so extended as to make incapacity practically certain. A testator may not be able at all times to recollect the names of persons or families of those with whom he has been intimately acquainted . . . and yet his understanding of the ordinary transactions of his life may be sound."
The standard announced by the court in Taylor is that mere weakness of intellect resulting
from sickness or old age is not legal grounds to set aside an executed contract if sufficient intelligence remains to comprehend the nature and character of the transaction, and no evidence of fraud, mutual mistake or undue influence is present.
Some cases are obvious. The family of an Oregon man with Alzheimer’s succeeded in voiding his contracts – he bought 7 cars from the same car dealer in one month.
What about drinking and substance abuse? While a person may consume enough alcohol and/or drugs to reduce or eliminate his or her ability to understand what he or she is doing, such conditions are self-induced. The law does not generally allow the intoxication or drugged state to be raised as an excuse. There are cases where a contract is voidable when an intoxicated party cannot understand the nature and consequences of the transaction and the other party is aware of the intoxication. Compulsive and chronic intoxication and abuse may constitute a mental illness. A sober party who takes advantage of a vulnerable drunk may be guilty of fraud or undue influence.