We were recently instructed in a matter where a person entered into a contract, the obligations under which, they were never going to be able to perform. The first question raised is why? Why would someone knowingly sign a contract that required them to do something which that person knew they were not capable of doing? After taking some further instructions it seemed clear that this person lacked capacity to some degree, they lacked the ability to make rational decisions. The next question raised is – Is a contract binding, if, when a person signed it they were lacking capacity due to dementia or some other medical condition, or perhaps even intoxication? The answer to that question is not particularly straight forward.
In the case of Imperial Loan Co v Stone [1892] 1 QB 59 it was said that a contract entered into by a person lacking capacity can be terminated. The contract is voidable at the option of the incapacitated person if their incapacity was known or should reasonably have been known to the other party.
The burden of proof lies with the party seeking to void the contract, they must prove both the incapacity and the other party’s actual or constructive knowledge of it. This is illustrated in Gibbons v Wright (1954) 91 CLR 423. However an exception to the general rule occurs if the party seeking to avoid the contract can demonstrate equitable fraud or unconscionability by the other party, as seen in Hart v O’Connor [1985] AC 1000.
If however a person has acted in a way which affirms the contract after the period of incapacity has ended they may may lose the right to void a contract as seen in Gibbons v Wright.
Intoxication appears not to be treated any differently to any other conditions where capacity is affected. If a party was intoxicated at the time of entering into the contract, the contract may be voidable if it can be shown that the other party was aware of the intoxication. This is discussed in cases like Kurth v McGavin.
The difficulty for the party seeking to void the contract in these type of matters is likely to be obtaining evidence that the other party knew of the incapacity, or should have known. Miller Sockhill Lawyers are able to assist with any contract disputes. Please contact our office on the Sunshine Coast for assistance.