CONTRACTUAL CAPACITY
photo by Vladimir Soares
In order to prove a contract is valid…
Although states differ in their specific definitions of contractual capacity, they all tend to boil down to one simple question: is the person entering into the contract able to reasonably understand the nature and consequences/effect of the transaction outlined in the contract? In some states, the inability to reasonably understand the contract must be caused by a mental or cognitive illness. In other states, that is not the case. Typically, not reading the contract before signing it does not cause incapacity (otherwise, we would all be able to get out of our iTunes contracts), and intoxication from drugs or alcohol is only sometimes seen as incapacitating.
Types of contracts that might be questioned:
Auto loans;
Deeds to properties;
Mortgages;
Divorce settlement agreements;
Trust Documents;
Will Codicils;
Powers of attorney;
Documents that switch ownership from individuals to a trust; and
Business documents (sale and purchase of businesses, transfer of power, etc.).
In general, a mental illness, cognitive illness, or developmental illness must cause an individual to have been unable to understand the terms and effects of the contract in question or to have made the individual act irrationally in the transaction.
Black’s Law Dictionary defines rational as “1. Behavior guided by reasoning and not by emotions, 2. A thinking process that uses logical, systematic methods in drawing a conclusion.[1]”
Rationality is defined as the “Mental state of a person characterized by beliefs that are coherent, purposeful and overall decision making based on cost versus benefit. Rationality also requires the person to maximize advantages and minimize the disadvantages [sic].[2]”
When I conduct an evaluation of contractual capacity, I evaluate the following aspects:
1. Was the person suffering from an insane delusion at the time of the signing of the contract?
a. If yes, did that insane delusion keep the individual from being able to understand the terms and effects of the contract?
b. If yes, did that insane delusion keep the individual from acting rationally in the transaction?
2. Beyond an insane delusion, was the person suffering from a mental illness, cognitive illness, or developmental illness at the time of the signing of the contract?
a. If yes, did that illness keep the individual from being able to understand the terms and effects of the contract?
b. If yes, did that illness keep the individual from acting rationally in the transaction?
3. With regard to acting rationally in the transaction, did the individual display the following deficits:
a. Was there a lack of capacity to guide behavior by reasoning rather than emotions?
b. Was there a lack of capacity to employ a thinking process that used logical, systematic methods in order to draw conclusions?
c. Was the person’s mental state characterized by beliefs that were incoherent or non-purposeful?
d. Was there a lack of capacity to employ a decision-making process that included a cost-benefit analysis?
e. Was there a lack of capacity to employ a person’s decision-making process that included maximizing advantages and minimizing disadvantages?
f. Was any lack of capacity to act rationally caused by a mental illness, cognitive illness, or developmental illness?
[1] Retrieved from http://thelawdictionary.org/rational/
[2] Retrieved from http://thelawdictionary.org/rationality/