Contract

Contract

Capacity to enter into a contract includes the capacity to buy and sell, to transfer and acquire property. While there is no “fixed standard of mental capacity” required to enter into a contract, the correct approach is to ask: “what is required in relation to each particular matter or piece of business transacted, is that the party in question should have an understanding of the general nature of what he is doing.”: Fortune Asset Development v De Monsa Investments Ltd (unreported, HCA 167/2009, 17 November 2010).

As a general rule, a person who is mentally disordered or otherwise lacking in mental capacity is bound by a contract, unless he can show that: (1) this lack of capacity meant he did not understand what he was doing, and (2) the other party is aware of this incapacity. When these two conditions are satisfied, the contract is voidable at the option of the incapacitated person: Fortune Asset Development v De Monsa Investments Ltd (unreported, HCA 167/2009, 21 August 2009). In other words, once these 2 conditions are met, the MIP may choose to set aside the contract. This applies to situations where one party is already an MIP at the time the contract is entered into. 

A voidable contract means the contract remains valid unless the MIP (or their representative, i.e. the Committee of Estate or attorney appointed by the Enduring Power of Attorney) chooses to void the contract. If the MIP regains “lucid intervals” or recover mental capacity, they can take steps to ratify or void the contract: Imperial Loan Co Ltd v Stone [1892] 1 QB 599.

If a person becomes an MIP after the contract has been entered into, a Committee appointed under Part II Mental Health Ordinance (MHO) can take over and continue carry out the contract entered into by the MIP: MHO, section 10B(1)(h).