As lawyers specializing in mental capacity issues, particularly as they apply to property transfers and wills, we are often asked what test applies, and when. This can be a difficult question and often the answer is not straightforward. In a recent decision of the New Zealand High Court, the Court had to grapple with the same question when deciding whether an individual had capacity to(1) execute a new will; and (2) exercise powers reserved to him as settlor under trust deeds. At stake was a property empire worth NZ$400m (HK$2bn), so the question was worth answering.
Introduction: Green v Green
Hugh Green was a very successful New Zealand businessman. During the course of a career spanning 60 years, he accumulated about NZ$400m (HK$2bn) of assets, owned by him personally and held on trusts settled by him. In 2010 Hugh was diagnosed with a terminal illness. Over the next two years until Hugh’s death in July 2012, he made various changes to his will and trust structures. These changes had the effect of essentially removing his daughter, Maryanne, with whom he had worked closely for over 20 years from positions of control within the trust and underlying companies, and replacing her with her siblings John and Frances.
After Hugh’s death, Maryanne issued two sets of proceedings. She alleged that Hugh’s last will was not valid and that the decisions he had made with respect to the trust and companies between 2010 and his death were also not valid. She brought these claims on the basis that Hugh lacked the mental capacity to execute the will and / or make the decisions he purported to make, or that he was unduly influenced by John. John and Frances denied these allegations.
In Green v Green  NZHC 1218, a decision issued for both proceedings, Maryanne succeeded in respect of some her claims of undue influence by John. She was unsuccessful in her claims that Hugh lacked the relevant capacity when he made his new will and / or exercised his powers under the trust deed. However, the Chief Judge of the High Court of New Zealand, Justice Helen Winkelmann, provided a useful synopsis of the law to be applied when considering whether someone has capacity to make decisions. This law was distilled from English, Australian and New Zealand cases. She also highlighted what evidence may be relevant in these kinds of cases.
General principles applicable to capacity tests
The Court found that the following principles apply to enquiry as to someone’s capacity:
Capacity must be assessed in relation to the specific decision or act that is questioned. This is the same as what psychiatrists as “task specific” capacity. For someone to have capacity to make a decision, he needs to have the capacity to understand the nature of the particular act and its effects. The “effects” of the particular act which the person must understand are those immediate effects related to the particular decision. The person need not understand the wider implications of the decision, particularly the interplay of the decision with the human dynamics of his family. The enquiry in all cases is the person’s capacity to understand rather than his actual understanding. In relation to challenges other than to wills, the onus of proof remains with the person seeking to challenge the decision.
Capacity to make a will
In addition to the above general principles, Justice Winkelmann found that the additional principles applicable in cases challenging capacity to make a will were those derived from various cases starting from the leading English decision of Banks v Goodfellow (1870) LR 5 QB 549:
In respect of testamentary capacity, to that general test must be added the capacity to understand the extent of the property that the person is disposing of, and to comprehend and appreciate the claims to which he ought to give effect. In relation to a challenge to a will, if the will is rational on its face, the person seeking to have it set aside must establish a tenable case that the will-maker lacked capacity. If she can do that, then the burden of proof shifts to the person defending the will. However, where a will has been professionally prepared and the lawyer has formed the view that the will-maker had capacity, the Courts should not too readily overturn that view, particularly on the basis of expert evidence where the expert did not interact with the will-maker. The will-maker must be able to understand and appreciate the claims to which he ought to give effect. The will-maker must be free of any disorder of the mind which would poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties. He must not suffer from any insane delusion which influences his will. To make a will, the will-maker need only have mental faculties sufficient to comprehend fully the testamentary act about to be done. He does not need to view his will with the eye of a lawyer, nor comprehend its provisions in their legal form. The bodily health of the will-maker is irrelevant. The will-maker’s mind may have been in some degree weakened, or his memory may have become in some degree enfeebled from its previous state and yet the will-maker will still have testamentary capacity if he meets the principles set out above.
Relevant evidence when assessing capacity
The Court found that the following evidence may be relevant when determining whether someone had capacity to make a decision:
Expert evidence as to likely issues in relation to the cognitive capacity of someone with that person’s age and medical profile. Evidence of family and friends who saw that person on a regular basis including contemporaneous records. Evidence of people who did business with that person. Evidence of medical professionals who attended that person. Evidence of lawyers who dealt with the person, particularly those who attended the execution of any relevant documents. Any light the particular circumstances throw on that person’s capacity.
Although Maryanne did not succeed in her challenge of Hugh’s capacity, Justice Winkelmann’s judgment contains a useful summary of the relevant legal principles applicable to questions of capacity to make decisions concerning property. It also contains a useful summary of the evidence which may support or refute a claim that the person lacked capacity to make the decisions.