This month at the Business Breakfast Club, Golnar Nekoee and Lauren Babic of BAL Lawyers discussed legal incapacity and the impact on your business, voidable transactions and advisors’ responsibilities.

How do you determine legal incapacity?

Generally, people think of legal incapacity to include the elderly or those with cognitive decline. Legal incapacity is not just limited to those instances.

Golnar Nekoee explored the three commonly recurring categories of legal incapacity we face in business:

  1. Persons under the age of 18 years (legal minors);
  2. Persons whose estates are under administration; and
  3. Persons with limited or no capacity to understand the nature and effect of the transaction.

It is important to examine the ability of the decision maker as compared to the task or transaction at hand.

What are some signs of limited capacity to understand the nature and effect of a transaction?

The following are some red flags that you may consider when dealing with a client that you suspect lacks the requisite capacity to contract:

  • your client demonstrates difficulty with recall or memory loss;
  • your client has ongoing difficulty with communication or is disoriented;
  • your client is accompanied by friends or family who speak on their behalf;
  • there is a sense that something about your client has changed; and
  • your client has changed advisors several times over a short period.

What is your role in the transaction?

The key point arising from the case law on this issue is that there is no ‘fixed standard of sanity’ or test that can be applied to determine capacity. Rather, you should ensure that the contracting party has such soundness of mind as to be capable of understanding the general nature, purpose, effect and risks of the contract or transaction which they wish to enter into.

If you enter into a transaction with someone who is later found to not have the requisite legal capacity, an interested person can seek to have the contract declared void or voidable.

The concept and consequences of incapacity have been explored in a variety of cases. Many of these cases show that if one party to a contract did not know, or should not reasonably ought to have known of the particular vulnerabilities that creates the incapacity, that party will have a sound defence.

What you can do if you doubt a person’s capacity?

It is always difficult for a professional who has concerns regarding a client’s capacity to contract or transact, given it is a sensitive topic to navigate.

Firstly, you should make a preliminary assessment as to capacity. If doubt arises, you should seek a clinical consultant or formal evaluation by a clinician with expertise in cognitive capacity assessments (if it is appropriate to do so). It is then important to make a final judgment as to whether to continue with the transaction or not.

When making your final assessment of a client:

  • Observe your client and/or the other party. Do they repeat themselves frequently? Do they appear to understand? Are they agitated?
  • Ask open ended questions of your client and/or the other party.
  • Take detailed notes.
  • Ask your client and/or the other side why they are undertaking the transaction and do they understand the benefit and risks to them.
  • Enquire as to whether they have sought legal and financial advice.

Legal capacity has far reaching implications for contracting parties and beyond. If you are concerned about this issue or require advice in relation to a topic that arose in this seminar, please contact the Business Team at BAL Lawyers.