Case law: Court clarifies test of mental capacity in relation to legal transactions

Individuals entering into transactions, and their legal advisers, should ensure they have the necessary mental capacity, or risk the transaction being invalid.

Under UK law, a person can only enter into a valid legal transaction if they have mental capacity to do so. Traditionally, the law requires that the person must understand the general nature of what they are doing.

However, in a recent case the capacity of an individual to enter into an individual voluntary arrangement was called into question. The court clarified that the 'general understanding' test required that the individual should have more than the capacity to 'understand … the general nature of what he is doing'. He or she must have the capacity 'to absorb, retain, understand, process and weigh information about the key features and effects of the contract, and the alternatives to it, if explained in broad terms and simple language'. However, the test did not require them to be able to understand every detail of the proposed transaction in the way that, for example, a lawyer might.

The court emphasised that the test only required the individual to have the capacity to do these things, not that they actually did them. Provided they are able to do them, the fact that they failed to do so in relation to a particular transaction does not affect the validity of that transaction.

It follows from this that the 'understanding and competence required … depend on the nature of the transaction'.

Operative date

  • Now

Recommendation

  • Individuals entering into transactions should ensure they have the necessary mental capacity, in accordance with the required criteria for determining mental incapacity in relation to transactions

Case ref: Fehily v Atkinson [2016] EWHC 3069

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