In the case of Fehily v Atkinson  EWHC 3069 (Ch), the High Court was asked to determine whether a person who had purportedly entered into an Individual Voluntary Arrangement (IVA), which subsequently failed, had lacked the mental capacity to enter into the IVA at all.
A finding that mental capacity was lacking may have rendered the IVA void.
The case was found against the applicant, primarily on the basis that insufficient medical evidence of lack of capacity had been placed before the Court to make a finding that the applicant lacked capacity.
In reaching this conclusion, the High Court set out some important points of principle regarding a person’s capacity to enter into a contract. These are set out below.
- A person needs the mental capacity to recognise the issues that need to be considered, to obtain, receive, understand and retain relevant information, including advice and to weigh the information in the balance in reaching a decision.
- A person may have sufficient capacity for one type of decision but not another.
- A person’s capacity to enter into a transaction may vary over time and accordingly when determining whether a person has capacity, the Court must consider whether the person had capacity at the time of entering into the transaction.
- The key issue is whether the person has the ability to understand the transaction, not whether they actually understood it.
- Individuals may require advice to fully understand a transaction. The fact that they did not receive advice in such a circumstance would not however affect capacity. The correct test of capacity is whether a person has the insight and understanding to realise that advice is needed, the ability to find and instruct an appropriate adviser, and the capacity to understand and make decisions based on that advice.
- A person does not need the ability to understand the minute detail of a transaction proposed but if explained in simple language, a person should be able to grasp the key features of the proposed transaction.
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Kevin Modiri is a Partner at Nelsons.