The law generally assumes that all persons have the capacity to enter contracts. The two exceptions to this rule are minors and mentally incompetent adults. A minor’s lack of contractual capacity is relatively easy to establish because it is largely based on the objective criterion of age. The determination that an adult lacks contractual capacity is more complex because it requires proof of mental illness or disturbance sufficiently serious to render the person incompetent. Although mental incapacity is necessarily based on the party’s subjective state of mind, her mental condition is proved by objective evidence of her behavior observed by others, and by expert psychiatric evidence.
There are connections between incapacity and the doctrines discussed in Chapter 13, but there are also notable differences. The underlying rationale for permitting the avoidance of a contract entered into by a person who lacks mental capacity is the protection of the incapacitated person. This suggests analogies both to improper bargaining and public policy. However, there are important distinctions.
Although improper bargaining may sometimes be present in an incapacity case, especially where the other party has exploited the lack of capacity, there is no requirement that any improper bargaining be proved. Where the other party has taken advantage of the incapacitated party, this obviously has an influence on the court’s decision on whether to permit avoidance of the contract on grounds of incapacity. However, the fundamental basis of incapacity is the legal status of the incapacitated party. This means that incapacity can be invoked even where there was no deception or illegitimate pressure in the formation of the contract and it is on fair terms.
Incapacity is based on the public policy of protecting an incapacitated person from assuming contractual duties to which she was not capable of assenting. However, incapacity usually does not create tension between the contract policy of freedom of contract and the more general, policy, external to contract law, of protecting mentally incapacitated people. Rather, the policies pull in the same direction because the incapacitated party’s lack of mental competence means that her apparent assent to the contract is illusory. The policy of freedom of contract is not served by holding a person incapable of assent to a false manifestation of it.
Like improper bargaining, incapacity renders the contract voidable, not void. Usually, avoidance of the contract in its entirety is the only appropriate form of relief. Severance is not a proper solution because the incapacity affects the whole contract, not just a term of it. Because there has been no breach of a contract, damages are not called for unless the conduct of the other party gives rise to some other cause of action. As in other situations of avoidance, rescission of the contract is accompanied by restitution of any benefit conferred under the contract. However, in the case of a minor, there are exceptions to this.