Contractual Capacity of a Party with Unsound Mind

In Imperial Loan Company Ltd v Stone [1892] 1 QB 599, an action was brought on a

promissory note which the defendant had signed as surety. The jury found that the defendant

was insane when he signed the note. However, an issue arose as to whether the defendant’s

incapacity was known to the agent of the plaintiffs who was present when the note was signed.

The Court of Appeal held that when a person enters into a contract, and later claims that he

was so insane at the time of signing the contract in which he did not know what he was doing,

the contract is still binding on him even if he can prove his insanity at that time, unless he can

prove further that the other contracting parties knew him to be so insane as not to be capable

of understanding what he was about. Lopes LJ further stated that the purpose of the rule that

the mental incapacity of the one must be made known to the other contracting parties is to avoid

a fair contract on the ground of insanity. The defendant who seeks to avoid a contract on the

ground of his insanity must prove, not only his incapacity, but also the plaintiff's knowledge of

that fact. The failure of proving these two components will make the contract to be still binding.

In Hart v O’Connor [1985] 1 AC 1000, the appellant entered into a contract to purchase

farmland in New Zealand which was the subject of a testamentary settlement. The agreement

was executed between the appellant and one Jack O’Connor, who was then the sole trustee of

the estate. Later, the respondents, who were the trustees and beneficiaries of the estate, applied

to set aside the agreement on the ground that Jack O’Connor had been of unsound mind when

he entered into the contract. The Privy Council held that the contract was not voidable as Jack

O’Connor's unsoundness of mind did not come to the knowledge of the other contracting party

at the time the contract was executed.

In Asia Commercial Finance (M) Bhd v Yap Bee Lee [1991] 1 CLJ 271, the first defendant

signed a letter of guarantee for the benefit of the plaintiff that was a finance company. The
plaintiff obtained a judgment in default against the first defendant. The first defendant’s

husband applied as her guardian ad litem for the judgment in default to be set aside on the

ground that the first defendant was of unsound mind at the moment she signed the guarantee.

A report from an expert at Hospital Bahagia showed that the first defendant had bipolar

depression. The plaintiff opposed the application on the ground that they were not informed

that the first defendant was of unsound mind. The High Court referred to case of Imperial Loan

Company Ltd v Stone and held that the contract was only voidable if the first defendant was

proven unsound at the time she signed the guarantee and the plaintiff had the knowledge of her

unsoundness of mind at that time. The Contracts Act was not referred to in this case.

In Che Som Binte Yip Alias Mrs Som Ismail and 2 Ors v Maha Private Limited and 2 Ors

[1989] 2 CLJ 893, the first plaintiff and the second plaintiff took action on behalf of the third

plaintiff for a declaration that a mortgage deed allegedly executed by the third plaintiff in

favour of the third defendant bank was null and void and had no legal effect on the ground that

the third plaintiff was of unsound mind and incapable of managing himself and his affairs at

the time of the execution of the mortgage deed. The Court referred to the case of Imperial Loan

Co Ltd v Stone and the case of Hart v O’Connor and held that the general rule is that a deed

executed by a person who has no mental capacity to do so is voidable when the party’s

unsoundness of mind is proven at the time the contract is executed and the other contracting

parties had knowledge of that fact. In this case, the court found that the third plaintiff was of

unsound mind and the third defendant bank had knowledge of the third plaintiff’s unsoundness

of mind. Therefore, the mortgage deed was voidable against the third defendant bank.

In Chemsource (M) Sdn Bhd v Udanis bin Mohammad Nor [2002] 6 MLJ 273, the

defendant suffered from Parkinson's disease and it caused physical as well as mental disabilities.

The plaintiff was said to be fully aware of the defendant's condition at all material times. It was

the defendant's case that the plaintiff took advantage of the defendant's disease and had induced
the defendant to execute various agreements for the benefit of the plaintiff and to the detriment

of the defendant. The High Court referred to ss11 and 12 of the Contracts Act and the case of

Imperial Loan Co Ltd v Stone and concluded that the issues of Parkinson's disease and the

capacity of the defendant to contract were triable issues that needed a full trial. Abdul Malik

Ishak J stated: “As to whether Parkinson's disease had affected the mental capacity of the

defendant to enter the said agreement, this can only be decided and adjudicated upon after a

full blown trial had been conducted. A mental patient could not, under the law, make a valid

contract. Of crucial importance to determine would be whether the defendant at the time of

contracting was suffering from such a degree of mental disability that he was so incapacitated

and incapable of understanding the nature of the contract”

If the defendant was incapable of understanding the nature of the contract, then the contract

was not void but voidable at the option of the defendant provided that the plaintiff knew or

ought to have known of the mental disability of the defendant... On the other end of the scale,

if the contract was made by the defendant at the time and during the lucid interval, then that

contract would be binding upon the defendant notwithstanding the fact that his disability was

known to the plaintiff (Hall v Warren (1804) 9 Ves 605 and Selby v Jackson (1844) 6 Beav

192). Of crucial importance would be whether the plaintiff knew-or ought to have known that

the defendant was mentally disordered and had no contractual capacity to enter the said

agreement.

While the above three cases held that contracts by persons of unsound mind are voidable

following the English position, an earlier High Court decision of Sim Kon Sang Peter

(administrator of the estate of Chong Yu Tai, decd) v Datin Shim Tok Keng [1989] 2 CLJ

893 appears cognisant that the provisions of the Contracts Act governing unsoundness of mind

would have the effect that the agreements are void. In that case, the plaintiff claimed that the

deceased, when she was alive, had transferred to the defendant certain undivided shares of her
land when she was, as the defendant well knew, of unsound mind. The plaintiff therefore

claimed that the transfers were void and of no effect. The defendant claimed that the agreements

were voidable and not void, citing Asia Commercial Finance (M) Bhd v Yap Bee Lee & Ors

and Imperial Loan Co Ltd v Stone. Ian Chin J stated: “Since section 11 of the [Contracts] Act

covers not only cases relating to the age of majority but also cases of unsoundness of mind, the

decision in Tan Hee Juan v Teh Boon Keat & Anor, though a decision in respect of a want of

age, applies equally to a case relating to unsoundness of mind. Therefore, if the Act applies to

the present case, it means that any contract made by a person of unsound mind is void and not

merely voidable. The contrary is the case if the English common law applies. See Asia

Commercial Finance (M) Bhd v Yap Bee Lee & Ors and Imperial Loan Co Ltd v S tone.”

However, the Court went on to hold that the English common law applied as the contract was

made in Sabah before the Contracts Act came into force, and therefore, the contract was

voidable and not void.

Claims for necessaries for maintaining a person of unsound mind has been allowed in the case

of In Re Beavan; Davies, Banks & Co v Beavan 69 [1912] Ch D 196. In this case, a customer

of a bank became of unsound mind. His son arranged with the bank to continue his banking

account and to draw upon it on behalf of the lunatic for the maintenance of the lunatic's

household and for the necessary outgoings of his estate. At the time of his death, the account

was overdrawn and the bank claimed to prove as creditors for the amount of the overdraft. The

court held that although the bank were not creditors of the lunatic, they were entitled under the

doctrine of subrogation to stand in the shoes of creditors paid by the son by means of the

lunatic's banking account for necessaries supplied for the maintenance of the lunatic’s

household, and for the necessary outgoings of his estate. Neville J stated: “Now it is not

disputed that the law is that a person maintaining another of unsound mind is entitled to
recoupment from his estate in respect of necessary expenditure, having regard to the position

in life of the person of unsound mind.”