Mental Illness or Defect

Mental Illness or Defect

The third exception to full capacity in § 12(2) covers a person who is mentally ill or defective.¹ Section 15(1) supplies the consequence. A person incurs only voidable contractual duties by entering into a transaction if, by reason of mental illness or defect, one of two kinds of inability is present.² The words "only voidable" place this category above the floor that § 12(1) sets, because the impaired person can incur duties, and holds an option to escape them. The two inabilities are stated in the subparagraphs that follow the opening clause, and each is taught separately below.

The result differs from the one the prior section reached for a ward. A person whose property is under guardianship by reason of an adjudication has no capacity at all, so the attempted contract is void.³ Here no court has made that finding, so the question of capacity is open when the contract is signed and has to be answered afterward, for one transaction, from evidence about what the person understood and how the person acted. The law cannot treat an unadjudicated person's promise as a nullity, because the other party had no court record to consult and often saw nothing unusual. Voidability fits that situation. The contract exists, the impaired person holds the power to undo it or to give that power up by ratifying, and a person who made a good bargain can keep it.⁴

This category produces more disputes than the others, since no calendar date and no court order settles it, and impairment comes in degrees. The doctrine has to protect people whose illness distorts their dealings without making every contract vulnerable to an after-the-fact claim of psychological impairment. Four devices strike that balance, and the subsections below take them in turn: two tests of inability, a knowledge requirement on the counterparty that attaches to one of them, rules about who must prove incapacity and how, and a limit on avoidance when a fair deal has already been performed. Rules on who may avoid and how the power ends complete the picture. The first test, which asks whether the person could understand the transaction, comes next.

The Cognitive Test

Restatement (Second) of Contracts § 15(1)(a) states the oldest and most familiar way a mental condition can undo a contract: a person incurs only voidable contractual duties by entering a transaction if, by reason of mental illness or defect, the person is unable to understand in a reasonable manner the nature and consequences of the transaction.⁵ The sentence has three working parts. The inability must flow from a mental illness or defect, so the facts must link the condition to the failure to understand. What the person must be unable to grasp is the nature and consequences of the transaction, meaning what is being exchanged and what follows from agreeing to it. And the failure is measured by whether the person can understand in a reasonable manner, a phrase that sets a practical standard and does not demand sophistication. A person who meets the test holds the option to avoid the contract, and the other party does not.

This is the traditional test, the one that asks whether the person lacked the mental capacity to grasp what entering the contract involved.⁶ Massachusetts courts call it the cognitive test, because it looks to the person's ability to comprehend, and they applied it in much the same form for a long time.⁷ A second test, taken up in the next subsection, covers the person who understands what is happening but cannot act reasonably, and it carries a knowledge requirement that this one lacks.⁸ The reason for building a test around understanding is that assent is the usual justification for holding someone to a promise, and assent presupposes some grasp of what was agreed to. When illness removes that grasp, the outward act of signing no longer signals a real choice. Requiring an inability to understand, and not merely poor judgment or modest intelligence, keeps the exception narrow, because otherwise any unwise bargain could be attacked afterward on the theory that its maker must not have understood it. The test also suits the people who must apply it, since a lay fact-finder can judge understanding from what the person said, did, and remembered, and incompetency may be proved by circumstantial evidence, including a disparity in the value exchanged.⁹

The test found incapacity in Krasner v. Berk, the case the chapter used earlier for the idea that capacity is judged transaction by transaction. Two physicians had shared a suite of medical offices and split the rent since 1964. In April 1969 they renewed the lease, and on May 22, 1969, they signed a written agreement, drawn up by the plaintiff's attorney, that each would pay half the rent and taxes even if one moved out or was unable to occupy his suite as a result of disability.¹⁰ The defendant, then fifty-three, was diagnosed that November with presenile dementia, closed his office in July 1970, and was sued for his stipulated share of $7,754.18.¹¹ His wife and brother described years of absent-mindedness, getting lost while skiing and traveling, being unable to use his dictaphone, and leaving his car at the office and hitchhiking home. A neurologist testified that testing showed a verbal IQ of 116 but a performance IQ of 76, indicating an inability to reason, form proper judgment, or learn new material, and that he would do poorly wherever a situation demanded new learning or independent judgment.¹² The court framed the question as whether the evidence warranted a finding that he did not understand in a reasonable manner the nature and consequences of the transaction, using the language of the Restatement draft that now appears as § 15(1)(a).¹³

The court did not treat that language as a departure from Massachusetts law. Its earlier cases asked whether the person was in such a state at the time as to be incapable of transacting the business, whether the person could grasp the transaction's nature and significance, and whether the person was too weak in mind to understand its meaning, effect, and consequences, and the court saw no difference in substance.¹⁴ One of those cases drew the line that governs the rest of this section: intellectual weakness that does not amount to a lack of power to comprehend is not incapacity, while an inability to realize the true purport of the matter in hand is.¹⁵ The case was nonetheless close. The defendant had discussed moving offices with the plaintiff before the renewal, read the agreement before signing, called it fair, and four months later dictated a letter of complaint to the landlord that showed some grasp of the lease terms, and the court said it would have upheld a finding of competence and a finding of testamentary capacity on this record.¹⁶ It still declined to draw its own inferences from conduct that was equivocal in the setting, because that would invade the province of the trial judge.¹⁷

What supported the trial judge's finding was a consideration the Restatement draft offers for exactly this middle ground: where a person has some understanding of a transaction that is affected by mental illness or defect, the controlling consideration is whether the transaction in its result is one that a reasonably competent person might have made.¹⁸ The agreement failed that measure. His practice had already been curtailed when he signed, which the judge could attribute to his condition, he consulted a brain specialist within two weeks and was advised within six months to give up medicine, and a promise to pay half the rent whether or not he could work was improvident for a doctor in that position.¹⁹ Courts look at the result because partial understanding is hard to measure directly. The words and acts of an impaired person at signing can look competent, and no witness can reconstruct the moment from the inside, but the terms of the deal are on the page. A bargain a sensible person with full faculties might have made suggests the understanding was adequate for it, and a bargain that makes no sense for the person who made it suggests that the impairment shaped the choice. Judges do tend to find capacity when the contract is fair and beneficial to the person and incapacity when it is not, yet that tendency reflects how borderline cases are decided and leaves in place the need for an arguable basis for finding incompetence.²⁰ A lopsided price therefore supports an inference of incapacity only when other evidence of impairment is present, as the earlier discussion of the presumption of capacity explained.

Krasner also shows how little this test needs beyond understanding. The court noted evidence from which it might be inferred that the plaintiff had reason to know of the defendant's condition, since the defendant's wife had discussed it with the plaintiff and the plaintiff's own attorney had drafted an agreement referring to inability to occupy the suite as a result of disability. The case had not been argued in those terms and no lower court had drawn that inference, so the decision did not rest on it.²¹ That course was open because the knowledge requirement belongs to the other branch of the rule, under which a contract is voidable when the person cannot act in a reasonable manner and the other party has reason to know of the condition.²² Section 15(1)(a) contains no such clause.²³ The older Massachusetts formulation went further and treated it as no defense that the other party acted fairly and without knowledge of the unsoundness.²⁴ The Restatement softens that result in § 15(2) for fair contracts that have already been performed, a limit taken up later in this chapter.²⁵

The test has boundaries on both sides of the Krasner facts. As to time, the question is what the person could understand at the moment of the transaction.²⁶ A diagnosis made earlier or later is evidence about that moment and does not answer it, and the conditions that can matter range from senility and Alzheimer's disease to temporary delirium after a physical injury and the side effects of medication.²⁷ As to degree, the person need not have average intelligence. In Cundick v. Broadbent, a 59-year-old sheep rancher sold his ranch properties and an interest in a development company, then sought to rescind, and two neurosurgeons and a psychologist testified without contradiction that he was confused and had very poor judgment, yet the trial court found that his conduct throughout the months of the sale was that of a person competent to manage his affairs and aware of the effect of his actions.²⁸ The appellate opinion stated the governing rule: capacity depends on whether the person had sufficient reason to understand the nature and effect of the act in issue, average intelligence is not essential to a valid bargain, and mere weakness of body or mind is not the mental incompetency that makes a contract voidable.²⁹ The court added that weak-mindedness remains highly relevant to a different question, whether the weaker party was overreached, meaning taken unfair advantage of.³⁰

Emotional distress marks a further boundary. In Sparrow v. Demonico, a mediation ended in a written settlement under which the Demonicos agreed to pay Sparrow $100,000 from the sale of their property, with counsel for both sides present throughout. The trial judge credited one spouse's testimony that she had stopped taking Zoloft, cried much of the day, and was out of control emotionally, and found that she was not thinking rationally.³¹ Those findings describe how she was feeling and reasoning that day. They do not by themselves show that she was unable to understand what a settlement was and what it would cost her, which is the question § 15(1)(a) asks. A person who is overwrought but follows what is being decided falls outside the cognitive test, and whether such a person has a claim under the other test, which looks to inability to act reasonably, is the subject of the next subsection.³²

The third step is where answers go wrong. A stem that reports a severe diagnosis, a low test score, or a bad price invites the conclusion that the person lacked capacity, but each of those facts is only evidence, and the question remains whether the person could understand this transaction when it was made.

The Volitional Test

The second route to voidability for mental illness appears in § 15(1)(b) of the Restatement (Second) of Contracts: a person incurs only voidable contractual duties if, by reason of mental illness or defect, he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.³⁴ The prong is called volitional because it looks to the will, meaning the capacity to choose and to carry out a choice. Courts also call it affective or motivational, because some illnesses act on emotion and drive conduct without disturbing the intellect.³⁵ It sits beside the cognitive test of § 15(1)(a), which asks whether the person could understand the transaction, and the two tests reach different people.³⁶ A person who cannot grasp the deal falls under the first. A person who grasps it fully but, because of a mental illness such as bipolar disorder, acts under a compulsion that overrides reasonable choice falls under the second.³⁷ The consequence is the same as for the cognitive test: the contract is voidable, and the impaired person holds an option to undo it.

The reason for a second test begins with what the first one assumes. A test that looks only at understanding treats a person who can describe a transaction accurately as a person who chose it freely, and that assumption fails for illnesses that damage motivation and self-control while leaving the intellect intact. Such a person can explain the deal correctly while the illness dictates the decision, so the cognitive test would bind the very people whose assent is least a product of their own judgment. The New York Court of Appeals followed this reasoning when it concluded that the cognitive rules were for the most part too restrictive and rested on a false factual basis, and it drew a parallel to criminal law, where the cognitive test of responsibility had been revised in response to modern psychiatric understanding.³⁸

The case that created the modern rule is Ortelere v. Teachers' Retirement Board of New York. A 60-year-old public school teacher, on leave for mental illness and suffering from cerebral arteriosclerosis after more than forty years in the retirement system, applied for retirement and elected the maximum allowance payable during her own life. That election revoked an earlier one naming her husband of 38 years as beneficiary of the unexhausted reserve, and she died less than two months later.³⁹ Her psychosis was undisputed, and it was not seriously disputable that she had complete cognitive judgment or awareness when she chose.⁴⁰ The court reasoned that modern understanding of mental illness shows that incapacity may exist because of "volitional and affective impediments or disruptions in the personality, despite the intellectual or cognitive ability to understand."⁴¹ The Appellate Division had held the proof insufficient as a matter of law, and the Court of Appeals reversed and ordered a new trial.⁴²

The Restatement's own illustration is built on these facts. The teacher fully understands the plan, but by reason of mental illness she cannot decide on the basis of the prospect that she may die before her husband. The change is foolhardy in view of her reduced life expectancy, nothing else explains it, and the plan's officers have reason to know of her condition, so the election is voidable.⁴³ Her complete understanding rules out the cognitive test. What carries the claim is the combination of an underlying illness with a result so senseless that it supports an inference that the illness, and not ordinary judgment, drove the decision. The illness is indispensable to that inference, because an adult's unwise choice standing alone remains no evidence of incapacity, as the earlier discussion of the presumption of capacity explained.

The majority fenced the rule in with limits that belong to it. It observed that nothing less serious than medically classified psychosis should suffice, because otherwise few contracts would be invulnerable to some kind of psychological attack.⁴⁴ It relied on the fact that the system, or the Board of Education, knew of her medical leave and of her resort to the Board's staff psychiatrists, and on the absence of any significant change of position by the system beyond the barest actuarial consequences of her election.⁴⁵ The reason-to-know requirement is the main safeguard, and the next subsection examines how it is met. Its logic can be stated here. The court framed the problem as a balance between stability in contractual relations, together with the expectations of those who bargain in good faith, and protection of persons who understand a transaction but cannot control their conduct because of mental illness.⁴⁶ A counterparty who saw nothing unusual cannot guard against an illness that is invisible from outside, so the rule gives relief only against a counterparty who had warning and could have declined to proceed.

The dissent in Ortelere shows the other side of that balance. Judge Jasen read the record as showing a rational choice: the teacher had written the system a detailed letter with eight pointed questions about her options, which revealed a mind fully in command of the plan's features.⁴⁷ In his view the maximum allowance, an extra $75 a month and a 20 percent increase, was a necessity for a couple whose only income was her retirement pay.⁴⁸ On the law, he defended the cognitive test as a workable balance between the security of transactions and the protection of the mentally handicapped, one that lay jurors can apply by inferring a state of mind from observed behavior, and he urged that the line between liability and nonliability be drawn as clearly as possible.⁴⁹ His central objection was practical: any benefit to those who understand what they are doing but cannot exercise self-discipline would be "outweighed by frivolous claims which will burden our courts and undermine the security of contracts."⁵⁰

That worry targets a proof problem peculiar to this test. An inability to understand shows itself in what a person says, whereas an inability to control conduct shows itself, if at all, in a pattern of behavior that a lay observer may read as ordinary poor judgment. The claim is therefore easy to assert and hard to test. Courts that accept the test have answered by tightening proof, and Massachusetts, in Sparrow v. Demonico, requires medical evidence to establish incapacity from a mental condition, a rule responsive to the concern the dissent voiced, though critics note that it may be costly in small cases.⁵¹ A later subsection takes up how the burden is carried.

The Restatement adopted the second test, and some courts have followed it. In Gore v. Gadd, the Oregon Supreme Court recognized that a person with manic-depressive psychosis, though aware of the nature and consequences of the conduct, may still be incompetent because the illness impels irrational action and leaves the person "incapable of making a rational judgment in the execution of the transaction."⁵² Massachusetts took the same step in Krasner v. Berk, the decision that supplied the cognitive-test discussion above, by recognizing that a contract may be voidable where the person has some or sufficient understanding but, because of mental illness or defect, is unable to act reasonably in relation to the transaction and the other party has reason to know of the condition, and it cited Ortelere for the point.⁵³ Other jurisdictions have declined to follow, and the Restatement's addition has not been widely adopted.⁵⁴

A jurisdiction that rejects the second test shows the cost of that choice. In Proctor v. Classic Automotive, Inc. a lessee with bipolar disorder had behaved impulsively and irrationally, having gone on a spending spree just before the transaction, seemed confused about the difference between a lease and a purchase, skipped the test drive, and could not afford the payments. The Alabama court still refused to let her avoid the lease, because she understood enough to realize she was entering an automobile lease and the cognitive test was the only test recognized in that jurisdiction.⁵⁵ Set beside Ortelere, the two outcomes turn on the legal standard each court applied and not on how impaired the person was, since both understood what they were doing and both suffered from an illness that bore on their choices. The Ortelere court asked whether the illness removed the ability to choose reasonably and weighed what the plan knew, while the Proctor court asked only about understanding and stopped when the answer was yes.

Two errors recur on exam stems. One is to infer incapacity from impulsive or ill-advised conduct when no underlying illness appears. The other is to stop at the cognitive question and conclude that a person who understood the deal is bound, which is the result in Proctor and is correct only where the jurisdiction has not adopted § 15(1)(b).

Reason to Know

The volitional test carries a requirement that its cognitive counterpart lacks. Under § 15(1)(b) of the Restatement (Second) of Contracts, a contract is voidable if, by reason of mental illness or defect, the person is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.⁵⁷ The first half of that sentence looks at the impaired person and asks whether illness left the person unable to choose reasonably. The second half looks at the counterparty and asks what that party had before it when it dealt. A party has reason to know of a condition when the facts it actually possessed would lead a sensible person to infer the condition, so the claimant need not prove that anyone announced a diagnosis or that the counterparty admitted noticing anything. A court may draw the inference from the surrounding circumstances, and the decisions below show which circumstances carry the weight.

The placement of this clause matters on exam stems. The cognitive branch, § 15(1)(a), covers the person who cannot understand the nature and consequences of the transaction, and its text contains no knowledge clause.⁵⁸ The reason-to-know element therefore attaches to the volitional prong alone: the person who understands the deal but acts under the compulsion of illness has a defense only if the other party had reason to know of the condition when the contract was made.⁵⁹ A claimant who proves an inability to understand does not also have to show what the counterparty saw or was told. The usual mistakes run in both directions, either carrying the element backward into the cognitive test or forgetting it when running the volitional test because the person's illness is so plain on the page.

The reason for attaching a knowledge clause to one branch only comes from what each kind of impairment looks like from across the table. A person who cannot understand a transaction tends to show it in what that person says and asks. A person whose illness distorts the will can describe the deal accurately and sign calmly, so nothing in the exchange reveals the problem, and a counterparty who acted in complete good faith would face a claim of hidden illness after the fact. If the claim required no showing about the counterparty's information, every ordinary-looking deal would be open to that attack, and no one could rely on a signature. The Ortelere court framed the competing interests as stability in contractual relations and protection of the expectations of parties who bargain in good faith on one side, and protection of persons who understand a transaction but cannot control their conduct because of mental illness on the other, and it resolved the conflict by allowing relief only if the other party knew or was put on notice of the illness.⁶⁰ The element also places the loss on the party able to prevent it. A counterparty with warning signs can decline, slow down, or seek protection, while a counterparty with no warning has none of those options.

The clearest illustration is Farnum v. Silvano, where the buyer's awareness decided the case. Viola Farnum, then ninety, sold her house for $64,900 when its fair market value was $115,000, and the buyer, Joseph Silvano, was a 24-year-old who knew her from mowing her lawn and doing other landscape work.⁶¹ Her mind had been failing since 1983: she mourned sisters who were dead, asked where the people upstairs had gone in a house with no upstairs, and repeatedly broke into her own home after locking herself out, and a brain scan in 1985 disclosed organic brain disease.⁶² The probate judge found a lucid interval at the closing and held that she had capacity, and the Appeals Court reversed because a different test measures competence to contract.⁶³ Farnum could be aware that the sale was happening and that the price was low while failing to grasp the unreasonableness of selling a major asset at a cut rate when she faced growing demands for her care.⁶⁴

The court rested voidability on one factor above the others, which was Silvano's awareness of Farnum's inability to act in a reasonable manner.⁶⁵ It found three sources for that awareness. Her conduct at the relevant times had caused concern to her relatives, her neighbors, and her physician. Silvano knew he was buying the house for about half its value. And her nephew had specifically warned him about the unfairness of the transaction and about her mental disability.⁶⁶ Each source works differently. Conduct that alarms the people around a person shows that the condition was visible to anyone paying attention, so a buyer who dealt with her could hardly claim to have seen nothing. The warning removes any doubt by delivering the information directly. The price does the subtlest work, because a buyer who knows it is paying half value is poorly placed to say that nothing looked wrong, yet price was a supporting fact here, set beside the conduct and the warning.

In Ortelere v. Teachers' Retirement Board the element was met without any personal dealing between the parties. The teacher there suffered from psychosis and had gone on leave for medical reasons, and the court found that the retirement system was, or should have been, fully aware of her condition, because the system or the Board of Education knew of her leave and of her resort to the Board's staff psychiatrists.⁶⁷ Knowledge of those two facts satisfied the element for the court. The court also noted that the system had made no significant change of position beyond the barest actuarial consequences of her election, a point that connects to the limit on avoidance taken up in a later subsection.⁶⁸ Krasner v. Berk shows the inference in the making, though the court declined to rest on it. The defendant's wife had discussed his condition with the plaintiff, and the plaintiff's own attorney had drawn an agreement that referred expressly to inability to occupy the suite as a result of disability. The court said it might be inferred that the plaintiff had reason to know of the condition, but the case had not been argued in those terms and no lower court had drawn the inference.⁶⁹ Reason to know is a finding of fact, so the party seeking avoidance has to put it in issue and prove it.

Taken together, the decisions identify the kinds of facts from which a court may infer reason to know:

• Conduct the counterparty could observe that had alarmed relatives, neighbors, or physicians, such as the confusion and erratic behavior in Farnum.
• A direct warning to the counterparty about the person's mental condition or about the unfairness of the deal, such as the nephew's warning to Silvano.
• The counterparty's own knowledge of medical leave or psychiatric care, as in Ortelere.
• Statements made to the counterparty, or language in the deal's own documents, that refer to the person's condition, as in the facts the Krasner court described.
• A price the counterparty knows to be far below value, which adds weight only alongside facts of the kinds above.

The opposite pole arises when the counterparty had nothing to observe. A customer in an elevated phase of bipolar disorder books an expensive, nonrefundable resort stay online by clicking the button that accepts the standard terms. In a jurisdiction that accepts the Restatement's volitional test, the customer might prove the disorder and its effect on judgment through expert psychiatric testimony, backed by friends or family who watched the behavior, and the claim still fails on the second element, because nothing suggests the resort knew or had reason to know of the condition.⁷⁰ The element is especially hard to meet in an internet transaction, where the resort had no opportunity to observe behavior that might have alerted it.⁷¹ Sparrow v. Demonico points the same way. The court there noted that nothing in the record showed that Sparrow was, or should have been, aware of the claimant's condition, and nothing suggested the claimant lacked independent counsel for the settlement, and it contrasted Farnum on that ground.⁷² What separates these outcomes from Farnum is the information available to the counterparty, and the severity of the illness does not decide it.

On an exam stem, run the element from the counterparty's chair by asking what this counterparty saw, heard, or was told before the deal closed. A diagnosis, a later hospitalization, and a lopsided price each show that the person was impaired or that the bargain was poor, but none shows what the counterparty knew at the time, so each needs support from conduct, warnings, or records that reached the counterparty. The cognitive branch needs no such showing, though a counterparty's lack of knowledge is not irrelevant there: where the contract was made on fair terms and the other party lacked knowledge of the illness, § 15(2) ends the power of avoidance to the extent of performance or changed circumstances.⁷³

Proving Incapacity

Section 15(1) says what a party must establish: that, by reason of mental illness or defect, the person was unable to understand in a reasonable manner the nature and consequences of the transaction, or was unable to act in a reasonable manner in relation to it while the other party had reason to know of the condition.⁷⁵ Those clauses leave open who must establish those facts, as of what moment, and with what kind of evidence. The answers decide most real disputes, because a claimant who cannot prove the facts is held to the bargain however sympathetic the story. The burden rests on the party seeking to void the contract, who must establish that the person was incapacitated at the time of the transaction.⁷⁶ That allocation follows from the presumption of capacity discussed at the start of this chapter. A court that begins by treating an adult's signature as binding needs a rule for the case in which the evidence about a single morning is thin or evenly divided, and the rule leaves the contract standing. The burden can be heavy in practice: courts have refused to find incapacity where the evidence showed residence in a nursing home, frequent confusion, dementia, and sedative medication, because none of those facts showed what the person could understand when signing.⁷⁷

The moment that matters is the signing. Sparrow v. Demonico explained that the inquiry into capacity to contract focuses on a party's understanding or conduct only at the time of the disputed transaction, so the evidence need not show an illness that is permanent, degenerative, progressive, or long-standing.⁷⁸ The reason lies in how a contract comes into being. A contract is formed at a point in time, and a condition that clouds comprehension for an afternoon can remove the understanding that assent depends on as completely as one that lasts for years. The conditions that bring the doctrine into play therefore include temporary delirium after a physical injury and the side effects of medication, alongside senility and Alzheimer's disease.⁷⁹ The same focus works against a claimant who offers only a label. A diagnosis made years earlier, or a decline that became obvious years afterward, is evidence about the signing and does not by itself answer what the person could understand on that day.

What Sparrow adds is a requirement about the kind of proof. The Massachusetts court held that, without medical evidence or expert testimony that the mental condition interfered with the party's understanding of the transaction or the ability to act reasonably in relation to it, the evidence will not support a finding of incapacity.⁸⁰ The lay testimony the trial judge credited described slurred speech, uncontrollable crying, and an inability to think rationally on the day of the mediation, and the party had recently stopped taking Zoloft, yet no one explained what diagnosis the drug treated or what stopping it would do to her judgment.⁸¹ Lay witnesses may describe a person's appearance, conduct, and acts, and an expert may build an opinion on those facts, but here nothing from a medical source tied the behavior to an inability to understand the agreement or to appreciate its reasonableness and consequences.⁸²

The court gave reasons that explain why the requirement attaches to this defense. Both tests ask how a mental condition affected comprehension or the ability to act reasonably, and the court observed that it had looked to physicians and other experts to explain whether, and to what extent, a person's condition had that effect.⁸³ Medical corroboration also guards against feigned claims and against honest but mistaken ones, since even a sincere claimant may convince himself or herself, wrongly, that a period of distress amounted to impairment.⁸⁴ Without some limit of this kind, the warning from Ortelere applies: "nothing less serious than medically classified psychosis should suffice or else few contracts would be invulnerable to some kind of psychological attack."⁸⁵

That requirement is a Massachusetts rule, and an answer should present it as one. The court rested it on its own earlier decisions, in which evidence of mental illness had consistently come in through physicians and mental health experts, and on the way lay witnesses are treated in other settings, and it noted that the party resisting enforcement had pointed to no case from another jurisdiction that would excuse medical proof.⁸⁶ Section 15 itself says nothing about expert testimony, so a court elsewhere is free to weigh lay observations differently. The practical lesson still travels, because a claimant who invokes a recognized mental disorder is expected to establish its existence, symptoms, and effects through expert psychiatric testimony, which friends or family who watched the behavior can support.⁸⁷

Farnum v. Silvano shows what proof can carry a claim, and why a good moment at signing does not defeat it. Viola Farnum was ninety when she conveyed her house for $64,900, although its fair market value was $115,000, and the probate judge found that she was coherent, or in a lucid interval, when she signed the deed, and so held that she had capacity.⁸⁸ The Appeals Court reversed, because a different test measures competence to contract. Acting in a lucid interval can support the execution of a will, but competence to contract presupposes something more than "a transient surge of lucidity," meaning an ability to comprehend the nature and quality of the transaction together with an understanding of its significance and consequences.⁸⁹ The difference comes from what each act involves. From a testator the law asks awareness of the natural objects of bounty, and the choice among them may be arbitrary, whereas a contract creates reciprocal obligations, so it is appropriate, when mental incapacity is manifest, to require a baseline of reasonableness.⁹⁰ The lucid-interval point is therefore a statement about contract capacity, and the testamentary standard should not be carried over to a sale.

At the closing Farnum was cheerful, made instant coffee for those present, and was aware of what was going on, yet afterward she insisted to her sister and nephew that she still owned the property.⁹¹ The court separated awareness of the surface of a transaction, that it was happening, from comprehension of its unreasonableness and consequences: she could know she was selling for less than the house was worth while failing to see the folly of doing so when she faced growing cash demands for rent, home care, or nursing home charges.⁹² What carried the claim was the accumulation of evidence. A mental disease had shown itself in erratic and irrational conduct and was confirmed by diagnostic test, her physician did not think she could live alone, she was hospitalized for dementia and seizure disorder some six months after the conveyance, and the lawyer who handled the closing had been chosen and paid by the buyer to effect the transaction.⁹³ Sparrow itself cites Farnum as a case in which a mental disease confirmed by diagnostic test left the person without the requisite contextual understanding, which shows that the two decisions fit together.⁹⁴ In Farnum something medical linked the behavior to the transaction, and in Sparrow nothing did.

Because no witness can reopen the moment of signing, incapacity may be proved by circumstantial evidence, and a disparity in value between the things exchanged is an accepted kind.⁹⁵ Judges also tend to find capacity where the contract is fair and beneficial to the person and incapacity where it is not, a tendency that reflects the treatment of borderline cases and still leaves the claimant to supply an arguable basis for finding incompetency.⁹⁶ The disparity must itself be proved. Farnum set a $115,000 value against a $64,900 price, while the Sparrow record contained no evidence of the property's value and none that the $100,000 settlement was unreasonable in the party's circumstances.⁹⁷ The court added that nothing showed a reasonably competent person would have refused the settlement.⁹⁸ A claimed bad price therefore helps only when the evidence establishes both sides of the comparison.

One last limit protects the presumption of capacity. Bizarre or inexplicable behavior is often read as evidence of diminished capacity, but eccentricity is not the same as incompetency, and legal capacity is not rationality measured against someone else's preferences.⁹⁹ Capacity is also not a simple yes-or-no question. A person may move between periods of clarity and confusion, and apparent confusion may come from medication that can be adjusted or from an undiagnosed hearing loss, so none of those facts alone shows an inability to understand a particular transaction.¹⁰⁰ Observations by worried relatives raise the question without settling it, and comments from people who spend time with the person can be biased by factors such as possible financial gain.¹⁰¹ That caution is one more reason courts look for evidence tying the condition to the transaction.

Two errors recur on exam stems. One treats a diagnosis, odd behavior, or a poor price as proof of incapacity, when each is only evidence that must be tied to what the person could understand or do at signing. The other treats a coherent moment at the closing as the end of the inquiry, or borrows the lucid-interval reasoning of will cases, when contract capacity asks about comprehension of the deal's nature and consequences. A claimant whose proof of incapacity falls short is not necessarily without a remedy, because a weakened mental state may still bear on whether the stronger party took advantage through misrepresentation, imposition, or undue influence, a theory taken up in the last section of this chapter.¹⁰²

Avoidance and Ratification

A contract voidable for mental illness or defect leaves the impaired person holding an option, and the Restatement's definition of a voidable contract says what that option consists of. Under § 7, one or more parties have the power, by a manifestation of election, to avoid the legal relations the contract created, or, by ratification, to extinguish that power of avoidance.¹⁰⁴ Section 15(1) puts a person who cannot understand the transaction, or cannot act reasonably in relation to it, into that category, because such a person incurs only voidable contractual duties.¹⁰⁵ The earlier subsections asked whether a particular person qualifies. This one asks who may use the power once it exists and what brings it to an end, and the answers follow the pattern already seen with minors, where only the protected party holds the power.¹⁰⁶

The power of avoidance and ratification is reserved to the incompetent person and, after death, to that person's heirs or personal representative.¹⁰⁷ If a guardian is appointed, the power is vested in the guardian.¹⁰⁸ The guardian who holds it is typically one appointed after the transaction, because a contract made while a guardianship adjudication was already in force is void under § 13, and a void contract calls for no election by anyone.¹⁰⁹ A guardian appointed later steps into the person's position and decides, as the person could have decided, whether the bargain is worth keeping. The heirs and the personal representative do the same after death. Because the option passes to the estate, a counterparty cannot make a bargain with an impaired person safe simply by waiting for that person to die without acting.

The competent party to the contract has no power of avoidance.¹¹⁰ The reason lies in whom the doctrine protects. Incapacity rules exist because an impaired person's assent is an unreliable signal of real judgment, and avoidance corrects that unreliability for the benefit of the person whose assent was unreliable. A counterparty that made a genuine promise has no comparable defect to correct, and a defect in one party's capacity does not travel to the other party, whose promise remains a real promise that stays binding while the impaired person decides what to do.¹¹¹ If the counterparty could invoke the other side's illness, it could keep every bargain that turned out well and escape every one that turned out badly, and a rule meant to shelter the vulnerable would become an exit for the party who needed no shelter.

The power ends in the other direction when the person ratifies. Once the incompetent person recovers, he or she may ratify the contract, and the ratification is irrevocable and may be made by words or by conduct.¹¹² Ratification works the way § 7 describes it, by extinguishing the power of avoidance, so after it the contract is no longer voidable and binds the former incompetent person like any other.¹¹³ Each part of the rule has its own reason. Ratification lets a person keep a deal that has proved worthwhile, which the protection would otherwise deny by offering avoidance as the only choice. Irrevocability gives the counterparty certainty, because once the former incompetent person has chosen to be bound, no later change of heart can reopen the bargain. The requirement of recovery follows from what ratification is, a decision to be bound made by someone who holds an option precisely because earlier decisions could not be trusted, so a decision made while the same condition persists carries the same unreliability.

The recovery requirement raises the question whether a brief period of clarity is enough. Students will sometimes see it said that an incompetent person may affirm a contract during a lucid interval, and that idea has to be read with care. In Farnum v. Silvano the court acknowledged that acting during a lucid interval can be a basis for executing a will, and then stated that competence to enter a contract presupposes something more than "a transient surge of lucidity."¹¹⁴ Contract competence involves more than comprehension of what is going on, because it requires an ability to comprehend the nature and quality of the transaction together with an understanding of its significance and consequences.¹¹⁵ The difference comes from what each act involves. A testator is asked only to be aware of the natural objects of bounty, and an arbitrary choice among them may be allowed, whereas a contract creates reciprocal obligations, so the court thought it appropriate, when incapacity is manifest, to require a baseline of reasonableness.¹¹⁶

That caution carries over to ratification by its own logic. Ratification is a decision to be bound, and it is irrevocable, so if a passing clear moment sufficed, a counterparty could collect an affirmation at a good hour and extinguish the power of avoidance for good. The distinction Farnum drew between awareness of the surface of a transaction, meaning that it was happening, and failure to comprehend its unreasonableness and consequences marks the gap that matters.¹¹⁷ A person who says the deal is fine while still unable to grasp why it was unwise has shown the first and lacks the second, and that person has not yet recovered in the sense that makes ratification effective. An exam stem that reports a pleasant conversation or a signature at a good moment therefore leaves the question of recovery open, and the analysis turns on whether the person comprehended what ratifying would mean.

Ratification closes the door on avoidance for incapacity, yet it does not necessarily close every claim arising from the dealing. After ratification, the former incompetent person or the guardian may have an action for compensatory and punitive damages if the exploitation of the incompetent amounted to actionable fraud.¹¹⁸ The two remedies rest on different facts. Avoidance asks whether the person was impaired when the contract was made, while fraud asks whether the counterparty's own conduct, such as a misrepresentation, was wrongful. The last section of this chapter returns to how incapacity claims and these other theories travel together. Before then, the next subsection takes up a separate limit on avoidance, one that applies even to a person who never ratified and that turns on fair terms and performance.

Fair Terms and Restitution

A contract voidable for mental illness or defect leaves the impaired person holding an option, and Restatement (Second) of Contracts § 15(2) names the circumstances in which that option disappears even though no one has ratified. Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under subsection (1) terminates to the extent that the contract has been performed in whole or in part or the circumstances have so changed that avoidance would be unjust, and in such a case a court may grant relief as justice requires.¹²⁰ The power being limited is the one § 7 describes, the power to undo the legal relations a contract created by a manifestation of election.¹²¹ Subsection (2) therefore works as a second way, besides ratification, in which the power can be lost. It also matters most where the cognitive test of § 15(1)(a) applies, because that test contains no knowledge clause, so subsection (2) is where a fair counterparty who never suspected the illness first receives protection.¹²²

The rule has a threshold and a trigger. The threshold is two facts about the original bargain: the terms were fair, and the other party did not know of the illness or defect. The trigger is one of two later developments: the contract has been performed in whole or in part, or circumstances have changed so much that avoidance would be unjust. The power ends only when the threshold and a trigger are both present, and because it ends only to the extent of the performance or the change, a contract performed in part loses the power as to that part and keeps it for the rest. For the remainder, the court's authority to grant relief as justice requires lets it craft a remedy in a case where the status quo can no longer be restored.¹²³

Each element has its own reason. Fair terms matter because avoidance exists to rescue a person whose assent was an unreliable signal from the consequences of a bad bargain, and a fair bargain leaves no bad result to rescue anyone from, since the impaired person received something of value for what was given. The knowledge element assigns the loss to the party able to prevent it. A counterparty that sees warning signs can decline, slow down, or insist on safeguards, while one that sees nothing has no such choice, and the court in Ortelere v. Teachers' Retirement Board of New York described the underlying balance as stability in contractual relations and the expectations of parties who bargain in good faith, set against protection of persons who understand a transaction but cannot control their conduct because of mental illness.¹²⁴ The performance trigger follows from how avoidance works. Undoing a contract means returning both sides to where they began, and once a good-faith counterparty has delivered goods, spent money, or changed its plans, a full unwinding is no longer possible and the counterparty would carry the whole loss of an impairment it had no means of detecting. The volitional test already requires that the other party have reason to know of the condition, so subsection (2) does its main work in cases that proceed under the cognitive test, where nothing else in § 15(1) takes the counterparty's information into account.¹²⁵

The pole where the limit fails appears in Ortelere itself. A 60-year-old teacher on leave for mental illness revoked an earlier election and chose a larger annuity with no death benefit, and she died two months later.¹²⁶ The court found that the retirement system, or the Board of Education, knew of her medical leave and of her resort to the Board's staff psychiatrists, and it found no significant change of position by the system beyond the barest actuarial consequences of her new election.¹²⁷ Because the system knew of her condition, the threshold of the limit was not met, and because the system had not altered its position in any meaningful way, avoidance threatened no injustice. Set beside the retailer, the system differs on the two facts the limit turns on, the counterparty's information and its reliance, and those facts decide which side is protected.

The older Massachusetts position shows what subsection (2) adds. In Sparrow v. Demonico the court traced its cognitive test to Reed v. Mattapan Deposit & Trust Co., which treated a contract as voidable by the impaired person or representatives once incapacity at the time of the transaction was established, and which held it no defense that the other party acted fairly and without knowledge of the unsoundness or of any circumstances that should have prompted inquiry.¹²⁸ Under that formulation a seller who gave full value, never suspected a problem, and performed completely stayed exposed to avoidance whenever the other side could prove the incapacity. Section 15(2) departs from that position for the fair and innocent counterparty. An answer should therefore say which formulation the stem invokes, because the same fair, performed contract is protected under the Restatement and was unprotected under the older view.

When the power survives and the impaired person avoids, the next question is what must be given back, and here the rule for mental incapacity departs from the rule for minors. A minor who disaffirms generally may do so even though the consideration cannot be returned, whereas a person who avoids for mental incapacity is required to make restoration to the other party unless special circumstances are present.¹³⁰ The traditional account is stricter still: the person must restore what was received, and not merely what remains of it, and in some courts a person who has used up or destroyed the consideration and cannot restore its value may not avoid at all.¹³¹ Other courts require restoration of only what remains in the person's hands, and in rare cases a court treats the contract as void and requires nothing to be returned.¹³² Because the courts vary, an answer should state the general requirement of full restoration and flag the more lenient approaches.

The difference follows from who is positioned to bear the cost. An adult who deals with a minor can see the risk, since age is fixed by the calendar, and the law leaves the loss with that adult to serve the interest in protecting the young. The counterparty to a person with a hidden mental illness often saw nothing unusual, and requiring restoration keeps that innocent party from absorbing the whole loss of an impairment it could not have detected.

The counterparty's knowledge changes the accounting. Where the capable party entered the transaction knowing of the disability and so imposed on the impaired person, some courts require the person to restore only the consideration that remains in the person's hands, and other courts are more critical still of the counterparty.¹³³ The reason for demanding full restoration was the counterparty's innocence, and a counterparty that knew has lost it, so it looks more like the adult who deals with a minor and accepts a risk it could see. Good faith pulls the other way. Under Restatement (Third) of Restitution and Unjust Enrichment § 16(3)(a), even when the transferor lacked capacity, rescission and restitution in favor of a good-faith transferee leaves the transferor liable in restitution for the benefits received.¹³⁴ Courts also have latitude when the contract itself was unfair: if an unfair contract that resulted from mental impairment has been partly performed, a court may reform it or limit the other party to recovering the value of the benefits it conferred.¹³⁵

One more consequence survives avoidance. Even if a person with a mental illness may avoid a contract, that person is liable in quasi-contract for the reasonable value of necessaries furnished to the person or the person's dependents.¹³⁶ A quasi-contract is an obligation the law imposes to prevent one party from being unjustly enriched, with no promise behind it, so the liability rests on the benefit received and the measure is reasonable value rather than a price the avoided contract fixed. Roughly the same goods and services that are necessaries for minors are necessaries for incompetents, and nursing and medical attention are the salient examples, which is why this point parallels the minors' rule and needs no separate development here. The reason is practical: a provider who knows its contract can be avoided and its bill left unpaid may decline to supply care, and an impaired person who goes without nursing or medical attention is harmed by the very protection meant to help. Some courts that require restoration of only what remains in the person's hands still impose liability for the value of necessaries on top of it.¹³⁷

Three errors recur on exam stems. One is treating subsection (2) as a bar whenever a fair contract has been performed, even though a counterparty who knew of the condition is outside it. Another is reading the limit as all or nothing, when it ends the power only to the extent of performance or changed circumstances. The third is carrying the minor's rule into this setting and letting an impaired adult keep the price while returning a wreck, when the traditional rule requires restoration of what was received.