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The High Court has considered the correct test to be applied to assess a person’s mental capacity to enter into a transaction. After a review of the authorities, it identified five general principles as being relevant:

  • A person needs the mental capacity to recognise the issues that must be considered, to obtain, receive, understand and retain relevant information, and to weigh the information in the balance in reaching a decision.
  • A person may have capacity for one type of decision but not another.
  • Capacity may vary over time and should be assessed at the specific time when the decision was made.
  • The key issue is whether the person has the ability to understand the transaction, not whether he actually understood it.
  • Although help might be needed to understand the transaction, this does not prevent the person having the capacity to understand it. The person needs 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.

The High Court considered the test set out in Chitty on Contracts. It concluded that the law as set out in Gibbons -v-Wright 91CLR 143 and summarised in Chitty was correct. Although it is not necessary for a person to understand every detail of the proposed transaction, they should be able to understand its key features explained in simple language, and alternatives to it. (Fehily v Atkinson [2016] EWHC 3069 (Ch))

Practical Law 20.12.16