What is Competency
The concept of legal competency is critical to understanding who is legally capable of entering into an agreement. Legal competency is the condition in which a person has the ability under the law to create or carry out legal rights, obligations and either incur or discharge a legal duty. Simply stated, a competent party is an individual who has reached the age of majority and is considered sane or living without a serious mental defect. In order to be found to have legal competency, a person must be able to comprehend the contract they are entering into, understand the identity of the other party, and appreciate the general nature of the contract into which they are entering.
In contract law , it is essential that all parties to an agreement be competent in order for the contract to be legally binding. An example of this would be if a client were to hire an attorney to draft a will or trust and the client, unbeknownst to the attorney, was suffering from a severe mental defect, the resulting agreement would be voidable due to the legal incompetency of the client. With regard to real estate law, an example of a legal inability to contract may be someone who is under the age of 18. (However, a minor who has entered into a contract that has been ratified or one that is beneficial to the minor will not have the ability to void that contact).
Age and Competency
The age of majority varies throughout the world. Although most countries follow the general tenets of English common law and consider any person 18 years or older to be of majority (that is, capable of acting without parental consent), some do require that a woman be over 21 (as in Monica S. v. Spector [19991-1-FCR 1]), while others grant majority to a woman who has been married (Age of Majority Act of 1978 (South Africa)). A male person in Jordan who is 14 is considered an adult, while the Age of Majority Ordinance, 1959 (Pakistan) applies only to ladies and is not in force anywhere in the country. Chinese law states that "with the age of 18 years, a citizen is in full possession of civil capacity" (Parties to Civil Actions: Age of Majority (1985) 24 HBFCC 163), which is not the case in Great Britain, where the Children Act of 1989 deems them minors until 18. The Indian Majority Act of 1875 defines majority as attainment by a citizen of 18 years of age, but divides this definition by sex, as being 21 years of age for females.
Civil law requires the presence of recognition before a contract becomes valid (e.g., the German Civil Code [BGB] §104; French Civil Code §112-113). However, an assumption exists that courts respecting the principle of good faith will not impose this condition. Decisions by German courts have held that the age of majority in Germany is 18 years and that each person has legal capacity starting at the age of seven. Thus, minors may enter into deeds with their parents’ consent; however, when they acquire a deed wholly for their personal benefit, it is enforceable (German rules of contract). South African law, on the other hand, makes no distinction between civil and common law in determining majority; it is echoic of international practices, establishing that a person of or over 18 years of age is of age.
The age of majority in North America is frequently 18, although not always. The Age of Majority Act of 1972 makes the age of majority 19 years for those born before June 1, 1972, while those who were born after this date are of majority on their 18th birthday (West’s Annotated Ohio Revised Code §3109.01). In the United States teenagers can marry and sign contracts on their 16th birthday. However, a New York law gives 14-year-olds the right to enter into unregulated contracts for the sale of goods.
Mental Competency
A primary requirement for legally competent parties is that they have mental capacity, meaning the ability to understand the nature and implications of an act: whether they have the mental ability to understand the nature and effect of an agreement. A few common criteria provide a good starting point for assessing mental capacity, including: Conditions that are likely to impair mental capacity include mental illnesses such as schizophrenia and bipolar disorder, dementia, traumatic brain injury, stroke, barrage of blows to the head or even prolonged periods without sleep.
Intoxication and Competency
While intoxication will not render a person legally incompetent to enter into a contract, it is common for parties to enter into voidable contracts under the influence of alcohol or drugs. Intoxication as it relates to competency arises in three situations: 1) when a party is adjudicated incompetent because of intoxication; 2) when a party was drunk or high when he or she entered into a contract (This may include an agreement contingent on sobriety, such as a gambling agreement); and 3) when a party was sober when he or she entered into a contract but then became intoxicated. The intoxication must be such that it prevents the person from knowing the nature and consequences of the transaction such that he or she is unable to understand the nature and consequences of the transaction. The test for mental incapacity is whether the person had sufficient mental capacity at the time the contract was made so as to know what he or she was doing and to know its nature and its probable consequences. A party who claims that his or her intoxication at the time of entering into the contract rendered him or her incompetent to make that contract has the burden of establishing that intoxication rendered him or her so incompetent.
Intoxication can be of any kind, whether voluntary or involuntary, and renders a person incompetent to enter into a binding agreement only when it deprives the person of reason and prevents the person from knowing the nature and effect of the contract.
Competency and Contract Law
The implications of legal competency extend far beyond the moment an agreement is entered into. The particularities of whether a challenged contract lacks all of the elements for valid formation can create new levels of adversity in the adversary system. In the context of competence, there is no single objective test of intellectual capacity for courts to apply. Instead, different tests apply for different types of competency as they relate to different types of litigants, at different times, for different contractual agreements, and at different stages in the negotiation process. So that is the first implication – the plaintiff can’t rely upon any user-friendly test. Plaintiff must pay attention to the contingent nature of the situation and develop an arsenal of legal arguments.
Practical examples include questions of the absence of capacity to enter into contracts based upon an individual’s mental state at the time of contracting, the question of the continued ability to enter into contracts as one age, the issue of competency/incompetency of corporate officers or agents to enter into contracts on behalf of a corporation, and the competency of parties to the negotiation process. Each of these situations affects litigation strategies very differently and requires different kinds of evidence to prove lack of competency. For example, if it is proved that one party to a contract or lease was incompetent and incapable of conducting business with another , the transaction may be illegal. A party may not take advantage of someone who is incompetent to conduct negotiations for fear of creating the next issue.
These issues of competency also become interwoven with contract challenges regarding the defense of unconscionability, i.e. the exercise of contract power over someone with diminished capacity or mental incapacity. To illustrate, the question of whether the plaintiff should or shouldn’t have been treated as an uninformed consumer, to use consumer law analogy, in evaluating a contract depends entirely upon whether the plaintiff was of sufficient competency to form a basic understanding of the transaction. The defendant may argue that the plaintiff was competent to contract but did not and took the risk of losing his money on the deal. On the plaintiff’s side of the coin, the plaintiff needs to demonstrate lack of competency to enter into a contract and then demonstrate how the defendant took advantage of his client when negotiating the terms of the contract. From the defendant’s perspective, this is a double-edged sword because showing that the plaintiff acted as a consumer provides a huge weapon to the plaintiff and tipping the scales of inequity against the defendant such that he is left only with boilerplate defenses to turn to.
For business transactions, competency is a larger issue in the context of a company entering into a contract because of the need to establish agency for the individuals in the relevant hierarchy to act on behalf of the company and will pay as a corporation. Lack of corporate competency opens up the door to the possibility that personal assets are available for judgment.
Proving Competency in Court
The burden of proof typically falls on the party challenging competency. In a contested attempt to appoint a guardian ad litem, for example, the court will evaluate the issue based on "all of the evidence adduced by the parties and all other evidence before it, incompetent to manage his affairs" and the specific facts of the matter. With that said, the "requisite standard of mental capacity to challenge competency [is] whether the alleged incompetent is able to understand and provide for his or her own money, business and estate matters."
By contrast, judicial proceedings to establish competency are far more formal and procedurally complex. A petition to adjudicate incompetency begins with the filing of a petition before a probate court, requesting a full evidentiary hearing. Then, the court must investigate the allegations in the petition, away from the regular course of its business. The court then appoints an attorney general. A psychiatrist is also appointed in an involuntary proceeding to assess the alleged incompetent. Finally, a hearing is held at which the alleged incompetent, the alleged Competent, the government, and the state’s attorney each have their own attorneys. This process is governed by separate statutory provisions (GS 122C-270) for the appointment and conduct of the involuntary guardian ad litem.
For example, in the case of In re Moore, the respondent argued "the trial court made no explicit finding on the issue of capacity." The NC Court of Appeals countered by stating the statutes provide the trial court shall admit a written statement of the alleged incompetent’s wishes respecting his guardianship. Because the respondent did not present any such statement to the trial court, this statement was deemed dispositive. Accordingly, the court affirmed that the trial court had consented to the plenary guardianship of the respondent.
If a party is declared incompetent by the court – or even simply temporarily incompetent – he or she may appeal the decision within 30 days (GS §122C-268.1). If a party temporarily or permanently adjudicated incompetent appeals, the trial court will not appoint a guardian ad litem until the court of appeals’ mandate has been issued, and may stay all proceedings in the trial court.
It is important to note, recently introduced legislation in 2013 diagnostic laboratory testing made significant changes to the way competence is evaluated.
Exceptions and Special Circumstances
An important exception to these general standards of capacity exists for contracts involving minors. While the legal age of majority in most states is 18, obligations that are incurred by minors under state laws are often enforceable against them when they turn 18. Statutory limitations vary among the states (and sometimes federal law), but in general, courts protect minors to the extent that before they turn 18, they can void contracts with all persons, except for merchants and other good faith merchants, and even those contracts can be voided without liability if made for a necessity. When minors contract, parents may guarantee the minors’ obligations, and also may be liable for necessaries (such as food, shelter, clothing and education), but they are not necessarily liable on the contract itself.
Legal standards may also vary for persons who are considered to be insane. In general , contract law holds that a person who is insane and is unable to understand his obligations under the contract, or to act reasonably in relation to it, then lacks capacity to enter into the contract. However, even with highly questionable capacity, unreasonable mental states alone may not necessarily prevent enforcement of the contract. If a party can show that it was materially damages by the other party’s incapacity, then a court may grant relief for breach of contract, such as by award of money damages.
In addition, legal standards may vary among states concerning the competency of managing conservators or guardians. State law outlines the powers and obligations of conservators and guardians. Firms who are personally represented by them should know whether a conservator or guardian has been appointed, what the scope of the conservator’s or guardian’s powers are, and what kind of authority the conservator or guardian has over the person’s estate.