Under California law, in order for a contract to be legally enforceable, the party entering into the agreement must have legal capacity. Whether or not someone has capacity to enter into the agreement is a frequent issue that arises in civil litigation and probate disputes. However, challenging the validity of a contract, amendment to a contract, or testamentary instrument can be very challenging.
Presumption of Capacity
While the standard for “capacity” may differ slightly depending upon the type of contract being entered into, the threshold level of mental capacity a person must have is generally very low. Because of this, disputing a contract based on a claim that a party to the contract lacked capacity can be very challenging. California Civil Code Section 1556 states that “all persons are capable of contracting, except minors, persons of unsound mind, and persons deprived of civil rights”. Additionally, California Probate Code Section 810 provides in relevant part that there is a “rebuttable presumption affecting the burden of proof that all persons have the capacity to make decisions and to be responsible for their acts or decisions.”
In order to challenge the validity of a contract based on an argument that a party to the contract lacked capacity requires proof that the party lacked sound mind, and in the context of probate disputes, evidence to defeat the presumption stated in Probate Code Section 810.
Contracts Generally
In the context of general civil contracts, private corporations, the State, and municipal and quasimunicipal corporations are included in the definition of persons that are “capable of contracting” pursuant to California Civil Code Section 1556.
Under California law, there is a legal distinction drawn between persons that are of unsound mind and are “without understanding” and those that are of unsound mind but are “not entirely without understanding”. California Civil Code Section 38 defines of a “person without understanding” as outlined in California Civil Code Section 1556 and 1557 as follows: “a person entirely without understanding has no power to make a contract of any kind, but the person is liable for the reasonable value of things furnished to the person necessary for the support of the person or the person's family.”
However, California Civil Code Section 39 describes that a conveyance or contract of a “person of unsound mind” that is “not entirely without understanding”, that was made before the incapacity of the person was judicially determined may be subject to rescission. Additionally, this code section provides that a rebuttable presumption exists concerning the burden of proof that a person is unsound mind, but “not entirely without understanding” if the person “is substantially unable to manage his or her own financial resources” or to “resist fraud or undue influence” (Cal. Civ. Code § 39).
WILLS, TRUSTS, AND TESTAMENTARY INSTRUMENTS
The standard for determining capacity to execute or make decisions concerning wills or other testamentary instruments is very low. The ability to conduct business is not the legal standard of testamentary capacity. For example, a person does not need to be able to read or write to make a will. (64 Cal. Jur 3d Wills 70-77).
To make a valid will, the testator must have testamentary capacity. Testamentary capacity is a question of the testator's mental state as it specifically relates to the creation of the will. The testator must be of sound mind. A person lacks the capacity to make a decision related to their testamentary instrument unless the person can communicate, and can make decisions and understand and appreciate all of the following items:
• the rights, duties, and responsibilities created by, or impacted by the decision;
• the consequences for the decision maker and, the persons affected by the decision;
• the significant risks, benefits, and reasonable alternatives.
Importantly, testamentary capacity is specific to a period in time. At the time the will is made, the testator must have sufficient mental capacity to understand what they are doing, and must understand the nature and situation of their property and their relationships to the beneficiaries of the testamentary instrument. An individual also is not mentally competent to make a will if, at the time of making the will, the individual suffers from a mental health disorder and has delusions or hallucinations that result in the person devising their property in a way they would not have otherwise done. However, it is important to note that mental capacity is a spectrum. Generally, the capacity required to make a will or other kinds of testamentary instruments require less capacity than that required to enter into other kinds of contracts. (64 Cal. Jur 3d Wills 70-77).
However, not every form of insanity proves that someone lacks mental capacity to make a will. Further, not every degree of unsound mind prevents someone from making or amending a will or testamentary instrument. To be grounds for invalidation of the will or testamentary instrument, the mental abnormality must have had a direct bearing on the will or instrument. Said differently, it must appear that the testator acted in a manner they would not otherwise have acted had it not been for their condition. Further, a person who has a mental or physical disorder may still be capable of executing a will even if they are considered of unsound mind by others, are unable to conduct ordinary business, have filthy personal habits, have physical disabilities, or are old, forgetful, eccentric, or confused at times. (64 Cal. Jur 3d Wills 70-77).
EXAMPLES
Applicable case law provides further guidance as to when a person may be considered to lack capacity in different legal contexts. For example, in In re Rains, the test under California law for whether party had capacity to enter into contract is outlined to be whether the person understood the nature, purpose and effect of what the person did. (C.A.9 (Cal.)2005, 428 F.3d 893).
For example, In Smalley v. Baker, a Plaintiff was found to have had capacity to understand what they were doing, despite that they suffered from manic-depressive psychosis. Smalley v. Baker (App. 1 Dist. 1968) 69 Cal.Rptr. 521, 262 Cal.App.2d 824. By contrast, in Drum v. Bummer, a contract induced by defendants, whereby plaintiff was to make will making defendants sole beneficiaries of plaintiff, was not binding upon plaintiff despite that the plaintiff was never adjudged incompetent. It was found that the plaintiff was not entirely without understanding, but that plaintiff at time of making the contract was suffering from senile dementia and did not actually understand the nature, purposes and effect of the contract. Drum v. Bummer (App. 1946) 77 Cal.App.2d 453, 175 P.2d 879.
However, a diagnosis of senile dementia alone was found not to render someone incapable of executing contracts or otherwise conducting business. Holman v. Stockton Savings & Loan Bank (App. 3 Dist. 1942) 49 Cal.App.2d 500, 122 P.2d 120. Further, in President, etc. of Bowdoin College v. Merritt, it was ruled that mere habits of forgetfulness, whether in young or old, are not sufficient evidence of a want of capacity to make a deed of gift disposing of the grantor's property. (President, etc., of Bowdoin College v. Merritt, 1896, 75 F. 480, appeal dismissed 17 S.Ct. 996, 167 U.S. 745, 42 L.Ed. 1209). Additionally, in Hellman v. Commercial Trust, the Court opined that ordinarily, a finding that one is unable to live without assisted care for themselves or their property due to weakness of mind will not warrant conclusions that specific contract is void for lack of mental capacity. Hellman Commercial Trust & Savings Bank v. Alden (1929) 206 Cal. 592, 275 P. 794.
An example that clearly details the importance of the “timing” of the unsoundness of a person’s mind comes from Moffat v. Lewis, where the trial court properly disregarded testimony of hallucinations, peculiarities, and eccentricities because the grantor was found to be mentally strong in business affairs and in the particular transaction at issue in the case. Moffatt v. Lewis (App. 1932) 123 Cal.App. 307, 11 P.2d 397. Similarly, in Rollins v. Smith, the fact that a deceased was suffering from senile dementia for some months prior to his death and during a period when assignments were executed did not render him incapable of making such assignments. Rollins v. Smith (App. 2 Dist. 1925) 72 Cal.App. 773, 238 P. 171.
As these cases demonstrate, the question of capacity is generally specific to the time and transaction at issue. Further, any person that wants to challenge the validity of a document based on capacity will need strong evidence to support those claims: which can be difficult to discover in many cases.
CONCLUSION
The question of whether someone has capacity to execute a contract – whether that be a testamentary instrument or a typical business contract – is complex and differs on a case to case basis. Depending on the details of the case, different Judges or Juries may come to different conclusions. If you are involved in a situation that deals with capacity to enter into a contract, is important to speak with an attorney quickly to help preserve any substantive rights you may have.
If you have any questions about how this area of law in California may apply to your situation, contact the experienced litigation attorneys at Webb Law Group.
Call or text directly to (559) 431-4888 and (619)399-7700 or send a message via email at Advice@WebbLawGroup.com