Contracts Entered Into by a Person Who Lacks Mental Capacity

What happens if someone enters into a contract to sell property, but there is evidence that they have some mental capacity issues?  What if the mental capacity issues are serious, like dementia, and they are so significant that they warrant the appointment of a guardian shortly after the contracts are entered into?  Are the contracts valid?  The In the Estate of Montemayor, No. 09-21-00054-CV (Tex. App.–Beaumont [9th Dist.] 2023) case helps to answer these questions.

Facts & Procedural History

Before he died, in 2013, the decedent decided to sell five parcels of real estate to a buyer. However, a month after the decedent and the buyer had agreed to the transaction, the decedent was diagnosed with dementia.  

Guardianship proceedings were commenced and the guardianship proceedings halted the real estate transaction from closing. This resulted in the buyer filing suit against the decedent and his guardians alleging that they failed to perform their contractual obligations for the sale of the properties.

The guardian (and then the executor for the estate) asserted affirmative defenses that the decedent lacked capacity to contract, that he entered into the contracts as a result of undue influence, and that the contracts were unenforceable.

The jury agreed with the buyer and concluded that the decedent and his guardian should have performed under the contracts. This appeal followed.

Mental Capacity to Contract vs. Testamentary Capacity

To help explain mental capacity to contract, it is helpful to consider how this compares to the testamentary capacity to execute a will.  

In Texas, testamentary capacity for creating a valid will typically has a higher standard to prove compared to mental capacity to enter into a contract. The key reason for this difference lies in the nature and significance of the legal documents involved.

For contracts, under Texas law, individuals must possess the mental capacity to fully grasp the nature and implications of the contract they are about to enter into. This entails not only understanding the terms of the contract but also comprehending its legal consequences, as well as appreciating the responsibilities and risks associated with it.

When it comes to creating a valid will in Texas, individuals must meet the standard of testamentary capacity, often referred to as having a “sound mind” or a “disposing mind.” This has several elements, which include:

  1. Understanding the Nature of a Will: The person must understand that they are creating a will, a legal document that dictates how their property and assets will be distributed after their death. They should comprehend that the document they are executing is their last will and testament.
  1. Knowledge of Their Property: The testator (the person making the will) must have a reasonable understanding of their assets and property. This includes knowledge of the extent of their estate, which encompasses various types of assets, such as real estate, bank accounts, investments, and personal belongings.
  1. Understanding the Beneficiaries: The testator should be aware of who the natural beneficiaries of their estate are, such as family members, friends, or charitable organizations. They should have the capacity to decide how their property should be distributed among these beneficiaries.
  1. Free from Undue Influence: The testator must not be unduly influenced or coerced by others while making the will. They should be creating the will voluntarily, free from external pressures or manipulation.

Even for a will, occasional confusion or forgetfulness does not necessarily render a person incapable of making a will, as long as they have the requisite understanding at the time of executing the document.  

Mental Capacity to Contract

Contracts, by their very nature, necessitate mutual understanding and consent from all parties involved.  This is often stated with the phrase, “ready, willing, and able,” which means:

  • Ready: The party has taken all necessary steps to finalize the deal
  • Willing: The party intends to complete the sale
  • Able: The party has the resources and capacity to conclude the deal

The “able” aspect refers to mental capacity.  To enter into a contract one must have the mental capacity to do so.  Mental incapacity is a common law defense to the formation of a contract.  The test is whether the decedent could not have “appreciated the effect of what [he] was doing and understood the nature and consequences of [his] acts and the business [he] was transacting.”  

In this case, if it were to be proven that the decedent did not have the requisite mental capacity, then the contract could be declared void. The jury heard testimony from a number of witnesses.  Several witnesses, including close family and friends of the decedent, testified about observing erratic and inconsistent behavior from him around the time the contract was signed. They shared anecdotes suggesting he might not have fully comprehended the nature or consequences of his actions. Conversely, the buyer’s side presented witnesses who claimed the decedent exhibited lucidity and understanding during their interactions related to the property sale.

Based on this testimony, the jury found that the decedent had the requisite mental capacity to enter into a contract. The appeals court did not overturn the jury’s finding given that it is up to the jury to evaluate the witnesses and evidence to reach a decision, not the appeals court.  

The Takeaway

This case shows that mental capacity to contract can be established even when the contracting party had dementia and even when there is evidence that they were not fully mentally capable. While the person may not have been able to execute a will, given the higher standard, they may have been able to contract.   It also serves as a potent reminder of the importance of comprehensive due diligence, the multifaceted nature of medical diagnoses, and the indispensable role of legal counsel in navigating these types of matters.

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The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.

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