Guarantees - legal capacity

Legal capacity to execute a guarantee is the application of the principle of legal capacity applied to the question of entering a contract to guarantee a loan, debt or other transaction.

The relevant general principles are set out at the Field of Expertise page “Legal capacity - Introduction and overview” which should be read with this page.

Legal capacity to provide a guarantee

Legal capacity requires the mental capacity to understand the specific transaction involved when explained, as well as its consequences, and to make decisions which are not influenced by mental health issues.

The question of whether or not a person has legal capacity to understand a guarantee will depend both upon their capacity to understand the general “domain” concept of a guarantee as well as the details of the specific guarantee, including the sum involved, the full nature and current and potential extent of the obligation being guaranteed, the nature of any security provided and the full extent of the consequences at some future time should the guarantee be called on.

Why this issue is gaining prominence: An ageing population

“The demographic reality of an ageing population means that the likelihood of challenges to wills on the ground of testamentary capacity is increasing.” (Justice Kunc Dalton v Ryan at [101]”

The same demographic reality means that other transactions for which legal capacity is required are also now being more regularly challenged.

Given the proportion of guarantees given by parents who are in their 60’s and 70’s this is a major issue for lenders.

Many, if not most, people will eventually develop dementia or suffer some loss of cognitive capacity as they age. Estimates suggest that more than 10% of people over 70 have some level of cognitive slowing, and that up to 45% of people over 85 suffer some degree of cognitive slowing.

Reversed onus to establish capacity

Although there is a presumption of legal capacity the High Court has stated that:

“...where the evidence as a whole is sufficient to throw a doubt upon the testator’s competency, then the court must decide against the validity of the will unless it is satisfied affirmatively that he was of sound mind, memory and understanding when he executed it.” Bull v Fulton.

A person who appeared well at age 70 when giving a guarantee may be diagnosed with dementia by age 77. Witnesses may have different recollections of when cognitive slowing began. Experts can give evidence that dementia can be a slow developing disease which may have been present, although not diagnosed, at age 72 when the transaction was entered. If dementia was present the inference arises that it may have been having some impact on decision making at that time.

On that basis the evidentiary onus may shift. The bank or other person calling on the guarantee may then be obliged to provide evidence from their file establishing that legal capacity was considered and that the person had the relevant legal capacity at the date of the transaction.

Moral hazard

in this field there is a significant moral hazard that the person who provided the guarantee may later seek to argue that they did not have the necessary legal capacity to enter the transaction.

Like independent legal advice

The issue is similar to that of independent legal advice.

“the effort involved in paying attention to questions of capacity at the time instructions [for a will] are taken and [the will is] executed (including, where necessary, obtaining an assessment of the client where it is thought one is called for) pales into insignificance with the expense, delay and anxiety caused by litigation [after the testator’s death]”. (see Dalton v Ryan above)

The best evidence of capacity is an independent contemporaneous assessment of mental capacity in relation to the specific transaction.

At the bottom of this profile are brief details of a number of the experts that Expert Experts represents. Call our office to discuss your requirements and to obtain a recommendation that suits your needs and budget.

Expertise in Action

When should an independent assessment be conducted - actual and constructive notice:

Three main scenarios arise.

1. Constructive notice. When there are circumstances giving rise to constructive notice. In Ryan v Dalton these were identified at [107] as: “anyone: (a) over 70; (b) being cared for by someone; (c) who resides in a nursing home or similar facility; or (d) about whom for any other reason the solicitor might have concern about capacity.”

It is anticipated that this will become an accepted minimum standard of constructive notice.

The other situation of constructive notice is a significant change of a will which benefits a person who may be in a position to unduly influence the testator.

2. Actual notice: When a person presents with a diagnosis of dementia or similar, when a family member or other person raises capacity as an issue, or when it appears clear to the person taking instructions that there is or may be reduced capacity.

3. Notice of a likely challenge: When familial or other circumstances including the nature of the transaction make it more likely that a transaction will eventually be challenged. This may include complex family structures, multiple partners and children, strained family relations, or the preferencing of some family members through gifts or as beneficiaries when it is anticipated this will upset other family members. Other circumstances may include large estates and complex trust structures where there is a high perceived potential reward for successfully challenging the transaction.

Qualifying an appropriate expert

The main difficulty in finding a suitable expert to assess legal capacity is in finding an expert who has both the expertise required to assess mental capacity and the understanding of the above principles.

Expert Experts has addressed this by developing products, processes and training programs to allow appropriately qualified experts to understand the legal issues involved so that they may address all of the issues required to conduct these assessments.

We also work with clients to ensure the briefing process adequately instructs the expert about the particular transaction, so that an assessment can be conducted and an admissible expert report produced in accordance with the expert witness code of conduct which addresses all relevant issues.

Different assessment types

The expert selected and assessment conducted will depend upon the condition of the examinee, the complexity and nature of the transactions being entered into, and where the examination takes place.

Sample Reports

For some fields of expertise we have some sample sections of de-identified reports. Please contact our office if you are interested in a sample.


The overall cost of expert opinion depends on the services required. Some of the key factors that affect the cost of advice include:

  • The need for a view or inspection of a location
  • The quantity of documentary material to be reviewed
  • Whether there are reports of other experts to be reviewed and commented on in detail
  • Whether there is a need for conferences with the expert either in person or by telephone/Skype
Relevant Cases Ryan v Dalton; Estate of Ryan [2017] NSWSC 1007 (31 July 2017)

"Rules of thumb" include testing those over 70, being cared for, in a nursing home, about whom for any other reason the solicitor might have concern about capacity.

Bull v Fulton [1942] HCA 13; (1942) 66 CLR 295

Reversal of evidentiary onus to establish legal capacity after some evidence of incapacity is lead.

Gibbons v Wright [1954] HCA 17; (1954) 91 CLR 423

Classic statement of common law position regarding capacity.

Guthrie v Spence [2009] NSWCA 369

No single common law test of capacity. Different thresholds for powers of attorney, litigation and wills. The issue is the capacity to understand the nature of the transaction when it is explained. (Citing Gibbons v Wright (1954) 91 CLR 423 at 437)

Related Blog Articles
Related Area of Legal Practice Related Area of Insurance

    Profiles of Experts in Legal capacity - guarantees

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