Enforcing guarantees - Independent evidence of mental capacity now as important as independent legal advice.

​A growing number of guarantees are being given by parents in their late 60’s, 70’s and even 80’s ... and later being challenged on the basis of lack of legal capacity. Independent evidence of legal capacity is now as important as independent legal advice.

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By bruce

April 16, 2018
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Legal capacity the new independent legal advice

A growing area of guarantee litigation is based on questions of legal capacity.

Many loans and debt repayment obligations are being guaranteed by parents aged over 65.

The problem is that current evidence indicates that at least 10% of people over 65 years of age are suffering from some degree of dementia or other impairment. That figure rises to 45% for those over age 85.

Example

A person who appeared perfectly well at age 72 when executing a guarantee over their house for their son in laws business loans was diagnosed with dementia at age 75. By age 77 when the guarantee was called on the guarantor was under a guardianship order. Witnesses, including the bankrupt son in law, suggested cognitive slowing began in the guarantors late 60s. Experts agreed that dementia can be a slow developing disease which was “probably” present in it’s earliest states at age 72 when the transaction was entered.

At that point the onus to establish capacity reversed onto the bank.

Onus of proof

While there is a presumption of legal capacity for adults, it is rebuttable.

Once evidence is lead “sufficient to throw a doubt upon” capacity then the onus reverses (see eg Bull v Fulton) and the person seeking to establish capacity at the date of the transaction bears the onus of proving not only that the guarantor had sufficient mental capacity to understand the general “domain” concepts of what a guarantee was, but that they had the capacity to understand and actually understood the specific transactions and all of the potential consequences of entering it (see eg Gibbons v Wright (1954) 91 CLR 423 ).

Moral hazard

In guarantee cases the person has an incentive to prevaricate about whether or not they had capacity when the guarantee is called on.

Who is this relevant to?

Banks and others obtaining guarantees have an obvious interest in obtaining contemporaneous evidence of capacity.

Those advising the guarantors may also wish to protect themselves against later allegations of unsatisfactory professional conduct for not establishing whether or not the person they were advising had capacity to enter a transaction that could cause them significant financial losses. There could also obviously be professional negligence ramifications.

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

Two main scenarios arise.

1. Constructive notice. When there are circumstances giving rise to constructive notice. In Ryan v Dalton in relation to wills, to which the same issues of legal capacity apply, 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.”

Experts have argued that given the 1 in 10 Australians over age 65 with dementia or other similar conditions 65 would be a more appropriate age than 70.

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.

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.


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