This category covers people suffering from mental disabilities such as mental illness or mental handicaps. It also applies to people who are drunk at the time the contract was made. In general, contracts made with someone in either state will be valid, unless, at the time when the contract is made, that person is incapable of understanding the nature of the transaction and the other party knows this. In such circumstances, the contract is voidable: the party suffering from mental disability or drunkenness can choose whether to terminate it.
Where one party is incapable, through drunkenness or mental disability, of understanding the nature of the transaction, but the other party does not realize this, the courts will ignore the incapacity. In Hart v O’Connor (1985), the Privy Council held that a person of unsound mind was bound by his agreement to sell some land because when the contract was made, the buyer did not realize that the seller had any mental incapacity.
The fact that a person has a poor understanding of the language in which the contract was made and is illiterate does not render them incapable of making a contract. In Barclays Bank v Schwartz (1995), the court held that a person who was illiterate, or did not understand the language of a contract, was aware of this and the obligation was on them to make sure that the contract was explained.
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