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Understanding Legal Capacity

Written by Domenica Caridi

Edited by Sam Ferraro


With the Australian population ageing and the number of people aged 65 and over more than trebling in the last 50 years, there will be a dramatic increase in the diagnosis of medical conditions that affect cognitive capacity.


One of the trickiest, most subjective things we do as lawyers is assessing whether our clients have the requisite capacity to execute legal documents. We regularly deal with clients who have diminished capacity for one reason or another.


What is Legal Capacity?


Legal capacity, or just capacity as it relates to an individual’s ability to make decisions, is a legal determination, not a medical determination.


While doctors may be called in to determine if a person has “mental capacity”, the term “legal capacity” is generally not a medical term as it involves more than a person’s mental state of mind. In fact, it may include a person’s right or ability to do certain things (such as to enter into a contract or to sue).


Concerns about an individual’s decision-making abilities may trigger the need to consider their legal capacity. Incapacity in one area (e.g. financial management) does not imply capacity in other areas (e.g. parenting). Also, diminished capacity is not always evident.

Assessing legal capacity requires a legal determination. A doctor’s opinion can assist, but it is up to the lawyer or legal advocate to determine capacity. The determination mixes medical, psychological and legal judgments. It must be made by the lawyer (or a judge) based on information gleaned by the lawyer in interactions with the client, from other sources such as family members and social workers, and, if necessary, from medical personnel.

The lawyers at Ferraro & Company are here to help if you have any legal capacity issues to deal with.


What causes the Loss of Legal Capacity?


Mental incapacity can arise from an accident, stroke, dementia, severe learning disability or severe mental health problems. This lack of capacity can be temporary or permanent. If there is any doubt of legal capacity, we may require the person to have a mental capacity assessment completed with a medical doctor.


What is Informed Consent?


All medical and other health care professionals have a duty to obtain informed consent from their patients to the treatment being proposed before that treatment is carried out.

As a patient, you should be given appropriate and sufficient information about the potential risks of a procedure or treatment to allow you to make an informed decision on whether to undergo the procedure or treatment.

A doctor is not expected to warn a patient about every possible risk associated with the medical procedure or treatment. But that doctor does have a duty to warn patients of all material risks associated with a medical procedure or treatment. If a practitioner fails to obtain informed consent prior to performing a procedure and one of the events or complications which should have been discussed with you prior to the procedure taking place arises and causes injury to you, you may have a medical negligence claim.


What are the consequences of not having Legal Capacity?


There is a common law presumption that adults are competent to validly enter transactions or execute documents that require legal capacity, but there is no fixed standard for what constitutes legal capacity.


Not having legal capacity, as it relates to an individual, means that a person cannot contract or enter into any legal arrangement, (verbally or by way of execution of a legal document) until such time as they regain the capacity to do so.


The capacity required depends on the transaction in question and may vary significantly. For example, there are different tests of the capacity required to make a will, appoint an enduring power of attorney, contract a marriage, give a gift, enter a mortgage, settle a trust, enter a plea, consent to medical treatment or to provide instructions. This means that the assessment of cognitive capacity must be finely tuned to the exact transaction at hand.


Capacity when buying, selling or mortgaging a home


This is one of the most common situations where lawyers deal with legal capacity issues. Often with the failing of one’s health, the decision is made to move or withdraw equity from one’s home to pay for treatment or care facilities. If a person does not have capacity, they cannot enter into a mortgage contract or transfer their interest in real property.


Capacity for executing a will, health care directive or power of attorney


As an individual’s health begins to fail, they or their loved one often want to make sure that their financial plans are looked after. This most often involves creating a will, enduring power of attorney and personal directive. Legal capacity is required in these situations. If the person making the will (testator) lacks testamentary capacity at the time that the will is executed, the will is invalid.


The best way to avoid any issues which may arise regarding legal capacity is to have a valid Will or other legal document prepared as soon as possible, while there are no capacity issues.


It does not matter how young or old you are, everyone should have a Will, as we do not know what tomorrow holds.


Capacity for selling a business or any other financial or corporate transaction


If people begin to lose their ability to make decisions, they are often in a situation where any business they have must be sold or otherwise run by someone else. This includes running day to day operations, signing cheques, selling shares or assets of the corporation. Without legal capacity, another individual authorized to sign on behalf of a corporation, must do so.


Assessing Legal Capacity


As lawyers, we are required to ensure that the person who enters into any legal arrangement does so with a full understanding of the consequences of doing so.


The legal test as to whether a person has the capacity to make a will comes from the old English case of Banks –v- Goodfellow (1870) 5 QB 549, in which the deceased person was suffering from delusions; chiefly that his butcher was trying to kill him, even though this butcher had been dead for 11 years.


In coming to its decision, the court determined that for a person to have capacity to make a will there are five things which need to be established:

1. The person making the will must understand what a Will is;

2. They can recall the details of the assets they are disposing of;

3. They can remember those people that they would ordinarily provide for in their Will;

4. They can give consideration to those people who would normally benefit under the Will; and,

5. They are not delusional or suffering from a mental illness at the time they sign their will.

The result in the case was the deceased did have capacity to make the will in question because the delusions he suffered were not about a person who would have normally benefitted under his will (i.e. people don’t usually leave part of their estate to their butcher).

Moving forward to the 21st century and putting this case into perspective, we see the case law has evolved. The legal position now suggests that just because a person suffers from dementia, it will not automatically mean they are unable to make a will.


The level of understanding required by the test varies according to the complexity of the will itself, the testator's assets and the claims on the testator.


What is required if a person lacks Legal Capacity


The law is complex and without legal advice, problems can arise during the capacity assessment process which can mean decisions are made by health and social service providers rather than by the individual or their family. We can help at all stages.

The lawyers at Ferraro & Company are pleased to assist you:

• To draw up a Lasting Power of Attorney before capacity becomes an issue;

• Where the capacity of a relative is called into question and you need to make decisions involving your relative’s care or finances;

• Where a dispute occurs with health or social services on issues surrounding your relative’s ability to make decisions about their care and support; and

• Where a dispute occurs with health or social services about what care and support your relative should be receiving.


We understand that this is a very difficult and emotional issue to deal with if someone has lost capacity and, also, understand that it is difficult for someone who is losing capacity to accept. We work with you to deal with legal capacity issues in a sensitive and caring way. Whether it is setting up an estate plan in advance to avoid potential legal capacity issues or making an application to the court in case it is already lost.


If this is relevant to you or your family, then please call us on (03) 9311 8911 or email us at info@ferraro.com.au.

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Ferraro & Company Pty Ltd

P: (03) 9311 8911

F: (03) 9311 9915

27A Sun Crescent, Sunshine, Victoria, 3020

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