WHAT EVERY OKLAHOMA ELDER LAWYER SHOULD KNOW ABOUT
MENTAL CAPACITY FOR BUSINESS TRANSACTIONS
By John David Lackey
December 1, 2003
I. INTRODUCTION
Oklahoma lawyers serving elder clients face a myriad of challenges that do not normally
surface for lawyers who do not serve the elderly. The concept of capacity is especially important,
as it pervades every transaction an elderly client might attempt to make, and an attorney serving
an older client would be well advised to have an understanding of the levels of competency for
different types of transactions, as well as the solutions available when capacity becomes an issue.
In this regard, the terms “capacity” and “competence” shall be used interchangeably.
The mental capacity of an older adult is not always easily determined. This problem can
be made even more difficult by the reluctance or anger created by the suggestion that the client
may need assistance. This problem is even more difficult for the elder lawyer, since the standard
for capacity itself may change, depending on the type of transaction the client may be attempting
to undertake. The standard for capacity in the ability to form contracts or dispose of real or
personal property is different than the standard for determining capacity in testamentary bequests
and donative transfers. Further, the standard for capacity in making medical decisions for the
client is different than either the business transaction sense or the gift sense. There are social
policy concerns that have helped shape and mold the standard of capacity for each of these
situations.
1
This paper does not attempt to address all of these concerns. Rather, this paper will
identify the standards for capacity in making business transactions (contractual competency) in
Oklahoma, and will only briefly touch on other types of transactions. Pertinent Oklahoma case
law and statutory material and commentary from other sources will be considered in order to gain
a more complete understanding of where the law regarding contractual competency in Oklahoma
stands at this time.
II. OKLAHOMA LAW
A. BASIC DEFINITION OF CAPACITY
The official definition of incapacity, found in the Oklahoma Guardian and
Conservatorship Act,1 is referenced by numerous other statutes when referring to incapacity. The
statute holds a person incapable “whose ability to receive and evaluate information effectively or
to make and to communicate responsible decisions is impaired to such an extent that said person
either lacks the capacity to meet essential requirements for his physical health or safety, or is
unable to manage his financial resources.”2 The law holds adults incompetent if they are unable
to manage their finances due to an inability to comprehend information relating to those
decisions due to impairments such as mental disease or physical disability.3
1
OKLA. STAT. tit. 30 § 1-111(12) (2003).
Id.
3
Id.
2
2
B. BUSINESS TRANSACTIONS
1. Contract Law
More applicable to business transactions, Title 15 of the Oklahoma Code, Contracts, §11,
specifically states the legislative intent with regard to capacity in business transactions,4 stating
that persons of unsound mind are incapable of forming binding contracts.5
Another Oklahoma statute that bears on capacity to form contracts is found at 15 Okla.
Stat. § 22, Persons Without Understanding,6 stating that a contract is unenforceable against a
person who lacks the ability to understand the transaction. This section may be important in the
business transaction context, since it does not include the term capacity or competence, and does
not cross reference the definition of incompetence as found in 30 Okla. Stat. § 1-111. As will be
seen, Oklahoma courts have interpreted § 22 as referring to capacity, and not some other
amorphous standard.7
A very similar provision in the Oklahoma Code to Persons Without Understanding is
found in Rescission of Person with Unsound Mind,8 holding that in contracts entered by
incompetent persons, the third parties have the right of rescission without prejudice. This statute
is similar to the language in § 22, but the difference is important, as § 22 makes contracts void as
applied to incompetent persons, while § 23 only makes those contracts voidable.
4
OKLA. STAT. tit. 15 § 11 (2003).
Id.
6
OKLA. STAT. tit. 15 § 22 (2003).
7
See Sooner Federal Savings and Loan Association v. Smoot, 735 P.2d 555 (Okla. 1987).
8
OKLA. STAT. tit. 15 § 23 (2003).
5
3
2. Uniform Commercial Code
The Uniform Commercial Code (UCC) has been adopted by Oklahoma,9 as it has by
every other state. Article 2 of the Code, Sales of Goods, may apply to contracts in which an
incompetent person might enter. While the UCC as it is adopted in Oklahoma makes no explicit
mention of capacity of parties, there are still provisions that bear on capacity to contract.
Specifically, Unconscionable Contract or Clause,10 states that a court may void a contract if it
finds a clause or even the entire contract to be unconscionable. Certainly this would apply to a
contract entered into by an incompetent person. Other UCC provisions that are substantively the
same include Article 2A’s lease clause, Unconscionability,11 which deals with leases of goods
and provides the same rule as for the sale of goods.
3. Property Law
From a property perspective, Oklahoma has established a standard for determining
whether a party has capacity to convey title to real property. Entitled Mental Capacity to
Convey,12 the statute requires that incapacity be judicially determined either through a
guardianship proceeding, a mental-health proceeding, or in some civil action. This is no method
of determining capacity itself, but defers to standards of capacity found in other sections of the
Oklahoma Code, such as the general provision found at 30 Okla. Stat. § 1-111.
9
OKLA. STAT. tit. 12A §§ 1-9-101 et seq. (2003).
OKLA. STAT. tit. 12A § 2-302 (2003).
11
OKLA. STAT. tit. 12A § 2A-108 (2003).
12
OKLA. STAT. tit. 16 § 4.2 (2003).
10
4
C. OTHER LAW
1. Testamentary Law
As opposed to contractual capacity, testamentary capacity is a concept that many people
are aware of. Generally, a person is found competent for testamentary reasons if they know what
they have, know to whom they are giving it, and know why they are giving it to them. In
Oklahoma, the applicable law is found in Title 84, Wills and Succession.13 Regarding capacity,
15 Okla. Stat. §41 provides that even those declared incompetent by a court may still effectively
dispose of their possessions, so long as the will is approved by a court. Importantly, there is no
ability by the court to amend or disapprove of the contents of the will; the requirement is merely
a safeguard. So long as this safeguard is used, the traditional “fruit of one’s bounty”14 test still
applies.
2. Medical Decisions
The test for capacity in medical decision making is found in Title 63 of the Oklahoma
Code. 63 Okla. Stat. § 3131.3, part of the Oklahoma Do-Not-Resuscitate Act, defines incapacity
as the inability “to appreciate the nature and implications of a health care decision, to make an
informed choice regarding the alternatives presented, and to communicate that choice in an
unambiguous manner.”15 This differs from business transactions in that the DNR Act envisions
some individuals who are incapable to make business transactions and have been appointed
13
OKLA. STAT. tit. 84 § 1 et seq. (2003).
Hutchings v. Bailey, 290 P.2d 405 (Okla. 1955).
15
OKLA. STAT. tit. 63 § 3131.3(9) (2003).
14
5
guardians or conservators may still be capable of making a medical choice for themselves,
especially as they pertain to life prolonging procedures.
Another law that relates to capacity is the Oklahoma Rights of the Terminally Ill or
Persistently Unconscious Act, found at 63 Okla. Stat. §§3101 et seq. Included in the Act is the
authorization and guided forms for health care proxies, organ donations, and living wills. Under
the advance directive forms, the subject of capacity is determined by the attending physician. As
an example, in 63 Okla. Stat. § 3101.4, the form for advance directives provides: “If my
attending physician and another physician determine that I am no longer able to make decisions
regarding my medical treatment, I direct my attending physician and other health care providers,
pursuant to the Oklahoma Rights of the Terminally Ill or Persistently Unconscious Act, to
withhold or withdraw treatment from me under the circumstances I have indicated below by my
signature.”16
The standard for capacity in medical decisions is different from that in business
transactions primarily for policy reasons. There is a significant presumption of personal
autonomy with regard to one’s own body, and the state has been reluctant, barring clear evidence
of incapacity, to prevent an individual from making their own choices, especially with regard to
end of life issues such as DNR and Advance Directives.
16
OKLA. STAT. tit. 63 § 3101.4 (2003).
6
III. CASE LAW
A. PRIOR TO INCAPACITY DETERMINATION
There are a number of Oklahoma cases that bear on capacity to perform business
transactions. The total number of cases in this context is relatively slight when compared with a
search of capacity for testamentary transfers. The most likely reason for this disparity may lie in
the fact that many business transactions involve relatively small amounts of money, and may not
be challenged later by a guardian or other conservator. Additionally, testamentary capacity
involves substantially higher emotions for those involved, and at least the perception that a more
significant amount of money is in play.
In Loman v. Paullin,17 the Supreme Court of Oklahoma found that incompetence could
not be founded solely upon the facts that a man was an illiterate, uneducated Indian with no
business skills. The Court held that competence was to be determined by the following question:
“Did he possess sufficient intelligence to understand what he was doing; that is, the effect of his
acts? In this case, that he was parting with the particular property he was disposing of, the
disposition he was making of it, and the person to whom he was conveying it?”18 Certainly this
is not a very objective test for determining a person’s ability to understand and complete business
transactions, especially since the court found that an uneducated illiterate did sufficiently
understand what he was doing when conveying a deed to property.19
17
Loman v. Paullin, 152 P. 73 (Okla. 1915).
Id. at 77.
19
Id. at 77.
18
7
In Harris v. Commerce Trust Co.20, the court held that capacity was to be determined at
the time of the transaction.21 In this case, the court found that despite a prior adjudication of
incompetency, the person in question “was at the time of the transaction in question a person of
unsound mind, but not entirely without understanding.”22 Following this analysis of the entire
record before the court, it was held that the ward did possess the requisite level of awareness in
order to effectively contract.23 The court in this case set aside a prior judicial determination that
the ward was incompetent to enter into contracts and found competency.24 Certainly from this
evidence, it appears that at the very least, early Oklahoma courts were willing to find competency
to contract, especially where the opposing party was held to have proceeded in good faith.
In re Woodward25 continued the trend toward legitimizing business transactions occurring
before a judicial determination of incapacity. In Woodward, an elderly person conveyed a deed
after being forced to leave the family farm and enter a nursing home.26 There was evidence that
the person was not fully aware of the ramifications of the transfer, but the court held: “The test
of capacity to make a deed is that the grantor shall have the ability to understand the nature and
effect of the act in which he is engaged and the business he is transacting. To invalidate a deed it
must appear that the grantor was incapable of comprehending that the effect of the deed, when
made, executed and delivered would be to divest him of the title to the land set forth in the
20
Harris v. Commerce Trust Co., 46 P.2d 368 (Okla. 1935).
Id. at 380.
22
Id.
23
Id.
24
Id.
25
In re Woodward, 549 P.2d 1207 (Okla. 1976).
26
Id. at 1210.
21
8
deed.”27 This test makes it extremely difficult to prove to a court in retrospect that incapacity for
the purpose of that conveyance existed.
B. POST INCAPACITY DETERMINATION
While it would appear from the brief sample of cases presented thus far that Oklahoma
courts lean heavily in the favor of capacity, not all cases have held such transactions valid. In
fact, in a significantly more recent decision, the Supreme Court of Oklahoma held in Sooner
Federal Savings and Loan Association v. Smoot28 that a contract entered into by an incompetent
person was void. The court stated:
The just and correct rule to be applied in determining the competency of a grantor
to execute a deed requires that the test to be applied in such circumstances is that the
grantor shall have the ability to understand the nature and effect of the act in which he is
engaged and the business he is transacting, and that in order to invalidate the deed it must
be shown that the grantor was incapable of comprehending that the effect of the deed
when made, executed, and delivered would be to divest him of the title to the land set
forth in the deed.29
This holding demonstrates the conflict between § 22 and § 23 of Title 15 of the Oklahoma Code,
as discussed above. In this case, both parties in the action admitted incompetence,30 but were
basing their opinion on different statutes,31 and the court was forced to determine which statute
controlled. The court found that § 22 controlled, with the result that the contract was
automatically void.32
27
Id.
Sooner Federal Savings and Loan Association v. Smoot, supra note 7.
29
Id. at 570.
30
Id.
31
Id.
32
Sooner Federal Savings and Loan Association, supra note 7, at 570.
28
9
IV. OUTSIDE SOURCE MATERIAL
A. INTRODUCTION
For purposes of this paper, information not contained within a statute or case arising in
Oklahoma is considered an outside source. As will be seen, some “outside sources” arise from
sources within Oklahoma but are not legal in nature, and serve only as a guide for evaluating
those legal sources found in the Oklahoma Code or common law.
B. AMERICAN BAR ASSOCIATION
Governed by the rules of professional responsibility, Oklahoma lawyers must be aware of
the ethical duties prescribed when dealing with an elderly client. ABA Rule 1.14, Client Under
A Disability,33 adopted by Oklahoma, states in the comments that even elderly clients of
advanced ages may be competent for most transactions, and only need protection for major
transactions. Further, Rule 1.4, Communication,34 also provides special rules for the normal
standard of full disclosure to a client with special mental disabilities that would prevent a
reasoned response.
C. OKLAHOMA BAR ASSOCIATION
Another important source of information is the Oklahoma Senior Citizens Handbook.35
Containing an enormous amount of information for seniors or lawyers serving elderly clients, the
33
OKLA. STAT. tit. 5 Ch. 1, Appx. 3-A, Rule 1.14 (2003).
OKLA. STAT. tit. 5 Ch. 1, Appx. 3-A, Rule 1.4 (2003).
35
Available at <http://www.okbar.org/members/younglawyers/srhandbk.htm> (viewed on 12/1/03).
34
10
senior handbook contains a section on guardianship,36 conservatorship,37 durable powers of
attorney,38 and health care proxies,39 all of which relate directly to the subject of capacity. With
regard to capacity, the handbook states the basic rule regarding capacity; namely that normally a
person has the right to make decisions for themselves so long as they are not incapable due to
some illness or disability, especially when those decisions can not harm other persons.40 Going
further, the handbook also provides:
In order for the court to appoint a guardian, the court must be convinced by
evidence presented at the hearing that you are not capable of making informed decisions
about your own care or the management of your property. A guardian cannot be appointed
just because of your age or because you are physically disabled. For example, a general
guardianship of the person is not appropriate merely because a person is wheelchairbound due to severe arthritis. A limited guardianship may be imposed if a disability
affects the individual's ability in some way to care for himself or manage his property.41
D. RESTATEMENT OF CONTRACTS
The Restatement (Second) of Contracts also has a section on capacity.42 The Restatement
basically holds that incompetent persons are unable to legally contract, and that contracts formed
by incompetent persons may be voidable, but are not necessarily void.43 Further, the Restatement
recognizes that capacity may be different depending upon the type of transaction or contract
entered into.44 Certainly a contract for lawn care services may be given a different standard than
a contract for sale of real property. In the situation where the contract is voidable, evidence of
36
Id.
Id.
38
Id.
39
Id.
40
Id.
41
Id.
42
RESTATEMENT (SECOND) OF CONTRACTS § 12 (1981).
43
Id.
37
11
good faith, misrepresentation, and duress would all tell in an evaluation of the efficacy of the
contract in question.45
E. CORBIN ON CONTRACTS
Yet another source of outside material that bears on capacity to enter business
transactions is the analytical treatise Corbin on Contracts.46 Within the treatise, Chapter 27
specifically deals with the capacity of parties to contract, and states the following: “It is
generally held that incapacity exists when a party does not understand the nature and
consequences of what is happening at the time of the transaction.”47 Further, Corbin goes on to
deal with contracts that have been formed by the incompetent. In this regard, he states
“According to older authority, transactions of the mentally infirm are void, but under the
overwhelming weight of modern authority, the contracts and executed transactions of the
mentally infirm are, with one exception, merely voidable.”48 This outside source once again
affirms the common law approach of the Restatement, and also shows that Oklahoma courts, in
their reluctance to automatically void contracts entered into by the incompetent are following the
current trend in the law.
44
RESTATEMENT (SECOND) OF CONTRACTS § 12 (1981).
Id.
46
Id.
47
CORBIN ON CONTRACTS § 27.10 (2003).
48
Id.
45
12
F. AMERICAN JURISPRUDENCE 2D
American Jurisprudence 2d also weighs in on the capacity of parties, stating in Capacity
to Contract 49 that capacity is the ability to understand the nature of the transaction taking place.
In this respect, it offers substantively the same guidance as is found in the Restatement and
Corbin, but then continues, finding it is the mental state when the contract is executed that is
relevant. A contract may not be voided based on previous incompetence or for alleged
incompetence arising after the execution of the contract, though a party's capacity before or after
execution of an agreement is relevant in determining competency at the time the contract was
executed.50 This reinforcement is important, especially in light of the reticence Oklahoma courts
have shown to retroactively voiding contracts for supposed incompetent individuals.
V. CONCLUSION
There is no doubt from the different statutory provisions and case law that once a person
has been declared incompetent, there is an inability to legally contract. However, the history of
the Oklahoma courts has been to find some measure of competency for transactions that are
challenged after the fact, especially when the other party involved has acted in good faith.
The lesson for elder lawyers to learn from this is simple. If competency becomes an issue
in representing a client, it will be extremely difficult to challenge business transactions the client
enters into until such time as some sort of guardianship proceeding is initiated. While this result
49
50
17A AM. JUR. 2D Contracts § 23 (2003).
Id.
13
may be unfair in some circumstances, it reinforces the concept that until the court determines a
person incompetent, that person is competent.
14