The elderly, the law and accommodation arrangements: some reflections from New Zealand.

• Jurisdiction: Australia
• Author: Atkin, Bill
• Date: 01 January 2003

I INTRODUCTION

This article looks at various aspects of agreements that elderly people in New Zealand may enter into. In particular, it will look at agreements relating to accommodation, but many of the principles are not limited to such agreements. Special legislation on retirement villages is currently before the New Zealand Parliament and it contains some interesting features that will be commented upon. The umbrella legislative framework for rest homes and similar institutions has also recently been updated.

Apart from such legislation, the ordinary law of contract and equity governs arrangements that the elderly enter. One of the initial questions to be explored is that of contractual capacity. What are the consequences of a lack of capacity? Where a person lacks capacity, what provision is there for someone else to make decisions on that person's behalf?

II CAPACITY

(a) The tests for incapacity

A fundamental question to be considered in assessing the effect of an agreement is that of capacity. (2) The issue is not limited to agreements entered into by the elderly but is especially pertinent to them. It breaks down into several other questions--what level of capacity is needed? What is the effect of incapacity? What other factors affecting capacity in the broadest sense can come into play?

Several key New Zealand cases have dealt with these issues. In Scott v Wise, (3) the Court of Appeal accepted that the law should recognise people's differing capacities for different purposes. The High Court Judge had held that the standard for contractual capacity in the circumstances of the case was the same high one as is necessary for the making of a will. The Court of Appeal rejected this, holding that '[t]he law requires in a case such as this that a person entering into it is able to understand the nature of the transaction when it is explained to him. It follows that the capacity required is related to the transaction'. (4) Thus, the capacity needed to buy a loaf of bread is quite different from that required for a sophisticated commercial deal.

On the facts of the case, Mr Scott was aged 71 at the relevant time. Shortly after, he was diagnosed with senile dementia and became a protected person under the Mental Health Act 1969. (5) The transactions in question related to the establishment of a family trust with a sale and mortgage back of farm land. Mr Scott had an illegitimate daughter who had been adopted by strangers but with whom he had later in life developed quite a relationship. The proceedings challenging the family trust were really designed to keep alive the illegitimate daughter's prospects of inheritance. A lot depended on which will was legally valid, a matter that need not delay us here. The High Court Judge held that there was a lack of capacity in these circumstances because 'the transactions were of such tremendous significance that he needed to have drawn to his attention not only those whom he was benefiting but also those whom he was excluding', viz the illegitimate daughter. (6)

The Court of Appeal was less impressed by this reasoning, because the transactions were not particularly unusual and did not denude Mr Scott completely of his property but actually left him with quite a few assets. It thought that a bare reading of the evidence suggested no lack of capacity. However, the existence of Mr Scott's senile dementia could not be ignored. There was no conclusive evidence that he suffered from this at the date of the transactions. If he was supposed to be sane at the time, he would have to have gone down hill far too quickly given his condition several months later. The Court of Appeal accepted medical evidence that in effect read senile dementia back to the earlier point, with the result that there was a lack of capacity at the relevant time even on the lower standard adopted by the Court of Appeal.

(b) Effect of incapacity on third parties

What then is the effect of incapacity on third parties? If a third party has signed an agreement with someone who gives no indication of a disability and who may well have had legal advice, is the third party left high and dry? For some time in New Zealand, it was thought that the party lacking capacity could avoid the contract so long as the contract was objectively unfair. So, in Archer v Cutler (7) there was held to be unfairness because the price an elderly woman suffering from senile dementia received for the sale of some land was significantly below its true value. Further, she had not received independent legal advice nor she did have a complete grasp of the details of the transaction.

The approach in Archer v Cutler was effectively struck down by the Privy Council in O'Connor v Hart. (8) Mr O'Connor, a man in his 80s, was trustee of farm land that had been subject to a testamentary settlement on the death of his father back in 1911. On advice from the solicitors who had long looked after the trust, the property was eventually sold in 1977 to Mr Hart. There was no obvious sign that Mr O'Connor was mentally incapable, but a finding to this effect was made. The Privy Council held that the earlier New Zealand view was wrong:

Their Lordships have not been referred to any authority that a Court of equity would restrain a suit at law where there was no victimisation, no taking advantage of another's weakness, and the sole allegation was contractual imbalance with no undertones of constructive fraud. It seems to their Lordships quite illogical to suppose that the Courts of common law would have held that a person of unsound mind, whose affliction was not apparent, was nevertheless free of his bargain if a contractual imbalance could be demonstrated which would have been of no avail to him in equity. Nor do their Lordships see a sufficient foundation in the authorities brought to their attention to support any such proposition. (9) It was held that the person with incapacity could avoid a contract such as this only if the other party knew of the incapacity or it was a case of equitable fraud. Neither of these conditions existed on the facts.

(c) Equitable fraud

Examples of equitable fraud are where there has been undue influence or an unconscionable bargain. In Scott v Wise (discussed above), (10) attempts to amend pleadings to include such pleas were refused because no evidence was presented to justify the claims. But unconscionable bargain was a secondary basis for refusing specific performance in Archer v Cutler, (11) even though the first basis no longer survives O'Connor v Hart. McMullin J set out the relevant conclusions as follows:

While I accept that the plaintiff had no knowledge of the defendant's unsoundness of mind and has not been shown to have set out to take her at a disadvantage, he was aware of her advanced years and some manifestations of her eccentricity. I hold that these matters, together with the defendant's lack of advice and her disadvantaged bargaining position brought about by her unsoundness of mind are such as to create such an inequality between the contracting parties that the bargain must be regarded as unconscionable particularly when the sale was made at a significant undervalue. The difficulty with this analysis is that it echoes very closely the set of factors that led to the conclusion that the agreement was unfair (now rendered illegitimate by O'Connor v Hart). Whether the level of inequality and exploitation was really sufficient to constitute equitable fraud is doubtful but this is not the place to pursue further the precise elements of equitable defences. (12)

(d) The balance has shifted

The law just discussed attempts to draw a balance between the position of the elderly vulnerable contracting party and the third party contractor. For a while the balance was tipped in the elderly person's favour, because the Court could examine the substantive impact of an agreement on the elderly person. That however cut across the traditional principles of freedom of contract and caveat emptor, and prejudiced the innocent third party.

The balance has since been struck in favour of the third party at the expense of the vulnerable person. It could well be argued that this is appropriate in the interests of certainty. Only if the third party is in some way to blame, for example has exploited the other person's vulnerability, can the agreement be challenged. Yet, this leaves the elderly person open to being ripped off. While a grossly unfair agreement may point to some improper advantage, it will not necessarily do so. The innocent third party might well walk away with a real bargain.

(e) Capacity and accommodation providers

How does all this relate to the provision of accommodation for the elderly? Providers of rest homes, retirement villages, and other forms of residence will have to conduct their affairs in the light of specific legislation to be discussed later. In addition, the ordinary rules of contract, in so far as they are not modified by legislation, will apply to agreements made with the elderly. Any provider who deals with an elderly person who ostensibly looks frail should be aware that, even under O'Connor v Hart, a contract may be set aside, because a Court might well determine that there was knowledge of incapacity.

Most providers are likely to have well scrutinised and standard arrangements that stand the test of time. Nevertheless, they would surely be wise to check out whether there is someone appointed to act on behalf of the elderly person (discussed in the next section), or otherwise should insist that the elderly person has independent legal advice.

If the elderly person is not so obviously frail, experience suggests that that person may nevertheless lack contractual capacity. Although the law is softer on a third party without knowledge of such incapacity, a provider of accommodation for the elderly should be skilled and professional enough not to leap too readily to conclusions and should...