II. A Chain of Argument

One might expect the starting point to be that the mere interposition of an agent between the incapax person and the third party would not produce a different result from that which the law has settled upon where the incapax person makes a contract directly with the third party. Generally speaking, the law of agency attempts to ensure that people are not in a different position by deploying agents than if they undertook the relevant task themselves: qui facit per alium, facit per se.Footnote ⁶ Equally, the third party who chooses to deal with an agent rather than directly with the principal takes some risks, and one would not expect those to be less merely because the principal had a mental disability. In particular, parties who choose to deal solely with an agent assume the risk as to whether the agent is empowered to bind the principal; the agent will usually be taken to warrant his or her authority to bind the principal, but the principal will be bound only if the agent has actual or apparent authority to bind the principal. The point of this in the present context is that third parties cannot get very far simply by pleading their ignorance of the principal's mental incapacity because they dealt with an agent. The agent's authority must still be established as with any contract purportedly made with an absent principal.

With those preliminary observations, one can turn to key aspects of the common law dealing with contracts made directly by incapax persons. Two things in particular should be noted.

First, the common law, including in this context the jurisprudence of equity, accepted that protection should be offered to persons suffering from degrees and types of mental incapacity well short of profound and complete insanity.Footnote ⁷ Indeed, to trigger the law's concern, it is sufficient that a party by reason of mental limitations is not capable of understanding the substance of the particular transaction being entered into. Dicta of the High Court of Australia in Gibbons v Wright,Footnote ⁸ replicating in part a dictum in Ball v Mannin,Footnote ⁹ are widely cited in this respect:

It will be seen, nonetheless, that there may well be legal significance in a person's being profoundly insane.

Secondly, at least in cases short of profound insanity, a contract made with an incapax person cannot be avoided where the other party neither knew nor ought to have known of the incapacity.Footnote ¹⁰ This latter principle is commonly labelled the Imperial Loan principle, after Imperial Loan Co. v Stone,Footnote ¹¹ a case followed by the Privy Council in Hart v O'Connor.Footnote ¹² Capacity to contract is, therefore, judged objectively, in the same way that intention to contract, and the content of the terms of the contract, are judged objectively.Footnote ¹³ Again, there are penumbral uncertainties. In particular, it is not clear what the position is where the other party deals with the incapax person by letter or remote communication, without ever having met that person. Does the mere fact that the other party might (not would) have observed the incapacity had he or she dealt face to face make that party a person who ought to have known of the incapacity? Where there is no doubt that the incapacity would have been apparent in a face-to-face transaction, should the law allow a party to be better off by having dealt by post, email, or the internet? One might expect the answer to that latter question to be “no”, although reported decisions on these points are scant.

Integrating the foregoing general propositions of the law of contract with those from the law of agency raises other questions. However, these are best explored by developing a chain of argument, as follows:

1. (1) If the third party asserting a contract has had no dealings whatsoever with the incapax principal, but only with the agent, then that party's position is dependent, in the usual way, on the agent's state of actual authority. An agent's actual authority is in turn dependent on a grant of authority from the principal.

2. (2) This then raises the question of whether a person can grant, or be deemed to grant, actual authority to an agent when that person by reason of mental impairment is unable to appreciate the substance of the delegation being made. If, as the Imperial Loan principle provides, a contract with an incapax person is prima facie valid, then at least where there is a contract of agency, that contract ought to be effective to confer actual authority where the agent did not know, or had no reason to know, of the incapacity.Footnote ¹⁴

3. (3) It would remain conceivable that, if there really were a rule that only a capax person can confer authority, the contract might have efficacy only to create a binding promise without in fact conferring authority. Certainly, the conferral of authority and contracting are separate concepts, rather like the passing of title to property and contracting. One can have the one without the other. It is established, too, that a principal can terminate actual authority even when to do so puts the principal in breach of contract.Footnote ¹⁵ The Imperial Loan principle, however, is not just a principle of contract formation. It extends to the execution of relevant promises, such as the conveyance of property interests.Footnote ¹⁶ In these circumstances, there would need to be good reasons for leaving an incapax person exposed to contract damages for failing to confer the promised authority, rather than giving the contract its full efficacy, resulting in the incapax party not being in breach but the agent empowered. It is not easy to conceive of compelling reasons. It is true that in some cases the conferral of authority might be open-ended and an incapax person might not be then equipped to put the brakes on the agent's activities. But agents can equally be appointed for a single transaction, and it would seem wrong to base a rule on a statistically doubtful generalisation.

4. (4) As for the conferral of authority where there is no contract of appointment, most of the reasons for the law's taking an objective approach to determining whether parties are willing to contract still apply. In the generality of cases, it is in the interests of both principals and agents that it not be necessary to establish that the principal had an actual intention to delegate. So, it would often be contrary to a principal's interests if a third party could go behind appearances of a delegation to an agent and assert that there was no contract because of a lack of actual intent to delegate and that it is now too late to ratify.Footnote ¹⁷ Plainly, if an agent were not able to rely on a manifestation of a delegation, the chances of the agent's being exposed to liability to the third party for breach of warranty of authority would be greatly magnified. It is not surprising, therefore, that, in his classic formulation of the concepts of actual and apparent authority in Freeman & Lockyer v Buckhurst Park Properties Ltd.,Footnote ¹⁸ Diplock L.J. treated their ascertainment as governed by the same objective principles as applied to contracting. Elsewhere, the conferral of authority is said to turn on “a unilateral manifestation of will” by the principal.Footnote ¹⁹ The word “manifestation” is synonymous with appearances, rather than actuality.

5. (5) It follows that an incapax person can manifest an intention to appoint an agent and that, so long as the agent does not know or has no reason to know of the incapacity (a test which may not protect agents who deal remotely with principals in circumstances where the incapacity would have been apparent had they dealt face to face), the conferral of authority would prima facie be valid. It seems likely, however, that actual authority would terminate were the agent to become aware of the incapacity, without the principal, or someone on his or her behalf, having to take steps to revoke the authority. It would not necessarily follow that, where there was a contract of agency, the contract would cease to exist in its totality, even though its main incident had come to an end.Footnote ²⁰

6. (6) Where the third party has had some interactions with the principal, the prospect of apparent authority arises. If an incapax person can make a contract, or at least manifest an intention to do so, as Imperial Loan provides, then such a person ought to be able to make a representation, including one as to the appointment of an agent. In other words, it would be peculiar if a promisee could rely on the incapax principal's communications if they involve an offer or an acceptance, but not if they indicate only that an agent will negotiate the contract for the principal.

It is necessary now to test this line of argument against the legal sources.

III. Daily Telegraph Newspaper Co. Ltd. v McLaughlin

Secondary sources, such as the important Victorian monograph, Pope's Treatise on the Law and Practice of Lunacy,Footnote ²¹ and leading cases on direct contracting, such as Molton v Camroux Footnote ²² and Gibbons v Wright,Footnote ²³ tell us that the law of mental incapacity has had a topsy-turvy history. Some very early authorities are said to have afforded absolute protection to the incapable, but other early sources, notably Chief Justice Coke, concluded that “no man should be allowed to stultify himself, or shew that he was non compos mentis, or of non-sane memory”.Footnote ²⁴ There is some risk that this hearsay material paints an unduly duplicitous view of the early law, but one is left to conclude that there is not much to inhibit a modern court from adopting the schema outlined above, or something rather like it. In essence, this regime adopts a middle course between the interests of incapax parties and those of innocent third parties. It adapts the principles adopted for direct contracting by Molton, which principles were cemented in Imperial Loan, and then re-pointed in Hart v O'Connor.

There is in fact only one modern authority of import on the effect of mental incapacity on contracts purportedly made by an agent for an incapax principal, and it is largely consistent with the above chain of argument. This is the decision of the High Court of Australia in Daily Telegraph Newspaper Co. Ltd. v McLaughlin.Footnote ²⁵ Even then, for reasons which will be addressed shortly, the Court did not have to rule on many of the key issues. Griffith C.J., however, delivered a most erudite and careful joint judgment. The case went on appeal to the Privy Council,Footnote ²⁶ but that Court simply affirmed the reasoning below.

The agency at issue in McLaughlin took the form of a purported power of attorney. The power was executed by a husband in favour of his wife. The document was found to have been thrust in front of him by his 17-year-old son. The boy was innocently doing his mother's bidding, in a period when the father lacked lucidity. The wife, perceiving her husband's failing mental health, apparently hoped to avoid having to engage formal committal processes by being appointed attorney. One surmises that she was prepared to chance that the document would never be challenged. There having been a challenge, she had no prospect of pleading ignorance of her husband's condition, and the relevant third parties (companies in which the wife had purported to transfer shares owned by the husband), not having had any dealings with the husband, could not be in any better position than she. A plea of apparent authority, in other words, was out of the question.

The Court held that, in the particular circumstances of the case, the power of attorney was a nullity, as consequentially were the share transfers. Indeed, it concluded that the facts were strong enough to trigger the non est factum doctrine. In places in his judgment, Griffith C.J. appears to have been willing to leave open the possibility that the non est factum doctrine did not lead to automatic voidness against an innocent party,Footnote ²⁷ but he also indicated that the cases supported the opposite conclusion.Footnote ²⁸ In any event, it is crucial to an appreciation of the case that the Court concluded that the husband did not even realise that he was signing a document of any legal import. If the non est factum doctrine were available in exceptional circumstances to the sane, so too it must be available to the insane. The Chief Justice made this point in the following way:

It is for this reason that, in the discussion in the preceding part of this article, it was signalled that cases of profound insanity may be different from those where lesser incapacity is present. Certainly, Griffith C.J. thought so. And it is difficult to contradict his reasoning in the just-cited quotation.Footnote ³⁰ Judges, however, have not found it easy to formulate the tests by which the non est factum doctrine is triggered,Footnote ³¹ and plainly the doctrine would be capable of disturbing a great number of transactions if its application were not tightly constrained. The courts have generally been very conscious of this,Footnote ³² as will be seen from the subsequent decision of the High Court of Australia in Gibbons v Wright.Footnote ³³

Given that the potential role for the non est factum doctrine in the law of insanity is not confined to cases involving agents, it is perhaps surprising that it attracted little attention in the judgments in Imperial Loan Co. v Stone Footnote ³⁴ and Hart v O'Connor.Footnote ³⁵ However, the Daily Telegraph case was cited by the Privy Council in Hart v O'Connor without any criticism, and the advice delivered by Lord Brightman is couched in a way that is consistent with a residual role for the doctrine. In particular, note the reference to ostensible sanity in the following passage from Lord Brightman's judgment:

Lord Brightman extracted this ratio decidendi from a line of cases that also refers to the need for ostensible sanity before mere voidability becomes the accepted consequence of the dealing. It is further apparent that the pre-condition of ostensible sanity is objective because the cases go on to say that notwithstanding ostensible sanity a party will not be able to enforce a contract if he or she in fact knows that the promisor is suffering from a sufficiently debilitating incapacity. In other words, there are two elements to the test – ostensible sanity on the part of the promisor and lack of knowledge of mental deficiency on the part of the promisee. Where insanity is profound, promisees will not usually be able to establish the first element and, except where they deal remotely, they are also likely to have difficulty with the second.Footnote ³⁷

In that part of his judgment that precedes his conclusion that the case before him is one of non est factum, Griffith C.J. discussed at length the position where the principal's mental incapacity is less profound. He brings out the two elements of ostensible sanity and the third party's state of knowledge in a dictum that was cited with approval in Hart v O'Connor:

The Chief Justice goes on to indicate that, non est factum apart, it is probable that the appointment of an agent by an incapax person is effective if the former is unaware of the incapacity of the latter.Footnote ⁴⁰ It would be fair to say, however, that the judge ultimately sat on the fence on the issues. Hence, he adverted, tentatively, to the notion that powers of attorney “may, perhaps, stand on a different footing”.Footnote ⁴¹ At another point, he said that, in view of the very old cases, there is difficulty in extending the Imperial Loan principle to the case of powers of attorney or “any other appointment of an agent”.Footnote ⁴² There then followed, nonetheless, the following passage:

There is also a later passage that suggests that the Chief Justice thought the issue of the validity of a power of attorney should be determined by the general principles applicable to the validity of powers given by a sane person:

Griffith C.J. further pointed out that two of the older cases said to establish the automatic voidness of the appointment of an agent by a lunatic, Stead v Thornton and Tarbuck v Bispham,Footnote ⁴⁵ were cases where the third party was aware of the incapacity.Footnote ⁴⁶

Finally, one should address a dictum of Lord Cranworth L.C. in Elliot v Ince Footnote ⁴⁷ to which Griffith C.J. adverted, in which the Lord Chancellor suggested that the voidability doctrine of Molton v Camroux might not apply to cases where the transaction did not involve consideration. In McLaughlin, the Chief Justice observed that an appointment of an attorney is often gratuitous and that that might explain why a power of attorney granted by an incapax person had been said to be void.Footnote ⁴⁸ It would be wrong, however, to treat the appointment of an unremunerated agent by an incapax person as if it were a gift. The situations are not analogous. Imperial Loan may not be applicable to gift transactions, but in such cases the worst prospect the donee faces is a surrender of the subject matter of the gift. Defences such as change of position are likely to be available to the donee. Gratuitous agents, in contrast, are more likely to be donors of their labour than recipients of any largesse, and could well have exposed themselves to liability on a warranty of authority. They should be treated in the same way as those acting for reward.Footnote ⁴⁹

IV. Gibbons v Wright

Gibbons v Wright Footnote ⁵⁰ is a case that did not involve agents. It does, however, contain some obiter dicta on the subject. These unfortunately involve a misinterpretation of the McLaughlin case. The principal focus of the case was on the effect of incapacity on a contract negotiated directly between the parties, and the Court's conclusion on that score is that it makes the contract voidable only.

One can start by observing that the joint judgment of Dixon C.J., Kitto, and Taylor JJ. took a narrow approach to the use of the non est factum doctrine in the context of mental incapacity. The Court drew a strong distinction between cases where the incapax party was unable to understand the nature of the document signed, with cases where that party was unaware that he or she was signing a document at all, or at least a document of significance. In the latter category, the Court instanced an incapax party signing a contract “in a frenzy, not even being aware what were the motions his hand was performing”.Footnote ⁵¹ The signature of a somnambulist would be the same. In such cases, the signer's “mind did not go with his pen”.Footnote ⁵² But very heavy intoxication would not qualify. In that respect, the Court reinterpreted Gore v Gibson,Footnote ⁵³ where the promisor was “in such a state of drunkenness that he did not know what he was doing”, as making the contract only voidable, and not void, even though the judgments in Gore used the word “void”. The Court's licence for doing that was Matthews v Baxter.Footnote ⁵⁴ It is not, however, clear that Matthews went as far as the Court in Gibbons states.

One cannot tell from reading the judgment in Gibbons whether the Court considered that in McLaughlin the earlier panel of the same Court had taken the non est factum doctrine too far because, rather than tackling that case head on, the Court concluded that the case turned on the presence of an agent in the fact pattern. First, the Court said that the ratio of McLaughlin was confined to powers of attorney. These documents were said to be governed by special rules, including automatic invalidity where the donor of the power is mentally incapable.Footnote ⁵⁵ Secondly, the Court thought that in fact there might be a “general rule of law that a lunatic cannot appoint an agent”, citing a number of older cases. The Court added that, insofar as dicta in McLaughlin did support a view that all deeds executed by an incapax party were void, rather than merely voidable, the dicta were wrong.

It is respectfully suggested that the Court in Gibbons was wrong on all these points. The ratio of McLaughlin turns on the non est factum doctrine, not on rules of agency law. As we have seen, Griffith C.J. indicated a preference for there not being automatic invalidity of appointment of agents by incapax parties, whether or not the appointment be made by power of attorney. And he certainly did not take the view that all deeds executed by incapax persons are void.

The reasoning in Gibbons in relation to powers of attorney was particularly unconvincing. The Court suggested, admittedly tentatively, that, if powers of attorney signed by an incapax person were only voidable, the position of outside parties might turn on the attorney's state of knowledge of the incapacity, not the outside party's.Footnote ⁵⁶ This is true, but the position could only be worse for outside parties if automatic voidness applied.Footnote ⁵⁷ If there were a special rule for powers of attorney, it might be better justified on the open-ended authority that such documents tend to confer. However, the most detailed of the older textbook treatments of powers of attorney, MacKenzie, The Law of Powers of Attorney and Proxies,Footnote ⁵⁸ confidently asserted that there was no such special rule:

The cases cited in Gibbons for the inability of an incapax person to appoint an agent also do not support the Court's view. None of the five cases referred to by the Court was analysed by it. Something, however, should be said about each of them here.

In relation to the first two, Tarbuck v Bispham Footnote ⁵⁹ and Stead v Thornton,Footnote ⁶⁰ in each case the relevant agent had actual knowledge of the principal's incapacity, as Griffith C.J. observed in McLaughlin, and so fell within the proviso to the Imperial Loan principle. Not only had the agent in Stead v Thornton been aware of his principal's incapacity for some time (the principal was his brother), but the facts were not concerned with action taken by the agent in the past but rather with an assertion that the agency was continuing at the date of the hearing in order that the agent might refuse to acknowledge the third party's rights. This was an untenable assertion. And, in Tarbuck v Bispham, it appears that at the relevant time the incapax principal had been formally declared insane (he had been the subject of “a commission of lunacy”), which may have borne on the reasoning in the case.

Gibbons's third authority was Elliot v Ince.Footnote ⁶¹ We have already seen that this case turned on the relevant transaction being a gift not a contract. A power of attorney was involved but neither the reported argument of counsel nor the judgment of Lord Cranworth made anything of the agency.Footnote ⁶²

The fourth case was Drew v Nunn.Footnote ⁶³ This case was concerned with supervening incapacity and Brett L.J. did seem to think that insanity would automatically terminate an agent's actual authority.Footnote ⁶⁴ However, the point was certainly obiter, because the judge held that the agent in question still had apparent authority, on the basis of a holding out made by the principal while he remained mentally sound.Footnote ⁶⁵ Moreover, the judge had already remarked that the defendant's “insanity was such as to be apparent to any one with whom he might attempt to enter into a contract.” The agent, his wife, was plainly fully aware of his disability. These facts may have coloured his dictum. Then, in a dictum later in his judgment, Brett L.J. stated:Footnote ⁶⁶ “As between the defendant and his wife, the agency expired upon his becoming to her knowledge insane” (emphasis added). The judgment, therefore, is equivocal on the issue. Bramwell L.J.'s judgment is even more equivocal, generally taking a very narrow view of when insanity will annul an agent's authority, and favouring the ability of an incapax person to continue to be able to make representations to third parties. Cotton L.J. did not give a judgment, but rather asked Brett L.J. to report his views. Brett L.J. duly reported that Cotton L.J. did not wish to decide whether insanity automatically terminated the wife's authority.

The relevance of the last case, Yonge v Toynbee,Footnote ⁶⁷ is even more tenuous. The case did not involve a contract, rather the authority of a firm of solicitors to defend litigation. The Court of Appeal held that the firm whose client, unknown to it, had lost mental capacity was personally liable for the costs of the plaintiff wasted in responding to the pleadings filed on behalf of the incapax defendant. The point that the firm's actual authority automatically terminated upon incapacity appears not to have been argued, but rather assumed by all parties. The focus of the case was on the basis of the firm's liability for the costs. Rather strangely, the Court seemed to think that that liability rested on an implied warranty of authority. It is difficult to see that there was a warranty here, since what was the consideration sought from the other party, who rather was suing the defendant? Arguably, the solicitor's liability, if any, should in such circumstances rest on some other principle.Footnote ⁶⁸

V. Modern Secondary Sources

There have not been any significant cases since Gibbons v Wright on the topic of mental incapacity and the appointment of agents. However, it seems reasonable to speculate that the dicta in that case have influenced later academic views.Footnote ⁶⁹ The criticisms in this article of those dicta do not detract from the fact that the case remains one of the more important Commonwealth authorities on mental incapacity in direct contracting. The style of the judgment suggests that the revered Dixon C.J. played a major part in its writing. It is not surprising, therefore, that the dicta in it have been accepted at face value.

Professor Hudson, writing in 1959, argued for the inability of an incapax person to confer authority on an agent, citing Gibbons and McLaughlin.Footnote ⁷⁰ In respect of the latter case, it must respectfully be maintained, of course, that he made the same mistake as the Court in Gibbons. In the article, and in subsequent writing,Footnote ⁷¹ Professor Hudson betrayed a dislike of the Imperial Loan principle, preferring a rule that gives more protection to the incapax party. The subsequent affirmation of the Imperial Loan principle in Hart v O'Connor makes it unlikely, however, that English courts, at least, will reopen the principle. This then puts pressure on finding a rationale for finding that the principle, all the same, does not operate where the incapax party acts through an agent. None is provided.

When the 13th edition of Bowstead on Agency appeared in 1968,Footnote ⁷² the authors took the view that incapacity precluded the grant of authority, again in reliance on McLaughlin and Gibbons, and referring to Professor Hudson's article. There is, however, a sense of hesitancy throughout the paragraph. Editions of the work from the first, in 1896, through to and including the 12th in 1959 had taken the opposite view (allowing for a touch of circularity), as follows:

Halsbury's Laws of England seems also to have lost its confidence that the Imperial Loan principle applies to contracts made through agents.Footnote ⁷⁴ The first three editions accepted that the principle applied in such circumstances, but subsequent editions have fallen silent on the topic.

The US Restatement of the Law 3d, Agency does not address the issues in relation to an initial grant of authority, but does take the stance that supervening incapacity does not take effect until the agent, or the third party in relation to a particular transaction, has “notice” of a loss of capacity.Footnote ⁷⁵ This view is in sympathy with the thesis of this article. It might be thought, nonetheless, that the Restatement's formulation of principle is unnecessarily complex, by providing that incapacity terminates actual authority but that that termination is not fully effective until notice arises. Why does actual authority just not continue? The explanation may be that the Reporter wanted to deal with the situation where the third party knows of the incapacity but the agent does not. But this is an issue that can arise with fully competent principals where the third party learns of the principal's revocation of authority before the agent does.Footnote ⁷⁶