Mental Capacity and Conditional Fee Agreements: Problem solved
A contract between a patient lacking capacity and his solicitor is generally a voidable, not void contract, and while it is sensible to ensure that both the claimant/patient and the litigation friend sign any conditional fee agreement, making them jointly and severally liable under the agreement, it is not fatal to the agreement if only the claimant/patient has signed.
Any challenge by a paying party that the conditional fee agreement is void as between solicitor and client should fail. Of course if the contact is void then due to the indemnity principle there is no liability on the paying party for costs.
In the case of contracts other than for necessaries, the general rule is that a person who is lacking mental capacity is bound by his contract unless he can show both that the lack of capacity meant that he did not understand what he was doing and that the other party was aware of the lack of capacity.
If the patient can satisfy these two conditions, then the contract is voidable at his option.
This rule was laid down in
Imperial Loan Co Ltd v Stone (1892) 1 QB 599 where the court said:
“When a person enters into a contract and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executry or executed, as if he had been sane when he made it, unless he can prove further that the person with whom contacted knew him to be so insane as not to be capable of understanding what he was about”.
“The validity of a contract entered into by a lunatic who is ostensibly same is to be judged by the same standards as a contract by a person of a sound mind, and is not voidable by the lunatic or his representatives by reason of unfairness unless such unfairness amounts to equitable fraud which would have enabled the complaining party to void the contract even if he had been sane.
This view was confirmed more recently in
Special Trustees for Great Ormond street v Ruskin and Others, High Court, 19 April 2000.
Assuming that the solicitor entering into the conditional fee agreement was aware of the client’s lack of capacity, then the contract is potentially voidable, but not void.
However, even assuming that the paying party can establish that the claimant lacked capacity to enter into a conditional fee agreement, the contract is still binding upon the claimant/patient but potentially voidable at his or her election.
This paying party has no standing to interfere with that legal position and has no power to argue that the claimant/patient should be required to void the contract.
In Forde v Birmingham City Council  1 WLR 2732
the court was considering the status of a potentially voidable conditional fee agreement retainer where undue influence was alleged.
There, the court said:
“But an agreement obtained by the exercise of undue influence is voidable, not void. It remains in effect unless the person influenced seeks to set aside the contract and the court allows her to do so; such relief may be given on terms, eg as to payment of a reasonable sum for services actually rendered:
Johnson v EBS Pensioner Trustees Ltd  Lloyds Rep PN 309, paragraphs 76-80 and O’Sullivan v Management Agency and Music Ltd  QB 429. There is no evidence that Miss Forde had done anything to avoid CFA2. On the contrary she has consented to these proceedings being brought by McGrath on her behalf. What the council cannot do is to purport to avoid CFA2, to which it is not a party, on her behalf and in defiance of her wishes; nor is the court required to proceed on the basis that she has avoided it when she has not”.
Thus a conditional fee agreement made with a patient, and which has not been voided by the patient, remains enforceable and thus the paying party is bound to meet any costs order within the indemnity principle and has no standing to challenge the validity of the conditional fee agreement.
Contract for necessaries
There is a strong argument that a conditional fee agreement to pursue a lawsuit is a contract for necessaries; such contracts have always been treated differently.
Section 7 of the Mental Capacity Act 2005 provides that if necessary goods or services are supplied to a person who lacks capacity to contract for them that person must nevertheless pay a reasonable price for them.
“Necessary” means suitable to a person’s condition in life and actual requirements at the time when the goods or services are supplied. The Mental Capacity Act 2005 provides an explanation of lack of capacity which is very much the same as that previously applied by the courts.
A person who lacks mental capacity at the time of entering into a contract, thus rendering it potentially voidable, may nevertheless be bound by it if he ratifies it after recovery, or during an interval where he has the capacity to ratify the contract.
Ratification can be express or implied by conduct, including by acquiescence or inactivity, and there is an overlap with the doctrine of estoppel. Clearly a client who continues to give a solicitor instructions is impliedly, if not expressly, ratifying the contract, which in personal injury wok will almost invariably be a conditional fee agreement.
Ratification is different from novation.
Thus the action of acting for a patient under a conditional fee agreement should not of itself cause any difficulties over and above those involved anyway in such cases.
I am grateful to Andrew Hogan, Costs Barrister, for much of the material relating to capacity
the issue was whether CPR 21.10 applies where it was not known that the claimant lacked capacity and a case was settled at the door of the court.
CPR 21.10 provides in uncompromising terms that no settlement of any kind involving a protected party is valid without the approval of the court.
Here the claimant’s personal injury claim was settled on the day of trial and the settlement was mentioned to the judge and a consent order approved, but sometime later it emerged that the claimant had been a patient within the meaning of the Mental Health Act 1983 and, now acting with a Litigation Friend, she issued negligence proceedings against her former solicitors and counsel.
She also issued an application for a declaration that she had not had capacity to enter into the original purported settlement. Thus the court had to consider whether CPR 21.10 applied where the claimant had brought a claim in breach of CPR 21.2 and thus had asserted to the court and to the defendant that she was not under a disability.
It held that it did. Thus a party who lacks capacity to conduct litigation is protected even though he or she has not been officially declared as lacking capacity and the rule applies whether or not the party is legally represented.