Recent Case Highlights the Importance of Competency in Contract Formation

November 7, 2018

A recent Wisconsin court of appeals case highlights the importance of the cause of action that exists under Wisconsin law to rescind a contract based upon mental incompetency.  Understanding this cause of action is important for anyone who is entering into a significant contract or business transaction.  Consider including an investigation of competency in any due diligence investigation for a major business transaction where competency may be an issue.

In this case, one party to the litigation sold two parcels of land to the other party for prices that were significantly below the list price and appraised value.  Two weeks later the seller was placed under emergency protective placement due to dementia.  Following that, the seller’s guardian brought an action to rescind the transactions, based on mental incapacity of the seller.  There were witnesses and experts for both sides of the argument.  The jury determined that the seller was mentally incompetent, and the judge ordered the transactions rescinded (the land returned to the seller and the purchase money returned to the buyer).

The Defendants argued there was an improper jury instruction and an erroneous exercise of discretion by allowing an expert to testify, and that a mistrial should have been declared due to the Plaintiff being disruptive in the courtroom.

All these arguments failed at the appellate court level.

The court of appeals identified the basic legal principle at issue:  that (a) Wisconsin law recognizes the cause of action to rescind a contract or conveyance based on lack of mental capacity, and (b) the law presumes that every individual adult person is fully competent to enter into contracts until proof to the contrary is presented.  The court also confirmed that the civil standard of proof for a cause of action for rescission based on lack of mental competency is the greater weight of the credible evidence standard, which is the same as the preponderance of the evidence standard.  In other words, the court held that no heightened burden of proof exists for a competency challenge, over and above the normal civil burden of proof.  The test of competency is whether the person involved had sufficient mental ability to know what he was doing and the nature of the act that is done.  Any conduct on the part of the person whose competency is being questioned may be relevant, in addition to lay and expert testimony, and prior and subsequent adjudication of incompetency.

In this case, the incapacity finding resulted in a judgment unwinding the entire transaction, with an order that the two parcels be returned to the Plaintiff, and the purchase price refunded to the Defendant.  This is a very significant remedy.  Any party in a significant business or real estate transaction where there is any concern about the actual or alleged incompetency of the counter-party should keep these standards in mind, and consider pausing until the issue is resolved or taking steps to build a record as to the competency issue.

Citation:  Jones v. Pizon, No. 2017AP2024 (Wis. Ct. App. Aug. 29, 2018)