Question:
If one party is experiencing early dementia and does not understand a complicated contract or its ramifications and signs, is it binding?
Response:
No, contracts are not binding if a party does not understand what they’re signing.We learned in first-year contracts class in law school that contracts represent a “meeting of the minds,” in other words the two parties must have the same concept in mind when they enter into a contract. That’s not possible if one party does not understand what they’re signing.
However, people are presumed to be legally competent. So the burden of proving incapacity would be on the party challenging the contract.
Interestingly (at least for lawyers), is that the standard for capacity is higher for contracts than for other legal actions, such as executing wills. At least in Massachusetts, the courts have said that while someone executing a will must recognize their family and have a general idea of their assets, someone executing a contract must not only understand its terms but also whether it makes financial sense. For example, the sale of a house to the neighbor for half it’s fair market value can be reversed if the seller was unaware of the market due to experiencing early stages of dementia.
