Court of Appeals Holds in En Banc Decision that Contracts of Mentally Incapacitated Persons Are Not Inherently Void

On May 2, 2013, the District of Columbia Court of Appeals, sitting en banc, decided Hernandez v. Banks, Nos. 08-CV-1571 & 09-CV-744, slip op. (D.C. May 2, 2013) in which it considered “whether [the District of Columbia] should continue to follow the [common law] rule . . . that the contracts of mentally incapacitated persons are inherently void, or should instead join the majority of jurisdictions in deeming such contracts only voidable.” Id. at 2. The Court of Appeals decided this issue by rejecting the rule that contracts of mentally incapacitated persons are inherently void and, in its place, expressly adopting Section 15 of the Restatement (Second) of Contracts. Id. at 32. Specifically, it adopted the rule that “‘[a] person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.'” Id. at 16 (quoting Restatement (Second) of Contracts § 15(1) (1981)). However, “‘[w]here the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance . . . terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust,'” in which case “‘a court may grant relief as justice requires.'” Id. (quoting Restatement § 15(2)). In adopting this new rule, the Court of Appeals concluded that, as compared with the old rule, the new rule is more consistent with modern contract law and better protects persons who are mentally incapacitated. Id. at 23-30. It further concluded that the new rule appropriately protects the interests of persons who contract with mentally incapacitated persons, including by limiting the power of contract avoidance in cases where such a person “had no reason to know of the incapacity and has substantially performed.” Id. at 31.