A contract is a legally binding agreement between two or more persons that is recognised by the courts. In order for an agreement to be legally binding there are certain criteria that have to be met. One of these criteria is capacity. The majority of us have the capacity to form a legally binding agreement, however certain categories of people are limited by law to make contracts the main categories are minors, people judged incapable of contracting due to mental disorders, drunkenness or under the influence of drugs. The purpose of this essay is explain the law relating to the mentally ill to conclude contracts and consider why these rules exist.
Apart from persons certified insane under section three of the Mental Health Act 1983 (www.statutelaw.gov.uk) a contract with an individual person with mental illness is valid. Persons with mental illnesses are bound by contracts for necessaries and must pay a sensible price, however other contracts are voidable if (a) individual did not know what they were doing and (b) the other party was aware of this.
Persons of unsound mind
Persons certified as insane under the Mental Health act 1983 section 3 can never make a valid contract, however a mentally unbalanced person has full contractual capacity, although such an individual may be entitled to avoid a contract that has been made if they did not know what they were doing and the other party was aware that they did not know what they were doing. In Imperial Loan co - v Stone  where a person of unsound mind was sued on a promissory note. He had signed it as a surety. The jury found that he was insane when he signed the note but there was no finding as to the creditor's knowledge of such insanity. It was held that the defendant was wrong and in order for the action to succeed the defendant has to convince the court of both issues....