Court Refuses To Enforce Arbitration Clause Due To Lack Of Mental Capacity

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In Oak Crest Manor Nursing Home, LLC v. Barba, a plaintiff sued a nursing home for negligently allowing a patient with mental disorders to leave the facility and jump from a bridge in an attempt to commit suicide. No. 03-16-00514-CV, 2016 Tex. App. LEXIS 12710 (Tex. App.—Austin December 1, 2016). The nursing home filed a motion to compel arbitration based on a facility admission agreement that the patient signed. The plaintiff’s response contended that due to the patient’s psychological and mental disorders, he lacked capacity to enter into an enforceable contract and, therefore, the agreement and its arbitration provision were unenforceable and void. The court denied the motion to compel, and the defendant sought an interlocutory appeal.

The court of appeals noted that it was the plaintiff’s burden to prove that the patient did not have the requisite mental capacity. The court held that “[t]o establish mental capacity to execute a contract, a party ‘must have had sufficient mind and memory at the time of execution to understand the nature and effect of [his] act.’” The court reviewed evidence that the patient was mentally incompetent around the time of his admission to the home. It also reviewed the defendant’s evidence that he was competent on the day he signed the agreement. The court held that “While the time of execution of a contract is indeed the relevant time for ascertaining competency to contract, evidence of competency from other periods is probative to establish competency at the time of execution if there is evidence that the later mental condition had some probability of being the same condition at the time of execution.” The court concluded:

Dr. McRoberts’s report, issued only 49 days after the Agreement’s execution, is probative of Frank’s mental condition on the date of execution in light of the other evidence in the record indicating that Frank’s psychiatric diagnoses were already present and were the same as when Dr. McRoberts examined him. We conclude that the record contains legally sufficient evidence to support the probate court’s implied determination that Frank did not possess the requisite capacity to contract when he signed the Agreement.

The court also held that the patient’s mental incompetency made the agreement void: “the supreme court has held that when the issue of mental capacity to contract is raised, ‘the very existence of a contract is at issue,’ as with other contract-formation issues, and therefore the court’s determination that a party lacked the capacity to contract would render that contract non-existent and void rather than merely voidable.” Finally, the court determined that because there was no contract to begin with, the defendant could not rely on other theories such as direct-benefits estoppel to enforce the arbitration clause. The court affirmed the order denying the motion to compel arbitration.

Interesting Note: This case raises an important issue for financial institutions. Financial institutions routinely have arbitration and other dispute resolution clauses in its contracts with customers. It is also common for a customer to be an elderly person or person with some mental disability. When disputes arise, the customer or his or her representative may challenge the invocation of arbitration or other dispute resolution clause due to mental incompetence. Financial institutions should be very careful that when they enter into these types of contracts that the other contracting party has mental competence. Alternatively, the financial institution should rely on a guardian or power of attorney holder to execute the contract for the customer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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