Section 5.3 has four parts. Select a link from the list below for more information about each topic
Contracts are a part of daily life. A simple contract is made when a person buys a paper, coffee or groceries. All purchases are simple contracts, even though a written agreement is not signed.
More complex contracts are usually written when a person buys or rents more expensive items, such as a car or house. For example, if a person signs a lease to rent a property or enters into a social housing tenancy agreement, this is making a contract. Written contracts may also be used in connection with the electricity, gas, water or phone.
A person may have a contract to borrow money with a financial institution such as a credit union, building society or bank.
Contracts also exist at the workplace. It is not unusual to enter into an employment contract with your employer.
If there is any doubt about a person’s capacity, it is important that you undertake, or seek, an assessment when they are entering into a contract. In some circumstances, the law may state that a person is still bound by a contract even if they did not have capacity when they signed the contract.
You might carry out, or seek, an assessment if you are a legal practitioner, family member, friend or carer, community worker, staff member of a financial organisation, government employee or anyone else concerned about the person’s capacity to enter into a contract.
This is what you are looking for when you are assessing whether a person has the capacity to make a contract:
CAPACITY = NATURE + EFFECT OF THE SPECIFIC CONTRACT AT THE TIME IT IS MADE
Does the person understand the particular contract they are deciding about, rather than any other contract or contracts in general? Does the person understand the contract when they are signing it, not hours or days before or after the contract is made? Do they know the ‘nature’ of the contract? Do they understand the general idea of the whole contract, not just details about parts of it? Do they understand the ‘effect’ of the contract? Do they know what the general result and effects of carrying out the contract will be? Do they have the level of understanding required for the degree of difficulty of the contract (greater for a complex contract than for a simple one)? Do they enter into the contract freely and voluntarily?Can they communicate the above, with assistance if necessary?
Remember, when assessing whether a person has the capacity to make a contract, it is important that you:
Here are some specific questions you may ask as part of the assessment process to determine if the person has capacity to make a contract.
‘I feel pretty cranky about what happened to my uncle at a local electrical store. He recently had a brain injury from a stroke. It means he has difficulty paying attention and is very slow to take in information and think things through. Also, he doesn’t comprehend complex ideas.
I dropped by his place the other day and was surprised to see that he has a whole lot of new whitegoods and entertainment equipment – a fancy new fridge/freezer, a washing machine, a new huge screen TV, DVD player and stereo system. He said that he had gone to buy a DVD player and ended up ‘renting’ the other stuff too. He thought he might try it out because he could always take it back if he didn’t need it. This sounded a bit odd, so I asked him if he had any documents to say how much rent he had to pay. It turns out the stuff is actually purchased on an ‘interest free’ finance deal.
I read the documents, which were long and technical, and I knew there was no way he had understood what they were about when he signed them. When I asked him about it he thought he could take the stuff back at any time and not pay a cent more! The contract actually said that if he didn’t pay off the goods in time, the store would arrange a loan for my uncle through a particular finance company (so he could pay off the goods), and then he would have to pay the loan back at a huge interest rate!
I freaked out and called the store. I have made an appointment with the manager, so I will see what I can do. If that doesn’t work I may have to take my uncle to a lawyer for advice.’
A person must manage their money and property, for themself and others who depend on them. This is an essential part of life. Financial management includes:
These are the ordinary, regular dealings that continue throughout life.
You may question a person’s capacity to manage their own money and property when their decisions are causing them or others harm, or when their assets are being lost, or wasted.
People often plan ahead and appoint a person who will have power of attorney to manage their finances for them when they lose capacity. If they don’t do this, the Supreme Court or the Guardianship Division of the NSW Civil and Administrative Tribunal can appoint a financial manager when a person lacks the capacity to manage their finances. The Mental Health Review Tribunal can also appoint a financial manager for a person where the Tribunal has determined that the person is in a mental health facility and lacks the capacity to make decisions about their finances.
There are several situations in which a person may need an assessment of whether they can continue making their own financial management decisions. Here are some examples.
The remainder of this section is concerned only with the test for capacity to manage financial affairs, such as in the types of situations outlined above.
This is what you are looking for when you are assessing whether a person has the capacity to make their own financial decisions:
You will need to consider two questions.
Does the person have the skills to deal in a fairly capable way with the ordinary, regular dealings in life (such as those described in the first paragraph of this section)?
Does the person have money management skills? For example, ask them the name of their bank, how they budget, and how they can work out the market value of their property?
Do they understand their assets, ongoing expenses and financial obligations?
Can they manage their money to provide for food, clothing, medicine and other necessities for themself and any dependents?
Do they have a history of looking after their affairs in the past? Some people may not have ever been involved in routine financial decisions. You may need to consider how the person can get assistance or become familiar with banking and other finances.
Does the person know when to get appropriate professional advice? When considering this you need to take into account the extent of their assets and the complexity of their financial affairs. If the person’s affairs are complex, determine if the person:
Can they protect their own interests? Can the person identify and deal appropriately with someone who is unfairly trying to gain benefit from their assets?
Can they communicate the above, with assistance if necessary?
2. If the person can’t manage their affairs, is there a risk that they may be disadvantaged or harmed, or their money or property wasted or lost?
Question the person to assess the following:
Is there risk of significant disadvantage or harm caused by their inability to manage their money or property?
Is the person freely and voluntarily making decisions about the management of their affairs?Remember, people have the right to manage their own affairs. Each individual has the right to take their own chances and make their own mistakes. Also, making an unwise decision or one that you don’t agree with does not necessarily mean that a person lacks capacity.29
If the person can’t manage all of their affairs, decide whether there are parts that they can manage.
Remember, when assessing whether a person has the capacity to make property and financial decisions, it is important that you:
Here are some specific questions you may ask as part of the assessment process to determine if the person you are assessing has capacity to make property and financial decisions. Assure the person that the answers are confidential.
After you have asked your assessment questions, it is worthwhile to then ask the person whether they believe they can manage their financial affairs. You might ask:
If they are not aware of the concerns, provide them with more information about the situation. Then ask them the questions again. You are looking for understanding of the situation and whether they have insight into what the potential or existing problems might be. For example unpaid bills, overspending on unwanted goods, giving away large amounts of money or property, accumulating large debts, mishandling of money, or allowing others to influence decisions about money or property.
Ask the person open-ended questions which help them to describe the situation and why they think it could be a matter for concern such as:
If the person can’t tell you these things, discuss with them the benefits and disadvantages of each option and ask them what they think of these choices.
You are looking for indications that the person can understand and weigh up information, options and consequences.
‘Last week I went to my client Joan’s house. There was a huge pile of unopened mail in the kitchen. When I asked her about it during our interview, she said that she didn’t feel like opening her mail. We talked about what she thought was in the mail, and she told me that it would just be junk. I showed her one envelope which was dated months ago and had the name of an electricity company and REMINDER written on it.
I suggested that it might be an electricity bill. We then discussed what might happen if she didn’t pay the bill, and Joan seemed to understand that the company would cut the electricity to her house.
I started to ask Joan questions about her property and her banking arrangements. Her answers made me realise that just before her husband had died Joan had stashed a whole lot of cash in the house and had been using it to live. Her husband was the one who dealt with all the accounts and Joan didn’t know the banking details. She was starting to run out of the cash and was too embarrassed to tell anyone about the situation! That’s why she tried to make light of the mail situation.
After I had worked it out, I told Joan that she wasn’t alone, that lots of people let someone close to them deal with the household money. But now, she either had to learn new skills so that she could take care of the finances or appoint a power of attorney to do it for her. I agreed to assist her to get some information on money matters, and to take her to the bank so that she could find out more about her financial arrangements.’
Rebecca, social worker
NSW Trustee & Guardian
Guardianship Division of NSW Civil & Administrative Tribunal
Mental Health Review Tribunal
Law Society of NSW
Legal Aid NSW
Community Legal Centre
Many people plan ahead and appoint a person with power of attorney to manage their financial decisions, such as buying or selling property or operating bank accounts.
There are two types of power of attorney: a general power of attorney and an enduring power of attorney.
A general power of attorney is made so that someone can make financial decisions on behalf of a person when they are absent, or if they simply prefer another person to make those decisions for them. For example, if a person is overseas and needs someone else to sell their house or pay their bills. It could also apply if a person couldn’t physically get to the bank to operate their own account.
An enduring power of attorney appoints someone to begin, or continue, to make decisions for a person when they no longer have the capacity to make their own decisions about their financial affairs. A general power of attorney will not continue when a person loses capacity unless this is stated in the document, and the document is properly made as an enduring power of attorney.
Please note - a power of attorney only operates while a person is alive.
There are two points at which a person’s capacity might be assessed when dealing with a power of attorney.
1. When the document is being madeFor the appointment of a power of attorney to be legal, the person making the appointment must have capacity at the time that they are signing the power of attorney document.Certain people are required to undertake an assessment of the person’s capacity to make a power of attorney document before witnessing the making of the document. These include a solicitor, barrister, local court registrar, licensed conveyancer, and an employee of the NSW Trustee and Guardian or a trustee company.
2. When an enduring power of attorney needs to be usedThis assessment is triggered by concern about whether the person who made an enduring power of attorney still has the capacity to make their own financial decisions. If they are found to lack capacity to make a certain decision, the individual appointed as having enduring power of attorney can make this decision for the person.
It will usually be the person appointed as enduring power of attorney that will undertake, or seek, an assessment of whether the person has lost the capacity to make the financial decision.The remainder of this section is concerned only with the first point: the test for capacity to appoint a general or enduring power of attorney. Advice about the test for the second point, capacity to make ‘financial decisions’, is in Section 5 ‘Financial decisions (money and property)’, on page 117.
This is what you are looking for when you are assessing whether a person has the capacity to appoint a power of attorney.
Does the person understand the nature and effect of the power of attorney document they are signing at the time it is being made, not hours or days before or after?Does the person understand the ‘nature’ of appointing a power of attorney? Are they familiar with the general idea of powers of attorney? More specifically, do they know:
Does the person understand the ‘effect’ of the document? That is, can they identify what the general result of the power of attorney appointment will be and the effect that it will have on them? More specifically, do they know:
Does the person appoint the attorney freely and voluntarily?Can they communicate the above, with assistance if necessary?
If the person wants to change or revoke a power of attorney, capacity needs to be assessed at that time. As well as the above checklist, also ensure the person is aware of the following:
How and why the new power of attorney differs from the old.The nature and effect of changing or revoking the existing power of attorney.
Remember that a person can have the capacity to make a power of attorney even though they may not have the capacity to manage their financial affairs.
Remember, when assessing whether a person has the capacity to appoint a power of attorney, it is important that you:
Here are some specific questions you may ask as part of the assessment process to determine if the person has capacity to appoint a power of attorney.
Similar questions to those above should be asked if the person wants to change or cancel a power of attorney.Also ask:
Enduring Power of Attorney
‘Noel came into the courthouse asking for a signature on his enduring power of attorney. The law says that before I sign his power of attorney document, I have to be satisfied that Noel understands the document and its effect.
Anyhow, I asked him some questions to find out whether he knew what an enduring power of attorney was and how it was different from a general power of attorney. His answers made me realise that he wasn’t sure of what he was really getting me to sign.
His friend had told him he’d better “see about doing an enduring power of attorney”, and he had photocopied the form and filled out some of it.
We ended up spending some time together going through the document. I explained it to him bit by bit and asked him questions to check that he understood what I was saying. When he realised that it was about who would deal with his finances if he lost capacity to do it himself, he decided to talk to his family before he chose an attorney.
He came back the next week, and when we went through the questions I was satisfied that he understood the document and what it did. He also understood who he wanted to appoint as an attorney and why, what powers he wanted to give them, and when they could use those powers.’
Antonio, court registrar
The NSW Trustee and Guardian
The Benevolent Society
A will is only legal if the person who made it had ‘testamentary’ capacity when they made it. ‘Testamentary’ capacity is the legal test on page 138.
So, it is very important to make sure that a person has the capacity to make a will. If this is not done, any will made by them could be seen as being based on misunderstandings or false assumptions and therefore may be held not to be legal.
Equally, if a person is wrongly assessed as lacking capacity, they will lose the freedom to decide whom to leave their estate to when they die.
Some people make their will themselves or get assistance from friends or family. However, it is best to get professional advice to ensure that a proper capacity assessment is undertaken. This will provide a future safeguard if the will is challenged on the grounds of lack of capacity.
An assessment of a person's capacity to make a will is usually done by a legal practitioner, NSW Trustee and Guardian or Trustee Corporation employee when instructions are given to make the will and again when the will is signed.
This is what you are looking for when you are assessing whether a person has the capacity to make a will, (testamentary capacity):
Does the person understand the nature and effect of the will at the time the will is being made, not hours or days before or after?
Does the person understand the ‘nature’ of making a will? Do they know the general function of a will? More specifically, do they:
Does the person understand the ‘effect’ of the will? More specifically, do they know:
Is the person making the will freely and voluntarily? Can the person communicate the above, with assistance if necessary?
If the person wants to change or revoke their will, capacity needs to be assessed at that time. Ensure that you ask the same questions as above, and also the following questions:
How and why does the new will differ from the old? What is the nature and effect of changing or revoking the existing will?Remember, people can make decisions about their possessions which may be seen as unwise, unfair, unreasonable, or based on values that you do not accept. This doesn’t mean that a person lacks the capacity to make a will.
33Importantly, a person may have testamentary capacity even though they may not have the capacity to manage their financial affairs.
Remember, when assessing whether a person has the capacity to make a will, it is important that you:
Here are some specific questions you may ask as part of the assessment process to determine if the person has capacity to make a will.
Similar questions to those above should be asked if the person wants to change or cancel a will. Also ask:
‘I had an appointment with a new client, Betty, about changing her will. She came in with her cousin and insisted that he sit with her during the appointment. The cousin was overbearing and kept speaking on behalf of the client. In the end I asked the cousin to wait outside, saying that I had to discuss some matters with Betty alone. I stated that I would not be able to continue with the appointment if he did not do this.
Alone, Betty was able to answer a lot of my questions about what a will was, her property and who she thought should benefit from the will. However, she was not so clear on why she wanted to change her will. It became apparent that Betty had already changed her will twice in the last three months, following an argument with her family.
After the family argument the cousin had become closer to Betty and had moved into her home. I spoke at some length with Betty about many general matters, including her health. She confided in me that her psychologist said she had a depressive disorder and that, at times, it seemed to impair her ability to think clearly and make decisions without being influenced by others.
When I asked Betty about wanting to change her will this time she just said, “It would be best for my cousin.”
I decided to ask Betty if I could contact her psychologist for an opinion about whether her depression would, at this time, affect her decision-making about her will. I explained this to her and told her that if I didn’t find these things out, it could make the will invalid later. She consented to my talking with her psychologist.’
NSW Trustee and GuardianLaw Society of NSWLawAccess NSWLegal Aid NSWCommunity Legal CentreBenevolent Society
NSW Trustee & GuardianPh: 1300 364 103www.tag.nsw.gov.au
The NSW Trustee and Guardian can also give you information and advice about the following
You can obtain the telephone number of your nearest branch from the general enquiries number above. You can also access information on their website.Law Society of NSWPh: (02) 9926 0300www.lawsociety.com.au
Solicitors can give you information and advice about contracts, financial management, apppointing a power of attorney, wills and other related matters. The Law Society of NSW has a list of solicitors on its website. Click on 'Find a lawyer search'. Or ring the 'Solicitor Referral Service' at the Law Society of NSW.
LawAccess NSWPh: 1300 888 529131 450 Telephone Interpreter Servicewww.lawaccess.nsw.gov.au
You might also contact LawAccess NSW which is a free government telephone service that provides legal information, advice and referrals for people who have a legal problem in NSW.
Legal Aid NSW provides free legal advice and in some cases can provide ongoing assistance. To locate the closest office call LawAccess NSW or visit the Legal Aid Commission’s website
Your local Community Legal Centre (CLC) may also provide free advice. A directory of CLCs is available from the National Association of CLCs by phoning (02) 9264 9595 or at its website:
NSW Civil & Administrative Tribunal
Guardianship DivisionPh: 1300 360 466www.ncat.nsw.gov.au and click on Guardianship
You can contact the
Guardianship Division for the Planning for your future publications, or access them on the website
www.ncat.nsw.gov.au and select ‘Publications’. Additionally, you can contact the Guardianship Division to speak with someone about appointment of a financial manager, or for further information on the Division.
Legal Aid and the Benevolent Society has jointly produced a publication Speaking for myself - Planning for later life decision-making. It is available on its website www.legalaid.nsw.gov.au/publications
Mental Health Review TribunalPh: (02) 9816 5955Toll free: 1800 815 511www.mhrt.nsw.gov.auWhen the person is a patient in a mental health facility or where the matter has been referred to the Mental Health Review Tribunal (MHRT) by a court, you can get more information on the appointment of a financial manager by contacting the Mental Health Review Tribunal.
NSW Fair TradingPh: 13 32 20www.fairtrading.nsw.gov.auThe NSW Office of Fair Trading has information on contracts on its website.
People who are Deaf or hard of hearing use the national relay service to contact any number above, unless a TTY number is specified, call: 133 677.
People with speech impairments use the national relay service speak and listen service 1300 555 727.
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