Proving psychological instability

Contributed by Winnie Ng, consultant and Winnie Wong, associate, Employment Practice, Minter Ellison

Article contributed by Minter Ellison

Under the law of contract, a person is bound by the terms and conditions set out in a contract that he or she has signed. However, if the person could prove that owing to certain mental conditions under which he or she had no comprehension of his or her acts, and that the other party was aware of this incapacity, the contract might be set aside.

The enforceability of a deed releasing an employer from its obligations upon the termination of an employee's employment is subject to the same principles within the scope of contract law. These principles were analysed by the judge in the case of Knight John Lee v Global Force Limited trading as The Mix (2009).

In 2000, Mr Knight was employed by Global Force Limited as general manager of The Mix, a fruit juice drinks and fresh salads retail chain. Since November 2001, Mr Knight, without his employer's knowledge, set up and operated a business called "Wrapper" that was in direct competition with The Mix. He also arranged for foods and other ingredients belonging to The Mix to be secretly supplied to Wrapper.

Global Force discovered this in 2002 and subsequently instructed its solicitors to prepare a deed, which recorded that Mr Knight had been secretly operating a competing business, and provided that Mr Knight would immediately resign from his employment on the terms and conditions set out in the deed.

Under the deed, Mr Knight acknowledged that Global Force was under no obligation to pay him any money to which he would ordinarily have been entitled. It also provided that Mr Knight agreed not to bring any action against Global Force in respect of any matter concerning his employment but in return, Global Force undertook that it would take no action against Mr Knight in respect of his disloyal acts. Mr Knight and Global Force both executed the deed.

However, in 2007, which was five years after Mr Knight left The Mix, he alleged that he was wrongfully dismissed by Global Force and sought termination payments. Mr Knight claimed that he was mentally unstable and was under threats made by the managing director of Global Force when he executed the deed. He also argued that the deed was not enforceable.

The issues the court had to determine included whether Mr Knight was mentally unstable at the time he executed the deed; and whether he executed the deed under duress.

It turned out Mr Knight was only able to produce a letter of referral from a general medical practitioner to a psychiatrist as evidence of his mental condition. He admitted that he did not visit the psychiatrist or any other psychiatrist after the referral letter had been issued. The court took the view that the referral letter was not sufficient evidence that Mr Knight was suffering from any mental disorder when he executed the deed and that there was no evidence that the person who executed the deed on behalf of Global Force had knowledge or was aware of Mr Knight's alleged mental instability at the material time.

The court took the view that considering Mr Knight's employment history and his position as general manager of The Mix, it could not be said that he was an inexperienced or naive person at the time of executing the deed. The fact that he executed the deed suggested that, on balance of probabilities, he had considered his options and decided that the terms and conditions represented an acceptable deal for him at that time. In addition to that, he did not make a report to the police of any unlawful threats at the material time so his claim of duress was rejected.

As a result, the court ruled that the deed of release was enforceable and Mr Knight was not entitled to any termination payments.

Q & A on principles of contract law
Q1 What does a person need to show in order to set aside a signed contract based on his or her mental incapacity?
A1 When a person claims that he or she did not have the required contractual capacity, he or she must prove that his or her mental instability did occur at the time of entering into the contract and that the other party was aware of this incapacity.

Q2 Would a delay in taking action be an obstacle to setting aside a contract?
A2 In general, a person may lose the right to set aside a contract if he or she fails to do so within a "reasonable period of time". The reasonable period of time depends on the facts of the case.

Taken from Career Times 23 October 2009, p. B6

(Last review date: 23 August 2013)

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