By and -

Snapshot

  • Since Brennan v O’Meara [2009] NSWSC 1374, where consideration was given to whether a purchaser had a right to rescind a sale of land contract as a result of ‘mental incapacity’, the incidence of mental illness in Australia has increased.
  • Questions have arisen regarding the extent to which mental illness must be an ‘impediment’ to completing the contract for a party to rely on a mental illness ground to rescind such a contract.
  • With the increasing incidence of mental illness, more situations may arise where a party seeks to rescind a contract on the grounds of mental illness. Drafting tips are provided to assist practitioners with practical ways to manage disputes on such matters.

More than a decade has passed since Brennan v O’Meara [2009] NSWSC 1374. It concerned whether a purchaser had a right to rescind a contract for the sale of land as a result of his ‘mental incapacity’ after exchange and prior to settlement. Since that time, the incidence of mental illness in Australia has increased. Important questions loom regarding the extent to which mental illness must still be an ‘impediment’ to completing the contract to validly rescind it based on a ‘mental illness’ special condition. When the next contested matter presents itself, how will the pendulum swing?

The current law in NSW

In Brennan v O’Meara, Mr Brennan, the vendor, and Mr O’Meara, the buyer, had negotiated a settlement of about 13 months. Mr O’Meara had early possession of the land. Various mishaps occurred including an altercation with a neighbour, the rejection of his finance application and the global financial crisis loomed large. These, and other matters, aggravated his existing mental health issues. Mr O’Meara served a notice to rescind pursuant to a special condition on the basis that he had ‘become mentally ill’. The special condition provided:

‘… should either party… prior to completion… die or become mentally ill, then either party may rescind this Contract by notice… thereupon this Contract shall be at an end…’ (emphasis added).

Mr Brennan disputed the validity of the notice. The Court identified that the issue to determine was whether O’Meara had satisfied the special condition; namely, whether Mr O’Meara had ‘become mentally ill’ within the meaning of the special condition.

The contract did not contain a definition of ‘mentally ill’. But the Court considered section 14 of the Mental Health Act 2007 (NSW) (‘MHA). It provided, ‘a person is a mentally ill person if the person is suffering from mental illness and, owing to that illness, there are reasonable grounds for believing that care, treatment or control of the person is necessary (a) for the person’s own protection from serious harm or (b) for the protection of others from serious harm’. Section 4 of the MHA defined ‘Mental Illness’ as ‘A condition that seriously impairs, either temporarily or permanently, the mental functioning of a person and is characterised by the presence in the person of any one or more of the following symptoms (a) Delusions; (b) Hallucinations; (c) Serious disorder of thought form; (d) A severe disturbance of mood; (e) Sustained or repeated irrational behaviours indicating the presence of any one or more symptoms referred to in paragraphs (a)–(d).

The Court approached the construction of the special condition from two perspectives. First, the special condition required Mr O’Meara to have ‘become’ mentally ill (i.e. it was not sufficient if he had a pre-existing mental illness). Secondly, the purpose of the special condition was directed at events which caused an impediment to the fulfilment of contractual obligations. Davies J observed that it would not be sufficient for a person wishing to take advantage of such a provision to merely point to a diagnosis of mental illness because it may be of a ‘nature or magnitude that does not cause any impediment to the fulfilment of the contractual obligations’ (at 41) (emphasis added).

Influential in the Court’s reasoning was the decision in Karfoal Pty Ltd v Lorence [2002] NSWSC 204 dealing with an almost identical provision. In it, one of two joint vendors died between the date of contract and completion. Gzell J held, ‘the provision cannot be enlivened on the basis of the death of one of the joint tenants… The provision is aimed at a death that creates an impediment to the fulfilment of contractual obligations (at [13]) (emphasis added).

In Brennan v O’Meara, the evidence did not show Mr O’Meara was unable to function or deal with his affairs. As such, the Court held his notice of rescission was invalid because he was not mentally ill within the meaning of the special condition, i.e. his diagnosed mental illness did not cause an ‘impediment’ to the fulfilment of his contractual obligations.

A similar factual situation presented a few years later in Coppa v Barnett [2012] NSWSC 490. Ms Coppa, the purchaser, sought to rescind a contract for the sale of land with Mr Barnett, the vendor. Ms Coppa relied upon a very similar special condition. Stevenson J held that the term ‘mentally ill’ was not defined in the contract but found that thecontext to which the expression was used… suggests that the mental illness must be of a nature that causes an inability, or at least an impediment, on the part of the relevant party to fulfil their contractual obligations’ (at [50]) (emphasis added).

So, what has changed in recent years?

Revised Drafting

Since Brennan v O’Meara, if a contract for the sale of land has an incapacity provision, it will often now provide a definition of ‘mental illness’ in order to promote greater contractual certainty. For example:

‘If any individual being a party to this contract is diagnosed with a mental illness as defined in the Mental Health Act 2007 (NSW) prior to completion then either party may rescind this contract by notice in writing.’

Increased mental illness awareness

In recent years, the incidence of mental illness has increased. One in five Australians suffer from a mental illness in a given year, and almost half the population has suffered a mental disorder at some time in their life.

If a situation such as in Brennan v O’Meara presents itself in today’s world, to what extent will the party relying on ‘mental illness’ need to prove an ‘impediment’ to fulfil the contractual conditions? Further, what does ‘impediment’ mean in the context of mental illness?

The issue is complex and sensitive. From a client instruction perspective, it is similarly complex and may, for example, require the appointment of a tutor. Mental illness, including its diagnosis and treatment, is far from clear cut. A person might have a ‘severe disturbance of mood’ as a symptom of generalised anxiety and depression. On one hand, the person may not be strictly ‘unable’ to carry out steps to bring a contract to completion, such as, for example, arranging finance to complete their contractual responsibilities. But on the other hand, the need to attend to such matters might be very burdensome as a result of the person’s mental illness. Further, doing so might place undue stress on a person who already has heightened vulnerability. In this scenario, must an ‘impediment’ be established and if so, when and to what extent does the mental illness become an ‘impediment’ such that the rescission is valid? If the right to rescind is rejected, how will that decision to proceed with the sale of property impact that person’s future? Will it cause that person to endure further mental illness, and possibly at a heightened degree? For opposing parties who wish to uphold the contract, how do they reconcile the pursuit of litigation in circumstances where it is potentially injurious to the other person’s mental health where consequences may be dire and possibly life threatening?

The threshold question that remains to be answered in any subsequent case on this issue is to what extent is a relatively narrow interpretation of such a clause correct having regard to the circumstances and sensitivities particular to mental illness.

With the increased incidence of mental illness, and greater awareness of it, it is likely that more situations will arise where a mental illness special condition is sought to be relied upon. To assist practitioners with practical ways to avoid or, at least, better manage disputes on such matters, the following points may be of assistance:

  1. Consider drafting a special condition dealing with mental illness which is separate to a special condition dealing with death and insolvency/bankruptcy and consider whether the words ‘becomes mentally ill’, should be used or whether words such as ‘is diagnosed with a Mental Illness as defined by… are preferable.
  2. Consider drafting the special condition dealing with mental illness with sufficient detail, including making it referable to s 4 of the MHA.
  3. Consider drafting a standard procedural condition for dealing with automatic rescission, such as ‘Automatic rescission occurs upon the service of a Notice to Rescind together with a diagnostic report from a registered clinical psychologist or psychiatrist, qualified to practice in New South Wales, stating the person is suffering from a Mental Illness as defined by the MHA.’

Anneka Frayne is Solicitor Director at Stacks Law Firm, Tamworth. Talitha Fishburn is a Barrister at Black Chambers.