Does the Agency Die When the Principal Becomes Mentally Incapacitated?

• Publication year: 1983

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 7, No. 1FALL 1983

Does The Agency Die When the Principal Becomes Mentally Incapacitated?

W. Alfred Mukatis(fn*)

I. Introduction

The legal problems associated with mental incapacity have recently been brought to the nation's attention in the trial of John Hinckley for the attempted murder of the president. The uproar over the jury verdict of not guilty by reason of insanity prompted a Congressional investigation into the insanity defense.(fn1) This troublesome relationship between an individual's mental capacity and his legal liability has caused problems in civil law areas as well. The courts have had particular difficulty developing a consistent, rational, and practical approach to mental incapacity in the law of agency.

This article explores the status of an agency when a competent principal enters into an agency relationship and thereafter becomes mentally incapacitated.(fn2) On the one hand, does the status of the agency depend on factors relating to the principal such as type, length, or permanence of the incapacity? For instance, is the status of the agency the same when a principal lapses into a coma as it is when a conscious principal is incapacitated because of a mental disease such as schizophrenia?(fn3) If in a coma, how does the length of the coma affect the status of the agency? Is a legal adjudication of insanity required to terminate the agency? On the other hand, is the agency status affected by notice to or knowledge of the agent or a third party dealing with the agent? For instance, is the agency terminated or suspended if either the agent or third party is without notice or knowledge of the principal's incapacity when they enter into a transaction for the principal's benefit? After exploring these questions and modifications of the basic common law rule, this article examines whether the modifications have gone far enough. Finally, this article will suggest changes that could be made to avoid the remaining problems.

The frequently cited general common law rule is that an agent's authority automatically terminates upon the permanent loss of mental capacity of the principal, irrespective of knowledge or notice.(fn4) This rule operates for actual as well as for apparent authority.(fn5) The reason given for this automatic and immediate cessation of authority is that the principal-agent relationship is a personal one and the agent has no authority to do anything for the principal that the principal, were he present, could not lawfully do for himself.(fn6) But does the above rule accurately reflect the current status of the law or does the general rule simply receive lip service while the courts and legislatures create exception after exception?

Reuschlein and Gregory state that, although the general rule is harsh, courts, with rare exception, have been reluctant to modify it(fn7) except in cases involving banks.(fn8) However, when a rule is harsh, exceptions are inevitably created. Story, very early, pointed out authority for the proposition that an agency relationship could not be revoked or suspended until an adjudication of mental incompetency.(fn9) Story, for example, cited the case of Wallis v. Manhattan Bank,(fn10) wherein the court held that "lunacy of a person who has executed a power of attorney(fn11) does not operate to revoke it, at least until the fact of his lunacy has been properly established by an inquisition."(fn12) Since that early case, common law decisions and statutory modifications have led to a number of different results concerning when the principal becomes mentally incapacitated.

II. Common Law Decisions

A. Principal Adjudicated Mentally Incompetent

Many decisions state that an adjudication of mental incompetence automatically terminates the agency without notice or knowledge.(fn13) Both the Restatement of the Law of Agency and the Restatement (Second) agree with this proposition.(fn14)

In the case of Powell v. Batchelor,(fn15) however, the court departed from this rule. The Powell court found evidence that a general agency had been established prior to the principal becoming insane on February 21, 1910, and being placed under guardianship.(fn16) The court stated that while the acts "occurred [on] March 10, 1910, that is, after [the principal] became insane, . . . such insanity did not have the effect, under the circumstances of this case, [of] terminating [the] authority or . . . releasing [the principal] from liability for the acts of his . . . agent."(fn17) The court failed to provide a rationale for its holding, but cited Hill's Executors v. Day(fn18) and Davis v. Lane,(fn19) wherein no adjudication of insanity had occurred.

Recently, in Matter of Estate of Head,(fn20) a case decided on the ground that the agency was coupled with an interest,(fn21) the court stated that "an adjudication of insanity is at most presumptive evidence of the mental capacity of a person at the time of a transaction. The strength of the presumption is lessened in proportion to the remoteness of the adjudication."(fn22) Thus, while the great weight of authority holds that an adjudication of incompetency terminates or suspends the authority of the agent regardless of knowledge or notice, Powell and Head support the proposition that even an adjudication may not terminate the agency.

B. Principal Mentally Incapacitated in Fact but Not Adjudicated Incompetent -The Restatement and Restatement (Second) of Agency

Although the Restatement of Agency and the Restatement (Second) of Agency are often used by courts to buttress their decisions, neither are much help in deciding what happens to the agent's authority when the mentally incapacitated principal has not been adjudicated incompetent. The basic rule of law, exemplified in section 122 of the Restatement,(fn23) is that the agent's authority is terminated or suspended by an event which deprives the principal of capacity to become a party to the relationship. However, with regard to the triggering event, comment a to Section 122 refers only to a judicial determination of insanity or other changes in conditions.(fn24) Neither section 122 nor comment a makes clear what events or what other changes cause termination or suspension of the agency. Illustration 1 following comment b to section 122 refers only to a judicial adjudication of insanity.(fn25) Comment c to section 122 adds to the confusion by stating:Temporary incapacity. The rule stated in this Section applies to mental incompetency only when it creates legal incapacity, as it may do in case of mental disease. Where the incapacity is only temporary, the authority of the agent may be merely suspended. Where the principal becomes mentally incompetent for but a short period, as where he has a delirium accompanying a fever, the agent's authority is not necessarily affected. . . .(fn26) The illustration following comment c concludes that where the principal becomes insane for eight hours after drinking wood alcohol, contracts made for him by his agent during that period are valid.(fn27)

Therefore, according to the Restatement, eight hours of insanity should not affect the agency. Perhaps eight hours were chosen in the illustration to suggest that the agency of a sleeping principal is unaffected. This raises a number of questions. What happens if the mental incapacity lasts one day or one week or one month? At what point is the authority suspended or terminated? The Restatement offers no guidelines. With respect to whether notice to, or knowledge of, the agent or a third party affects the agency, comment b states that the agent's lack of notice does not affect termination of the agent's power. Comment b does not distinguish between situations arising before or after an adjudication of incompetency.(fn28)

Both illustrations following comment b refer only to situations where the principal is adjudicated incompetent.(fn29) No illustrations are provided to suggest what happens to the agent's power to bind a mentally incapacitated principal prior to an adjudication. Furthermore, the possible prejudice to third parties dealing with the agent in good faith and in ignorance of the principal's incompetence prior to adjudication is not mentioned. The Restatement of Agency, therefore, ignores early case law which carved out an exception to the general rule for the protection of ignorant third parties.(fn30)

The Restatement (Second) of Agency is even less helpful. The basic rule of law in subsection (1) of section 122, Incompetence of Principal, provides "[e]xcept as stated in the caveat, the loss of capacity by the principal has the same effect upon the authority of the agent during the period of incapacity as has the principal's death."(fn31) Section 120, Death of Principal, states that "[t]he death of the principal terminates the authority of the agent without notice to him except as stated in subsections (2) and (3) and in the caveat."(fn32)

The caveat and comment a under Death of Principal point out possible exceptions to the rule of termination without notice. In cases dependent upon a special relation, such as trustee and beneficiary, or in transactions with special rules such as in dealings involving negotiable instruments, an exception may govern.(fn33) Comment a discusses the possible prejudice to an unknowing agent or third party and concludes that the courts...