Imperial Loan Co Ltd Vs. Stone  1 QB 599
The defendant, stone, had signed a promissory note as surety and afterwards on the inquisition by the plaintiff, imperial loan co. ltd., was found as of insane mind. The plaintiff i.e. the holders of the note brought a suit against him. The defendant took the defense of insanity and pleaded that his insanity was known to the plaintiffs at the time of contract. The judge had entered into the judgment for defendant and the court of appeal ordered a new trial on the ground that the plaintiff’s knowledge of the fact that defendant was lunatic was essential to find.
- Could the defendant successfully claim insanity as a defense?
- Is the knowledge of the defendant’s lunacy to the plaintiff important when the contract is signed to decide the capacity of the party entering into the contract?
The common law was that the lunatic could not prove his own insanity though his heir might, to avoid the obligation which has been undertaken.
Initially, the judge had entered the judgment in favor of the defendant which was appealed by the plaintiff. The court of appeal held that a contract made by a person who lacked the capacity is not void but voidable at his option if he satisfies the court that he was not capable of understanding the implications of the contract and the other party had the knowledge of this incapacity.
The court of appeal had ordered a new trial on the basis that the knowledge of the defendant’s lunacy to plaintiff was important for defendant to successfully claim the ground of insanity as defense for breach of contract.
Lord Esher while pronouncing the judgment said, “When a person enters into a contract, and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executory or executed, as if he had been sane when he made it, unless he can prove further that the person with whom he contracted knew him to be so insane as not to be capable of understanding what he was about.”
The degree of the insanity to be proved is important and it is a question of fact to be established by inquisition.
Thus, a person who is non compos mentis is competent to contract under English law and the only exception to waive the responsibility is to prove that the other party knew of his condition which will make the contract unfair and hence voidable.
Current Day Significance
The case was considered as a precedent in many judgments by Supreme Court of England Blankley vs. Manchester and Manchester children’s university hospital NHS trust, 2015 where the defendant’s fluctuating condition was not given an exception and was considered competent to enter into contract at the time of signing the contract. Similarly in Josife vs. Summertrot holdings ltd, 2014 the appeal had failed because there was no reasonable evidence to prove that the party seemed mentally incapable to other party at the time of contract. The case changed the ground of claiming insanity as defense in English common law and now a lunatic is competent to enter into contract and it will be voidable only if the prerequisites are achieved.