On the 23rd of February 2018 the Grand Court issued a judgement which set out the current legal test for mental capacity in the Cayman Islands.
The facts surrounding the case revolve around an elderly settlor who had reserved certain powers in a Cayman Islands governed trust instrument, including a power to amend the Trust instrument (the "Power"), which she purported to exercise at a time when her mental capacity was in doubt. The exercise of the Power was subject to the approval of the Trustee, and the Trustee took various steps to ascertain the state of the Settlor's mental capacity before providing its approval, but sadly the Settlor died before that process was completed.
The Grand Court determined that the test for mental capacity had two elements:
- What does the law recognise as the essential requirements for establishing capacity that is universally applicable from case to case, and;
- How ought the test be applied from case to case depending on the factual circumstances presented to the Court?
With respect to the so-called "essential requirements," it was decided that the test to be applied to the exercise of trust powers is the same test which applies to the making of Wills, namely that the person exercising the power should understand the nature of his acts; the extent of the property being disposed of; and the person should be able to comprehend and appreciate the claims to which the exercise of the power may give effect1.
With respect to the standard of proof required to prove capacity, the learned Judge Kawaley confirmed it was the civil "balance of probabilities" test. The Court also determined that the presumption of capacity would not be assumed in this case, and that the party asserting capacity would be required to prove it, however, this finding is likely confined to the facts of the case and is unlikely to be construed by practitioners as a general departure from the presumption of capacity doctrine.
The learned Judge Kawley also set out the requirements the court must examine to ascertain the level of understanding in light of the circumstances of each case, noting it may vary depending on the relative value of the assets being disposed or affected: the lower the value of the property being disposed or affected, the lower the level of understanding (and vice versa). The nature and level of complexity of the transaction was also cited as a factor: the less complex the transaction, the lower the level of understanding required (and vice versa). Importantly, the learned Judge interposed a counterbalance on the later condition, which can empower the Court to further reduce the level of understanding for elderly persons so as not to prevent them from disposing of assets as they see fit, despite the fact they may be suffering from a more limited form of mental capacity2. The learned judge highlighted that the key question the court was required to answer was whether the individual was mentally capable of exercising a power at the time the power was exercised.
Applying the above principles, Judge Kawley determined that the Settlor had a sufficient level of capacity to exercise the Power at the time it was exercised — despite the fact that she was suffering from a range of aliments, some of which could have compromised her mental capacity; and that the exercise of the Power was, therefore, valid and would be honoured posthumously.
1 Justice Kawaley citing the classic case of Banks v Goodfellow (1870) LR 5 QB 549 at 565.
2 Following the decision In re Walker (deceased)  EWHC 71
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