This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The widest divergence between the voidable contracts of an infant and those of an insane person consists in the duty to restore the consideration on disaffirmance. If the contract is a fair and reasonable one and the insane person has received the consideration, and the adversary party did not know of the insanity, the insane person cannot disaffirm without putting the adversary party in statu quo by restoring to him the consideration which he has received or its equivalent.1 It follows that in such a case if the insane person does not or cannot place the adversary party in statu quo the contract is binding upon the insane person; since though it was originally voidable he has not taken the proper steps to avoid it.2 This is said to be the niece of an insane grantor,10 the insane person is not required to place the adversary party in statu quo.11 But where one indorsed a note while sane, and renewed his liability after becoming insane, and the time for protesting the original note had passed, he was held bound to pay the note even though he was originally an accommodation indorser.12 Where the parties are in personal communication, the fact that the adversary party is ignorant of the insanity implies that the insane person was not clearly and evidently insane. If the parties are not in personal communication the rather peculiar view has been expressed that the adversary party had no reason for thinking that the other was sane, and hence was not misled though he was insane.13 Conversely, if the adversary party knew of the insanity or had such knowledge and information as would arouse inquiry in the mind of an ordinarily prudent man which would result in his learning of such insanity, the contract may be avoided without replacing such adversary party in statu quo;14 and a similar rule obtains where the contract is harsh and oppressive.15 Thus specific performance was refused where the contract was oppressive, and the defendant was given to an excessive use of intoxicating liquors, was predisposed to insanity and was unable to understand the transaction intelligently;16 and if false representations were made, it is no defense that the party to whom they were made was in such mental condition that he could not understand them.17 So if A conveyed realty situated on a river bank to B in exchange for other realty, the exchange being greatly in A's favor, and A knowing of B's insanity, B's heirs can rescind although a change in the bed of the river has washed away the greater part of the land so conveyed to B.18 A contract is not, however, unfair merely because there is some advantage in it to the adversary party.19 What the insane person should return in the two classes of cases last given is not clear from the authorities, while it has been said that he need not make restitution,20 this probably means that restitution is not a condition precedent.21 The best view seems to be that as in the case of infants, so much of the consideration as remains must be restored ;22 though a fair rule not necessarily inconsistent is that one who makes advances on a mortgage given by one whom he knows to be insane can hold him only for benefits actually received by him.23 In any case if the benefit received from the rents and profits equals the value of the consideration parted with, no further restitution is necessary.24 Where the proceeds of the sale have been used to pay valid debts, and the purchaser has made valuable improvements on the realty, he has been held to be subrogated to the rights of the creditors and entitled to retain possession until paid.25 So if money lent to an insane person and secured by a mortgage given by him is, under the contract of loan, used in bank on which it is drawn is not protected in paying it, even if in ignorance of such adjudication.4 The rule itself is an old Common Law rule. The reason for the rule is that the adjudication is intended to determine the question of status once and for all; that it is notice to the world; and that the guardian should not be driven to the perpetual litigation that would be necessary if the sanity of the ward could be retried whenever he made a contract or a conveyance. Accordingly where there has been an adjudication of insanity but no guardian has been appointed,5 or where the guardianship has been in fact abandoned,6 the contract or conveyance cannot be treated as void; and whether no guardian was appointed,7 or one was appointed but never took charge of the estate,8 if the insane person recovers, his subsequent contracts are valid. So where the guardian who was appointed to enable the insane person to draw his pension, refused to take charge of a valuable mill on which repairs were needed, it was held that the insane person might bind himself by a fair contract, at least to the extent of paying a reasonable compensation for the repairs needed, though they were not technical necessaries.9 Where the guardian was removed by an appellate court as an unsuitable person, the cause remanded to the court of probate powers, and a petition for the appointment of another guardian dismissed, it was held that after this the former adjudication ceased to be conclusive, as it was not intended to fix "permanently the status of the party affected by it."10 So where an adjudication of insanity was set aside, a sale made thereafter by such alleged insane person was held not to be void, even though the adjudication of insanity was subsequently reinstated.11 Normal status may in some
9 Gingrich v. Rogers, - Neb. -; 96 N. W. 156.
10 Bunn v. Postell, 107 Ga. 490; 33 S. E. 707.
1 Molton v. Camroux, 4 Exch. 17; Imperial Loan Co. v. Stone (C. A.) (1892) 1 Q. B. 599; Cockrill v. Cockrill, 79 Fed. 143; Parker v. Marco, 76 Fed. 510; More v. Calkins, 85 Cal. 177; 24 Pac. 729; Strodder v. Granite Co., 99 Ga. 595; 27 S. E. 174; Eldredge v. Palmer, 185 111. 618; 76 Am. St. Rep. 59; 57 N. E. 770; Ronan v. Bluhm, 173 111. 277; 50 N. E. 694; Boyer v. Berryman, 123 Ind. 451; 24 N. E. 249; Thrash v. Starbuck, 145 Ind. 673; 44 N. E. 543; Alexander v. Haskins, 68 Ia. 73; 25 N. W. 935; Harrison v. Otley, 101 Ia. 652; 70 N. W. 724; Behrens v. McKenzie, 23 Ia. 333; 92 Am. Dec. 428; Grib-ben v. Maxwell, 34 Kan. 8; 55 Am, Rep. 233; 7 Pac. 584; Leavitt v. Files, 38 Kan. 26; 15 Pac. 891; Brown v. Cory, 9 Kan. App. 702; 59 Pac. 1097; Riley v. Carter, 76