Key Takeaways

  • Contractual capacity refers to a person or entity's legal ability to enter a binding agreement.
  • Minors typically lack capacity, though exceptions exist for necessities and emancipation.
  • Mental incapacity can render contracts void or voidable depending on state-specific legal tests.
  • Intoxication may impair capacity, but courts generally require severe impairment to void a contract.
  • Emancipated minors, business entities, and guardians may have unique contractual capacities.
  • Legal persons (corporations, LLCs) must act within their authority to form valid contracts.
  • Capacity may vary based on circumstances, such as power of attorney, duress, or undue influence.

Capacity in contract law refers to minors who don't have the capacity to create a contract. In most states, this refers to those who are under the age of 18. A minor who signs a contract can void it or honor the deal, but there are a few exceptions. Minors can't void a contract for items that are considered necessities such as clothing, food, and lodging. A minor can only void a contract due to lack of capacity when they're underage. When they turn 18 years old and don't void the contract, it can't be voided any longer.

However, there are a few exceptions to the law from a business standpoint that prohibit minors from having capacity. Some states also let minors obtain bank accounts and credit. They are in charge and responsible for these accounts, similar to a legally binding contract.

Mental Incapacity

Someone who doesn't have mental capacity can either void a contract or have a guardian void it with the exception of contracts for necessities. Most states define the standard of mental capacity as to whether or not a party understands the effect and meaning of words in a transaction or contract, which is known as the cognitive test. Other states use the affective test, which is where the contract can be voided if a party can't act in a reasonable manner. The other party also has reason to know what the condition is.

There's also a third measure in some states known as the motivational test. The courts in these states measure capacity based on if someone can judge if they entered an agreement or not. Varying results may come from the tests when they're applied to certain mental issues, such as bipolar disorder. Mental incapacitation is defined as people who can't enter a contract due to psychological disabilities. In most jurisdictions, mental capacity means a person can fully understand the effects and meaning of a contract.

If someone can't delineate their responsibilities and rights under the contract, they're not considered to be of legal capacity to enter into the contract. The courts depend on expert witnesses to figure out one's legal capacity, since the situations can vary greatly due to different levels of psychological disability. The tests for figuring out mental capacity once someone's of legal age vary for each state and are complex. Some states might ask someone if they know what they're doing and what the effects are, while another test might ask if someone can control themselves no matter what their understanding is.

Alcohol and Drugs

Those who are intoxicated by alcohol or drugs aren't considered to lack capacity to enter into a contract. The courts usually decide that people who are voluntarily intoxicated can't be allowed to avoid their contractual obligations, but need to take responsibility for their choice to have an altered state of mind. If a party is too far gone to understand the consequences and nature of the agreement, the sober party can take advantage of their condition. This is considered voidable by the party who's inebriated.

It's best to not sell services or products to anyone who might be under the influence in a business setting. A contract can be voidable if a party has some reason to believe the other party is too intoxicated to know what the contract obligations are. The majority of courts won't look to see if the intoxicated person knew what they were doing, but rather if the sober person knew they were intoxicated. Even if the person didn't appear drunk at the time of entering into the contract, if the other party thought they might be intoxicated and lack the mental capacity, they can be at fault.

Capacity to Contract Law and Legal Definition

Having the capacity to contract means a person is legally competent to enter into a contract. The capacity to contract is defined as having the capacity to enter into a legal agreement, which means someone must be of sound mind. With legally binding agreements, some people don't have the capacity to enter into an agreement, whether they're underage, mentally ill, or intoxicated.

Corporate and Organizational Capacity

In addition to individuals, businesses and other legal entities must have the capacity to enter into contracts. This is often referred to as corporate capacity. A corporation, limited liability company (LLC), partnership, or other legal entity acts through its authorized representatives. Contracts made outside the scope of that authority may be deemed unenforceable.

For instance:

  • A corporate officer generally has authority to bind the business in contracts related to daily operations.
  • Nonprofits and government agencies may have special rules governing contract formation.
  • Contracts signed by someone without the proper authority (e.g., an intern or unauthorized employee) may be void or voidable.

To establish capacity, the entity must be duly formed under applicable law and act within its governing documents, such as bylaws or operating agreements.

Emancipated Minors and Exceptions for Minors

While most minors lack the legal capacity to contract, emancipated minors are an important exception. An emancipated minor is someone legally recognized as independent from parental control, typically through court order or marriage.

Key exceptions where minors may have enforceable contractual obligations include:

  • Necessities: Contracts for essentials like food, shelter, or healthcare are often binding.
  • Emancipation: An emancipated minor may be treated as an adult for contractual purposes.
  • Statutory exceptions: Some jurisdictions allow minors to engage in certain contracts, such as those related to educational loans or employment, without full capacity.

These nuances highlight that the law provides flexibility in evaluating the different capacities of a contract when minors are involved.

Power of Attorney and Guardianship Capacity

In cases where an individual cannot personally enter a contract due to incapacity, a legally authorized representative may act on their behalf. This is common in scenarios involving:

  • Power of attorney (POA): A principal can grant an agent authority to enter contracts on their behalf, either generally or for specific tasks.
  • Guardianship: Courts may appoint a guardian to manage the legal affairs of someone who is mentally or physically incapable.

These legal mechanisms ensure that individuals who otherwise lack capacity can still engage in contracts through a proxy, preserving legal and financial continuity.

Duress, Undue Influence, and Fraud

Even when a party is legally capable of entering a contract, external factors can impair their ability to do so freely. Courts may find that a party lacked meaningful capacity if the agreement was formed under:

  • Duress: Threats or coercion to force agreement.
  • Undue influence: Exploiting a relationship of trust or authority to induce consent.
  • Fraud or misrepresentation: Deceiving someone about material facts related to the contract.

These situations do not inherently remove legal capacity, but they do challenge the voluntariness of consent—potentially rendering the contract voidable.

Frequently Asked Questions

  1. What are the different capacities of a contract?
    The different capacities of a contract refer to the legal ability of various parties—including minors, mentally incapacitated persons, intoxicated individuals, corporations, and representatives acting under power of attorney—to enter into legally binding agreements.
  2. Can a minor ever legally enter into a contract?
    Yes, minors may enter contracts for necessities or if they are emancipated. However, most contracts involving minors are voidable at the minor’s discretion.
  3. What happens if a person without capacity signs a contract?
    The contract may be considered void or voidable depending on the specific incapacity. For example, contracts made under mental incompetence or extreme intoxication may be voided.
  4. Can a business entity lack contractual capacity?
    Yes. If an entity is not properly formed, lacks authorization, or operates outside its corporate powers (ultra vires acts), it may lack capacity to contract.
  5. What role does power of attorney play in contract law?
    A power of attorney grants another person legal authority to act on someone else’s behalf, including the ability to enter contracts if the principal is incapacitated.

If you need help with different capacities of a contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.