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.

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.

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