Competent parties to a contract have the ability to comprehend a contract is being created and understand the nature of the contract.

Overview of Contractual Capacity

It is a presumption of the law that everyone has the capacity to contract. If a party does lack the capacity, the contract is usually voided and the party without capacity will not need to comply with their obligations to the contract. Both parties must have contractual capacity to create a binding contract.

Just because a person does not fully understand the contract's meaning and its terms will not automatically mean the person is lacking in contractual capacity.

The common law rule stipulates that persons under the age of 21 years are considered a minor and therefore are deemed by law to lack contractual capacity. Many states have changed this rule and reduced the age limit from 21 to 18 years. Other states have changed the age of majority to 19 years.

Overview of Competent Parties

A competent person is someone who is of legal age. The person must have the mental capacity to enter into a contract knowingly. They must also understand it is enforceable by law. Some parties are not contractually competent. These include:

  • Minors
  • Persons influence by alcohol
  • Persons influenced by drugs
  • Mentally ill persons who are not declared insane
  • Those with a limited capacity to contract

A person who is incompetent and has a limited capacity to contract is allowed to back out of a contract. This is a legal right called disaffirmance.

Others who are completely incompetent have no legal capacity to contract. This includes persons declared insane by a court due to mental illness.

Minors

If a competent party chooses to deal with incompetent parties, such as minors, they do so at their own risk. This is because minors may disaffirm or avoid ordinary contracts, usually, any time before they reach the age of majority and a reasonable time after reaching the age of contractual competence. Adults do not have the avenue to disaffirm and are bound by the agreements they've made.

Minors in many states cannot disaffirm an agreement for the following:

  • The sale of real estate
  • A loan
  • Agreements involving life insurance
  • Selling stock
  • A contract involving the minor's business
  • If the minor lies about their age

Persons Under the Influence of Alcohol or Drugs

There are some situations where agreements made by a person under the influence of drugs or alcohol are voidable. Once the person is sober, the agreement made while under the influence may be disaffirmed. This may happen only if the other party was responsible for the person to be under the influence or they knew the person was incapacitated and unable to understand the terms and consequences of the contract. There is a reasonable timeframe for the sober person to disaffirm or they will lose the right to do so.

Mental Illness

An agreement made with a person declared legally insane by a court is considered void. Agreements made by persons with mental illness, but a court has not declared them legally insane, are voidable only if the disability can be proven.

When this person understands what they did, the contract may be disaffirmed or ratified, provided the consideration they received under the contract is returned to the other party. All persons, whether they've been declared legally insane or not, are liable for the reasonable value of necessaries/considerations furnished to them.

Competent Parties

Each party must be competent to contract legally binding agreements. The parties must exist and be identifiable and have the authority to contract.

In situations where there is a contracting person appointed to handle contractual dealings, proof should be attained validating that the person signing has the authority to do so. Examples of when this may occur would be someone appointed as a personal representative of an estate, a corporate assignee, someone with a power of attorney, or a court-appointed trustee or receiver.

Legalese

In practice, when working with an agreement, the assumption is that the person is competent unless you know otherwise.

  • Material Fact - this is information known to you that affects a transaction.
  • Concealment - all material facts must be disclosed. If they are not, this is concealment.
  • Guardian - an incompetent person may have a guardian or conservator assigned by the court.

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