Essential Requirements for Competent Parties in a Contract
Learn the essentials of competent parties in contracts, including legal age, mental capacity, and authority requirements. Understand rights for minors, the intoxicated, and those with limited capacity, and explore when contracts may be void or voidable to protect all involved parties. 6 min read updated on November 04, 2024
Key Takeaways:
- Contractual Capacity: All individuals are presumed legally capable of entering into contracts, barring minors, the intoxicated, or the mentally incapacitated.
- Legal Age: Most jurisdictions set the age of contractual competence at 18, though it varies by state.
- Mental Capacity: A person must understand a contract's implications; otherwise, the contract could be voidable or void.
- Minors' Contracts: Minors may disaffirm most contracts but are restricted from voiding contracts in certain financial and real estate transactions.
- Influence of Intoxication: Contracts signed while under involuntary intoxication or significant influence may be voidable.
- Authority of Representation: Certain roles, like power of attorney or corporate assignees, must provide proof of authority when signing contracts.
- Legal Rights for the Incapacitated: Incompetent parties have the right to disaffirm contracts, but they must return benefits received.
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.
Types of Contractual Capacity and Their Impact on Contracts
The capacity to contract can be affected by various factors, each impacting the enforceability of a contract. Contractual capacity can be limited by law (e.g., age restrictions), mental health conditions, or even temporary incapacities like intoxication. Lack of capacity usually makes a contract voidable, meaning the contract may be legally canceled, usually by the party lacking capacity. However, to void a contract, evidence is often required to show the incapacity existed at the contract’s formation, such as medical documentation or witness testimony. This safeguard ensures fair judgment in cases where contractual competence is questioned.
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.
Determining Competent Parties in Contractual Agreements
For a contract to be enforceable, each party must be competent and have authority to represent themselves or their organization. When entering contracts with entities like corporations or estates, confirming a party’s legal authority is essential. Here, competent parties may include a corporation’s authorized signatories or an estate’s personal representative. Legal verification methods may include a power of attorney, a corporate resolution, or court documentation for guardianship.
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
Specific Limitations and Rights for Minors in Contracts
Minors retain a unique set of protections within contract law. While minors may generally disaffirm contracts, exceptions exist for those involved in particular transactions, such as student loans, life insurance, or business-related contracts. Contracts providing essential services, like medical care or housing, are also more likely to be upheld, emphasizing the minor’s responsibility when the service is deemed necessary. Additionally, in cases where minors misrepresent their age, they may be restricted from later canceling the contract, emphasizing honesty in legal engagements.
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.
Temporary Incapacity Due to Substance Influence
Contracts formed under substance influence are scrutinized based on whether the party’s judgment was significantly impaired. If intoxication was known to the other party, the contract might be voidable. However, there is an assumption that sobriety reaffirms intent unless promptly challenged. Courts often allow a “reasonable period” for the intoxicated party to disaffirm the agreement post-sobriety, preventing exploitative agreements made under impaired conditions.
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.
Rights and Limitations of Mentally Incapacitated Parties
Contracts involving mentally ill individuals are either void or voidable based on the severity of incapacity. When mental incapacity is severe enough to prevent understanding, courts often classify contracts as void. Otherwise, contracts can be voided at the individual’s discretion if they did not fully comprehend the terms at signing. In cases where the contract is voided, the mentally incapacitated party must return any benefits received. Guardianship often plays a critical role here, as guardians can step in to protect an incapacitated individual’s rights in contractual matters.
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.
Verification of Competent Parties’ Authority in Legal Documents
Validating a party’s authority is particularly relevant in cases involving corporations or estates. Those acting as representatives, such as corporate agents or individuals with power of attorney, must have documented proof of authority. This might include corporate minutes or resolutions, estate paperwork, or guardianship documentation in cases of incapacitated individuals. If a representative’s authority is challenged, the contract’s validity may be questioned.
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.
Additional Considerations for Ensuring Competence in Contracts
Understanding and disclosing all material facts is crucial in upholding contracts. “Material facts” impact the parties’ decision to engage in the contract and are legally required for informed consent. Concealing such facts may lead to disputes or even make a contract voidable. Additionally, terminology like “voidable” and “disaffirmance” should be clarified in contracts involving potentially incompetent parties, ensuring all parties understand their rights. Where competence is unclear, having a guardian or legal representative involved may provide further safeguards.
If you need guidance on competent parties in contracts, UpCounsel’s legal professionals can help evaluate contractual capacity, especially in cases involving minors, guardianships, or corporate signatories. Post your legal need here.